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Banking & Finance Law Report

Examining the Enforceability of Prepetition Waivers of the Automatic Stay

Posted in Bankruptcy

Recently, a bankruptcy court for the district of Puerto Rico held that a debtor’s waiver of the automatic stay contained in a pre-petition forbearance agreement was enforceable. In re Triple A & R Capital Inv., Inc., 519 B.R. 581 (Bankr. D.P.R. 2014). Unfortunately, the case adds little to the debate over the enforceability of pre-petition agreements impacting bankruptcy rights for one simple reason — the court’s holding was premised on the fact that the pre-petition forbearance agreement waiving the automatic stay was enforceable because the debtor, as part of a post-petition stipulation permitting the use of cash collateral, had ratified and agreed to be bound by the forbearance agreement.

Nonetheless, the court did briefly look at the treatment of pre-petition waivers of the automatic stay lacking post-petition ratification. Its examination provides a good opportunity to review the state of the law on this issue.

Before deciding the issue on its ratification grounds, the court noted that bankruptcy courts that have examined the enforceability of pre-petition waivers of the automatic stay:

[H]ave used different approaches with conflicting results. Three basic approaches have emerged: (1) uphold the stay waiver in broad unqualified terms on the basis of freedom of contract; (2) reject the stay waiver as unenforceable per se as against public policy; and (3) treat the waiver as a factor in deciding whether “cause” exists to lift the stay.

Id. at 584. The court further noted that “[a] review of the cases nationwide that addressed this issue indicate a trend that appears toward the enforcement of stay waivers.” Id.

Both of these observations oversimplify the issue.

Courts have refused to enforce prepetition stay waivers on a number of grounds, including: (1) a pre-petition debtor’s lack of “capacity to waive the rights bestowed by the Bankruptcy Code upon a Chapter 11 debtor in possession,” e.g., In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996); (2) as a disguised ipso facto clause, e.g. id.; (3) as depriving third-party creditors of the protections of the bankruptcy code, e.g., In re South East Fin. Assocs., 212 B.R. 1003, 1005 (Bankr. M.D. Fla. 1997); and (4) as a violation of public policy, which, especially in the case of a single asset case, is said to closely approximate an unenforceable agreement not to file bankruptcy. In re DB Capital Holdings, LLC, 454 B.R. 804 (Bankr.D.Colo. 2011); In re Jenkins Court Assocs. Ltd. Partnership, 181 B.R. 33, 37 (Bankr. E.D. Pa. 1995).

Nonetheless, for those courts considering the issue, the modern trend appears to be to find “cause” to modify the automatic stay, based at least in part on a debtor’s prepetition agreement to waive the benefits of the automatic stay. However, typically a pre-petition stay wavier is not held to be per se enforceable. E.g., In re Frye, 320 B.R. 786, 787 (Bankr. D. Vt. 2005) Indeed, most courts will consider a stay waiver appearing only in a forbearance agreement or loan modification, and not in the original loan documents. E.g., Wells Fargo Bank, N.A. v. Kobernick, 2009 U.S. Dist. LEXIS 126723, 20-22 (S.D. Tex. May 28, 2009). Courts often consider the circumstances in which the stay waiver was agreed upon and changes in circumstances following such agreement, including:

  1. the sophistication of the party making the waiver;
  2. the consideration for the waiver, including the creditor’s risk and the length of time the waiver covers;
  3. whether other parties are affected including unsecured creditors and junior lienholders;
  4. the feasibility of the debtor’s plan.

SouthWest Ga. Bank v. Desai (In re Desai), 282 B.R. 527, 532 (Bankr. M.D. Ga. 2002);

  1. whether there is evidence that the waiver was obtained by coercion, fraud or mutual mistake of material facts;
  2. whether enforcing the agreement will further the legitimate public policy of encouraging out of court restructurings and settlements;
  3. whether there appears to be a likelihood of reorganization;
  4. the extent to which the creditor would be otherwise prejudiced if the waiver is not enforced;
  5. the proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time; and
  6. whether the debtor has equity in the property and the creditor is otherwise entitled to relief from stay under § 362(d).

In re Frye, 320 B.R. 786, 791 (Bankr. D. Vt. 2005).

Importantly, courts hold that such stay waivers are not self-executing, such that the stay is not automatically lifted and a motion to lift stay is still required. Id. at 790. Furthermore, such stay waivers are typically considered alongside other legitimate grounds for stay relief. And, in most cases, a stay waiver will not prevent a court from considering an objection from a third-party creditor. E.g., In re Atrium High Point Ltd. Partnership, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995).

Finally, it should be noted that the modern trend does not include any circuit court opinions, and in fact includes only a handful of cases in total. Furthermore, the modern trend appears inconsistent with the dicta of several circuit courts, including the Second Circuit, Commerzanstalt v. Telewide Sys., 790 F.2d 206, 207 (2d Cir. N.Y. 1986) (considering a post-petition waiver and stating, “[s]ince the purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay.”), the Third Circuit, Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. Pa. 1995) (considering a post-petition wavier and stating, “[t]he automatic stay cannot be waived.”); Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991 (considering a post-petition waiver and stating, “[b]ecause the automatic stay serves the interests of both debtors and creditors, it may not be waived and its scope may not be limited by a debtor.”); Ass’n of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982), and the Ninth Circuit, Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1026 (9th Cir. Cal. 2012) (citing In re Pease approvingly and invalidating pre-petition waiver of Bankruptcy Code provisions invalidating prepetition anti-assignment clauses.); Bank of China v. Huang (In re Huang), 275 F.3d 1173, 1177 (9th Cir. Cal. 2002) (considering pre-petition waiver of dischargability and stating, “[i]t is against public policy for a debtor to waive the prepetition protection of the Bankruptcy Code.”). But see, In re Wheaton Oaks Office Partners, 1992 U.S. Dist. LEXIS 18781 (N.D. Ill. Dec. 9, 1992) (considering and rejecting applicability of Commerzanstalt and Ass’n of St. Croix Condominium Owners to pre-petition waivers, explaining “[n]either case stands for the proposition that a bankruptcy court can never find such a waiver to constitute cause to grant relief from the automatic stay.”).

Given the uncertain state of the law, lenders would be wise to (1) exclude such stay waivers from their original loan documents, (2) consider including stay waivers in their forbearance agreements, and (3) not rely exclusively on such waivers in their motions to lift stay.


An Ohio Alternative – Foreclosure Sales Conducted by a Special Master

Posted in Collection and Foreclosure, Commercial Lending

Lenders can typically credit bid at sheriff’s sales in an amount well in excess of the minimum bid requirements, as a result of which some real estate investors shy away from attending and bidding at sheriff’s sales because they feel like they won’t necessarily get a “bargain”.  Accordingly, lenders are typically the successful purchaser at sheriff’s sales.  However, the epic credit meltdown that began in 2008 resulted in lenders’ REO (real estate owned by the lender) spiking to the point where, beginning in 2009 or 2010, lenders—especially on the residential real estate side–no longer wanted to be the purchaser at foreclosure sale.   This caused them to consider—particularly after being bombarded with pitches from real estate auction houses–using a “special master” instead of the sheriff to conduct foreclosure sales, with the thought that the sales would be well attended by buyers not concerned with being outbid by the first mortgagee.

Pursuant to Revised Code § 2329.34, a master commissioner may be appointed by the court to sell real property. Such sales often work more like a private auction than a public sale, with specialized brokers performing targeted advertising prior to the sale.  Although auction companies usually don’t mention this when marketing their services to lenders, the scenarios under which a court may appoint such a special master are limited, however, to those situations where “there exists some special reason why the sale should not be made by the sheriff of the county where the decree or order was made, which reason, if the court finds any to exist, shall be embodied in and made part of the judgment, order or decree for such sale.”  See Huntington National Bank v. Conservatory Associates, LLC, 2011-Ohio-3249 (order for master commissioner sale overturned because trial court did not specifically incorporate special reasons for the sale into the final judgment, but rather glossed over the issue by indicating that the plaintiff’s motion was “well taken” and “granted”). Examples of possible “special reasons” may include:

1.         An inordinate length of time in a particular county between the date foreclosure decree is entered and the date of the foreclosure sale;

2.         The property was previously offered at sheriff’s sale but resulted in a “no bid no sale”; and

3.         The nature of the property is such that it would be best for all parties that it be sold by a master commissioner instead of the sheriff.

It is important for lenders to make sure they support any motion for sale by special master with appropriate reasons why the particular property ought to be sold by a special master instead of the sheriff, and for the court order granting that motion to contain specific findings with respect to those reasons.  Otherwise, the sale could be attacked by the borrower after the fact, or a title company might refuse to insure the buyer’s title.


Does your construction mortgage really protect you from mechanic’s liens?

Posted in Bank Lending, Lien Perfection, Other Articles, Real Estate

If you are a lender/mortgagee and your borrower/mortgagor is adding more real property collateral to the mortgage (in Ohio), how do you retain your first priority position in all mortgaged property while adding that property to the mortgage? This question is especially relevant when the borrower is assembling property as part of a development. The answer may not be as simple as you think.

You could do an amended and restated mortgage, but that could be construed as replacing the original mortgage, which would cause the priority of the mortgage to be changed from the recording date of the original mortgage to the recording date the amended and restated mortgage. So, instead you could record an amendment or modification which adds property to the mortgage. Naturally you would include a provision that states that all of the original mortgage provisions continue in full force and effect. That should do it, right? Well, recently one Ohio Court said “no.”

In 2003, Bridgeview Crossing LLC (“BC”) began assembling properties for a commercial development. In 2006 BC signed a $24,000,000 Cognovit Note and granted an open-end construction mortgage (the “Original Mortgage”) in favor of its lender (the “Mortgagee”). There was evidence that Panzica Construction Company (“Panzica”) had done some work before the mortgage was recorded (and before the Notice of Commencement was recorded).

Normally, a subsequently filed mechanics lien for work done before the Original Mortgage was filed would have priority over the mortgage. (See Ohio Revised Code § 1311.13.) However, the Original Mortgage contained the standard construction mortgage provision contained in Ohio Rev. Code 1311.14, which, if the requirements are satisfied, gives a construction mortgage “super-priority” over mechanic’s liens which are later filed for work done prior to the filing of the mortgage.

After the Original Mortgage was filed, BC continued to acquire more properties. The Mortgagee wanted to add those properties to the Original Mortgage and maintain the same “super-priority” over subsequently-filed mechanics liens. This was done by recording a series of Mortgage Modifications (individually a “Modification” and collectively, the “Modifications”) adding more property to the lien of the Original Mortgage, which were recorded from December 22, 2006 through May 13, 2008. Each Modification included the following language (the “Reaffirmation Clause”): “Except as amended and modified hereby, the provisions of the Loan Documents remain in full force and effect and are binding upon and shall inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors and assigns.”

On October 15, 2008 Panzica filed a mechanics lien affidavit (amended December 12, 2008), claiming that it had started construction work prior to the date of filing of the Original Mortgage. In late 2008 BC defaulted on the loan and the Mortgagee took judgment on the Cognovit Note, but did not foreclose.

In August 2009 Panzica filed a foreclosure action (Cuyahoga County Common Pleas Court Case No. 09 CV 700759) and subsequently claimed that it had priority over the Mortgagee’s interest in the collateral. In late 2012, the Mortgagee and the Panzica both filed motions for summary judgment. The facts were complicated and many legal issues were raised. On September 24, 2014, the Court issued its ruling.

The Court held that since the Modifications did not include a recitation of the 1311.14 statutory construction loan language, that the “super-priority” law did not apply to the property added to the Original Mortgage. The Court then ruled that Panzica’s mechanics lien had priority over the Original Mortgage with respect to the properties added via the Modifications. The Mortgagee’s priority over the various property parcels would be based on the date the respective Modifications were recorded. The Court did not address the efficacy of the Reaffirmation Clauses in the Modifications or any of the other issues raised in the summary judgment motions. On October 22, 2014, the Mortgagee filed a notice of appeal, which appeal remains pending.

You may scoff at this ruling, assured that it does not apply to you because if you were going to add additional land to your mortgage, you would get a lien waiver and title insurance. Well, the Mortgagee here did those things, but Panzica argued that the lien waivers were ineffective. Furthermore, the Mortgagee obtained title insurance guarantying the Modifications were first priority. Unfortunately the ruling did not discuss the lien waiver issue or any other issues raised in the motions. Moreover, the title insurance covers any eventually proved loss, but it does not speed up the foreclosure process itself. This foreclosure has been pending for five years and the appeals are likely to last for years longer. As a result, the property will remain in limbo and remain undeveloped for a long time without generating any income and without any productive use.

So, faced with this ruling, what should mortgagees do to protect themselves in these situations? Of course, there is no definitive answer. It appears that the Panzica case judge wants you to specifically include in your amendment or modification, the 1311.14 construction mortgage language. But if you do that and do not include other provisions of the original mortgage, you might be faced with the claim that the amendment did not include all other terms of the original mortgage and therefore those provisions do not apply to any property or debt added to the original mortgage with the amendment. Finally, as stated above, if you do an amended and restated mortgage you could lose your original priority date.

Perhaps for now, until the Court of Appeals sorts this out, the best compromise is to add the following clause to any amendment: “All of the terms of the Original Mortgage remain in place and are incorporated hereat by reference, including but not limited to the provision in the Original Mortgage that states that it is a Construction Mortgage pursuant to Ohio Revised Code Section 1311.14.” Additionally it would be prudent for all original mortgages to include a provision that states that any and all future amendments or modifications to the mortgage shall be governed by the provisions of said mortgage, except as otherwise set forth in such amendments or modifications.

Just when you thought you had enough belt and suspenders language, you find out that you need to think again.

Texas Federal Court decision illustrates need for BYOD policies

Posted in Labor Law, Other Articles

EDITOR’S NOTE:  This recent post from the PWMA Employer Law Report on the importance a BYOD policy highlights an area of current concern for bankers and other employers.

Saman Rajaee was a salesman for Design Tech Homes. He used his personal iPhone to connect to his employer’s Microsoft Exchange Server, which allowed him to access his work-related email, contacts and calendar from his phone. Design Tech did not have a BYOD policy. When Rajaee’s employment terminated, Design Tech remotely wiped his phone, which deleted all of his data, including personal emails, texts, photos, personal contacts, etc.

Rajaee sued under the federal Stored Communications (“SCA”) and Computer Fraud and Abuse Acts (“CFAA”) as well as raising various state law claims. Design Tech moved for summary judgment on the federal claims. On the SCA claim, the court held, based on Fifth Circuit precedent, that information an individual stores to his hard drive or cell phone is not in electronic storage within the meaning of the statute.

Design Tech was successful on the CFAA claim as well, but was forced to take a much riskier path than would have been necessary had it simply had a BYOD policy. Generally speaking, the CFAA prohibits accessing a protected computer without authority or in excess of authority, but requires a showing that the computer owner sustained at least $5000 in losses specifically due to either the cost of investigating and responding to an offense or the costs incurred because of a “service interruption.” In Rajaee, the court held that the value of the data wiped from Rajaee’s phone was not the type of loss or cost contemplated as being recoverable under the CFAA. In addition, the court held that the deletion of Rajaee’s data did not constitute a “service interruption.” As a result, his claim under the CFAA failed.

Takeaway for Employers:

Employers using a BYOD environment really need to put a BYOD policy in place. Had Design Tech had such a policy, it could have – and indeed, should have told its employees, including Rajaee, that upon separation of employment (or, for instance, also if the device is lost or stolen), any device used to access the employer’s network would be wiped. This would enable the employees to preserve any important personal data on their devices. In addition, using containerization software would permit the employer to segregate business data from personal data on the phone, which also would permit the employer to wipe only the business data upon separation from employment.


Here we go again: Does the DOL’s request for information regarding self-directed brokerage accounts mean new fee disclosure requirements are coming soon?

Posted in ERISA

If you’re a fan of the tv show “The Simpsons,” you might remember an early episode where Homer Simpson launched a crusade against every public safety issue in the city. The result was practically every square inch of the town contained signs alerting people to every dip, pothole, and other nuisance on the roads. After watching that episode again recently (we won’t admit which one of us got sucked into the tv marathon), we were reminded of a first year torts class in law school that discussed the efficacy of public safety notices. The professor made the comment, “A wealth of information leads to a poverty of attention.”

That comment is especially fitting with respect to ERISA fee disclosures, particularly regarding defined contribution plans. Recently, the DOL requested information and comments about self-directed brokerage accounts (“SDBAs”). The DOL’s history with trying to provide guidance on SDBAs provides a great illustration of the difficulty of determining how much information is too much. On one hand, the DOL has been concerned that defined contribution plan participants will be unable to navigate the wide universe of investment options available under SDBAs unless strict procedural rules are in place. On the other hand, the plan sponsor community has tried to make clear that rank-and-file employees typically are not interested in SDBAs. Instead, more sophisticated investors request this feature, and they do not need a detailed protective regime. The DOL, to its credit, has recognized the different points of view on this issue and has sought input to help develop a balanced approach to regulating SDBAs.

DOL’s Early Attempts to Regulation SDBAs

As background, ERISA’s fiduciary duties require plan sponsors to offer a diverse menu of investment options to participants in defined contribution plans. Plans typically contain a packaged menu of options that are called Designated Investment Alternatives (“DIAs”). With DIAs, the plan sponsor compiles a list of funds, from which the plan participants can select for investment of their plan contributions. As with any benefit plan governed by ERISA, plan fiduciaries are required to act prudently for the exclusive benefit of plan participants. As such, plan sponsors must monitor the DIAs to ensure they remain prudent investments and make certain the funds continue charging reasonable fees for their services. Further, participants must have enough information to make an educated decision as to which fund to direct investment, a responsibility that additionally falls to the plan fiduciary. Required disclosures include information regarding the prior performance of the fund, comparative benchmarks, and fee amounts.

In addition to DIAs, plans may offer participants the option to look outside the plan for alternative funds in which to invest. When participants elect this method, it is referred to as a Self-Directed Brokerage Account (“SDBA”). SDBAs place the burden of making investment decisions on the participant, giving control over where their money will go. SDBAs actually originated to meet the demands of more sophisticated employees who (in theory) are sophisticated enough to analyze a wide range of investment options on their own. They thought that they could make better investment decisions than their employers and wanted their employers out of their investment decisions and financial planning. The people who demanded SDBAs in many ways were similar to the types of participants who would fall into a top-hat plan select group eligible to participate in nonqualified deferred compensation plans.

In terms of fiduciary standards, however, allowing participants the freedom to fail may not be either prudent or in their best interest. The DOL’s concern initially appears to have been that plan fiduciaries use SDBAs to shirk some of the more onerous fiduciary duties by placing these kinds of investment decisions in the hands of participants.

To address those potential concerns, the DOL issued FAB 2012-02 in May of 2012. The question-and-answer-styled bulletin explained that where high volumes of SDBA participants began investing in the same fund, compliance with fiduciary duties would require monitoring and disclosure similar to that associated with DIAs. The guidance failed to provide any definitive threshold, beyond which the additional disclosures would be required. In the midst of this uncertainty, sponsors and brokers feared the heightened duties would apply to nearly every fund in which SDBA investors participated. Given that the entire universe of investment funds is open to these participants, the list could have been extensive. As a result, plan sponsors and brokers expressed widespread alarm over the content of the guidance.

Because of their concern, a mere month later, the DOL issued a revision removing all of the offending requirements, but maintaining a tone that suggested a general distrust of self-directed brokerage accounts. The revision additionally explained that the DOL would keep the topic open, returning to it later for further discussion.

Recent Request for Additional Information

That time is upon us. In the DOL’s recent request for information regarding SDBAs, the DOL has included questions concerning the following:

  • The number of plan participants who opt for an SDBA;
  • Demographic information about those participants;
  • Comparative analysis of outcomes and costs for SDBAs and DIAs;
  • The fiduciary to participant and the fiduciary to broker relationships;
  • The amount of information available to participants;
  • Fiduciary knowledge of their duties with respect to SDBA participants.

In the introductory portion of its information request, the DOL cites the debate regarding the overall merits of allowing SDBAs in defined contribution plans. On one hand, the DOL cited articles that indicated the need for fiduciaries to analyze thoroughly the different investment options available in an SDBA before making them available to participants, essentially to protect participants from themselves. In essence, the DOL provided support for its initial position on the topic. On the other hand, the DOL acknowledged commentary that explained that brokerage windows actually benefit both sophisticated and unsophisticated participants. The reason is that SDBAs reduce the need for a plan to provide a large number of DIAs in order to satisfy specific investment option demands by more sophisticated participants.

What the Future May Hold

It is unclear where the DOL will go from here. In the past, the DOL showed clear apprehension with respect to the use of SDBAs, and it appears that the DOL still has some of those concerns. The DOL should be applauded, however, for understanding the counterargument and reaching out to the industry to assist with determining the extent of new procedural requirements for SDBAs. As of now, the DOL is only requesting information. While the future remains uncertain, it appears that additional guidance will be coming soon.


“The Bandits’ Club” gets its due

Posted in Bank Litigation, Regulation and Compliance

Our colleagues at Antitrust Law Source posted an interesting update about probable charges alleging that traders at approximately a dozen global banks – including Deutsche Bank, JPMorgan Chase, Barclays, and USB – fixed the foreign exchange market, or “forex,” market. The U.S. Department of Justice may bring charges by the end of the year. Read the complete article on Antitrust Law Source.

Porter Wright Announces New Antitrust Law Site

Posted in Other Articles, PWMA News, PWMA Practice

We wanted to take a moment to announce our newest endeavor, Antitrust Law Source. Antitrust Law Source is a new site designed for visitors to quickly and easily learn about developments in this growing arena. The site primarily will focus on providing news and legal updates in the antitrust arena in a podcasting format. The podcasts will feature a variety of insights, educational offerings, discussions and interviews with thought leaders across a variety of industries.

The site is prepared by members of our firm’s Antitrust Practice Group and will feature news and information on a wide range of areas, including:

  • Agriculture
  • Civil litigation
  • Compliance programs/audits
  • Consumer protection
  • Criminal and civil government enforcement
  • Distribution, pricing and promotional allowance programs
  • Healthcare
  • Intellectual property/Technology
  • International issues
  • Legislative matters
  • Mergers, acquisitions and joint ventures
  • Privacy and data security

We encourage you to visit the site and share your thoughts with us.


CIP To Cover Small Business Ownership And Control

Posted in Bank Regulation, BSA/AML, Regulation and Compliance

It has been an active couple of weeks for FinCEN from a regulatory pronouncement perspective. For example, FinCEN has proposed a regulation to amend existing “know your customer” rules for certain financial institutions to require the verification of beneficial owners of legal entities. Legal entities in this context would mean corporations, partnerships or similar business entities. Public companies, regulated entities and trusts other than business and statutory trusts, would not be covered.

In addition, FinCEN issued an advisory for financial institutions on the importance of a “culture of compliance” with respect to BSA/AML. The guidance had these suggestions based on recent enforcement actions: ensure leadership that supports compliance; don’t mitigate BSA/AML efforts in light of revenue considerations; operating departments must share with compliance staff BSA/AML information; the organization must devote adequate resources to BSA/AML compliance; BSA/AML compliance should be tested by an independent party and the organization’s leadership and staff should understand the purpose and use of BSA/AML reporting. FIN-2014-A007 is available here.

FinCEN’s proposal to amend existing “know your customer” rules requires a financial institution would have to identify each individual who directly or indirectly own 25% or more of the equity and one individual who has responsibility to control, manage or direct the legal entity. This information is to be recorded on the standard certification form.

The proposal is available here. Comments are due on October 3rd, 2014. The original release contemplates that the rule would be effective one year after adoption, so it would appear that late 2015 is the earliest the final version of the regulation might become effective.

The proposed regulation is the culmination of a regulatory process that began in March 2012. While it is intended to be consistent with existing requirements for covered financial institutions, the proposed regulation is intended to address elements of a customer due diligence that had been previously unaddressed by regulation, according to FinCEN.

For FinCEN, the key elements of (customer due diligence) include: (i) identifying and verifying the identity of customers; (ii) identifying and verifying the identity of beneficial owners of legal entity customers (i.e., the natural persons who own or control legal entities); (iii) understanding the nature and purpose of customer relationships; and (iv) conducting ongoing monitoring to maintain and update customer information and to identify and report suspicious transactions.

The first element is already included in existing customer identification program requirements. The rule change is intended to address the three remaining elements. For covered financial institutions FinCEN believes its proposal is “substantively” the same as existing requirements or rules issued by the regulatory agencies for those institutions.


Conflict of Interest and Cognovit Judgment

Posted in Attorneys and Clients, Collection and Foreclosure, Commercial Law, Litigation

Does a conflict of interest arise under the Ohio Rules of Professional Conduct (“Rules”) when an attorney confesses judgment on a cognovit note? No, according to a recent opinion (Opinion 2014-3, August 8, 2014) issued by The Supreme Court of Ohio’s Board of Commissioners on Grievances & Discipline (“Board”), so long as the cognovit note contains a warrant of attorney that expressly waives a conflict and permits a creditor’s attorney to confess judgment pursuant to R.C. §2323.13. In issuing the Opinion, the Board reaffirmed and updated Advisory Opinion 93-3, which found no conflict existed under Ohio’s former Code of Professional Responsibility, which the current Rules replaced in 2007.

R.C. §2323.13 permits an attorney hired by a creditor to obtain cognovit judgment without notice or hearing in certain commercial transactions (typically loans and guaranties of loans) by producing in court a valid warrant of attorney that also contains a specific warning to the debtor of the rights being surrendered and otherwise complies with law. Ohio courts grant such cognovit judgments because the debtor consented in advance to the creditor obtaining a judgment upon the debtor’s default.

The Opinion specifically finds that confessing judgment does not create a conflict of interest under R. 1.7 of the Rules, which governs conflicts of interest, because the confessing attorney represents only the creditor and not the debtor under both contract law and statute. DiBenedetto v. Miller, 180 Ohio App.3d 69, 72, 2008-Ohio-6505, 904 N.E.2d 554 ¶15 (1st Dist.). In other words, there is no conflict of interest or violation of the Rules because the creditor’s attorney does not have an attorney-client relationship with the debtor.

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.