Bank Lawyer's Blog

A Long, Hot Summer Of Foolish Things

Among the many critical events that occurred this summer while I was pounding down Shiner Bocks by the busload and watching stupefied as the greatest self-aggrandizer since P.T. Barnum managed to vault to the top of the opinion polls by leveraging a condor's wingspan of hair and a face that looks like someone set it on fire with liquefied steroids and tried to beat it out with a rake into the most SPECTACULAR, FINEST, CLASSIEST, ENERGETIC, and HUUUUUGEST presidential campaign EVERRRRRR, the always amusing Supreme Court of the United States of America was proving everyone but left wing-nuts as wrong as Liz Warren about an Indian chief's skeleton in her family's closet when it determined, after a couple of previous misfires, that "disparate impact," indeed, applied to already shell-shocked residential housing lenders. While the opinion did sow some landmines in the statistical road to government-determined racial diversity in housing, the use of the doctrine itself as a basis to bring baseless actions against home lenders and to squeeze some juice out them for the benefit of those who will tend to vote reliably for the party that puts the chicken in all of their pots, was validated.

An excellent analysis of the decision, and potential legal issues to be considered by interested parties, can be found in this client alert by Joe Lynyak and his colleagues at Dorsey & Whitney. For the moment, I'm more interested in more fundamental concerns regarding the entire notion of "disparate impact." Another person who shares similar concerns is economist Thomas Sowell. He was interviewed in the Wall Street Journal on a wide range of topics, but the following is what Sowell, a man once so poor he pawned a suit of clothes for enough money to buy a knisch and a can of orange soda, had to say about disparate impact:

Or take “disparate impact,” the idea that different outcomes among different groups—say, that there are more male CEOs than female—is ipso facto evidence of discrimination. The Obama administration has used disparate impact to charge racism in housing, employment and other matters. In the absence of discrimination, the theory goes, people naturally would be dispersed more or less at random. Nonsense, Mr. Sowell says. “In various books I’ve given lists of all the great disparities all over the world, and I recently saw a column by Walter Williams in which he added that men are bitten by sharks several times as often as women.”

Differences in outcome is a matter that Mr. Sowell takes up in his new book, “Wealth, Poverty and Politics: An International Perspective,” out Sept. 8. Its theme, he says, is that “in a sense, there was never any rational reason to believe that there would be this evenness that they presuppose.” Some continents have more navigable rivers and deep water harbors than others. Some cultures value education highly, and some don’t. Underwhelming as the conclusion might sound to those with the urge to reorder society, many disparities arise simply because people are different, and because they make different choices.

Another problem is that the “disparate impact” assumption misidentifies where group differences originate. He sets up an example: “If you have people in various groups in the country, and their kids are all raised differently, they all behave differently in school, they do differently in school. And now they’re grown up and they go to an employer, and you’re surprised to find that they’re not distributed randomly by income.” It’s “just madness,” he says, to assume “that because you collected the statistics there, that’s where the unfairness originated.”

[...]

Why do we never seem to learn these economic lessons? “I think there’s a market for foolish things,” Mr. Sowell says—and vested interests, too. Once an organization such as the Equal Employment Opportunity Commission is created to find discrimination, no one should be startled when it finds discrimination. “There’s never going to be a time when the EEOC will file a report saying, ‘All right folks, there’s really not enough discrimination around to be spending all this money,’ ” he says. “You’re going to have ever-more-elaborate definitions of discrimination. So now, if you don’t want to hire an ax murderer who has somehow gotten paroled, then that’s discrimination.”

"A market for foolish things." Yes, we are.

The Rocky Mountain Lowdown: Loan Collateral Up In Smoke

I asked Steve Mulligan, a partner in the Denver office of the law firm that suffers my presence in their Texas office, to write a guest post for the blog on an issue of concern to lenders in Colorado (and, perhaps, other states) where, after the most recent state and national elections, lighting up a fat boy in public, or growing smokable hemp in  your basement, no longer puts you on the wrong side of local law enforcement. As Steve points out, that's not the end of the story for lenders whose collateral may be a place where some mellow cats are toking up a Rocky Mountain high.

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Bankers & Lenders, Your Real Property Collateral May Be At Risk if Your Borrower Violates Federal Drug Laws

By Steven T. Mulligan, Bieging Shapiro & Barber LLP

Bankers and lenders, if your borrower grows marijuana or rents to people who grow marijuana, your real property collateral may be at risk of forfeiture under federal law despite the fact that such activity might be legal under Colorado state law.

Judge Howard A. Tallman, chief judge of the U.S. Bankruptcy Court in Colorado, had recent occasion to considersuch a situation.  In In re Rent-Rite Super Kegs West Ltd., the Chapter 11 debtor owned a warehouse in Denver and some of its tenants were in the business of growing marijuana.  While this may be a legal activity under Colorado law, it is not under the federal Controlled Substance Act (the “CSA”) unless one receives a certificate of registration from the Drug Enforcement Agency (“DEA”). 

Judge Tallman looked to § 856 of the CSA, known as the “crack house statute,” which provides that it is a federal crime to use real property or allow real property to be used for unlawfully manufacturing, storing, distributing, or using a controlled substance.  Marijuana is a Schedule I controlled substance under the CSA. 

The Judge then looked to the criminal penalties for violating the CSA which includes a potential prison term of not more than twenty years.  As a result, the federal forfeiture statute comes into play.  That statute provides that real property used in connection with activities that violate the CSA and are punishable by more than one year’s imprisonment is subject to forfeiture.

Consequently, Judge Tallman found that the debtor’s illegal activity put the lender’s collateral at risk because of the federal forfeiture statute.  Moreover, since the automatic stay provisions of the Bankruptcy Code do not prevent the U.S. from seizing property under the forfeiture statute, the risk continued every day that the debtor remained in bankruptcy.  The matter was before the court on the secured creditor’s motion to dismiss the debtor’s bankruptcy case. 

In re Rent-Rite highlights the need for lenders to gather important information when underwriting and administering a commercial real estate loan.  Such information should include current rent rolls, copies of any leases, and research on any tenant; it may be that the name is a good indication as to what the tenant’s business is.  If possible, you may want to visit the property to see if any potentially illegal activity is taking place.  An affirmative covenant from the borrower that no activity in violation of state or federal law may also be beneficial.

Additionally, consider requiring the borrower to provide periodic updates and immediate notification if it enters into any new leases or changes its own business to include growing marijuana.  Finally, think about reviewing your default provisions; if the borrower engages in activities that are in violation of the CSA or allows such activities to occur, you may be able to declare a default under the loan documents.

The Prez Says: I'm Thankful For Bankers

I wish all my readers, even those Bubbas out there in Bubbaland who are about to commit the mortal sin of deep frying a turkey, a Happy Thanksgiving. And if, over the holiday, you can't be with the one you love, love the one you're with.

And since I'm in the holiday spirit, I'd like to leave you with the following news report, which demonstrates once again that when any public figure needs a ratings boost, all he or she has to do is kick a banker in the teeth. It never fails.

President's Approval Rating Soars After Punching Wall Street Banker in Face

Bank of America's Galveston Fish Story

I realize that whenever a bank (or any other business entity) is sued these days the standard public response  is some variation of "the lawsuit is without merit and we intend to vigorously defend," but occasionally, you wonder why the bank didn't simply settle the dispute short of letting it get to the point where a lawsuit is initiated. Some claims are just public relations losers regardless of the legal issues involved. Take the case of the Galveston, Texas, homeowner who discovered that his vacation home had been seized by Bank of America, which thought it was taking control of a home on which it had foreclosed and which proceeded to change the locks on the house and turn off the power by throwing the main power switch.

Unfortunately, at the time the power was cut off, there was 75 pounds of  Alaskan halibut and salmon sitting in a freezer. The homeowner, a retired professor, and his wife were planning to throw a party for 30 guests. Instead, after entering the house a week after the power was turned off, they, and the police officers who responded to their call that their home had been invaded, were poleaxed by the overpowering stench of rotting fish. I assume it will take more than a single air freshener to police up the atmosphere in that dwelling.

“It was the most unbearable stench,” [homeowner Dr. Alan] Schroit said. “It was so unbearable the police officer asked if we could leave the house so he could take the report; it was absolutely horrible, a gooey mess.”

Needless to say, the fish fry was canceled.

The problem for Bank of America is that it seized the wrong house. The professor thinks the bank might have been looking for a house on another street with the same house number. However, he and his wife don't have a loan with Bank of America. I assume they're not likely to apply for one in the near (or distant) future. Whatever the reason for the error, that was a major "oops" moment for the nation's biggest bank.

The professor and his wife apparently are claiming that substantial damages were incurred as a result of the power being cut off, in addition to the rotting fish odor issue.

“The property sustained water damage, potential mold contamination arising from the standing freezer residue, water, heat and high humidity conditions during the time the electrical power was off,” according to the lawsuit.

Schroit said he kept doors and windows open for days to try to rid the house of the foul odor. Cleanup efforts were substantial, he said.

The floors had to be cleaned, as did the joists of a lower-level ceiling, through which fish blood seeped, and some painting had to done to get the house back to a “preinvasion” state, according to the lawsuit.

Perhaps the bank thinks the plaintiffs' monetary demands exceed the bounds of reasonableness. At this point, the bank isn't saying much other than it is familiar with the claims and "we do not believe the case will show merit.”

Maybe it does, maybe it doesn't. You can't determine that from the press report, although it does seem that because the plaintiffs are doing most of the talking, and that big banks aren't exactly admired by the reading public these days, the bank's image is taking a hit. Therefore, you'd think that unless the plaintiffs were trying to extract a windfall, the bank would want to avoid the bad publicity. After all, these stories give reporters a chance to publicize the fact that this isn't an isolated case for Bank of America.

According to an Oct. 30 article in the Floyd County Times, a Wheelwright, Ky., man filed a lawsuit against Bank of America for repossessing his home by mistake and refusing to pay for damages other than replacing the locks.

“Christopher Hamby arrived home on Oct. 5 to find the locks on his doors changed and winterization chemicals placed in the plumbing and various lines cut at the residence,” according to the article.

Hamby also did not have a mortgage with Bank of America, according to the article.

Countrywide Continues To Pay The Piper

In February of this year, Colorado’s Attorney General proudly announced that “Colorful Colorado” had squeezed $6 million out of Countrywide Financial Corp. for alleged violations of Colorado’s Consumer Protection Act, arising out of Countrywide’s subprime mortgage lending in that state. As we noted, the $6 million was only a small drop in the bucket compared to the amounts that other states were flushing out Countrywide’s fire hydrant of cash.

Texas recently showed how much blood a great big pair of Justin boots can stomp out of the Countrywide turnip.

Countrywide Financial will send $7.46m in restitution to eligible Texans who lost their homes to foreclosure, according to a statement from the Texas attorney general.

The restitution program, first announced by Attorney General Greg Abbott in February, disperses the funds to Countrywide’s Texas customers whose loans originated between Jan. 1, 2004 and Dec. 31, 2007.

[…]

The program was part of a $345m settlement between the attorney general’s office and Countrywide, which also provides $335m in loan modifications for 30,000 Texans.

[…]

And roughly 1,400 Texans who are in or approaching default and voluntarily relinquish their residence to the Relocation Assistance Program could receive $2,000.

The Relocation Assistance Program plans to send $2.8m in benefits to Texas homeowners.

So, all told,Texas made out like a bandit compared to Colorado. However, California, with a whopping $3.5 billion carved out of Countrywide's hide, remains the Platonic ideal of claimants, of whom all other claimants are merely pale reflections.

While it may have placed well on down the list of Countrywide jackpot winners, Colorado won bragging rights to one of the most hotly contested competitions in recent memory, namely, the right to be named as the beer of choice by one of the three participants in The Change We Have Been Waitng For’s “teachable moment” this Thursday before dinner at The White House. Apparently, "The One" prefers a Budweiser (surprisingly, because customarily Bud's the choice of those pathetic lower class prols who cling to their guns and their religion). Well, this Bud’s for you, Mr. White House Change Meister!

The bantam rooster who helped provoke this firestorm of a “teachable moment,” Harvard Professor Henry Gates, reportedly prefers either Red Stripe or Becks. That means in a contest between The Change and The Prof over who'd you rather pop a frosty with, the Prof wins hands down. Not to be outdone, however, Officer James Crowley, the other half of the testosterone-laden duo, is quaffing a blue ribbon beer, and we don't mean Pabst, we mean Blue Moon. That beer started out as a microbrew sold only at The Sandlot, a pub within the confines of Coors Field in Denver. As a season ticket holder of the Colorado Rockies when they made the move into Coors Field in 1995, I consumed many a Blue Moon, although it's been a blue moon since I've had one (being now converted to the wonders of Shiner Bock). Nevertheless, as the world now understands, Colorado's own Blue Moon is a beverage worthy of the most teachable moments in the most powerful hovels that this planet possesses.

Colorado may have been short-changed on Countrywide "swag," but it can take pride in its place at The White House table. Unless, of course, Crowley and Gates over-imbibe their respective favorites, once again pull out their rulers and start measuring, and all hell breaks loose. Actually, that would be one teachable moment I'd enjoy watching, with or without my favorite beer in hand.