Ethical Issues in Leveraged Financing Transactions. Julian S.H. Chung Edwin E. Smith May 2, 2018

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1 Ethical Issues in Leveraged Financing Transactions Julian S.H. Chung Edwin E. Smith May 2, 2018

2 Current Client Lender asks you to represent it on a mezzanine loan to ABC Corp. XYZ Corp. asks you to represent it on a mezzanine loan from Lender Can you represent XYZ Corp.? Do you need a waiver? If so, from whom? How should the waiver be evidenced? ABA Model Rule 1.7(a)(1) See NYSBA Committee on Professional Ethics Opinion 990 (2013) 2

3 Current Client Lender asks you to represent it on a mezzanine loan to ABC Corp. Your firm handles employment matters for ABC Corp. and you determine that you need a waiver from ABC Corp. The engagement letter from ABC Corp. contains an advance waiver. Does that suffice? See NY Rule 1.7 Macy s, Inc. v. J.C. Penney Corp., 107 A.D. 3d 616, 968 N.Y.S 2d 64 (1st Dept. 2013) 3

4 Former Client Lender asks you to represent it on a mezzanine loan to ABC Corp. Your firm used to handle employment matters for ABC Corp. but no longer represents ABC Corp. Do you need a waiver? ABA Model Rule 1.9 4

5 Who is the Client? You are advising Investment Bank as agent on a syndicated loan to ABC Corp. to acquire XYZ Corp. A lender who is thinking of joining the syndicate asks you for your advice as to how material certain litigation brought against XYZ Corp. is and how you assess the risk to ABC Corp. following the acquisition Can you provide that advice? ABA Model Rule 1.6; cf. DLA Piper LLP (US) v. Linegar, 2017 WL (2017); Oakland Police & Fire Retirement System v. Mayer Brown, LLP, 861 F.3d 644 (7 th Cir. 2017) 5

6 Who is the Client? You are advising a group of lenders on the workout of mezzanine loans made by them to ABC Corp. One of the lenders comes to you and explains its strategy for using the workout to acquire ownership of ABC Corp. You know that other lenders in the syndicate have no desire to become an owner of ABC Corp. What are your duties to the other lenders? ABCNY Formal Opinion

7 Work Product You advised Lender on its secured loan to ABC Corp. used to acquire the assets of XYZ Corp. ABC Corp. is now in financial trouble. It is threatening to file for bankruptcy and to claim that the security interest that you documented in certain assets acquired by ABC Corp. from XYZ Corp. is unperfected. Lender wants you to represent it on that dispute. Should you do so? ABA Formal Opinion 481 (April 17, 2018) 7

8 Representing Adverse Parties Lender asks you to represent it on a loan to ABC Corp. to finance ABC Corp. s acquisition of XYZ Corp. Your firm is representing XYZ Corp. on the sale to ABC Corp. Your firm has material information relating to XYZ Corp. s potential environmental liabilities that might affect Lender s decision to lend to ABC Corp. Can you represent Lender on the loan? ABA Model Rules 1.6 and 1.7; See Brussels Bank Lambert v. Fiddler Gonzalez & Rodriguez, 305 F.3d 120 (2nd Cir. 2002); ABCNY Formal Opinion

9 Client Affiliates You represent Lender in the chapter 11 bankruptcy of its borrower ABC Corp. ABC Corp. challenges a lease transaction, claiming that the lease creates a security interest and that the security interest is unperfected. If the argument is successful, it would benefit Lender as a blanket lien secured creditor The lessor is a sister company of Lender. Your firm does no work for the lessor. Can you represent Lender in supporting ABC Corp. s position? ABA Committee on Ethics and Professional Responsibility, Op (1995); GSI Commerce Solutions, Inc. v. BabyCenter LLC, 618 F.3d 204 (2 nd Cir. 2010). 9

10 Non-clients You have completed advising Lender on its loan to ABC Corp. and have provided Lender with a legal opinion that its security interest in the assets of ABC Corp. is perfected. Lender wants any participant in or assignee of the loan to have the benefit of the opinion. If you agree, can you cap your liability to the participant or the transferee in the opinion letter? If you agree, may you ask the client for an indemnity against a claim by a recipient? ABA Model Rule 1.8 (h); NYSBA Committee on Professional Ethics Opinion 969 (2013) 10

11 Thrust Upon Conflict You have been representing Lender on its acquisition loan facility to ABC Corp. As permitted by the facility, ABC Corp. merges with XYZ Corp. Your firm represented XYZ Corp. on intellectual property and litigation matters Can your firm continue to represent both Lender and the survivor of the merger? If not, can your firm represent either? Orange County (Cal.) Bar Ass n Professionalism and Ethics Comm., Op

12 Client Confidentiality You have just closed a syndicated loan for Lender acting as agent for a group of three lenders, including Lender, to ABC Corp. The loan agreement contains a covenant prohibiting the sale by ABC Corp. of a certain asset that ABC Corp. is looking to sell. However, ABC Corp. negotiated for a provision, over the vehement objection of one of the lenders, that two of the three lenders could waive that covenant. You have just learned that, at the closing and without your knowledge or that of ABC Corp., the three lenders entered into a side agreement by which they are agreed that no two of them would waive the covenant without the consent of the third. Do you have any duty to disclose the side letter to ABC Corp.? ABA Model Rule 1.6; NY Rule 1.6; NYSB Ethics Opinion 998 (2014) 12

13 Negotiations You are representing Lender on selling to Buyer Lender s mezzanine loan to ABC Corp. The account officer at Lender has previously told you that management of ABC Corp. are crooks. During the negotiations the account officer says to Buyer s representative that the account officer has no reason to doubt the integrity of ABC Corp. s management. What are your duties? ABA Model Rules 1.2(d), 1.4(b), 1.13(b), 4.1 and 1.6; NY Rule

14 Choice of Law Same facts as the prior slide Your office is in New Jersey. You are admitted to practice in New York and New Jersey The negotiations all take place in New York City By which state s ethical rules are you bound New York s or New Jersey s? Would the result change if your engagement letter with the client specified that the other jurisdiction s ethical rules apply? ABA Model Rule 8.5; NJ Rule 8.5; NY Rule

15 Contact with a Represented Person In connection with Lender s sale to Buyer of Lender s mezzanine loan to ABC Corp. you are scheduled to participate with Lender in a telephone conference negotiation for the sale. When you get on the phone, you learn that Buyer s counsel is not available, but Buyer wants to proceed with negotiating anyway. Can you continue to participate in the call? ABA Model Rule

16 Inadvertent Disclosure You are representing Lender on its loan to ABC Corp. to purchase the assets of XYZ Corp. ABC Corp s lawyer sends you an that discusses possible strategies for ABC Corp. to negotiate certain issues on the loan Once you have read enough of the to realize that the was inadvertently sent to you, may you continue to read the and disclose its contents to Lender? ABA Model Rule 4.4(b) and commentary; ABA Comm. on Ethics and Prof l Responsibility, Formal Op (2011); State Bar of Cal. Standing Comm. on Prof l Responsibility and Conduct, Formal Op

17 Drafting Errors You are representing Lender on a loan to ABC Corp. ABC Corp. s counsel sends you a revised draft of the loan document, which includes an apparent, material error in Lender s favor. Do you have a duty to correct the error or inform ABC Corp. s counsel of the error? What are your duties to Lender with respect to the error? State Bar of Cal. Standing Comm. on Prof l Responsibility and Conduct, Formal Op. No

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