National Credit Markets and Subprime Lending Task Force
The legal impact of the devaluation of subprime-mortgaged properties and debt, the severe contraction in the credit markets generally, and the evaporation of credit for many business segments well beyond residential and commercial real estate markets is only beginning to be seen. Companies affected by these conditions are increasingly subject to litigation and investigations, forced to sell assets at discount, struggling to finance operations and restructurings both in and out of bankruptcy court, and being subjected to legislative, regulatory and policy initiatives at the state and federal level. At the same time, a widespread downturn may create certain investment and acquisition opportunities. Institutions and individuals affected by current market conditions require the guidance of highly skilled advisors and advocates to assist in managing the legal challenges and capitalizing on the opportunities that may emerge.
Sonnenschein Nath & Rosenthal LLP ("Sonnenschein") has extensive experience representing clients in a broad range of matters involving the business, legal, and public policy issues arising from today's credit market conditions. Our litigation experience, coupled with the depth and breadth of our highly integrated national bankruptcy, corporate, construction, real estate, and public law and policy practices, and our familiarity representing major financial institutions in complex transactions, uniquely positions us to effectively and efficiently help clients address all legal issues and attain their business objectives. To this end, Sonnenschein has created the National Credit Markets and Subprime Lending Task Force.
Litigation and Dispute Resolution
Sonnenschein has handled complex litigation in federal and state courts across the country that involve issues related to subprime lending, assets, and credit contraction. A representative sampling is set forth below:
Royal/SFC Representation (MBIA v. Royal, D. Delaware; Royal v. Pepper Hamilton et al., D. Delaware; Royal v. CDI, M.D. Tennessee; Royal v. T.E. Moore & Co., et al., Jefferson County, Texas): SFC was an originator and purchaser of subprime loans to vocational--primarily trucking school--students. Loan pools were securitized and then sold in private transactions to institutional investors. Credit risk insurance issued by Royal Indemnity Company was essential to SFC's warehouse lending relationships and marketing of the securitizations to investors. When it was revealed that SFC's subprime loans were defaulting at rates far higher than SFC had represented, and numerous other irregularities in the securitization transactions were discovered, litigation ensued, by and against Royal, and by Royal against, among others, SFC's lawyers and accountants, the SFC securitization trustee, and trucking schools who had participated in the SFC program. Sonnenschein represented Royal both in actions brought against Royal regarding Royal's credit risk insurance policies, and Royal's actions against the various other participants in SFC's scheme and the failed securitizations.
Royal/CMC Representation (Multiple actions consolidated as multi-district litigation in N.D. Ohio, state court litigation, bankruptcy litigation and governmental investigations): CMC leased equipment to lessors with subprime credit. Subprime leases were pooled and pledged or sold to investors, mostly commercial banks. CMC procured either surety bonds or credit insurance whereby the insurer/surety pledged to pay certain sums in the event of lessee default. When it was revealed that CMC's subprime leases were defaulting at rates far higher than CMC represented, litigation ensued between CMC, the sureties and insurers, and the investors, among others. Sonnenschein has defended Royal in these actions against claims on Royal-issued surety bonds and has also represented Royal as a plaintiff against, among others, CMC and certain of the investor banks.
Sears, Roebuck and Co.: We have represented Sears and certain of its officers in a number of class actions filed in the U.S. District Court for the Northern District of Illinois and state courts, including the following:
- In re Sears Roebuck and Co. Securities Litigation, N.D. Ill.: An action by common stock shareholders under §10(b) of the Securities Exchange Act and Rule 10b-5 alleging that Sears made misleading statements about the amount of subprime loans in its credit card portfolio, the disclosure of which caused a significant drop in the price of Sears stock.
- In re Sears Roebuck and Co. Erisa Litigation, N.D. Ill.: An action by participants in Sears profit sharing plans alleging that the defendants violated the Employee Retirement Income Security Act by investing in Sears stock when they knew or should have known that the amount of subprime debt in Sears credit card receivables, and the quality of Sears overall credit portfolio, was not accurately represented.
- Ong v. Sears Roebuck and Co. et al., N.D. Ill.: An action by holders of Sears Roebuck Acceptance Corporation debt securities alleging violations of §11 of the Securities Act of 1933 and §10(b) of the 1934 Act, and Rule 10b-5 relating to the adequacy of disclosures about subprime loans in Sears' credit card portfolio.
In re Spiegel Securities Litigation: Sonnenschein represented the outside directors and audit committee of Spiegel Holdings, Inc. in a case brought in the U.S. District Court for the Northern District of Illinois alleging misrepresentations and omissions about the credit quality of the credit card receivables and the asset-backed securities issued by Spiegel affiliates, which those receivables backed. The case included allegations that the securitizations did not meet "true sale" criteria, whether the securitizations were non-recourse, whether rapid, or accelerated, amortization had been triggered and the efficacy and consequence of trigger waivers, alleged overvaluation of retained interests in the securitizations, and allegedly improper "net-downs" in the assembly of loan pools.
MBNA v. Spiegel Holdings Corp.: Sonnenschein represented Spiegel outside directors in an action brought by the insurer of the asset based securities referred to in the preceding matter, under section 10(b) of the 1934 Act and Rule 10b-5. On the defendants' motion, the complaint was dismissed for failure to state a claim, primarily because MBNA could not allege that it was a purchaser or seller of the securities and was not subrogated to the rights of any purchasers.
SEC Investigation of Subprime Lender: Sonnenschein represented a senior officer of the consumer finance branch of a major financial institution with a significant subprime lending business in an SEC investigation of the accuracy of the company's disclosures about credit quality. The issues included the company's default, re-aging, reinstatement, and reclassification policies, changes in underwriting criteria and disclosures to and dealings with ratings agencies.
Corporate Reorganization and Bankruptcy
We realize that there is no one-size-fits-all answer for handling the wide variety of restructuring issues our clients regularly face; that's why the goal of our Corporate Reorganization and Bankruptcy practice is to work with our clients in developing and implementing the appropriate case resolution. We bring creativity and vigor to every representation, as shown in the matters described below, and we have the experience and credibility to succeed.
The following is a sampling of matters in which we have been actively involved and that are of a public nature. There are also numerous representations and consultations in non-public matters that are not discussed by name herein.
First MerchantAcceptance Corp.: These cases involved a sizable automobile financing company that specialized in subprime lending and had multiple outstanding securitizations. It was discovered during the course of the case that senior management had altered loan delinquency data, which had been removed from the company's books days before the bankruptcy filing.
Sonnenschein assisted the debtors in securing approval of a financing plan proposed by the strategic bidder, and facilitated the transfer of the debtor's portfolio and servicing of the outstanding securitizations to preserve value of the assets. We also structured a joint prosecution strategy addressing the altered loan delinquency data. Plaintiff's class counsel obtained recovery from the former accountants and insurers on security fraud theories, agreeing to split a portion of that recovery with the estate and its creditors.
HomeBanc, American Home Mortgage, et al.: We have advised a major insurance company regarding bankruptcy issues relating to carrier rights and exposures in several of the pending major subprime mortgage originator cases.
First PlusFinancial, Inc.: Sonnenschein attorneys represented a bondholder committee of the parent company in the bankruptcy proceedings of this national subprime mortgage lender. In the bankruptcy proceedings and in separate litigation on behalf of the bondholders, we secured a recovery for these creditors from the workout of the subprime loans of the operating subsidiary as well as from the equity of the parent. In addition, a member of our firm represented the State of Arizona with respect to consumer finance regulatory matters in the bankruptcy case.
First Wisconsin MortgageTrust: We were counsel to this troubled REIT in the out-of-court liquidation of its assets. We helped it to dispose over 400 separate properties and were able to obtain a higher return to the secured and unsecured creditors than would have been possible had the banks foreclosed.
Southern Pacific FundingCorporation: We represented the Indenture Trustee, who served as a member of the creditors' committee, in the Oregon Chapter 11 case of this specialty finance company engaged in the business of originating, purchasing and selling high-yielding, subprime mortgage loans secured by one to four family residences. Together with the representative for the holders of senior bonds, we litigated the terms of the indentures and other documents of the debtors to determine the priority of claims and to obtain a recovery for all creditor constituents.
Harbor FinancialCorp.: In this bankruptcy proceeding, Sonnenschein attorneys represented a purchaser of subprime mortgage loans from the debtors and structured an agreement to resolve competing claims by the lenders, the debtors and the purchaser over a reserve fund.
Forrest Financial: We were special securitization counsel to the Assignee for the Benefit of Creditors of this subprime equipment finance company.
VMS: We represented this large syndicator of real estate loans in its out-of-court wind down for the benefit of creditors. This matter also involved over 400 properties, including several with environmental issues.
The Corporate Restructuring and Bankruptcy practice also has extensive experience in the workout of distressed real estate. We served as equity committee counsel in the NVR and UDC cases. We represented lenders, investors and creditors of troubled apartment complexes, golf and resort developments, multi-use and office building complexes, retail chains, and nursing home properties.
Corporate
Our Corporate practice attorneys distinguish themselves by partnering with clients so that legal problems are addressed with a full understanding of their business objectives, operations and strategies. We think creatively, proposing ideas that our clients may have not previously considered but which advance business goals. With deep experience and success representing all parties in corporate transactions, we are dedicated to building strong relationships and meeting our clients' most sensitive and critical needs. This is accomplished by balancing risk management and deal execution based on our clients' specific criteria.
With respect to commercial law, we routinely assist our clients in the evaluation and negotiation of complex commercial transactions including joint ventures, supply, distribution, information technology, and business service agreements. As a result of our work with national and multi-national clients in diversified industries, we have the opportunity to work on a broad spectrum of contractual issues and participate in the development of emerging trends and best practices in commercial contracting. This broad exposure allows our attorneys to structure creative contract solutions, often extrapolating from trends in unrelated industries.
In addition, our attorneys represent indenture trustees and custodians in negotiating issuance documentation, as well as advising on defaulted issuances, in connection with collateralized debt obligations ("CDOs"), collateralized loan obligations ("CLOs"), commercial mortgage backed securities ("CMBS"), commercial real estate collateralized debt obligation ("CRE CDO"), real estate mortgage investment conduits ("REMIC"), net interest margin notes ("NIMs"), and other mortgage-backed securities transactions. During 2007, our attorneys closed approximately 250 of these transactions representing the indenture trustee and/or custodian.
Mergers & Acquisitions
Consolidation may provide solutions to many of the significant legal and financial challenges created by current credit market conditions. Mergers and acquisitions ("M&A") may be the answer to providing financial institutions the opportunity to increase market share, reduce operating expenses and allow for more alignment of risk and pricing. We have the ability to efficiently guide clients through every step of such a transaction.
Mergers, acquisitions and divestitures represent one of the most extensive areas of Sonnenschein's Corporate practice. We represent U.S. and non-U.S. companies, public and private companies, and funds and financial institutions, each in their roles as buyers, sellers, investors, and financial advisors.
Our attorneys have represented buyers and sellers in friendly and hostile settings in all types of complex corporate acquisitions and dispositions, including: stock purchases, asset purchases, mergers, tender offers, going private transactions and spin-offs.
Our approach to mergers and acquisitions for all clients combines our understanding of the client's business with legal expertise relating to the client's industry. These factors, coupled with the magnitude of our M&A practice, permits us to provide clients with knowledge of the "market" in order to best structure, evaluate, negotiate and close deals. Our capabilities are further enhanced because Sonnenschein's Corporate lawyers often represent investment banking firms, hedge funds and private equity groups.
We bring together the exact expertise required in a transaction from other firm practice areas so that clients receive a seamless, multidisciplinary team effort in consummating a transaction, whether the issues at hand require tax, environmental, employee benefits, labor, regulatory, bankruptcy, real estate, antitrust, international or other advice. In many deals, Sonnenschein Corporate lawyers will lead M&A teams that include a client's other professionals (often consisting of other lawyers) and assure cooperative, communicative and reliable team work.
Real Estate
With more than 100 attorneys, Sonnenschein's Real Estate practice offers tremendous scope and international presence. Our collective strength makes us the law firm of choice on an international level, yet our geographic diversity means we are also the first choice in our local markets. Given that the business of real estate is increasingly multifaceted, we have successfully wed our real estate, corporate, tax, litigation and workout expertise to offer an integrated team that is responsive to the realities of the market.
Our real estate expertise spans several areas, including Capital Markets and Finance.
Capital Markets
Sonnenschein's Capital Markets practice is comprised of attorneys from the firm's Real Estate, Finance and Taxation practices. They assist clients with the origination and acquisition of commercial real estate loans for aggregation in CMBS and CRE CDO, acquisition of servicing rights, investment in subordinate interests, post issuance servicing and REMIC compliance.
Our origination experience spans a broad range of financing transactions, including interim, construction and permanent fixed and floating rate financing secured by all property types, mezzanine lending, equity investments, structured finance, tenant in common financings, subscription facilities, loan syndications and participations. Our attorneys have closed over $40 billion in securitized loans and represent national banking associations, mortgage bankers and investment banks in the nationwide origination of over 400 transactions totaling more than $6 billion in CMBS loans annually.
Sonnenschein attorneys routinely represent master and special servicers in connection with the servicing of mortgage loan pools, including loan assumptions, transfers of interests, defeasances, collateral releases, loan extensions, servicer consents and modifications, restructurings and workouts. We advise our clients on Pooling and Servicing Agreement compliance issues, REMIC tax issues associated with various servicing transactions, and work closely with the rating agencies on transactions in which rating agency "no-downgrade" letters are required. Additionally, our attorneys have significant expertise in connection with the formation and operation of securitization vehicles, including REMICs, CRE CDOs and grantor trusts. Our recent work includes:
- Representation of Pabrai when Delta Financial Corp. ("DFC"), a loan company with a diversified wholesale/retail origination platform, issued $10.0 million of convertible notes to funds managed by Pabrai. The notes are convertible into an aggregate of 2.0 million shares of common stock, at a conversion price of $5.00 per share. The exercise of most of the warrants and the issuance of all of the shares upon conversion of the notes are both subject to shareholder approval. Pabrai is already a significant shareholder of DFC.
- Representation of Imperial Credit Commercial Mortgage Investment Corp. ("ICCMIC"), a mortgage REIT, as its outside general counsel, in its IPO, financings, acquisitions, securitizations, and eventually its sale by merger. ICCMIC owned mortgages including some subprime mortgages. The company that acquired ICCMIC is no longer in the business.
- Representation of Household Finance, prior to its sale to HSBC, in connection with its financing documents and currently represents a trustee of securitized mortgage loan trusts.
Finance
Sonnenschein has long been recognized as a national leader in the representation of institutional lenders in real estate financing transactions. Leveraging an ever-growing and well-integrated team, our Finance practice offers national reach and local expertise. Our experience spans a broad range of real estate financing transactions, including interim, construction and permanent financing secured by all property types, mezzanine lending, structured finance, tenant-in-common financings, subscription facilities, loan syndications and participations, and workouts.
Public Law & Policy Strategies
The subprime mortgage industry is facing increased media attention and regulatory scrutiny. Federal financial regulatory agencies are releasing various statements on subprime mortgage lending and both chambers of the U.S. Congress are holding a series of hearings associated with this highly criticized market. The Bush Administration and Congress have both made developing legislative and regulatory solutions to the subprime crisis a major public policy issue for 2008 and beyond. Legislative changes regarding lending activities in this market are most likely imminent. Thus, clients require the guidance of a highly skilled legal advocate in the areas of public law and policy.
Sonnenschein's Public Law & Policy Strategies practice has successfully advanced client agendas in challenging regulatory and legislative environments. Led by attorneys in our Washington, D.C. office, our practice includes more than 50 attorneys and professionals. Whether before federal, state, or local policymaking bodies and decision makers, our clients rely on our innovative advocacy and substantive approach to problem solving. When companies and other organizations face public policy challenges, they trust our team's broad-based knowledge of the process and comprehensive legal, legislative, and public affairs methods to ensure they remain advantageously engaged through every step. Whatever the forum—Congress, state legislators, executive branch officials, public opinion, private sector partners, or foreign audiences—our lawyers and professionals keep our clients informed and well-positioned by being proactive and responsive in understanding that our clients' trust demands our full engagement.
Of equal importance, the Public Law & Policy Strategies practice offers clients counsel on internal compliance programs, including the drafting of corporate ethics guidelines. We have conducted internal investigations and recommended procedures to ensure appropriate revisions in employee conduct and organizational oversight.
Sonnenschein Attorneys and Other Professionals
For more information, please contact Task Force Co-Chairs Fruman Jacobson (312.876.8123) or John Grossbart (312.876.8095) or any member of the Task Force:
