THE BRIEF

FINANCIAL SERVICES LITIGATION QUARTERLY

FALL 2023

1

TABLE OF CONTENTS

Were There Underwriting Requirements for PPP Loans After All? The Sound-Value Requirement May Pose Risk for PPP Lenders

3

Noteworthy10

District Court Upholds New ERISA Rules on ESG Investing

10

Fourth Circuit Holds That Class-Action Waivers Must Be Addressed Before Class Certification

12

Ninth Circuit: Fees for Claims-Made Settlements Must Be Based on Actual Recovery

13

In the second largest US bank failure since the 2008 global financial crisis, the California Department of Financial Protection and Innovation took over Silicon Valley Bank (“SVB”) on March 10 and appointed the Federal Deposit Insurance Corporation (“FDIC”) as SVB’s receiver. Just two days later, the New York State Department of Financial Services took over another bank, Signature Bank, and appointed the FDIC as receiver. And, yesterday, the share price of various European banks plunged following record one-day selloffs.

The Express Grain Terminals, LLC (“Express Grain”) bankruptcy is a case study for grain farmers and their crop production lenders. Near the end of corn harvest and during the peak of soybean harvest, many grain farmers in the Mississippi Delta discovered that they faced potential financial ruin as a result of the bankruptcy filing by Express Grain¹ on September 29, 2021 (the “Petition Date”).

A bankruptcy court’s recent decision in Bailey Tool & Mfg. Co., et al. v. Republic Bus. Credit (In re Bailey Tool & Mfg. Co.), Adv. No. 16-03025-SGJ (Bankr. N.D. Tex. Dec. 23, 2021) serves as a reminder for lenders that they should avoid certain actions when dealing with distressed borrowers. Specifically, in Bailey, a bankruptcy judge found a lender squarely at fault for its borrower’s bankruptcy and subsequent liquidation, and held the lender liable to the borrower’s bankruptcy estate for various breach of contract, tort, and bankruptcy claims.

On August 16, 2021, the US Court of Appeals for the Fifth Circuit held that an individual guarantor remained liable for more than $58 million in commercial debt, despite the individual’s claims that the lenders induced him to provide the guaranty under duress. See Lockwood International, Inc. v. Wells Fargo, NA, et al., Case No. 20-40324 (5th Cir. Aug. 16, 2021).

On May 24, 2019, New Zealand-based online asset exchange, Cryptopia Limited, filed a petition under Chapter 15 of the United States Bankruptcy Code seeking recognition of its New Zealand liquidation proceeding in the United States. On the same day, the United States Bankruptcy Court for the Southern District of New York granted provisional relief to Cryptopia, including extending the benefits of the automatic stay to prevent creditors or other parties in interest from taking actions to interfere with Cryptopia’s assets.

On March 27, 2019, the United States Bankruptcy Court for the Northern District of West Virginia issued an opinion holding that an over-secured creditor could not recover a portion of the creditor's attorney's fees incurred in connection with the borrower's bankruptcy proceeding despite provisions in the loan agreement that provided for recovery of attorney's fees "incurred in connection with the enforcement" of the loan documents.

The U.S. Supreme Court recently scrutinized the proper application of the safe harbor found in Section 546(e) of the U.S. Bankruptcy Code1 in Merit Management Group, LP v. FTI Consulting Inc.2 While the Supreme Court's decision narrowed the reach of the safe harbor, it did little to change the landscape for the multi-billion dollar U.S. structured finance industry, including warehouse lending.

The Bankruptcy Code prohibits a chapter 13 debtor from modifying a mortgage lien on the debtor's principal residence. Even in situations in which a secured creditor fails to file a proof of claim or otherwise participate in the bankruptcy proceeding, the Bankruptcy Code allows a secured creditor's lien on a primary residence to pass through the bankruptcy unaffected. However, a recent decision from a bankruptcy court in Texas illustrates the risks to secured creditors of blind reliance on these statutory protections.

"The Parent Bank entered into this insurance contract with its eyes wide open and its wallet on its mind."