Source: http://www.jdsupra.com/legalnews/points-authorities-summer-2011-74188/
Timestamp: 2015-01-29 05:18:58
Document Index: 301037028

Matched Legal Cases: ['§ 12', '§157', '§157', '§157', '§ 10910', '§ 66473', '§ 10505']

Points & Authorities - Summer 2011 | Buchalter Nemer - JDSupra
3. Successful Strategies for Defending Fraud-Based Commercial Lender Liability Claims
4. Buyer Beware: The Arizona Homeowner's Purchaser Dwelling Act
5. Lender Beware: When Real Property Title Issues Arise, Don't Forget Your Escrow Claim
8. Truimph of the Impractical: Treatment of Water Supply Under the California Environmental Quality Act
9. Solving the Puzzle of Community Bank Mergers and Acquisitions
Download PDF A􀃄􀃄􀂃 N􀂮􀂑􀃊􀂽􀂛 S􀃃􀂮􀃣􀂫 S􀃣􀃙􀂮􀃖􀃝 B􀂃􀃄􀂻􀃙􀃧􀃖􀃣􀂑􀃹 C􀃊􀃧􀃙􀃣 J􀃧􀃙􀂮􀃝􀂗􀂮􀂑􀃣􀂮􀃊􀃄 B􀂛􀃄􀂹􀂃􀃃􀂮􀃄 S. S􀂛􀂮􀂦􀂛􀂽 B U C H A L T E R N E M E R A􀃄􀃄􀂃 N􀂮􀂑􀃊􀂽􀂛 S􀃃􀂮􀃣􀂫 S􀃣􀃙􀂮􀃖􀃝 B􀂃􀃄􀂻􀃙􀃧􀃖􀃣􀂑􀃹 C􀃊􀃧􀃙􀃣 J􀃧􀃙􀂮􀃝􀂗􀂮􀂑􀃣􀂮􀃊􀃄 T􀂫􀂛 A􀂗􀃲􀂛􀃄􀃣 􀃊􀂥 “.A􀃄􀃹􀃣􀂫􀂮􀃄􀂦”: J􀃊􀃧􀃙􀃄􀂛􀃹 I􀃄􀃣􀃊 􀃣􀂫􀂛 U􀃄􀂻􀃄􀃊􀃳􀃄 N􀂛􀃳 F􀂃􀂑􀂛􀃝 P􀃊􀂮􀃄􀃣􀃝 􀂥􀃙􀃊􀃃 􀃣􀂫􀂛 P􀃙􀂛􀃝􀂮􀂗􀂛􀃄􀃣 S􀃧􀂑􀂑􀂛􀃝􀃝􀂥􀃧􀂽 S􀃣􀃙􀂃􀃣􀂛􀂦􀂮􀂛􀃝 􀂥􀃊􀃙 D􀂛􀂥􀂛􀃄􀂗􀂮􀃄􀂦 F􀃙􀂃􀃧􀂗-B􀂃􀃝􀂛􀂗 C􀃊􀃃􀃃􀂛􀃙􀂑􀂮􀂃􀂽 L􀂛􀃄􀂗􀂛􀃙 L􀂮􀂃􀂐􀂮􀂽􀂮􀃣􀃹 C􀂽􀂃􀂮􀃃􀃝 B􀃧􀃹􀂛􀃙 B􀂛􀃳􀂃􀃙􀂛: T􀂫􀂛 A􀃙􀂮􀃾􀃊􀃄􀂃 H􀃊􀃃􀂛􀃊􀃳􀃄􀂛􀃙’􀃝 P􀃧􀃙􀂑􀂫􀂃􀃝􀂛􀃙 D􀃳􀂛􀂽􀂽􀂮􀃄􀂦 A􀂑􀃣 L􀂛􀃄􀂗􀂛􀃙 B􀂛􀃳􀂃􀃙􀂛: W􀂫􀂛􀃄 R􀂛􀂃􀂽 P􀃙􀃊􀃖􀂛􀃙􀃣􀃹 T􀂮􀃣􀂽􀂛 I􀃝􀃝􀃧􀂛􀃝 A􀃙􀂮􀃝􀂛, D􀃊􀃄’􀃣 F􀃊􀃙􀂦􀂛􀃣 Y􀃊􀃧􀃙 E􀃝􀂑􀃙􀃊􀃳 C􀂽􀂃􀂮􀃃 T􀃙􀂮􀃧􀃃􀃖􀂫 􀃊􀂥 􀃣􀂫􀂛 I􀃃􀃖􀃙􀂃􀂑􀃣􀂮􀂑􀂃􀂽: T􀃙􀂛􀂃􀃣􀃃􀂛􀃄􀃣 􀃊􀂥 W􀂃􀃣􀂛􀃙 S􀃧􀃖􀃖􀂽􀃹 U􀃄􀂗􀂛􀃙 􀃣􀂫􀂛 C􀂃􀂽􀂮􀂥􀃊􀃙􀃄􀂮􀂃 E􀃄􀃲􀂮􀃙􀃊􀃄􀃃􀂛􀃄􀃣􀂃􀂽 Q􀃧􀂃􀂽􀂮􀃣􀃹 A􀂑􀃣 S􀃊􀂽􀃲􀂮􀃄􀂦 􀃣􀂫􀂛 P􀃧􀃾􀃾􀂽􀂛 􀃊􀂥 C􀃊􀃃􀃃􀃧􀃄􀂮􀃣􀃹 B􀂃􀃄􀂻 M􀂛􀃙􀂦􀂛􀃙􀃝 􀂃􀃄􀂗 A􀂑􀃘􀃧􀂮􀃝􀂮􀃣􀂮􀃊􀃄􀃝 Con􀆟 nued on page 7 SUMMER 2011 12 I􀃄 T􀂫􀂮􀃝 I􀃝􀃝􀃧􀂛 POINTS & authori􀆟 es Q U A R T E R L Y N E W S L E T T E R ® Con􀆟 nued on page 6 Who is Anna Nicole Smith? Anna Nicole Smith was born in 1967 and died in 2007. A􀅌 er a troubled childhood, among other ac􀆟 vi􀆟 es, she worked as a waitress in a fried chicken restaurant and held jobs at Wal-Mart and Red Lobster. She became a stripper in 1991, was Playmate of the Year in 1993 and a model for Guess Jeans. Li􀆩 le did she know that she would gain notoriety for ini􀆟 a􀆟 ng legal proceedings that would result in what some legal pundits and scholars believe to be a signifi cant change in one aspect of our country’s bankruptcy laws. Did her ac􀆟 ons strip the Bankruptcy Courts of jurisdic􀆟 on over ma􀆩 ers that they had tradi􀆟 onally decided? The Li􀆟 ga􀆟 on History On June 23, 2011, in a 5/4 decision, the United States Supreme Court decided the case of Stern, Executor of the Estate of Marshall v. Marshall, Executrix of the Estate of Marshall, 546 U.S. _____ (2011), or simply, Stern v. Marshall. It involved a long running dispute between Vickie Lynn Marshall, be􀆩 er known to the world as Anna Nicole Smith, and her deceased husband’s son, Pierce Marshall over a purported trust that Vickie claimed was promised to her by her late billionaire husband, J. Howard Marshall. The marriage took place approximately one year prior to J. Marshall’s death. 34 T􀂫􀂛 A􀂗􀃲􀂛􀃄􀃣 􀃊􀂥 “.A􀃄􀃹􀃣􀂫􀂮􀃄􀂦”: J􀃊􀃧􀃙􀃄􀂛􀃹 I􀃄􀃣􀃊 􀃣􀂫􀂛 U􀃄􀂻􀃄􀃊􀃳􀃄 F􀂃􀃙􀂃􀂫 P. B􀂫􀂃􀃣􀃣􀂮 􀂃􀃄􀂗 A􀃄􀃄􀂮􀂛 L. A􀂽􀂐􀂛􀃙􀃣􀃝􀃊􀃄 In June 2011, the Internet Corpora􀆟 on for Assigned Names and Numbers (ICANN), the regulatory body that oversees the Internet’s domain name system, approved a plan to expand on generic Top-Level Domain (“gTLD”) extensions. The plan will soon allow virtually anyone to apply for their own custom gTLD suffi xes. In addi􀆟 on to the current limited number (22, at last count) of defi ned gTLDs (e.g., .com, .org, .net, .info, .edu, .gov, etc.), the new plan will re-organize the Internet to allow for there to be “.anything.” The gTLDs can be as long as 63 characters, and can consist of almost any word in any language. Clearly, this landmark move signals a watershed moment in the development of the Internet. With the ability to create “.anything” domain names, the organiza􀆟 on of the Internet now has the poten􀆟 al to become much more confusing, a fer􀆟 le breeding ground for increased cybersqua􀆫 ng and trademark infringement. Many commentators believe this new expansion will drama􀆟 cally change the ways in which web surfers use and approach Internet websites. At the same 􀆟 me, the new ICANN ini􀆟 a􀆟 ve will open up crea􀆟 ve branding opportuni􀆟 es for 589S􀃧􀃃􀃃􀂛􀃙 S􀃣􀃙􀂃􀃣􀂛􀂦􀂮􀂛􀃝2 BUCHALTER NEMER New Faces PETER BALES San Francisco Associate Li􀆟 ga􀆟 on 415.227.3655 pbales@buchalter.com Points from the President RICK COHEN It’s a wrap. Summer is drawing to a close and with it comes our Summer 2011 Points and Authori􀆟 es. Opening this issue, Ben Seigel entertains and informs us with his analysis of Stern v. Marshall: its circuitous path, twice, to the United States Supreme Court, and the impact of the High Court’s controversial 5-4 decision on the Bankruptcy Court’s jurisdic􀆟 on. Turning our a􀆩 en􀆟 on to the IP world, Farah Bha􀆫 and Annie Albertson take us on a journey into the unknown as we watch and wait to see how the launch of .anything unfolds along with its poten􀆟 al impact on businesses. Impending crisis or much ado about nothing? In a follow-up to his ar􀆟 cle on California’s water issues in our Spring Points and Authori􀆟 es, Howard Ellman returns with an update on this rapidly developing situa􀆟 on. The remainder of this issue’s ar􀆟 cles focus on li􀆟 ga􀆟 on. Denise Field and Kim Arnone write about a new trend shaped by commercial borrowers bringing lawsuits against their lenders in search of some form of relief as they stave off foreclosure. Their winning strategy: early assessment and collabora􀆟 on with counsel are key to a successful defense in those cases. Also wri􀆟 ng for lenders in li􀆟 ga􀆟 on, Jason Goldstein reminds them not to overlook possible escrow claims when 􀆟 tle issues arise with respect to loans secured by real property. Escrow claims may allow a lender to recover damages beyond the indemnity amount prescribed in a 􀆟 tle insurance policy. A􀆩 orneys Rob Ru􀆟 la and Ben Go􀆩 lieb address the Arizona courts’ strict applica􀆟 on of legisla􀆟 on passed in response to a crushing wave of construc􀆟 on defect li􀆟 ga􀆟 on that fl ooded the Arizona courts in 2002. Dismissal looms for homebuyers who fail to adhere precisely to the steps required by the statute, even where the builder steps in to repair. We hope you enjoy our Summer reading wind-down. Rick Cohen President and Chief Execu􀆟 ve Offi cer ANTHONY R. CALLOBRE Los Angeles Shareholder Bank and Finance 213.891.5024 acallobre@buchalter.com ALEXANDER ZOLFAGHARI Sco􀆩 sdale Of Counsel Bank and Finance 480.383.1833 azolfaghari@buchalter.com BRADLEY GRUMBLEY Los Angeles Associate Li􀆟 ga􀆟 on 213.891.5232 bgrumbley@buchalter.com JOHN CONNOLLY San Francisco Shareholder Bank and Finance 415.227.3508 jconnolly@buchalter.com ABI GNANADESIGAN Los Angeles Associate Li􀆟 ga􀆟 on 213.891.5430 abi.gnanadesigan@buchalter.comPOINTS & AUTHORITIES 3 S􀃧􀂑􀂑􀂛􀃝􀃝􀂥􀃧􀂽 S􀃣􀃙􀂃􀃣􀂛􀂦􀂮􀂛􀃝 􀂥􀃊􀃙 D􀂛􀂥􀂛􀃄􀂗􀂮􀃄􀂦 F􀃙􀂃􀃧􀂗-B􀂃􀃝􀂛􀂗 C􀃊􀃃􀃃􀂛􀃙􀂑􀂮􀂃􀂽 L􀂛􀃄􀂗􀂛􀃙 L􀂮􀂃􀂐􀂮􀂽􀂮􀃣􀃹 C􀂽􀂃􀂮􀃃􀃝 D􀂛􀃄􀂮􀃝􀂛 H. F􀂮􀂛􀂽􀂗 􀂃􀃄􀂗 K􀂮􀃃 Y. A􀃙􀃄􀃊􀃄􀂛 As the economy struggles to stay on track, court dockets con􀆟 nue to be dominated by li􀆟 ga􀆟 on arising from defaulted loans. Disputes over defaulted loans are being brought not only by lenders seeking to enforce their rights but also by borrowers claiming some form of lender liability. Commercial borrowers are fi ling these suits as the economic downturn con􀆟 nues to challenge their businesses and real estate developments. Increasingly, claims alleging lender liability include allega􀆟 ons of fraudulent prac􀆟 ces. This ar􀆟 cle examines this trend in borrower suits and presents strategies to defend against them. A case study is presented that employed these strategies in the successful defense of a lender facing fraud-based claims. Typical Claims And Remedies Sought In fi ling suits against lenders, borrowers are o􀅌 en a􀆩 emp􀆟 ng to plead various fraud-based claims including inten􀆟 onal misrepresenta􀆟 on, fraudulent inducement to contract and Racketeer Infl uenced Corrup􀆟 on Act (“RICO”) causes of ac􀆟 on. These claims carry the possibility of puni􀆟 ve damages. Plain􀆟 ff s o􀅌 en supplement these fraud-based claims with allega􀆟 ons of breach of contract, unfair compe􀆟 􀆟 on (California Business and Professions Code sec􀆟 on 17200 et seq. (“UCL”)), negligence, and breach of fi duciary duty, among others. Through these claims, borrowers seek damages from the lender as well as rescission of the loan. Addi􀆟 onally, unstated goals of borrowers may include renego􀆟 a􀆟 on of loan terms, forgiveness of principal, staying foreclosure proceedings, and staying enforcement of guarantees. The wide range of claims, as well as the sheer volume of allega􀆟 ons asserted, may at fi rst, appear to be daun􀆟 ng. Preparing To Defend When a lender liability claim is threatened or fi led, good prac􀆟 ce dictates that the lender: • assemble all agreements with the borrower, • assemble all correspondence and notes regarding the transac􀆟 on at issue, • iden􀆟 fy witnesses, and • undertake a review of the factual claims. Collabora􀆟 on between counsel and the lender to facilitate an early, clear assessment of the allega􀆟 ons is key to determining how to respond to a lender liability claim. Defending Commercial Lender Liability Claims Early collabora􀆟 on between lender and counsel coupled with an in depth analysis of the complaint’s factual allega􀆟 ons and legal theories will determine whether the lender should answer the complaint or move to dismiss the complaint for failure to state a claim. Buchalter Nemer recently defended a lender facing fraud-based claims as well as claims of breach of contract, inten􀆟 onal interference with prospec􀆟 ve economic advantage, and negligence. The borrower’s claims were alleged in a complaint of more than 300 paragraphs fi led in federal court. Buena Vista, LLC v. New Resource Bank, 2011 WL 250361 (N. D. Cal. January 26, 2011). In that suit, the borrower did not generate the revenue it had an􀆟 cipated from a townhome construc􀆟 on project as the real estate market slumped. Facing the sale of its loan to another lender and poten􀆟 al loan default and foreclosure, the borrower alleged various unsubstan􀆟 ated general misrepresenta􀆟 ons. The complaint included, among other claims, RICO mail and wire fraud, breach of contract, fraud-based UCL claims, inten􀆟 onal misrepresenta􀆟 on, and negligence. Ul􀆟 mately, the district court rejected each of the borrowers’ claims and dismissed the en􀆟 re ma􀆩 er at the pleading stage. With the fraud-based claims, RICO, misrepresenta􀆟 on and fraudulent UCL claims, the court found that the borrower failed to allege the purportedly fraudulent statements with par􀆟 cularity. As to RICO claims, the decep􀆟 ve statements made by wire or mail needed to be iden􀆟 fi ed by date and the content alleged and the borrower needed to plead how the alleged fraud was furthered by the par􀆟 cular mailings or telephone calls. United States v. Blecker, 657 F.2d 629, 637 (4th Cir. 1981). The borrower was unable to allege any specifi c mail or interstate telephone communica􀆟 on to support its RICO claim and thus the claim was dismissed along with the misrepresenta􀆟 on and UCL claims. As to breach of contract claims, the court found that the borrower made general breach allega􀆟 ons related to the lender’s promised handling of the loan but failed to iden􀆟 fy any provision of the loan agreement that was breached. The loan documents, the court ruled, simply did not provide evidence that the lender made the promises alleged in the complaint. As loan agreements typically include an integra􀆟 on clause indica􀆟 ng that the loan documents are a fi nal expression of the par􀆟 es’ agreement, allega􀆟 ons contradic􀆟 ng the express loan terms cannot support a breach of contract claim. Con􀆟 nental Airlines, Inc. v. McDonnell Douglas Corp., 216 Cal.App.3d 388, 418 (1989). As such, borrower’s contract claims also failed to survive the dismissal mo􀆟 on. Negligence or fi duciary duty causes of ac􀆟 on are also u􀆟 lized by borrowers in lender liability ac􀆟 ons but such claims cannot be maintained under applicable case law. In Buena Vista, the court dismissed borrower’s negligence cause of ac􀆟 on because a fi nancial ins􀆟 tu􀆟 on owes no duty of care to a borrower where the lender does not exceed its role as a lender of money. Nymark v. Heart of Fed. Savings & Loan Assn., 231 Cal.App.3d 1089, 1095 (1991). This tenet applies equally to breach of fi duciary duty claims. In the Buena Vista case, a􀅌 er being permi􀆩 ed to amend its pleading once, eventually all of borrowers’ lender liability claims were dismissed with prejudice. Early assessment and analysis provided the key to a successful defense. Denise Field is a Shareholder in the Firm’s Li􀆟 ga􀆟 on Prac􀆟 ce Group in San Francisco. She can be reached at 415.227.3547 or dfi eld@buchalter.com. Kim Arnone is Senior Counsel in the Firm’s Li􀆟 ga􀆟 on Prac􀆟 ce Group in San Francisco. She can be reached at 415.227.3577 or karnone@buchalter.com. B􀃧􀃹􀂛􀃙 B􀂛􀃳􀂃􀃙􀂛: T􀂫􀂛 A􀃙􀂮􀃾􀃊􀃄􀂃 H􀃊􀃃􀂛􀃊􀃳􀃄􀂛􀃙’􀃝 P􀃧􀃙􀂑􀂫􀂃􀃝􀂛􀃙 D􀃳􀂛􀂽􀂽􀂮􀃄􀂦 A􀂑􀃣 R􀃊􀂐 R􀃧􀃣􀂮􀂽􀂃 􀂃􀃄􀂗 B􀂛􀃄 G􀃊􀃣􀃣􀂽􀂮􀂛􀂐 4 BUCHALTER NEMER In 2002, as a direct response to the wave of construc􀆟 on defect li􀆟 ga􀆟 on fl ooding the Arizona courts, the Arizona legislature enacted the Purchaser Dwelling Act (the “Act”), A.R.S. § 12-1361, et seq. The purpose of the Act was to reduce traffi c within the courts by making it more diffi cult for homebuyers to fi le construc􀆟 on defect claims against homebuilders and developers. This ar􀆟 cle outlines the processes—and pi􀆞 alls—of which a homebuyer must be aware and a homebuilder may take advantage, before any construc􀆟 on defect lawsuit may be fi led in Arizona. Homebuyer’s Hurdles to Filing a Lawsuit Boiled down to its essence, the Act shields homebuilders from being sued for alleged construc􀆟 on defects unless and un􀆟 l the homebuyer takes specifi c ac􀆟 ons laid out in the Act that give the homebuilder an opportunity to repair the defects before suit is fi led. Should a homebuyer fi le suit without fi rst complying with the specifi c steps laid out by the Legislature, the homebuilder will likely succeed in having that lawsuit dismissed.1 First, under the Act, an aggrieved homebuyer must provide the homebuilder with no􀆟 ce of any alleged construc􀆟 on defects at least 90 days no􀆟 ce before fi ling a lawsuit. The wri􀆩 en no􀆟 ce must be given to the builder “by cer􀆟 fi ed mail, return receipt requested,” and it must specify, in reasonable detail, the basis of the lawsuit. Importantly, the Act defi nes “seller” as “any person, fi rm, partnership, corpora􀆟 on, associa􀆟 on or other organiza􀆟 on that is engaged in the business of designing, construc􀆟 ng or selling dwellings.” Thus, as a prac􀆟 cal ma􀆩 er, “seller” means developers and homebuilders.2 (Interes􀆟 ngly enough, the Act precludes “real estate brokers” or “real estate salesperson”). Once the homebuilder receives the wri􀆩 en no􀆟 ce of defects, it may inspect the house to determine the nature and cause of the alleged defects. Upon inspec􀆟 on, the contractor is then provided an opportunity to cure and must, within 60 days of receipt of the homebuyer’s no􀆟 ce, “send to the purchaser a good faith wri􀆩 en response to the purchaser’s no􀆟 ce by cer􀆟 fi ed mail, return receipt requested.” If the homebuilder does not provide the homebuyer with a response within 60 days of receiving the “no􀆟 ce” le􀆩 er, the homebuyer can then fi le a lawsuit without wai􀆟 ng for the 90 days to expire. However, if the homebuilder does respond, the homebuilder may off er “to repair or replace any alleged defects, to have the alleged defects repaired or replaced at the seller’s expense or to provide monetary compensa􀆟 on to the purchaser [homebuyer].” Once the homebuyer receives the homebuilder’s off er, he or she must then either accept or reject the off er and provide a “good faith wri􀆩 en response to the seller within 20 days a􀅌 er receiving the seller’s off er.” The homebuyer’s response must also be provided in wri􀆟 ng by cer􀆟 fi ed mail, return receipt requested. Strict Compliance Arizona courts appear to have eagerly accepted the Arizona Legislature’s challenge as they have enforced the Act and its procedural hurdles. This strict enforcement was illustrated recently in McMurray v. Dream Catcher USA, 220 Ariz. 71, 76, 202 P.3d 536, 541 (App. 2009). There, the trial court dismissed the homebuyer’s lawsuit because the buyer did not strictly comply with the Act’s wri􀆩 en no􀆟 ce requirements. The facts were simple: A􀅌 er discovering a number of construc􀆟 on defects, the homebuyer fi led a complaint with the Arizona Registrar of Contractors. Upon receipt of the wri􀆩 en complaint, the homebuilder a􀆩 empted repairs to the home. Because the homebuyer believed the homebuilder did not repair all the defects, the homebuyer eventually fi led a lawsuit against the builder in Maricopa County Superior Court. The trial court dismissed the case because the homebuyer failed to properly send the “wri􀆩 en no􀆟 ce le􀆩 er, return receipt required” to the homebuilder as required by the Act. Thus, despite fi ling an ac􀆟 on before the Arizona Registrar of Contractors, and having the homebuilder a􀆩 empt repairs to the home, the homebuyer’s failure to strictly abide by the Act’s wri􀆩 en no􀆟 ce requirements proved fatal to its claims. A lesson learned by the homebuyer the hard way. As the above demonstrates, it is impera􀆟 ve that an Arizona homebuyer comply with the specifi c procedural requirements of the Purchaser Dwelling Act or face possible dismissal of his or her lawsuit. Rob Ru􀆟 la is an Associate in the Li􀆟 ga􀆟 on Prac􀆟 ce Group in Sco􀆩 sdale. He can be reached at 480.383.1826 or rru􀆟 la@buchalter.com. Ben Go􀆩 lieb is an Associate in the Li􀆟 ga􀆟 on Prac􀆟 ce Group in Sco􀆩 sdale. He can be reached at 480.383.1810 or bgo􀆩 lieb@buchalter.com. 1 Note, in a narrow excep􀆟 on, that the Act does not apply to claims for defects involving an immediate threat to the life or safety of a home’s occupants or visitors. 2 The provisions of the Act are not limited to new construc􀆟 on. In the instance of alleged defects to exis􀆟 ng construc􀆟 on, the buyer would serve no􀆟 ce on the seller of the property.POINTS & AUTHORITIES 5 When a lender experiences real property 􀆟 tle issues involving a secured loan, the fi rst thought that normally comes to mind is: where is my 􀆟 tle insurance policy? While this is a very good ini􀆟 al reac􀆟 on—and one that cannot be forgo􀆩 en—what is some􀆟 mes overlooked is that the lender may also have an escrow claim based on the instruc􀆟 ons it provided to the escrow holder who closed the loan. Accordingly, when 􀆟 tle issues arise with respect to loans secured by real property: don’t forget your escrow claim! In other words: welcome to the escrow claim zone. It is an area close to, and some􀆟 me overlaps, the 􀆟 tle claim zone. Nevertheless, entrance into both zones always begins the same way. A would-be borrower fi lls out an applica􀆟 on for a loan and compiles suppor􀆟 ng documenta􀆟 on. This documenta􀆟 on is either submi􀆩 ed directly to the lender by the borrower or through a broker or a correspondent lender. The would-be lender then reviews the applica􀆟 on and suppor􀆟 ng documenta􀆟 on and obtains an appraisal to determine whether the value of the proposed real property security is suffi cient to jus􀆟 fy the proposed loan amount. If the informa􀆟 on compiled by the lender sa􀆟 sfi es its underwri􀆟 ng guidelines, the proposed loan is approved. An escrow is then set-up and instruc􀆟 ons are provided by the lender to the escrow holder. These instruc􀆟 ons are normally in wri􀆟 ng, although they do not have to be, and include a request for the issuance of a 􀆟 tle insurance policy which insures that 􀆟 tle to the real property securing the loan is vested in the borrower and that the deed of trust securing the loan is in a fi rst lien posi􀆟 on on the secured property. A closing date is set, the borrower signs the appropriate loan and security documents, and then the loan funds. The deed of trust securing the loan is then recorded with the applicable county recorder and the origina􀆟 on process is complete. In a perfect world, shortly a􀅌 er the escrow closes the lender receives a 􀆟 tle insurance policy with no excep􀆟 ons that indicates that 􀆟 tle to the real property security is vested in its borrower alone. The borrower then begins to make 􀆟 mely payments on the loan and does so un􀆟 l the en􀆟 re loan balance is sa􀆟 sfi ed. The lender then happily reconveys its deed of trust and closes the books on what was a perfect loan. But wait, we are not in a perfect world . . . we have traveled into the escrow claim zone! Here, borrowers do not always tell the truth or make payments on 􀆟 me. These borrowers some􀆟 mes fall on hard 􀆟 mes and are willing to do things that honest people are not willing to do. Similarly, in the escrow claim zone, escrow companies do not always follow the instruc􀆟 ons that they are given. The escrow companies also cannot always be relied upon to make sure that the lender is fully apprised of all per􀆟 nent facts—of which they have actual knowledge at the most important 􀆟 me—prior to the funding of the loan. For example, in the escrow claim zone, borrowers default on loans secured by proper􀆟 es that they misrepresented that they owned (but didn’t) and the 􀆟 tle insurance company who issued your policy did not catch this material issue or is part of the borrower’s scheme to defraud. This same 􀆟 tle insurance company, which gladly took the lender’s money to issue a 􀆟 tle policy, now refuses to issue the li􀆟 ga􀆟 on guarantee that the lender needs to provide to the trustee under the deed of trust so that the foreclosure sale can proceed. In this situa􀆟 on, the lender should of course tender a claim under its 􀆟 tle insurance policy. In fact, it is always a best prac􀆟 ce, subject to certain excep􀆟 ons, to try and tender every possible claim that you may have to an insurer. However, 􀆟 tle insurance is a policy of indemnity and not a guarantee. Prac􀆟 cally speaking, this means that just because the 􀆟 tle insurance company screwed up, it does not mean that the 􀆟 tle insurer needs to pay the full amount of the policy, which is generally the cap on damages a lender will be able to obtain against a 􀆟 tle insurer. To keep all of the lender’s op􀆟 ons open, the lender should also consider an escrow claim. An escrow claim is based on the lender’s instruc􀆟 ons to the escrow holder in conjunc􀆟 on with the closing of the loan. Since an escrow holder is the agent of all of the par􀆟 es to the escrow, it has a fi duciary duty to the par􀆟 es to the escrow. A fi duciary duty is the highest duty of care provided for in the law. As a result, the escrow holder is required to strictly comply with the instruc􀆟 ons provided to it and is liable for damages to the lender when it does not do so. Accordingly, unlike a 􀆟 tle claim, which is solely contractual in nature, an escrow claim is not so limited. For example, an escrow claim does form the basis for a breach of contract cause of ac􀆟 on. But it can also form the basis for negligence, breach of fi duciary duty and fraud claims. This means that the damages a lender suff ers from an escrow claim may not be limited solely to contract—benefi t of the bargain principles— but may be governed by common law tort principles which include damages proximately caused as a result of the escrow company’s breaches of duty. Under certain circumstances, tort principles can allow a lender to a recover an amount in excess of what is obtainable in indemnity under a 􀆟 tle insurance policy. Accordingly, when real property 􀆟 tle issues arise: don’t forget the escrow claim. Jason Goldstein is Senior Counsel in the Li􀆟 ga􀆟 on Prac􀆟 ce Group in Orange County. He can be reached at 949.224.6235 or jgoldstein@buchalter.com. L􀂛􀃄􀂗􀂛􀃙 B􀂛􀃳􀂃􀃙􀂛: W􀂫􀂛􀃄 R􀂛􀂃􀂽 P􀃙􀃊􀃖􀂛􀃙􀃣􀃹 T􀂮􀃣􀂽􀂛 I􀃝􀃝􀃧􀂛􀃝 A􀃙􀂮􀃝􀂛, D􀃊􀃄’􀃣 F􀃊􀃙􀂦􀂛􀃣 Y􀃊􀃧􀃙 E􀃝􀂑􀃙􀃊􀃳 C􀂽􀂃􀂮􀃃 J􀂃􀃝􀃊􀃄 G􀃊􀂽􀂗􀃝􀃣􀂛􀂮􀃄6 BUCHALTER NEMER Con􀆟 nued from page 1 The li􀆟 ga􀆟 on against Pierce was commenced by Vickie prior to the death of J. Howard at age 90 and worked its way through the State and Federal courts in Louisiana, Texas and California. Two of those courts, a Texas state probate court and the Bankruptcy Court for the Central District of California, reached contrary decisions on the merits. Vicky and Pierce both died in the course of the li􀆟 ga􀆟 on so the li􀆟 ga􀆟 on con􀆟 nued between the representa􀆟 ves of their respec􀆟 ve estates. Stern v. Marshall was the second 􀆟 me that the Supreme Court was faced with adjudica􀆟 ng the rights of Vickie and Pierce. The issue before the Supreme Court this 􀆟 me was whether a Bankruptcy Court had the authority to enter a fi nal judgment on a counterclaim fi led by Vickie against Pierce in Vickie’s California bankruptcy case. Pierce had fi led a proof of claim in the bankruptcy proceedings, claiming that she had defamed him, and Vickie fi led a counterclaim against Pierce for tor􀆟 ous interference with her rights to receive the purported trust. The Bankruptcy Court held that it could hear and decide the counter claim and awarded Vickie a bit under $450 million. The award was reduced to $88 million by a District Court Judge. The 9th Circuit Court of Appeals overruled the District Court reasoning that the federal courts lacked jurisdic􀆟 on to overrule the Texas state court decision in favor of Pierce. The issue eventually came before the Supreme Court. What the Supreme Court Decided In a 38-page opinion the majority held that although the Bankruptcy Court had the statutory authority to enter judgment on Vickie’s counterclaim, it lacked the cons􀆟 tu􀆟 onal authority to do so. In a separate 2-page concurring opinion, Jus􀆟 ce Scalia stated, “The sheer surfeit of factors that the court was required to consider in this case should arouse the suspicion that something is seriously amiss with our jurisprudence in this area.” In a 17-page dissen􀆟 ng opinion, Jus􀆟 ce Breyer, joined by Jus􀆟 ces Ginsburg, Sotomayor and Kagan, disagreed with the majority’s cons􀆟 tu􀆟 onal interpreta􀆟 on and predicted dire consequences sta􀆟 ng, “[A] constu􀆟 onally required game of ping-pong between the courts would lead to ineffi ciency, increased cost, delay and needless addi􀆟 onal suff ering among those faced with bankruptcy.” So What? So, what’s it all about? Well, fi rst of all, Bankruptcy Courts are created under Ar􀆟 cle I of the cons􀆟 tu􀆟 on, the administra􀆟 ve branch of government. Those courts get their power and authority from the Ar􀆟 cle 3 courts, or the judicial branch of government. Some ma􀆩 ers that come before a bankruptcy court are called “core” ma􀆩 ers and are defi ned in the Bankruptcy Code. If a ma􀆩 er comes before the bankruptcy court that is not a core ma􀆩 er, there are arguments both in favor and against the jurisdic􀆟 on of the bankruptcy court to decide the ma􀆩 er. In Stern v. Marshall, the Supreme Court held that the counterclaim brought by Vicky against Pierce was based on his tor􀆟 ous interference with her right to receive the trust purportedly promised to her by Pierce’s father, the late J. Howard Marshall, was not a core proceeding and could not be decided by the bankruptcy court. Looking at the Law The law at issue is found in 28 USC §157(b) (2) (C) which states in per􀆟 nent part, “Core proceedings include, but are not limited to…counterclaims by the estate against persons fi ling claims against the estate.” The Supreme Court majority opinion held that although the Bankruptcy Court had the statutory authority to enter judgment on Vicky’s counterclaim, it lacked the cons􀆟 tu􀆟 onal authority to do so. That decision was supported by a lengthy disserta􀆟 on on what powers had been given to the Bankruptcy Courts and what powers had not been so granted. Some Comments Professor Dan Schechter of Loyola Law School, commen􀆟 ng on the Supreme Court opinion, indicated that the eff ect of the opinion is to delete §157(b) (2) (C) from the statute and that Bankruptcy courts will s􀆟 ll be able to hear and decide counterclaims under another statutory provision, §157(c) (1) by issuing proposed fi ndings and conclusions which will then be rou􀆟 nely rubber-stamped by a district court judge—the only change being the addi􀆟 onal paper, expense and 􀆟 me delay. Schechter also raised the long debated issue of whether or not the opinion con􀆟 nued what some believe to be the “…con􀆟 nuing and inexplicable hos􀆟 lity of some judges toward the bankruptcy bench….I think that some federal judges are simply worried about encroachments on their turf.” Adam A. Lewis, Esq., a bankruptcy lawyer with the San Francisco offi ce of Morrison & Forrester commented that the decision did not resolve the compulsory counterclaim issue and how it should be procedurally resolved. He asks, “Does the decision mean that the claim objec􀆟 on remains with the Bankruptcy Court, but that the debtor has to bring her ‘compulsory’ counterclaim in the District Court? Could the debtor bring the compulsory counterclaim with the claim objec􀆟 on and ask the District Court to withdraw the reference?” (A term used to describe the referral of bankruptcy cases by the District Court to the Bankruptcy Court.) Conclusion As is the case with all controversial decisions of our Supreme Court, only 􀆟 me will tell if this decision is much ado about nothing or a true and signifi cant stripping of bankruptcy court jurisdic􀆟 on. Benjamin S. Seigel is a Shareholder in the Firm’s Insolvency & Financial Solu􀆟 ons Prac􀆟 ce Group in Los Angeles. He can be reached at 213.891.5006 or bseigel@buchalter.com. A􀃄􀃄􀂃 N􀂮􀂑􀃊􀂽􀂛 S􀃃􀂮􀃣􀂫 S􀃣􀃙􀂮􀃖􀃝 B􀂃􀃄􀂻􀃙􀃧􀃖􀃣􀂑􀃹 C􀃊􀃧􀃙􀃣 J􀃧􀃙􀂮􀃝􀂗􀂮􀂑􀃣􀂮􀃊􀃄 B􀂛􀃄􀂹􀂃􀃃􀂮􀃄 S. S􀂛􀂮􀂦􀂛􀂽POINTS & AUTHORITIES 7 companies, municipali􀆟 es and other owners of intellectual property. It is an􀆟 cipated that many corpora􀆟 ons and businesses will apply for gTLDs based on their brands. The ability to use non-La􀆟 n characters (such as Cyrillic, Arabic, and Chinese) will also increase the number of new gTLDs. Industry analysts predict this new program will usher in 500-1000 new gTLDs, mostly refl ec􀆟 ng the names of companies and products, but also ci􀆟 es and generic names like .bank and .sport. Overview of the Applica􀆟 on Process Once ICANN opens the formal applica􀆟 on period, which is expected to occur on January 12, 2012, companies must submit their applica􀆟 ons within a three-month window of 􀆟 me. Applicants will be required to describe in their applica􀆟 ons the rights protec􀆟 on mechanism they propose for second-level registra􀆟 ons, but will not be required to own a trademark in the proposed gTLD. Unlike the typical domain name registra􀆟 on process by which anyone can purchase a single or mul􀆟 ple available domain names such as “i-love-domains.com” from an already exis􀆟 ng domain name registrar by paying a nominal fee, these new gTLDs will essen􀆟 ally allow an applicant to form and operate a new gTLD registry. For that reason, the ini􀆟 al price to apply for a new gTLD extension is steep—$185,000 for each gTLD extension applica􀆟 on. While the applica􀆟 on fee itself is quite high, there may also be other costs involved, such as dealing with any third-party objec􀆟 ons to one’s applica􀆟 on, and applicants may also need to outsource many services based on the many legal and technical issues involved in owning and opera􀆟 ng a registry. Overall, most experts es􀆟 mate that the total fees and costs associated with the applica􀆟 on and evalua􀆟 on process, together with opera􀆟 onal costs and legal fees, could total as much as $2 million dollars over a one-to two-year period. ICANN will use a dedicated web-based applica􀆟 on interface through which applicants will submit their applica􀆟 ons as well as suppor􀆟 ng documenta􀆟 on. A􀅌 er the applica􀆟 on window closes, the applica􀆟 on will be evaluated in several stages, each with its own es􀆟 mated 􀆟 me dura􀆟 on. The total evalua􀆟 on process is expected to last eight to eighteen months. In the event that ICANN receives mul􀆟 ple applica􀆟 ons for the same or “confusingly similar” gTLD extensions, the pre-selected evalua􀆟 on panels will be responsible for coming to a fi nal determina􀆟 on based on certain established conten􀆟 on procedures. A􀅌 er the ini􀆟 al applica􀆟 on period closes, which is currently set to be April 12, 2012, ICANN will verify that all of the applica􀆟 ons are complete and will then release the list of all gTLD extensions, applicant names, and other applica􀆟 on data. This will then start an approximately six-month period of 􀆟 me for third par􀆟 es to fi le a formal objec􀆟 on using pre-established dispute resolu􀆟 on procedures. Any such formal objec􀆟 ons will be adjudicated by independent dispute resolu􀆟 on service providers, not by ICANN. Once an applica􀆟 on has passed all evalua􀆟 on and selec􀆟 on procedures, including the public objec􀆟 on process, the applica􀆟 on will be deemed approved. This approval is not expected to occur any sooner than November, 2012. An applicant is then required to sign a registry agreement with ICANN and pass technical pre-delega􀆟 on tests before a new gTLD can be assigned. The new gTLD is expected to be delegated within one year of execu􀆟 on of the registry agreement. Important Considera􀆟 ons In theory, the rollout of unlimited generic top-level domains would allow companies to explore branding or re-branding themselves in fresh, innova􀆟 ve ways. The inclusion of non-La􀆟 n characters in gTLDs may precipitate a huge increase in the number of Internet users around the world. Thus, the ability to reach a much larger audience could prove to be a major shi􀅌 for businesses with global brands. However, cri􀆟 cs believe the new program is a disaster wai􀆟 ng to happen, concerned that the expansion of virtually unlimited gTLDs would cause great confusion among average consumers and Internet users. S􀆟 ll others predict that the hype of the new program will outlive its actual implementa􀆟 on if past rollouts of other top-level domains such as .jobs, .museum, and .travel, which have largely been under u􀆟 lized, are any indica􀆟 on. Clearly, the process can become very expensive, very quickly. Trademark owners who feel strongly about owning a new gTLD registry and extension would be well served to judiciously consider only applying for the trademarks that are most cri􀆟 cal to their businesses. Companies that cannot make a business jus􀆟 fi ca􀆟 on to own and operate their own gTLDs are not without op􀆟 ons to protect their brands and trademark rights under the new gTLD system. Rights owners should remain vigilant in monitoring ICANN’s applica􀆟 on process, and fi le formal objec􀆟 ons to any gTLD that infringes their rights. ICANN has established four separate grounds for formal objec􀆟 ons to gTLD applica􀆟 ons, and the most relevant of the four for brand owners is the “legal rights objec􀆟 on.” Under this ground, a trademark owner, one who claims that it has rights in a trademark, can object on the basis that an applied-for gTLD takes advantage of the objector’s reputa􀆟 on or mark, impairs the dis􀆟 nc􀆟 ve character of the objector’s mark, or otherwise creates a likelihood of confusion with the objector’s mark. The “legal rights objec􀆟 on” can be based on either registered or common law trademark rights, but ICANN has not yet specifi cally provided details on how one must prove its trademark rights. The formal objec􀆟 on procedure will be similar in scope and structure to complaints fi led under the current Uniform Dispute Resolu􀆟 on Process for exis􀆟 ng domain name disputes. Brand owners can watch ICANN’s website (h􀆩 p://www.icann. org/en/topics/new-gtld-program.htm) for future announcements concerning important applica􀆟 on and objec􀆟 on dates. Farah Bha􀆫 is a Shareholder and Chair of the Firm’s Intellectual Property Prac􀆟 ce Group. She can be reached at 949.224.6291 or 􀄩 ha􀆫 @buchalter.com. Annie Albertson is an Associate in the Intellectual Property Prac􀆟 ce Group in Los Angeles. She can be reached at 213.891.5102 or aalbertson@buchalter.com. Con􀆟 nued from page 1 T􀂫􀂛 A􀂗􀃲􀂛􀃄􀃣 􀃊􀂥 “.A􀃄􀃹􀃣􀂫􀂮􀃄􀂦”: J􀃊􀃧􀃙􀃄􀂛􀃹 I􀃄􀃣􀃊 􀃣􀂫􀂛 U􀃄􀂻􀃄􀃊􀃳􀃄 F􀂃􀃙􀂃􀂫 P. B􀂫􀂃􀃣􀃣􀂮 􀂃􀃄􀂗 A􀃄􀃄􀂮􀂛 L. A􀂽􀂐􀂛􀃙􀃣􀃝􀃊􀃄8 BUCHALTER NEMER T􀃙􀂮􀃧􀃃􀃖􀂫 􀃊􀂥 􀃣􀂫􀂛 I􀃃􀃖􀃙􀂃􀂑􀃣􀂮􀂑􀂃􀂽: T􀃙􀂛􀂃􀃣􀃃􀂛􀃄􀃣 􀃊􀂥 W􀂃􀃣􀂛􀃙 S􀃧􀃖􀃖􀂽􀃹 U􀃄􀂗􀂛􀃙 􀃣􀂫􀂛 C􀂃􀂽􀂮􀂥􀃊􀃙􀃄􀂮􀂃 E􀃄􀃲􀂮􀃙􀃊􀃄􀃃􀂛􀃄􀃣􀂃􀂽 Q􀃧􀂃􀂽􀂮􀃣􀃹 A􀂑􀃣 H􀃊􀃳􀂃􀃙􀂗 E􀂽􀂽􀃃􀂃􀃄 Several Court of Appeal opinions have announced the unremarkable conclusion that assessment of water supply in environmental impact reports must start with a realis􀆟 c baseline supply number.1 The State Water Project currently consists primarily of the Oroville Dam impounding the waters of the Feather River, delivered by instream fl ow to the Tracy pumps at the southern end of the Delta and then transported by the California Aqueduct to points south. The planners originally designed the State Water Project to achieve an output of 4.2 million acre feet per year. The state has never built several of the planned project components essen􀆟 al to achieving that output. Fiscal and environmental considera􀆟 ons render comple􀆟 on of the ini􀆟 ally planned facili􀆟 es highly unlikely. As a result, the Project has rarely been able to deliver more than about half of its ini􀆟 al planned capacity, and the actual yield fl uctuates from year to year in response to varia􀆟 ons in precipita􀆟 on. Nonetheless, the Department of Water Resources (“DWR”), the State operator of the Project, entered into contracts with various downstream water agencies based on an assumed output equal to the original design capacity. In other words, irriga􀆟 on districts and water agencies south of the Delta hold contracts from DWR purpor􀆟 ng to en􀆟 tle them to roughly twice as much water as DWR can ever hope to deliver.2 Despite the historic discrepancy between paper en􀆟 tlement and wet delivery, many of the water agencies and other par􀆟 es holding DWR contracts projected supply for purposes of their environmental impact reports at their contract en􀆟 tlement rather than at the level of actual deliveries. It should come as no great shock that the courts struck down EIRs based on that type of analysis, making li􀆩 le a􀆩 empt to mask their disdain. A􀅌 er all, CEQA is intended to deal in the real world of actual environmental impact. One cannot determine whether or not adequate water exists to meet the demands of a project when an agency relies on fi c􀆟 􀆟 ous water as the basis for compu􀆟 ng supply, par􀆟 cularly when that approach greatly overstates the quan􀆟 ty of real wet stuff available for developments both public and private. The Court of Appeal similarly rejected a fi ddle with supply numbers in a case not involving the SWP. In Save Our Peninsula Commi􀆩 ee v. Monterey County Board of Supervisors (2001) 87 Cal.App.4th 99, a project developer sought to establish that his project would not need water in excess of historic agricultural usage. He infl ated “historic usage” by drama􀆟 cally increasing irriga􀆟 on for alleged agriculture prior to applying for his project approval, then claiming the higher usage as a baseline. The Court had no diffi culty rejec􀆟 ng that approach. Although the foregoing cases undoubtedly reached the correct result under CEQA, they shed li􀆩 le light on the proper approach to addressing the real diffi culty inherent in a􀆩 emp􀆟 ng to predict long-term water supply required to sustain a major development. Vineyard Area Ci􀆟 zens for Responsible Growth v. City of Rancho Cordova (2007) 40 Cal.4th 412, dealt with that problem. The Specifi c Plan the County of Sacramento3 had approved in that case covered an area of 2,600 acres to contain 9,886 residen􀆟 al units as well as a community commercial area with shopping centers, neighborhood parks and schools. Groups opposed to the project challenged the adequacy of the EIR in its treatment of water supply. The Court rejected their arguments for the early stages of the development, but found the EIR inadequate in its treatment of the later stages, projected for comple􀆟 on roughly twenty years in the future. In fi nding the EIR insuffi cient in its analysis of long-term supply, the Court stated: [The relevant decisions] ar􀆟 culate certain principles for analy􀆟 cal adequacy under CEQA, principles with which we agree. First, CEQA’s informa􀆟 onal purposes are not sa􀆟 sfi ed by an EIR that simply ignores or assumes a solu􀆟 on to the problem of supplying water to a proposed land use project. Decision makers must, under the law, be presented with suffi cient facts to “evaluate the pros and cons of supplying the amount of water that [the project] will need.” 40 Cal.4th supra at 430, 431. That quote, however, set up a straw man, as the EIR in ques􀆟 on went much further, iden􀆟 fying a number of possibili􀆟 es from which water essen􀆟 al to later stages of the project might be supplied, including a mi􀆟 ga􀆟 on measure requiring that no further increment of the project could be developed without proof of water supply at the 􀆟 me each such increment came up for the approval that would actually ini􀆟 ate physical development. State law mandates that result in any case. Water Code §§ 10910-10912; Govt. Code § 66473.7. The EIR sensibly acknowledged the diffi culty inherent in trying to formulate a predic􀆟 on so far into the future in a fi eld clouded by many imponderables. While claiming that it was not requiring a demonstra􀆟 on of certainty (40 Cal.4th at 438), the Court nonetheless rejected the EIR on grounds that can be construed as transcending the limits of reasonable clairvoyance: Factual inconsistencies and lack of clarity in the FEIR leave the reader—and the decision makers—without substan􀆟 al evidence for concluding that suffi cient water is, in fact, likely to be available for the … [project] at full buildout. Con􀆟 nued on page 10POINTS & AUTHORITIES 9 S􀃊􀂽􀃲􀂮􀃄􀂦 􀃣􀂫􀂛 P􀃧􀃾􀃾􀂽􀂛 􀃊􀂥 C􀃊􀃃􀃃􀃧􀃄􀂮􀃣􀃹 B􀂃􀃄􀂻 M􀂛􀃙􀂦􀂛􀃙􀃝 􀂃􀃄􀂗 A􀂑􀃘􀃧􀂮􀃝􀂮􀃣􀂮􀃊􀃄􀃝 D􀂃􀃄 W􀂫􀂛􀂛􀂽􀂛􀃙 The merger and acquisi􀆟 on market for community banks as of mid-2011 presents real challenges for par􀆟 cipants on either the buy or sell side. The market could be considered a buyer’s market because there are probably more interested sellers than buyers and because the anxiety and pressure is generally found on the seller side. But, acquirers also have signifi cant diffi culty in fi nding an opportunity with an a􀆩 rac􀆟 ve price. The central problem that must be solved is credibility on credit quality. If the buyer and seller don’t agree on the true credit quality of the target bank’s loan por􀆞 olio, a deal cannot happen. If, on the other hand, a seller/target bank can make available a robust database for its en􀆟 re loan por􀆞 olio that could be opened to poten􀆟 al buyers, this would provide enormous comfort and credibility to any buyer doing its due diligence. Such a database would include: • A spreadsheet summarizing key metrics for each loan with hyperlinks allowing a buyer to drill down and review all loan informa􀆟 on; • Borrower and guarantor fi nancial statements, tax returns, projec􀆟 ons and credit scores; • All loan documents, guaran􀆟 es, modifi ca􀆟 ons, 􀆟 tle reports, 􀆟 tle insurance; • Payment history; • Appraisals, past and most recent; • Credit memos and loan approvals; and • A descrip􀆟 on of how the loan’s status and grade squares with the analysis of auditors and examiners. The goal is to give a poten􀆟 al buyer complete certainty as to the accuracy of loan por􀆞 olio grades and valua􀆟 on. Each side can then defend to its board of directors and to its shareholders a price that might otherwise have seemed too low or high. Otherwise, the credibility gap on credit quality will almost always prevent a closing because neither side can defend the price. Obviously, robust security procedures and a tough confi den􀆟 ality agreement are necessary to protect the disclosing bank and its customers. Next, management at the selling bank should be regularly upda􀆟 ng its board and shareholders as to the bank’s expected valua􀆟 on based on (1) the uncompromisingly thorough and frank loan analysis detailed above and (2) the currently modest priceto-book valua􀆟 ons being achieved in the M&A market. Without being condi􀆟 oned to understand the bank’s market valua􀆟 on, boards and shareholders might reject an off er that actually is in the range of fair market terms and valua􀆟 ons. For example, as of mid-2011, the median price-to-book value is about 107 percent. A deal priced at 125 percent is probably fair for many community banks right now. And, the price likely will be paid en􀆟 rely or signifi cantly in stock of the acquiring bank. A good market indicator for a par􀆟 cular bank is the pricing it has to off er to a􀆩 ract equity investors. Many 􀆟 mes, the 􀆟 ny premium in an M&A transac􀆟 on is be􀆩 er for shareholders than the heavily dilu􀆟 ve price at which the bank must issue stock to new investors. Many small community banks may need to combine with another small bank in order to register any interest with a strategic buyer. This can be an excellent, albeit slightly more complex strategy. The ins􀆟 tu􀆟 ons may need to bring in addi􀆟 onal capital in order to sell the combina􀆟 on to regulators. Members of the two management teams will need to be re-allocated, but the result can be a win for the individuals as well as the ins􀆟 tu􀆟 ons. There is a great deal of talk about the need for mergers to be strategically a􀆩 rac􀆟 ve, and that is true. But, at the level of two small community banks, an excellent strategy and jus􀆟 fi ca􀆟 on for the combina􀆟 on can be as simple as the opportuni􀆟 es fl owing from though􀆞 ully realloca􀆟 ng par􀆟 cular people on the banks’ combined teams so as to free more people to develop business and build the combined franchise. For example, instead of two sets of compliance personnel, there can be one and the balance devoted to acquiring core deposits and worthy credits. In a merger of small banks, the two banks don’t have to be geographically close to one another, although proximity is usually important in obtaining regulatory approval. Opus Bank in Irvine, California (the former “Bay Ci􀆟 es Bank”) recently succeeded in obtaining approval to buy Cascade Financial Corp. (the holding company for Cascade Bank) in Evere􀆩 , Washington State. Of course, Opus Bank is si􀆫 ng on an excep􀆟 onally large ($460 million) pool of equity capital raised in 2010, has an approved plan to become a regional bank and could demonstrate its capacity to absorb the liabili􀆟 es of Cascade Bank. Dan Wheeler is a Shareholder in the Firm’s Bank and Finance Prac􀆟 ce Group in San Francisco. He can be reached at 415.227.3530 or dwheeler@buchalter.com.10 BUCHALTER NEMER Most fundamentally, the project FEIR and [a related waterplanning document] provide no consistent and coherent descrip􀆟 on of the future demand for new water due to growth in the [larger area that might require service] or of the amount of new surface water that is poten􀆟 ally available to serve that growth. 40 Cal.4th at 439. As Jus􀆟 ce Baxter pointed out in dissent, this analysis requires the EIR writers to an􀆟 cipate possible future demand generated by projects not yet en􀆟 tled and for which no en􀆟 tlement applica􀆟 on has yet been fi led—a level of analysis the Court did not require with respect to the ini􀆟 al stages of the Project when such a predic􀆟 ve exercise would have had a much stronger claim to accuracy. 40 Cal.4th supra at 452-53. No one seriously argues that a governing body approving a project should not be required to make a serious eff ort to determine that adequate water supplies are available to meet project demand. But asking a lead agency to project supplies against hypothe􀆟 cal demand from projects not yet proposed—and not likely to be proposed for ten or twenty years—invites nothing more than specula􀆟 on, an exercise that CEQA supposedly abjures. The real ques􀆟 on, however, is why a mi􀆟 ga􀆟 on measure requiring proof of adequate supplies as a condi􀆟 on of approval for each increment of development does not serve the desired purpose, against a backdrop of condi􀆟 ons that make accurate projec􀆟 on of water supply almost impossible—and where a tedious, exac􀆟 ng and expensive eff ort must be deployed even to create the appearance of such an examina􀆟 on. Moreover, none of the cases cited above dealt with the current sources of uncertainty in any ques􀆟 on dealing with water supply in California. They include area-of-origin protec􀆟 on (Water Code §§ 10505.5, 11460 et seq.), applica􀆟 on of an invigorated public trust doctrine, water required to prevent harm to endangered species under the Endangered Species Act, the fl ow requirements that will be generated by the Delta protec􀆟 on legisla􀆟 on; and of course, the inevitable varia􀆟 ons in precipita􀆟 on that may deviate in unpredictable way from historic pa􀆩 erns due to climate change. All of these preempt assessments of future supply, taking priority even over “vested” water rights and supposedly binding supply contracts.4 In the face of these requirements and compound uncertain􀆟 es, how can lead agencies at any level be expected to generate legally adequate environmental documents? The likely answer: with great eff ort, expense and scien􀆟 fi c input—inevitably opening up vast areas for challenge and li􀆟 ga􀆟 on. In short, we have added more buckets of glue to an already fraught decisional process at a 􀆟 me when the governing bodies responsible for the integrity of that process lack the fi nancial resources to do their job. Those who cooked up this stew, while undoubtedly well meaning, demonstrate by their eff orts a less than vise-like grip on prac􀆟 cal reality. It would be diffi cult to imagine a legal structure more well calculated to serve the pernicious ends of delay, excessive cost, and as a breeding ground for even more li􀆟 ga􀆟 on as obstacles to benefi cial development both public and private. Howard Ellman is a Shareholder in the Real Estate Prac􀆟 ce Group in San Francisco. He can be reached at 415.296.1610 or hellman@buchalter.com. 1 California Oak Founda􀆟 on v. City of Santa Clarita (2005) 133 Cal.App.4th 1219, Santa Clarita Organiza􀆟 on for Planning v. County of Los Angeles (2003) 106 Cal. App.4th 715, Friends of Santa Clara River v. Castaic Lake Water Agency (2002) 95 Cal.App.4th 1373, and Planning and Conserva􀆟 on League v. Dept. of Water Resources (2000) 83 Cal.App.4th 892 all concerned a fundamental issue related to the State Water Project. 2 The contracts contain a clause to adjust deliveries to actual water available. The baseline in the contracts, however, was calculated on an assumed yield of 4.2 million acre feet. 3 The County granted the approval with the property annexing to the newly incorporated City of Rancho Cordova shortly therea􀅌 er—which explains why the City is iden􀆟 fi ed as the nominal respondent in the case cap􀆟 on. 4 The most recent issue of Points and Authori􀆟 es contained an ar􀆟 cle in which I elaborated on those sources of serious uncertainty. “The Real Drought Has Just Begun,” Points & Authori􀆟 es, p.9 (Spring 2011). T􀃙􀂮􀃧􀃃􀃖􀂫 􀃊􀂥 􀃣􀂫􀂛 I􀃃􀃖􀃙􀂃􀂑􀃣􀂮􀂑􀂃􀂽: T􀃙􀂛􀂃􀃣􀃃􀂛􀃄􀃣 􀃊􀂥 W􀂃􀃣􀂛􀃙 S􀃧􀃖􀃖􀂽􀃹 U􀃄􀂗􀂛􀃙 􀃣􀂫􀂛 C􀂃􀂽􀂮􀂥􀃊􀃙􀃄􀂮􀂃 E􀃄􀃲􀂮􀃙􀃊􀃄􀃃􀂛􀃄􀃣􀂃􀂽 Q􀃧􀂃􀂽􀂮􀃣􀃹 A􀂑􀃣 H􀃊􀃳􀂃􀃙􀂗 E􀂽􀂽􀃃􀂃􀃄 Con􀆟 nued from page 8Points & Authori􀆟 es Points & Authori􀆟 es is published as a service to our clients and friends. Its ar􀆟 cles are synopses of par􀆟 cular developments in the law and are not intended to be exhaus􀆟 ve discussions or relied upon as conclusive. The authors are pleased to discuss the informa􀆟 on contained in their ar􀆟 cles with you in greater detail. To reprint ar􀆟 cles that appear in the Points & Authori􀆟 es, please contact the Marke􀆟 ng Department by email at marke􀆟 ng@buchalter.com or call (213) 891-0700. POINTS & AUTHORITIES 11 Buchalter Nemer Los Angeles Offi ce Building Providing expert legal services for six decades Los Angeles Orange County San Francisco Sco􀆩 sdalewww.buchalter.com BuchalterNemer 1000 Wilshire Boulevard, Suite 1500 Los Angeles, CA 90017-2457 ADDRESS SERVICE REQUESTED PRESORTED STANDARD U.S. POSTAGE PERMIT NO. 1233 GLENDALE, CA PAID
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