Posts filed under ‘Legal Watch’
A couple’s home on Long Beach Long Island is destroyed by Hurricane Sandy. They fall on hard times and become delinquent on their mortgage loan. They file for Chapter 13 bankruptcy, which allows them to reorganize their debts, still owing hundreds of thousands of dollars on their mortgage loan.
The bank makes a reasonable business decision not to seek to exercise its lien but instead to allow the homeowners to keep their home which is worthless. The homeowners make the reasonable decision that they don’t want the home. Even though it is worthless, there are still property taxes to pay and the responsibility to maintain it. Over the bank’s objection the bankruptcy court agrees to a Chapter 13 reorganization plan in which the property is vested in the bank but Can the property vest in the bank over its objection?
The first court to look at this case answered that question with a Yes. ( In re Zair, 535 B.R. 15, 16 (Bankr. E.D.N.Y. 2015). It concluded that by surrendering the property to the bank, HSBC as the first lien holder, became the owner of the property.
Round 2 recently went to the bank when federal district court overruled the bankruptcy court. ( HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *1 (E.D.N.Y. Apr. 12, 2016). The case is important and instructive since it involves an exploration of what your credit union is actually getting with its mortgage.
As explained by the district court, a Chapter 13 repayment plan is only confirmable if, with respect to each secured creditor, one of the following is true: (1) the creditor consents to the plan; (2) the plan provides for the creditor to retain his security interest in his collateral and receive periodic payments equaling the present value of the collateral, or (3) the debtor agrees to surrender the collateral so that the creditor may pursue any legal remedies he may have.
What everyone agrees on is that a debtor can surrender his property to a creditor. What is in dispute is whether the surrender vests legal right and responsibilities for the property to the creditor\lienholder. (11 U.S.C.A. § 1322(b)(9) (West). HSBC argued that it could not be forced to assume responsibility for the property. Our homeowners argued that “Without being able to vest the property, as is specifically permitted under Section 1322(b)(9), the Debtors are at the whim of the [Bank] and will be incurring expenses associated with the Property, such as real estate taxes, until if and when the [Bank] completes a state court foreclosure.” HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *5 (E.D.N.Y. Apr. 12, 2016).
In the end the District court sided with the bank. It explained that “the Bank is entitled to the full array of property rights that accompany its position as first-priority lienholder, including and especially the right to foreclose its security interest, or to refrain from doing so.” The concept of surrender necessarily contemplates permit[ting] the creditor to exercise its property rights “to do nothing to recover its collateral”); HSBC Bank USA, N.A. v. Zair, No. 15-CV-4958 (ADS), 2016 WL 1448647, at *12 (E.D.N.Y. Apr. 12, 2016).
Why is this important? Because the stigma of walking away from a house is fading away and policy makers are looking for ways to make creditors take responsibility for vacant property without taking away foreclosure protections for debtors. You don’t want a world in which it becomes even easier for homeowners to reorganize their debts by making their underwater mortgage someone else’s problem.
Late last week, Uber announced it had settled two class action lawsuits brought by drivers claiming, among other things, that the ride sharing service was violating the labor law by classifying drivers as independent contractors. For those of you with either a direct or indirect stake in the taxi industry through the financing of medallions, the settlement of these lawsuits is another blow. Here’s why.
The Uber model is based fundamentally on the assumption that the company is nothing more or less than the provider of an App that enables individuals in need of a ride with those willing to provide one. In Uber’s view of the world, ride sharing allows the mom on the way to the store to make a few extra dollars by taking Sally down the street along for the ride. Under this best case scenario, our mom is an independent contractor picking and choosing what rides to take as she makes her way through her busy day.
To critics of Uber and other ride sharing services, the mom is not so much an independent contractor as a poorly paid employee. For instance, under Uber’s model drivers who consistently turn down rides can be dropped from the service and each ride comes with a suggested price and gratuity.
If the critics are correct, the Uber model is illegal and the traditional taxi medallion model is alive and well. This is why the settlement is such a big deal. Uber agreed to pay drivers up to $100 million and end its practice of automatically removing drivers who refuse too many rides. At the same time, the drivers will continue to be classified as independent contractors in Massachusetts and California.
Uber is by no means out of the woods. Similar lawsuits are still pending. And just last week California’s Commissioner of Labor ruled that an Uber driver was an employee rather than an independent contractor. But this ruling is being appeal and is not binding on anyone beyond the employee involved.
While the settlement of the Massachusetts and California cases leaves the independent contractor issue undecided, in my ever so humble opinion, anyone looking for the courts to provide a silver bullet, at least in the near future, when it comes to regulation of ride sharing businesses is likely to be disappointed. For those of you who feel that the system should be better regulated in order to put medallion taxi and ridesharing service on an equal footing, the places to look for relief are State legislatures.
I’m not running for the Republican Party’s Presidential nomination (but, unlike House Speaker Paul Ryan I am open to being drafted at the convention) . So I can say that when it comes to housing policy Ted Cruz has a point about New York values being bad for the country. We need fewer procedural hoops and more commonsense.
A report released yesterday by NYS Comptroller Thomas P. DiNapoli provides the best evidence yet of how the state’s kneejerk reaction to the 2008 Mortgage Meltdown actually did more harm than good. As legislators debate what to do about NY’s Zombie property they should also consider making adjustments to a foreclosure process run amuck to the benefit of no one but the delinquent homeowner who often has no realistic means of paying off the mortgage. With much of the CFPB’s mortgage mitigation procedures modeled after states like California and New York there are lessons in this blog for you even if you don’t live in the Empire State.
It is remarkable just how backlogged NY’s foreclosure pipeline still is. According to the Comptroller New York state has the second highest home foreclosure rate in the nation, with 1 in 21 home mortgages in foreclosure; I t also has the fourth-slowest foreclosure process in the nation, averaging over 2.5 years per property. As the report tartly notes “ It is not surprising” that New York has a disproportionately high share of mortgages in foreclosure, relative to the rest of the country” New York has the second-highest home foreclosure inventory in the nation with 4.77 percent of mortgages in foreclosure. New Jersey led the nation at 6.47 percent.
What a coincidence that the states with two of the most convoluted foreclosure processes have the biggest backlogs.
But what is wrong with regulatory and statutory safeguards intended to crack down on banker abuses such as the dreaded Robo-Signing epidemic? Funny you should ask. According to the Comptroller the requirement mandating that lenders and attorneys personally vouch for having reviewed pertinent foreclosure records has created a “shadow docket” of cases in which foreclosures had been initiated but were essentially frozen as lawyers and lenders turned gun-shy about making personal assertions, especially about vacant property. This exacerbated the rise of vacant property that have local governments so frustrated.
New York’s judicially supervised settlement conferences provide another great example of unintended consequences. Multiple meeting replete with rescheduled conferences are the norm According to the report, these conferences don’t settle many foreclosures they simply delay them. On average they take 110 days to complete downstate and eighty upstate
In reacting to the mortgage meltdown with a phalanx of legal protections New York missed the mark. The problem was never the foreclosure process itself but the fact that too many people were given houses they couldn’t afford.
Believe it or not a more efficient foreclosure system really is in everybody’s best interest. Localities will have to deal with fewer Zombies if lenders know they can quickly access property and get it back on the market and delinquent homeowners will have more of an incentive to negotiate reasonable settlements if they know they can’t drag out the foreclosure process for years.
Here is one more quote from the report worth pondering:
“ New York’s lengthy foreclosure process offers some benefits to borrowers or other people who occupy homes while the loans are delinquent. Borrowers have a right to occupy their properties until the foreclosure process is complete. Doing so enables them to avoid the costs of mortgage, tax and home insurance payments.”
Here it is:
Often, the biggest battles happen by accident. For instance, the first shots at Gettysburg were fired only after a small contingent of Southern troops came to town foraging for shoes.
Similarly, you wouldn’t necessarily think that an esoteric legal battle involving the applicability of mortgage reinsurance to the Real Estate Settlement Procedures Act (RESPA) would become the most direct and credible legal challenge to the structure of the CFPB. But that’s what has happened.
On the surface, PHH Corporation v. Consumer Financial Protection Bureau involves whether the CFPB abused its authority when it issued a cease and desist order and a large fine on PHH for violating RESPA. The CFPB argued, an administrative law judge agreed, that PHH violated RESPA when it referred borrowers in need of mortgage insurance to mortgage insurers based on whether the mortgage insurer had entered into a captive reinsurance arrangement with PHH. The company took the unusual step of appealing the decision to Director Cordray who issued an opinion increasing the $6.5 million fine imposed by by the administrative law judge to $109 million fine.
In challenging both the Director’s and the CFPB’s actions, the company’s lawyers allege that the structure of the CFPB violates the Constitution. It alleges that “the CFPB is the first and only federal agency to amass such broad and unchecked powers in the hands of a single person.” It goes on to argue that the type of broad executive and quasi-judicial powers exercised by the Bureau can only be exercised by a multi-person board. Otherwise, it effectively runs afoul of the President’s authority.
PHH’s argument got the attention of the D.C. Appellate Court. It also took an unusual step: It put both PHH and the CFPB on notice that it wanted answers to the question of whether it is constitutional for an independent agency to be headed by a single person and what the appropriate remedy should be if it decides that the Bureau’s structure is unconstitutional. According to the WSJ the oral argument featured questions indicating that some judges are skeptical that its legal to have an independent agency run by a single director not answerable to the President.
This case appears more than ripe to ultimately be decided by the Supreme Court. When Congress gets around to selecting a 9th Justice, expect there to be a lot of talk about the Justices’ interpretation of agency powers.
How much can you, or should you, discipline employees for comments they make on their own social media accounts, like Facebook? That is the question I have been asking myself since reading this article in the CU Times reporting that MTC Federal Credit Union based in Greenville, South Carolina fired one of its loan officers for using a racial slur on Facebook.
The CU Times reports that Gerri Cannon admitted to posting the slur, but also contended that she is not a racist and has retained a lawyer. As I like to point out, retaining a lawyer doesn’t mean you have a case. Ms. Cannon’s dilemma provides an important teaching moment for credit union employers and employees alike.
The first thing I always hear in these cases is that the employee’s free speech rights are being violated. But they aren’t. The First Amendment restricts government conduct, not the conduct of private citizens. Hudgens v. N. L. R. B., 424 U.S. 507, 513, 96 S. Ct. 1029, 1033, 47 L. Ed. 2d 196 (1976). This means that Ms. Cannon has a right to post just about anything she wants on Facebook and MTC FCU has every right to fire her for it.
The second question that always gets raised in these situations is that the Employee Handbook didn’t ban the specific conduct. But to answer this question, we need to take a little detour. As most of you know, New York, like most other states, is an at-will employment state. This means that unless otherwise specified, employment is for an indefinite period of time and may be “freely terminated by either party at any time for any reason or even for no reason.” Lobosco v. New York Tel. Co., 96 N.Y.2d 312, 316, 727 N.Y.S.2d 383, 751 N.E.2d 462 (2001). There is a misconception on the parts of employees and employers that a handbook creates a contract which modifies at-will employment. And, in fact, there have been cases in which a poorly drafted handbook restricted the ability of employers to get rid of an employee. Weiner v. McGraw-Hill, Inc., 57 N.Y.2d 458, 465-66, 443 N.E.2d 441, 445 (1982).
But this is very much the exception to the rule. As a federal court noted earlier this year New York’s Court of Appeals has pointed out, “[r]outinely issued employee manuals, handbooks, and policy statements should not be lightly converted into binding employment agreements. This is especially true where the handbook contains an express disclaimer.” Rumsey v. Ne. Health, Inc., 89 F. Supp. 3d 316, 340-41 (N.D.N.Y. 2015), aff’d, No. 15-833, 2016 WL 336196 (2d Cir. Jan. 28, 2016), as corrected (Jan. 29, 2016).
Does this mean that a credit union can just ignore its handbook? Not at all. A more typical case than the one involving MTC FCU involves a discharged employee who argues that she was unfairly disciplined by her employer because of her race. For instance, let’s say that a credit union routinely looks the other way when it hears about inappropriate comments on employee Facebook pages. If that same credit union turns around and fires a pregnant or minority employee who makes such a comment, the unequal treatment can be used as evidence of discrimination on the part of the employer. Redford v. KTBS, LLC, No. 5:13-CV-3156, 2015 WL 5708218 (W.D. La. Sept. 28, 2015), on reconsideration in part, No. CV 13-3156, 2016 WL 552960 (W.D. La. Feb. 10, 2016).
One more thing to keep in mind when monitoring employee social media conduct is to make sure you are not violating federal labor laws. As I’ve mentioned in previous blogs, the NLRB is aggressively protecting the right of employees to engage in “concerted activity” using social media. This means that an employee’s complaints about his workplace may in fact be protected. It also means that you must be sure that your social media policies are not so poorly written that they can be read as prohibiting employees from taking to Facebook to talk about workplace concerns.
Needless to say this is one of those fast evolving areas that creates confusion and legal actions. This is one of those areas where a review of your handbook and a call to your attorney make a lot of sense.
On that note, enjoy your day.
Congressmen and women continue to confuse the issue surrounding why so many banks and credit unions remain reluctant to open accounts for marijuana businesses, even though the DOJ and FinCEN have both issued guidance explaining the circumstances under which institutions will not be accused of violating the law or regulations if they do. THE SALE, DISTRIBUTION, AND POSSESSION OF POT REMAINS ILLEGAL AS A MATTER OF FEDERAL LAW. Rather than prodding regulators to overlook this fact, they should be working on amending federal law so that it is consistent with the law in the many states that have chosen to legalize pot to varying degrees.
What has me going this morning is a letter sent by Oregon’s Senator Jeff Merkley, Senator Patty Murray (D-WA), Senator Michael Bennet (D-CO) and Senator Ron Wyden (D-OR) urging federal financial regulators, including Debbie Matz and Janet Yellen, “to issue clear guidance for financial institutions serving legal marijuana businesses, making it easier for those businesses to access banking services rather than operating on an all-cash basis.”
To be clear, FinCEN has already issued detailed guidance explaining how financial institutions can service these businesses, and DOJ has explained the circumstances under which it will not prosecute them; but, what neither FinCEN, NCUA nor any other federal regulator can do is amend federal law. Last I checked, only Congress can do that. All regulators can do is explain the circumstances under which they will not enforce the law, a troubling enough proposition without Congressmen further confusing the issues with letters seeking guidance.
This isn’t just the Monday morning rant of a father who just hours ago was stuck on the world’s greatest parking lot, otherwise known as the Long Island Expressway on a holiday weekend, with a seven year old who had to go to the bathroom. Perhaps the legislators should take another look at United State’s District judge R. Brooke Jackson’s decision upholding the right of the Federal Reserve to deny Four Corners Credit Union access to the federal reserve system despite the existing guidance. In short, these guidance documents simply suggest that prosecutors and bank regulators might “look the other way” if financial institutions don’t mind violating the law. A federal court cannot look the other way. I regard the situation as untenable and hope that it will soon be addressed and resolved by Congress. Fourth Corner Credit Union v. Fed. Reserve Bank of Kansas City, No. 15-CV-01633-RBJ, 2016 WL 54129, at *4 (D. Colo. Jan. 5, 2016).
Nevertheless, the Senators note with approval that yet more guidance might be forthcoming. We don’t need more guidance; what we need is federal law that explicitly sanctions activities that states have already permitted. Here is the letter.
I think it was Vince Lombardi who once said that a tie is as exciting as kissing your sister and George Brett who added that losing is like kissing your grandmother with her teeth out.
Vince Lombardi was wrong. Yesterday, the Supreme Court of the United States issued its first 4-4 decision since the death of Justice Scalia. Although the ruling basically resolves nothing, it underscores two important issues that credit unions should be paying attention to (Hawkins v. Community Bank of Raymore):
- Does the Equal Credit Opportunity Act apply to guarantors? This is an unresolved issue with real practical significance for your compliance. The ECOA bans discrimination against loan applicants. For the last 30 years, federal regulation has defined an applicant to include guarantors. See 12 CFR Section 202.2(e); 12 CFR 1002.2.
In the case in which the Court deadlocked yesterday, the wives of two businessmen claimed that the bank violated the Act’s prohibition against discriminating on the basis of marital status by requiring them to personally guarantee their husbands’ loans.
The bank denied the allegation and argued that notwithstanding federal regulation, Congress never intended the ECOA to extend to guarantors. The 4-4 tie means that two federal appeals courts have come to opposite conclusions on this narrow but important issue.
- It may not be one of the high profile issues that gets partisans riled up into a foamed-mouth frenzy, but one of the key questions that will be decided by the newest Supreme Court justice will be how much deference courts should have towards federal regulation interpreting federal law. This case is fascinating to me in part because it involves a 30 year-old regulation.
Bernanke Endorses Going Negative as a Last Resort
In a recent blog I talked about the increasing willingness of central bankers to impose negative interest rates – i.e. to charge banks for holding money in central bank accounts – as a means of spurring lending. In this recent blog, former Fed Chairman Ben Bernanke endorses its possible use if and when the economy goes South.
“Overall, as a tool of monetary policy, negative interest rates appear to have both modest benefits and manageable costs; and I assess the probability that this tool will be used in the U.S. as quite low for the foreseeable future. Nevertheless, it would probably be worthwhile for the Fed to conduct further analysis of this option. We can imagine a hypothetical future situation in which the Fed has cut the fed funds rate to zero and used forward guidance to try to talk down longer-term interest rates. Suppose some additional accommodation is desired, but not enough to justify a new round of quantitative easing, with all its difficulties of calibration and communication. In that scenario, a policy of modestly negative interest rates might be a reasonable compromise between no action and rolling out the big QE gun.”