Robo-Signers, Foreclosures and MERS, Oh My!: Housing Market Chaos, Media Frenzy and Opportunistic White Knights

Harper’s Magazine January 2012’s cover piece, “Stop Payment,” a feature article by Christopher Ketcham about homeowner-advocate groups who are trying to throw a wrench in banks’ foreclosure works, caught my eye as a sign of just how mainstream, misunderstood and emotional the relatively esoteric world of real property title law has become in the modern American dialogue. The American housing market has received a lot of attention in the media over the last few years, and rightly so (prices, sales and construction freefell for four years and counting).

But the public hasn’t been satisfied with chalking the decline up to simplistic “supply and demand” or cyclical market realities. Rather, the narrative has developed a more sinister triumvirate of bogeymen and their conspiratorial efforts to destroy the U.S. housing market, destroy equity, force millions into foreclosure (or bankruptcy) and blight entire neighborhoods with bank-owned, unkempt homes. The three horsemen of the housepocalypse ride on steeds named Securitizer, Servicer and MERS. Greedy banks created investment vehicles secured by brick and mortar homes, outsourced the servicing of the actual loan mechanics and created a hyper-efficient electronic database of information to keep track of all of the inter-investor transactions.

The Mortgage Industry Collapse

Since the underlying risks were underwritten by pseudo public corporations FannieMae and FreddieMac, it appeared that not only had Wall Street co-opted Main Street, but it had hoodwinked Washington and the American taxpayer to hedge the bet.

Now that the system has broken down in a very public way, public outcry has focused practical frustration on some potential failings, incorrect assumptions and institutional practices that yielded tremendous results, then catastrophically failed and, adding insult to injury, deepened the crater due to the lack of a contingency plan for handling the massive amounts of defaulting loans within the conventional foreclosure process.

The New Urban Legend

While everyone knows that Wall Street’s greedy securitization and bundling of millions of “sub-prime” mortgages exposed the larger markets to a ticking time bomb of a portfolio, the mechanics of how these operations developed has become something of an urban legend (note, curiously, that no one was complaining about the record levels of minority home ownership or the availability of credit to under-served portions of the population during the housing-bubble era):

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Quick! . . . Mediate That Business Divorce!

One of the officers of a corporate client calls. You note the distress in his voice immediately. He tells you that a dispute has arisen between the major shareholder factions of the company, and he wants you to advise on what he and those in his faction can do to win this. And you can tell he expects you to talk “reason” to the other faction.

But you quickly realize that although for the moment knowledge of the dispute is restricted to people in the company, it will only be a short time before it gets out to the customers, suppliers, banks and others with whom the company does business, threatening the existence of the company.

You should consider recommending the factions mediate the dispute, if possible before litigation is filed.

Advantages of Mediation

Some advantages of mediation are:

No Publicity. No lawsuit is filed. The situation can be kept as confidential as the parties want.

Speed. Trial, or even a hearing for significant injunctive relief, will take months, if not years. And as soon as customers hear there is an internal dispute — and they will — they will take their business elsewhere, to a “stable” competitor. And this risk increases significantly if a lawsuit is filed. A mediation can begin immediately.

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Crowdfunding – Good and Not So Good

On November 3, 2011, with a bi-partisan 407-17 vote the U.S. House of Representatives passed the Entrepreneur Access to Capital Act (H.R. 2930 and the “Access to Capital for Job Creators Act” H.R. 2940) (the “Acts”). The bills will now go to the U.S. Senate for reconciliation.

This Acts amend the Securities Act of 1933 to essentially allow “general solicitation,” heretofore illegal, in small offerings of investments if they meet numerous other restrictions. The Acts allows an issuing company to offer and sell securities, without regard to the general solicitation–type methods of promotion used, to an unlimited number of purchasers, so long as no purchaser is allowed to spend more than the lesser of $10,000.00 or 10% of his or her net worth, and the total amount of securities purchased within any 12 month period is no greater than one million dollars. And purchasers need not be “accredited” (usually meaning having a net worth of no less than one million dollars or annual income of $200,000.00 or $300,000.00 if purchasing jointly with a spouse). (And, if the issuer provides potential investors with audited financial statements, the offering may be as much as two million dollars. This may be particularly important in light of the ease of auditing a newly formed issuer with no history of operations and earnings).

Also, the Acts allow entrepreneur issuers to utilize “intermediaries,” who need not be registered as broker-dealers with the SEC, to assist in finding investors. This is a significant change from the present law, albeit with many restrictions on the use of the intermediary.

This is a “sea change” in the law of private placements. Perhaps its greatest significance is the new ability of such issuers to use the internet in private offerings. Also, it allows many potential investors, not sufficiently affluent to be “accredited,” to participate in an admittedly limited method in the growth of entrepreneurial companies. And, of course, it opens to entrepreneurial companies’ access to a body of investors hereto for prohibited to them.

However, some of the “restrictions” on crowdfunding should cause some companies to select other methods of private placement, particularly those who can attract sufficient accredited investors. These negative factors should also cause the Senate, in its considerations, to consider improving this new exemption.

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Employees Can Sue Employers in Civil Court for Occupational Disease Claims: Missouri Appeals Court

Missouri’s Western District Court of Appeals recently decided that an employee can sue his employer in civil court for an “occupational disease” claim. The case, KCP & L Greater Missouri Operations Co. v. Cook, involved Monroe Gunter’s claim for damages stemming from a work-related injury. He claimed that he contracted mesothelioma as a result of having been exposed to asbestos during his employment with KCP&L. The court ruled that Gunter was allowed to file suit in civil court because, under Missouri law, the workers’ compensation forum is not the exclusive forum for a claim premised on an “occupational disease,” such as mesothelioma. (Note the distinction between an “occupational disease,” which develops over a period of time, versus an injury that happens instantaneously or acutely as a result of a single accident.)

This is a major change from prior law. Historically, the exclusive remedy for an employee with any employment-related injury – whether acute or gradual in onset – was to pursue a claim in the workers’ compensation forum. This is a system that clearly benefits employers (as well as third-party workers’ compensation insurers).

There are two types of employers in the workers’ compensation context: those who carry insurance policies issued by third-party insurance companies, and those who self-insure – that is, who create and pay into their own private workers’ compensation insurance policies. In every work-injury case, there are three benefits to which an injured employee is presumptively entitled: medical costs, lost wages, and permanent disability.

Two Scenarios

Consider the difference between the likely cost of a workers’ compensation claim versus the possible cost of a civil lawsuit with regard to: (1) a Missouri business with a workers’ compensation insurance policy issued by a third-party insurance carrier; and (2) a Missouri business that self-insures.

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Control Agreements from the Secured Party’s Perspective – Perfecting Security Interests in a Securities Account

Any secured party, e.g. a bank, making a loan inevitably wants as much control over its collateral as the borrower is willing to give, and the law allows. In a declining real estate market, an obvious source of collateral for lenders may include a borrower’s securities account. But, taking a securities account as collateral adds an additional element to the loan process by bringing a new party to the table – the financial intermediary.

As people in the industry know all too well, different forms of collateral require different procedures to properly perfect their security interests. Real property, for example, is relatively straight forward; a secured party in Missouri records a properly executed deed of trust with the recorder of deeds office in the county in which the property is located. Investment property (stocks, bonds, mutual funds, brokerage accounts, etc.) are a different animal altogether. Under the Uniform Commercial Code (the “UCC”), a securities account is classified as investment property (UCC § 9-102(a)(49)). Most investors do not maintain physical possession of their certified securities (stock certificates or bonds); rather, these are held by their financial intermediaries. Understanding that your borrower will not have the ability to hand you its certified security for this reason, a creditor wishing to obtain its highest priority should perfect its security interest in investment property by control (UCC § 9-314(a)).

The secured party gains control over the securities account when the owner of the account instructs the securities intermediary, after the secured party has rights in the account, that the intermediary shall comply with the secured party’s orders without consent of the owner.

Put more simply, for a lender to perfect its security interest in a securities account two steps are required: (1) execute a written security agreement whereby the borrower acknowledges its pledge of the account (rights to the account); and (2) enter into a written three-party agreement among the lender, borrower, and financial intermediary (borrower’s instructions to the intermediary).

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Employee Social Media Griping: Can An Employer Terminate Employees Because of Their Social Media Posts Without Violating Section 8(a)(1) of the National Labor Relations Act

Social Media is the new water cooler conversation. It enables and facilitates conversations that years ago would have taken places at the old-fashioned water cooler. In today’s world of Facebook and Twitter, employee complaining is instantly, electronically and permanently transmitted to the world. Social Media users think less about their posts and disclose more so that a simple gripe monologue is turned into dialogue – on steroids – with the world. Such platforms encourage employees to blur their personal and professional lines of behavior and blurt out what is bothering them without engaging their higher level thinking tools.

With seven hundred and fifty million people actively using Facebook, there is a significant chance that a post about working conditions, compensation or other issues related to their employment will spark a conversation with an employee’s colleagues, and such conversations may constitute concerted activity under the National Labor Relations Act.

The question remains, if your employees say something negative on Facebook about your company, their fellow employees or their supervisors, can you terminate without running afoul of the National Labor Relations Act?

The answer depends on the facts surrounding the post(s). The test is whether the employee is engaging in activity solely for himself or on behalf of other employees.

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Frequently Asked Questions: Revocable Living Trust

What is a Revocable Living Trust?

A trust is an agreement that determines how a person’s property is to be managed and distributed during his or her lifetime and also upon death.

A revocable living trust normally involves three parties:

• The Settlor – Also called grantor or trustor, this is the person who creates the trust, and usually the only person who provides funding for the trust. More than one person can be the settlors of a trust, such as when a husband and wife join together to create a family trust.
• The Trustee – This is the person who holds title to the trust property and manages it according to the terms of the trust. The settlor often serves as trustee during his or her lifetime, and another person or a corporate trust company is named to serve as successor trustee after the settlor’s death or if the settlor is unable to continue serving for any reason.
• The Beneficiary – This is the person or an entity that will receive the income or principal from the trust. This can be the settlor (and the settlor’s spouse) during his or her lifetime and the settlor’s children (or anyone else or a charity the settlor chooses to name) after the settlor’s death.

A trust is classified as a “living” trust when it is established during the settlor’s lifetime and as a “revocable” trust when the settlor has reserved the right to amend or revoke the trust during his or her lifetime.

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Black History Month: BAMSL’s Exclusion of Sidney R. Redmond

This marks my 13th column as President of the Bar Association of Metropolitan St. Louis (BAMSL). If anyone has read more than one of them, you’ll have likely figured out that I have a certain fascination with history, and that I have availed myself of the privilege of unfettered access to the BAMSL archives, which date back to 1874. You may also have noticed that I frequently use this column to exalt the association. Certainly I cannot write a column for the February Black History Month edition without this month’s tale will do little to glorify BAMSL. In fact I’ll delve into one of the most ignoble chapters of BAMSL’s history: the organization’s participation in racist segregation.

Prior to 1948, BAMSL’s refusal to admit African American attorneys was not codified or recorded on any document I have found in our archives; however, we know that African Americans were not admitted to BAMSL as far back as 1922. This fact is not from our own records, but from the records of the Mound City Bar Association. The Mound City Bar, named for St. Louis at a time when there were still Mississippians’ burial mounds on both sides of the river, was, and is, one of the first bar associations for African Americans in the country. It was formed because black attorneys were not admitted to BAMSL. Therefore, I assume that, like many Jim Crow-era institutions, BAMSL’s segregation policy was strictly implicit.

Until 1948 when the association received an application for admission from Mr. Sidney R. Redmond. At that time, applications for membership in BAMSL were subject to review and required an affirmative vote by at least 80 percent of the members. Nevertheless, most applicants were admitted on oral vote for an entire slate of new members. Mr. Redmond’s resume would have been not only adequate for admission, but exceptional for an applicant. He held both an undergraduate and a law degree from Harvard. He had already tried and successfully appealed a case to the United States Supreme Court. He was counsel for Lloyd Gaines in State of Missouri Ex ReI. Gaines v. Canada, 305 U.S. 337 (1938). The case was one of the first to address racial separation in education. Mr. Gaines had applied to attend law school at the University of Missouri. However, because he was black, Mr. Gaines was denied admission.

The Court held that this practice was not Constitutional, but in keeping with the then prevailing “separate but equal” doctrine of Plessy v. Ferguson, 163 U.S. 537 (1896) it stopped short of ordering Mr. Gaines’ admission to the University of Missouri Law School, but did hold that he had a right to an education in the law within the state. This lead to the creation of a separate, but theoretically equal, public law school in Missouri through Lincoln University.

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Government of Laws, Not of Men … or Corporations

As lawyers, it’s not difficult for us to generally subscribe to the political philosophy that society works better when it is governed by “the rule of law.” As American attorneys, we most often trace the roots of this philosophy to Plato or Aristotle, but in truth, ancient philosophers in many cultures enunciate similar concepts, including Chinese and Islamic thinkers.

In comparing the success of our country and culture, we frequently cite the “rule of law” as basis for our economic success over the last two centuries. We often hear from other cultures that the inviolability of property and contract rights in our legal system is what instills the confidence in our system that encourages individuals to take the economic risk that causes our economy to thrive.

However, if “rule of law” is the structural “foundation” of our society, it might be time we grabbed a flashlight and headed into the basement. Every property owner in or around St. Louis knows that this foundation, like those in our homes, requires constant vigilance for cracks and leaks. Unfortunately, the bad news that property owners often learn is that even with constant vigilance, the early discovery of a tiny trickle of water in a well designed and maintained basement can result in significant and expensive repair costs. 

As lawyers, we are explicitly the guardians of our society’s rule of law foundation, so even with the queasy horror of substantial sacrifice on the horizon; I think we must continuously inspect the rule of law to ensure it is watertight.  This seems a particularly appropriate analogy given the alarming mortgage crisis that has predicated our current national recession. 

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Is Equitable Subrogation Dead for Lenders in Missouri?

The Meaning of Equitable Subrogation

In short, lender’s equitable subrogation is a tool by which real property lenders, or lienors, may replace the prior, senior lien position of an earlier in time lender by paying off that prior lender’s loan. This result could soften the blow dealt by Missouri’s notice-based recording statutes or the impropriety of deceitful borrowers or other lenders. A lender could seek equitable subrogation in many different circumstances, but always due to one of two possible scenarios: either the new lender was mistaken as to the intended collateral’s title; or the new lender was tricked into thinking it would hold a first priority lien.

Likewise, Missouri courts, in determining whether to apply the doctrine, historically chose one of two policy perspectives: either that the new lender should have known better as to previous lienors’ interests and thus equitable subrogation is denied; or that the new lender gave value with an expectation and inherits the same position as the prior, satisfied lender, so long as no junior lender suffers. Missouri’s current approach, though, adopts the former position to limit the remedy to only those instances where a lender or insurer falls prey to egregious fraud.

The standard definition or understanding of subrogation (often found in lender/borrower or insurer/insured relationships) springs when a party pays an obligation or incurs debt which should be borne by another. It is, then, “a principle of equity, [that] an insurer, upon payment of the loss, acquires the legal right to be subrogated pro tanto to the insured’s right of action against the person responsible for the loss. The conventional legal wisdom was that the payor could recover from the beneficiary of the satisfied debt as a matter of equity. This logic was often reduced to contractual terms and thus became what could be described as “conventional” or “legal” subrogation. Historically, when no such contract right existed, but the circumstances were such as to warrant subrogation, courts would use “equitable subrogation” in lieu of a contractual subrogation right.

Development of the Remedy for Lenders

The First 100 Years: From Reluctance to Acceptance

Missouri’s early 19th century cases looked critically at the new lender’s motivation to pay another’s debt despite early legal scholars’ advocacy for the broad use of equitable subrogation in a “great variety” of circumstances. These cases sought to limit equity’s ability to compromise prior creditors’ legal rights.

Continue reading at American Land Title Association or download a PDF of “Is Equitable Subrogation Dead for Lenders in Missouri?”

This article originally appeared in the Journal of the Missouri Bar and is reprinted with permission.