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PACE Loans in Florida: A Lender’s Perspective

Florida’s “PACE” Program (which stands for Property Assessed Clean Energy) was created in 2010 through Section 163.08, Florida Statutes, which authorized Florida local governments to finance property improvements for energy conservation and improving a property’s resistance to storm damage.

Establishing the priority of a lender’s mortgage lien during foreclosure or bankruptcy can be challenging when the collateral is also encumbered by governmental or quasi-governmental liens with unsettled lien priority. One such problematic example is the lien priority of PACE loans.

Florida’s “PACE” Program (which stands for Property Assessed Clean Energy) was created in 2010 through Section 163.08, Florida Statutes, which authorized Florida local governments to finance property improvements for energy conservation and improving a property’s resistance to storm damage.

In furtherance of the PACE program, many local governments in Florida established special districts, and entered into agreements with companies such as Ygrene Energy Fund Florida, LLC and PACE Funding Group, LLC to advance monies for qualified improvements, such as energy efficient windows and solar panels. PACE financing is available to both residential and commercial property owners. The loans are repaid through non ad-valorem assessments, which are included within the property owner’s annual property tax bill issued by county tax collectors.

The PACE loan program and enabling statutes withstood legal challenges, resulting in multiple Florida Supreme Court opinions upholding bond validation proceedings and the creation of special districts.

However, Florida courts have not yet directly addressed the lien priority of PACE loans. The law ostensibly places the credit extended for PACE-qualified improvements above that of prior-recorded first mortgages. By doing so, PACE loan repayment mechanisms appear to have eroded the priority of consensual liens in Florida.

If a borrower is considering a PACE loan, or is repaying a PACE loan, lenders should be aware of the following:

  • PACE loans must be recorded in the Public Records of the County where the real property is located.
  • Monthly escrow payments, if any, may need to be adjusted if a borrower obtains a PACE loan.
  • When a borrower notifies a lender prior to the execution of a PACE Agreement, as required by statute, the lender should reevaluate the equity in the collateral.
  • Lenders may not accelerate a loan, or require a loan modification, should a borrower enter into a PACE Agreement. Any such clauses are deemed unenforceable under Florida law.
  • Properties encumbered with an outstanding PACE balance are not eligible for FHA insured mortgages.
  • Lenders can expect a challenge should it attempt to extinguish the lien established under a PACE loan in a foreclosure proceeding.

Should you have questions regarding lien priority and PACE Agreements in your area, please contact Michael Caborn at mcaborn@whww.com or 407-246-8694.

Michael C. Caborn, a shareholder with WHWW, practices law in the areas of business litigation, bankruptcy, creditors rights and collections, foreclosure litigation, real property and receiverships. Mike holds both his law degree and undergraduate degree from the University of Florida. He currently serves as a board member and general counsel for the not-for-profit company Operation American Dream, Inc, which funds scholarships for children of U.S. Military, law enforcement and fire rescue personnel who have sacrificed their lives in the line of duty.

FAREWELL TO LIBOR: Preparing for the Effects of a Disappearing Lending Benchmark

FAREWELL TO LIBOR: Preparing for the Effects of a Disappearing Lending Benchmark

For decades LIBOR (short for London Inter-bank Offered Rate) was one of the most commonly used benchmark interest rates for financial transactions. Derived from a daily survey of about 20 large banks, it was intended to reflect the interest rate at which banks lent to one another. However, confidence in LIBOR as an accurate reflection of market interest rates was shattered when investigations concluding in 2012 uncovered criminal manipulation of LIBOR markets by certain reporting banks. Despite attempts at reforming the system, in 2017, it was announced that LIBOR will be effectively phased out at the end of 2021.

While efforts to develop a replacement for LIBOR have been ongoing for years, financial markets have yet to settle on the replacement benchmark rate with different countries coming up with various alternatives, but no one proposal is gaining clear traction as the universal benchmark rate. In the United States, the Federal Reserve and United States Treasury have introduced the Secured Overnight Finance Rate (SOFR) as the proposed LIBOR replacement and began publication of that rate in April 2018. The SOFR is a rate derived from market data on overnight loans collateralized by Treasury securities. Some of the primary differences between SOFR and LIBOR are that SOFR is based on real transactions from a range of firms versus the reported expectations of a small set of bankers on which LIBOR was based (making SOFR more transparent and less susceptible to manipulation), and SOFR reflects the interest rate for collateralized loans which are now more common, whereas LIBOR reflected an unsecured interest rate. One concern with SOFR is that it has been susceptible to price swings tied to Treasury Bill issuance and month/quarter end supply variations, which has made it more volatile than LIBOR. Also, for SOFR to truly replace LIBOR, larger volumes of trades are needed in order to develop longer term SOFR based reference rates.

With US banks currently holding an estimated $10 trillion in LIBOR benchmarked loans, there are major potential implications for the elimination of LIBOR and transition to a new interest rate benchmark. At the end of 2021, LIBOR benchmarked loans will fall into two general categories: (1) non-problematic loans containing an adequate replacement benchmark rate provision that either identify a specific, and viable, alternative benchmark rate, or allowing the lender to choose the alternative benchmark rate; or (2) those that do not. Lenders with LIBOR benchmarked loans that do not have adequate benchmark rate replacement language could face significant loan administration issues including possible loss of interest income and increased risk of litigation. In order to mitigate this potential risk, lenders should consider consulting with counsel to evaluate existing loan portfolios for inadequate language and incorporating new replacement benchmark rate provisions in connection with any borrower requests for modifications, waivers or any other concession.

Are Out-of-State Bank Accounts Out of Reach for Florida Judgment Creditors?

Are Out-of-State Bank Accounts Out of Reach for Florida Judgment Creditors?

A creditor has several tools to pursue collection from a judgment debtor. One of the most commonly used tools is garnishment of a judgment debtor’s bank account because it can be done relatively quickly and cheaply. In fact, most courts will routinely grant a motion to issue a writ of garnishment on an ex-parte basis, meaning without notice to the judgment debtor.

However, a trend is developing in federal courts in Florida disfavoring writs of garnishments against out-of-state bank accounts. Specifically, some courts are refusing to grant writs of garnishment, and have even dissolved existing writs of garnishment, against out-of-state bank accounts.

A minority of federal courts in Florida have determined that a judgment creditor cannot garnish an account at a national bank incorporated outside of Florida even if that bank has branch locations in Florida, because the national bank is outside of the Florida court’s jurisdiction.

The implications of these minority decisions are significant in light of the prevalence of mobile and online banking. Under that reasoning, a bank account at a national bank that is accessed and maintained online could essentially be protected from garnishment because no Florida court could obtain jurisdiction over such account. See Fed. Deposit Ins. Corp. for GulfSouth Private Bank v. Amos, 3:12CV548/MCR/EMT, 2017 WL 9439161, at *7 (N.D. Fla. Jan. 10, 2017), report and recommendation adopted in part sub nom. Fed. Deposit Ins. Corp. v. Amos, 3:12CV548/MCR/EMT, 2017 WL 772340 (N.D. Fla. Feb. 28, 2017) (rejecting creditor’s argument that modern bank accounts are not actually located in any state and can be accessed in Florida or anywhere in the world).

What options does a judgment creditor have if it finds itself before a court that disfavors writs of garnishments against out-of-state bank accounts?

One option might be to prove that the judgment debtor accesses and maintains the account at a branch located in Florida; however, at this time, there does not appear to be any clear precedent to indicate how a court would rule on this strategy. Further, obtaining such proof could be difficult, if not impossible, as the banking industry shifts away from in-person banking.

Alternatively, a judgment creditor could obtain the necessary jurisdiction over an out-of-state garnishee bank by domesticating its judgment in a court located in the state where the garnishee bank is incorporated and then requesting that the new court enter a writ of garnishment against the garnishee bank. Clearly, that is a time-consuming endeavor that would be cost prohibitive in most circumstances.

Although only a handful of federal courts in Florida have adopted this reasoning disfavoring writs of garnishment, other courts in Florida could follow suit. Any judgment creditor or litigant seeking a judgment should be aware of this issue and the potential pitfalls in obtaining a writ of garnishment against an out-of-state bank account.

Does Your Limited Liability Company Have a “Prenuptial Agreement”? (If Not, Consider Reading This)

With the emergence of the limited liability company (“LLC” or “company”) entity type, an owner, known as a “member,” can minimize or prevent setbacks that interrupt business operations that in very extreme instances, cause it to dissolve.

With the emergence of the limited liability company (“LLC” or “company”) entity type, an owner, known as a “member,” can minimize or prevent setbacks that interrupt business operations that in very extreme instances, cause it to dissolve.

Similar to a prenuptial agreement in the marriage context, a properly drafted operating agreement can protect members and even the company in the event that a member or members decide to breakup or call it quits.

Below are sections, which at a minimum, should be included in a company’s operating agreement:

  1. Formation. A formation section includes information concerning the company’s name, date created, its members, office location, registered agent and ownership. Ownership may be determined either by the percentage or interest that a person has in a company, or by membership units (“units”), which is equivalent to shares of a corporation. If a company has different classes of units, this section should provide detail whether voting rights differ among each class, and if applicable, any distribution waterfalls and preferences describing the ordering of payments among members.
  2. Management and Voting. A management and voting section provides information on how a company is managed. It is either “manager-managed” by person(s) appointed by members (a manager may, but is not required to be, a member) or “member-managed,” thus managed by its members. This section should also include provisions regarding how the company conducts official business, such as member voting requirements, resolutions for voting deadlocks, protocols for official meetings including proxy voting, and provisions that specify member authority over company affairs.
  3. Capital Contributions. A capital contributions section contains information regarding capital contributions made by members (monetary and non-monetary), the amount, value of contribution (if nonmonetary), and class of units (if applicable) that each member owns, and whether members may be required to make additional capital contributions.
  4. Allocation of Profit and Losses and Distributions of Cash. This section explains how company profits and losses are shared among members and other fiscal matters. It may contain information on special allocations, which are non-pro-rata distributions. This section should also discuss how distributions of cash shall be made and whether distributions may be “in kind,” which are payments in the form of a security or property other than cash.
  5. Membership Changes. A membership change section describes the process how members are added and removed, if and when members can transfer ownership, and other related provisions. This section should also describe how a company handles a member’s death, bankruptcy of a member, and events that disqualify a person from being a member.
  6. Dissolution. A dissolution section provides circumstances when a company may or must be dissolved and steps involved to wind up business affairs.

A properly drafted operating agreement is a critical step to starting a company. Members should invest time in creating this tool which promotes formality and separates a company’s business matters from its owners’ personal matters. Costly attorney fees and litigation expenses can be avoided upfront if an operating agreement is properly drafted.

Consideration should also be given to tax matters by an attorney experienced in that area. The pitfalls of not drafting a timely operating agreement can be costly. Business owners waiting to draft this document when business activity “picks up” may encounter setbacks when a disagreement among members ensues. Discipline and effort should be used to avoid falling into this trap, so make drafting this document a priority when setting up your company.

Is California Dreaming or Will More Healthcare Workers Become Employees?

Is California Dreaming or Will More Healthcare Workers Become Employees?

There is no bigger industry in the state of Florida than healthcare. Hospitals, physician groups, and surgical centers provide valuable care to the citizens of the Sunshine State. For many of these businesses, the workers are independent contractors, rather than employees. However, a recent decision by the California Supreme Court is causing those in the healthcare industry nationwide to examine that business model.

The California Supreme Court recently issued a landmark decision in the case of Dynamex Operations West, Inc. v. Superior Court, which makes it more difficult for companies in California to classify their workers as independent contractors for purposes of minimum wage requirements, the withholding of taxes, and eligibility for company benefits.

The Dynamex case involved a courier service that classified its drivers as independent contractors, rather than employees. The California Supreme Court determined that the drivers should have been classified as employees. In reaching its conclusion, the California court used the “ABC test”. Under this test, a worker is properly considered an independent contractor if the company establishes:

(a) That the worker is free from the control and direction of the company in connection with the performance of the work;

(b) That the worker performs work that is outside the company’s business; and

(c) That the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work that the worker is performing for the company.

Applying this test, the Court determined that the drivers were performing work in the usual course of Dynamex’s business and that they were not engaged in an independently established trade (such as plumbing) outside the core function of the courier company.

The Dynamex decision does not apply to the classification of workers in the state of Florida. The law in Florida focuses on the extent of control the company exerts over the worker. However, historically cases decided by the California Supreme Court have, on occasion, led to sweeping changes in the law nationwide. Whether or not the Dynamex case will generate change in Florida remains to be seen.

The classification of workers as either employees or independent contractors impacts the healthcare industry because of the number of workers required to deliver the services. Healthcare companies engaged in business planning should consult with their legal advisors and examine how they are classifying their workers and whether those classifications will be subject to change in the future.

Changing the Playing Field: Viable Alternatives to Non-Compete Agreements

Viable Alternatives to Non-Compete Agreements

Employers seeking to prevent their employees, contractors, consultants or former partners from competing or soliciting will typically utilize a traditional non-compete agreement, either standing alone or embedded within a broader agreement. The non-compete limits a person from competing and soliciting for a specific period of time, and within a designated geographic area.

However, it can be difficult to predict whether, and to what extent, a non-compete will be enforced. In Florida, although non-compete agreements are permitted by statute (§ 542.335, Fla. Stat.), they are often construed strictly against the employer. Courts are generally skeptical of non-compete agreements which flatly prohibit competition as being «restraints of trade», weighing an employer›s right to protect legitimate business interests against an employee›s ability to earn a living.

Employers seeking a more predictable alternative to a traditional non-compete may want to consider the following alternatives:

 “Forfeiture-For-Competition”. This is a contract provision which states that an employee who competes will forfeit a benefit, such as deferred compensation, future payments or incentives. The appeal of such a provision is that it creates a negative consequence for competing, rather than looking to the court system for a remedy.

“Clawback”. A provision requiring an employee to repay compensation or other benefit following specific events, such as working for a competitor (in which the employer files suit for damages to recover the prior compensation or benefits as damages). A clawback is often combined with a forfeiture-for-compensation.

“Bad-Boy”. A provision which allows forfeitures and/or clawbacks for specific acts objectively considered as bad (e.g. disclosing confidential information, crimes or publicly disparaging an employer).

Considerations. The benefit forfeited or subject to clawback cannot constitute regularly earned income, such as wages, ordinary bonuses and commissions previously earned. Additionally, employers need to confirm that the forfeited benefit is not subject to ERISA vesting protections, such as a vested benefit in a qualified plan or a 401(k) plan (however, certain unfunded, non-qualified ERISA plans, such as “top-hat” plans, are typically not subject to ERISA’s protections). As a result, forfeiture and clawback devices are usually confined to management level employees who receive some sort of discretionary incentive or deferred compensation, or to sellers of a business receiving deferred payments. Finally, the forfeiture cannot amount to a “penalty”.

Because an employer does not seek to enjoin an employee from earning a living, or even competing, courts in Florida and in many other jurisdictions are less inclined to subject these provisions to the higher scrutiny applied in the traditional non-compete analysis, so long as the employer can show that the restriction is intended to protect a legitimate business interest. Such provisions may be an effective alternative to traditional non-compete agreements in their intended effect of deterring employees, contractors and others from competing or taking action adverse to a former employer or business partner.