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Bryan Cave Continues Support for Corporate Sustainability

Bryan Cave participated in a daylong conference at Fordham University exploring opportunities and challenges that participants in the capital markets face as they look to harness the power of corporate sustainability data.  Alongside Bryan Cave attorneys, the event featured voices from academia, leading investment firms as well as ESG rating and research agencies.  The conference was jointly presented by Fordham Law School and Fordham’s Gabelli School of Business.

The conference, “The Corporate Sustainability Movement: The Flood of Data,” gathered a diverse audience and presented perspectives on this theme from users (the investors), providers (the companies and reporting agencies), as well as exploring innovation and ideals for how disclosure can enhance the market. To find out more about the conference, visit the organizer’s website.

Ken Henderson, partner in Bryan Cave’s New York office, moderated a lively panel to discuss the current state of corporate sustainability and ESG data disclosure, what the experts envision as the ideal standard and expectation of reporting (both for the benefit of investors, companies and other stakeholders), and the potential roadmaps to reach this goal.  Harnessing the perspectives of panelists whose backgrounds include experience as reporting and research agents and financial advisors and investors, Ken kept up a lively debate and integrated particular insights and questions from the audience into the discussion.

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Before You Comment on My Haircut, Think Again

Back in 2008 and 2009 Eddie Liles lent around $102,000 to his brother Dallas to purchase rental properties at 554 South Shore Drive and 540 South Shore Drive in Greenup County, Kentucky, as well as a 2008 Ford 4×4 truck.  The brothers signed a Loan Agreement that provided the loan would be interest free and that the loan for 554 South Shore Drive to be repaid first, followed by the loan for the truck, and finally the loan for the 540 South Shore Drive. The Loan Agreement called for Dallas to make payments of “ [a] minimum of $600.00 per year,” which it specified could be “multi-payments or one payment of $600.00.” It was also clear that Dallas could pay more than $600 per year towards the indebtedness, if he so desired.

The Loan Agreement also provided that if Dallas died, any outstanding balance would be forgiven. If, however, Dallas survived Eddie and the loan remained unsatisfied, the property would revert to Eddie. If both men died at the same time, and before satisfaction of the loan, the property was to pass to John B. Liles, II, or his estate. Eddie filed the Loan Agreement for record with the Greenup County Clerk and Dallas began making payments. As of early 2011 when the brothers had a falling out, Dallas had reduced the indebtedness to $89,400.

According to an affidavit filed by Dallas, the impetus for the falling out was an argument the two had in January of 2011 about a haircut. The argument was bad enough that the two were no longer communicated except for filing legal pleadings. Eddie refused to accept any more installment payments from Dallas and demand payment in full. Dallas refused but continued to make installment payments into an escrow account. Eddie filed suit and later sought summary judgment on the basis that he had full rights to demand payment in full. The circuit court determined that the loan was not a demand obligation and Eddie appealed.

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Georgia Supreme Court Weighs in On Guarantor Liability for Deficiencies

On April 17, 2017, the Supreme Court of Georgia made yet another critical decision in a line of cases which together, create the framework for a guarantor’s liability for a deficiency after a foreclosure has been conducted. The case styled York et al. v. Res-GA LJY, LLC came before the Supreme Court in consideration of the questions of (i) the extent and limitations of guarantor waiver of rights under O.C.G.A. §44-14-161; and (ii)  whether a creditor may pursue a guarantor for a deficiency after judicial denial of confirmation of a foreclosure sale.

In York et al., the lender sought to confirm the foreclosure sale of real property located in three different counties in Georgia, which properties were used to secure five promissory notes evidencing loans made to several entities and guaranteed by individual guarantors affiliated with such entities. The court in each of the three counties denied the confirmation of the respective sale citing as the basis for such denial, the lender’s failure to prove that the sale garnered fair market value, as is required under O.C.G.A. § 44-14-161. Despite its lack of success at the confirmation proceedings, the lender pursued deficiency actions against the guarantors. The trial court in awarding judgment against the guarantors, concluded that the waiver provisions of the guaranties executed by the guarantors served to waive any defense that the guarantors may have had as a result of lender’s failure to successfully seek confirmation. On appeal, the trial court’s judgment against the guarantors was affirmed.

In Georgia, to pursue a borrower for a deficiency after a foreclosure, a lender is required to file a confirmation action within thirty (30) days after foreclosure and present (i) evidence that the successful bidder at the foreclosure sale bid at least the “true market value” for the property and (ii) evidence regarding the legality of the notice and advertisement and regularity of the sale.  See O.C.G.A. § 44-14-161.

The Georgia Court of Appeals issued its decision in HWA Properties, Inc. v. Community & Southern Bank, 322 Ga. App. 877 (746 SE2d 609) (2013) in July of 2013, finding that a creditor’s failure to obtain a valid confirmation of a foreclosure sale did not impair its authority to obtain a deficiency judgment against the loan’s personal guarantor if the guarantor waived the defenses otherwise available to the guarantor under O.C.G.A. § 44-14-161.  In 2016, the Georgia Supreme Court addressed two questions regarding this issue certified to it by the United States District Court for the Northern District of Georgia and agreed with the Court of Appeals in its reasoning, holding that Georgia’s confirmation statute “is a condition precedent to the lender’s ability to pursue a guarantor for a deficiency after foreclosure has been conducted, but a guarantor retains the contractual ability to waive the condition precedent requirement”.  See PNC Bank National Ass’n v. Smith, 298 Ga. 818, 824 (758 SE2d 505) (2016).

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ESOPs: A Path to Bank Independence

the-bank-accountEmployee Stock Ownership Plans offer an opportunity for banks to offer an attractive employee benefit plan, but can also do so much more.  On the latest episode of The Bank Account, Jonathan and I are joined by Bryan Cave Partner, Steve Schaffer, to discuss the advantages to banks considering implementing an ESOP.

Steve describes many of the advantages of implementing an ESOP, including allowing for smooth transitions of ownership for independent banks.  We also discuss some of the risks and the best means to avoid those risks.

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Reduced Protections for Holders of an English Floating Charge

A recent decision of the European Court of Justice (“ECJ”), on a referral from the Latvian courts and which is binding on the English courts (although the UK has commenced steps to leave the EU, the UK’s formal exit is still some time away), will make it more difficult for the holder of an English floating charge to enjoy the benefit of the UK’s Financial Collateral Arrangements (No.2) Regulations 2003 (“FCARS”)

FCARS implement an EU directive whose purpose was to assist the taking of security over financial collateral, which includes securities and cash.  When the FCARS apply, the collateral taker has certain advantages: a number of insolvency law provisions as well as some formalities will not apply.  The FCARS can also permit the collateral taker to enforce its security by appropriating collateral without having to get a court order.  Thus for a holder of security over financial collateral the applicability of the FCARS to its security can be very useful.

The English floating charge is used widely.  It is a form of security whose creation in response to the needs of the emerging economic environment was endorsed by the English courts in the nineteenth century.  It allows companies to grant security whilst at the same time still being able to carry on their business.

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Order in the Meeting: Dealing with Difficult Shareholder Meetings

the-bank-accountOn our twentieth(!) podcast episode of The Bank Account, Jonathan and I take the opportunity to discuss tips for how to approach challenging shareholders or circumstances at your annual meetings.

Unfortunately, Jonathan had a brain freeze during recording, and forgot to use his favorite Mike Tyson quotation, “Everyone has a plan ’till they get punched in the mouth.”  That said, planning ahead for disruptive shareholders is almost always worthwhile.

Providing a written agenda and set of governing rules to attendees can further help establish and maintain order, but it often comes back to simply ensuring that the disgruntled shareholder is provided an opportunity to be heard.

We’re also thrilled to announce that we’ve updated our recording microphones.  While our voices and ideas are unchanged, we hope you will find your listening experience improved.  We also want to thank all of our listeners for their comments and feedback.  We’ve heard from many of you via e-mail, twitter, phone calls and even in person  face-to-face meetings.  As we recorded this episode, we had already reached 5,000 downloads, including listeners in 39 states and the District of Columbia.

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Analysis of FDIC v. Loudermilk Decision

The FDIC’s lawsuit against former directors and officers of the failed Buckhead Community Bank, one of the most closely watched Georgia corporate governance cases in years, went to trial in October, 2016.  The jury returned a verdict of nearly $5 million against the defendants for their role in the approval of four large commercial development loans that later defaulted.  FDIC v. Loudermilk, No. 1:12-cv-04156-TWT (N.D. Ga. Oct. 26, 2016).  It was less than a complete victory for the FDIC, which had sought over $21 million in damages based on ten bad loans, but the verdict nonetheless represents a significant recovery against directors and officers of a Georgia bank.  The case is all the more significant because it was the first known jury trial to evaluate a negligence claim under the business judgment rule as defined by the Georgia Supreme Court earlier on in the proceedings.

Editor’s Note:  This piece is an excerpt from the author’s 2016 Georgia Corporation and Business Organization Case Law Developments, which addresses decisions handed down in 2016 by Georgia state and federal courts addressing questions of Georgia corporate and business organization law.  The year saw a large number of decisions involving limited liability companies, continuing a trend from recent years.  The Georgia Supreme Court addressed some interesting and novel questions of corporate law, including whether an out-of-state LLC (or corporation) can avail itself of the removal right that permits Georgia-based companies to shift certain tort litigation from the county in which it is brought to the county where it maintains its principal office, and whether a nonprofit corporation has standing to pursue a write of quo warranto against public officials.

Buckhead Community Bank was closed by the Georgia Department of Banking and Finance in December, 2009, during the heart of the financial crisis.  The FDIC was named as receiver for the Bank.  In 2012, the FDIC filed suit against the Bank’s former directors and officers, alleging that they pursued an aggressive growth strategy aimed at building a “billion dollar bank,” causing the Bank’s loan portfolio to become heavily concentrated in commercial real estate acquisition and development loans.  The FDIC’s allegations were highly similar to allegations it made in dozens of other cases involving similarly situated banks that failed during the Great Recession.  In all, the FDIC filed over 100 civil actions between 2010 and 2015 in its capacity as its receiver for failed banks throughout the country, 25 of which were filed in Georgia against directors and officers of Georgia banks.  The vast majority of these cases have settled.  In fact, Loudermilk was only the second of these cases to proceed all the way to trial, and the first in Georgia.

As the case progressed to trial, it eventually focused on ten specific loans that were approved directly by the defendants acting as members of the Bank’s loan committee.  As to each of these loans, the FDIC alleged that approving the loans violated the Bank’s own loan policy, banking regulations, prudent underwriting standards and sound banking practices.  For instance, it was alleged that some loans exceeded the Bank’s loan-to-value guidelines but were approved anyway.  Other loans were approved without certain documentation that the FDIC alleged was necessary, such as current financial statements of borrowers and guarantors.  Other loans were allegedly approved before the loan application paperwork was final.  There was no claim that any of the loans were “insider” loans that provided a direct or indirect personal benefit to any of the defendants.

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Mobile Wallets and Tokenization: Banks are Catching On

On April 20, 2017, the American Banker reported that U.S. Bank’s new high-end credit card features an interesting differentiator from the high-end cards recently introduced by other large credit card issuers.  U.S. Bank’s new high-end credit card significantly incents mobile usage over conventional swipe or chip dip for purchases.  While the other card offerings typically provide triple miles for travel and entertainment purchases, the U.S. Bank “Altitude Reserve Visa Infinite” card puts its money on getting cardholders to enroll their cards in mobile wallets – Apple Pay, Android Pay, Samsung Pay and Microsoft Wallet.

For a generation of customers who want to do everything, or as much as possible, on their phones, millennials have not adopted mobile payments as quickly as expected. Personally, I constantly encourage everyone to enroll their cards in the mobile wallet on their phone ASAP and use it that way at every opportunity.

I do that for two reasons –  1) it is much more secure than swiping your stripe or dipping your chip and 2) it is much faster than inserting your chip card at the terminal to complete the transaction.

Plus, it looks really cool to wave your phone at the terminal and “boing” you’re done. I smugly watch the people in line behind me watching this transaction with interest.

The transaction is more secure because the phone wallets keep card credentials in a secure element on the phone, which is highly resistant to hacking, and more importantly, does not transmit real card credentials to the merchant. Instead, the merchant only receives a one-time use tokenized version of your card credentials. This means that if the merchant’s database is hacked, the tokenized version of your card credentials that are exposed are just useless gibberish.

This saves the card issuer from eating losses under Reg Z for unauthorized transactions and crediting your account for charges the hacker racked up on a spending spree for fenceable goods. Actually, most of those unauthorized charges flow back to the merchant who was hacked, but the issuers whose cards are exposed typically do not recover their full costs.

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Do Banks Need a Holding Company?

the-bank-accountOn April 11, 2017, Bank of the Ozarks announced that it would be completing an internal corporate reorganization to eliminate its holding company.  As a result, it will continue as a publicly-traded, stand-alone depository bank, without a bank holding company.

In this episode of The Bank Account, Jonathan and I discuss the advantages and disadvantages of the bank holding company structure.  Specific topics include:

  • praise for Bank of the Ozarks innovative approach to further improve its already impressive efficiency,
  • a review of the existing landscape of holding company and non-holding company structures,
  • activities that may require a holding company,
  • size-related thresholds impacting holding company analysis,
  • charter and corporate-governance related elements to the analysis, and
  • the impact the absence of a holding company may have on merger and acquisition activity.

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Do you get Bragging Rights if the Malware Infecting your Computer was Named after Zeus?

Over the last decade as the specter of cyber attacks has increased dramatically, financial institutions have been encouraged to look into the use of cyber fraud insurance as one means of minimizing risk. A recent decision by the 8th Circuit provides an interesting opportunity to see how such policies are going to be interpreted by the courts.

In 2011, an employee at Bellingham State Bank in Minnesota initiated a wire transfer through the Federal Reserve’s FedLine Advantage Plus system (FedLine). Wire transfers were made through a desktop computer connected to a Virtual Private Network device provided by the Federal Reserve. In order to complete a wire transfer via FedLine, two Bellingham employees had to enter their individual user names, insert individual physical tokens into the computer, and type in individual passwords and passphrases. In this instance the employee initiated the wire by inputting the passwords both for herself and the other employee and inserted both of the physical tokens. After initiating the wire the employee left the two tokens in the computer and left it running overnight. Upon returning the next day the employee discovered that two unauthorized wire transfers had been made from Bellingham’s Federal Reserve account to two different banks in Poland. Kirchberg was unable to reverse the transfers through the FedLine system. Kirchberg immediately contacted the Federal Reserve and requested reversal of the transfers, but the Federal Reserve refused. The Federal Reserve, however, did contact intermediary institutions to inform them that the transfers were fraudulent, and one of the intermediary institutions was able to reverse one of the transfers. The other fraudulent transfer was not recovered.

Bellingham promptly notified BancInsure of the loss and made a claim under their financial institution bond which provided coverage for losses caused by such things as employee dishonesty and forgery as well as computer system fraud. After an investigation, it was determined that a “Zeus Trojan horse” virus had infected the computer and permitted access to the computer for the fraudulent transfers. BancInsure denied the claim based on several exclusions in the policy including employee-caused loss exclusions, exclusions for theft of confidential information, and exclusions for mechanical breakdown or deterioration of a computer system. In essence, the policy does not cover losses whose proximate cause was employee negligence or a failure to maintain bank computer systems. Bellingham contested the denial and brought suit in federal court for breach of contract.

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