Banking & Finance Law Report

NCUA’s Proposed Rules Concerning Credit Union Commercial Loans

Credit unions’ ability to lend to businesses may receive a boost if proposed NCUA regulations are approved. Business loans are becoming an increasingly important part of credit unions’ operations. Total business loans at federally insured credit unions grew from $13.4 billion in 2004 to $51.7 billion in 2014, growing from 3% of all total credit union loans to 6.8% over the same period. As of 2014, 36% of credit unions offer business loans, the vast majority of which (76%) are held by credit unions with assets greater than $500 million.

However, certain business loans, termed “member business loans” (“MBLs”), are limited by statute and regulation. An MBL is defined as a loan through which the borrower uses the proceeds for commercial, corporate, agricultural, or other business purposes, excluding extensions of credit that:  Continue Reading

Ohio Financial Institutions Tax and National Banks

In September, at the request of an Ohio-based national bank, the Office of the Comptroller of the Currency issued an opinion challenging the application of the Ohio Financial Institutions Tax (FIT) to national banks with their principal office in Ohio.

The opinion held that the FIT contradicted a federal statute that provides a national bank should be treated as a state bank chartered by the state in which the national bank has its principal office when state taxes are assessed.

The challenger maintain that the FIT contradicted federal law because Ohio chartered banks have a tax credit against the FIT for regulatory assessments paid to the Ohio Division of Financial Institutions but the FIT does not provide corresponding credit for national banks. The OCC agreed.

The opinion concluded that:

“Ohio law provides that each bank organization organized under Title XI of the Ohio Revised Code may claim a non-refundable tax credit against the FIT for regulatory assessments paid to the Ohio Division of Financial Institutions. The law provides no similar credit for regulatory assessments paid by bank organizations not organized under Title XI of the Ohio Revised Code, and it provides no credit for assessments paid to other financial regulators.  Thus, the FIT provides a tax credit to Ohio-chartered state banks that is not available to national banks.  This arrangement does not treat a national bank with its principal office located in Ohio as if it were an Ohio-chartered state bank . . .”

A review of OCC letter and review of Ohio Revised Code (“R.C.”) Chapter 5726 dealing with the FIT suggests from a substantive standpoint, the Department of Taxation would likely argue that the sum of FIT paid by an Ohio-chartered bank (taking advantage of the deduction) plus the Ohio regulatory assessment on such bank is equal to the FIT on a similarly situated nationally-chartered bank, so the treatment of the two banks is the same. The counter-argument is likely that the Ohio regulatory assessment isn’t under the FIT and shouldn’t count when assessing the federal preemption of the FIT.

Procedurally, a nationally-chartered bank can file for a FIT refund under R.C. 5726.30 for taxes paid within the last four years. Ohio Taxation Form FIT REF would be used.  The form contains space for the reason.  The Tax Commissioner then must act under R.C. 5703.70 by allowing briefing and/or a hearing.  The Tax Commissioner could issue a refund as relief sought (unlikely) or issue a negative Final Determination.  The bank would then have 60 days under R.C. 5717.02 to file an appeal of a negative Final Determination with the Board of Tax Appeals.  Decisions of the Board of Tax Appeals may be taken to the Ohio Supreme Court.

Newly Effective HVCRE Loan Rules

Lenders who finance commercial real estate exposures should be aware of new regulations that impose harsher capital requirements on certain “high volatility commercial real estate,” or HVCRE, exposures. In June 2013, the FDIC, OCC, and Federal Reserve jointly approved proposed rules intended to implement new international banking standards, known as the Basel III Capital Accords, as well as establish new risk-based and leverage capital requirements for financial institutions, as required by Dodd-Frank. The rules have been in effect for all banks since January 1, 2015, having applied to the largest banks one year prior.

Under the rules, an HVCRE exposure is defined as “a credit facility that, prior to conversion to permanent financing, finances or has had financed the acquisition, development, or construction (“ADC”) of real property,” if it fails to satisfy any of the following three capital requirements: Continue Reading

Seriously Misleading UCC Searches

Determining whether a security interest is properly perfected by using a state’s online lien search may be leading you astray.

Perfecting a security interest in collateral establishes the priority of the secured party’s claim to such collateral, providing the perfected secured party with an interest in such collateral superior to the rights held by most subsequently perfected security creditors or judicial lien creditors.  For most types of collateral owned by an entity, a security interest may be perfected by filing a financing statement describing the security interest with the secretary of state’s office in the state where such entity is formed.  A financing statement is a form of public notice intended to inform others dealing with such borrower (referred to as a “debtor”) that the debtor has granted a security interest in its assets.

The Uniform Commercial Code (“UCC”) dictates that a financing statement covering property owned by an entity debtor (as opposed to an individual) must identify the debtor by its exact legal name.  Nonetheless, to alleviate the otherwise disastrous consequences of harmless errors or omissions in a financing statement, the law provides that financing statements are effective (even with errors) so long as they are not “seriously misleading.” Continue Reading

STRUCTURED DISMISSAL OF CHAPTER 11 CASES AND THE INVOLUNTARILY SUBORDINATED CREDITOR: Official Comm. of Unsecured Creditors v. CIT Group/Bus. Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015)

The United States Court of Appeals for the Third Circuit plays a uniquely important role in the development of the bankruptcy laws.  The liberal venue rule for bankruptcy cases set out in 28 U.S.C. § 1408 has led to the disproportionate filing of large and mega chapter 11 bankruptcy cases being filed in the District of Delaware.  The decisions of the Third Circuit are binding on the District Court and Bankruptcy Court for the District of Delaware.  Consequently, the decisions of the Third Circuit govern that disproportionate number of large and mega chapter 11 cases.  Furthermore, because the bankruptcy court decisions in these mega cases often involve greater dollar amounts, they are more likely to be appealed, which can result in the Third Circuit being one of the few circuit courts to address a given issue.

In Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), the Third Circuit recently considered the propriety of a “structured dismissal” of a chapter 11 case that provided for a distribution of estate assets contrary to the distributional scheme set out in the Bankruptcy Code.  In Jevic, the debtor was woefully insolvent.  Its secured creditors were owed millions more than the value of the debtor’s assets.  The Official Committee of Unsecured Creditors, however, challenged the secured creditors’ claims on fraudulent conveyance and preference theories.  That litigation lasted for several years, and the Committee’s claim eventually survived a motion to dismiss the case.  At that point, the secured creditors, the debtor and the Unsecured Creditors’ Committee agreed to settle the litigation.  Under the terms of the settlement, nearly $4 million was made available to the Committee and a litigation trust, with those funds available for use in the pursuit of unrelated litigation in the bankruptcy case.  Any amount remaining after such litigation would be distributed to general unsecured creditors.  The claims against the secured creditors were dismissed with prejudice, and the chapter 11 case was to be dismissed.  Conspicuously absent from the parties who reached the settlement was a group of truck drivers who held an uncontested WARN Act claim against the debtor for its failure to provide the required statutory notice prior to closing the business.  A significant portion of that WARN Act claim was entitled to priority over the claims of general unsecured creditors under Bankruptcy Code § 507 (a)(4).  Nevertheless, the claim would not be paid under the settlement even though general unsecured creditors would receive at least a partial payment on their claims. Continue Reading

Sixth Circuit Re-Affirms There Is No Constitutional Right to Financial Privacy

In a decision issued May 21, 2015, the Sixth Circuit stayed its course in refusing to extend constitutional protection to encompass a right of privacy in financial records and, in doing so, retained its position as the most conservative of the federal circuits to have addressed this issue.

The case, Moore v. WesBanco Bank, Inc., Case No. 13-4477, 2015 U.S. App. LEXIS 8589, arose from allegations that a bank and an assistant county prosecutor violated plaintiff Moore’s Fourteenth Amendment right to substantive due process when the bank provided copies of two canceled checks drawn on his account to the prosecutor without insisting upon a subpoena or seeking his consent.  Both defendants denied that the bank provided Moore’s checks to the prosecutor.  The district court found no need to resolve the factual dispute because it concluded Moore had no constitutional claim based on prior Sixth Circuit precedent.  On appeal, the Sixth Circuit agreed and declined to revisit the issue of whether it should extend the right to informational privacy to financial records. Continue Reading

The Eleventh Circuit Holds That the National Bank Act Preempts State-Law Whistleblower Claims by Terminated National Bank Officers

The United States Court of Appeals for the Eleventh Circuit just recently held that an officer of a nationally-chartered bank regulated by the National Bank Act (NBA) had no claim for wrongful termination under a Florida whistleblower statute.  According to the federal court, the state-law whistleblower claims were preempted by 12 U.S.C. § 24 (Fifth) of the NBA, which gives a national bank the power to dismiss bank officers “at the pleasure” of the board of directors.  Consistent with decisions by other federal circuits, the Eleventh Circuit interpreted “at the pleasure” to be equivalent to at-will employment and held that the Florida whistleblower statute at issue was preempted because, contrary to the nature of at-will employment, it prohibited dismissal of an employee for complaining about certain improper activities by an employer.  Further, there was no comparable employment protection in federal law (e.g., Title VII) that would indicate congressional intent not to preempt the Florida statute through 12 U.S.C. § 24 (Fifth) of the NBA.  This is a useful employment law decision for national banks that helps preserve their freedom to employ, or not employ, their officers as they see fit and avoid certain types of miscellaneous wrongful termination lawsuits under state law.  Below are the details. Continue Reading

Ohio Supreme Court Confirms That A Foreclosure Plaintiff May Submit Proof Of Standing Subsequent To Filing The Complaint

In what most pundits agreed would be a swift reversal, the Ohio Supreme Court did in fact unanimously reverse the Ninth District Court of Appeals in Wells Fargo Bank, N.A. v. Horn, Slip Opinion No. 2015-Ohio-1484, a 20-paragraph decision that helps to explain a sometimes-misunderstood line from Schwartzwald.

In Horn, Wells Fargo filed the foreclosure complaint on its behalf as “successor by merger to Wells Fargo Home Mortgage, Inc. fka Norwest Mortgage, Inc.”  Both the note and the mortgage identified Norwest Mortgage as the lender and the Horns as the borrowers.  The Horns, first acting pro se and later with the assistance of counsel, defended against the complaint and Wells Fargo’s ensuing motion for summary judgment by asserting that Wells Fargo was not the real party in interest and lacked standing.  Wells Fargo then submitted the affidavit of a “Default Litigation Specialist” employed there, who averred that in 2000, Norwest Mortgage, Inc. had changed its name to Wells Fargo Home Mortgage, Inc., that Wells Fargo Home Mortgage, Inc. had later merged into Wells Fargo, and that Wells Fargo was the holder of the note and mortgage at the time it filed the complaint.  The trial court granted Wells Fargo’s motion for summary judgment and issued a decree of foreclosure in Wells Fargo’s favor.  The Horns appealed, but did not challenge the trial court’s conclusion on standing grounds.  Nevertheless, the Ninth District sua sponte considered the issue of standing.  Seizing on the language in Schwartzwald that standing is “determined as of the filing of the complaint,” 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, ¶ 3, the court of appeals held that a plaintiff in a foreclosure action must attach to its complaint documents that prove that it has standing at the time the complaint is filed.  Because Wells Fargo had failed to attach such proof to its complaint, the Ninth District held that Wells Fargo lacked standing and remanded the case to the trial court to dismiss the complaint without prejudice. Continue Reading

Volcker Alliance Report Ignores Community Banks (For The Most Part)

There is much to like in the recently released report of the Volcker Alliance.  Unfortunately, however, there is little discussion of those banking institutions commonly referred to as community banks.

At roughly the same time last month, the Independent Community Bankers Association of America highlighted in a press release the importance of community banks in helping small businesses gain financial stability.  The release said there are roughly:

6,000 community banks, including commercial banks, thrifts, stock and mutual savings institutions. Assets may range from less than $10 million to $10 billion or more. Across the nation, community banks operate 52,000 locations, employ 700,000 Americans and hold $3.6 trillion in assets, $2.9 trillion in deposits and $2.4 trillion in loans to consumers, small businesses and the agricultural community.

The relative unimportance of the community banking industry, notwithstanding employment of roughly 700,000 people, to those who prepared the Volcker Alliance report on regulatory reform suggests just how concentrated in large banking organizations the financial services industry has become following the Great Recession.  The draftsmen just had bigger fish to fry. Continue Reading

The dawn of .sucks — protecting your brand

Our colleagues at Porter Wright’s Technology Law Source blog have watched the launch of hundreds of new generic top-level domains (gTLDs) through the past several months. Introduced to increase competition in the domain name market, and enhance the Internet’s stability and security, these new gTLDs are projected to change the face of the Internet and how we use it. Today, our attorneys share an article that should be of interest to anyone with a recognizable brand: The .sucks gTLD entered its sunrise period. What does that mean? If unclaimed, brand owners could wake up to a full-fledged — and completely legal — gripe site come September. Read more