September 06, 2018

MONTH-IN-BRIEF: Bankruptcy & Finance

Penny Christophorou, Taryn Darling Hill

Professional Responsibility

The Supreme Court of Florida on Security Interest for Lawyer Fees

By Stephen Sepinuck, Frederick N. & Barbara T. Curley Professor & Director of the Commercial Law Center at Gonzaga University School of Law

The Florida Bar v. Parrish, 241 So.3d 66, 2018 WL 2049999 (Fla. 2018). A lawyer who acquired a security interest in a client’s Lamborghini to secure payment of past and future legal fees thereby entered into a business transaction with the client that was not an ordinary fee agreement because the transaction enabled the lawyer to obtain funds from the sale of the Lamborghini that would constitute an excessive fee. Because the lawyer did not comply with the rules of professional responsibility relating to such transactions, the Court ruled that he was subject to discipline.

Commercial Finance

The Eastern District of Arkansas and the Western District of Missouri on Incorrect or Ambiguous Financing Statements

By Stephen Sepinuck, Frederick N. & Barbara T. Curley Professor & Director of the Commercial Law Center at Gonzaga University School of Law

Winfield Solutions, LLC v. Success Grain, Inc., No. 3:17CV00329 JLH, 2018 WL 1595871 (E.D. Ark. Apr. 2, 2018). A financing statement covering equipment, among other things, was not seriously misleading because it incorrectly included in the collateral description the statement, “this filing filed as ag lien.” The Court ruled that since the debtor’s name was listed correctly, the erroneous language would not mislead a searcher regarding the collateral the financing statement covers.

In re 8760 Service Group, No. 17–20454–drd–11, 2018 WL 2138282 (Bankr. W.D. Mo. 2018). An amended financing statement describing the collateral as “all accounts receivable, inventory, equipment, and all business assets located at 1803 W. Main Street . . .” was effective even though the debtor’s goods were located at a different address because the description was ambiguous – the address could restrict all the described collateral or merely the phrase “all business assets” – and thus a reasonably prudent searcher should inquire further.

Bankruptcy Law

Seventh Circuit Shields Officers From Trustee’s Claims

By Michael Enright

The Court of Appeals for the Seventh Circuit recently held that corporate officers could not be liable to the corporation’s bankruptcy estate for failing to take prepetition actions that would have been directly contrary to the directions they received from the board of directors. Levin v. Miller, et al., Case No. 17-1775 (August 17, 2018). The corporation was a bank holding company that filed bankruptcy after the two banks it owned failed during the financial crisis. The Chapter 7 trustee sued three officers of the holding company, alleging that they breached their duties by failing to advise the board that it should retain a large tax refund received by the holding company, rather than distribute those funds down to the two operating entities (the banks), consistent with past advice and practice. Had the holding company retained the tax refund, more funds would have been available to creditors of the holding company. However, the board of directors had directed the officers to seek additional capital for the banks and to do everything possible to keep them afloat. Furthermore, the board of directors, made up largely of independent directors, had been well-advised in the months preceding the bank failures, by bank regulators and skilled professionals. The court expressed skepticism about the viability of this claim even if it could have survived a motion to dismiss, and it went on to affirm the lower court’s dismissal, holding that the duty of an officer to provide information to the board of directors is not absolute, but it is qualified by the officer’s duty to obey the board’s lawful instructions. Because the board clearly manifested its intention to save the banks, and directed the officers specifically to take steps to do so, the officers had a duty to execute that strategy, which was incompatible with proposing a course of action that abandoned the banks and declared bankruptcy for the holding company. Corporate officers seeking a personal safe harbor from the prospect of a business failure may take solace in this decision, particularly if they have otherwise observed their duties to keep the board informed and have been clearly directed by the board regarding the strategy it desires to implement.

Penny Christophorou

Counsel; Cleary Gottlieb Steen & Hamilton LLP

Penelope L. Christophorou’s practice focuses on commercial financing, including secured transactions and bankruptcy law, derivative products, and structured finance. She represents leading financial institutions, corporate borrowers, private investment funds and sovereign clients on these matters.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.