Yesterday’s post discussed the recent appellate ruling in Sentinel’s bankruptcy, Grede v. Bank of New York Mellon Corp.

“The panic appears to be over. Now is the time to get worried.”
William Keegan (1938–), British author and journalist

A signed and recorded joint operating agreement (JOA) is often the first line of defense for an operator dealing with distressed partners.  For example, a JOA generally grants an operator a lien upon the oil and gas rights of a non-operator in default and may establish certain penalties that can be assessed against a party who does not pay their share of development.  But what happens when there is no JOA?

For secured lenders, the single most dangerous provision of the U.S. Bankruptcy Code is section 506(c). This section permits the bankruptcy court to collect from the lender’s collateral the bankruptcy estate’s necessary expenses of preserving and disposing of the collateral, "to the extent of any benefit" to the lender.

Last week, the United States Court of Appeals for the Sixth Circuit issued a decision in the case of Cyber Solutions International LLC v. Pro Marketing Sales, Inc. Although the decision blazes no new legal territory, the facts of the case and rulings offer important lessons for both lenders and licensees.

The Seventh Circuit Court of Appeals recently held that a lender is obligated to conduct a diligent investigation when it becomes aware of suspicious facts relating to the legitimacy of a loan transaction. In Sentinel Management Group, Inc., 2016 WL 98601 (7th Cir. January 8, 2016), the Seventh Circuit found that a bank officer’s puzzlement was enough to place the bank on inquiry notice, which required the bank to investigate the collateral the borrower was using to secure the loan.

In SGK Ventures, LLC, the Bankruptcy Court for the Northern District of Illinois ordered that the secured claims of two entities controlled by insiders of the debtor be equitably subordinated to the claims of unsecured creditors.

The U.S. Court of Appeals for the Second Circuit recently held that a debtor in bankruptcy can pursue claims under the federal Fair Debt Collection Practices Act ("FDCPA") in district court for trying to collect a discharged debt, reversing a judgment dismissing the FDCPA claims and requiring the plaintiff seek relief in bankruptcy court.

The U.S. District Court for the Middle District of Florida recently dismissed allegations that a debt buyer violated the federal Fair Debt Collection Practices Act by filing a proof of claim on time-barred debt, holding that such claims are precluded by the Bankruptcy Code, and that the FDCPA does not provide a private right of action against debt collectors who file time-barred proofs of claim in bankruptcy court.

In the latest ruling in the long-running dispute in Sentinel Management’s bankruptcy case, the Seventh Circuit recently held that a bank employee’s suspicions about the source of the bank’s collateral should have put the bank on inquiry notice, thus precluding the bank from asserting a “good faith” defense to a fraudulent transfer claim that a liquidating trustee brought against the bank.

Lenders and secured creditors often require that debtor-customers direct all receivable collections into a lockbox, hoping to wrangle any available proceeds to apply to their debtors’ outstanding debt. In requiring a debtor or its customer to remit payments to a lockbox, however, creditors may be overlooking a potential source of significant liability. A creditor using a lockbox may unwittingly expose itself to greater risk and liability than just a debtor’s default if it receives funds that were collected as sales tax on a debtor’s goods or services.