Business Leasing and Finance News (BLFN) January - March 2010

FOUNDER'S NOTE
By David G. Mayer

                            2010 Changes

As many of you know I wrote Business Leasing For Dummies in 2001, with publication coming just months before we launched BLFN. The “For Dummies” books satisfy the need for information presented in clear, simple and often humorous terms. It is still available online today but at 5 to 20 times its cover price.

BLFN’s first issue appeared on the Internet in January 2002. For the first year George, an enthusiastic and skillful Internet guru at Patton Boggs, and I struggled – sometimes into the wee hours of the night – to format and publish the newsletter on a monthly basis for about 300 initial subscribers. My idea then and now has been to offer leasing and financing strategies for your success. BLFN aims to provide you with useful, relevant and current information that helps you make money and stay out of harm’s way in your business. Thanks to you, our readers, BLFN now is privileged to reach thousands of readers in approximately 45 countries.

Now starting our ninth year, again thanks to you, we have progressed from a start-up to a stand-up publication for the leasing and financing industries. Starting this year, we will publish BLFN quarterly, not bi-monthly as we have done in the last few years. As a new feature of BLFN in 2010 we will also publish a “BLFN Alert” when we spot a “hot” issue, circumstance or event affecting your business. In one-page or so, the BLFN Alert will present immediate challenges, opportunities or actions you should consider before the next quarterly publication of BLFN. We will continue to use guest writers from time to time. If you have an interest in writing for BLFN, please e-mail me with your topic and some bullet points on the proposed subject.

Thanks for helping us build this publication into one of the most highly regarded online leasing and finance newsletters available today. We value your trust and appreciate your input as we enter BLFN’s ninth year of publication.

1. Pre-pack Bankruptcies: A Faster Way To Emerge From Bankruptcy?

The 2008-2009 recession forced debtors and their creditors to make a dramatic shift in the strategies previously used in Chapter 11 bankruptcy cases. Given the increased number of bankruptcies expected to occur in 2010, this trend is bound to continue this year.

Traditional Chapter 11 reorganizations, which have proven to be costly and disruptive for corporate debtors, have largely been supplanted by faster and more cost-efficient strategies. Section 363 sales exemplify this phenomenon. See Fast-Tracked Sales Under Section 363 of the Bankruptcy Code Imperil Lessor Interests, by Michael Richman and Mark Salzberg, BLFN (July – Aug. 2009). Though not a new concept, parties have recently opted to pursue “pre-packaged” bankruptcy filings or “pre-packs.”

Pre-packaged Bankruptcy

The increased use of “pre-packaged” bankruptcy filings or “pre-packs” represents one of the most significant new trends in bankruptcy proceedings. In 2009, debtors filed more than 30 pre-pack cases, a 300 percent increase over 2008. See The Year of the Pre-packaged Bankruptcy, Total Bankruptcy (Nov. 2009).

*Terms to Know: For purposes of this article, a corporate bankruptcy (including public companies) frequently results from the inability of the debtor corporation to pay its creditors as its obligations become due. Often, this circumstance arises when debt or losses cripple the routine business operations of the debtor.

A traditional Chapter 11 bankruptcy filing and reorganization arises under Title 11, Chapter 11 of the U.S. Code, a federal law governing the substance and procedure of bankruptcies filed by or against the debtor. It is an extended restructuring of a company and its balance sheet. By contrast, a pre-pack is an expedited proceeding in which the parties negotiate as fully as possible the bankruptcy reorganization, which they effectuate upon filing the Chapter 11 (subject to orders of the Bankruptcy Court).

Debtors reorganize through such methods as:

• generating liquidity through the sale of assets,
• reducing expenses by shedding executory contracts and unexpired leases and
• compromising claims through negotiations with claimants and other interested parties.

They typically effectuate the restructuring through drafting a disclosure statement and a plan of reorganization. Once a debtor completes a traditional reorganization disclosure statement and plan, its creditors then vote for or against the plan.

While sounding rather straightforward this process often produces unpredictable delays as creditors not only fight among themselves for control and authority, but also battle with the debtor. Numerous horror stories litter the bankruptcy landscape as major bankruptcies have continued for the better part of a decade. For example, the UAL Corporation (United Airlines) bankruptcy lasted for three years; the Interstate Bakeries Corp./Hostess bankruptcy lasted for four and one-half years; and the Dow Corning bankruptcy lasted for nine years.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Amendments) limited the lifespan of bankruptcy cases to a maximum of 18 months from the petition date, during which the debtor can exclusively propose a plan.

*Insight Point: Despite this deadline, the inevitable truth of any Chapter 11 proceeding is that every day a company spends in bankruptcy imposes ever-mounting fees and expenses upon an already financially-distressed entity.

One productive alternative, which is consistent with the deadline-shortening aspects of the 2005 Amendments, calls upon debtors and creditors to coordinate as much of the reorganization as possible prior to the Chapter 11 filing.

*Insight Point:The parties usually find that the more pre-filing planning they complete, the smoother the case flows toward a timely conclusion under the 2005 Amendments.

One of the benefits of pre-planning is that the parties can plan the reorganization completely prior to filing under Chapter 11, including obtaining creditor approval to a plan and disclosure statement. When the pre-planning succeeds, the Chapter 11 case can be filed and completed in as little as 60 to 90 days (and sometimes even faster).

That is the essence of a pre-packaged bankruptcy or “pre-pack.” In this way, a company can reduce the amount of attorney’s fees incurred battling adversaries in court, avoid some of the U.S. Trustee’s quarterly fees (by reducing the length of the case), bypass the lengthy notice and hearing requirements of motions before the court and reduce numerous other expenses that are incurred in the typical Chapter 11 case. Moreover, the less time the debtor spends in bankruptcy, the less likely it will lose the intrinsic value of its business. Strategically, the less time the company spends in bankruptcy, the lower the chances are that the company will lose control of the bankruptcy proceeding.

Some commentators question the time and cost savings of the pre-pack process. Generally speaking, however, it would appear that there are material savings when most of the process is consensual rather than adversarial, and the parties do not resort to court hearings. See An Empirical Examination Of Pre-packaged Bankruptcy, Reprint from Financial Management Association, by BNET (1995).

Analysts argue that while the parties incur less time and attorneys’ fees during the actual bankruptcy proceeding, the parties still use significant time and pay high professional fees prior to the filing in the negotiations with creditors as part of the restructuring plan and associated activities. Thus, they argue, both approaches to a bankruptcy filing cost the same in total time and fees. See How Pre-packaged Bankruptcy Really Works, Ohio Practical Business Law (Dec. 2008).

When a Company Should Resort to a Pre-Pack or Pre-Negotiated Plan

The pre-pack process begs the question why a distressed company needs Chapter 11. Why not effectuate a complete out-of-court restructuring and avoid Chapter 11 altogether? The answer is that with a pre-pack a company can avail itself of the many bankruptcy protections and rights not present in an out-of-court-restructuring. A court-approved pre-pack plan has the same legally binding effect as any traditional plan confirmation in a traditional reorganization process. In addition, debtors can benefit from the automatic stay to halt ongoing litigation or other detrimental proceedings.

“Prearranged” or “pre-negotiated” plans appear to be similar to pre-packs, but differ in significant ways. Under prearranged plans, the company and its major constituencies negotiate the terms of the final plan before the debtor files its petition in bankruptcy (pre-petition). Once submitted, the parties then typically execute a plan support agreement.

The plan of reorganization and disclosure statement are filed at the outset of the case, oftentimes before a committee of unsecured creditors is formed, but without the pre-petition solicitation of votes that is the hallmark of the pre-pack. Instead, that process takes place after the Chapter 11 is commenced. It may add somewhat to the duration of what would otherwise have been a pre-pack, yet still travels through the bankruptcy court very quickly.

*Warning: Pre-negotiated plans present some pitfalls not usually present with pre-packs. On June 15, 2009, Six Flags, Inc. entered Chapter 11 with a pre-negotiated bankruptcy, expecting to quickly emerge. See Six Flags Bankruptcy Judge Rejects Exit Financing, (Update1), Bloomberg (Dec 9, 2009). But it did not have the support of its bondholders who forced Six Flags to scrap its originally proposed reorganization in favor of a new modified plan. As of February 15, 2010, Six Flags is still in Chapter 11, and could exit bankruptcy in March 2010.

Court approval of a pre-packaged plan depends on meeting Bankruptcy Code standards designed to guard against a circumvention of the bankruptcy process. 11 U.S.C. § 1126(b); Fed. R. Bankr. P. 3018(b). Under Section 1126(b), votes made on a pre-pack plan prior to bankruptcy will be invalid unless one of two requirements is met. First, the plan disclosure and solicitation must be in compliance with any applicable non-bankruptcy disclosure laws, like securities regulations for example. This requirement can often impose a greater burden than what is typically required in bankruptcy, as 11 U.S.C. § 1125(d) specifically exempts traditional bankruptcy plan disclosure statements from complying with securities law disclosure requirements. Second, if there are no applicable non-bankruptcy disclosure laws, then the pre-pack disclosure and solicitation must comply with the traditional bankruptcy disclosure requirements under 11 U.S.C. § 1125(a).

In addition to the determination of the adequacy of the disclosure and solicitation, Rule 3018(b) of the Federal Rules of Bankruptcy Procedure imposes a notice and timing requirement for the pre-bankruptcy solicitation of votes. Pre-pack votes will be disqualified if a court finds that the plan was not “transmitted to all creditors and equity holders of the same class” or if “an unreasonably short time” was given for the voting.

*Warning: Bankruptcy courts will carefully scrutinize the pre-petition solicitation of a pre-packaged Chapter 11 plan of reorganization to ensure that substantially all creditors affected by the plan receive notice.

While pre-packs are often more predictable and efficient than traditional Chapter 11 bankruptcy, the requirements imposed on pre-packs still add a flavor of uncertainty to the process. There have been cases where the disclosure and timing objections of dissenting creditors have derailed the pre-pack process. See In re Southland Corp., 124 B.R. 211 (Bankr. N.D. Tex 1991).

*Tip: As a debtor you should prepare a detailed disclosure and plan materials and provide creditors with enough of time for the proper review and acceptance of such a plan.

A company would be remiss in its bankruptcy planning if the pre-pack’s legal requirements were the only hurdle considered. A company must also consider the pragmatic requisites like generating the consensus necessary for the approval of a pre-pack plan. This is a nontrivial task, and coordinating various creditors becomes significantly more challenging as parties with divergent interests are added to the mix.

In addition, companies run the risk of alerting creditors to an impending bankruptcy. Aggressive creditors may push a distressed company into an involuntary bankruptcy, may initiate actions against the board of directors for breach of fiduciary duty or may take other adverse actions in the absence of an automatic stay. This action leads many bankruptcy attorneys to conclude that pre-packs are most appropriate for companies with a predictable voting body: one that is made up of a smaller, finite and sophisticated set of creditors and equity holders.

Traps for the Unwary When Considering the Use of Pre-packs

Pre-packaged bankruptcies work best where the debtor has a limited number of secured creditors and unsecured creditors with varying claims.

*Warning: Proponents of a pre-packaged plan should use extreme care to ensure that the disclosure requirements are met under applicable non-bankruptcy disclosure laws.

If applicable non-bankruptcy disclosure laws place too heavy a burden on the debtor, a debtor may consider proceeding with the traditional Chapter 11 filing.

*Warning:Proponents of a pre-packaged plan must strictly adhere to solicitation requirements.

Specifically, the plan must be transmitted to all creditors and equity holders of the same class and a reasonable time must be given to creditors and equity holders to vote on the proposed plan.

Proponents of a pre-packaged plan should be aware of defensive actions that dissatisfied creditors and equity holders can take during the solicitation process, especially the institution of an involuntary petition.

*Tip: Proponents of a prearranged plan should ensure that the plan has support from those parties whose consent will be necessary for confirmation.

The support should be confirmed, if at all possible, through a plan support agreement. A debtor should avoid finding out post-petition, for the first time, that its major constituencies do not support the plan.

Conclusion

The rocky economic environment since 2008 has lent itself to a rise in pre-pack bankruptcies, adding new flavors of risk, uncertainty and unpredictability for debtors facing a process under Chapter 11.

Debtor-in-possession or DIP financing, the monetary lifeblood necessary to sustain a debtor through the bankruptcy process, has all but dried up since the latter part of 2008. The only entities typically able or willing to supply such financing are the captive lenders already invested in the debtor. On the other hand, the dramatic rise in distressed companies has pushed trade creditors to the bargaining table as they grow ever-reluctant to see the demise of their largest customers.

Many creditors today would rather come to a consensual agreement than taking their chances battling it out in the bankruptcy courtroom. These concerns have led to a common desire for all parties to exert as much control and ensure the highest degree of certainty over the bankruptcy process. Traditional Chapter 11 proceedings lack those features, forcing realistic parties to join forces and pursue pre-packaged and prearranged bankruptcies for the benefit of all concerned.

Thanks to Michael Richman, Chair of Patton Boggs’ Bankruptcy and Restructuring Group, and Mark Salzberg, a Partner Patton Boggs’ Bankruptcy and Restructuring Group located in New York City and in Washington, DC, respectively, for contributing this article.

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2. Business Lenders Find Strict Foreclosure an Efficient Remedy For Loan Defaults

While economists seem to agree that the recession has ended, asset-based lenders continue to foreclose on collateral securing business loans using a potentially devastating remedy known as “strict foreclosure.”

*Warning: Different rules pertain to foreclosures of consumer goods or real estate. This article does not cover those rules.

Strict Foreclosures: Lenders Taking Property for Debtor’s Obligations

One foreclosure option relating to personal property which is allowed pursuant to the Uniform Commercial Code (UCC) is a strict foreclosure. A strict foreclosure allows secured parties to take title and possession of its debtor’s interest in the underlying collateral after the debtor defaults on its debt or other obligations to said secured party.

*Terms to Know: A “secured party” includes a lender or other person to which a debtor obligates its rights in property (“collateral”). A debtor grants a security interest in collateral for loans to or other credit extended by the lender or other creditor. In short, credit in exchange for property as security. A debtor can grant rights in collateral. Collateral may include equipment (in the UCC category of “goods”), inventory, accounts receivable (in the UCC category of “accounts”) and equipment leases (in the UCC category of “chattel paper).” See New York UCC. Note that the Cornell University library UCC (primarily used in this article) may differ from other state UCCs, the UCC of New York and other states.

The secured party may elect to avail itself of the strict foreclosure remedy without being hampered by cumbersome processes associated with a public or private foreclosure sale. Both of these remedies generally take more time, increase cost and potentially allow theft or waste of collateral during the time before the lender completes the foreclosure process. If a strict foreclosure makes sense for the parties, it may, despite the notice requirements and other formalities, be a more cost-effective, rapid-fire foreclosure method for lenders to realize value from the collateral after its borrower defaults.

*Terms to Know: The UCC refers to strict foreclosure as an “acceptance of collateral” and provides the rules and procedures for this method of foreclosure. The acceptance typically occurs when the secured party determines that taking the collateral back from the debtor for all or a portion of its obligations is the least painful or most expeditious solution to a bad situation – the unwanted and uncured default.

For example, if the lender (a secured party) finances the purchase of 50 medical scanners worth $100,000 each when new, the lender may accept the scanners from the debtor in lieu of repayment of its loan and resell them at market price. The lender may do so to maximize cash value that is more certain and perhaps significantly greater than a cash repayment by the debtor. A lender may similarly finance inventory. Rather than risk the disappearance of inventory or other losses in value, the lender may take the inventory and deliver it for sale to a liquidator or other third parties for sale in a manner that provides the greatest value it can expect to obtain from any post-default remedy.

In a strict foreclosure, the secured party accepts the collateral in either full or partial satisfaction of the debt secured thereby without being required to dispose of it. Strict foreclosure is often the preferred method of foreclosure for asset-based lenders if the debtor is willing to consent. When executed properly, strict foreclosure (1) discharges the obligations of the debtor to lender; (2) transfers all of the debtor’s rights in the collateral to the secured party (leaving debtor with no rights in the collateral); (3) discharges any security interests or agricultural liens; and (4) terminates any subordinate interests or liens. See UCC §9-622.

*Insight Point: Strict foreclosure is usually a fast and seamless method of foreclosure for a secured party dealing with a cooperative debtor. In the business lending context, strict foreclosure is a practical tool for workouts and restructuring debt obligations. In today’s tough economic climate, debtors often need to exit a deal and will voluntarily consent to “hand over the keys.” In short, strict foreclosure is perhaps the easiest way for a secured party to take possession of its collateral and move on and seek other remedies from third parties such as guarantors.

How Strict Foreclosures Occur: The Technical Process

A secured party may accept the collateral in full or partial satisfaction of the obligation if (i) the debtor consents to the acceptance; or (ii) the secured party does not receive a timely objection to its proposal of the terms of the foreclosure from a party with a right to object. See UCC §9-620(a). If the debtor desires to consent to acceptance of collateral in full satisfaction of the obligation it secures, it must do so in an authenticated record (signed document) after default. See UCC §9-620(c)(2).

A secured party that proposes to accept collateral in partial satisfaction of the debt must obtain the debtor’s actual acceptance of the proposal after default. See UCC §9-620(c)(1). Of course, the debtor is still liable for any portion of the debt that is not specifically discharged in the partial strict foreclosure. Accordingly, the secured party is free to sue the debtor for the balance of the deficiency or use other methods to collect the debt. However, in all other respects, the conditions necessary to an effective partial strict foreclosure are the same as those governing acceptance of collateral in full satisfaction of the debtor’s obligations. See UCC §9-620, Comment 3.

Because a strict foreclosure is effective in discharging and terminating the debtor’s and any subordinate lien holder’s rights in the collateral, Article 9 requires that the foreclosing secured party give certain parties written notice of the proposed strict foreclosure. A secured party must send its proposal to (1) any person from which the secured party has received, before the debtor consents to the acceptance, an authenticated notification of a claim of interest in the collateral; and (2) any other secured party that, 10 days before the debtor consented to the acceptance, held a security interest which was perfected by statute, regulation, treaty or the filing of a UCC financing statement. See UCC §9-621(a).

Any party that receives a proposal has 20 days from the date the proposal was sent to return an authenticated objection to the secured party. If the party objecting was not entitled to notice but has grounds to object, it must do so within 20 days of the date the last proposal was sent. See UCC §9-620(d)(2)(A).

*Insight Point: The notice requirements of a strict foreclosure make it a foreclosure tool that can only be used where subordinate lien holders are either disinterested or hold a debt position so minimal compared to the foreclosing secured party’s debt that they would not object upon receiving notice. Any subordinate lien holder possessing a debt it believes it may collect from the debtor will not allow a strict foreclosure to proceed – thereby wiping out its liens and obligations from the debtor – and will object upon receipt of notice.

Where the debtor and the secured party have not agreed to an acceptance of collateral the secured party may send a proposal in which it unconditionally (with the exception of the condition that the collateral be preserved or maintained) proposes to accept the collateral in full or partial satisfaction of the obligation it secures. The obligation is frequently the repayment of debt. If the secured party does not receive an authenticated notification of objection by the debtor within 20 days after the secured party sends the debtor its proposal, the debtor’s consent to the acceptance is deemed to have been given. See UCC §9-620(c)(2).

A proposal is not required to be in any specific form. However, the proposal must: (1) identify the collateral to be accepted, (2) state the amount of the secured obligations to be satisfied, (3) include the conditions (if any) under which the proposal may be revoked, and (4) describe any other conditions or requirements. A conditional proposal will require the debtor’s consent in order to take effect. See UCC §9-620, Comment 4.

*Warning: As a debtor in default of a secured loan you should understand the rules for strict foreclosure and communicate with your lender to find solutions to your default or address any notice you may receive from the secured party. If you remain silent or evasive in response to the proposal for strict foreclosure from a secured party, you may lose your property, which is collateral, and literally face a potential shutdown of your business and operations because the secured party may presume you consented within certain time limits.

If the foreclosing secured party does not send (or is not required to send) a notice regarding the foreclosure to another lien holder, the lien holder must, in any event, object before the debtor accepts the proposal for acceptance of collateral.

*Warning: As the foreclosing secured party, you must give proper notification of a proposal for acceptance of collateral in a strict foreclosure. See UCC §9-620(d)(2)(B). Remember secondary obligors (e.g., guarantors) and other persons are entitled to notice from you. If you do not give the proper notice, the acceptance of collateral in strict foreclosure by debtor should still be effective. However, you may be liable for damages in the amount of any loss caused by your failure to give notice to parties entitled to notice under the UCC. See UCC §9-625(b).

Article 9 requires that foreclosing secured parties make clear the actions they intend to take. For example, a foreclosure by means other than giving actual notices or acceptances by the appropriate parties will not suffice. In legal parlance, foreclosing secured parties can not claim that a “constructive strict foreclosure” can occur or has occurred. See UCC §9-620, Comment 5.

Practice Makes Perfect

Any remedy for default carries baggage in the form of notices or other procedures necessary to effect a foreclosure. When circumstances permit, a strict foreclosure potentially affords all parties a quicker solution without expensive court battles and loss of value in assets serving as collateral for a loan.

*Tip: Although procedures for strict foreclosures seem complicated, those lawyers with experience in this area may work hard to prepare for a foreclosure but often develop a routine to complete these foreclosures efficiently. When choosing counsel, ask them for their specific experience in foreclosing on various types of assets.

As a creditor, a strict foreclosure allows you to accomplish your remedies efficiently in the absence of unexpected opposition or procedural delays, especially if you receive a valid and enforceable consent from your debtor.

Given the continuing challenges in the economy some debtors simply cannot or will not repay loans or satisfy their other obligations to their creditors. Secured parties these days have to consider a whole range of remedies after defaults. A strict foreclosure should always be one of them.

Thanks to Jamie Grammer, a partner in the Corporate Finance and Project Finance Practice Groups in the Dallas, Texas office of Patton Boggs LLP and Lewis Goss, an associate in the same office in the Corporate Finance Practice Group, for contributing this article.

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3. Congress Transforms False Claims Act into “All-Purpose Antifraud Statute”

The False Claims Act (FCA) has been a potent weapon against alleged fraud by individuals and entities doing business with the federal government, whether in leasing, procurement or other types of businesses. The U.S. government has used the FCA primarily to prevent and punish fraud against the government by government contractors and health care providers. Recent amendments to the FCA, however, have transformed the FCA into a broad “all-purpose antifraud statute” affecting virtually every business and every transaction involving government funds.

Until its recent amendment, the FCA generally imposed liability for knowingly presenting a false or fraudulent claim to the government for payment. Two features of the FCA have made it particularly effective: (1) it imposed liability of treble damages plus potentially ruinous civil penalties; and (2) it permitted whistle-blowers, often disgruntled current or former employees, to initiate suit under the FCA in return for 15 percent to 30 percent of any recovery by the government.

In recent years courts have ruled that a defendant must present a false claim directly to the Government, not to a contractor or grantee, to come within the scope of the FCA.

*Technical Point: Last year the Supreme Court ruled that a false statement, made to get a false claim paid, falls within the scope of the FCA only if the person making the claim stated with the intent that the government itself (not the contractor) pay the claim. The Court reasoned that “[r]ecognizing a cause of action under the FCA for fraud directed at private entities would threaten to transform the FCA into an all-purpose antifraud statute.” Allison Engine Co., Inc. v. United States ex rel. Sanders, 128 S.Ct. 2123, 2130 (2008) (Allison).

The whistle-blower’s bar, and its congressional allies, wanted to overrule Allison and other court decisions favorable to FCA defendants. The financial crisis in 2008-09 provided the perfect opportunity. Congress amended the FCA by, in the words of the Allison decision, making it applicable to “fraud directed at private entities,” thereby transforming the FCA into an “all-purpose antifraud statute.”

Expansion of Liability for Businesses

In response to the financial meltdown and the resulting American Recovery and Reinvestment Act of 2009 (stimulus) package, Congress also enacted the Fraud Enforcement and Recovery Act of 2009 (FERA), signed by President Obama on May 20, 2009. Under FERA, certain transactions involving mortgage lenders and recipients of stimulus funds have become criminal offenses. In addition to the changes in the criminal code, FERA made substantial changes to the FCA.

The definition of a “claim” makes the most significant change.” The FCA redefined the term “claim” as:

any request or demand . . . for money or property whether or not the United States has title to the money or property, that . . . is made to a contractor, grantee, or other recipient if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest” if the United States has provided, or will provide, “any portion of the money or property.”

The statute contains no definition of “on the Government’s behalf” or “a Government program or interest.”

Tip*: If you make any request or claim for money and are a “recipient” of funds, in whole or in part, by the government, “to advance a Government program or interest,” you should ask your legal advisor whether you will be subject to the expanded scope of the FCA, and the associated penalties and other adverse actions that may be asserted against you.

According to the Senate Report accompanying FERA, the FCA now imposes liability for making a false claim for money or property, “any part of which is provided by the Government without regard to whether the wrongdoer deals directly with the Federal Government.” S.Rep. 111-10, 111th Cong., 1st Sess. at 11 (S. 386).

*Insight Point: Because the Senate Report states that the amended definition of the term “claim” was intended to address a different problem, the most far-reaching amendment to the FCA has been among the least noticed. That lack of attention is precisely the way you can overlook this significant change.

The Impact of the Change for Doing Business with the U.S.

Using TARP funds to make loans was obviously the “Government program or interest” for which the money was provided. If any of those fledgling businesses in western Pennsylvania make a false statement in their loan applications, however, they arguably are subject to liability under the FCA. Similarly, any other commercial transaction involving financing is subject to the FCA if the government furnished funding to the lender. Because money is fungible, it is not necessary to determine whether the funds provided by the government were the same funds that were used in the transaction.

*Warning: Under the new definition of “claim” the FCA applies whenever the government has provided “any portion of the money or property” -- even if the borrower is unaware that the funds came from the government.

FERA also expanded the FCA’s “reverse false claims” provision of the FCA which imposes liability on anyone who knowingly “avoids or decreases an obligation to pay” funds that have been paid in error. 31 U.S.C. §3729(a)(1)(G).

*Warning: Under this provision, there is FCA liability for retaining funds even if the erroneous payment was not caused by the submission of a false record or statement. In addition, the amended FCA defines “obligation” expressly to include overpayments. 31 U.S.C.§ 3729(b)(3).

This is a particularly important change for health care providers, who frequently receive inadvertent overpayments from Medicare.

FERA also eliminated language in the FCA requiring a false claim to be presented to an officer or employee of the government or a member of the armed forces. The FCA now simply imposes liability on anyone who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval.” 31 U.S.C. §3729(a)(1)(A).

How to Protect Your Business: An Effective Compliance Program

Health care providers and government contractors have long known that the best protection against FCA liability is an effective compliance program. Such a program can prevent a failure to adhere to legal requirements, or at least alert the company to potential problems. In this manner, the potential for the submission of false claims can be minimized, if not eliminated.

To be effective a compliance program must have support of the highest levels of the company. The board of directors and senior management must be committed to the program. They must demonstrate their commitment not only through direct written and verbal communications, but also by providing the necessary resources to the operation of the program.

While organizations can vary significantly in size, industry and product, effective compliance programs have a number of common elements, often referred to as the “seven pillars of compliance.” These programs include implementing written policies and procedures; designating a compliance officer and compliance committee; conducting effective training and education; conducting internal monitoring and auditing; enforcing standards through well-publicized disciplinary guidelines; and responding promptly to detected problems and undertaking corrective action.

*Action Point: If you do business with the government, directly or indirectly, you should have updated your compliance program. If you have not done so, call your legal advisors with knowledge of the FCA and update or even implement a compliance program, as appropriate.

Finally, companies can protect themselves by recognizing the importance of maintaining good employee relations in connection with their compliance program. One of the reasons the FCA has become such a feared and dangerous weapon is that it permits whistle-blowers to initiate an action on behalf of the government in return for a percentage of any recovery. Because employees are the people most likely to be aware of legal or regulatory violations, most whistle-blowers are current or former employees.

Many whistle-blower suits can be prevented by assuring employees that all compliance complaints, objections and questions will be taken seriously and investigated. Companies should, as a matter of policy, inform employees that if their complaint is meritorious, the problem will be corrected consistent with applicable law.

The FCA, a statute that extends to virtually any fraud, directly or indirectly, against the government, deserves immediate, continuous and appropriate action to avoid reputational damages and potentially serious liability dwarfing the perceived benefit of the alleged fraud itself. A well-constructed and implemented compliance program will help, but rigorous compliance with the FCA will ultimately be the best protection for any business.

Thanks to Harry R. Silver for contributing this article. Harry is a partner in the Government Contracts, Litigation and Dispute Resolution and Health Care Practice Groups in the Washington DC office of Patton Boggs LLP.

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4. Finance 101: What is “Project Finance?”

“Project finance“ is a long-term credit arrangement with a debtor related to the development and construction of infrastructure or a large commercial or industrial project. It is typically repayable solely from cash flows of the debtor’s project and, as such, usually constitutes a non-recourse obligation of the debtor. The debtor may enter into the credit arrangement in the form of a loan or a lease.

*Term to Know: Infrastructure typically refers to the physical plant or property of a project that facilitates the production, distribution and delivery of a product or service. For example, wind farms (electrical energy product), roads (transportation of goods and services), gas storage facilities (holding natural gas until needed for production of power or heating), thermal electric generating plants, pipelines, sports stadiums and bridges are examples of infrastructure projects. See Unique pad gas lease supports project financing of natural gas storage facility in the US, by David G. Mayer, Patton Boggs LLP, Financier Worldwide (Oct. 2006).

The debtor is almost always a special purpose entity (called the “project company"), which is designed to shield liability at the project company level and isolate the documents and assets of the project from liens of creditors and other claims unrelated to the project, and thus limit the liability of the sponsors (the developers and equity investors in the project). The project company is typically formed by the sponsor of the project. It usually obtains all permits and approvals, owns or leases the project assets and acquires other rights necessary to design, construct, operate and maintain the project. See Introduction to Project Finance – A Guide for Contractors and Engineers (June 3, 2002) for a diagram of a project financing.

The most important agreement in virtually every project financing is a long-term purchase agreement between the project company and its customers that will buy the company’s products or services. The purchases generate the projected cash flow typically required by financiers to underwrite and approve a project. The cash flow also provides a source of payment of the related indebtedness or rent. Numerous contracts, including the purchase agreement, arise out of the design, construction, maintenance and operation of the facility and form a part of the web of agreements often called the “project documents.”

*Tip: As a sponsor you should engage knowledgeable lawyers and consultants early in a project’s development. Those resources can help you navigate the complexities of your particular project and project documents and adhere to standards that a project financier will require you to meet.

In a project financing that is a loan transaction, a bank or other lender advances loan proceeds to the debtor in an amount equal to a negotiated percentage of the cost of the project. The sponsors invest equity and/or arrange for the investment of equity in the project by other equity sources. The underlying obligations in a project financing are secured solely by the project’s assets, including its physical property and project documents (such as a construction contract) between the project company and third parties.

In a project financing that is a secured loan, the loan proceeds plus the equity provided by the sponsor and any other equity investor pay the entire cost to build the project. A lessor, by contrast, purchases the facility and typically finances 100 percent of its cost. The term of a project financing depends on the type of facility, cash flow generated, market conditions, the product or service created or provided by the facility and other factors. The term of a loan financing is typically shorter than the term of a lease financing, however, both structures constitute long-term obligations of the project company.

A project financing is often non-recourse to the sponsor. In other words, the sponsor incurs no personal liability even if project revenues do not cover the principal and interest payments on the loan or rents under a lease. In order to minimize the risks associated with a non-recourse loan or lease, some projects require the sponsor to assume some risk other than the initial equity investment.

Although project financing is not a new concept, it has been and will remain a viable method to raise capital and finance infrastructure and other projects. It allows sponsors to significantly leverage projects. However, this type of financing is usually expensive and complicated.

*Warning: This article provides only a general and high-level glimpse of the concepts in project financing transactions. Every transaction is unique, even though similar concepts recur in most project financing transactions. Do not assume any general description of a project financing in this article will apply for all transactions.

Thanks to Scott Wallace, a Project Finance partner in the Dallas office of Patton Boggs LLP, for editing this article.

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About Patton Boggs LLP; PB Capital Resource Center; PB Podcast and Capital Thinking Internet Radio Show; Publications, Speeches and Radio Interviews

About Patton Boggs LLP

Patton Boggs LLP is a law firm of approximately 600 attorneys and other professionals located in Washington DC, Northern Virginia, New Jersey, New York, Dallas, Denver, Anchorage and internationally in Abu Dhabi, United Arab Emirates and Doha, Qatar.

Patton Boggs has major practice areas in business, intellectual property, public policy and litigation. These areas are composed of many practice groups designed specifically to meet client needs and the trends in developing legal markets. David G. Mayer often focuses on capital equipment and facility financing and development in energy, transportation, infrastructure, aviation and technology transactions, workouts and litigation.

The firm provides a broad array of skills in domestic and international business transactions, including equipment finance and leasing, corporate finance, secured transactions, syndications, mezzanine finance, aviation and transactions law, federal leasing, project finance, real estate, health care, pharmaceuticals, technology transactions and public policy work.

The equipment finance practice at Patton Boggs regularly involves the buying, selling, financing and leasing of personal property of all kinds, including business aircraft, energy facilities, power plants (including wind farms and other renewable energy facilities) and technology and health care assets.

When these transactions encounter defaults or other disputes, Patton Boggs responds with a team of business transaction lawyers, who have extensive restructuring and workout experience; litigators, who manage court actions and alternative dispute resolution proceedings; and bankruptcy lawyers, who assist in restructuring transactions, handle workouts, advise on potential bankruptcy filings and litigate and otherwise participate in the entire bankruptcy process.

PB Capital Resource Center

Capital Markets Web site – PB Capital Markets is the firm’s dedicated Web site offering current political news and in-depth analysis of the most important legislation pertaining to the crisis in the financial services and banking industries today. Click on Capital Markets for more information.

Capital Thinking Magazine – For insightful interviews with business and political leaders and more in-depth information on business, finance, politics and the law, pick up a copy of Patton Boggs’ Capital Thinking magazine. Published quarterly, Capital Thinking features articles from top business and legal minds providing readers with actionable tips on timely topics.

PB Podcast and Capital Thinking Internet Radio Show – PB Partner Kevin O’Neill hosts both a weekly podcast series and a weekly Internet radio show that delivers the latest news and insight into policy, law and politics in Washington. The PB podcast series is updated every Monday and is available on the firm’s Web site and iTunes. Capital Thinking, Patton Boggs’ weekly Internet radio show, airs live every Thursday at 12:30 p.m. ET on VoiceAmerica Business network. Top guests, including politicians, business leaders, public policy advisors and PB partners, join Kevin to discuss how legislation and business developments raise a wide array of pressing issues in the United States.

Partial List of Publications, Speech and Radio Interviews

The following is a partial list of articles written or co-authored by David G. Mayer and a mention of radio show appearances by BLFN Founder David G. Mayer:

17^th Annual Aircraft Registry Forum, Ritz-Carlton, Ft. Lauderdale, FL. Mayer on panel: “The Shift to Leases: Negotiating the Lease Agreement”, Monday, February 22, 2010.

Capital Thinking Internet Radio (Patton Boggs podcast), with host Kevin O’Neill: Interview of Ed Bolen, president and CEO of the National Business Aviation Association and David G. Mayer, Patton Boggs partner, July 30, 2010, regarding the significant challenges and trends in business aviation today.

Capital Thinking Internet Radio (Patton Boggs Podcast), with host Kevin O’Neill: Interview of David G. Mayer on March 12, 2010 regarding trends in financing and development of natural gas storage facilities. To listen to the interview, click on Mayer Interview.

A Test of the Cape Town Convention: Useful Tool in Debtor Insolvencies and Defaults or a Trap for the Unwary, David G. Mayer and Frank Polk, Corporate Rescue and Insolvency Magazine, Vol. 2.5 (Oct. 2009).

U.S. Court of Appeals Upholds Graves Amendment in Garcia v. Vanguard, by Connie Ariagno and David G. Mayer, with the assistance of Tyson Wanjura, LNJ Leasing Newsletter (Dec. 2008). To listen to the interview, click on Bolen & Mayer Interview.

Unique Pad Gas Lease Supports Project Financing and Development of Gas Storage Facility in U.S., by David G. Mayer (with Fortis Capital Corp.), Asset-Based Lending Review, Financier Worldwide (Nov. 2006).

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Thanks to BLFN’s Team

I would like to thank BLFN’s team at Patton Boggs LLP. The team includes Tyson Wanjura, an associate in Dallas and the Patton Boggs staff: our marketing writers Jennifer Becker and Gina Cimarelli, our marketing manager Mark Holub, our project manager Melissa Green, Penny Utley, our subscription coordinator and our web coordinator Gina Cimarelli. Thanks also to Douglas C. Boggs, a Business Group/Securities partner and Web site reviewer for BLFN, and our Chief Marketing Officer Mary Kimber, for assisting BLFN through our firm’s editing, design and posting process.

All the best,

David

David G. Mayer
Founder: Business Leasing and Finance News
(formerly Business Leasing News)
Partner: Patton Boggs LLP
2000 McKinney Avenue
Suite 1700
Dallas, Texas 75201
(214) 758-1545 (phone)
(214) 758-1550 (fax)
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© David G. Mayer 2010

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