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Enforceability of PDF Signature Pages

June 2, 2015

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Many loan transactions are closed today with parties delivering to the lender or lender’s counsel an e-mail with scanned PDF copies of signed loan documents. Increasingly often, the original “wet ink” hard copy paper document never makes it to the lender. This is especially true for documents signed by parties other than the borrower, such as a landlord lien waiver.  After the fog has cleared from a closing, a loan officer may call to ask if she really needs to chase down the original document or if having the PDF copy in the loan file is sufficient. Putting aside any internal bank policy requiring original documents, what the loan officer really wants to know is whether that PDF received by e-mail is enforceable against the other party in a court of law.  The answer is probably yes.

Recognizing that business in today’s world is often conducted at least partially electronically, forty-seven states have adopted the Uniform Electronic Transactions Act (UETA) to facilitate electronic commerce. The three states that have not adopted the UETA, Illinois, New York, and Washington, have adopted other statutes allowing for the enforceability of electronic signatures and records. The UETA acts as an overlay statute to clarify requirements for originals or signed writings in other laws. UETA gives electronic records such as scanned PDFs of signed documents the same legal effect as paper records. For example, Section 7 of the UETA provides that an electronic record will satisfy another law’s requirement that a record be in writing.  With respect to evidentiary rules, Section 13 of the UETA states that a record may not be excluded from evidence solely because it is in electronic form.

For the UETA to apply to a transaction, the parties to that transaction must agree to conduct business electronically.  The good news is that this requirement can be satisfied informally and can be inferred from the parties’ conduct. Going back to the landlord waiver scenario, the parties agreed to conduct business electronically when the landlord e-mailed a PDF of the signed waiver to the lender and the lender accepted that PDF for closing. Despite the ability to infer an agreement to apply the UETA, it is good practice to include language in loan documents providing that delivery by PDF is the same as delivery of a paper original or otherwise opting in to UETA.

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A $1.5 Billion (Un)Secured Loan

February 2, 2015

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A $1.5 Billion (Un)Secured Loan

February 2, 2015

Authored by: Brian Devling and Jeff Chavkin

An opinion from the Second Circuit Court of Appeals in In re Motors Liquidation Company, relying on the Delaware Supreme Court’s answer to a certified question highlight the need to focus on the details when dealing with financing statements and terminations under Article 9 of the Uniform Commercial Code.  Because the parties in that case did not pay attention to the details, a $1.5 billion secured term loan became unsecured loan.

General Motors had two separate credit facilities led by JPMorgan Chase Bank, N.A., as agent for the different lender groups: a $300 million synthetic lease financing and a $1.5 billion secured term loan.  Two UCC-1 financing statements were filed in connection with the synthetic lease and a separate UCC-1 was filed with respect to the term loan.. All three financing statements identified JPMorgan, as agent, as the secured party.

In 2008, General Motors told its counsel on the synthetic lease to prepare documents to unwind the synthetic lease.  The partner at GM’s counsel delegated some of the work to an associate who further delegated the UCC work to a paralegal.  The paralegal ran a UCC search that revealed the 3 UCC-1 filings and the paralegal prepared termination statements for all three filings including one for the term loan that was not being repaid.  JPMorgan and its counsel reviewed the draft termination statements, did not catch the mistake and authorized the filing.  All three terminations were filed and no one noticed the term loan’s financing statement was terminated until after GM filed for bankruptcy protection.

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BBA LIBOR No Longer Exists

February 5, 2014

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BBA LIBOR No Longer Exists

February 5, 2014

Authored by: Brian Devling

Commercial and consumer loans commonly accrue interest at a rate calculated in reference to LIBOR, the London Interbank Offered Rate. LIBOR was designed to be the average interest rate that leading banks in London, England would charge other banks. The British Bankers Association (BBA) administered LIBOR and many loan documents refer to BBA LIBOR. Effective February 1, 2014, the BBA no longer administers LIBOR. The Intercontinental Exchange Benchmark Administration Ltd (ICE) now has responsibility for LIBOR. The handover is part of the fallout from the recent scandal caused by banks trying to manipulate LIBOR.

Going forward any references to BBA LIBOR in your loan document templates should be updated. There is no need to refer to the entity administering LIBOR. A general reference to the London Interbank Offered Rate should suffice. Even better, many loan documents refer to LIBOR as reported by Reuters because that is where the lender is actually obtaining the rate. Loan documents should also contain provisions to accommodate future, unexpected changes in LIBOR or the Reuters reporting service.

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Reminder: Credit Practices Cannot be Based on Marital Status

November 4, 2013

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A recent opinion by the Fourth Circuit Court of Appeals is a good reminder that lenders and lending lawyers must be aware of Regulation B’s limitations on requiring spousal guarantees when underwriting and documenting commercial loan transactions. Regulation B implements the Equal Credit Opportunity Act and, among other things, prohibits creditors from using credit approval and underwriting practices that discriminate on the basis of marital status.

On October 30, 2013, the Fourth Circuit, in Ballard vs. Bank of America, upheld the lower court’s dismissal of a wife’s claims against the bank. The opinion provides a detailed discussion of Regulation B’s requirements and, in dicta, suggests that the bank may very well have violated Regulation B in requiring the wife, Mrs. Ballard, to guaranty a loan to her husband’s business. The court, however, finds the dismissal was proper because Mrs. Ballard waived her claims against the bank.

After the loan was originally made, defaults occurred and the borrower and guarantors waived and released claims against the bank in connection with restructuring agreements. The court found those subsequent waivers and releases were sufficient to waive any claims Mrs. Ballard may have had against the bank for violating Regulation B. This is an interesting (and some may say unfair) conclusion because the only reason Mrs. Ballard had signed the release is because she was a guarantor. Had the bank not required the guaranty in the first place (a supposed violation of Regulation B), Mrs. Ballard would not have been included in the release agreement. Nevertheless, the court did not agree that the initial violation which started the chain of events prevented the release from being effective.

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