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Date
Rule
15 USC 18a(c)(1), 802.1
Staff
Michael Verne
Response/Comments
The HSR Act exempts "acquisitions of goods ... transferred in the ordinary course of business." 15 U.S.C. 18a(c)(1). See 16 CFR 802.1. The Premerger Notification Office (PNO) has long taken the position that in transactions involving a type of good that can be transferred in the ordinary course of business, if the seller is exiting an entire business via the transaction, the ordinary course exemption will not apply. For example, if a seller is exiting the mortgage servicing business via a sale of all of its mortgage servicing rights, that transaction would not be within the ordinary course of business even though the sale of such rights might otherwise qualify for the ordinary course of business exemption. The question as to whether the ordinary course of business exemption can be relied upon where the seller has announced that it intends to exit an entire business (e.g., the mortgage servicing business), but will do so through two or more transactions involving multiple buyers rather than through a single transaction recently arose as a result of the email below. The PNO's position is that if seller has announced that it intends to exit a business, and it will do so through two or more sales of assets, none of those sales qualify for the ordinary course of business exemption. Such exit may be as a result of bankruptcy, or without seller entering bankruptcy. The fact that seller may not actually exit the business until the last sale occurs is not determinative. Thus, the transaction described below would be reportable. K Walsh & Marian Bruno concur.

Question

From: (Redacted)
Sent: Wednesday, November 04, 2009 1:07 PM
To: Verne, B. Michael
Cc: (Redacted)

Subject: HSRQuestion re: 802.1(a)

Dear Mike:

We would like foryou to confirm that the following transaction is not reportable under Section7A of the Clayton Act:

Buyer intends toacquire the following assets relating to Seller's mortgage servicing business:(i) servicing contracts for certain commercial mortgage loans, includingsecuritized mortgage loans, mortgage loans serviced for certaingovernmental-sponsored entities and portfolio loans (ServicingContracts), with a value in excess of $65.2 million (exclusive ofadvances); (ii) Buyer will also pay Seller approximately $15 million forcertain accrued and unpaid servicing fees (Servicing Fees It ) (thisamount includes the value of any fees the servicer is entitled to receive fromcollections on account of the serviced loans, but that it has not yetreceived); and (iii) Buyer will also reimburse Seller for the value of"advances, i.e., payments the servicer has made on behalf of themortgagees for principal and interest payments to bondholders and protectiveadvances including property taxes and insurance premiums (ServicingAdvances). The approximate value of the ServicingAdvances is anticipated to be greater than $65.2 million. In addition,Buyer proposes to acquire certain mortgage loans from the Seller with anapproximate outstanding principal balance of $303 million that are unrelated tothe Servicing Contracts.

Buyer will not beacquiring Seller's servicing rights and servicing agreements relating to aportfolio of Fannie Mae loans currently serviced by Seller. Buyer will also notbe agreeing to offer employment to the employees of the Seller, but may in itsdiscretion choose to do so in selected cases. However, Seller has filedfor Chapter 11 bankruptcy, and its remaining mortgage servicing assets arelikely to be sold to another bidder.

Under 802.1(a), the sale of mortgage servicing rights constitutes a sale of goods inthe ordinary course of business for purposes of the ordinary course of businessexemption under Section 7A(c)(1) of the HSR Act. The exemption applies as longas (1) the seller remains in the ordinary course of business of servicingmortgage loans after the transaction has been consummated; and (2) theacquisition does not constitute the sale of an operating unit within themeaning of 802.1(a).* See Informal Interpretation No. 0609005(September 19, 2006); Informal Interpretation No. 060700l (July 3, 2006).Because Seller will continue to service Fannie Mae mortgages after thetransaction closes, the first requirement is met. This is the case eventhough Seller's remaining mortgage servicing business involves a different lineof mortgages. See Informal Interpretation No. 0607001 (July 3, 2006);Informal Interpretation No. 9806002 (June 5, 1998). Secondly, there is noacquisition of an operating unit, as evidenced by the fact, among others, thata substantial majority of the employees associated with the business beingacquired will not be offered employment with Buyer. Because the acquisition by Buyerof Seller's mortgage servicing business does not result in Seller exiting themortgage servicing business entirely, it is our understanding that theacquisition by Buyer of the Servicing Contracts is exempt under 802.1(a)as an acquisition of goods in the ordinary course of business.

The acquisition ofthe Servicing Fees is akin to the acquisition of accounts receivable.Based on Informal Interpretation 0804012 (April 23, 2008), we assume thatwe need to include the value of the consideration paid to acquire these assetsin the size-of-transaction, since they do not constitute exempt assets underthe Act.

Finally, weunderstand that unreimbursed advances, such as the Servicing Advances describedabove, are viewed by the FTC PNQ as cash equivalents. See InformalInterpretation 0804012 (April 23, 2008). Cash and cash equivalents areassets whose acquisition is exempt under 801.21. Therefore, thevalue of the Servicing Advances to be paid by the Buyer to the Seller is notincluded in the HSR size-of-transaction.

Based on theforegoing, because the acquisition of the Servicing Contracts is exempt under 802.1(a) I and because the acquisition of the Servicing Advancesis exempt under 801.21, assuming that the fair market value of theServicing Fees is below $65.2 million, the transaction will not be notreportable.

Thank you for yourhelp with this issue. Please feel free to call me to discuss the foregoing. Ican be reached at (redacted)today and tomorrow.

* It is unclearwhether the PNO still applies the operating unit concept in thiscontext. See ABA Section of Antitrust Law, Premerger NotificationPractice Manual, Interpretation 7 (4th ed. 2007). We have not addressedthe question since the concept does not, in any event, apply to this transaction.

About Informal Interpretations

Informal interpretations provide guidance from previous staff interpretations on the applicability of the HSR rules to specific fact situations. You should not rely on them as a substitute for reading the Act and the Rules themselves. These materials do not, and are not intended to, constitute legal advice.

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