Contagion, at least of the buggy sort, can make for a terrific, spooky movie. Remember Gwyneth Paltrow and Matt Damon in Contagion? (Spoiler alert – she dies early on.) Got to admit, I love The Stand and Captain Trips; we all love a good scare… in the movies. In reality, however, contagion means bad things are happening: Bubonic Plague, excess body piercings and the 24 hour news stories (in no particular order). Contagion is very scary. Continue Reading

Dechert OnPoint: Does Tribune Make Merit Management Obsolete?

A recent decision out of the District Court for the Southern District of New York may bring greater certainty to the interpretation of what constitutes a “financial institution” in connection with the safe harbor in section 546(e) of the bankruptcy code. The decision, In re Tribune Fraudulent Conveyance Litig., 2019 U.S. Dist. Lexis 69081 (S.D.N.Y. Apr. 23, 2019), addresses whether transfers are protected from avoidance under the section 546(e) safe harbor when a “financial institution” merely acts as a conduit and is neither the debtor nor the real party in interest that ultimately received the payment as a result of the debtor or the recipient being the customer of the financial institution and may undercut the practical impact of the Merit Management case. To read more about this decision, as well as the implications it may have on section 546(e) fraudulent transfer litigation, check out this Dechert OnPoint by Dechert’s Business Restructuring and Reorganization group.


“Nobody Fell Off the Turnip Truck Yesterday”: What’s at Stake for Commercial Real Estate Lenders in Sutton 58?

Note: This was republished on June 6, 2019 to reflect factual updates.

Sutton 58 Associates LLC v. Pilevsky et al., is a New York case which gets to the heart of the enforceability of classic single-purpose entity restrictions in commercial real estate lending.  At issue is how far a third-party may go to cause a violation of a borrower’s SPE covenants, and whether those covenants are enforceable at all.

A Defaulted Construction Loan and Frustrated Attempts to Foreclose:

Sutton 58 is a case involving a defaulted New York City construction loan consisting of mortgage and mezzanine debt provided by Gamma Real Estate.  After a maturity default, Gamma’s attempt to foreclose on its equity collateral through a UCC foreclosure sale was hindered by the bankruptcy filings of the mortgage borrower and mezzanine borrower.

The borrowers were established as single-purpose bankruptcy-remote vehicles but subsequently acquired additional assets from one of the defendants (Sutton Opportunity), and took on debt from Prime Alliance (another one of the defendants – both controlled by the individual Pilevsky family defendants).  Sutton Opportunity obtained a 49% indirect stake in each borrower as a result of the asset transfer.  The additional assets and debt destroyed each borrower’s status as a “Single Asset Real Estate” entity under the Bankruptcy Code (or “SPE”), and allowed both entities to file a petition for bankruptcy.  Both the transfer of assets and the transfer of indirect equity interests in each borrower violated separateness covenants in the mortgage and mezzanine loan documents.

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The Jack and Rick Show:  Point and Counterpoint

I’m a great admirer of Jack Cohen and his periodic market commentary.  I answered his last one and then after the two of us talked, we decided we’d publish them together as a duet.  So here you go.

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Beany & CECL

Beany & Cecil was a cartoon.  The Current Expected Credit Loss accounting rules, better known as CECL, which the FASB is insisting will go into effect at the beginning of next year for publicly traded banks and lenders and a year later for all other GAAP reporting entities is not.  Now, heaven forfend that I suggest that the work of the Financial Accounting Standards Board is cartoonish, but there’s a parallel in this pairing of harmless and obscured menace worth noting.  Continue Reading

A Survival Guide for Winning Default Rate Interest in Courtroom Battles

Last year, a California Bankruptcy Court wiped out $10.2 million in default interest (“DRI”) when it ruled that a 5% DRI was an unenforceable penalty in a Chapter 11 bankruptcy case where the construction lender fully recovered principal, interest, and other costs of collection. In acting as the borrower’s fairy godmother, the Court noted that the 5% DRI, an industry standard for construction loans, was unreasonable because it was not negotiated in detail at origination and because it did not adequately forecast the lender’s anticipated costs and damages. So much for considering prevailing practices when gauging reasonableness! The court’s decision also hinged on the fact that the lender was able to collect exit fees, late fees, and loan extension fees while the loan was in forbearance. In the court’s opinion, such fees already compensated the lender for the costs associated with the default.  Now that’s novel!  We sort of thought that lenders collected exit fees, late fees and loan extension fees in consideration of other things the lender did or forbore from doing.  Silly us.

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Pending Sub-Prime Lawsuit Questions Securitization’s “Debt” Classification for ERISA Purposes

A new OnPoint from Dechert’s Employee Benefits and Executive Compensation team discusses a recent ruling from a federal court in the Southern District of New York. There, a pension plan that had acquired notes issued by a vehicle invested in a pool of sub-prime residential mortgage-backed securities is arguing that the vehicle’s assets are “plan assets” that are subject to ERISA. Essentially, the plan’s argument is that the notes should be considered equity for ERISA purposes under ERISA’s so-called 25% test, notwithstanding that the notes were the subject of a “will” level legal opinion that the notes are debt for tax purposes. The plan further asserts, among other things, that the vehicle’s servicers are therefore ERISA fiduciaries with potential ERISA liability. On March 15, the court, although expressing skepticism regarding the plan’s claim, allowed the litigation to proceed to the discovery stage. We will be keeping an eye on this case, and please come back to Crunched Credit if and as the case develops. For more information on this topic or other ERISA matters, contact Andrew L. Oringer or Steven W. Rabitz.

Commercial Real Estate and Climate Change

God help me, I’m finally writing about climate change.  This commentary assiduously avoids the obviously political (we take the view that complaining about and belittling our elected representatives and the permanent bureaucracy for doing boneheaded things is entirely apolitical).  And while even the phrase “climate change” carries with it a certain frisson of a capital “P” political debate, this is not that.  So, please, don’t ball this missive up, toss it away and cancel your subscription to Crunched Credit if you’re (A) not a fully-enrolled initiate in the Green Revolution, or indeed, even, if you are someone who thinks that the threat of climate change is somewhat… overblown (I’m not even going to think about using the term “climate denier”) or (B) someone who thinks climate change is real but simply throws your arms up in frustration over the possibility of finding a possibly affordable fix.

In either of those cases, I expect your default response to climate change talk is simply to move on to something more actionable in your professional life and I’m going to suggest here why you shouldn’t do that.  We need to start paying more attention than I have paid to date.

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Dechert OnPoint: Japanese Risk Retention: JFSA Favors Diligence Over Disruption

On March 15, the day the Japanese Financial Services Agency (the “JFSA”) published its final risk retention rules, Dechert’s CLO team published an OnPoint discussing the new final Japanese risk retention rules and their impact on the CLO market. 

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LIBOR, Again (Sorry!)

We are all going to be heartedly sick of discussing LIBOR and LIBOR transition long before it becomes a thing at the end of 2021, but we really need to get this done. I can’t make this at all funny. We have a problem…but not a solution. Fixing it is going to be a heavy lift. Like a colonoscopy, demonstrably necessary, but in no way fun. (Actually, I really should say, that my doctor is a lovely person, but one simply can’t make wonderful really matter when discussing all things proctologic.)

Okay, we are indeed doing stuff. I appreciate and certainly don’t want to diminish the efforts of our trade organizations, major banking institutions or the Alternate Reference Rate Committee of the Fed (ARRC), but I fear we are not doing enough and not doing it quickly enough. Even as one who got a merit badge during an undistinguished boy scout career for procrastination (I never got around to picking it up), I know that to elide this from the immediate to do list, hoping someone rides in on a white horse to make all this better, is really a bad idea.

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