Banking and Finance law

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Last news: November 30, 1999 00:00:00

Total news: 99
Last news: April 30, 2009 20:04:37

The House Financial Services Committee yesterday voted to amend the Mortgage Reform and Anti-Predatory Lending Act (the "Act") to require HUD to suspend the implementation of its new Good Faith Estimate and HUD-1 Settlement Statement, and instead to work with the Federal Reserve Board to publish a proposed joint rule with comparable Real Estate Settlement Procedures Act ("RESPA") and Truth in Lending Act ("TILA") disclosures within six months of enactment of the Act, and a final joint rule with comparable RESPA/TILA disclosures within one year of its enactment.

The amendment does not affect other portions of HUDs final RESPA rule, including HUDs new average charge pricing rules that took effect in January 2009 and a clarification that electronic disclosures are permitted under RESPA. In addition, the amendment does not affect the new definition of "required use" that effectively bans builder incentives. HUD separately has delayed the effective date of that provision and has sought comments on whether to withdraw it entirely.

The House Financial Services Committee will continue marking up the Act today. Once the amended Act is approved by the Committee, it will go to the House for a floor vote. The Senate is likely to introduce and pass its own mortgage reform bill (which may or may not include the suspension of the GFE and HUD-1 and the directive to HUD to work with the Federal Reserve Board on disclosures), after which the House and Senate must resolve any differences in a conference.�


Authored By:

Sherwin F. Root

(213) 617-5465

sroot@sheppardmullin.com �

Although we have seen little change in the area of lender liability law over the past decade, todays unprecedented slowdown in the global economy is proving to be fertile ground for disputes among lenders, borrowers, guarantors, and other third parties. During the widespread defaults of the 1980s and early 1990s, lenders pursuing remedies were met by a massive upsurge in claims directed at them. During the mid-1980s, California courts expanded the theories under which lenders could be held liable and often awarded substantial damages to plaintiffs. The late 1980s and early 1990s saw a reversal in this trend, where courts limited some of the more far-reaching lender liability theories and reversed a number of high-profile judgments from previous years.

Today, the number of lenders taking enforcement actions is once again on the rise. This will likely result in a corresponding increase in borrowers challenging, and courts probing, lender practices. For example, in response to the exercise of remedies by construction lenders against developers of troubled real estate projects, numerous lender liability claims have been brought by developers - not only to maximize their ultimate recoveries but also to increase leverage in workout negotiations. These claims mostly allege breach of contract and recycle familiar issues such as course of conduct and breach of the covenant of good faith and fair dealing. As the credit crisis spreads in 2009 to various industries and continues to affect all types of lending arrangements, lenders should take care to be aware of the most common lender liability claims (as well as new claims that will begin to evolve), including the following.�
�
Typical Lender Liability Causes of Action

• Breach of Contract. A lender-borrower relationship is a contractual relationship, which may result in a lender being held liable for breaching written, oral, and implied contracts or agreements. Some common breach of contract claims are that a lender failed to (a) lend after a loan commitment became legally binding, (b) extend a loan, honor loan modification terms or forbear from exercising remedies after promising to do so, or (c) take actions required under loan documents or interpret loan documents properly. In breach of contract claims, the courts have considered "course of conduct" between parties as a critical factor in interpreting the language of a contract.

• Breach of the Implied Covenant of Good Faith and Fair Dealing. Borrowers have also used traditional breach of contract claims to piggyback claims based on the evolving theory of breach of the implied covenant of good faith and fair dealing. In jurisdictions recognizing this covenant, lenders have been found liable for (a) refusing to release a deed of trust in an effort to pressure the borrower into paying off another loan and (b) manipulating the appraisal of the borrowers property to trigger a default and deliberately delaying foreclosure to increase the debt through interest accrual, thereby enabling the lender to take the entire collateral. Nonetheless, in most cases the obligation of good faith does not compel a lender to refrain from enforcing express contract terms as written.

• Fraud. Fraud is usually based upon an affirmative misrepresentation. Even where the law imposes no obligation upon a lender to answer an inquiry in the first place, a lenders voluntary response may trigger a duty to disclose additional, pertinent information in a truthful and complete manner. Even where a lender possesses no actual fraudulent intent, constructive fraud may arise if a relationship of confidence and trust exists between borrower and lender and the lender subsequently breaches its duty to the borrower. Additionally, silent fraud may be found if the lender has a duty to speak but chooses to remain silent.

• Economic Duress. In addressing these claims, the courts have drawn a distinction between a lender (a) making inappropriate threats or demands and (b) threatening to do that which it has a legal right to do or refusing to do that which it is not legally required to do. Since it is difficult to assess if a lender has made improper use of legitimate rights or remedies, courts have tended to find liability in cases where the lenders conduct was tainted with some additional fraud or other wrongdoing.

• Tortious Interference with a Contract. Tortious interference with a contract may arise when a lender intentionally induces breach of the borrowers contract with a third party. However, lenders who have interfered with contracts through the bona fide exercise of their rights and remedies have been deemed privileged to do so. Courts have taken varied approaches with regard to whether malice or a purposeful or improper motive are essential elements to this cause of action. Moreover, some courts have allowed lenders to interfere with contracts between borrowers and third parties if the lenders hold equal or superior interests in the subject matter.

• Instrumentality Theory. Under this theory, a lender may expose itself to direct liability to the borrower and third parties where the lender exercises such control over the borrowers day-to-day operations that, in effect, the lender becomes the borrower. Direct liability can also be found where total control of a borrower does not exist, but the lender may be characterized as an agent or principal of the borrower, or the lenders relationship with the borrower is more akin to a partnership or joint venture.

• Breach of Fiduciary Duty. In one recent decision, the court held that the elements to establish a fiduciary relationship between a bank and a debtor are (a) the borrower reposes faith, confidence, and trust in the bank, (b) the borrower is in a position of inequality, dependence, weakness or lack of knowledge, and (c) the bank exercises dominion, control, or influence over the borrowers affairs. Where a fiduciary duty is found, a lender will owe far greater duties to the borrower than those arising under a loan agreement.

• Statutory Violations. With respect to federal tax laws, a lender with sufficient control over a borrower may be liable under the Internal Revenue Code (IRC) for withholding federal taxes. Courts have also held lenders liable under the Racketeer Influenced and Corrupt Organizations Act (RICO) if they engage in activities prohibited thereunder. Also, a significant amount of lender litigation has occurred under the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) in relation to lenders exercising a certain degree of control over the day-to-day operational aspects of a borrowers mortgaged property.

The causes of action listed above represent a mere sampling of potential lender liability claims that may be asserted against lenders in todays environment. Additionally, in a syndicated context, lead lenders also have duties to other lenders, the violation of which may expose lead lenders to liability. The foregoing summary is clearly not all-encompassing and only serves as a brief discussion of this vast and growing area of law.

Authored By:

Eugene C.�Kim

(213) 617-5404

ekim@sheppardmullin.com

and

Gina Giang

(213) 617-5484�

ggiang@sheppardmullin.com

�

The U.S. Department of Housing and Urban Development (HUD) today announced that it will once again delay the implementation date of the proposed changes in RESPAs new required use definition by 3 months, from April 16th until July 16th, and that HUD intends to seek further public comment on required use practices to determine whether HUDs proposed rule changes are necessary, or whether HUD should withdraw its new required use definition altogether.�

The changes to the required use definition, which would have effectively banned the offering of incentives or discounts to a consumer in exchange for the use of a settlement service provider in which the builder had an equity interest, were originally due to take effect in January, but were delayed as a result of lawsuits filed against HUD challenging these changes. While the announcement today will affect the implementation date of the required use definition changes, the timetable of all other changes to RESPA remains unaffected. Click here for a link to the announcement from HUD. For further information on the other changes to RESPA that HUD has proposed, please click here.

Authored By:�

David H. Sands

(213) 617-5536

dsands@sheppardmullin.com

and

Sherwin Root

(213) 617-5465

sroot@sheppardmullin.com

The Term Asset‐Backed Securities Loan Facility (TALF) was unveiled by the U.S. Treasury on November 25, 2008. Through the TALF, the Federal Reserve Bank of New York (FRBNY) will finance the purchase of asset‐backed securities (ABS) in order to support lending to consumers and small businesses. The current credit crisis has driven interest rates on many consumer and small business loans to unaffordable levels, which has restrained the ability of the economy to recover. Since the ABS markets have historically funded a substantial portion of consumer and small business credit, the TALF is designed to improve lender liquidity so as to increase the availability of affordable financing for consumers and small businesses.

Click here to read more.

As part of their continuing efforts to promote financial stability and restore the health of the economy, the United States Treasury has continued to develop new applications for the funds allocated to the Troubled Asset Relief Program (TARP) established in October 2008 by the Emergency Economic Stabilization Act of 2008 (EESA). In mid-October 2008, the Treasury announced it would forgo its initial plan to buy troubled assets from financial institutions and would instead use TARP funds to inject capital directly into banks. To date, $195.3 billion has been invested directly into qualifying financial institutions, both publicly traded and non-public, under the Treasurys Capital Purchase Program (CPP). To date, CPP funds have been invested in 359 financial institutions in 45 U.S. states and Puerto Rico.

Click here to read more.

Since 1992, HUD has allowed all companies - including homebuilders, real estate brokers and mortgage lenders - to offer incentives to consumers as an inducement to the consumers to use the companys affiliated settlement service provider as long as the settlement service providers service is separately offered and as long as the incentive is genuine, meaning it is not offset by higher prices elsewhere in the transaction. As part of its revisions to Regulation X implementing the Real Estate Settlement Procedures Act, HUD in November revised the rule effective January 16, 2009 to prohibit homebuilders from offering these incentives, while still permitting real estate brokers, mortgage lenders and other settlement service providers to offer certain forms of consumer incentives. On December 23, 2008, the National Association of Homebuilders ("NAHB") and certain of its members filed an action against HUD seeking to overturn the new consumer incentive rule.

HUD announced today that it has decided to delay from January 16, 2009 until April 16, 2009 the effective date of its new ban on homebuilder consumer incentives that are tied to the consumers use of the builders affiliated settlement service provider. HUDs stated purpose of the delay is to allow it time to vigorously challenge the NAHBs lawsuit on the merits of the case, and not on procedural grounds.

Authored by:

Sherwin F. Root

(213)�617-5465

sroot@sheppardmullin.com

Question: Does the federal Fair Credit Reporting Act preempt all actions filed under Californias Consumer Credit Reporting Agency Act?

Answer: Yes, according to the First District Court of Appeal, Division One, in Liceaga v. Debt Recovery Solutions, LLC (A120277), decided December 29, 2008.

In this case, plaintiff Rebecca Liceagas purse was stolen, and her identity was used to obtain a Sprint cell phone account.� Although Liceaga had never done business with Sprint, when the thief failed to pay, Sprint assigned the account to the defendant debt collection agency, which reported her "default" to various consumer credit reporting agencies.� Liceaga filed suit under Californias Consumer Credit Reporting Agencies Act, alleging the debt collection agency furnished information it knew or should have known was inaccurate.

The trial court granted the collection agencys motion for judgment on the pleadings on the grounds the Fair Credit Reporting Act preempted Liceagas claim under the CCRAA.� The First District affirmed, holding the express language of the FCRA granted all state laws "relating to the responsibilities of persons who furnish information to consumer reporting agencies" except, as to California, one specific subsection of the CCRAA (Civil Code section 1785.25(a)).� The First District concluded this "California exception" was, in fact, limited to the one enumerated subsection and "does not allow a private right of action." �According to the Court, "Congress has preempted state court private actions against furnishers of inaccurate credit information to credit reporting agencies, and no exclusion for California actions exists."

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

The United States Treasury has released a term sheet for the injection of capital into non-public qualifying financial institutions under the Treasurys Capital Purchase Program, implemented as part of the Troubled Asset Relief Program (TARP). The deadline for submitting applications under the Capital Purchase Program for publicly traded financial institutions was November 14, 2008, and as of the date of this memorandum, over 80 publicly traded financial institutions have announced their intent to participate in the Capital Purchase Program, accounting for almost $250 billion in investments by the Treasury. Non-public financial institutions are comprised of approximately 4,300 entities in the United States, far outnumbering the approximately 930 publicly traded financial institutions.

Click here to read more.

As you are no doubt aware, the United States Treasury has decided to forgo its initial plan to buy troubled assets from financial institutions, and intends instead to use the funds made available under the Troubled Asset Relief Program (TARP) to inject capital directly into banks.� As of the date of this memorandum, over 80 publicly traded financial institutions[1] have announced their intent to participate in the Treasurys Capital Purchase Program, accounting for almost $250 billion in investments by the Treasury.

Click here to read more.

The Emergency Economic Stabilization Act of 2008 (the "Act") temporarily increased the standard maximum deposit insurance amount from $100,000 to $250,000, effective October 3, 2008, and ending December 31, 2009. After that date, barring further action by Congress and the President, the standard maximum deposit insurance amount will return to $100,000.

Under regulations in effect prior to the passage of the Act, principal and interest payments on mortgage loans that were deposited into a Federal Deposit Insurance Corporation ("FDIC")-insured institution were treated as owned by the investors (and therefore insured as to the investors) that owned the mortgage loans, and taxes and insurance funds were insured to the mortgagors or borrowers on the theory that the borrower still owns the funds until the tax and insurance bills are actually paid by the loan servicer. Because principal and interest payments on mortgage loans that are part of a securitization may involve multi-layered securitization structures, the FDIC became concerned that it may prove difficult for the servicer holding a deposit account in the institution to identify every security holder in the securitization and determine his or her share. The FDIC also acknowledged that at any one time, billions of dollars in principal and interest funds may be on deposit at insured depository institutions, providing a significant source of liquidity for the institution and credit to the institutions community.

As a result, effective on October 10, 2008, the FDIC revised the deposit insurance rule to provide that principal and interest payments on mortgage loans will be determined for deposit insurance purposes on a per-mortgagor (or borrower) basis rather than a per-investor basis. This insurance coverage will not be aggregated with or otherwise affect the coverage provided to mortgagors in connection with other accounts the mortgagors might maintain at the same insured depository institution. This will likely result in all mortgage loan principal and interest payments deposited with an insured depository being fully insured. Amounts constituting payments of taxes and insurance premiums will continue to be insured on a pass-through basis as the funds of the mortgagor, and will be added to other individually owned funds held by each such mortgagor at the same insured institution and insured to the applicable limit.

Authored by:

Sherwin F. Root

(213)�617-5465

sroot@sheppardmullin.com

Question: Is a banks claim against its borrower for unjust enrichment arising out of the borrowers nonpayment of a promissory note governed by the four-year statue of limitations for breach of written contract?

Answer:�No, according to the Fourth District Court of Appeal, Division One, in Federal Deposit Insurance Corporation v. Richard K. Dintino (D051447), decided October 2, 2008.

In this case, the plaintiff bank mistakenly executed and recorded a full reconveyance of a deed of trust securing a home loan.� Thereafter, the borrower sold the property, retained the sale proceeds, and made no further payments.� The bank sued the borrower for breach of contract, money lent, and unjust enrichment.

The trial court ruled in the banks favor on the unjust enrichment claim, ruling that the three-year statute of limitations under Code of Civil Procedure section 338, subd. (d) applied rather than the four-year statute for breach of a written contract.

The court of appeal agreed the three-year statute applied, reasoning that the banks cause of action for unjust enrichment was "based on its mistaken request for recordation of the Reconveyance is not based on, and does not arise out of, a written contract (i.e., the Note), but rather is based on an obligation implied by law because of the equities in the circumstances of this case."�

In addition, the court reversed the trial courts denial of the borrowers motion for an award of attorneys fees he incurred in successfully defending against the banks breach of contract claim.� According to the court of appeal, the trial court could not consider the banks success on its noncontract causes of action (including unjust enrichment) in making its determination of which party, if any, prevailed on the contract cause of action.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

Question:� If checks payable to one entity are presented and negotiated by a related but different legal entity, is the depository bank liable under the California Commercial Code or common law?

Answer: No, according to the Fourth District Court of Appeal in Mills v. U.S. Bank (D049805), decided September 10, 2008.

In this case, the plaintiff investors in "Third Eye Systems, LLC" wrote checks to that entity to purchase their investment units.� The checks were negotiated by a related entity, "Third Eye Systems Holdings, Inc.," which deposited the checks in its account at the defendant bank.� Plaintiffs alleged they were injured because their entity was worth substantially less without the funds and because they could not access the assets of the related entity.� The trial court sustained demurrers to the plaintiffs claims for statutory negligence and breach of the transfer warranties in section 4207 and 4208 of the Commercial Code.� It also granted summary judgment to the bank on plaintiffs common law negligence claims.

The court of appeal affirmed.� As to the statutory presentment warranties under sections 4207 and 4208, the Court held that the warranties in those sections did not apply to the plaintiffs as drawers of the checks.� Nor did section 4205 apply, since that section merely creates warranties that the depository bank made a deposit into the "customers" (not the "payees") account.� Likewise, section 3404, 3405, and 3406, which apply to fraudulent and forged endorsements did not apply on the facts in this case.� Finally, the court held that because the managing partners of Third Eye Systems, LLC had the authority to supply endorsements payable on checks to that entity to be deposited into the related entitys account, the plaintiffs could not establish the bank was the legal cause of the damages they were claiming, and thus they could not prevail on their negligence claims.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

Question:� If checks payable to one entity are presented and negotiated by a related but different legal entity, is the depository bank liable under the California Commercial Code or common law?

Answer: No, according to the Fourth District Court of Appeal in Mills v. U.S. Bank (D049805), decided September 10, 2008.

In this case, the plaintiff investors in "Third Eye Systems, LLC" wrote checks to that entity to purchase their investment units.� The checks were negotiated by a related entity, "Third Eye Systems Holdings, Inc.," which deposited the checks in its account at the defendant bank.� Plaintiffs alleged they were injured because their entity was worth substantially less without the funds and because they could not access the assets of the related entity.� The trial court sustained demurrers to the plaintiffs claims for statutory negligence and breach of the transfer warranties in section 4207 and 4208 of the Commercial Code.� It also granted summary judgment to the bank on plaintiffs common law negligence claims.

The court of appeal affirmed.� As to the statutory presentment warranties under sections 4207 and 4208, the Court held that the warranties in those sections did not apply to the plaintiffs as drawers of the checks.� Nor did section 4205 apply, since that section merely creates warranties that the depository bank made a deposit into the "customers" (not the "payees") account.� Likewise, section 3404, 3405, and 3406, which apply to fraudulent and forged endorsements did not apply on the facts in this case.� Finally, the court held that because the managing partners of Third Eye Systems, LLC had the authority to supply endorsements payable on checks to that entity to be deposited into the related entitys account, the plaintiffs could not establish the bank was the legal cause of the damages they were claiming, and thus they could not prevail on their negligence claims.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

Question:� If checks payable to one entity are presented and negotiated by a related but different legal entity, is the depository bank liable under the California Commercial Code or common law?

Answer: No, according to the Fourth District Court of Appeal in Mills v. U.S. Bank (D049805), decided September 10, 2008.

In this case, the plaintiff investors in "Third Eye Systems, LLC" wrote checks to that entity to purchase their investment units.� The checks were negotiated by a related entity, "Third Eye Systems Holdings, Inc.," which deposited the checks in its account at the defendant bank.� Plaintiffs alleged they were injured because their entity was worth substantially less without the funds and because they could not access the assets of the related entity.� The trial court sustained demurrers to the plaintiffs claims for statutory negligence and breach of the transfer warranties in section 4207 and 4208 of the Commercial Code.� It also granted summary judgment to the bank on plaintiffs common law negligence claims.

The court of appeal affirmed.� As to the statutory presentment warranties under sections 4207 and 4208, the Court held that the warranties in those sections did not apply to the plaintiffs as drawers of the checks.� Nor did section 4205 apply, since that section merely creates warranties that the depository bank made a deposit into the "customers" (not the "payees") account.� Likewise, section 3404, 3405, and 3406, which apply to fraudulent and forged endorsements did not apply on the facts in this case.� Finally, the court held that because the managing partners of Third Eye Systems, LLC had the authority to supply endorsements payable on checks to that entity to be deposited into the related entitys account, the plaintiffs could not establish the bank was the legal cause of the damages they were claiming, and thus they could not prevail on their negligence claims.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com

Question:� If checks payable to one entity are presented and negotiated by a related but different legal entity, is the depository bank liable under the California Commercial Code or common law?

Answer: No, according to the Fourth District Court of Appeal in Mills v. U.S. Bank (D049805), decided September 10, 2008.

In this case, the plaintiff investors in "Third Eye Systems, LLC" wrote checks to that entity to purchase their investment units.� The checks were negotiated by a related entity, "Third Eye Systems Holdings, Inc.," which deposited the checks in its account at the defendant bank.� Plaintiffs alleged they were injured because their entity was worth substantially less without the funds and because they could not access the assets of the related entity.� The trial court sustained demurrers to the plaintiffs claims for statutory negligence and breach of the transfer warranties in section 4207 and 4208 of the Commercial Code.� It also granted summary judgment to the bank on plaintiffs common law negligence claims.

The court of appeal affirmed.� As to the statutory presentment warranties under sections 4207 and 4208, the Court held that the warranties in those sections did not apply to the plaintiffs as drawers of the checks.� Nor did section 4205 apply, since that section merely creates warranties that the depository bank made a deposit into the "customers" (not the "payees") account.� Likewise, section 3404, 3405, and 3406, which apply to fraudulent and forged endorsements did not apply on the facts in this case.� Finally, the court held that because the managing partners of Third Eye Systems, LLC had the authority to supply endorsements payable on checks to that entity to be deposited into the related entitys account, the plaintiffs could not establish the bank was the legal cause of the damages they were claiming, and thus they could not prevail on their negligence claims.

Authored by:

Robert J. Stumpf, Jr.

(415) 774-3288

rstumpf@sheppardmullin.com