Banking & Financial Services Insights

Why in the aftermath of a chemical accident does the government seek enormous cash penalties for accident prevention, when instead they could do more to reap the benefits of improving the environment and the communities surrounding an incident, and at the same time the government could be more proactive in avoiding future environmental problems?

The EPA has provided the ideal vehicle to address the avoidance of environmental harm in the guise of Supplemental Environmental Projects (SEPs).  A SEP is an environmentally beneficial project or activity that is not required by law, but that a defendant agrees to undertake as part of the settlement of an enforcement action.  A violator may pay a reduced cash penalty amount, but rather than simply writing a big check, they invest the would–be penalty amount in the affected community.  The SEP shifts the focus toward a model where the offender works to right the harm caused by their actions.   Environmental violators are encouraged to consider SEPs in communities where there are environmental justice (EJ) concerns.  EJ is defined as the equitable distribution of environmental risks and benefits.  EPA has always been keen to address harms done to communities disproportionally burdened by exposure to pollutants.

After a chemical accident, it makes logical sense to seek to repair the harm done to the community and to obtain measurable benefits ― by seeking to facilitate quicker and more efficient responses associated with emergency events; by seeking to provide technical support to the impacted community; by developing plans to respond to releases associated with emergency events and by working to enhance local coordination with emergency responders.  If using a SEP can be viewed as a vehicle designed to make an aggrieved community whole, and if a particular SEP can enable a community to feel better equipped to handle an impending disaster, then why shouldn’t a SEP be the premier mitigation tool in the enforcement arsenal, and the preferred tool to a large cash penalty.

In re: World Imports LTD (No. 15-1498)

Recently, the U.S. Court of Appeals for the Third Circuit issued a favorable decision for a secured creditor in the context of maritime liens on the prepetition goods of a Chapter 11 debtor, World Imports, Ltd., et al. The court noted the existence of a strong presumption that the creditor, OEC Group (“OEC”), a provider of non-vessel-operating common carrier transportation services, did not waive its maritime liens in connection with the prepetition goods. The court indicated there was clear documentation that the parties intended such liens to survive delivery of the goods, and evidence of an intention to preserve the lien after delivery. The contract stated that the “lien shall survive delivery, for all sums due under this contract or any other undertaking to which the merchant was party.” In support of the decision, the Court noted the “familiar doctrine” of admiralty courts that enables maritime liens to attach to property substituted for the original object of the lien. Although the lien arose by operation of law, the Court held that the parties were free to modify or extend the existing liens via contract, extending the lien from the prepetition goods to the “current goods” which included landed goods in OEC’s possession and those goods in transit for which OEC was to provide delivery in the near future.

The Court reasoned that the express agreement that OEC would not waive its liens upon delivery, constituted an ex ante agreement that OEC would retain the position already afforded by operation of maritime law. Essentially, the extension of the outstanding liens from prepetition goods to current goods functioned, in the aggregate, as it would have as to individual shipments, under maritime law.

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You have a commitment from your Lender; certainly you should be able to close in one week, Right? Wrong. When closing a loan, there are many areas that can derail you from a timely closing. One area of particular concern and which often delays closing, is with respect to the Lender’s insurance requirements. To reduce discrepancies or issues leading up to closing, and to ensure that closing occurs as expeditiously as possible, it is important to understand the Lender’s insurance expectations and requirements at the outset; specifically, as set forth in the Lender’s commitment letter.

For commercial mortgage transactions, Lenders typically require a) property insurance on a “special form of loss” policy, previously referred to as an “all risk” policy, and b) commercial general liability insurance. For the property insurance, the lender will require the property to be insured at least in the amount of the loan and it will require a standard mortgage clause that names it as the mortgagee. Prudent lenders also typically require that the policy must be endorsed as “lender’s loss payable,” which gives the lender the right to receive the loss payment on a claim even if the insured has failed to comply with certain terms of the policy or because the loss was occasioned by the insured’s wrongful acts. The liability insurance policy should name the Lender as an additional insured and should waive all rights of subrogation against the mortgage lender. Often times, an insurance broker will claim that the lender has no insurable interest, and therefore cannot be added as an additional insured on the commercial general liability policy. The lender is concerned that if its borrower suffers an uninsured loss that is beyond its ability to absorb, the borrower’s continued viability is at stake. Furthermore, even though the likelihood of a claim against a mortgagee for injuries incurred at the mortgaged property is small, the lender wants to reduce its chance that its own insurance will be required to pay a claim that would be covered by the borrower’s required insurance. As an additional insured, the lender is entitled to the benefits of the policy but is not charged with the obligations of the named insured, moreover, the insurer cannot exercise subrogation rights against its own insured.

To prove you have the correct insurance in place, the Lender typically requires specific types of insurance proofs to be produced and approved prior to closing. In the past, certificates of insurance were provided to Lenders in the form of an ACORD 27 (for residential property) or ACORD 28 (for commercial property) as evidence of property insurance, and an ACORD 25, as evidence of commercial general liability insurance. In 2006, the ACORDs were revised to indicate that they do not grant any rights in coverage to the policy holder or to the mortgagee, additional insured, certificate holder, lender, etc. Essentially, these certificates are often prepared by insurance brokers as a summary of what coverage is purported to exist, but they do not prove that there is coverage under a particular policy and they do not grant coverage. This essentially makes these certificates or evidences of insurance ineffective in the risk management arena. They are merely for informational purposes only and their validity and accuracy cannot be verified without the underlying policy documents. As a result, many lenders now require, in addition to the ACORD forms, that as part of the normal due diligence process, a copy of the policy be produced and reviewed by the lender and the lender’s insurance advisor. In order to avoid delays, the ACORD forms and policy documents should be provided to the lender well in advance of closing so that the lender has sufficient time to process and review the insurance.

Traditionally, aspiring entrepreneurs looking for easy, low cost access to capital to fund their start-up businesses had limited means.  Recently, sites such as Kickstarter and GoFundMe provided a platform, but the most companies could offer in exchange for a cash investment was a first look to the particualr product or other creative reward, each of which, however was not stock.

Recognizing in part that access to the capital markets should not be limited to the domain of the few, and in view of the democratizing effect the Internet has had with respect to reaching prospective investors, the Jumpstart Our Business Startups Act (JOBS Act) was enacted in April 2012.  One of the most anticipated parts of the JOBS Act was the rules pertaining to crowdfunding.

Business & Financial Services Shareholders, Robert Anderson and Monica Vir recently authored an article for the New Jersey Law Journal in which they provide an overview of the SEC’s allowance for smaller early-stage companies and start-up businesses to raise money by selling securities to non-accredited investors through qualified intermediaries, more commonly known as crowdfunding.

On March 10, 2015 the New Jersey State Supreme Court issued a unanimous ruling allowing trial courts in the state, rather than the state Council on Affordable Housing (“COAH”), to decide if towns are providing enough low- and moderate-income housing.  The Court issued its decision after finding that COAH has repeatedly failed to establish new affordable housing guidelines.

The Court has delayed the implementation of its ruling for 120 days in order to allow parties to prepare “fair share” or “higher density” arguments.  Ninety days after the Court’s March 10th ruling, municipalities will have 30 days to file declaratory judgment actions seeking immunity from litigation.  Municipalities will need to show the court they have either (1) achieved substantive certification from COAH under prior iterations of the Third Round Rules before they were invalidated, or (2) had achieved “participating” status before COAH.  If at the conclusion of the 120 day period municipalities have not either filed for a declaratory judgment, or have not been granted immunity, “builder’s remedy” actions may be brought against the municipality.

Currently 314 of 565 municipalities in New Jersey have plans pending before COAH.  Developers and their counsel should remain vigilant as to how trial courts rule on declaratory judgment motions filed by these municipalities.  For developers seeking to begin real estate development projects in any of the 251 New Jersey municipalities that do not have plans pending before COAH, developers may seek the assistance of the courts after 90 days from March 10, 2015.

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