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Banking & Finance Law Report

Covered affirmative action employers — more scary news from the OFCCP

Posted in Bank Regulation, Labor Law, Regulation and Compliance

On August 6, 2014, the Office of Federal Contract Compliance Programs (OFCCP) announced a proposed rule that should be of real concern to covered affirmative action federal contractors. The OFCCP is the agency that enforces federal affirmative action laws. If the proposed rule is adopted, it will add compensation data to the information that covered employers must submit with their annual EEO-1 reports. Keep in mind the “web” of coverage under affirmative action laws reaches far. Coverage is triggered not just by direct federal contracts but also by contracts to provide goods or services to any private sector entity, as long as those goods or services are used in connection with fulfilling some federal contract that your customer or their customers may have. Coverage of financial institutions is triggered by being a depository for federal funds or by being an issuing or paying agent for U.S. Savings Bonds or Notes. Coverage issues and obligations can vary with the dollar volume of the covered work.

The Specifics:


Currently, the annual EEO-1 report contains race, ethnicity, and gender information about your workplace, sorted by nine EEO job-type categories. The proposed rule would expand the report to include the following information for each of the EEO categories by race, ethnicity, and gender: total number of employees; total W-2 income; total hours worked.


The obligation to provide compensation information on EEO-1 reports would apply to covered affirmative action employers with more than 100 employees and a covered federal contract or subcontract for $50,000 or more covering a period of at least 30 days, including modifications.

The Concerns:

The employer community which is subject to affirmative action obligations has very legitimate concerns about this new reporting obligation. OFCCP will use the data as part of its method for identifying contractors for compliance reviews. An OFCCP compliance review can involve not just review of the Company’s written affirmative action plan, but, also, a detailed review of its employment practices including compensation, hiring, and terminations. Employers have a legitimate question whether this broad-based compensation data is a legitimate basis for identifying a contractor for compliance review based on alleged concern about equal pay. A second, very real concern for the covered employer community is confidentiality of compensation information. OFCCP assures that the information can be submitted on a web-based data tool conforming with government IT security standards. But, EEO-1 reports are subject to Freedom of Information Act requests from the public. Even though OFCCP assures companies they will be given notice of any FOIA requests for their data and an opportunity to object, there is no assurance that the objections would be successful. Therefore, this proposed rule opens the door for confidential compensation information to be made available to competitors and the general public.

OFCCP intends to release aggregate summary compensation data by race and gender annually to the public. OFCCP believes that public dissemination of the aggregate data will give employers an opportunity to evaluate their own compensation structure against that of others in their industry.


Delaware Extends Its Voluntary Unclaimed Funds Compliance Program

Posted in Unclaimed Funds

In a move of interest to both businesses organized under Delaware law and businesses that hold funds owned by Delaware residents, Delaware’s unclaimed property voluntary compliance program has been extended. Pursuant to 79 Del. Laws, c. 278 (the “Act”), which was signed by Governor Markell on June 30, 2014, the deadline to enter the Secretary of State’s voluntary compliance program (the “SOS VDA Program”), has been extended to September 30, 2014, and the deadline to resolve all unclaimed property liability under that program has been extended to June 30, 2016. Before the Act, those deadlines had been June 30, 2014 for entry into the SOS VDA and June 30, 2015 for resolution of liabilities.

The SOS VDA offers participants the opportunities to reduce years of liability and to eliminate interest and penalties.

Those who should participate include holders of property owned by Delaware residents and businesses organized under Delaware law that cannot locate a last known address for the owner of property. This second category, based on the holder’s place of organization, follows the U.S. Supreme Court case Texas v. New Jersey, 379 U.S. 674 (65), pursuant to which unclaimed property will be reported to the state of the owner’s last known address. However, if the owner’s last address is unknown or is in a foreign country, the unclaimed property is reported to the holder’s state of organization.

In addition to extending the entry and resolution deadlines, the Act made three other changes to Delaware’s unclaimed property law:

Record Confidentiality: The Act provides that it is unlawful for any officer or employee of the Department of Finance or the Department of State to disclose any of the following: (i) the amount of unclaimed property reported to the state; (ii) the terms of any annual filing, unclaimed property voluntary self-disclosure agreement or settlement agreement; or (iii) any supporting documentation related to such reports or agreements.

Penalties: Penalties for failure to file an unclaimed property report have been reduced from 5% of the amount owing under the report per month with a maximum penalty of 50% of the amount owing under the report to the lesser of (i) 5% of the amount owing under the report per month (not to exceed 50% of the amount owing under the report), or (ii) $100.00 per day (not to exceed $5,000).

Interest: The Act eliminates the imposition of 0.5% interest on unremitted unclaimed property.

For more information about unclaimed funds compliance, contact Polly Harris, Esq. at Porter Wright at mailto:pharris@porterwright.comor (614)227-1962. The Delaware Secretary of State’s unclaimed funds web site can be found at http://revenue.delaware.gov/unclaimedproperty.shtml.


FDIC Guidance on Agricultural Credits

Posted in Agricultural Lending, Bank Lending, Bank Regulation, Commercial Lending, Community Banking, Regulation and Compliance

At a time of relative affluence in the farming industry, the FDIC has issued a warning on a need for monitoring agricultural credits. FIL-39-2014 (July 16, 2014) suggests that banking institutions of all sizes should carefully consider a recent, negative projection by the U.S. Department of Agriculture.

While current market conditions are good, the projection suggests there will be a slowdown in the growth of the farming and livestock sectors and that agriculture may be affected by adverse weather and declining land values, among other factors.

The guidance suggests that financial institutions should work carefully with agricultural borrowers when they experience financial difficulties. The guidance states that the FDIC’s supervisory expectations previously expressed in a 2010 financial institution letter continue (although the letter is rescinded in light of the current letter).

Cash flow analysis, secondary repayment sources and collateral support levels must be considered in order to properly analyze agricultural credits, according to the guidance.

The guidance notes that smaller farms and ranches rely on the personal wealth and resources of the owners, including off-farm wages. A universal review of the financial strength of the credit is required.

The guidance also notes workout strategies must be specifically tailored for agricultural credits in light of experience in the 1980’s with depreciating farm land values, among other factors. The guidance suggests that properly restructured loans to farming operations with a documented ability to repay under the modified terms will not be subject to adverse classification because the value of the underlying collateral has declined.

Personal Liability, Bank Directors and the Business Judgment Rule

Posted in Bank Regulation, Community Banking, Corporate Governance, Corporate Law, Regulation and Compliance

Last April, a trade association for bank directors, the American Association of Bank Directors reported the results of a survey designed to measure the impact of concerns about personal liability on the decision of bank board members to resign and by individuals to turn down board seats on banking organizations.

One of the key concerns, the survey highlighted, is the possibility of an FDIC lawsuit against the directors if a bank failure occurs. The fear was bank directors would be liable for decisions made as directors notwithstanding what is commonly referred to as the business judgment rule. Generally, the business judgment rule shields corporate directors, including bank directors, from liability when board decisions result in losses to the corporation or to shareholders.

The AABD mentioned in particular a then pending lawsuit in Georgia arising out of FDIC claims related to the failure of Buckhead Bank. These claims against the directors sounded in simple negligence regarding the making of loans. And the directors had asserted the business judgment as a defense.

A few days ago the Georgia Supreme Court ruled on the matter and the decision is worth a review by bank directors and managers even though they don’t do business in Georgia. The Georgia Supreme Court decision elegantly summarizes the business judgment rule including its history and common law origins. So the opinion is a useful “read” for bankers everywhere because the development of local jurisprudence in most states is likely similar to the process described in the opinion.

The decision concluded the business judgment rule in Georgia does not preclude, as a matter of law, all claims sounding in ordinary negligence against officers and directors of a bank in a lawsuit brought by the FDIC as a receiver for the bank.

The Georgia court notes that the standard of care required of bank directors is to exercise the same skill ordinarily prudent men would exercise in positions at similarly situated banking institutions. The Court also observes that under Georgia law, it is reasonable for an officer or director to rely on information prepared by employees, other officers, counsel and public accountants which the director or officer reasonably believes to be within the preparer’s professional or expert competence.

For some, the ruling will confirm fears expressed in the AABD survey. That survey indicated that in the past 5 years roughly 25% of the 80 banks responding to the survey reported that a director had resigned out of fear of personal liability, a person had refused to serve out of a similar fear or a director had refused to serve on the board loan committee for a similar reason. The cautionary report of the AABD noted, further, anecdotal reports that bank examiners in some instances have sought information from directors concerning their net worth including recent tax returns.

For others, however, the ruling will confirm their understanding of what has always been the basic legal environment for bank directors:

[T]he business judgment rule makes clear that, when a business decision is alleged to have been made negligently, the wisdom of the decision is ordinarily insulated from judicial review, and as for the process by which the decision was made, the officers and directors are presumed to have acted in good faith and to have exercised ordinary care. . . Although this presumption may be rebutted, the plaintiff bears the burden of putting forward proof sufficient to rebut it. All together, the limited standard of care, the conclusive presumptions as to reasonable reliance, and the rebuttable presumptions of good faith and ordinary care offer meaningful protection, we think, to officers and directors who serve in good faith and with due care. The business judgment rule does not insulate “mere dummies or figureheads” from liability, of course, but it never was meant to do so.

The survey regarding bank director participation is available here and Georgia Supreme Court’s opinion is FDIC v. Loudermilk, No. S14Q0454, — S.E.2d —, 2014 WL 3396655 (Ga. July 11, 2014).

Significant Changes to Ohio Foreclosure Law Proposed

Posted in Collection and Foreclosure, Ohio Law

Legislation has been introduced in the Ohio House that would amend Ohio’s foreclosure law in a manner favorable to licensed auctioneers and realtors and unfavorable to county sheriffs and appraisers. As set forth below, House Bill 586 would, among other things, permit “private selling officers” to conduct judicial sales of real property; permit written or electronic bidding; eliminate the requirement that judgment creditors or lienholders who appear in an action pay deposits and eliminate the three-freeholder appraisal. The bill was introduced on June 17, 2014, and proposes amendments to O.R.C. §§2329.151, 2329.17, 2329.18, 2329.19, 2329.20, 2329.271, 2329.28, 2329.34, and 2329.39 and would enact new sections 2329.152 and 2329.311.

R.C. §2329.151 would be amended to permit goods and chattels levied upon execution to be sold by a licensed auctioneer who is a resident of the state and would permit sales of land upon execution to be auctioned by a “private selling agent”, defined at R.C. §2329.152(H) as a state resident who is both a licensed auctioneer under R. C. Chapter 4707 and a real estate agent under R. C. Chapter 4735. Continue Reading

Ohio Law on Cognovit Judgments and Relief Under Civ R. 60(B)

Posted in Collection and Foreclosure, Commercial Law, Commercial Loans and Leases

In K One Limited Partnership v. Salh Khan, et al., 10th Dist. No. 13AP-830, 2014 Ohio 2079, the Tenth District Court of Appeals for Franklin County, Ohio reexamined the limited meritorious defenses available to obtain relief from a cognovit judgment under Civ. R. 60(B) and held that such defenses are restricted “to the integrity and validity of the creation of the debt or note, the state of the underlying debt at the time of confession of judgment, or the procedure utilized in the confession of judgment on the note.”

Defendants-Appellants executed a cognovit guaranty containing warrant of attorney language (“Guaranty”) to guarantee payment of a related-company’s revolving cognovit promissory note (“Note”) in favor of Plaintiff-Appellee. The parties and others were involved in numerous business ventures when they entered into the Guaranty and Note. When the Note subsequently went unpaid, Plaintiff-Appellee brought a cognovit action to confess judgment against Defendants-Appellants on the Guaranty, and the trial court entered cognovit judgment in favor of Plaintiff-Appellee. Defendants-Appellants timely filed a motion for relief from judgment under Civ. R. 60(B) admitting they executed the Guaranty but alleging as defenses that Plaintiff-Appellee and related individuals and entities had acted fraudulently toward them in this and other transactions and intentionally misled them into executing the Guaranty. They also alleged they had legal and equitable claims relating to these and other business transactions pending against these parties in another jurisdiction. The 60(B) motion did not allege payment, partial payment or defects in the Guaranty or Note as defenses, and the trial court denied their motion for relief from judgment. Defendants-Appellants then appealed to the Tenth District Court of Appeals (“Appeals Court”). Continue Reading

Intellectual Property and Banking – The Complications of Distinguishing Your Bank Name

Posted in Bank Regulation, Community Banking, Intellectual Property

Expansion of Banking: What happens when First National Bank is no longer First?

Ask any community banker and she will tell you that bank name disputes are on the rise. The Third Federal Circuit Court of Appeals attributes the rise of bank name disputes to “an outgrowth of aggressive and expansionist banking flowing from the Congressional liberalization… of national banking laws.” Citizens Financial Group, Inc., v. Citizens Nat’l Bank, 383 F.3d 110, 112 (3rd Cir. 2004). This case is one of many examples of disputes arising between two financial institutions, in similar geographic regions, operating under identical or a confusingly similar name (e.g., Citizens National Bank of Evans City and Citizens Financial Group, Inc.).

Today we are accustomed to large banks having developed into multinational corporations, such as JP Morgan Chase or Wells Fargo, but this growth occurred in most cases only in the late twentieth century. But the banking industry began with banks being purely local entities, the sole bank within a town or a smaller city as opposed to multi-branch banks within the same metropolis or state. For many banking organizations, this is still true. Within these towns, the use of names like First National Bank or Columbus City Bank were distinctive enough because that was the only show in town and everyone knew where they were banking. It was unlikely that another First National Bank two towns over would confuse or mislead consumers. The National Bank Act fostered the practice of bank names being rather undistinctive and descriptive furthered by state regulation keeping a firm grip on the use of “bank” and related terms by non-banking entities. Continue Reading

Ohio Foreclosure Procedure . . . Twice the Appeal

Posted in Collection and Foreclosure, Ohio Law, Real Estate

Earlier this month the Supreme Court of Ohio resolved a split of authority between the Fifth District and Seventh District regarding whether a foreclosure decree is a final appealable order when it includes unspecified amounts advanced by the mortgagee for inspections, appraisals, property protection and the like. Prior to the May 15 decision in CitiMortgage, Inc. v. Roznowski1, it was unclear whether a judgment decree of foreclosure – which typically includes unspecified amounts that may be advanced by the mortgagee prior to confirmation of the foreclosure sale for inspections, appraisals, property protection and maintenance – is a final appealable order, or whether a foreclosure defendant must wait until after the property has been sold at sheriff’s sale and the order of confirmation of sale issued before he or she may appeal.

The Supreme Court of Ohio’s decision in the CitiMortgage case establishes that there are two separate opportunities for appeal. The first opportunity arises after the trial court issues a judgment decree of foreclosure. The Court found that as long as the foreclosure decree addresses the rights of all lienholders and the responsibilities of the mortgagor – regardless whether all exact amounts for which the mortgagor is liable are set forth in the judgment order, such as interest and protective advances made or to be made by the mortgagee – the foreclosure decree constitutes a final appealable order. A party appealing a foreclosure decree may challenge “the court’s decision to grant the decree of foreclosure” and once that appeals process has run its course, “all rights and responsibilities of the parties have been determined and can no longer be challenged.”

The second opportunity for appeal arises after the trial court issues an order confirming the foreclosure sale, which order sets forth the specific damage amount and orders distribution of sheriff’s sale proceeds accordingly. The Court stated that because some amounts will necessarily not be calculated until after the sale of the property, such as interest and protective advances made by the mortgagee up to the time of sale, the proper time for foreclosure defendants to contest the accuracy and validity of those amounts is after the confirmation order is issued, which is also the appropriate time to contest generally “whether the sale proceedings conformed to law.” But as the Court pointed out, a mortgagor cannot seek to undo the foreclosure decree itself via an appeal of a confirmation order because the proper time to appeal the validity of the foreclosure itself is after the foreclosure decree is issued, not after the order confirming the sale of the property is issued. As the Court summarized it, “if the parties appeal the confirmation proceedings, they do not get a second bite of the apple, but a first bite of a different fruit.”




FBI increases criminal fraud investigations by 65%, director reports

Posted in Bank Lending, Collection and Foreclosure, Litigation

FBI Director James Comey shared the bureau’s enforcement trends and objectives at the New York City Bar Association’s Third Annual White Collar Crime Institute on May 19.

Comey recognized that although counter-terrorism is still a top priority for the agency, white-collar cases are receiving significant focus and resources. In the mortgage industry, agents are investigating foreclosure rescue companies preying on stressed homeowners and criminals who target senior citizens with the lure of reverse mortgages. In money laundering, enforcement targets are involved in a buying anonymous prepaid credit cards, using of “virtual currency” to transfer money and using smaller institutions to inject money into the banking system. In securities markets, the FBI also is targeting micro-cap market manipulation, insider trading and accounting fraud.

Comey emphasized in his remarks that the FBI has received additional resources from Congress, which allowed the agency to hire 2,000 people this year. In addition, he disclosed that more than 1,300 agents are working more than 10,000 white collar crime cases. These figures represent a 65% increase in the number of criminal fraud cases investigated by the FBI since 2008. Continue Reading

U.S. Supreme Court Says Restitution Depends on Property a Lender Loses, not Collateral the Lender Receives

Posted in Bank Lending, Collection and Foreclosure, Workouts

In the unanimous ruling Monday, the U.S. Supreme Court resolved a split in circuits regarding the interpretation of the Mandatory Victim’s Restitution Act (MVRA). In Robers v. United States, the high court confirmed that for purposes of calculating restitution, the return to the lender of collateral securing a fraudulent loan is not completed until the victim lender receives money from the sale of the collateral.

In 2010, Robers was convicted in federal court of conspiracy to commit wire fraud relating to two houses that Robers purchased by submitting fraudulent loan applications. When Robers failed to make loan payments, the banks foreclosed on the mortgages and, in 2006, took title to the two houses. The houses were sold in 2007 and 2008 in a falling real estate market. At sentencing, Robers was ordered to pay restitution of approximately $220,000, equal to the loan amount, minus the money that the banks had received from the sale of the two homes.

On appeal, Robers challenged the sentence imposed pursuant to the MVRA and argued that the MVRA required the court to determine the amount of loss based upon fair market value of the homes on the date that the lenders obtained title to the house, as opposed to the fair market value on the date that the properties were sold. Continue Reading