Bavely v. Fifth Third Mtg

• Court: Bankruptcy Appellate Panel of the Sixth Circuit
• Decided: February 12, 2002
• Docket: 01-8011
• Status: Published

Opinion

(/(&7521,&&,7$7,21)('$SS3WK&LU )LOH1DPHES

%$1.5837&<$33(//$7(3$1(/2)7+(6,;7+&,5&8,7

,QUH '(%25$+(&2:$1

'HEWRU BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB

(+$1/,1%$9(/<75867((

3ODLQWLII$SSHOOHH

Y 1R

+817,1*7211$7,21$/%$1.HWDO

'HIHQGDQWV$SSHOOHHV

),)7+7+,5'0257*$*(&203$1<

'HIHQGDQW$SSHOODQW BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB

$SSHDOIURPWKH8QLWHG6WDWHV%DQNUXSWF\&RXUW IRUWKH6RXWKHUQ'LVWULFWRI2KLR:HVWHUQ'LYLVLRQDW&LQFLQQDWL &DVH1R$GYHUVDU\1R

$UJXHG6HSWHPEHU

'HFLGHGDQG)LOHG)HEUXDU\

%HIRUH&22.025*(167(51&/$55(1DQG5+2'(6 %DQNUXSWF\$SSHOODWH3DQHOsXGJHV

BBBBBBBBBBBBBBBBBBBB

&2816(/

$5*8(''DYLG$)UHHEXUJ0F)$''(1 $662&,$7(6&2/3$&OHYHODQG2KLR IRU$SSHOODQW(+DQOLQ%DYHO\&LQFLQQDWL2KLR6WHSKHQ&&URZH0LOIRUG2KLRIRU $SSHOOHHV21%5,()'DYLG$)UHHEXUJ0F)$''(1 $662&,$7(6&2/3$ &OHYHODQG2KLRIRU$SSHOODQW(+DQOLQ%DYHO\&LQFLQQDWL2KLR6WHSKHQ&&URZH 0LOIRUG2KLR(OL]DEHWK*:HEHU'(7(56%(1=,1*(5 /D9(//(36&&RYLQJWRQ .HQWXFN\IRU$SSHOOHHV BBBBBBBBBBBBBBBBBBBB

23,1,21 BBBBBBBBBBBBBBBBBBBB

3$7(025*(167(51&/$55(1%DQNUXSWF\$SSHOODWH3DQHOsXGJH7KLVFDVH SUHVHQWVDYDULDWLRQRQWKHQRZFRPPRQIDFWSDWWHUQLQLQGLYLGXDO&KDSWHUEDQNUXSWF\ FDVHVILOHGLQ2KLRZKHUHD&KDSWHU7UXVWHHDWWHPSWVWRVHWDVLGHDUHFRUGHGPRUWJDJH RQUHDOSURSHUW\RQWKHJURXQGWKDWWKHPRUWJDJHZDVQRWSURSHUO\H[HFXWHGXQGHUVWDWH ODZOHDYLQJWKHPRUWJDJHKROGHUjVLQWHUHVWXQSHUIHFWHG7KHUHSRUWHGFDVHVWRGDWHKDYH GHDOWZLWKWUDGLWLRQDOODQGZKLFKLVRQHRIWZRUHFRUGLQJV\VWHPVLQ2KLRWKHRWKHUEHLQJ UHJLVWHUHGODQG7KHGLVSXWHLQWKLVFDVHFHQWHUVRQUHJLVWHUHGODQGDQGWKHPDQQHULQ ZKLFKLQWHUHVWVLQVXFKODQGDUHWUDQVIHUUHGDQGSHUIHFWHG 7KH&KDSWHU7UXVWHHILOHGDFRPSODLQWFKDOOHQJLQJDPRUWJDJHKHOGE\)LIWK7KLUG 0RUWJDJH &RPSDQ\ RQ WKH 'HEWRUjV UHJLVWHUHG ODQG  7KH EDQNUXSWF\ FRXUW JUDQWHG VXPPDU\MXGJPHQWLQIDYRURIWKH7UXVWHHDYRLGLQJWKHPRUWJDJHXQGHU%DQNUXSWF\&RGH †D EHFDXVHLWKDGQRWEHHQQRWHGRQWKHODQGWLWOHDVUHTXLUHGE\2KLRjVUHJLVWHUHG ODQGODZDQGILQGLQJWKDW)LIWK7KLUGZDVQRWHQWLWOHGWRDOLHQXQGHUHLWKHU%DQNUXSWF\&RGH †HRUWKHGRFWULQHRIHTXLWDEOHVXEURJDWLRQDVDJDLQVWWKH7UXVWHHRURWKHUSDUWLHV ZKRKDGSHUIHFWHGWKHLULQWHUHVWV)LIWK7KLUGDSSHDOHGWKDWMXGJPHQW)RUWKHUHDVRQV VWDWHG EHORZ ZKLFK GLIIHU VRPHZKDW IURP WKRVH DGRSWHG E\ WKH EDQNUXSWF\ FRXUW WKH EDQNUXSWF\FRXUWjVGHFLVLRQLV$)),50('

, s85,6',&7,21 $1' 67$1'$5' 2) 5(9,(: 7KH%DQNUXSWF\$SSHOODWH3DQHOKDVMXULVGLFWLRQWRGHFLGHWKLVDSSHDOXQGHU 86&††DDQGF7KHEDQNUXSWF\FRXUWjVRUGHUJUDQWLQJVXPPDU\MXGJPHQWLVD ILQDODSSHDODEOHRUGHUZKLFKLVUHYLHZHGGHQRYR63&3ODVWLFV&RUSY*ULIILWK,QUH 6WUXFWXUOLWH3ODVWLFV&RUS%5%$3WK&LUFLWDWLRQVRPLWWHG

,, ,668(

 7KHLVVXHLVZKHWKHU)LIWK7KLUGKROGVDSHUIHFWHGILUVWPRUWJDJHRQWKHUHJLVWHUHG SURSHUW\RULVRWKHUZLVHHQWLWOHGWREHLQDILUVWSRVLWLRQ

,,, )$&76 :KHQWKH'HEWRU'HERUDK&RZDQILOHGKHU&KDSWHUFDVHLQVKHRZQHGWZR VHSDUDWHSDUFHOVRIUHDOSURSHUW\LQ&OHUPRQW&RXQW\2KLR$OWKRXJKWKHWZRSDUFHOVDUH FRQWLJXRXVRQHSDUFHOZDVUHJLVWHUHGODQGDQGWKHRWKHUZDVWUDGLWLRQDOQRQUHJLVWHUHG ODQG7KH'HEWRUjVKRXVHVWUDGGOHGWKHWZRSDUFHOV ,QWKH'HEWRUERUURZHGIXQGVIURP)LIWK7KLUG0RUWJDJH&RPSDQ\DQGLQWXUQ JUDQWHG)LIWK7KLUGDPRUWJDJHRQWKHWZRSDUFHOV7KH'HEWRUXVHGVRPHRIWKHORDQ SURFHHGV WR SD\ RII H[LVWLQJ OLHQV RQ WKH SURSHUW\  )LIWK 7KLUG SURSHUO\ UHFRUGHG LWV PRUWJDJHRQWKHWUDGLWLRQDOODQGZLWKWKHFRXQW\UHFRUGHUjVRIILFHEXWGLGQRWSK\VLFDOO\ QRWHWKHPRUWJDJHRQWKHUHJLVWHUHGSDUFHOjVFHUWLILFDWHRIWLWOH7KHUHLVQRGLVSXWHRYHU )LIWK7KLUGjVLQWHUHVWLQWKHWUDGLWLRQDOODQG ,QDQGUHVSHFWLYHO\WKH'HEWRUJDYHDGGLWLRQDOPRUWJDJHVRQWKHWZR SDUFHOV WR +XQWLQJWRQ 1DWLRQDO %DQN DQG 5LFKDUG *RGDU ZKR SURSHUO\ SHUIHFWHG WKHLU LQWHUHVWV XQGHU ERWK WKH WUDGLWLRQDO DQG UHJLVWHUHG ODQG V\VWHPV  &OHUPRQW &RXQW\ ZLWKGUHZ IURP WKH ODQG UHJLVWUDWLRQ V\VWHP LQ  DV SHUPLWWHG E\ 2KLR ODZ  7KH &KDSWHUILOLQJIROORZHG 7KH7UXVWHHILOHGWKLVDGYHUVDU\SURFHHGLQJXQGHU86&†WRDYRLG)LIWK 7KLUGjVPRUWJDJHDVWRWKHUHJLVWHUHGSDUFHORQO\%RWKWKH7UXVWHHDQG)LIWK7KLUGPRYHG IRUVXPPDU\MXGJPHQW7KHEDQNUXSWF\FRXUWJUDQWHGWKH7UXVWHHjVPRWLRQKROGLQJWKDW

   )LIWK 7KLUG DFWXDOO\ KROGV WKH PRUWJDJH DV WKH VXFFHVVRU E\ PHUJHU WR &LWIHG 0RUWJDJH&RUSRUDWLRQRI$PHULFD)RUHDVHRIUHDGLQJQRGLVWLQFWLRQLVGUDZQEHWZHHQ WKHWZRHQWLWLHV  7KH7UXVWHHVROGERWKSDUFHOVZLWKWKHLQWHUHVWVRIDOOSDUWLHVDWWDFKLQJWRWKH SURFHHGVSHQGLQJGHWHUPLQDWLRQRIWKHDSSURSULDWHGLVWULEXWLRQ  7KH7UXVWHHVRXJKWUHOLHIDJDLQVWRWKHUSDUWLHVZKLFKLVQRWDWLVVXHKHUH  7KHUHFRUGVKRZVWKDWWKHSDUWLHVVXEPLWWHGWKHPRWLRQVWRWKHFRXUWRQZKDW DPRXQWHGWRDJUHHGIDFWV

 )LIWK7KLUGKDGQRWSHUIHFWHGLWVPRUWJDJHRQWKHUHJLVWHUHGSDUFHOWKXVUHQGHULQJWKH PRUWJDJHDYRLGDEOHXQGHU†D 7KHFRXUWDOVRKHOGWKDW)LIWK7KLUGZDVQRWHQWLWOHG WR D OLHQ DJDLQVW WKH SURSHUW\ XQGHU † H EHFDXVH )LIWK 7KLUG KDYLQJ FDXVHG WKLV SUREOHPWKURXJKLWVRZQDFWLRQVZDVQRWDJRRGIDLWKWUDQVIHUHHWKDWFRXOGLQYRNHWKDW SURYLVLRQ7KHFRXUWDOVRGHFOLQHGWRDSSO\WKHGRFWULQHRIHTXLWDEOHVXEURJDWLRQILQGLQJ LWXQDYDLODEOHDVDPDWWHURIODZDJDLQVWWKH7UXVWHHDQGLQDSSOLFDEOHEDVHGRQWKHIDFWV DVDJDLQVW+XQWLQJWRQDQG*RGDU

,9',6&866,21 $3HUIHFWLQJD0RUWJDJHXQGHU2KLRjV5HJLVWHUHG/DQG/DZV 2KLRKDVWZRGLIIHUHQWV\VWHPVIRUSHUIHFWLQJLQWHUHVWVLQUHDOSURSHUW\WKHJHQHUDO RUWUDGLWLRQDOUHFRUGLQJODZVDQGWKHODQGUHJLVWUDWLRQODZVDOVRUHIHUUHGWRDVWKH7RUUHQV 6\VWHP,IODQGLVJRYHUQHGE\WKHWUDGLWLRQDOV\VWHPDSURSHUO\H[HFXWHGPRUWJDJHPXVW EHILOHGZLWKWKHDSSURSULDWHFRXQW\UHFRUGHUjVRIILFHLQRUGHUWRFUHDWHDSHUIHFWHGLQWHUHVW LQWKHSURSHUW\6HH2+,2 5(9 &2'( ††DQG,IODQGIDOOVXQGHUWKH UHJLVWUDWLRQV\VWHPKRZHYHUOLHQVDQGHQFXPEUDQFHVPXVWEHUHJLVWHUHGLHQRWHGRQ WKH SURSHUW\jV FHUWLILFDWH RI WLWOH VR WKDW DQ\RQH ORRNLQJ DW WKH WLWOH ZLOO KDYH D IXOO XQGHUVWDQGLQJRIRZQHUVKLSDQGHQFXPEUDQFHV6HH2+,2 5(9 &2'( †6HH JHQHUDOO\2+,2 5(9 &2'( &KDSWHU/DQGUHJLVWUDWLRQODZVZKLFKDUHQRWXQLTXHWR 2KLRDUHLQWHQGHGWRFUHDWHDQXQDVVDLODEOHWLWOHVLPSOLI\ODQGWUDQVIHUVDQGVDYHWKHFRVW RI UHSHDWHG WLWOH H[DPLQDWLRQV ZKHQ ODQG LV WUDQVIHUUHG  52%(57 0 &855< s$0(6 s())5(< '85+$0 2+,2 5($/ 3523(57< /$: $1' 35$&7,&(†QWKHG 2KLRFRXUWVLQWHUSUHWLQJDQGDSSO\LQJWKH2KLR5HJLVWUDWLRQRI/DQG7LWOHV$FWKDYHKHOG WKDWWKHSXUSRVHRIWKHODZ LVWRFUHDWHDQDEVROXWHSUHVXPSWLRQWKDWWKHUHJLVWHURIWLWOHV VSHDNV WKH ODVW ZRUG DERXW WKH WLWOH WR ODQG HOLPLQDWLQJ DOO VHFUHWOLHQVDQGKLGGHQHTXLWLHVDQGPDNLQJWKHODQJXDJHLQ WKH UHJLVWHU RI WLWOHV DEVROXWH SURRI RI LQGHIHDVLEOH WLWOH H[FHSWLQJRQO\WKRVHHQFXPEUDQFHVDQGFODLPVQRWHGWKHUHLQ &XUU\Y/\EDUJHU2KLR6W1(G> 22@7KLVSXUSRVHLVHYLGHQFHGE\DVHULHVRISURYLVLRQV LQWKH$FW5&VWDWHVWKDWDOOOHVVHUHVWDWHVYHVWHG

 RU FRQWLQJHQW SULYDWH HDVHPHQWV DQG RWKHU LQWHUHVWV PRUWJDJHVOLHQVDQGFKDUJHVVKDOOEHQRWHGRQWKHRULJLQDO DQGGXSOLFDWHFHUWLILFDWHVRIWLWOHZKHQWKHODQGLVUHJLVWHUHG H[FHSWRQO\DVSURYLGHGLQ5&

.LQFDLG Y W@UDQVIHUHHVRIUHJLVWHUHGODQGDUHQRWFKDUJHGZLWKQRWLFH DFWXDORUFRQVWUXFWLYHRIDQ\XQUHJLVWHUHGFODLPRULQWHUHVW NQRZOHGJHWKHUHRIVKDOOQRWEHLPSXWHGWRWKHWUDQVIHUHHDV IUDXG DQG QR XQUHJLVWHUHG FODLP RU LQWHUHVW VKDOO SUHYDLO DJDLQVW D UHJLVWHUHG WLWOH WDNHQ ERQD ILGH IRU YDOXDEOH FRQVLGHUDWLRQ

.LQFDLG1(GDWFLWLQJ2+,2 5(9 &2'( †)LIWK7KLUGjVPRUWJDJHZDV QRWQRWHGRQWKHFHUWLILFDWHRIWLWOH%DVHGRQWKHSODLQODQJXDJHRIWKHVWDWXWH)LIWK7KLUG GRHV QRW KROG D SHUIHFWHG VHFXULW\ LQWHUHVW LQ WKH UHJLVWHUHG SDUFHO DQG WKH 7UXVWHH +XQWLQJWRQDQG*RGDUWRRNWKHLULQWHUHVWVLQWKDWSURSHUW\IUHHRI)LIWK7KLUGjVPRUWJDJH 'HVSLWHWKHVWDWXWH)LIWK7KLUGPDNHVWZRDUJXPHQWVLQVXSSRUWRILWVSRVLWLRQWKDWLWGRHV KROGDSHUIHFWHGVHFXULW\LQWHUHVW7KHILUVWLVEDVHGRQFRQVWUXFWLYHQRWLFH)LIWK7KLUG DVNVWKH3DQHOWRGHWHUPLQHDVDPDWWHURI2KLRODZWKDWDPRUWJDJHZKLFKLQFOXGHVERWK UHJLVWHUHGDQGWUDGLWLRQDOODQGJLYHVWKHKROGHUDSHUIHFWHGVHFXULW\LQWHUHVWLQERWKNLQGV RIODQGVRORQJDVWKHPRUWJDJHLVSURSHUO\UHFRUGHGLQWKHWUDGLWLRQDOV\VWHP)LIWK7KLUG

   7KH VWDWXWH VWDWHV WKDW ZLWK H[FHSWLRQV QRW UHOHYDQW KHUH D SHUVRQ WDNLQJ DQ LQWHUHVWLQUHJLVWHUHGODQG

VKDOOQRWEHDIIHFWHGZLWKQRWLFHDFWXDORUFRQVWUXFWLYHRIDQ\ XQUHJLVWHUHGWUXVWOLHQFODLPGHPDQGRULQWHUHVW>DQG@ >Q@RXQUHJLVWHUHGHVWDWHLQWHUHVWSRZHUULJKWFODLPFRQWUDFW RU WUXVW VKDOO SUHYDLO DJDLQVW WKH WLWOH RI D UHJLVWHUHG RZQHU WDNHQERQD ILGHIRUYDOXDEOHFRQVLGHUDWLRQRURIDQ\SHUVRQ ERQDILGHFODLPLQJWKURXJKRUXQGHUKLP

2+,2 5(9 &2'( †$QGHUVRQ

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mVKDOOQRWEHDIIHFWHGZLWK QRWLFHDFWXDORUFRQVWUXFWLYHRIDQ\XQUHJLVWHUHGWUXVWOLHQFODLPGHPDQGRULQWHUHVWl 2+,2 5(9 &2'( †   :H FRQFOXGH WKHUHIRUH WKDW WKH GRFWULQH RI FRQVWUXFWLYH QRWLFH GRHV QRW DSSO\ VR DV WR JLYH )LIWK 7KLUG D YDOLGO\ UHFRUGHG PRUWJDJH RQ WKH UHJLVWHUHGSDUFHO 6HFRQG)LIWK7KLUGDUJXHVWKDW&OHUPRQW&RXQW\j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

2+,2 5(9 &2'( †$QGHUVRQ)LIWK7KLUGSRLQWVWRWKHODQJXDJHLQWKHILUVW VHQWHQFHWKDWDIWHUDEROLWLRQIRUPHUO\UHJLVWHUHGODQGLVWREHmGHDOWZLWKWKHVDPHDVLILW ZHUHQRWUHJLVWHUHGODQGl)LIWK7KLUGSRVLWVWKDWZKHQ&OHUPRQW&RXQW\DEROLVKHGODQG UHJLVWUDWLRQWKHHDUOLHUH[LVWLQJUHJLVWUDWLRQUHTXLUHPHQWYDQLVKHGPDNLQJWKHXQUHJLVWHUHG PRUWJDJH D SHUIHFWHG OLHQ EHFDXVH LW ZDV UHFRUGHG LQ DFFRUGDQFH ZLWK WKH VXUYLYLQJ WUDGLWLRQDOODQGODZV7KLVVHQWHQFHGRHVQRWKRZHYHUVHUYHUHWURDFWLYHO\WRXQGRDOOWKH ULJKWVHVWDEOLVKHGZKHQWKHUHJLVWHUHGODQGV\VWHPZDVLQHIIHFW7KHVHFRQGVHQWHQFH

 PDNHVWKLVFOHDUE\VWDWLQJWKDWWKHFHUWLILFDWHRIWLWOHZLOOFRQWLQXHWREHUHIHUUHGWRLQIXWXUH WUDQVDFWLRQVXQWLOWKHHQWLUHIHHLQWKHUHJLVWHUHGODQGKDVEHHQFRQYH\HG 2WKHU2KLRVWDWXWHVDOVRVKRZWKDWUHJLVWHUHGODQGODZGLGQRWVLPSO\FHDVHWRH[LVW DIWHUDEROLWLRQ)RUH[DPSOHWKHFRXQW\UHFRUGHUPXVWFRQWLQXHWKHFHUWLILFDWHRIWLWOHDQG UHFRUGLWDVDPXQLPHQWRIWLWOHLQWKHWUDGLWLRQDOUHFRUGLQJV\VWHP6HH2+,2 5(9 &2'( †$VDFRUROODU\WKHFHUWLILFDWHFRQWLQXHVWRKDYHFRQFOXVLYHHIIHFWDVWRWKH FRQYH\DQFHVDQGHQFXPEUDQFHVQRWHGRQLW2+,2 5(9 &2'( † 7KLVFRQFOXVLRQLVIXUWKHUVXSSRUWHGE\2KLRjVUXOHVRIVWDWXWRU\LQWHUSUHWDWLRQXQGHU ZKLFK D VWDWXWH LV SUHVXPHG WR RSHUDWH SURVSHFWLYHO\ XQOHVV WKH OHJLVODWXUH H[SUHVVO\ PDNHVLWUHWURVSHFWLYH2+,2 5(9 &2'( †$QGHUVRQ,QWKLVLQVWDQFHWKH OHJLVODWXUHGLGQRWFKRRVHWRGRVR 7KH 3DQHO FRQFOXGHV WKDW )LIWK 7KLUG GLG QRW KROG D SHUIHFWHG PRUWJDJH RQ WKH UHJLVWHUHGSDUFHO7KHEDQNUXSWF\FRXUWjVGHFLVLRQRQWKLVLVVXHLVDIILUPHG

%0RUWJDJH$YRLGDQFH )LIWK7KLUGDOVRDSSHDOVWKHEDQNUXSWF\FRXUWjVGHWHUPLQDWLRQWKDWLWVPRUWJDJHLV DYRLGDEOHXQGHU†D 7KHEDQNUXSWF\FRXUWKHOGWKDWWKH7UXVWHHFRXOGDYRLGWKH XQUHJLVWHUHGPRUWJDJHJLYHQKLVVWDWXVDVDERQDILGHSXUFKDVHURIUHJLVWHUHGODQGZLWKRXW QRWLFH,QUHDFKLQJWKLVUHVXOWWKHEDQNUXSWF\FRXUWDSSDUHQWO\DVVXPHGZLWKRXWGHFLGLQJ WKDW)LIWK7KLUGDFTXLUHGDQLQWHUHVWLQWKHUHJLVWHUHGSDUFHOWKURXJKWKHPRUWJDJHHYHQ WKRXJKWKHPRUWJDJHLVQRWQRWHGRQWKHFHUWLILFDWHRIWLWOH)RUWKHUHDVRQVWKDWIROORZ

 6HFWLRQSURYLGHVWKDW

$FHUWLILFDWHRIWLWOHWKDWLVWUDQVFULEHGRUERXQGLQWKHUHJLVWHURIWLWOHV RQWKHGDWHRILPSOHPHQWDWLRQLQDFRXQW\WKDWKDVDEROLVKHGODQGUHJLVWUDWLRQ KDVWKHIROORZLQJHIIHFWVRQDQGDIWHUVXFKGDWH

$&RQFOXVLYHHIIHFWDVWRFRQYH\DQFHVDQGHQFXPEUDQFHV RFFXUULQJEHIRUHWKHGDWHRILPSOHPHQWDWLRQDQGQRWHGRQWKH FHUWLILFDWH>@

 2+,2 5(9,6(' &2'( †$QGHUVRQ

 KRZHYHU ZH FRQFOXGH WKDW WKH PRUWJDJH GLG QRW HIIHFW D WUDQVIHU RI DQ LQWHUHVW LQ WKH SURSHUW\WR)LIWK7KLUG&RQVHTXHQWO\)LIWK7KLUGGLGQRWKROGDQLQWHUHVWLQWKHSURSHUW\ DQG WKH 7UXVWHH GLG QRW QHHG WR DYRLG WKDW LQWHUHVW XQGHU †  LQ RUGHU WR EULQJ WKH SURSHUW\LQWRWKH&KDSWHUHVWDWH7KHEDQNUXSWF\FRXUWjVGHFLVLRQLVDIILUPHGRQWKDW GLIIHUHQWJURXQG m7KH µVWURQJ DUPj FODXVH RI WKH %DQNUXSWF\ &RGH  86& † D JUDQWV D EDQNUXSWF\WUXVWHHWKHSRZHUWRDYRLGWUDQVIHUVRISURSHUW\WKDWZRXOGEHDYRLGDEOHE\ FHUWDLQK\SRWKHWLFDOSDUWLHVl6LPRQY&KDVH0DQKDWWDQ%DQN,QUH=DSWRFN\)G WK&LU7KHSUHGLFDWHTXHVWLRQKHUHLVZKHWKHUWKH'HEWRUWUDQVIHUUHG DQ\LQWHUHVWLQWKHUHJLVWHUHGODQGWR)LIWK7KLUGWKURXJKWKHPRUWJDJH,IQRWWKHUHLVQR LQWHUHVWIRUWKH7UXVWHHWRDYRLG6HH&UDLJY6H\PRXU,QUH&UDEWUHH)G WK&LUDFNQRZOHGJLQJWKDW†DDYRLGDQFHLVXQQHFHVVDU\ZKHUHDSDUW\KDV QRLQWHUHVWLQUHDOSURSHUW\XQGHUDSSOLFDEOHVWDWHODZ )LIWK7KLUGDUJXHVWKDWHYHQLILWGRHVQRWKROGDSHUIHFWHGPRUWJDJHLWVWLOOKDVDQ XQDYRLGDEOHLQWHUHVWLQWKHSURSHUW\EDVHGHLWKHURQHTXLW\RUFRQWUDFW:KLOH2KLRODZ

 $IWHURUDODUJXPHQWWKHSDUWLHVZHUHDVNHGWRILOHVXSSOHPHQWDOEULHIVRQWKLV LVVXHZKLFKZDVUDLVHGLQWKHEDQNUXSWF\FRXUW  6HFWLRQD VWDWHVWKDW

D  7KH WUXVWHH VKDOO KDYH DV RI WKH FRPPHQFHPHQW RI WKH FDVH DQG ZLWKRXWUHJDUGWRDQ\NQRZOHGJHRIWKHWUXVWHHRURIDQ\FUHGLWRUWKHULJKWV DQGSRZHUVRIRUPD\DYRLGDQ\WUDQVIHURISURSHUW\RIWKHGHEWRURUDQ\ REOLJDWLRQLQFXUUHGE\WKHGHEWRUWKDWLVYRLGDEOHE\o

 

DERQDILGHSXUFKDVHURIUHDOSURSHUW\IURPWKHGHEWRU DJDLQVW ZKRP DSSOLFDEOH ODZ SHUPLWV VXFK WUDQVIHU WR EH SHUIHFWHGWKDWREWDLQVWKHVWDWXVRIDERQDILGHSXUFKDVHUDQG KDVSHUIHFWHGVXFKWUDQVIHUDWWKHWLPHRIWKHFRPPHQFHPHQW RIWKHFDVHZKHWKHURUQRWVXFKDSXUFKDVHUH[LVWV

86&†D 

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

2+,2 5(9 &2'(†$QGHUVRQ7KLVVHFWLRQFOHDUO\SURYLGHVWKDWQROHJDO RUHTXLWDEOHLQWHUHVWLQUHJLVWHUHGODQGSDVVHVXQOHVVDQGXQWLOLWKDVEHHQQRWHGRQWKH FHUWLILFDWHRIWLWOH%HFDXVHWKHPRUWJDJHZDVQRWQRWHG)LIWK7KLUGGLGQRWDFTXLUHDQ\ LQWHUHVWLQWKH'HEWRUjVUHJLVWHUHGSDUFHOE\YLUWXHRILWVPRUWJDJH :LWKRXWDGGUHVVLQJ†)LIWK7KLUGDUJXHVWKDWLWREWDLQHGDQLQWHUHVWLQWKH UHJLVWHUHGSURSHUW\XQGHUDGLIIHUHQWVHFWLRQ2KLR5HYLVHG&RGH†WLWOHGm(IIHFW RILQVWUXPHQWVGHDOLQJZLWKUHJLVWHUHGODQGlZKLFKVWDWHV $PRUWJDJHRURWKHULQVWUXPHQWSXUSRUWLQJWRFRQYH\ WUDQVIHU PRUWJDJH OHDVH FKDUJH RU RWKHUZLVH GHDO ZLWK UHJLVWHUHGODQGRUDQ\LQWHUHVWWKHUHLQVKDOOWDNHHIIHFWRQO\ DVDFRQWUDFWEHWZHHQWKHSDUWLHVWKHUHWRDQGDVDXWKRULW\WR WKH FRXQW\ UHFRUGHU WR UHJLVWHU WKH    PRUWJDJH    XSRQ FRPSOLDQFHZLWKVHFWLRQVWRLQFOXVLYHRIWKH 5HYLVHG&RGH

2+,2 5(9 &2'( †  $QGHUVRQ   7KLV VHFWLRQ LV HQWLUHO\ FRQVLVWHQW ZLWK †LQWKDWWKHPRUWJDJHRQO\WDNHVHIIHFWDVDFRQWUDFWEHWZHHQWKHSDUWLHVXQWLOLW LVHQWHUHGRQWKHFHUWLILFDWHRIWLWOHDWZKLFKSRLQWLWFUHDWHVDQLQWHUHVWLQWKHSURSHUW\LWVHOI $VDUHVXOW)LIWK7KLUGPD\KDYHDFTXLUHGFRQWUDFWULJKWVDJDLQVWWKH'HEWRUEDVHGRQLWV PRUWJDJHXQGHU†EXWWKDWVHFWLRQGLGQRWFUHDWHDOHJDORUHTXLWDEOHLQWHUHVWLQ WKHUHJLVWHUHGSDUFHO  )LIWK 7KLUG DOVR DUJXHV WKDW LW KDV DQ HTXLWDEOH LQWHUHVW LQ WKH ODQG EDVHGRQ HTXLWDEOHHVWRSSHO7KLVGRFWULQHLVXVHGmWRSUHYHQWDFWXDORUFRQVWUXFWLYHIUDXGDQGWR SURPRWHWKHHQGVRIMXVWLFH,WLVDYDLODEOHRQO\LQGHIHQVHRIDOHJDORUHTXLWDEOHULJKWRU

 FODLPPDGHLQJRRGIDLWKDQGVKRXOGQRWEHXVHGWRXSKROGFULPHIUDXGRULQMXVWLFHl2KLR 6WDWH%GRI3KDUPDF\Y)UDQW]1(G2KLRm(TXLWDEOHHVWRSSHO SUHFOXGHVDSDUW\IURPDVVHUWLQJFHUWDLQIDFWVZKHUHWKHSDUW\E\KLVFRQGXFWKDVLQGXFHG DQRWKHUWRFKDQJHKLVSRVLWLRQLQJRRGIDLWKUHOLDQFHXSRQWKDWFRQGXFWl+HOPDQY(3/ 3URORQJ,QF1(G2KLR&W$SS )LIWK7KLUGUHOLHVRQWZR2KLR6XSUHPH&RXUWFDVHVERWKRIZKLFKDUHIDFWXDOO\DQG OHJDOO\GLVWLQJXLVKDEOH$PULFKY%R\OH1(G2KLRDQG6KDNHU&RUOHWW /DQG&RY&LW\RI&OHYHODQG1(G2KLR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mVXEMHFWWRWKHHTXLW\WKDWDULVHVRXWRIHVWRSSHOl6KDNHU&RUOHWW/DQG&R1(GDW SDUDRIWKHV\OODEXV 7KHLVVXHLQWKHVHWZRFDVHVZDVQRWZKHWKHUDQLQWHUHVWLQUHJLVWHUHGODQGZRXOG EHFUHDWHGGHVSLWHWKHVWDWXWRU\ODQJXDJHEXWZKHWKHUHVWRSSHODSSOLHGWRSUHYHQWWKHODQG RZQHUVIURPFKDOOHQJLQJDQ DVVHVVPHQW  ,GDWm,WWKXVDSSHDUVWKDWWKHULJKWWR VXEMHFWWKHUHJLVWHUHGODQGVWRSD\PHQWRIWKHDVVHVVPHQWVLIVXFKULJKWWKHUHLVDULVHV QRWRXWRIDVVHVVPHQWOLHQVIRUQRQHHYHUH[LVWHGEXWRXWRIDQHVWRSSHO>@l(TXLWDEOH HVWRSSHOLVXVHGDVDPHDQVWREDUDSDUW\IURPDVVHUWLQJDOHJDOSRVLWLRQWKHSRWHQWLDO DYDLODELOLW\RIHTXLWDEOHHVWRSSHODVDGHIHQVHGRHVQRWFUHDWHDQLQWHUHVWLQUHJLVWHUHGODQG LQGHURJDWLRQRI† $OWHUQDWLYHO\DQGDGGLWLRQDOO\HYHQLIWKHGRFWULQHGLGDSSO\WRJLYH)LIWK7KLUGD SURSHUW\LQWHUHVWWKHUHVXOWLVWKHVDPH7KH7UXVWHHDVDERQDILGHSXUFKDVHURIWKH SURSHUW\ZLWKRXWQRWLFHRIWKHPRUWJDJHLVVWLOOHQWLWOHGWRDYRLGDQ\VXFKLQWHUHVW6HH 6LPRQY&KDVH0DQKDWWDQ%DQN,QUH=DSWRFN\%5%$3WK&LU DIIjG)GWK&LU6LPLODUO\+XQWLQJWRQDQG*RGDU

 KROGWKHLUSHUIHFWHGVHFXULW\LQWHUHVWVDKHDGRI)LIWK7KLUGEHFDXVH)LIWK7KLUGKDVQRWFLWHG DQ\WKLQJLQWKHUHFRUGVKRZLQJWKDWHLWKHUSDUW\LQGXFHG)LIWK7KLUGWRFKDQJHLWVSRVLWLRQ LQJRRGIDLWKUHOLDQFHRQWKHLUDFWLRQVVXFKWKDWHTXLW\VKRXOGVWHSLQWRSUHYHQWIUDXGDQG SURPRWHMXVWLFH )RUWKHVHUHDVRQVZHFRQFOXGHWKDW)LIWK7KLUGGLGQRWDFTXLUHDQLQWHUHVWLQWKH UHJLVWHUHGSDUFHOE\YLUWXHRILWVPRUWJDJHDQGWKDWHYHQLILWGLGWKHEDQNUXSWF\FRXUW FRUUHFWO\IRXQGWKDW)LIWK7KLUGGRHVQRWKROGDVHFXUHGSRVLWLRQDKHDGRIWKHRWKHUSDUWLHV

&(TXLWDEOH6XEURJDWLRQDQG%DQNUXSWF\&RGH†H )LIWK7KLUGDUJXHVDOWHUQDWLYHO\WKDWLWLVHQWLWOHGWRDILUVWOLHQDJDLQVWWKHSURSHUW\ EDVHG RQ HTXLWDEOH VXEURJDWLRQ IRU LWV FODLP DJDLQVW +XQWLQJWRQ DQG *RGDU DQG %DQNUXSWF\&RGH†HIRULWVFODLPDJDLQVWWKH7UXVWHH7KHFODLPVDUHEDVHGRQWKH IDFWWKDWWKH'HEWRUXVHGVRPHRIWKH)LIWK7KLUGORDQSURFHHGVWRSD\RIISULRUPRUWJDJHV KHOGE\QRQSDUWLHV

(TXLWDEOHVXEURJDWLRQ (TXLWDEOH RU OHJDO VXEURJDWLRQ mDULVHV E\ RSHUDWLRQ RI ODZ ZKHQ RQH KDYLQJ D OLDELOLW\RUULJKWRUDILGXFLDU\UHODWLRQLQWKHSUHPLVHVSD\VDGHEWGXHE\DQRWKHUXQGHU VXFKFLUFXPVWDQFHVWKDWKHLVLQHTXLW\HQWLWOHGWRWKHVHFXULW\RUREOLJDWLRQKHOGE\WKH FUHGLWRUZKRPKHKDVSDLGl)HG8QLRQ/LIH,QV&RY'HLWVFK1( 2KLR   7KH DYDLODELOLW\ RI HTXLWDEOH VXEURJDWLRQ GHSHQGV XSRQ WKH IDFWV DQG FLUFXPVWDQFHVRIHDFKSDUWLFXODUFDVH6WDWHRI2KLRYsRQHV1(G 2KLRm,QRUGHUWRHQWLWOHRQHWRVXEURJDWLRQ>DSDUW\jV@HTXLW\PXVWEHVWURQJ DQG>LWV@FDVHFOHDUl,GDW,QWKHsRQHVFDVHWKHPRUWJDJHHZKRFRQWUROOHGWKH UHFRUGLQJSURFHVVIDLOHGWRSURWHFWLWVLQWHUHVWE\SURPSWO\UHFRUGLQJDVLJQHGPRUWJDJH 8QGDXQWHGWKHPRUWDJHHDUJXHGWKDWLWVPRUWJDJHVKRXOGWDNHSULRULW\RYHUDMXGJPHQW OLHQWKDWZDVILOHGLQWKHLQWHUYDOEHWZHHQWKHPRUWJDJHVLJQLQJDQGLWVUHFRUGLQJ7KHFRXUW UHIXVHGWRDSSO\HTXLWDEOHVXEURJDWLRQWRUHDFKWKDWUHVXOWVWDWLQJWKDWWKHPRUWJDJHHjV mRZQDFWLRQVOHGWRLWVGLOHPPDRIQRWREWDLQLQJWKHEHVWSULRULW\OLHQl,G

 )LIWK7KLUGjVVLWXDWLRQLVFRPSDUDEOHWRWKDWRIWKHPRUWJDJHHLQsRQHV)LIWK7KLUG FRXOGKDYHREWDLQHGDILUVWPRUWJDJHSRVLWLRQLQWKHUHJLVWHUHGSURSHUW\E\WLPHO\QRWLQJLWV PRUWJDJHRQWKHFHUWLILFDWHRIWLWOH)LIWK7KLUGGRHVQRWSRLQWWRDQ\WKLQJLQWKHWULDOUHFRUG WKDW H[SODLQV LWV IDLOXUH WR GR VR RU VKRZV WKDW +XQWLQJWRQ DQG *RGDU ZKR ZHUH XQFRQQHFWHGWRWKH)LIWK7KLUGWUDQVDFWLRQZHUHXQMXVWO\HQULFKHGE\LW8QGHUWKHVHIDFWV )LIWK7KLUGLVQRWHQWLWOHGWRKDYHLWVLQWHUHVWEHHTXLWDEO\VXEURJDWHGWRWKRVHRI+XQWLQJWRQ DQG*RGDU

%DQNUXSWF\&RGH†H )LQDOO\)LIWK7KLUGDUJXHVWKDWLWLVHQWLWOHGWRDOLHQXQGHU%DQNUXSWF\&RGH†H 86&†H:HDIILUPWKHEDQNUXSWF\FRXUWRQWKHEDVLVWKDW†GRHVQRWDSSO\ LQWKLVPDWWHU)LUVW†RQO\FRPHVLQWRSOD\LIWKH7UXVWHHDYRLGVDWUDQVIHU$VKHOG DERYH WKH XQUHJLVWHUHG PRUWJDJH GLG QRW JLYH )LIWK 7KLUG DQ LQWHUHVW LQ WKH UHJLVWHUHG SURSHUW\ WKDW KDG WR EH DYRLGHG  6HFRQG HYHQ LI †  GLG DSSO\ WKLV DUJXPHQW LV IRUHFORVHGE\WKH%$3jVGHFLVLRQLQ6XKDUY%XUQV,QUH%XUQV%5%$3WK &LU8QGHU%XUQV†DYRLGDQFHRIDPRUWJDJHLVDFRPSOHWHUHPHG\DQGLWLV QRWQHFHVVDU\IRUWKH7UXVWHHWRWDNHWKHDGGLWLRQDOVWHSRIUHFRYHULQJWKHPRUWJDJHHjV LQWHUHVWLQWKHSURSHUW\XQGHU†7KHGHIHQVHVHWRXWLQ†HZRXOGQRWWKHUHIRUH EHDYDLODEOHWR)LIWK7KLUGLQDQ\HYHQW  9&21&/86,21 )RUWKHUHDVRQVVWDWHGWKHEDQNUXSWF\FRXUWGHFLVLRQLV$)),50('