Iowa Banking Law Blog

Bank Employee Terminated for Refusing to Open Customer Account in Violation of Federal Regulations; Claims Retaliatory Discharge

This Tennessee appellate case is instructive for banks located in Iowa and elsewhere regarding employees who claim they have been terminated for failing to violate banking statutes and regulations.

 

In VanCleave v. Reelfoot Bank, 2009 WL 3518211 (Tenn. App. 2009), the plaintiff, Mary Beth VanCleave, had been employed by Reelfoot Bank as an Assistant Vice President for approximately 14 years.  A long-time customer of the bank asked VanCleave to open an account for him.  VanCleave was aware that the customer had previously had overdue loans and that the customer’s other accounts had been subject to executions. In meeting with VanCleave about opening the new account, the customer explained he wanted to open the  account in his employer’s name, with a check made payable to the employer, and that any checks written on the account could only be signed by the customer.  The customer further explained the check “was really [his] money,” not the employer’s.  VanCleave believed she would be violating banking laws by doing what the customer asked; therefore, she refused unless the customer would agree to sign a signature card and provide identification.  The customer refused.  After another bank employee set up the account at the direction of higher management (but only after the employer came in to set it up), VanCleave was terminated. 

 

VanCleave sued the bank for retaliatory discharge, alleging that she did not open the account in the manner the customer requested because she was protecting the bank, complying with banking laws, and acting in accordance with how she had been trained to set up accounts. The trial court dismissed VanCleave’s case on the bank’s motion for summary judgment because the Court concluded the underlying purpose of VanCleave’s actions was not “to protect the public,” but only to protect the bank. 

 

Under Iowa law, a cause of action for this type of claim requires that the plaintiff show: (1) the existence of a clearly defined public policy that protects employee activity; (2) the public policy would be jeopardized by the discharge from employment; (3) the employee engaged in the protected activity, and that this conduct was the reason for the employee’s discharge; and (4) there was no overriding business justification for the employee’s termination.  Tennessee law is similar in most respects to Iowa law regarding this type of claim, and the Tennessee appellate court found that VanCleave’s case should not have been dismissed, because she presented evidence that she believed her refusal to do what the customer wanted involved an important public policy concern, not that she was somehow protecting the public by her actions.  The Court further found that among the laws the employee believed were implicated was the Bank Secrecy Act.  In addition, whether VanCleave believed she was protecting herself, the bank, or the “public good” was immaterial.  The Court concluded it was sufficient that the basis for the refusal to participate was her belief that doing as the customer asked would violate banking regulations, go against her own training, and put the bank in jeopardy.  This case is instructive generally for claims of “retaliatory discharge” or “discharge in violation of public policy”; however, other jurisdictions may have different standards.

 

If you have questions, please contact Rebecca Boyd Dublinske at 515-246-4505 or rdublinske@dickinsonlaw.com.

Iowa Appeals Court Rules in Case Involving Court Challenge of Non-Judicial Foreclosure

The Iowa Court of Appeals recently entered a ruling which should be of general interest to lenders.  The case of Regions Bank v. City State Bank, filed December 30, 2009, makes it clear that “non-judicial” foreclosures may in fact be subject to judicial review, even where the foreclosure appears to have complied with the strict requirements of Iowa’ non-judicial foreclosure statute.  The borrower in that case deeded approximately 117 acres of real estate to City State Bank, the first mortgage lien holder, pursuant to a written non-judicial foreclosure agreement between City State and the borrower.  City State Bank then notified Regions Bank, a second lien holder, of its statutory right to redeem the real estate by paying City State the full amount of the mortgage debt.  Regions had no interest in paying the full amount of the Regions debt in order to redeem all 117 acres, but alleged in a lawsuit it filed to set aside the non-judicial foreclosure action that it had the right to redeem one specific lot located within the 117 acres by paying a fraction of the total indebtedness owed to City State.  Regions based that claim on an agreement between City State and its borrower which contemplated that City State would have released certain lots from its mortgage, had the borrower paid some of the funds it borrowed from Regions Bank to City State, in exchange for partial releases of its mortgage.

Although the District Court found that City State had complied with the express requirements of Iowa’s non-judicial foreclosure statute and therefore granted summary judgment in City State’s favor, the Iowa Court of Appeals reversed the District Court’s decision, finding that the District Court should have at least granted Regions Bank more time to gather facts in support of its case before granting summary judgment to City State.  The Court of Appeals did not dispute the District Court’s finding that City State had followed the statutory requirements for non-judicial foreclosure set forth in the Code.  Unlike the District Court, however, the Court of Appeals found that that City State’s compliance with those statutory requirements did not preclude further judicial review of the foreclosure, because the Court of Appeals could not “foretell what effect, if any, [the alleged agreement between the borrower and City State] would have on the foreclosure process without examining its terms.”

At a time when many lenders and their borrowers are finding Iowa’s non-judicial foreclosure process to be the most cost-effective and speedy method for foreclosure of real estate mortgages, many junior lien holders are disappointed to find that their liens can be extinguished upon thirty days notice without judicial oversight of any kind.  This ruling will provide ammunition to those junior lien holders who may feel that judicial review of a particular non-judicial foreclosure is warranted.

If you have questions, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com. 

Protecting the Enforceability of a Loan Guaranty

Banks that rely on the enforceability of loan guaranties should be concerned about the decision of the Iowa Supreme Court in Spreitzer v. Hawkeye State Bank, No. 06-0877 (October 30, 2009).  In that case the Iowa Supreme Court concluded, among other things, that a guarantor justifiably relied on a lender’s oral statements that were contrary to the language in a standard form guaranty despite wording in the guaranty requiring that amendments be in writing.

 

A $1.5 million loan made to Walker Manufacturing (the “Company”) was the subject of a personal guaranty cosigned by two shareholders (the “Guaranty”).  The Guaranty was signed at a meeting at which Ray Glass, the president of Hawkeye State Bank in Iowa City (“the “Bank”), and the co-guarantors, Spreitzer and Ross, were present.  The Guaranty expressly stated that it was enforceable against either shareholder and could only be amended in writing.

 

When he signed the Guaranty, Spreitzer understood that he would only be personally responsible for $750,000 and that the Bank would pursue both co-guarantors in the event of a default.  Spreitzer testified that Glass told him that the Bank would collect the amount subject to the Guaranty “equally” in that event.   Spreitzer assumed that Ross had the means to satisfy his half of the debt and that this representation meant that the Bank would require Ross to pay his share.  In reality, Ross had arranged his personal assets in such a way as to limit his exposure to less than $100,000, a fact known to Glass but not disclosed to Spreitzer.  When its loan became due, Walker Manufacturing was unable to repay the Bank.  Although Spreitzer was able to settle his liability under the Guaranty for $750,000, the Bank collected nothing from Ross.  The Bank seized the assets of Walker Manufacturing in an effort to collect the amount never paid by Ross.  Spreitzer suffered substantial losses when his investment in Walker Manufacturing became worthless.  

 

The Iowa Supreme Court addressed many legal issues in this case, but some of its most instructive holdings are listed below:  

 

• An ambiguous representation does not necessarily preclude a claim for fraud.   
• Holding back material information can provide a basis for a finding that a representation was false when made.    
• Oral representations made about standard form documents in a face-to-face setting can provide a basis for a finding that the representations were not seen as involving a clear conflict with the written terms and that there was justifiable reliance on the oral statements.
• Holding back material information can provide a basis for an award of punitive damages. 

An enforceable guaranty can make a critical difference in the quality of a loan.  There are strategies that can reduce the risk that a guaranty upon which a lender has been relying will turn out to be unenforceable or could be deemed to have been obtained fraudulently.  Contact us if you wish to learn more about how to buttress the enforceability of your loan guaranties.

 

If you have questions, please contact Howard O. Hagen at 515-246-4543 or hhagen@dickinsonlaw.com or Arthur Owens at 515-246-4515 or aowens@dickinsonlaw.com.

The Mighty Sword of Preemption Sheathed; State AGs Can Enforce State Lending Laws

The battle between federal banking regulation and state regulation of national banks has been brewing for years.  It has been primarily a one-sided battle; the OCC has wielded the mighty sword of preemption and consistently vanquished state regulators, with their consumer protection warhorn around their neck, in courtrooms across the country.  The OCC has aggressively maintained its power to preempt state laws that affect national banks’ federally authorized activities.  State regulators have argued that the broad preemption endorsed by the OCC weakens state consumer protection and fair lending laws.  In Cuomo v. Clearing House Association, LLC, the Supreme Court ruled in favor of state regulation, at least partially, forcing the OCC to sheath its mighty sword in state judicial enforcement actions. 

 

In Cuomo, the New York Attorney General sent letters to various national banks requesting nonpublic information regarding their lending practices.  The AG was investigating the banks' residential lending practices for violations of the state fair lending laws.  The OCC and a trade group for the banks brought suit to enjoin the request claiming that the National Bank Act preempts the enforcement of state fair lending laws against national banks.  The Court held that the NBA does not prohibit the ordinary enforcement of state law.  The Court clearly delineated between any purported state “visitorial powers” or general oversight of national banks, which is preempted by the NBA, and the “prosecution enforcement actions,” which is not preempted.  When the state sues to enforce a state law against a national bank, it is not exercising visitorial or oversight powers; it is exercising its power to enforce state law.  Thus, the New York Attorney General could not simply request nonpublic lending information from national banks, but could bring suit or get a judicial search warrant and obtain the information though legal channels.  Under the Court’s ruling, only the OCC can exercise administrative visitorial oversight of national banks.  Substantive state law, on the other hand, can be enforced judicially by state authorities. 

 

This decision levels the playing field between state and national banks.  National banks now must clearly abide by the same fair lending and consumer protection laws as state banks.  The decision also will likely increase the regulatory burden on national banks, as they will have to be sure to comply with the differing consumer protection and lending laws of individual states.  It is unclear at this time how this decision will fit into the Obama administration's planned reform of the banking system.  For the time being, however, the mighty sword of preemption has lost a bit of its shine, and the warhorns of state attorney generals are sounding across the nation.

 

If you have questions, please contact Jeff Andersen at 515-246-4503 or jandersen@dickinsonlaw.com.

Supreme Court Upholds Tax Exemption for In-State Bonds

In Kentucky v. Davis, the United States Supreme Court upheld the long-established practice of many states which tax bond interest from other states but exempt from their state income tax interest on in-state bonds.  The Court’s 7-2 decision, issued on May 19, 2008, has the effect of avoiding disruption of the municipal bond market. 

Kentucky’s income tax law taxed interest on bonds issued by other states and their subdivisions but exempted interest on bonds issued by the State of Kentucky and its political subdivisions.  The issue before the Supreme Court was whether this violated the Commerce Clause found at Article I, §8 of the United States Constitution, which expressly empowers Congress to regulate “Commerce . . . among the several States . . . .”  The Supreme Court has considered that this express grant of power to Congress requires, by implication, a “dormant Commerce Clause” prohibition on state laws that discriminate against interstate commerce.  A “market participant exception” to the restrictions imposed on the states by the dormant Commerce Clause applies when a state or local government actually participates in a market rather than merely regulating other market participants.    

The majority opinion, written by Justice Souter, emphasized that Kentucky’s law favoring in-state bonds related to “a quintessentially public function, with a venerable history” and involved Kentucky’s direct market participation. The majority opinion concluded that no “traditionally forbidden discrimination” against interstate commerce was involved because Kentucky’s law did not create “a commercial advantage for goods or services marketed by local private actors”, but instead involved state government carrying out civic objectives.

By Arthur F. Owens (aowens@dickinsonlaw.com)

Eight Circuit Confirms Blanket Bankers Bond Does Not Cover Bank's Losses

In a recent case, Ohio Savings Bank (“OSB”) sought indemnity for losses under a bankers blanket bond issued by Progressive Casualty Insurance Co. (“Progressive”).  OSB incurred losses after buying loans which went into default as the result of the actions of the party who had sold the loans to OSB.    The Eighth Circuit confirmed this month that the blanket bond did not cover the losses.

The bond did not cover losses resulting from normal lending activities, but there were two exceptions to the exclusion.  OSB argued that the losses were covered under a rider entitled, “Fraudulent Mortgages Insuring Agreement (‘FMIA’),” and that the losses were covered by “Insuring Agreement (E).”  The Eighth Circuit rejected both arguments.

Regarding FMIA, the Eighth Circuit limited application of FMIA to cover losses from a mortgage “defective by reason of the signature thereon,” which failed to provide a security interest because the mortgagor was tricked or defrauded as to the nature of the document signed.  As the borrowers admitted that they understood they were signing mortgages to encumber their property, the mortgages were not defective.  Thus, OSB was not covered for losses which resulted simply by the borrowers’ refusal to pay their mortgage notes.

With regard to Insuring Agreement (E), this provision was held to cover losses resulting when an instrument is lost or stolen from its rightful owner and then used to persuade a bank to extend credit.  As the mortgages in question were the borrowers’ mortgages, and the original documents were not lost until after OSB relied on what was assigned in extending credit to the borrowers, OSB’s losses were not covered.  The Eighth Circuit held that losing collateral documents after a loan was made is precisely the sort of practice that is excluded from coverage by a bankers blanket bond.

Court Holds State Licensing Laws Not Preempted By Federal Law

In State Farm Bank, F.S.B. v. John B. Reardon, a case out of the Southern District of Ohio, a federal judge ruled that a thrift's independent contractors are subject to state licensing laws.  State Farm Bank ("SFB") used independent contractors to sell insurance and commercial retail bank products.  It sought to have these agents market mortgages.  In 2004, State Farm Bank was issued a formal opinion from OTS counsel stating that federal law preempts state laws relating to the banking activities of SFB's independent contractors.  SFB notified the Ohio Superintendent of this opinion, but the Superintendent maintained that state law requiring mortgage broker licenses was not preempted.

The court concluded that "while the OTS may have the authority to extend federal preemption to agents of federal depository institutions, it has failed to comply with the Administrative Procedures Act in its efforts to do so."  It held that the OTS could only extend preemption to independent third parties through a formal regulation issued after publication and public hearing.  The letter signed by OTS counsel was insufficient.  The court went on to state that the "mortgage foreclosure crisis" underscores the need to follow the Administrative Procedure Act and that the OTS's proposal would create a situation in which certain mortgage brokers are not licensed by state or federal law.  In sum, the court stated that the OTS may have the authority to preempt the state licensing statutes at issue, but did not take the necessary Administrative steps necessary to effect such preemption.   

The court distinguished Watters v. Wachovia on the basis that Watters dealt with operating subsidiaries of national banks.  While these subsidiaries are supervised and regulated by the OCC to the same extent as the parent bank, wholly independent contractors are not. 

This case is contrary to a 2006 case out of Connecticut with very similar facts.  In State Farm Bank, F.S.B. v. Burke, the court held that OTS regulations preempted state licensing laws.  That court declined to address the argument that the Opinion Letter had not followed the Administrative Procedure Act.  State Farm Bank appealed the decision. 

The facts in these two cases exemplify the delicate nature of many Opinion Letters -- is it an interpretation of existing laws and regulations or is it an improper change in the law?  Also, the Ohio case shows that the preemption tug-of-war is far from over.   

For more information on this case contact Jeffrey Andersen.

LARGEST JUDGMENT IN FTC HISTORY FOR DEBT COLLECTIONS VIOLATIONS

The United States District Court in the District of New Jersey awarded the Federal Trade Commission a $10.2 million judgment and an injunction against a debt collection company earlier this month.  According to the FTC, this judgment constitutes the largest in FTC history for violations of the Fair Debt Collections Practices Act (FDCPA). 

In Federal Trade Commission v. Check Enforcement, et al., the FTC filed a complaint in 2003 alleging, among other things, that Defendants’ debt collection practices on NSF checks violated the FDCPA and the Federal Trade Commission Act.  According to the complaint, Defendants purportedly routinely sent collection letters that failed to identify the face value of the NSF check and merely stated the total amount due without noting the additional charges they were attempting to impose.  Defendants also allegedly threatened consumers with arrest and prosecution through collection letters and harassing telephone calls.  Those who attempted to assert their rights under the FDCPA were further abused and harassed. 

Among Defendants’ arguments were that the check writers’ actions were tantamount to criminal conduct and thus, they should not be afforded the protections of the FDCPA.  Since the FDCPA did not apply, according to the Defendants, then the Defendants could not be considered “debt collectors” subject to the FDCPA.  The Court rejected these arguments and stated, among other things, that Defendants satisfied the FDCPA definition of “debt collector” in that they used “any instrumentality of interstate commerce or the mails in any business the principal purpose of which is the collection of any debts” and they regularly collected or attempted to collect “directly or indirectly, debts owed or due or asserted to be owed or due another.”  The Court further reasoned that there was insufficient evidence that the check writers intentionally wrote checks on accounts with insufficient funds or on closed accounts with the intent to steal the service or merchandise provided.

To read a full copy of the opinion and final order of the Court, as well as other pleadings filed in this case, click here.

For further information contact Mary A. Zambreno.

Companies May be Partially Shielded from Data Breach Class Action Suits

            The Seventh Circuit dismissed a class action lawsuit against Old National Bancorp, ruling consumers had no right to recover for a 2005 data breach.  The plaintiffs accused Old National Bancorp of failing to properly secure personal data collected through its web site after a hacker obtained access to a 2005 online customer application.  The breach exposed financial data and personal information, including social security numbers, of thousands of customers.

            The plaintiffs believed they should be compensated for the credit monitoring services they needed after the breach.  The Court ruled that Indiana law did not provide recovery for plaintiffs’ mere “allegations of increased risk of future identity theft.”  The Court stated the consumers “have not suffered a harm that the law is prepared to remedy.” 

            In sum, victims of data breaches cannot recover until they can show the breach actually led to identity theft.  At least according to this Court's determination, no remedy exists for an increased likelihood of identity theft, or for the expenses of credit monitoring.

For other articles on this see Wired, and Computerworld. 

Valuation Issues and Reverse Stock Splits

It is important to read the footnotes when considering how a minority interest in your bank or bank holding company might be valued. Iowa Code §524.1406(3) permits the use of minority and marketability discounts in determining fair value in connection with appraisal rights for banks and bank holding companies. We have successfully represented a client in a district court case in which this provision was recognized and upheld against a constitutional challenge. At first glance it might appear that the Iowa Supreme Court’s July 13 2007 decision in Northwest Investment Corp. v. Wallace reaches a different result. In that new reverse stock split case an appraised value was approved that not only did not apply such discounts but added a control premium. The critical distinction is found in footnote 3 which indicates that the corporation involved was not a "bank holding company" within the meaning of Iowa Code §524.1801. Therefore, the generally applicable corporate standards for determining fair value set forth in Iowa Code §490.1301 applied, rather than the special rule for banks and bank holding companies found in Iowa Code §524.1406(3).

For more information contact Arthur F. Owens, who practices primarily in business and corporate law.