In Errico vs. Pacific Capital Bank, N.A., ___ F.Supp.2d ___, 2010 Westlaw 4699394 (N.D. Cal.), William and Loretta Errico allege that in 2005 they applied for three loans to finance and develop a single parcel of real property they had owned for about 25 years. The loan was obtained through Niraj Maharaj, a vice president of Pacific Capital Bank, with whom the Errico's had previously done business. The bank orally agreed to finance at least 75% of the appraised value of the project.
Subsequently, Maharaj advised the Errico's that, due to a declining market, they should construct the project in phases, which would result in delayed financing. The Errico's agreed that the financing would be staggered in three separate loans for three phases: (1) construction of 140 condominium units; (2) construction of a commercial plaza; and (3) construction of off-site improvements (typically roads and utility trenches). Simultaneously, the bank assured the Errico's that it would provide the promised minimum financing for the entire project. However, as of approximately August, 2007, the bank secretly determined not to fund the condominium phase.
After the other two phases were funded, the bank advised the Errico's that the condominium construction costs should be reduced and that the units should be initially leased as apartments, and the Errico's agreed. Thereafter, the bank approved certain expenditures for the condominium phase, additional appraisals were obtained and additional information was provided to the bank. The prevailing economic crisis intervened, and in July, 2009, the bank informed the Errico's that it would not fund the condominium project.
The bank moved to dismiss the complaint, and the court ruled that the allegations of fraud and promissory estoppel were sufficient to state a cause of action. Specifically, the court ruled that the allegations could support findings that the bank orally promised to finance the entire project, and that the bank acted as financial adviser to the Errico's, who reasonably relied upon the promise.
The ruling that the bank might have acted as a financial adviser may be subject to criticism because no fiduciary relationship arises in a loan transaction absent special circumstances. Perlas v. GMAC Mortgage, LLC, 187 Cal.App.4th 429, 436 (2010). Whether the facts of this case give rise to a fiduciary duty is likely to be an issue at trial and possibly on appeal. In any case, this case is a reminder to both borrowers and lenders against going too far on a handshake.
By Reno F.R. Fernandez III
New to the Barrister's Club Board of Directors
We are pleased to announce that Reno Fernandez has been appointed for a two-year term to the Board of Directors for the Barrister's Club of San Francisco. You can read the press release here. - Reno Fernandez
Payments to Creditors Ahead of Schedule May Constitute Avoidable Preferences
A recent decision by Judge Stuart M. Bertnstein of the Bankruptcy Court for the Southern District of New York in the case of M. Fabrikant & Sons, a jewelry retailer, could make it more difficult for a creditor to defend against an action to avoid pre-petition payments as preferences in the case where the payments were made early or on time.
Under Bankruptcy CodeSection 547, payments to creditors made by the debtor within the 90 days preceeding bankruptcy that are deemed to favor one creditor over another can be reversed. A common defense to a preference action is the “ordinary course of business” defense under Section 547(c)(2). In order to prevail, the creditor must show that the debt was incurred in the ordinary course of business and either: (1) the payment was made in the ordinary course of business between the debtor and the creditor; or (2) the payment was made according to ordinary business terms.
In the typical case, a debtor rushes to pay several old invoices, sometimes in order to curry favor with a trade creditor or satisfy the demands of an insider, and the payments are subject to avoidance in order to place the recipient on equal footing with other creditors. In M. Fabrikant & Sons' case, although the debtor made payments for jewelry purchased from Gramercy on average 65 days after the invoice, the debtor made a certain payment 30 days after the invoice (and another payment 95 days after the invoice). Significantly, the 30-day payment was consistent with the payment terms provided in the invoice. Nevertheless, the court found that the payment constituted an avoidable preference because it was inconsistent with the debtor's practice of paying the invoices late.
Creditors and their attorneys should keep this case in mind when defending a preference suit. If a creditor paid some invoices late and others on time or early, it will be necessary to carefully present the facts to harmonize the payments with the debtor's practices.
By Reno F.R. Fernandez III
Under Bankruptcy CodeSection 547, payments to creditors made by the debtor within the 90 days preceeding bankruptcy that are deemed to favor one creditor over another can be reversed. A common defense to a preference action is the “ordinary course of business” defense under Section 547(c)(2). In order to prevail, the creditor must show that the debt was incurred in the ordinary course of business and either: (1) the payment was made in the ordinary course of business between the debtor and the creditor; or (2) the payment was made according to ordinary business terms.
In the typical case, a debtor rushes to pay several old invoices, sometimes in order to curry favor with a trade creditor or satisfy the demands of an insider, and the payments are subject to avoidance in order to place the recipient on equal footing with other creditors. In M. Fabrikant & Sons' case, although the debtor made payments for jewelry purchased from Gramercy on average 65 days after the invoice, the debtor made a certain payment 30 days after the invoice (and another payment 95 days after the invoice). Significantly, the 30-day payment was consistent with the payment terms provided in the invoice. Nevertheless, the court found that the payment constituted an avoidable preference because it was inconsistent with the debtor's practice of paying the invoices late.
Creditors and their attorneys should keep this case in mind when defending a preference suit. If a creditor paid some invoices late and others on time or early, it will be necessary to carefully present the facts to harmonize the payments with the debtor's practices.
By Reno F.R. Fernandez III
Holiday Reading
The holidays are approaching, so why not treat yourself to an education in the history of American bankruptcy law? Last Christmas, my wife Laura gave me a copy of David A. Skeel, Jr.'s Debt's Dominion: A History of Bankruptcy Law in America (Princeton University Press, 2001). Skeel's book explores the development of bankruptcy law from the 1800's to the reforms proposed in the early 2000's, some of which were incorporated in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Debt's Domion gives a particularly enlightening treatment of railroad receiverships, which ultimately developed into modern Chapter 11 practice, and William Douglas' mid-century crack-down on the Wall Street reorganization bar. We had the honor of hearing the author give a lecture as the keynote speaker at the California Bankruptcy Forum last May, and his insights into contemporary bankruptcy law and his preductions for the future were fascinating. - Reno Fernandez
Upcoming Event: Alternative Strategies in Assisting Distressed Companies
UPDATE: This program was moved to January 13, 2010, at 12:00 pm, due to the Giants' victory parade!
Check out this upcoming lunch program, "Alternative Strategies in Assisting Distressed Companies," on November 3, 2010. John Seeley, managing directors of Acrius Capital, will give the inside scoop on turnaround financing and other issues to the Barrister's Club of San Francisco Business, Commercial and Bankruptcy Section. For more information and to sign up, click here. - Reno Fernandez
Check out this upcoming lunch program, "Alternative Strategies in Assisting Distressed Companies," on November 3, 2010. John Seeley, managing directors of Acrius Capital, will give the inside scoop on turnaround financing and other issues to the Barrister's Club of San Francisco Business, Commercial and Bankruptcy Section. For more information and to sign up, click here. - Reno Fernandez
Serving Two Masters: Representing the Chapter 11 Debtor and the Estate
On September 19, 2010, Judge Alan Jaroslovsky entered a short memorandum opinion denying $8,000 in attorney's fees for defending an individual chapter 11 debtor's claim of exemption for $1 million in retirement funds. The Judge ruled that it was a conflict of interest for a law firm to represent both the estate and the debtor where their interests were opposed. The court noted that it had the power to order the firm to disgorge all of its unpaid fees, but declined to do so in order to avoid a financial disaster for the firm. In the end, the firm's fees were reduced by $8,000 and it was barred from collecting this amount from the estate, the debtor or anyone else. This opinion underscores the fact that handling an individual chapter 11 bankruptcy case requires a high degree of care and skill. To learn more, check out our in-depth article on individual chapter 11 cases. - Reno Fernandez
Just Married!
Reno F.R. Fernandez III is proud to announce that, on August 14, 2010, he was happily wedded to Laura H.W. Fernandez (nee Wineland)! The wedding was held in Madison, Wisconsin, near Laura's home town, and the newlyweds have just returned from their honeymoon in Playa del Carmen, Mexico! Laura and Reno would like to thank everyone who offered their support in bringing joy to their wedding day, including their parents, Laura's grandmother Ms. Ann Sphar, and Reno's boss Mr. Iain A. Macdonald, who gave a moving toast!
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