FINANCIAL SERVICES CLIENT ADVISORY GROUP

Law Alert

Single Member Limited Liability Companies and Asset Protection

By: Harriet B. Alexson
714.384.6578
halexson@bmkalaw.com
©2011. All Rights Reserved.

In an important decision relating to asset protection for single-member limited liability companies, the Florida Supreme Court reviewed a statute that permitted debtors to use a wholly owned limited liability company (LLC) to put their assets beyond the reach of judgment creditors. In Olmstead v. FTC, Case No. SC08-1009 (Fla. June 24, 2010), the Florida Supreme Court ruled that a court may order a judgment debtor to surrender all right, title, and interest in the debtor’s single-member Florida limited liability company to satisfy an outstanding judgment.

Until the Court’s decision in Olmstead, it was generally believed that a charging order was the exclusive remedy available under Florida law. A charging order permits the judgment creditor to collect distributions otherwise payable by the LLC to the judgment debtor until the debt is paid. However, the debtor’s interest in the underlying company is preserved. The charging order does not permit the creditor to seize and force the sale of the debtor’s ownership interest of the LLC or to vote or otherwise participate in management of the LLC.

The Florida Supreme Court ruled that the provision of the Florida LLC statute authorizing the use of charging orders does not constitute the exclusive remedy for a judgment creditor against a judgment debtor’s intent in a single-member LLC. The Court based its decision on the provisions of the Florida LLC statute which does not specifically state that a charging order is an exclusive remedy. A copy of Olmstead v. FTC is available at http://www.floridasupremecourt.org/decisions/2010/sc08-1009.pdf.

This case presents a dilemma for asset protection plans that have been set up for single-member limited liability companies.  If you already have established a limited liability company, you should contact legal counsel to determine if this case has an effect on your current plan.

For further information about this interesting topic please contact:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578

halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

Law Alert

Will the Securitization Indenture Documents be Upheld Post Default?

By: Harriet B. Alexson
714.384.6578
halexson@bmkalaw.com
©2011. All Rights Reserved

In the case In re Zais Investment Grade Ltd. VII a senior noteholder of a collateralized debt obligation (“CDO”) placed the CDO issuer in an involuntary chapter 11 bankruptcy in order to advance an asset management plan that would otherwise require supermajority approval of all noteholders (including all junior classes) under the related indenture.  Zais Investment Grade Limited VII (“ZAIS”) was a CDO issuer formed in the Cayman Islands in 2005. In March 2009, a covenant default (for failure to maintain a certain debt coverage ratio) occurred under the related indenture, which triggered an event of default and resulted in the declaration of the notes to be due and payable. Following such an event of default and acceleration of the notes, the indenture requires that the indenture trustee hold the CDO’s assets passively to maturity. Any deviation from this, including disposition of any of the CDO’s assets, is not permitted under the indenture except upon the direction of at least 66 2/3% of all noteholders.  An involuntary bankruptcy petition was filed by the senior noteholder.

Junior noteholder Hildene Capital Management, LLC (“Hildene”) moved for dismissal of the involuntary petition. Hildene’s primary arguments were that (i) ZAIS is not an eligible debtor in the United States; (ii) Anchorage is not an eligible petitioning creditor; (iii) Anchorage is using the bankruptcy courts in bad faith; and (iv) the indenture is a subordination agreement or intercreditor agreement to be recognized under bankruptcy law. The court denied Hildene’s motion to dismiss.

The court stated that ZAIS, although formed and maintained in the Cayman Islands, is an eligible debtor in the United States because (i) ZAIS has a New York-based trustee and a New Jersey-based collateral manager who together perform the major portion of ZAIS’s operations on its behalf in the United States; therefore, ZAIS has a place of business in the United States and (ii) the CDO collateral, which, even though pledged to and held by the trustee, is nominally ZAIS’s property and is held in the United States; therefore, ZAIS has property interests in the United States.

Hildene argued that, because the indenture sufficiently addresses all post-default considerations and all necessary parties to the bankruptcy proceedings are bound by the indenture, Anchorage’s use of bankruptcy to circumvent limitations under the indenture also indicated bad faith. The court found that the indenture may be rejected as an executory contract under the Bankruptcy Code and mentioned in dicta that “any knowledgeable attorney opining on the enforceability of a contract will disclaim the effects of bankruptcy law.” The Zais court rejected the proposition that the use of bankruptcy proceedings to avoid certain contract limitations or restrictions is on its face an indication of bad faith.

Hildene asserted that the indenture is a subordination agreement that must be respected under the Bankruptcy Code and that the indenture’s non-petition provision is an intercreditor agreement to be enforced.  In addressing the indenture’s non-petition provision, the court found that because the language did not specifically bar petitions by senior noteholders, such provision was intended to benefit senior noteholders rather than limit their ability to institute bankruptcy proceedings.

In securitization transactions, the operative documents should clearly set out limitations on bankruptcy petitions by noteholders. The ZAIS indenture non-petition provision established a period (from the closing date to the date that is one year and one day after the senior noteholders have been paid in full) during which junior noteholders may not place the issuer into bankruptcy for failure to make required payments. Because the Zais court found this provision allowed Anchorage, as a senior noteholder, to file the involuntary petition, operative deal documents will need to better reflect the intent, to bar involuntary petitions by all noteholders, and to clarify the circumstances in which noteholders may file.

For further information about this interesting topic please contact:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578

halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

FINANCIAL SERVICES CLIENT ADVISORY GROUP

Intermediaries in Securities Transactions Changes Under the Dodd-Frank Wall Street Reform and Consumer Protection Act

Law Alert

By:  Harriet B. Alexson

714.384.6578

halexson@bmkalaw.com

©2011.  All Rights Reserved.

The recent Supreme Court decision in Janus Capital Group, Inc. v. First Derivative Traders addressed Rule 10b-5 of the Securities Exchange Act of 1934 and held intermediaries in securities transactions could not be found liable for the issuer’s or seller’s violation of that rule.  However, the Dodd-Frank Wall Street Reform and Consumer Protection Act will change the liability exposure of intermediaries in the sale of securities, as follows.

Under Rule 10b-5, adopted by the SEC in 1942 pursuant to Section 10(b) of the 1934 Act, it is unlawful “to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading” in connection with the purchase or sale of securities. This clearly applies to issuers and sellers, but the question before the Court in Janus Capital has been the extent to which intermediaries in a securities transaction can be found liable for the issuer’s or seller’s primary violation.

The Supreme Court decided Janus Capital Group, Inc. v. First Derivative Traders, No. 09-525, on June 13, 2011. The Court held in Janus Capital that the investment adviser to the Janus Funds could not be liable in a private action under Rule 10b-5 for false statements in prospectuses issued by the Funds, even though the investment adviser wrote the prospectuses and the employees of the Funds were also employees of the investment adviser. The Court ruled that only the “maker” of a false statement can be liable under Rule 10b-5 and the “maker” is “the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” The Court concluded that the mutual fund itself was the entity with “ultimate authority” over the prospectuses because it had the statutory obligation to file the prospectuses with the SEC.

New Section 9(a)(4) of the 1934 Act makes it unlawful for any broker, dealer or other person selling or offering to sell (or purchasing or offering to purchase) any security other than a government security, “to make. . . for the purpose of inducing the purchase or sale of such security, . . . any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which that person knew or had reasonable ground to believe was so false or misleading.” Previously, Section 9 of the 1934 Act applied only to securities traded on an exchange. Now it applies to any securities, excluding government securities—another change that was part of the Dodd-Frank Act.

Dodd-Frank also added new Section 9(f) to the 1934 Act, which says that anyone who “willingly participates” in an act or transaction in violation of Section 9(a) is liable to the person who bought the security. “Willingly participates” is not defined.  There is no requirement in Section 9(f) that the willing participant have knowledge of the false statement, an intent to misrepresent a material fact, or even a careless disregard of the facts given to offerees.  It allows the “willing participant,” if found liable, to seek recovery from any other violator of Section 9(a).  Presumably, this allows the plaintiff to seek recovery from the willing participant, rather than an issuer who may be insolvent, and gives the willing participant a right to sue its own client for a recovery.

What should a placement agent or other intermediary do under the Dodd-Frank provision?  Any party working in this area should conduct a proper due diligence investigation for the offering.  Large investment banking firms, when acting as underwriters in public offerings, conduct very thorough due diligence investigations.  This is the means of establishing a defense against liability under Section 11 of the Securities Act of 1933 (i.e., there is no liability if the underwriter “had, after reasonable investigation, reasonable ground to believe and did believe, at the time such part of the registration statement became effective, that the statements therein were true and that there was no omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading”). However, small broker-dealers offering private placements may not conduct a full investigation, based upon the cost of such an investigation.

The best way to reduce the risk of liability for false statements in an offering document is through a properly conducted and properly documented due diligence investigation.

For further information about this interesting topic please contact:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578

halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

Here is a link to the seminar webpage: How to Structure and Negotiate the Buy-Sell Agreement

Payment Processors – Compliance For Financial Institutions

October, 2011;  No. 10

By: Harriet B. Alexson (714.384.6578)

halexson@bmkalaw.com

©2011. All Rights Reserved.

Payment processors are deposit customers of banks which use deposit accounts to process large volumes of payments for third party merchants. This type of relationship raises difficult compliance issues for both banks and payment processors. Regulators have scrutinized certain payment processors because the processor/merchant relationships make it difficult for consumers to identify the merchant because the bank statement shows the payment processor’s name and not the merchant’s name. Banks opening accounts in the names of payment processors may be exposed to enforcement actions by regulators, class-action lawsuits by consumers and possible criminal investigations.

The FDIC, issued guidance reminding banks of their obligation to conduct appropriate due diligence to uncover and report suspicious activities by payment processors, pursuant to Financial Institutions Letter (“FIL”) 127-208.  Additional guidance has been addressed in 2011, pursuant to the FDIC Supervisory Insights – Summer 2010. The FDIC and OCC require banks to do more than just engage in routine credit and other underwriting processes when considering relationships with payment processors. Banks must now: (a) look at payment processors’ businesses, and review their Web sites and promotional materials; (b) determine whether the payment processors sell their excess capacity (in such a situation, the payment processor itself actually processes payments for another payment processor), thus further concealing the ultimate users of such payment services; (c) examine the payment processors’ business policies, procedures and history of complaints; and (d)  visit the payment processors’ business locations. The FDIC has identified various lines of business that are particularly “high-risk” when involving payment processors. These businesses include, but are not limited to, pharmaceutical sales, tobacco, credit repair services, government grants and charities.

Payment processors will also need to examine their compliance procedures as they run the same risks. Prosecutors have taken a very active interest in banks’ relationships with payment processors and will likely open criminal and civil investigations of processors and banks. In February 2011, the U.S. Attorney’s Office in Philadelphia obtained an indictment of six defendants for processing gambling payments from offshore companies. See United States v. Hellinger, Crim. No. 11-83 (February 10, 2011). Also, in April 2011, a federal grand jury in New York returned an indictment charging 11 defendants, related to their processing of payments for Internet poker companies.

Comprehensive compliance plans are a necessity based upon the current trends and may also provide a strong defense against criminal and civil actions for processing payments.

Please see next month’s newsletter for an overview of the requirements for the Financial Institution Compliance Plan.  For further information about the requirements of a compliance plan for third party processors and financial institutions please see below:

Harriet B. Alexson

Chair Financial Services Practice Group

Bohm, Matsen, Kegel & Aguilera, LLP

695 Town Center Drive, Suite 700

Costa Mesa, CA 92626

Tel: 714.384.6578

halexson@bmkalaw.com

info@alexsonlaw.com

www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

July, 2011; No. 7

Law Alert

By: Harriet B. Alexson (714.384.6578)
halexson@bmkalaw.com
©2011. All Rights Reserved.

The Credit Card Accountability Responsibility and Disclosure Act of 2009 (“CARD Act”) prohibits unfair credit card rate increases, bans certain fees, requires plain language disclosures, and creates additional protections for students.  The law also addresses concerns about fees and expiration dates related to gift cards.  Section 401 of the Act adds a new Section 915 to the Electronic Fund Transfer Act (“EFTA”) which limits the ability of card issuers to impose dormancy, inactivity, and other service fees on gift certificates, store gift cards and general-use prepaid cards.

Section 205.20 in Regulation E establishes a general rule that dormancy, inactivity, or service fees may not be assessed against covered gift cards and general-use prepaid cards unless:

There has been no activity with respect to the certificate or card, in the one-year period ending on the date on which the fee is imposed;

2.    The following are stated, as applicable, clearly and conspicuously on the gift certificate, store gift card, or general-use prepaid card:

(i)   The amount of any dormancy, inactivity, or service fee that may be charged;

(ii)  How often such fee may be assessed; and

(iii) That such fee may be assessed for inactivity; and

3.     Not more than one dormancy, inactivity, or service fee is imposed in any given calendar month.

Regulation E also prohibits the sale of gift cards and general-use prepaid cards that carry an expiration date unless four (4) specific conditions are met, as follows.

1.  With regard to expiration dates, issuers are required to establish policies and procedures to provide consumers with a reasonable chance of purchasing a card with at least five (5) years remaining before expiration.

2.  If the issuer wants an expiration date, that date must be the greater of five (5) years from either the date of issuance or, for a reloadable card, five (5) years from the date funds were last added to the card.  Because the expiration date on a reloadable is extended each time the card is reloaded it is not possible to provide a precise calendar date on which the underlying funds will expire.  In this situation, the expiration date may be expressed in words like “five years from the date funds were last added to the card.”

3.  A card must disclose “with equal prominence and in close proximity” to the expiration date that while the card expires, the underlying funds do not expire or expire later than the card and that the “consumer may contact the issuer for a replacement card.”  “Close proximity” in this context means the statement must appear on the same side of the card as the expiration date.

4.  A card with an expiration date must provide a toll-free telephone number through which a consumer may obtain a replacement card if the current card expires and funds are still remaining.  If the issuer maintains a website address, that also must be disclosed.  The telephone number and web address are required so that a consumer may “obtain a replacement certificate or card more easily if the certificate or card expires before the underlying funds.”

Gift cards and general-use prepaid cards must disclose each type of fee that may be imposed (other than dormancy, inactivity, or service fees that are covered by subdivision (d)(2), discussed above).  The disclosure must indicate the type of fee, amount of the fee, and conditions under which it will be imposed.  A toll-free telephone number and, if one is maintained, a website address must be provided through which the consumer may obtain information about fees.  The same toll-free number and website used for card replacement inquiries may be used for fee information.

Regulation E also requires that gift card disclosures be “clear and conspicuous.”  The disclosures should be “readily noticeable” and in a print “that contrasts with and is otherwise not obstructed by the background on which they are printed.”  Disclosures on the back of a card in which the print is on top of the indentations from embossed type on the front of the card are likely to be difficult to read and thus may not qualify as “clear and conspicuous.”

Disclosures may be given in written or electronic form.  Electronic disclosures are not subject to the consumer consent requirements of the Electronic Signatures in Global and National Commerce Act.  Such disclosures, however, must be provided in a form that the consumer can retain.  Providing the ability to print or download a copy of the disclosure complies with this requirement, but providing a hyperlink to a website where the disclosure is stored does not comply with the requirement that a disclosure be in a form the consumer may retain.

For further information about this interesting topic please contact:

Harriet B. Alexson
Chair Financial Services Practice Group
Bohm, Matsen, Kegel & Aguilera, LLP
695 Town Center Drive, Suite 700
Costa Mesa, CA 92626
Tel: 714.384.6578
halexson@bmkalaw.com
info@alexsonlaw.com
www.alexsonlaw.com

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.

FINANCIAL SERVICES CLIENT ADVISORY GROUP

May, 2011; No. 5

Law Alert

By: Harriet B. Alexson

(714.384.6578)

halexson@bmkalaw.com

©2011. All Rights Reserved.

In Pineda v. Williams-Sonoma Stores, Inc., 2011 Cal. Lexis 1355 (Cal. Feb. 10, 2011), the California Supreme Court ruled that a customer’s ZIP code constitutes “personal identification information” and that requesting and recording the customer’s ZIP code during the course of certain credit card transactions is a violation of California Civil Code §1747.08.

California Civil Code §1747.08, prohibits businesses that accept credit cards from doing any of the following:

Requesting, or requiring as a condition of accepting the credit card as payment in full or in part for goods or services, the cardholder to write any personal identification information upon the credit card transaction form or otherwise;

Requesting, or requiring as a condition of accepting the credit card as payment in full or in part for goods or services, the cardholder to provide personal identification information that the person, firm, partnership, association or corporation accepting the credit card writes, causes to be written or otherwise records upon the credit card transaction form or otherwise.

Utilizing, in any credit card transaction, a credit card form that contains preprinted spaces specifically designated for filling in any personal identification information of the cardholder.

There are exceptions to the above statute, as follows.  A retailer may record information that is on the face of the credit card, but nevertheless must comply with 15 U.S.C. §1681c(g), which limits the data that may be electronically printed on receipts provided to the customer.  The retailer may demand reasonable identification, but may not record identification information, such as a driver’s license number, phone number, or address, on the transaction record or elsewhere.  The law exempts transactions involving security or damage deposits; cash advance transactions; Internet, telephone, and mail order transactions; refund transactions; and a variety of other instances for which personal identification information is required for a special purpose incidental but related to the individual credit card transaction.

The California attorney general can seek injunctive relief under the Song-Beverly Credit Card Act, but private parties pursuing individual claims and class actions can obtain civil penalties of up to $1,000 per transaction, plus costs and legal fees.

In Pineda v. Williams-Sonoma, the court held that a credit card customer’s ZIP code-even when provided with nothing more-constitutes “personal identification information,” and that businesses are subject to liability for requesting and recording it during a credit card transaction.  All businesses who accept credit card payments should institute information-capture policies and procedures.

For further information about this interesting topic please contact:

Harriet B. Alexson

Chair Financial Services Practice Group

Bohm, Matsen, Kegel & Aguilera, LLP

695 Town Center Drive, Suite 700

Costa Mesa, CA 92626

Tel: 949.610.3237

Fax: 714.384.6501

halexson@bmkalaw.com

info@alexsonlaw.com

www.alexsonlaw.com

*****

Actual resolution of legal issues depends upon many factors, including variations of fact and state laws. This article is not intended to provide legal advice on specific subjects, but rather to provide insight into legal developments and issues. The reader should always consult with legal counsel before taking action on matters covered by this article.