Wednesday, December 22, 2010

FYI: DOJ Sues Mortgage Lender for Discrimination Based on Discretionary Pricing, With 0.05%-0.14% APR Difference

PrimeLending reportedly agreed to pay $2 million to resolve Justice Department allegations that it engaged in disparate impact discrimination against African-American borrowers between 2006 and 2009, by virtue of a discretionary pricing policy.  A copy of the complaint is attached, but a copy of the settlement agreement is not yet available in the court's online records. 

 

The DOJ's complaint alleges African-American borrowers nationwide were charged higher prices on retail loans made through PrimeLending's branch offices, in violation of the federal Fair Housing Act and Equal Credit Opportunity Act.

 

Between 2006 and 2009, PrimeLending allegedly charged African-American borrowers higher annual percentage rates of interest for prime fixed-rate home loans and for home loans guaranteed by the Federal Housing Administration and Department of Veterans Affairs than it charged to similarly-situated white borrowers.   PrimeLending gave its employees wide discretion to increase their commissions by adding "overages" to loans, which increased the interest rates paid by borrowers.   This policy allegedly had a disparate impact on African-American borrowers.

 

In each year between 2006 and 2009, PrimeLending allegedly charges African-American borrowers APRs of 11 to 14 basis points (0.11% to 0.14%) higher than similarly situated Caucasian borrowers on conforming loans.

 

In each year between 2006 and 2009, PrimeLending allegedly charges African-American borrowers APRs of 5 to 11 basis points (0.05% to 0.11%) higher than similarly situated Caucasian borrowers on FHA and VA loans.

 

PrimeLending allegedly did not have monitoring in place to ensure that it complied with the fair lending laws, compensation for its loan officer employees was allegedly based in part in their ability to charge overages and avoid accepting underages, it allegedly did not establish objective criteria to be followed by employees in charging overages or accepting underages, it allegedly did not require employees to document the reasons for overages and underages, and it allegedly did not offer detailed fair lending training to its employees.

 

This case resulted from a referral by the Board of Governors of the Federal Reserve to the Justice Department's Civil Rights Division in 2009.   PrimeLending's owner, PlainsCapital Bank of Lubbock, Texas, is a member of the Federal Reserve System.   PrimeLending reportedly cooperated fully with the Justice Department's investigation into its lending practices, and agreed to settle this matter without contested litigation.

 

In addition to paying $2 million to the victims of discrimination, the settlement reportedly requires PrimeLending to have in place loan pricing policies, monitoring and employee training that ensure discrimination does not occur in the future.   It also incorporates provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act and regulations recently enacted by the Federal Reserve that restrict loan officer compensation based on the terms or conditions of a particular transaction. 

 

PrimeLending reportedly began at the start of this year to implement policies to prevent discrimination, which include requiring employees to provide legitimate non-discriminatory reasons in order to adjust loan prices.  Following the settlement, these policies will be reportedly strengthened by generally banning overages beginning next spring.    

 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

Friday, December 17, 2010

FYI: Cal App Confirms UCC Overrides Common Law, Holds Bank Not Required to Prove It Was Free from Negligence

The California Appellate Court, Fourth District, recently ruled in favor of a bank in a lawsuit arising from a check cashing scheme, confirming that the Uniform Commercial Code ("UCC") overrides inconsistent principles of state common law, and did not require the bank to prove it was free from negligence.

 

A copy of the opinion is available at: http://www.courtinfo.ca.gov/opinions/documents/E049170A.pdf.

 

Chino Commercial Bank, N.A. ("Chino") brought an action against Brian Peters and Marylin Charlnoes for breach of contract and fraud.  Peters and Charlnoes maintained a checking account with Chino through their small construction business, Faux Themes Inc. ("Faux").  In March of last year, Peters entered into a business arrangement with a man he met on the internet, whereby the man would send Peters checks to deposit into Faux's account with Chino and Peters would then wire the funds to a bank account in Hong Kong.  Peters would retain a fifteen percent fee for this service.

 

Overall, Peters wired just under half a million dollars to Hong Kong, but the checks he deposited with Chino were ultimately dishonored as forgeries.  Chino then brought an action against Peters and Charlnoes to recover the funds overdrafted from Faux's account, seeking to attach property of Peters and Charlnoes under a common law contract theory.  The trial court found in Chino's favor, placing the burden of proving any negligence by Chino in accepting the altered checks or wiring the funds on Peters and Charlnoes.

 

Peters and Charlnoes appealed the trial court's ruling, arguing that Chino should have been required to prove it was free from negligence under the traditional principles of California common law that govern contracts.  The Appellate Court rejected the appeal, explaining that California's enactment of the UCC preempted any inconsistent common law principles.  It then discussed Chino's potential liability under the relevant UCC provisions for (1) accepting the altered checks; and (2) wiring the funds as directed by Peters.

 

Concerning Chino's acceptance of the altered checks, the Appellate Court looked to the UCC's chargeback provisions to determine that Chino could, in fact, be liable for charging the amounts of the dishonored checks back to Faux's account if it failed to exercise ordinary care in accepting the altered checks.  However, the Appellate Court found that Chino presented uncontradicted evidence that it used ordinary care, and that Chino was therefore entitled to charge the funds back to Faux's account.  Specifically, the Appellate Court relied on evidence that Chino's employees (1) looked for irregularities on the face of the altered checks without finding any; and (2) considered whether the amounts of the checks were consistent with deposits to other companies owned and operated by Peters at the same address as Faux.

 

Concerning Chino's wiring of the funds as directed by Peters, the Appellate Court looked to Article 4A governing funds transfers.  Noting that Article 4A specifically limits the liability of banks in connection with the transfer of funds to that created under its express provisions, the Appellate Court held that negligence is not an element of the article's general obligation of good faith, and nothing in the current version of Article 4A would otherwise create liability for a bank negligently accepting a duly authorized wire transfer.

 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

Saturday, December 11, 2010

FYI: 11th Cir Says Payment Through Internet-Based Intermediary Was FDCPA "Debt"

The United States Court of Appeals for the Eleventh Circuit recently held that the reversal of payment and related fees charged by an internet-based payment intermediary to its customer after a third-party's payment was determined to be fraudulent was a "debt" under the Fair Debt Collection Practices Act 15 U.S.C. §§ 1692 et seq. ("FDCPA"), and the Florida Consumer Collection Practices Act, Fla. Stat. §§ 559.72 et seq. ("FCCPA").
 
A copy of the opinion is available at: 
http://www.ca11.uscourts.gov/opinions/ops/201012461.pdf
 
Plaintiff-debtor received the proceeds from the sale of a laptop through internet-based intermediary PayPal.  PayPal subsequently discovered that the laptop purchaser's payment was fraudulent, and demanded Plaintiff-debtor reimburse PayPal for the payment and related fees pursuant to the PayPal User Agreement.  PayPal then employed Defendant-debt collector to pursue the funds when Plaintiff-debtor refused to reimburse the payment and fees.  Plaintiff-debtor brought suit against Defendant-debt collector, alleging that the collection efforts constituted a form of harassment and contained false and misleading representations in violation of the FDCPA, FCCPA, and for common law invasion of privacy by intrusion.
 
Defendant-debt collector moved for summary judgment on all counts, arguing Plaintiff-debtor's obligation to PayPal did not constitute a "debt" under the FDCPA or the FCCPA, and that Plaintiff-debtor did not plead sufficient facts to maintain the claim of invasion of privacy.  The District Court granted the motion as to the privacy claim but not the FDCPA and FCCPA.  Plaintiff-debtor was awarded damages and fees at trial.  Defendant-debt collector appealed the lower court's denial of its motion for summary judgment, and the Appellate Court affirmed.
 
As you may recall, "to recover under both the FDCPA and the FCCPA (a Florida state analogue to the federal FDCPA), a plaintiff must make a threshold showing that the money being collected qualifies as a 'debt.'" The FDCPA and the FCCPA identically define "debt" as: "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment. 15 U.S.C. § 1692a(5) and Fla. Stat. § 559.55(1) (emphasis added).  "Accordingly, the FDCPA and FCCPA apply only to payment obligations of a (1) consumer arising out of a (2) transaction in which the money, property, insurance, or services at issue are (3) primarily for personal, family, or household purposes."
 
Analyzing the case before it under the three prongs, the Eleventh Circuit first held that Plaintiff-debtor was a "consumer," reasoning that Plaintiff-debtor was a purchaser of PayPal's services.  In addition, "the mere fact that Plaintiff-debtor consumes PayPal's services in order to facilitate a separate sale does not thereby negate his consumer status with respect to PayPal."
 
The Eleventh Circuit next held that a "transaction" occurred for purposes of the FDCPA and FCCPA.  "At a minimum, a 'transaction' under the FDCPA must involve some kind of business dealing or other consensual obligation." In this case, Plaintiff-debtor "had utilized PayPal's services in a transaction and, according to the terms of that transaction, was under a contractual obligation to repay the money."   In addition, Plaintiff-debtor's "transaction with PayPal did not cease upon the transfer of funds to his account; rather, he remained under a continuing contractual obligation to refund any invalidated payments—an obligation which arose from the transaction itself." 
 
Rejecting Defendant-debt collector's argument, the Court distinguished the case before it from previous cases in which erroneous credits to customers' accounts by banks were held not to be "transactions" under the FDCPA.  In those cases, there is was no indication "that the debtors had a contractual obligation dictating their liability in the event of any overpayment."
  
Lastly, the Defendant-debt collector argued on appeal that the subject transaction was for commercial purposes and therefore the Plaintiff-debtor did not satisfy the requirement that the services provided be "primarily for personal, family, or household purposes."  However, Defendant-debt "was not clearly raised" in Defendant-debt collector's initial brief, and therefore the Court deemed the issue waived. 
 
Notwithstanding the waiver, the Eleventh Circuit held the third prong was satisfied because the Plaintiff-debtor did "not run a business and specifically registered his PayPal account as a 'personal account,' which the User Agreement defines as an account 'used for non-business purposes and used primarily for personal, family, or household purposes.'"
 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: IL to Enact "Civil Union" Statute Likely Affecting Homestead, Credit Disclosure and Other Laws

Illinois Governor Pat Quinn is expected to sign into law the "Illinois Religious Freedom Protection and Civil Union Act," providing for civil unions in Illinois. 
 
The legislation may be important for banks, lenders and other consumer financial services companies, among other things due to homestead, credit disclosure, credit discrimination, employment and other marital and spousal rights laws.
 
The full text of the legislation is available at:
 
The new legislation provides that:  "A party to a civil union is entitled to the same legal obligations, responsibilities, protections, and benefits as are afforded or recognized by the law of Illinois to spouses, whether they derive from statute, administrative rule, policy, common law, or any other source of civil or criminal law."
 
The parties to the civil union would have to apply for and obtain a certificate, similar to a marriage license.
 
Under Illinois law, if the Governor sings the legislation into law as he has publicly stated he would, the new statute should become effective on June 1, 2011.
 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 

Wednesday, December 8, 2010

FYI: 11th Cir Confirms No Private Right of Action for Excessive Notary Fees Under Georgia Statute

The United States Court of Appeals for the Eleventh Circuit affirmed in part and vacated in part the lower court's dismissal for failure to state a claim of a putative class action seeking recovery of notary fees in excess of the statutory maximum set by OCGA 45-17-11(b), the Georgia notary fee statute.
 
 
The Eleventh Circuit certified four questions concerning Georgia law to the Georgia Supreme Court.  The Georgia court replied as follows:  (1) there is no private civil cause of action, express or implied, under OCGA section 45-17-11; (2) under the facts of the present case, the "voluntary payment doctrine cannot bar a breach of contract claim;" (3) the statute of limitations was "not tolled" for the plaintiff's fraud and "money had and received" claims; (4) a corporation , while not "directly or vicariously liable" for violations of OCGA, can become liable "if it participates in or procures the notary's violations."
 
Applying the Georgia Supreme Court's rulings, the Eleventh Circuit held that OCGA section 45-17-11 does not create a private civil cause of action to recover notary fees, had been properly dismissed by the district court.
 
The plaintiffs also asserted that the district court had erred when it had dismissed their "fraud and "money had and received"" claim on statute of limitations grounds.  The Eleventh Circuit noted that more than five years had passed since the plaintiffs had signed the relevant loan agreement.  Moreover, the Court was unconvinced by the plaintiffs' contention that "equitable tolling" should apply because lender had supposedly committed fraud when they contracted for "reasonable and necessary" notary fees, and then charged "fees far exceeding the statutory maximum" and failed to inform the plaintiffs of the statutory maximum.  The Georgia Supreme Court held that equitable tolling did not apply because the plaintiffs "could have discovered the discrepancy" between the statutory fee and the actual fee by "simple reference" to the statute.  Therefore, the Eleventh Circuit held the district court had not erred in dismissing the plaintiffs' second claim.
 
Plaintiffs' third claim that the lender had breached the loan agreement provision which stated that notary fees would be "reasonable and necessary" was dismissed by the district court under Georgia's "voluntary payment statute."   However, the Eleventh Circuit vacated the dismissal.  The Georgia Supreme Court held that the statutory limit under OCGA was $4, and that the lender had not only charged the plaintiffs $350, but had not informed them of the statutory limit and had in fact "expressly and affirmatively misrepresented" that their notary fee was "reasonably necessary."  Given these circumstances, the Georgia Supreme Court found that Plaintiffs "alleged sufficient "artifice, deception, or fraudulent practices" to qualify under the exception to the Georgia voluntary payment statute.  The Eleventh Circuit noted that the plaintiffs' breach of contract claim would fall within the six year statute of limitations for written contracts in Georgia.
 
Finally, the Eleventh Circuit held that, although the Georgia Supreme Court found that under Georgia law a corporation "employing notaries public" was "neither directly nor vicariously subject to section 45-17-11," the corporation could be liable for a notary's violation of the statue "if [the corporation] participates in or procures the notary's violations."  The Eleventh Circuit held that it was a question for the district court whether the lender had so procured its notary's statutory violations.
 
 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 
 

Tuesday, December 7, 2010

FYI: Indiana App Ct Holds Noncompliance with HUD/FHA Regs is a Valid Defense to FHA Foreclosure Action

Rick Vance of Stites & Harbison PLLC in Louisville, Kentucky (www.stites.com) provides the update below/attached regarding a recent Indiana appellate court opinion.
 

"It's not getting any easier for lenders seeking foreclosure on delinquent FHA home loans in Indiana.  In a case of first impression, the Indiana Court of Appeals held that a servicer's noncompliance with HUD servicing regulations is a valid affirmative defense to the foreclosure of an FHA-insured mortgage.  Lacy-McKinney v. Taylor, Bean & Whitaker Mortg. Corp., 2010 Ind. App. LEXIS 2161 (Ind. Ct. App. Nov. 19, 2010). 

 

"The Federal Housing Administration operates a mortgage insurance program for the purpose of encouraging lenders to issue loans at favorable interest rates to otherwise ineligible borrowers.  Participating lenders must comply with rules imposed by the Department of Housing and Urban Development (HUD), including the servicing regulations contained at 24 CFR § 203.500 – § 203.681.  These regulations include requirements that in certain default circumstances servicers may not immediately accelerate and foreclose, but must first meet face-to-face with borrowers prior to filing a foreclosure claim, accept partial payments, and engage in other timely  loss mitigation efforts.

 

"The Indiana appellate court rejected the loan servicer's argument that the HUD regulations apply only to the relationships between mortgagees and the government and that Congress did not intend for the regulations to be used by mortgagors as a private right of action or defense.  Instead, the court found that public policy, the language of the regulations and precedents from other state courts supported its decision that a mortgagee's satisfaction of HUD-imposed regulations is a binding condition precedent to its right to foreclose on an FHA-insured property.  Finding that the servicer improperly refused the borrower's partial payments and failed to conduct a face-to-face meeting prior to foreclosure, the appellate court reversed the trial court's summary judgment in favor of the mortgagee and remanded the case for further proceedings.  An appeal has not yet been filed.

 

"Although the Lacy-McKinney decision only allows the HUD regulations to be used by borrowers as a shield and not a sword, it is certain to attract attention from the growing number of attorneys specializing in the representation of borrowers facing foreclosure."

 

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

 
 
 

Monday, December 6, 2010

FYI: LA Sup Ct Confirms YSP Not Included in HOEPA "Points and Fees"

The Supreme Court of Louisiana recently confirmed that a yield spread premium is not part of the "total points and fees payable by the consumer at or before closing" within the meaning of the Home Ownership and Equity Protection Act (HOEPA).  A copy of the opinion is attached.

 

This case arises from an adjustable rate promissory note executed by Kathleen Johnson Parnell (Parnell), and secured by a mortgage on her home.  The HUD-1 Settlement Statement prepared in connection with the loan closing noted that the lender paid the mortgage broker a YSP of $1,264.  The HUD-1 stated that the YSP was "paid outside of closing."

 

On June 19, 2003, Parnell demanded rescission under the federal Truth in Lending Act.  Parnell claimed that her loan was subject to HOEPA, as the "points and fees charged in connection with her loan exceeded eight percent of the total loan amount."  She further claimed that she had not received certain disclosures required by HOEPA. 

 

Following her demand, starting in September of 2003, Parnell stopped making the monthly payments due on her loan.  The lender denied the demands made in Parnell's June letter, as her points and fees totaled only 6.7 percent of the total loan amount by its calculation.  The owner of the loan sought to seize and sell Parnell's house in response to her failure to make payments on her promissory note.  However, the note secured by the mortgage was later paid in full on June 26, 2006, from insurance proceeds following Hurricane Katrina.

 

In September of 2008, the loan owner filed a motion for summary judgment as to all claims asserted by Parnell in her June 2003 letter.  The trial court held that the YSP paid by the lender to the mortgage broker "outside of closing" is "not included in HOEPA's "point and fees" calculation" because "it was not paid or payable by Parnell at the time of closing."  Therefore, the trial court granted the Bank's motion for summary judgment, and dismissed Parnell's petition with prejudice.  Parnell appealed this decision.

 

The court of appeals reversed the portion of the trial court's decision granting summary judgment relating to Parnell's HOEPA claim.  The court of appeals "adopted a consumer-oriented view to HOEPA and a related regulation, Regulation Z."  Under this interpretation, the court found that "payable", in relation to the YSP, meant "legally enforceable or obligated to pay rather than paid."   Therefore, "Parnell was legally obligated to pay the yield spread amount at or before closing" because of her obligation to pay a higher rate of interest during the life of the loan.  This inclusion of the YSP in the points and fees calculation made the loan subject to HOEPA's disclosure requirements.

 

The Louisiana Supreme Court reversed.  The Court noted that "the phrase "points and fees" includes all compensation paid to mortgage brokers and excludes interest," but "all "points and fees" must be "payable by the consumer at or before closing."

 

Therefore, the Court held that while the statute itself and relevant case law sought to prevent "allowing lenders and financial institutions to manipulate the payment of points and fees . . . to avoid triggering the HOEPA protections", the Board's Official Staff Commentary clearly stated that "mortgage broker fees that are not paid by the consumer" are not included in calculating points and fees under HOEPA.

 

Thus, the Court held that, in cases where "the YSP is paid by the lender to the broker at the time of closing" and the borrower satisfies their obligation by paying a higher interest rate "over the course of the loan," the YSP should not be included "in the calculation of the eight percent trigger."

 

 

Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

FYI: Ill App Ct Says Assignee for the Benefit of Creditors Entitled to Reasonable Compensation Ahead of Perfected Secured Party

The Illinois Appellate Court for the Second District recently held that an assignee for the benefit of creditors was entitled to receive reasonable compensation for services and expenses before the satisfaction of perfected secured interests, because Section 9-102(a) of the Uniform Commercial Code ("UCC") does not transform an assignee for the benefit of creditors into a creditor with a competing security interest for the debtor's collateral.

 

A copy of the opinion can be found at: http://www.state.il.us/court/Opinions/AppellateCourt/2010/2ndDistrict/November/2091287.pdf

 

Plaintiff-Creditor obtained a perfected security interest in Defendant-Debtor's collateral on October 22, 2004.  Defendant-Debtor entered into an assignment for the benefit of creditors with third-party intervenor Trustee on November 18, 2008, which provided the trustee "reasonable compensation" for his services and expenses "from the Assets." 

 

Plaintiff-Creditor first learned of the trust agreement on November 21, 2008.  Plaintiff-Creditor obtained a judgment against Debtor and moved to collect on that judgment.  The trustee intervened, seeking fees and expenses for his duties as assignee.  Plaintiff-Creditor moved for summary judgment against the trustee, asserting that, as a perfected secured creditor under the UCC, it had priority over the trustee, a lien creditor.

 

The trial court granted summary judgment in favor of Plaintiff-Creditor, and the trustee appealed.  The Appellate Court reversed and remanded, holding that the UCC did not preclude the payment of reasonable compensation to the trustee for his services as assignee in an assignment for the benefit of creditors arrangement.

 

As you may recall, Section 9-102(a) of the UCC defines "lien creditor" in pertinent part as "an assignee for the benefit of creditors from the time of assignment."  The Plaintiff-Creditor argued that inclusion of an assignee for the benefit of creditors within the definition of "lien creditor" transforms, in the context of assessing an assignee for the benefit of creditor's right to his or her fees and expenses, the assignee into a mere lien creditor with a competing security interest for the debtor's collateral. 

 

However, the Court disagreed, reasoning that the Plaintiff-Creditor's interpretation of the UCC was illogical and inconsistent with the legislative intent in enacting the UCC, given the role of an assignee for the benefit of creditors. 

 

The Court noted that, "[i]f assignees were required to forgo payment in favor of perfected security interests, no assignee would take on the task of liquidating assets, and assignments for the benefit of creditors would cease to be available as an efficient method of maximizing the liquidation value of troubled companies."  In addition, the Court noted that the Plaintiff-Creditor's "interpretation would put an assignee in competition with the creditors he or she is bound to serve," which "is an absurd scenario because it transforms a fiduciary into a competing creditor."  Moreover, "an assignment for the benefit of creditors is a common-law vehicle used to liquidate a company's assets, and, pursuant to the common law, the assignee has a right to his or her reasonable fees and expenses." "If the General Assembly had intended to foreclose this common-law right, it would have clearly and explicitly set forth in the statute that a perfected secured creditor such as Creditor has priority over the assignee's right to fees and expenses."

 

The Court also commented "on the scope of the trial court's calculation of reasonable compensation" on remand.  The "trial court is to take into account that Trustee's compensation shall be based at least in part on the benefits that Creditor received between the date it had notice of Trustee's assignment and the date Creditor notified Trustee to cease his liquidation efforts." The Court reasoned that the Plaintiff-Creditor received certain payments and, by not objecting to the assignment upon notice thereof, Plaintiff-Creditor at a minimum, implicitly accepted the services that Trustee rendered. "In other words, in spite of Creditor's status as a secured creditor, Trustee's notice to the Creditor and the Creditor's implicit acceptance of Trustee's services enable Trustee to collect reasonable compensation for his services" based upon "the concept of quantum meruit."

 

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

Friday, December 3, 2010

FYI: Feds Issue Final Appraisal Guidance

The Office of the Comptroller of the Currency, Treasury (OCC); Board of Governors of the Federal Reserve System (FRB); Federal Deposit Insurance Corporation (FDIC); Office of Thrift Supervision, Treasury (OTS); and the National Credit Union Administration (NCUA) recently issued final supervisory guidance regarding real estate appraisals and evaluations.

 

A copy of the Guidance is available at:

http://www.ots.treas.gov/_files/490054.pdf

 

These Interagency Appraisal and Evaluation Guidelines ("Guidelines") replace the prior 1994 guidelines.  The Guidelines incorporate the regulators' recent supervisory issuances on appraisal practices, address advancements in information technology used in collateral valuation practices, and clarify standards for the industry's appropriate use of analytical methods and technological tools in developing evaluations. 

 

The Guidelines emphasize that financial institutions are responsible for selecting appraisers and people performing evaluations based on their competence, experience, and knowledge of the market and type of property being valued.  The Guidelines also emphasize the importance of institutions maintaining strong internal controls to ensure reliable appraisals and evaluations. 

 

According to the Guidelines, financial institutions should demonstrate the independence of their processes for obtaining property values, and adopt standards for appropriate communications and information-sharing with appraisers and people performing evaluations.  In addition, under the Guidelines, institutions are responsible for monitoring and periodically updating valuations of collateral for existing real estate loans and for transactions, such as modifications and workouts, according to the guidelines.

 

The regulators noted that future revisions may be necessary after regulations are adopted to implement the Dodd-Frank Wall Street Financial Reform and Consumer Protection Act of 2010 Act.

 

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

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Wednesday, December 1, 2010

FYI: Cal App Holds Lender Owed No Duty to Disclose Judgment Obtained Against Add'l Cardholder

The Court of Appeals of the State of California, Second Appellate District, recently affirmed that a lender had no duty to disclose a judgment obtained by an affiliate against an additional cardholder.

A copy of the opinion is available online at:  http://www.courtinfo.ca.gov/opinions/documents/B223686.PDF

Kayatta brought the appeal contending that American Express had a duty to disclose to him that "it had filed suit against, or obtained a judgment against" Robert E. Francis, a third party additional card-member.  Kayatta had entered into a Business Agreement with American Express upon application for the card, which stated in part, "You [the cardholder] promise to pay all Charges, including Charges incurred by Additional Cardmembers, on your Account."  The Agreement further stipulated that the "Company and the Basic Cardmember" will be held responsible "for any losses as well as any other consequences related to or resulting from actions taken by any third parties authorized to act on behalf of the Company and Basic Cardmember."

The facts and terms of the Business Agreement were undisputed. Kayatta posited three "extra-contractual" bases for American Express's purported duty to advise him of its  affiliates' judgment against FrancisThe Appellate Court stated that Kayatta "apparently contends that American Express is barred from enforcing the Business Agreement" because of its failure to disclose the judgment.  The three bases for this extra-contractual duty Kayatta posited were: "(1) federal and state statutes and regulations on credit accounts; (2) the "special relationship" of "trust and confidence" between American Express and Kayatta; and (3) the implied covenant of good faith and fair dealing." 

Kayatta argued that American Express owed him a duty of disclose under the federal Truth in Lending Act.  The court agreed with Kayatta that the purpose of TILA was to assist cardholders with making an "informed decision" regarding use of credit.  However, the court noted that there is no specific language in TILA that supports the proposition that American Express would have the duty to disclose a judgment against an additional cardholder to the basic cardholder.   

The court also found Kayatta's citations to "dicta" in cases involving fraudulent obtainment of a charge card or authorization of a conditional possession of a card readily distinguishable.  No fraud was alleged in the present case, and American Express "did not authorize a conditional possession of a charge card by Francis."  Kayatta himself authorized Francis's use of the card "and thus he bore the risk of nonpayment by Frances.

The court also rejected Kayatta's attempts to establish a "special relationship" of "trust and confidence" with American Express.  Kayatta argued that "some courts in other states have recognized that the relationship between a bank and its loan customers" may place a duty to disclose "facts which may place the bank or a third party at an advantage with respect to the customer."  However, in the present case, the court held that "nothing in the record suggests a confidential relationship" between Kayatta and American Express such that would require disclosure.  Kayatta made no claims that he sought advice from American Express regarding additional cardmembers, nor did American Express induce him to authorize Francis as such.

Lastly, Kayatta invoked the "implied covenant of good faith and fair dealing", which is "implied by law in every contract" to try to establish American Express's duty to disclose Francis's credit history.  However, examining the language of the Business Agreement, the court found that there was no stipulation that Kayatta would be given "credit-related information" concerning additional card members.  The court held that American Express's failure to disclose the judgment against Francis did not in any way deprive Kayatta of any rights or benefits in relation to the charge card.  Kayatta himself did not dispute that he obtained the charge card and "was able to add (or remove) Francis as an additional member."

For the foregoing reasons, the Appellate Court upheld the lower court's decision granting American Express money damages pursuant to the terms of the Business Agreement with Kayatta. 

Let me know if you have any questions.  Thanks.

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

Monday, November 29, 2010

FYI: FTC Issues Final Mortgage Assistance Relief Services (MARS) Rule, Banning Advance Fees and Requiring Various Disclosures

The FTC issued its final Mortgage Assistance Relief Services (MARS) Rule and Statement of Basis and Purpose concerning the practices of for-profit companies that, in exchange for a fee, offer to work on behalf of consumers to help them obtain modifications to the terms of mortgage loans or to avoid foreclosure on those loans.

In sum, the Final Rule, among other things, would:  (1) prohibit providers of such mortgage assistance relief services from making false or misleading claims; (2) mandate that providers disclose certain information about these services; (3) bar the collection of advance fees for these services; (4) prohibit anyone from providing substantial assistance or support to another they know or consciously avoid knowing is engaged in a violation of the Rule; and (5) impose recordkeeping and compliance requirements.

A copy of the final rule is available online at:  http://www.ftc.gov/os/2010/11/R911003mars.pdf

Advance fee ban

Under this provision of the Final RuleMARS companies may not collect any fees until they have provided consumers with a written offer from their lender or servicer that the consumer decides is acceptable, and a written document from the lender or servicer describing the key changes to the mortgage that would result if the consumer accepts the offer.  MARS companies also must remind consumers of their right to reject the offer without any charge.

Disclosures

In their advertising and in communications directed at individual consumers (such as telemarketing calls), MARS companies must disclose that:

  • they are not associated with the government, and their services have not been approved by the government or the consumer's lender;
  • the lender may not agree to change the consumer's loan; and
  • if companies tell consumers to stop paying their mortgage, they must also tell them that they could lose their home and damage their credit rating.

MARS companies also must explain in their communications to consumers that they can stop doing business with the company at any time, can accept or reject any offer the company obtains from the lender or servicer, and, if they reject the offer, they don't have to pay the company's fee.  MARS companies also must disclose the amount of the fee.

Prohibited claims

The MARS Rule prohibits mortgage relief companies from making any false or misleading claims about their services, including claims about:

  • the likelihood of consumers getting the results they seek;
  • the company's affiliation with government or private entities;
  • the consumer's payment and other mortgage obligations;
  • the company's refund and cancellation policies;
  • whether the company has performed the services it promised;
  • whether the company will provide legal representation to consumers;
  • the availability or cost of any alternative to for-profit mortgage assistance relief services;
  • the amount of money a consumer will save by using their services; or
  • the cost of the services.

In addition, the rule bars mortgage relief companies from telling consumers to stop communicating with their lenders or servicers.  MARS companies also must have reliable evidence to back up any claims they make about the benefits, performance, or effectiveness of the services they provide.

Attorney exemption

Attorneys are generally exempt from the rule if they meet three conditions:  (1) they are engaged in the practice of law;  (2) they are licensed in the state where the consumer or the dwelling is located; and  (3) they are complying with state laws and regulations governing attorney conduct related to the rule.

In order to be exempt from the advance fee ban, attorneys must also meet a fourth requirementthey must place any fees they collect in a client trust account, and abide by state laws and regulations covering such accounts.

 

The FTC and states may enforce the Rule.  However, before a state brings such an action, states must give 60 days advance notice to the Commission or other "primary federal regulator" of the proposed defendant, and the regulator has the right to intervene in the action.

All provisions of the rule except the advance-fee ban will become effective December 29, 2010.

The advance-fee ban provisions will become effective January 31, 2011.

 
 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com

 

 

Sunday, November 28, 2010

FYI: WA Sup Ct Upholds Ruling Protecting Lender Files Obtained by AG from Release to Consumer Attorney

The Supreme Court for the State of Washington recently affirmed a Court of Appeals decision holding that federal privacy laws apply to a request for information brought by a consumer lawyer under Washington's State Public Records Act (PRA), chapter 42.56 RCW, as to documents received by the state attorney general during an investigation of Ameriquest.

A copy of the opinion is available online at:
http://www.courts.wa.gov/opinions/pdf/826901.opn.pdf

This case concerns documents obtained by the Washington State Office of the Attorney General from Ameriquest Mortgage Company (Ameriquest) during an investigation of  Ameriquest's lending practices.  These documents included loan files, e-mails, and "other papers."  The AG received other information from consumers who filed complaints against Ameriquest, and also generated their own documents in relation to the investigation.   
 
Melissa A. Huelsman (Huelsman), a "member of the public", made a request for records from the investigation referencing the PRA.  The AG intended to disclose some of the information collected, but Ameriquest objected to the release of any information received from Ameriquest itself.  The issue before the Supreme Court is "whether, and to what extent the federal Gramm-Leach-Bliley Act (GLBA) . . . and the relevant Federal Trade Commission (FTC) rule" either preempt the PRA or otherwise prevent the AG from disclosing the information it received directly from Ameriquest.

The Washington Supreme Court described the GLBA as intended to protect customers' privacy, and to "protect the security and confidentiality of those customers' nonpublic personal information."   Under the rule-making authority contained in the GLBA, the FTC adopted the "Privacy of Consumer Financial Information."  These federal regulations prohibit a "financial institution" from releasing a consumer's "nonpublic personal information to a nonaffiliated third party", unless the consumer is given the chance to opt out of such release by receiving prior notice.  Relevant exceptions to this notice and disclosure requirement include when the release is done "with the consent or at the direction of the consumer", or to "comply with a properly authorized civil, criminal, or regulatory investigation."  The Court also noted that the federal regulations prevent a nonaffiliated third party from re-using or re-releasing any protected information received from a financial institution, and the nonaffiliated third party can share nonpublic personal information so received to its affiliates, but cannot share this information to a nonaffiliated third party unless the financial institution in question could lawfully do so.

Huelsman, an attorney representing former customers of Ameriquest, placed a request for documents which contained borrowers' "names, addresses, and loan terms and costs" but not other information such as their social security numbers. Ameriquest objected to such disclosure specifically in relation to Ameriquest's customer loan files, internal customer complaint files, employee e-mails, trade secrets and proprietary  information, and the AG generated documents.  The trial court denied Ameriquest's motion, while leaving in place a temporary restraining order, finding that the GLBA did not preempt state laws governing public disclosure of documents.  The Appellate Court reversed this decision, holding that if the PRA conflicted with GLBA concerning disclosure, then the GLBA preempted the PRA and prohibited such disclosure.  The Appellate Court held that as the AG is a nonaffiliated third party under GLBA, and Huelsman is not an affiliate of the AG, the GLBA therefore prohibited the AG's contemplated disclosure to Huelsman.

The Supreme Court affirmed the Appellate Court's ruling.  The Appellate Court had remanded the case to the trial court stating, "[w]hat information in loan customers' files is public is a factual question that the trial court will need to address."  The Supreme Court held that GLBA and FTC restrictions apply to the AG's proposed release of "nonpublic personal information to Huelsman."  Information which meets the definition of "personally identifiable financial information", is non-public and may not be disclosed, regardless of the form it comes in, i.e.; loan files, emails, etc.   
 
The Supreme Court further held that "the circumstances of the case" dictated that names, cases, addresses, and phone numbers of Ameriquest customers fit this definition as they were not only "personal identifiers", but would also disclose that the person in question "is or has been Ameriquest's customer."    The Court further held that "[a]ny information" that constitutes "'nonpublic personal information' cannot be recast as publicly available information by the AG.   
 
Finally, the Court held that only "aggregate information or blind data" that does not contain "personal identifiers" is exempt from the federal nondisclosure rules.  The Court held that both the GLBA and FTC do not allow the AG to "newly redact or repackage the information" it already has to transform it into "blind data."  Such data can only be disclosed if it is already in a "blind" or identifier-free state as delivered to the AG.  

 
Let me know if you have any questions.  Thanks.
 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874

Email:  RWutscher@kw-llp.com

http://www.kw-llp.com

 

NOTICE:  We do not send unsolicited emails.  If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention.  Thank you.

 

Our updates are available on the internet, in searchable format, at: http://updates.kw-llp.com