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Florida Banking Law Blog

Legal developments impacting banking, finance and loan enforcement in Florida

Welcome to the Florida Banking Law Blog!

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Rogers Towers, P.A. welcomes you to its Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, P.A., and we look forward to your comments in response to our blog.

Supreme Court Takes Broad Perspective of “Fraud” in Bankruptcy

Posted in Bankruptcy

In a win for creditors, the Supreme Court of the United States has taken an expansive view of the type of fraud that will prevent a debtor from discharging his debts in bankruptcy. The Court’s decision in Husky International Electronics, Inc. v. Ritz settles a circuit split over whether the Bankruptcy Code prohibits debtors from discharging debts obtained by purposeful concealment where the debtor does not make a misrepresentation to the creditor.

The facts of Husky center on an individual who served as the director and part owner of the debtor corporation. The corporation owed the plaintiff creditor nearly $164,000. Instead of paying the debts, the director transferred large sums of cash from the corporation to other entities he controlled. The plaintiff attempted to hold the director personally liable for the corporation’s debts which resulted in the director filing for Chapter 7 bankruptcy protection.

In bankruptcy, debtors are prohibited from discharging debts “obtained by . . . false pretenses, a false representation, or actual fraud.” 11 U.S.C. § 523(a)(2)(A). The director argued that because he did not make any misrepresentations the conveyances did not rise to the level of “actual fraud.”

In reversing the Fifth Circuit, the Supreme Court noted that the phrase “actual fraud” had been added by amendment to the existing terms constituting prohibited conduct, and its meaning is not limited to the same misconduct proscribed by the other two. The Court held that actual fraud can be effectuated without an affirmative misrepresentation. The Court held that actual fraud may occur not just “when a person applying for credit adds an extra zero to her income or falsifies her employment history” but can result from the transfer of property made to evade payment.

This decision should be well received by creditors as the prohibition on discharging debt due to actual fraud applies to Chapters 7, 11, 12, and 13.

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A purchaser of real property may be subject to liability for taxes, including sales taxes, owed by the Seller to the Florida Department of Revenue (“DOR”). Title insurance does not protect against this liability. Under F.S. 213.758, a transferee of more than 50% of the assets of a business (including real property) is liable for unpaid tax owed by the transferor arising from the operation of that business. Two exceptions to this rule exist when the transfer is either (1) an involuntary transfer (i.e. bankruptcy, foreclosure etc.) or (2) the transferee is not an insider and the asset is either (i) a 1-4 family residential real property; (ii) unimproved real property; or (iii) owner occupied commercial real property and, in each case, is not accompanied by a transfer of other assets of the business.

One common scenario where a buyer could see potential liability arises in the acquisition of non-owner occupied commercial real estate. Sales tax is owed on commercial lease payments in Florida and, as such, the owner and landlord of property subject to commercial leases owes tax to the DOR on the lease payments. If the owner fails to pay the tax and then sells the property, assuming the property consists of over 50% of the assets of the owner, the buyer of the property is subject to liability for the unpaid taxes owed by the seller. This situation is quite common because special purpose entities are frequently formed solely for the purpose of owning and operating income producing real estate, such as shopping centers, office buildings, and free-standing restaurant and retail sites.

One way to protect a buyer against this liability is to request a certificate of compliance from the Florida Department of Revenue. If the buyer receives a certificate of compliance from the Florida Department of Revenue showing that the seller has not received a notice of audit, the seller has filed all required tax returns and the seller has paid all tax arising from the operation of the business, the buyer will not be subject to transferee liability. A buyer can also request a clearance letter. The clearance letter typically takes about 7-10 days and provides a status of account. Unlike a certificate of compliance however, a clearance letter does not exempt the buyer from future audits that may cover periods before the business was sold.

Buyers can also protect themselves with an indemnification from the seller in the purchase agreement. Note however that an indemnification from a special purpose entity that has now lost its assets could have little value post-closing. As such, it is advisable that the principals of the seller join in any indemnification and/or there be a hold-back of closing funds to meet future tax liabilities.

Although foreclosing lenders are exempt from liability under the involuntary transfer exception above, lenders should still try to ensure that their borrowers are protected from inheriting an unknown tax liability. Borrowers are better able to start and continue payments to their lenders when other liabilities are minimized.

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Decision Underscores Need for Specificity when Drafting Releases

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By:  Edward L. Kelly and Karl R. Gruss

Many settlement agreements contain mutual releases by the parties of claims against each other.  For institutional lenders, workouts of defaulted loans often result in the execution of such agreements by the parties.  When drafting any release language, lenders would be wise to include language restricting the effect of the release to the subject matter at issue.  Failure to do so may result in unintended consequences, potentially discharging a borrower not only from its obligations relating to the loan transaction in question, but from all debts and obligations of the borrower to the lender.  As discussed in Wells Fargo Bank v. Gonzalez, but for a procedural error by two homeowners, one lender nearly learned a hard lesson by executing a general release.

In Gonzalez, the lender filed a foreclosure complaint against a pair of homeowners who had executed a mortgage on their Broward County, Florida, home.  The homeowners in turn filed an answer, asserting a series of affirmative defenses.  Two years later, the homeowners moved for an involuntary dismissal of the foreclosure action, claiming for the first time that the parties previously settled all existing claims against each other through the execution of a general mutual release contained in a settlement agreement involving two completely unrelated loans.  The default in the case involving the Broward County property predated the date of the settlement agreement, and the language in the settlement agreement released each party from any cause of action in law or equity in favor of the other arising prior to the date of the release.

Despite the argument by the lender that the mutual release made no reference to the Broward County property and was therefore irrelevant to the foreclosure action, the trial court nonetheless granted the homeowner’s motion for an involuntary dismissal, based upon the clear language of the mutual release.  The trial court refused to entertain the lender’s request that one of the homeowners be called to testify as to the release’s intent, limiting the court’s review to the four corners of the release.  On appeal, Florida’s Fourth District Court of Appeal reversed the lower court’s decision; however, the reversal was not based on the lower court’s interpretation of the mutual release, but rather on procedural grounds.  If not for the homeowners’ procedural misstep, the trial court’s dismissal may have carried the day.

Institutional lenders, especially banks, credit unions and savings associations, may have multiple relationships with a borrower or guarantor, including, for example, other loans, credit cards and deposit accounts.  Every clause included in a release granted by an institutional lender should have a specific purpose, and such lender should ensure that each release is narrowly tailored to the matter at hand.  As evidenced by the Gonzalez decision, a general mutual release clause has the potential to trump other limiting language included in the document.  Relying on a form release can spell trouble, and thought must be given to each transaction prior to putting pen to paper.