Lending & Restructuring Alert
September 2007
Authors: Paul A. Rubin
In a long-awaited decision, the Delaware Supreme Court held that there is no cause of action for deepening insolvency under Delaware law. In prior issues, we have discussed this novel claim and highlighted the emerging trend in favor of limiting, and even rejecting, claims based on deepening insolvency. The Delaware Supreme Court's decision is noteworthy because some other courts had predicted—incorrectly—that Delaware law would recognize this cause of action.
The court did not issue its own decision in this case. Rather, it simply affirmed the decision of the Court of Chancery "on the basis of and for the reasons assigned by" the lower court. The wholesale adoption of the lower court's reasoning is significant because that court had issued a sharply worded opinion that protects the directors of troubled companies from personal liability based on what the lower court called a "catchy" term that "does not express a coherent concept."
While some courts may continue to recognize deepening insolvency as a cause of action under the law of other states, the decision by this court, which is considered highly influential on matters of corporate law, is welcome news to lenders who were concerned that claims for deepening insolvency might be asserted against them based on their dealings with troubled companies.
Lender Left to Suffer the Consequences of Identity Theft
As instances of mortgage fraud increase, lenders should take note of a New York state court's recent holding that a lender may not maintain a foreclosure action to clear title against a party that did not execute a note or mortgage. This case indicates that lenders will have to suffer the consequences should they fail to discover identity theft of a borrower.
The case: A lender filed a mortgage foreclosure action naming an individual as the defendant-mortgagor. The defendant filed an answer asserting that he was victim of identity fraud, did not own any interest in the real property, never obtained a loan from the lender, and had not signed the loan documents that the lender submitted to the court. But then the defendant disappeared, and the lender moved for summary judgment, arguing that it needed to clear title to the property and proposing that the court enter a judgment specifying that the defendant was not responsible for any monetary obligation and that he had no interest in the premises covered by the mortgage.
The decision. The court dismissed the complaint against the fraud victim, and left it to the lender to locate the true owner of the property through public records to add as a necessary party so the action could continue. The court noted that a foreclosure judgment on a concededly fraudulent mortgage would have no legal effect. More pointedly, the court reasoned that, in the normal course of business, a lender requires proof of identity in a loan transaction, and there exist methods for identifying altered or fake documents, and for comparing signatures on deeds, mortgages and satisfactions.
Conclusion. It is incumbent upon lending institutions and their representatives, including title agents and closers, to pay careful attention to the identifications presented by borrowers who execute loan documents and to recognize inconsistencies between documents submitted and reviewed during the loan application and closing processes.
For further information regarding these or other lending issues, you may contact:
Paul Rubin at 212-592-1448 or prubin@herrick.com
Eric Sleeper at 609-452-3818 or esleeper@herrick.com
Herrick's Financial Restructuring, Bankruptcy and Creditors' Rights Practice Group represents debtors, creditors' committees, secured and unsecured creditors, trustees, financial institutions, investment banks, assetbased lenders, insurance companies, pension funds, purchasers of assets, landlords, acquirers of distressed debt, equipment lessors and licensors in workout, restructuring, bankruptcy, and reorganization matters.
Copyright 2007 Herrick, Feinstein LLP. The Lending and Restructuring Alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.
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