EEECCCOOOAAA: Fourth Circuit Enforces Waiver of ECOA Rights in Loan Restructuring Agreements

Photo: http://wpggamegeeks.blogspot.com/2011_02_01_archive.html 

Bob Gaumont co-authored this post.  

The Fourth Circuit recently affirmed the Maryland U.S. District Court’s holding that a borrower’s wife’s waiver of statutory rights, in loan restructurings, was enforceable.  Ballard v. Bank of America, 734 F.3d 308 (4th Cir. 2013).  The statute at issue in Ballard was the Equal Credit Opportunity Act (“ECOA”), specifically the provisions prohibiting discrimination on the basis of marital status.  Such provisions were originally enacted to halt credit discrimination against married women, to whom creditors historically refused to provide credit.

In Ballard, Plaintiff Kellie Ballard’s husband owned and operated a food-packing company (the “Company”), and in March 2008, Mr. Ballard entered into an agreement with Defendant, Bank of America (the “Bank”), to obtain a loan for his Company in the amount of $4,100,000.  Plaintiff, Mrs. Ballard, played no role in the ownership or operations of the Company, but the Bank required her to sign the loan agreement as a guarantor, guaranteeing “full and complete payment” of the loan and waiving “[a]ll rights of redemption” with respect to the property securing the loan.

In February 2009, the Company defaulted on the loan, and Mr. Ballard entered into a modified loan agreement with the Bank to restructure the debt.  The Company defaulted twice more, and additional debt restructuring agreements followed.  As with the original loan, the Bank continued to require that Mrs. Ballard guarantee each new agreement. Such restructuring agreements contained a comprehensive waiver, mandating that the Ballards waive “any and all” claims—past, present, or future—against the Bank.  The Ballards affirmed that they made such waiver after “actively and with full understanding” negotiating the agreement and “after consultation and review with their counsel.”

The couple’s home in Maryland and a winery in California secured the loans.  After the 2011 default, the Bank recorded consensual liens on both properties. 

Mrs. Ballard filed the underlying action against the Bank in November 2012, alleging that the Bank violated the federal and state Equal Credit Opportunity Act (“ECOA”) by requiring her to serve as her husband’s guarantor.  The district court dismissed her claims with prejudice for failure to state a claim upon which relief could be granted, and held that regardless, waiver and limitations barred her claims.  The Fourth Circuit affirmed.

ECOA prohibits discrimination against a loan applicant on the basis of marital status, see 15 U.S.C. § 1691(a)(1) (2006) and specifically prohibits lenders from requiring a spouse’s signature on a loan agreement when the applicant individually qualifies for the requested credit.  See 12 C.F.R. § 202.7(d)(1) (2013). 

There are exceptions to the rule, however, permitting lenders to obtain the signature of a borrower’s spouse on a loan agreement, including where:

1. the borrower does not independently qualify for the loan;
   
2. the borrower’s spouse owns or co-owns the entity benefitting from the loan, i.e., is a “de facto” joint applicant; or  
   
3.  two spouses co-own property designated as collateral for a loan, a lender may require the non-applicant spouse to sign the loan “for the purpose of creating a valid lien, passing clear title, waiving inchoate rights to property, or assigning earnings,” see 15 U.S.C. § 1691d(a) (2006); and further, where it is necessary under applicable state law to make the property being offered as security available to satisfy the debt in the event of default.

Exception 3 “ensure[s] that a lender can acquire collateral co-owned by the borrower’s spouse in the event that the borrower defaults.”  Ballard, 734 F.3d 308.

The Fourth Circuit started its analysis by acknowledging that it was assuming, without deciding, that guarantors qualify as applicants for purposes of ECOA—an issue upon which the Federal Reserve Board regulations and Judge Posner have differences of opinion.  The Court stated that it made this assumption because resolution of the issue was not determinative in this case.

The Plaintiff conceded that her guaranty regarding property co-owned with her husband would have been permissible, but she objected to the “unlimited” liability on the debt to which she agreed.

The Court found that none of the above-listed exceptions applied to the Bank’s requiring Plaintiff to sign, because “although ECOA permits lenders to require a borrower’s spouse to relinquish her interest in co-owned collateral, it appears to prohibit lenders from demanding that a spouse guarantee the full loan without first appraising the borrower’s creditworthiness” and cited case law to support this conclusion.  Id. (emphasis added); see Riggs Nat’l Bank of D.C. v. Linch, 36 F.3d 370, 374 (4^th Cir. 1994).  Thus, the Court concluded that the Bank may have violated ECOA by requiring Plaintiff to sign as an unlimited guarantor without first determining that her husband was not creditworthy, but stated that it did not have to resolve this question.  Rather, the Court found that Plaintiff’s claim failed on the grounds that she waived “any and all” claims against the Bank, including those arising under ECOA, in the four loan restructuring agreements she executed with the Bank upon the Company’s defaults.

The Court, analogizing to claims made under Title VII,  distinguished between a bank requiring a prospective waiver of a borrower/guarantor’s ECOA rights, as a precondition for providing a loan (likely impermissible) and a bank requiring a waiver of ECOA rights as a condition to a favorable loan restructuring, which the Court found permissible.  While the former would permit a bank to circumvent ECOA, the latter “merely affords both parties a negotiated benefit: a means of escaping default for the borrower, and protection against future claims for the lender.”  Ballard, 734 F.3d 308.  Moreover, the Court explained, “refusing to enforce waivers attendant to refinancing could well harm borrowers like the Ballards, since a lender would be reluctant to work with a borrower to restructure a loan after a default if the lender knew that a waiver would not be enforced.”  Id.  In sum, the very waiver Plaintiff opposed in this case is one of the waivers that enable defaulted borrowers to restructure loans with their lenders.  And according to the Fourth Circuit, such waivers are enforceable. 

To read the full opinion, use the link below.

www.wcsr.com/resources/pdfs/ballardvbankofamerica.pdf

Banks: How to Garnish a Married Couple

 

                                                   

Photo: http://garnishfood.blogspot.com

Bob Gaumont co-authored this post. 

The Maryland Court of Special Appeals recently decided an issue of first impression in Maryland -- that is, whether funds in an existing joint bank account can be garnished where one of the account holders is a non-debtor.  O’Brien v. Bank of America, -- A.3d ----, 2013 WL 4788294 (Sept. 9, 2013).  The O’Brien Court, relying on the legislative history of the applicable statute, § 11-603(c) of the Courts and Judicial Proceedings Article of the Maryland Code (hereafter “11-603”) and looking to related statutes and case law in other jurisdictions, found that such accounts can be garnished, even where one of the account holders is a non-debtor. Thus, Bank of America could garnish the account held by the O’Briens, a married couple, even though Mrs. O’Brien was the sole debtor.  Such joint bank accounts are thus distinguishable from trust accounts, which, in Maryland National Bank v. Pearce, 329 Md. 602 (1993), were found to be not subject to garnishment unless both holders are the debtors.  Note, however, that garnishment of a joint account is only valid if the account was in existence before the court entered a judgment regarding the garnishment.  This differs from secured transactions involving after-acquired property.  See Md. Code, Com. Law § 9-204(a).

The Court reviewed, in particular, the General Assembly’s amendments to 11-603(c) in 1991, which did not include the addition of a proposed “safe harbor” for accounts shared by spouses.  On account of countless issues regarding such a safe harbor, including financial institutions’ concerns that they, at the time of garnishment, might lack knowledge regarding the marital status of the account holders, the General Assembly decided not to include the exception and instead permitted the financial institutions to maintain the assets in the bank account as opposed to placing them in court, thereby provided a “thoughtful solution to the institutions’ concerns.” The U.S. District Court for the District of Maryland has, however, considered the issue of adequate notice to judgment debtors.  See Reigh v. Schleigh, 595 F. Supp. 1535 (D. Md. 1984), rev’d, 784 F.2d 1191 (4th Cir. 1986).  Here, Bank of America did not provide post-judgment deprivation notification by the means of personal service or by publication, but the O’Briens had actual notice of the procedure and logistics regarding Bank of America’s compliance with a writ of garnishment pursuant to their Deposit Agreement with Bank of America.

Moreover, notice and an opportunity for a hearing, the Court explained, should be provided after attachment has occurred.  Notice post-attachment, rather than pre-attachment, reduces the opportunity for spouses, family members, and/or significant others to engage in any type of conveyance intended to defraud the debtor’s creditors.  Such attempts are common in family law cases, notably those involving alimony and child support issues.

In sum, the Court found that the trial court provided the O’Briens with a reasonable opportunity to be heard, and 11-603 did not violate the Due Process Clause of the Fourteenth Amendment to the U.S. Constitution, Article 3, Section 43 of the Maryland Constitution, Article 19 of the Maryland Declaration of Rights, or the Expedited Funds Availability Act.

For the full opinion, click here.

Businesses Can Collect On Their Own Debts Without Being Subject To FDCPA

                              Photo: http://www.nationaldebtrelief.com/fairdebtcollectionpractices/

Bob Gaumont co-authored this post.
When litigating cases under the Fair Debt Collections Practices Act (“FDCPA”) one of the more difficult issues is defining exactly what a “debt collector” is (and what it is not).   Ramsay v. Sawyer Property Management of Maryland, LLC and Jeffrey Tapper, 2013 WL 2405309 (D. Md. 2013) is another case from the United Stated District Court of Maryland which analyzes the definition of a “debt collector.”  In Ramsay the Court applied the now well-settled rule that businesses can collect on their own debts without being subject to the FDCPA.

Plaintiff Kharyn Ramsay (“Plaintiff”), a tenant at one of Sawyer Property’s (“Sawyer”) rental properties, defaulted on her rent payments.  Sawyer hired attorney and licensed collection agent Jeffrey Tapper (“Tapper”), to collect the delinquent rent from Plaintiff and other tenants in default.  Plaintiff brought this class action lawsuit against Sawyer and Tapper (collectively, the “Defendants”) for their actions taken to collect these debts.

Plaintiff Ramsay’s claims under the FDCPA were dismissed with prejudice where Tapper, acting on behalf of his client, Sawyer, stamped plaintiff’s DC/CV 32 (Order of Court Directing Defendant to Appear for Examination in Aid of Enforcement of Judgment) and DC/CV 33 (Show Cause Order for Contempt) court orders with the following:

THIS COMMUNICATION IS FROM A DEBT COLLECTOR.  IT IS AN ATTEMPT TO COLLECT A DEBT AND ANY INFORMATION OBTAINED WILL BE USED FOR THAT PURPOSE. (hereafter the “Disclosure Stamp”)

The Court found that Plaintiff’s FDCPA claim against Sawyer failed because Plaintiff lacked a plausible claim that Sawyer is a debt collector under the FDCPA where Sawyer is a rental and property management company for Maryland landlords, collecting on a debt in its own name.  The Court affirmed the holding in Kennedy v. Lendmark Fin. Servs., RDB-10-02667, 2011 WL 4351534, at *3 (D. Md. Sept. 15, 2011) that “creditors whose primary business is not debt collection may not be held liable under the FDCPA.”  Such creditors are also not required to be licensed as a collection agency.  See Fontell v. Haslett, 870 F. Supp. 2d 395, 409 (D. Md. 2012) (holding that a homeowner association was not required to have a collection agency license where “there [was] no question that the homeowner association was not acting as a collection agency when it took action to collect fees on its own behalf and under it own name”).

Moreover, the Court applied the rationale from Fontell to prevent the Plaintiff from holding a non-debt collector, Sawyer, vicariously liable for the acts of the debt collector it hired.  Fontell, 870 F. Supp. at 412.  Although a debt collector cannot hire an attorney to engage in illegal debt collection practices on its behalf to avoid liability under the FDCPA, this does not apply where the hiring party is not a debt collector itself.  In the latter circumstances, a debt collector is hired to perform collection services, not evade the FDCPA.

Tapper, the attorney and licensed collection agent hired by Sawyer, did meet the FDCPA’s definition of a debt collector.  However, analyzing the Disclosure Stamp under the “least sophisticated consumer” standard set forth by the Fourth Circuit for a claim of a FDCPA violation under 15 U.S.C. § 1692(e), which prohibits a debt collector from using “any false, deceptive, or misleading representation or means in connection with the collection of any debt,” the Court concluded that Plaintiff failed to assert a plausible claim that the Disclosure Stamp was false or misleading.  Nor did Defendants violate section 1692(f)’s prohibition on the use of “unfair or unconscionable means to collect or attempt to collect any debt.”

Finally, given that the Court dismissed the Plaintiff’s federal claim, it no longer had original jurisdiction over the case, and the Court declined to exercise its discretionary supplemental jurisdiction over Plaintiff’s state law claims under the Maryland Consumer Debt Collection Act and the Maryland Consumer Protection Act.

Read full opinion here:

 http://www.mdd.uscourts.gov/Opinions/Opinions/Ramsay%20v.%20Sawyer%20MEMO%20AND%20ORDER.pdf

The Pleading Bar for Securities Fraud Cases Is Higher Than It Looks

                Photo: http://www.ilovetodance.ca/NY2009/Mens%20limbo3.jpg

Cases involving securities fraud in the United States District Court for the District of Maryland have become rare, much rarer than in the past.  The Plaintiffs’ bar might attribute this to passage of the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b)(1).  Among other things, the PSLRA requires that Plaintiffs plead facts in the complaint warranting a strong inference of “scienter,” which means “a mental state embracing intent to deceive, manipulate, or defraud.” 

In re Human Genome Sciences, Inc. Securities Litigation, Civil Action No. RWT 11-cv-3231 tested how PSLRA applies to disclosures related to clinical trials of a drug.  In re Human Genome Sciences, Inc. Secs. Litig., 2013 U.S. Dist. LEXIS 42049 (D. Md. March 26, 2013).  The drug, Benlysta, was the first FDA-approved treatment for lupus in 56 years.  Id.  But during the course of several clinical trials involving more than 1,900 patients, three participants committed suicide.  Id.  The class shareholders serving as plaintiffs in this case claimed that the companies who developed and marketed Benlysta deliberately misrepresented the results of these clinical trials.  Id.

The Honorable Roger W. Titus of the United States District Court for the District of Maryland disagreed and dismissed the complaint.  Id.  What is interesting about this decision is it highlights the degree to which courts will now look at matters outside the pleadings to determine whether “scienter” exists and thus whether a cause of action exists under Section 10(b) of the Securities and Exchange Act.  Citing two decisions from the United States District Court for the Middle District of North Carolina, the Court noted that, in the Fourth Circuit, district courts “routinely take judicial notice of newspaper articles, analysts’ reports, and press releases in order to assess what the market knew at particular points in time, even where the materials were not specifically referenced in the complaint.”  Id.

Considering those materials, the Court found that the drug companies did not “selectively disclose” only favorable aspects of the studies at issue.  Id.  The companies actually disclosed at least one suicide, albeit concluding that it was unrelated to the use Benlysta.  Id.  This conclusion was shared by the operators of the study.  Id.  This is not the same as, for example, a drug company deliberately failing to disclose side effects of a drug that become evident after numerous trials and independent studies.  Id.  Thus, “[i]n securities litigation cases premised upon a drug company’s partial non-disclosure of drug trials to the investing public, the key inquiry is whether the non-disclosure at issue results in a suspiciously incomplete data set that yields a strong inference of scienter.”  Id.  The Court did not find that such scienter existed in this case.  Id.

The Court granted the Motion to Dismiss on March 26, 2013.  We will watch this decision to see whether it is appealed to the Fourth Circuit. 

Read the full opinion here.

http://www.mdd.uscourts.gov/Opinions/Opinions/InReHumanGenomeSciencesInc._Securities%20Litigation_0313_MemoOpinion.pdf