The United States Supreme Court recently affirmed an opinion from the United States Court of Appeals for the Eighth Circuit affirming the dismissal of the claim by two spouses that a lender’s requirement that they sign guarantees violated the Equal Credit Opportunity Act (“ECOA”), but the Court’s 4-4 decision has limited applicability.  See Hawkins v. Cmty. Bank of Raymore, 2016 WL 1092416 (U.S. Mar. 22, 2016).  In the case, a lender issued loans to a limited liability company and obtained personal guarantees from the company’s two members, as well as each member’s respective spouse.  After the company defaulted, the two spouses filed an action against the lender, claiming that their guarantees were required solely because of their marital status, in violation of the ECOA provision that states it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction . . . on the basis of . . . marital status.” 15 U.S.C. § 1691(a).  In support of their argument, the guarantors referenced the Federal Reserve Bank’s regulation that defined “applicant” as including guarantors.  12 C.F.R. § 202.2.  The United States District Court for the Western District of Missouri found that a guarantor is not an “applicant” under the ECOA, however, and granted the lender’s motion for summary judgment. 

On appeal, the Eighth Circuit affirmed the lower court’s decision.  See Hawkins v. Cmty. Bank of Raymore, 761 F.3d 937 (8th Cir. 2014).  Specifically, it held that the ECOA defines an “applicant” as “any person who applies to a creditor directly for an extension, renewal, or continuation of credit, or applies to a creditor indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  15 U.S.C. § 1691a(b).  The court found that a guarantor does not meet this definition and, because the ECOA’s language was unambiguous, the court did not owe any deference to the Federal Reserve’s interpretation that a guarantor was an “applicant” under the act and it rejected the guarantors’ argument to the contrary.  See Chevron U.S.A., Inc. v. Natural Resources Defense Council, 467 U.S. 837 (1984).  This decision was in conflict with a Sixth Circuit decision that the ECOA was ambiguous and that the Federal Reserve’s interpretation was owed deference.  See RL BB Acquisition, LLC v. Bridgemill Commons Dev. Grp., LLC, 754 F.3d 380 (6th Cir. 2014) (“[a] guarantor may therefore seek relief for violations of the spouse-guarantor rule.”).

The Supreme Court affirmed the Eighth Circuit’s decision, simply stating “[t]he judgment is affirmed by an equally divided Court.”  Therefore, though the Eighth Circuit’s opinion was affirmed, the decision does not constitute a binding nationwide precedent.  This decision allows conflicting opinions from other Circuits to remain good law.  Though the Third Circuit has not addressed the ECOA under Chevron analysis, it has previously found guarantors to be applicants based on the regulatory language.  See Silverman v. Eastrich Multiple Inv’r Fund, L.P., 51 F.3d 28, 31 (3d Cir. 1995).

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

The United States District Court for the Northern District of New York recently held that a restraining notice served on a Wells Fargo Advisors branch in Albany was sufficient to restrain the out-of-state assets of a non-party.  See Berkshire Bank v. Tedeschi, 2016 WL 1029526 (N.D.N.Y. Mar. 15, 2016).  In the case, the plaintiff obtained a judgment against the defendant and discovered that the defendant had received dividends from some Wells Fargo Advisors investment accounts.  One of the accounts was held by an Arizona partnership, which was 98% owned by a trust for which the defendant was a trustee, 1% owned by defendant and 1% owned by the defendant’s son.  When the plaintiff served the restraining notice on the Wells Fargo Advisors branch in Albany, the defendant moved to have it set aside because (i) the assets belonged to the partnership, not the defendant, and (ii) the plaintiff could not restrain out-of-state assets without registering the judgment in the state in which the assets were located.  The court first found that the plaintiff could restrain the non-party assets because it had made a prima facie showing of a fraudulent conveyance, specifically in that the defendant had transferred a significant sum of money from her personal account to that of one of her business entities the day after the plaintiff had been awarded summary judgment in its action against the defendant, and that money was subsequently transferred to the account at issue here.  The court then found that the restraining notice properly restrained the out-of-state property.  Citing to Koehler v. Bank of Bermuda, Ltd., 12 N.Y.3d 533 (2009), the court found that “a court’s personal jurisdiction over a bank garnishee authorizes it to order the bank to turnover out-of-state property. This conclusion equally applies to a restraining notice.”  In a footnote, the court added that there was no evidence that New York’s “separate entity” doctrine, which requires a judgment creditor to serve the bank branch in which the assets are located in order to restrain out-of-state assets, applied to a brokerage account.

For an analysis of the applicability of the separate entity doctrine, please click here.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

The United States District Court for the District of New Hampshire recently granted a lender summary judgment and held that its mortgage was entitled to priority over a prior-recorded mortgage securing a home equity line of credit (“HELOC”) when the HELOC was not fully paid off despite the lender’s actual knowledge of the lien.  See Bank of Am., N.A. v. Citizens Bank, 2015 WL 9305653 (D.N.H. Dec. 21, 2015).  In the case, Bank of America’s predecessor in interest received a mortgage on a property from a borrower to secure a loan.  Later, a second lender obtained a mortgage on the property to secure a HELOC to the borrower.  Two years after the second mortgage was recorded, Bank of America’s predecessor agreed to refinance with the borrower and asked the second lender to provide a payoff statement.  The bank then issued the new loan and sent the payoff amount to the second lender, but three days after the closing, the borrower borrowed more money against the HELOC.  The HELOC therefore was not paid off and remained open, and the mortgage was never discharged.  Bank of America eventually filed a lawsuit seeking a determination of priority, and the parties filed cross-motions for summary judgment. 

Bank of America argued that it was entitled to be equitably subrogated to the first priority position because it had paid off the first mortgage and the second lender would be unjustly enriched if it was given priority without having paid anything.  The second lender claimed, among other arguments, that Bank of America was not entitled to summary judgment because it had actual knowledge of the intervening lien.  The Court, though acknowledging that most states prohibit equitable subrogation when the lender has actual knowledge of the intervening lien but that the New Hampshire Supreme Court had not addressed the issue, granted Bank of America’s motion.  It held that “[t]he majority rule permits junior lienholders to invoke equitable subrogation if they negligently fail to learn of an intermediate lien, but denies similar protection to lienholders, like Bank of America, who were aware of an intermediate lien but were arguably negligent in failing to pay it off. In both cases, the intermediate lienholder will receive a windfall unless the junior lienholder is subrogated to the position of the senior lienholder. I cannot conceive of a reason why equity would allow such a windfall in one case but not the other.” 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

The Iowa Supreme Court recently held that a bank’s overdraft fees did not violate a state usury statute because the fees were not extensions of credit.  See Legg v. W. Bank, 873 N.W.2d 763 (Iowa 2016).  In the case, the plaintiffs were bank customers who paid a number of overdraft fees when they overdrafted their bank account.  They then filed a proposed class action against the bank, arguing, among other allegations, that the $27.00 overdraft fee violated Iowa’s usury laws for extensions of credit.  The bank filed a motion for summary judgment, which the district court denied.  On appeal, the Supreme Court reversed the denial of summary judgment on the usury claim.  It held that Iowa law defines credit as “the right granted by a person extending credit to a person to defer payment of debt . . .”  Because the bank immediately collected the overdraft payment when the customer deposited sufficient funds into his or her account, the customer did not have the right to “defer payment of debt,” and the overdraft fees, therefore, were not extensions of credit subject to usury laws. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

The United States Court of Appeals for the Third Circuit recently affirmed a District Court’s grant of summary judgment dismissing a class action complaint that alleged that a lender’s captive reinsurance arrangement violated the anti-kickback provisions of the Real Estate Settlement Procedures Act (“RESPA”) because the claims were time-barred.  See Cunningham v. M & T Bank Corp., 2016 WL 683372 (3d Cir. Feb. 19, 2016), as amended (Feb. 24, 2016).  In the case, the named plaintiffs’ closed on home mortgage loans with a lender in 2007 and 2008.  The plaintiffs all were required to purchase mortgage insurance because the loan amount exceeded 80% of the property value.  The lender selected mortgage insurers who would then reinsure the policies with the lender’s own reinsurance company.  All plaintiffs received a disclosure at their closing that noted that the lender may enter these captive reinsurance agreements and were given the option to opt out, but none chose to do so.  In 2012, they filed a lawsuit alleging that this agreement violated RESPA’s prohibition against kickbacks.  See 12 USC 2607.  The lender moved to dismiss because the alleged violations occurred on the date of the closing and the plaintiffs were outside RESPA’s one-year statute of limitations.  The District Court denied the motion to allow discovery on whether the claims had been equitably tolled.  After the parties conducted discovery, the lender moved for summary judgment on the statute of limitations issue, and the District Court granted the motion.  On appeal, the Third Circuit affirmed the decision, holding that the plaintiffs had not exercised reasonable diligence in investigating potential claims under RESPA, and they therefore were not entitled to equitable tolling. 

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.

The Second Department of New York’s Appellate Division recently affirmed a lower court’s denial of a bank customer’s motion for summary judgment and held that the customer may have contributed to the allegedly fraudulent transfer.  See Proactive Dealer Servs., Inc. v. TD Bank, 18 N.Y.S.3d 62 (2d Dept. 2015).  In the case, $50,000 was transferred from the plaintiff’s account to another account, despite the plaintiff not signing the withdrawal slip.  Instead, the withdrawal slip had a handwritten notation that someone had “spoke with” the plaintiff’s president, who had approved the transfer.  The plaintiff moved for summary judgment, noting that the Uniform Commercial Code (“UCC”) imposes strict liability for banks that charge a customer’s account for “any item not properly payable, such as a check bearing a forgery[.]”  UCC 4-401.  The defendant bank opposed the motion by alleging that the bank had acted in good faith and the customer’s negligence had contributed to the forgery, which is an exception to liability under the UCC.  UCC 3-406.  The bank claimed that its employee had spoken to the plaintiff’s president on the telephone, and the president had approved the transaction.  The Supreme Court denied the plaintiff’s motion.  The Appellate Division affirmed, finding that the bank had raised a triable issue of fact regarding the plaintiff’s contributory negligence.

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com.