Banking Law Roundup
No. 112 Perspectives on Developments in the Law from The Sharp Law Firm, P.C. April 2014
“Predatory” Lending May Prevent Foreclosure
Predatory lending may give rise to a defense preventing foreclosure on a mortgage loan, the Supreme Court of Arkansas held recently.
Finding the mortgagee’s conduct “unconscionable,” Gulfco of La., Inc. v. Brantley, __ S.W.3d __, 2013 Ark. 367, 2013 WL 5497308 (Ark. 2013), said courts in making such an inquiry were to examine “the totality of the circumstances surrounding the negotiation and execution of the contract.” However, it identified three factors which it regarded as particularly important: (1) “whether there [was] a gross inequality of bargaining power between the parties”; (2) “whether the aggrieved party was made aware of and comprehended the provision in question”; and (3) whether there was “a belief by the stronger party that there [was] no reasonable probability that the weaker party [would] fully perform the contract.”
In Gulfco, the debtors were unemployed, had first obtained a modest unsecured loan to pay household bills, and had evidenced incapability to make the $92-a-month payments on that loan. Subsequent loans were made to pay off previous notes or to bring their payments current. The creditor proposed and the debtors took a $20,000 loan secured by their home.
“Despite the Brantley’s [sic] demonstrated inability to pay, Gulfco continued to loan them money,” the court said. “Each loan, that included built-in fees and high interest rates, placed the Brantleys in a position of ever-increasing debt, such that it was all but inevitable that they would end up in default. While the Brantleys’ debt situation became more dire with each loan, Gulfco’s risk was minimal, because with the mortgage, it was assured of receiving full payment on the loan. . . . [T]he evidence revealed an intolerable pattern of reprehensible and unconscionable conduct on the party of Gulfco. . . . We hold that the [trial] court did not err in refusing to enforce the mortgage”.
Appeals Court Holds 765 ILCS 5/11 Permissive
Section 11 of the Conveyances Act (765 ILCS 5/11) always has been a “safe harbor” provision stating what a recorded mortgage may contain in order to be effective, the Seventh U.S. Circuit Court of Appeals has ruled.
Deciding an issue argued but left open in Peoples Nat’l Bank v. Banterra Bank, 719 F.3d 608 (7th Cir. 2013) (see Sharp Thinking No. 91 (May 2013)), the court said that the form set forth in § 11 was merely permissive, that the mortgages before it (which did not state the maturity date or interest rate on the underlying notes) “supplied the indispensable elements of a mortgage under Illinois common law,” and that the mortgages “were effective to give constructive record notice” to potential claimants. In re Crane, 742 F.3d 702 (7th Cir. 2013).
Construing the statute’s provision that “[m]ortgages of lands may be substantially in the following form,” the court noted it “simply does not say that a recorded mortgage must set forth every element listed for the recording to be effective against third parties. Strict compliance with the suggested form is not required to ensure a valid mortgage enforceable against subsequent lenders and purchasers” (court’s emphasis).
The court did construe the amount of the underlying debt to be a required term, however,
Noting that late last year the General Assembly had amended §11 to state that it was intended to be permissive, the court said it would not rely on that amendment because the cases predated it. “[W]e agree that the terms listed in section 5/11 have always been permissive rather than mandatory.”
Relying on Crane, the United States District Court for the Southern District of Illinois then affirmed a bankruptcy court holding that § 11 was permissive in In re HIE of Effingham, LLC, __ B.R. __, No. 13-0393-DRH (S.D. Ill. March 28, 2014).
FIRREA May Not Bar Negligence Claims Against Bank Officials
The gross negligence standard for bank officer and director liability stated in the Financial Institutions Reform, Recovery and Enforcement Act (12 U.S.C. § 1821(k)) (FIRREA) does not prevent the Federal Deposit Insurance Corporation from invoking an ordinary negligence standard in a suit against officials of a failed bank when state law imposes an ordinary negligence standard, a federal court in Georgia has reasoned. Quoting Supreme Court precedent, FDIC v. Loudermilk, __ F.Supp.2d __, 2013 WL 6178463 (N.D. Ga. 2013), said FIRREA’s gross negligence standard “provides only a floor” and does not stand in the way of FDIC relying on an ordinary negligence standard when state law provides same. It further appeared to rule that the “business judgment” defense does not apply to the FDIC’s negligence claims.
Arguably inconsistent is FDIC v. Skow, 741 F.3d 1342 (11th Cir. 2013). Both cases have been certified to the Georgia Supreme Court for decision.
Appeals Panel Okays $1 Million Penalty, Banishment Order
A federal appeals panel in Washington, D.C., has denied review of orders assessing $1 million in civil penalties against a bank CEO, director and shareholder and banishing him from banking.
The court in effect affirmed penalties imposed by the Office of the Comptroller of the Currency (OCC) for occurrences that predated the collapse of American Sterling Bank of Sugar Creek, MO.
The court noted that under 12 U.S.C. § 1818(e)(1) banishment was appropriate when a bank official (1) violated “any law or regulation,” “engaged or participated in any unsafe or unsound practice,” or breached a fiduciary duty; (2) that either caused the bank to “suffer or … probably suffer financial loss or other damage,” prejudices or could prejudice depositors’ interests, or gives the party “financial gain or other benefit;” and (3) that involves personal dishonesty … or … demonstrates willful or continuing disregard . . . for the safety or soundness of [the bank]”. Dodge v. Comptroller of Currency, __ F.3d __, 2014 WL 888423 (D.C. Cir. 2014).
It found those tests met where, among other things, the official had caused the bank to treat as capital the transfer of a non-performing political loan from its holding company; the treating as capital of the transfer to the holding company of a charged-off loan which the official had guaranteed; the backdating of alleged capital contributions for the purpose of making the bank appear well capitalized; and the treatment as income of potential earnings on a pipeline mortgage servicing project, even though there was no written agreement.
It also found that the misconduct constituted reckless engagement in unsafe or unsound practices such as to justify the monetary penalty under 12 U.S.C. § 1818(i).
-John T. Hundley, email@example.com, 618-242-0246