FROM THE CHAIR
From The Chair
Nominate the Maryland Attorney Deserving of the Distinguished Maryland Real Property Practitioner
Troubled Loans and Lender Liability
Equitable Subrogation and the Revolving Line of Credit
Acceleration of Rent in the Commercial Lease
Letters of Credit Protect Landlords in Maryland











 

Ronald S. Deutsch, Esq.

This Bar Year for the Section is off to a great start, thanks to the work of Past Chairs of the Section, and last year's and this year's Section Council and Section Members.  A commitment to excellence and enthusiasm for real estate law makes this one of the premier sections of the MSBA.  Thanks to all of you who work on the Section's projects and programs.

A special thank you is extended to Cindy Motsko and Francie Spahn, co-chairs of the Advanced Real Property Institute and to the committee members and faculty of the Institute.  The all-day seminar, on October 27, again proved to be one of the most outstanding programs for the Section.  The content was essential to the real estate practitioner and the faculty were unsurpassed in their presentations and materials.

Many may be unaware of the webcasts that are available at no charge on MSBA website for Section members.  I would encourage everyone to view the available topics that have been posted over the past few years.  Recent postings include webcasts of presentations on Maryland Statutory Trusts and Green Building Standards.  Marc Bergoffen is working hard to make Ground Rules the newsletter that provides updates and information that real estate practitioners can use in their day-to-day practices.  Those who have not attended the Commercial Real Estate Discussion Group Luncheons are truly missing a valuable membership benefit.

On April 29, 2011, the Land Use Committee will be holding an outstanding annual event at the Maritime Institute.   A special thank you is extended to David Freishtat, Judge Glen Harrell, Gus Baumann, John Delaney and Stanley Abrams for their hard work in organizing this event.  We hope many of you will be able to attend to what we believe will be a very informative program.

As you can see, the Section Council and committee members are working to bring benefits to the Section members, and there is more to come.  If you are interested in working on a committee, we are always looking for volunteers to become involved.  We will keep you abreast of these and other matters in the upcoming months.  For now, I am excited about the growth of our Section and look forward to a rewarding year.


  NOMINATE THE MARYLAND ATTORNEY DESERVING OF THE DISTINGUISHED   MARYLAND REAL PROPERTY PRACTITIONER

For 2010-2011
Visit http://www.msba.org/sec_comm/sections/realprop/
to complete your nomination.


  TROUBLED LOANS AND LENDER LIABILITY

By Robert W. Cannon, Esq.

I. Introduction

During these and other difficult economic times, legal disputes involving allegations of "lender liability" are more prevalent and borrowers seeking relief from troubled financings are more likely to consult with their advisers about any lender conduct that might be argued to form the basis for an affirmative defense to the enforcement of loan obligations or the full or partial discharge of the borrower in connection with any of such obligations.  This article will review a series of important court decisions involving various claims of lender liability and explain the reasoning and decision of the court in each of such cases.  In a series of sections entitled "Lender's Guide", the author will also offer advice and suggestions regarding the importance of each such case as guidance for the future conduct of lenders encountering similar financings or circumstances. 

II. Lender Liability Claims

A.Breach of Duty of Confidentiality

One claim a borrower may advance is a breach of confidentiality if the lender improperly discloses information provided in confidence.  Any release of information by the lender where it has no obligation to provide the information can result in liability to the lender, particularly where the information provided is false, misleading or inaccurate.  Waivers of confidentiality may be ineffective.

Lenders Guide – OBSERVE CONFIDENTIALITY 

B. Improper/Excessive Control

If the lender effectively controls the borrower, it could be liable for the borrower's actions.

1. Lender Replaced Board and Controlled Operations

State Bank of El Paso v. Farah Manufacturing Company, Inc., 678 S.W.2d 661 (Tex. Ct. App. 1984) was a case involving interference with corporate governance resulting in a jury verdict against the lenders in excess of $18 million.  This verdict was upheld on appeal.  In this instance, the lenders placed their own people on the board of the borrower company and they were alleged to have mismanaged the company and sold off valuable assets to make loan prepayments which were not required under the terms of the loan.  The court determined that the company was injured by "the election of directors and officers whose particular business judgment and experience and whose divided loyalty" was in conflict with the ability of directors and officers to manage.  The court concluded that legitimate self interest could and did become illegitimate control.  As a consequence, lenders should not be involved in making decisions concerning the operation of a business and should focus on the financial criteria needed for making loans.  In this case, the dispositive item was control.

[View Entire Article Online]


  ACCELERATION OF RENT IN THE COMMERCIAL LEASE

By Douglas M. Bregman, Esq.

Some leases for commercial property contain provisions calling for the payment of damages by the breaching tenant, calculated by accelerating all future rents owed under the remaining lease term.  Although the general concept of liquidated damages provisions had previously been broached at the appellate level in Maryland, no appellate decision to this point has addressed specifically acceleration of rent provisions. 

In 2009, the Circuit Court for Montgomery County, Maryland, heard the case of Saul Holdings Limited Partnership, et al. v. Raquel Sales, Inc and Barefeet Enterprises, Inc., which involved actions for breach of lease and breach of guaranty on simultaneous commercial tenancies entered in Georgia and Maryland.  Following Raquel Sales' breaches, the aggrieved landlords sought restitution for unpaid and accelerated rent due under the leases, presenting the court with the opportunity to adjudicate the validity of such damages provisions.  Because the case involved separate commercial leases for properties in Georgia and Maryland, the court evaluated the validity of the accelerated rent provisions in the contracts pursuant to the law of the respective states.  However, without prior Maryland appellate case law to guide its evaluation of the provision in the Maryland lease, the court's consideration was one of first impression, and thus offers insight into how similar clauses may be weighed in future actions under commercial leases.

Given the novelty of the decision in Maryland jurisprudence, this article will review and analyze the Circuit Court's opinion.  First, it will begin with a brief background of the facts in the case of Saul Holdings, including the terms of the lease agreements providing for accelerated rent upon tenant default.  Next, the Saul Holdings opinion will be presented and analyzed, beginning with its application of Georgia law, and moving on to its use of existing Maryland legal authority to disallow the validity of the acceleration clauses in that case.  The next discussion will concern the case law regarding accelerated rent provisions in certain selected states.  Finally, looking forward, the article will draw upon the reasoning in the Saul Holdings opinion as to how future accelerated rent provisions may be crafted to be enforceable.

[View Entire Article Online]


  EQUITABLE SUBROGATION AND THE REVOLVING LINE OF CREDIT

By Bradford S. Bernstein, Esq.

Settlement attorneys beware. Imagine this situation you are conducting a refinance transaction, you need to pay off a bank's revolving line of credit, you request and obtain a payoff statement, the proceeds of the new loan are used to "pay off" the revolving line of credit, and you request the bank to record a satisfaction to release the deed of trust securing the line of credit. Unfortunately, the bank does not release its lien. Based on the doctrine of equitable subrogation, the new lender is in first position, right? Wrong!

In Egeli v. Wachovia Bank, N.A., 184 Md.App. 253, 965 A.2d 87 (2009), the Court of Special Appeals held that a lender (SunTrust Bank) did not surrender its lien priority by accepting funds from a bank (Wachovia Bank) that paid the then existing balance of the revolving line of credit, when the mortgagors did not provide authorization to SunTrust Bank to close the line of credit.

Section 3-105.1(c) of the Real Property Article provides:

Procedure for release. Within a reasonable time after a loan secured by an existing mortgage or deed of trust has been paid in full and there is no further commitment by the holder to make an advance or by the borrower to incur an obligation secured by that mortgage or deed of trust, the holder shall:

[View Entire Article Online]
 

  LETTERS OF CREDIT PROTECT LANDLORDS IN MARYLAND
By Daniel P. Wilansky, Esq.

Landlords structuring leases of commercial space should anticipate the effects of tenant bankruptcies.  This is especially true in the current economy, in which landlords are frequently dealing with distressed tenants.  Tenant bankruptcies, among other things, affect the ability of landlords to access cash security deposits.  In a tenant bankruptcy, these deposits generally become an asset of the bankruptcy estate pursuant to Section 541(a) of the Bankruptcy Code.  Assets of the bankruptcy estate, including security deposits, are subject to the Bankruptcy Code's automatic stay under Section 362(a).  A landlord may still be able to obtain some or all of the security deposit, but it will have to enter bankruptcy proceedings in order to obtain relief from the automatic stay.  As a result, the landlord may have no immediate source of funds to deal with rent arrearages and other unpaid funds. 

To address this situation, commercial landlords are increasingly requiring letters of credit in lieu of traditional cash security deposits.  A number of jurisdictions have held that letters of credit are not subject to the Bankruptcy Code's automatic stay.  See, e.g., In re Stonebridge Techs., Inc., 430 F.3d 260, 269 (5th Cir. 2005) (letters of credit are obligations entirely separate from debtor's estate); In re Elegant Merchandising, Inc., 41 B.R. 398, 399 (Bankr. S.D.N.Y. 1984) (same).  The rationale is that letters of credit are obligations of the issuing bank that are independent of the tenant's obligations to the landlord.  Because letters of credit are not subject to the automatic stay, landlords may obtain proceeds of the letter of credit without having to enter into bankruptcy proceedings.  Letters of credit therefore provide landlords with an immediate source of payment – a source that is not subject to pro rata distribution of the bankruptcy estate.

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