Filed under: Current Issues in Credit Unions
This month, we are joined by Rick Wargo, Esq. of the Pennsylvania Credit Union Association. Here are the topics:
–The Corporates (It’s not a bailout!)
–Appendix J of Opportunity
–Safe Act Update
–Marcellus Shale and credit unions
–Big K Roundup (Top 10 ways CUs can attract young people)
We had a little trouble with a sound driver so it sounds like we recorded the show in a cave. We’ll return to normal sound next week, so please bear with us.
The CIiCU hosts are:
Farleigh Wada Witt,
Attorneys at Law
121 SW Morrison Street, Suite 600
Portland, Oregon 97204
Messick & Weber P.C.
211 North Olive Street
Media, PA 19063
American Airlines Credit Union
P.O. Box 619001
DFW Airport, TX
AFCU Director of Regulatory Compliance
NAFCU – National Association of Federal Credit Unions
3138 10th Street North
Arlington, VA 22201-2149
Weltman, Weinberg & Reis Co., L.P.A.
323 W. Lakeside Avenue, Suite 200
Cleveland, Ohio 44113
Subcribe to the show via iTunes Music Store: http://phobos.apple.com/WebObjects/MZStore.woa/wa/viewPodcast?id=151785964&s=143441
Filed under: Viewpoint | Tags: accord, full and final payment, jennifer monty, satisfaction, viewpoint
The following is an article reprinted with permission from the Summer 2010 edition of Viewpoint (WWR’s Governmental Collections newsletter):
By: Jennifer M. Monty, Associate
“Full and Final Payment”—these four words that appear on the bottom of a check can incite fear and questions for many creditors. Should you cash the check? If you cash the check, can you still collect any of the remaining balance? What should you do with the check? Can any bill be partially paid merely by writing “full and final payment” in the memo line? In tough economic times, more debtors are turning to creative methods to avoid payment or continued collections.
The Ohio Revised Code and Ohio case law provide answers to all questions regarding accord and satisfaction. The Code provides that full and final payment checks are only a bar to future collections when certain elements are established:
• The person tendering the full and final payment is doing so “in good faith”
• The amount of the claim or debt is the subject of a “bona fide dispute”
• The payment is accompanied with a written communication that fully discloses the debtor’s attempt to fully settle the claim.
Essentially, for a full and final payment to act as full satisfaction, the borrower has to meet all of the above requirements. The first step of the analysis is to determine what debt is at issue and whether there is an underlying dispute. If there is no dispute, then there can be no satisfaction merely by offering a partial payment. If there is a dispute, it has to be a bona fide dispute. For example, on a credit card account, a debtor may have a bona fide dispute if they have properly contested charges. Disputing whether the United States allows credit cards to loan money is not a bona fide dispute. Finally, the creditor has to be put on sufficient notice to understand that cashing the check will result in full satisfaction. Merely writing “full and final payment” on the memo line of a check may not be sufficient enough notice, as most creditors electronically process payments and never see or read the actual check.
The Ohio Supreme Court has long upheld these elements and explains its position in terms of contract law. Under the Supreme Court analysis, there is no satisfaction unless the debtor can prove:
• That the parties went through a process of offer and acceptance—an accord
• That the accord was carried out—satisfaction
• That the accord and satisfaction were supported by consideration.
The Court has further clarified this and provided that if there is not an actual dispute between the parties, there cannot be an accord and satisfaction. The Court explained that unless both the debtor and creditor give up something, then there can be no accord and satisfaction.
What should you do when you receive a full and final payment check? First, review your notes and file to see if there is any actual dispute between the parties. Second, look to see if the check is accompanied by a letter explaining a dispute. Also, if you have a policy in place to notify your consumers that they must send dispute letters to a certain place, and the consumer does not send it to that address, the consumer’s full and final payment check will not serve as a bar to future collections. In advance (i.e. on a monthly basis) a creditor should inform the consumer that if they want to dispute a debt or tender a partial payment that it must be sent to a specific person or place (this is routinely provided on a billing statement). Then, if the dispute letter is not sent to that specific person or place, the check can be cashed. Otherwise, the check should be returned.
Jennifer M. Monty is an Associate in Litigation & Defense; Consumer Finance Litigation, Commercial Business, Real Estate Default, Commercial Real Property and Federal Court Litigation Groups. She is based in the Cleveland office. She can be reached at (216) 685-1136 or email@example.com.
Filed under: compliance, credit unions | Tags: CFPB, consumer financial protection bureau, cost cutting, innovation, rob rutkowski
By: Rob Rutkowski, Esquire
I recently gave a presentation on “Preventing Credit Union Failure Given the Passage of Regulatory Reform” for NAFCU and will be presenting material to other credit unions on the new Consumer Financial Protection Bureau (CFPB) in the coming months. At the end of the day, I think that this new Act boils down to two things that credit unions must work harder on: cost-cutting and innovation. My thoughts:
Traditionally, a credit union doesn’t run as lean as possible, that is, just short of the point of employee discomfort. With member service being such an important focus, sometimes this means having more than enough tellers and loan officers to handle member needs. Unfortunately, as compliance costs increase, credit unions will be forced by the market to run as lean as possible, merge with other credit unions or cease to exist. Therefore, it makes sense to have a contingency plan concerning layoffs. A credit union can do a reduction in force and create a plan whereby it reduces its labor force to the minimum possible number of employees to operate as a business. Moreover, there are ways that the credit union can pick up some of the lost labor resources via outsourcing and through volunteers.
This will take planning. Credit unions are already great at forming CUSO’s to provide anything from accounting services, to back office services, to BSA compliance, to data processing. Some credit unions even outsource aspects of lending with 24-hour loan application and review services. There is room for more. If a credit union’s very existence is threatened, it can start eliminating all types of overhead including brick and mortar. If a credit union can move from a brick and mortar model to an Internet or virtual model, the cost savings can be significant– perhaps enough to save a credit union’s existence. An Internet-based credit union can take in checks via remote capture and distribute funds via ATMs and checks. It can also have a bill pay system via ACH to move money around as well. There are already examples of this in the marketplace. REALTORS Federal Credit Union is a virtual credit union and there are also quite a few virtual banks. The point is that if the credit union cannot do business because of the increased costs of compliance then everything needs to be on the table.
Can this affect morale? Certainly. However, if the question is finding funds to handle compliance burdens, then tough choices may need to be made. If a credit union needs to free up funds but is not in a make-it-or-break-it situation, some of these concepts can be integrated without turning into an Internet credit union.
Another more traditional resource is utilizing volunteers. When I was a director at a credit union, we had a supervisory committee that functioned as the credit union’s auditing entity. In other words, volunteers spent their time auditing the financial records of the credit union. This is entirely permissible under NCUA Regulations (assuming qualified people are involved). Historically, credit union volunteers have taken on very tough jobs for no remuneration. This sort of resource drive can be undertaken by a credit union especially if it is do or die. It may take some persuasion, but there are vast resources in terms of cognitive surplus in any given credit union’s membership. Certainly, with the media’s focus on the graying of America and the large number of retirees from the baby boomer demographic, this cognitive surplus is both more talented and more productive than ever before. In terms of motivating people to volunteer, there need not be financial rewards involved. The Tom Sawyer effect from Mark Twain’s novel has been discussed in many popular business books. The idea is that someone can be motivated by recognition and by glamorizing the task in question. This doesn’t have to be a false whitewashing; simply disclosing how important the particular task is to the perpetuation of the credit union is sometimes all it takes to encourage volunteers. For example, let’s take BSA testing. A credit union must test its BSA policies and procedures by law. Volunteers can be mobilized to conduct this testing at the credit union and in every aspect of the BSA process at little cost. Volunteers can play a role in every part of the credit union’s functions. There have been credit unions that have used volunteers for tellers and loan officers and even CEOs. I’ll grant you that these were small credit unions at the time but it just depends on whether the person has the interest and motivation and is qualified and bondable.
Other resources available to credit unions include collaborative Internet-based efforts. These include compliance collectives like the cob web list serve and cob web forum, FTP sites that are associated with the Credit Union National Association. Moreover, NAFCU’s Compliance Blog is the industry leader among compliance-oriented credit union blogs and provides free compliance information and a place to discuss compliance issues in the comments. More can be done. Internet forums can be setup to provide compliance information among credit unions free of charge. Credit union compliance officers know what applies and what doesn’t and that expertise can be shared on a nationwide basis. Another thing that can be done in terms of drilling down on each particular compliance obligation is assessing the risked-based aspect of the statute. Many of the large compliance burdens such as BSA and FACTA have risked-based components to them. Identifying the minimal level of compliance is important in allocating resources to meet the compliance burden.
Finally, ultimately, the regulator is not the enemy. Open communication with the regulator in the compliance field is helpful. If we don’t communicate with the regulator, the regulator will not understand what challenges the credit union faces. Don’t get me wrong, this will be tough. Regulators are notoriously slow in understanding how credit unions make money. The costs of the compliance burden versus the actual value of the consumer protections provided are seldom compared by regulators. It is up to the credit unions to speak out loudly or at least identify issues that appear and take them to the regulators directly and via the trade associations.
The credit union movement has a long history of using a model that works. Formed during the Great Depression, arguably the credit union model hits its stride in environments such as the one we are living in today. However, during the Depression, credit unions could help members without dealing with the onerous regulations that they now face. There were actually some different regulations then that we don’t have now, but certainly nothing like the Bank Secrecy Act or RESPA or Regulation Z existed in the 1930’s. One thing that credit unions need to keep in mind is that problem solving leads to innovation. If we have large looming issues in the compliance arena that seem insurmountable, then brainstorming over the specific problems can lead to innovative solutions. Credit union think tanks already exist, I3 comes to mind. However, these think tanks and other great minds in the credit union movement cannot be utilized if the people experiencing the issues don’t talk about them. In other words, when credit unions encounter significant compliance problems or changes, they need to survey the industry. They need to talk to each other and talk to consultants, talk to experts and even regulators so that all these minds are thinking about the specific problems at hand.
You know we have in the red flag regulation, this Appendix J from the government that describes all of these red flag examples from the complicated to the mundane. What we need, though, is an Appendix J of opportunity. We need a list of all of the credit union opportunities to review on a case-by-case basis. We need a checklist of escape paths and innovative revenue creating ideas that fit in the credit union model. A lot of these ideas exist but they are not widely disseminated. We need a list of all the products from indirect lending to shared branching to the types of CUSOs available, to student loans, to trade association preferred partners and on the flip side, credit unions need to be open-minded about trying new methods of generating revenue. The only way to beat a dramatically increasing compliance burden is to run faster than the regulators. Credit unions need to cut costs brutally while at the same time exploring any and all opportunities for growth and revenue that fit in the particular credit union’s business model. With the advent of the CFPB, the wolf is at the door. Either pursue cost cutting, compliance management, innovation and growth or explore merger partners, conservatorship or liquidation.
Filed under: Viewpoint | Tags: electronic payment systems, jill keck, viewpoint
The following is an article reprinted with permission from the Summer 2010 edition of Viewpoint (WWR’s Governmental Collections newsletter):
By: Jill A. Keck, Associate
Over the past decade, the Internet has evolved from a specific resource for IT pros and computer geeks to a daily destination for people all over the world. Technology has inarguably made our lives easier. Recent years have seen an explosive growth in the online retail arena. Many people are just as willing to order a movie from Netflix as they are to stop by their local Blockbuster or Hollywood Video. One of the biggest technological innovations is in the area of banking, finance and commerce – the Electronic Payments. Electronic Payments or e-payments refer to the technological breakthrough that enables us to perform financial transactions electronically.
E-payments have several advantages, which were never available through the traditional modes of payment. Some of the most important are:
- Good transaction efficiency
- Low financial risk
Perhaps the greatest advantage of e-payments is the convenience. Individuals can pay their bills and make purchases at unconventional locations 24 hours a day, 7 days a week, 365 days a year. There is no waiting for a merchant or business to open. Vacationers and others away from home need not worry that they forgot to drop off the payment for the utilities or mail the check for their credit card bill. They can simply pull up their account online and pay their bills on the road.
This leads to the second best benefit of e-payments- they save time. Once the initial set-up of the payment system for each account is completed, an individual can pay his bills in a flash. In a research study Marketwatch.com found that the average American, who writes checks and mails them for payment, spends over 24 hours during the course of a year paying bills*. E-payments have reduced the amount of time spent on bill management or payment by about 60%. This has given busy individuals more time to spend doing those things they enjoy.
The cost of e-payments is yet another benefit. For the majority of merchants, vendors, and businesses, there is no fee or charge to pay online. For others, the fee is nominal. Compared to the cost of postage, check writing fees and trips to the post office, individuals paying their bills online can save hundreds of dollars per year. In this day and age, reducing expenses is quite important for many individuals.
Finally, despite the belief of many to the contrary, e-payments are secure. They may even be more secure than the old fashion way of mailing in a check. According to most sources, most instances of identity theft occur by stealing mail out of a person’s mailbox or from discarded trash, not over the Internet. Encryption technology allows an individual’s personal financial data to be scrambled before it is sent electronically. It also lowers the risk of human error by reducing the number of people touching the payment once it leaves the payer.
On the flip side, with so many benefits to using e-payments, it’s important to remember that there are negative aspects too. Some of the biggest downsides of e-payments are the lack of authentication, repudiation of charges and credit card fraud. There is no way to authenticate or verify that the individual entering the information online is who they say they are. There is no request for picture identification or even a signature. Therefore, an unauthorized user may carry out transactions in your name before you have time to alert authorities the information has been taken. Because no identifying information is provided at the time of the online payment, an individual may have an extremely hard time disputing a charge later. Further, given the benefits of convenience and speed that come along with e-payments, this creates the perfect opportunity for fraudulent credit card transactions.
One of the other disadvantages of e-payments is that most sites require you to open an online account with them. You need to register with the institution in order to be authorized to perform money transactions with them. While the overall payment process is efficient, the initial registration to a given site can be time-consuming. It also involves a username and a password, which implies the need of password protection, to maintain an e-payment account at each organization. If a person has more than one or two accounts, e-payments can become extremely cumbersome.
This article is not meant to discourage you from making electronic payments, but rather to make you aware of the positive aspects and potential disadvantages of electronic payment systems. Anyone considering using an electronic payment system for paying monthly bills should carefully consider how that organization’s electronic payment system works. Ask what lead time the system will require from them in order to make sure their payments are being made timely. And, most importantly, find out what safeguards are in place to prevent unauthorized individuals from obtaining or using their information and resolving payment conflicts. Users should learn what protections are in place with respect to fees and penalties applied to improperly processed payments. Every need or obligation is different, and for some, the electronic payment services may be of great help.
Jill A. Keck is an Associate in Consumer Collections; Consumer Collections and Subrogation Groups and is based in the Cincinnati office. She can be reached at (513) 723-2205 or firstname.lastname@example.org.
Today’s blog comes courtesy of Denise Wymore, owner of consulting service for cooperatives, Denise Wymore, LLC.
Recently I heard a credit union CEO say they were looking to add a new branch in a new city. Not earth shattering news, but I was a little surprised they would consider it in this economy and with a 52% loan-to-share ratio. Plus, this city is practically “owned” by one of the largest credit unions in its state.
So I asked these questions: “Have you already saturated your current marketplace? Are your current branches at their limit? Do you have people queuing up Apple-store-style for your latest loan promotion? Have you ever had to restrict the number of members entering your building because you are violating fire codes?”
Okay – maybe I didn’t ask all of those questions. But I wanted to. This strategy feels desperate and dangerous. The build-it-and-they-will-come arrogance that has forced countless credit unions to close branches and refocus today.
It’s time to get back to basics. On the one hand we fought hard (HR 1151) for a community charter so we could serve more people. On the other hand, we’re so used to lending to employed people with credit and direct deposit that we’re afraid to lower our standards. The average age of a credit union member continues to trend upward, the loan-to-share ratios are expected to trend downward. This is mathematically the beginning of the end of credit unions.
We forget that the Great Depression was the best thing to happen to the movement. Banks would not lend to the “little guy.” The person of modest means. And don’t confuse this with low-income, public assistance. We’re talking school teachers, blue-collar laborers, postal workers, etc. They had jobs, they just didn’t have much. They often lived paycheck to paycheck, so when an unexpected expense occurred, they needed help.
Making a $500.00 loan was commonplace (even as late as the 1980’s). There was no such thing as a credit score, and so we were forced to get to know them as an individual. Character, capacity, collateral. When the last two C’s were minimal, we would fall back on the first.
Community charters and credit scores have choked off our supply. The majority of people we’d like to lend to don’t need money. They are old, paying off their debt and getting ready to retire.
So how do you make money on risky paper and small amounts? Volume. The way we used to do it. You charge more, lend less and lend often. And don’t tell me these small loans are too time consuming to process. (Warning – grumpy old man statement coming up). Back in MY day, we had to type the advance vouchers on an IBM Selectric typewriter on triplicate carbon paper. To pull a credit report meant dialing up a modem and placing the receiver in a holder while the other end demanded perfection or you would be cut off, only to have to start all over. A monkey could do a signature loan today if you have the right technology in place. And if you don’t, how about spending money on that, rather than brick and mortar?
The branch you built several years ago is up and running and ready to serve people of modest means. I’ll bet in this economy you have tons of them in your backyard. They might not work for the post office, or the factory, but they need your help.
History is repeating itself. What will the history books say about us in 20 years? Are we the new era of bank-like exclusion or are we ready to act like a credit union again?
Filed under: Viewpoint | Tags: amanda yurechko, bankruptcy, beth ann schenz, non-dischargeability, tax claims, viewpoint
The following is an article reprinted with permission from the Summer 2010 edition of Viewpoint (WWR’s Governmental Collections newsletter):
Whether or not the taxes owed to a municipality have been reduced to Judgment, there remains the ever-present possibility that the taxpayer will file bankruptcy. While there is a stay on all collections during the bankruptcy, a municipality may have the ability to collect once the debtor does receive his or her discharge. What taxes can a municipality collect post-discharge? The answer lies in determining which taxes are excepted from discharge or are “non-dischargeable.”
This article will address two questions:
1) Under what circumstances can a taxpayer discharge the taxes owed to a municipality in bankruptcy?
2) What can a municipality do to protect itself when a bankruptcy has been filed?
Federal law, codified in 11 U.S.C. §523, sets forth the exceptions to discharge available to a creditor by virtue of a completed bankruptcy filing, whether Chapter 7 or Chapter 13.
Taxes Not Discharged in Either a Chapter 7 or 13
1) Taxes involving a tax return which was not filed;
2) Taxes involving a tax return that was filed late and filed less than two years before the bankruptcy filing date;
3) Taxes relating to a fraudulent return or relating to the debtor willfully attempting to evade or defeat such taxes; and
4) Withholding taxes for which the debtor is liable.
In a Chapter 7 bankruptcy, there are additional taxes excepted from discharge.
Taxes Not Discharged in a Chapter 7
1) An income tax for the taxable year ending on or before the bankruptcy filing date where the return is last due (including extensions) three years before the bankruptcy filing date;
2) An income tax for the taxable year ending on or before the bankruptcy filing date where the tax is assessed within 240 days before the bankruptcy filing date (excluded during the 240 days is any time in which an offer in compromise was pending plus 30 days);
3) Any other tax as described in #1 and #2 above, which was not assessed before but is assessable after the bankruptcy case commences;
4) A property tax incurred before the bankruptcy filing date and that was last payable without penalty less than one year before the date of the bankruptcy filing;
5) Certain employment taxes earned from the debtor prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing date;
6) Excise taxes where a transaction occurred prior to the bankruptcy filing date for which a return was last due less than three years before the bankruptcy filing or if a return is not required, a transaction occurring during the three years immediately preceding the bankruptcy filing date;
7) Certain customs duties; and
8) Penalties related to an above-listed tax that provides for compensation for an, “actual pecuniary loss.”
Keep in mind that the three-year or 240-day time frame may be suspended for any period when the municipality is stayed from collecting the tax under applicable, non-bankruptcy law (i.e. when a debtor requests a hearing or appeal) plus 90 days. Also, the time frame may be suspended for any period of time when the municipality is stayed from collecting a tax pursuant to the bankruptcy- automatic stay plus 90 days.
The Bankruptcy Code treats taxes and interest resulting from them differently than the penalties assessed on the underlying unpaid taxes. Situations may arise where penalties for certain taxes are dischargeable, while the underlying taxes and interest are not. In summary, all penalties are non-dischargeable except:
1) Those assessed to the taxes listed above that do not involve compensation for an actual, pecuniary loss, or
2) Those imposed with respect to a transaction or event that occurred prior to three years before the bankruptcy filing date.
Post-petition interest on a non-dischargeable tax is also non-dischargeable. Likewise, pre-petition interest on otherwise non-dischargeable taxes is also non-dischargeable.
“Return” and “Tax”
What constitutes a “return” and the proper filing of that return is governed by each municipality’s code or local ordinance. What constitutes a tax has been defined as “(1) involuntary pecuniary burden, regardless of name, laid upon individuals or property, (2) imposed by or under authority of legislature (3) for public purposes of defraying expenses of government or undertakings authorized by it (4) under police of taxing power of state. The chief distinction between ‘tax’ and ‘fee’ is that tax is exaction for public purpose, while fee relates to individual privilege or benefit to taxpayer.”
The best course of action when a bankruptcy petition has been filed by a taxpayer is to review the total debt due with an experienced bankruptcy attorney in order to determine whether or not the debt, or parts of the debt, is dischargeable. Weltman, Weinberg & Reis Co., L.P.A. has provided bankruptcy representation to municipalities for many years. We are available to discuss all bankruptcy issues at your convenience.
Amanda R. Yurechko is an Associate in the Consumer Collections; Governmental Collections and Healthcare Groups and Commercial Collections; Commercial Business Group. She can be reached at (216) 685-1060 or email@example.com.
Beth Ann Schenz is an Associate in Bankruptcy; Commercial and Consumer Bankruptcy Groups and is based in the Brooklyn Heights office. She can be reached at (216) 739-5645 or firstname.lastname@example.org.
Filed under: bankruptcy | Tags: adversary proceeding, bankruptcy, lien stripping, unsecured liens
By: Monette W. Cope, Attorney
Stripping unsecured liens without an adversary proceeding is now easier for debtors in the Northern District of Illinois (Chicago). The new Model Plan adds a section specifically for lien stripping. Debtors will be required to use this new plan commencing October 15, 2010, but the plan is available online now, and debtor’s attorneys can start using it immediately.
Previously, if a plan sought to strip a lien, language to that effect was inserted in the Special Terms section at the end of the plan. A creditor must be aware of this new section so as not to miss a debtor’s intention to strip its lien.
The new Model Plan adds Sec. E. 3.2, titled Other secured claims treated as unsecured, and is as follows:
The following claims are secured by collateral that either has no value or that is fully encumbered by liens with higher priority. No payment will be made on these claims on account of their secured status, but to the extent that the claims are allowed, they will be paid as unsecured claims, pursuant to Paragraphs 6 and 8 of this section.
(a) Creditor: _________________Collateral:_________________________
This section permits a debtor to declare a lien unsecured and then pay it as an unsecured claim along with other unsecured creditors. Coupled with Sec. B. 3, which provides that a creditor must release its lien upon discharge (or earlier if the debtor pays off the debt in full), this permits lien stripping without an adversary proceeding. Liens would be stripped at discharge.
To further trip up lien holders, the plan also provides in Sec. E. 8. that:
Any claim for which the proof of claim asserts secured status, but which is not identified as secured in Paragraphs 2, 3.1, or 3.2 of this section, will be treated under this paragraph to the extent that the claim is allowed without priority.
This means that if a creditor files a secured claim, and it is not listed in these sections, it will be paid as an unsecured claim by operation of the plan.
Some of the judges in the Northern District of Illinois will still require an adversary proceeding to strip liens even if debtors fill out this section. I’ve talked to the chair of the court’s liaison committee, and this will be on the agenda at the next meeting. Hopefully, the inquiry will help identify which of our eleven judges will accept the plan provision in lieu of an adversary proceeding.
So, lien holders must now check in three places within the plan to determine the treatment of their claim. First, look to see if your claim is identified as secured in Sec. E. 2, 3.1, or 3.2. If it is not listed at all, it will be treated as unsecured. If it is listed in Sec. E. 3.2, it will be treated as unsecured. Finally, check in the Special Provisions Section at the end of the plan. If a judge still requires an adversary proceeding, the intention to file an adversary to strip the lien and pay the claim as unsecured may be listed there.
If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. For more real estate default information, please visit the WWR Real Estate Default Group website. She can be reached directly at 312-253-9614 or via email at email@example.com.
By: Larry R. Rothenberg, Partner
Ohio has a statutory scheme for foreclosures, which generally mandates a judicial action resulting in a public sale by the county sheriff or other officer of the court, or by a licensed auctioneer.
In order to provide some protection for the owner whose property is to be sold through foreclosure, the law requires that the sheriff or other officer retain three disinterested freeholders (usually experienced appraisers), who are residents of the county, to appraise the property. The minimum bid for the sale must be at least two-thirds of the appraised value. A notice of the sale is required to be filed and served on the parties, and published once a week for three weeks, beginning not less than 30 days prior to the sale. Assuming a bid is entered at the sale, the court must review the record to determine whether it is satisfied of the legality of the sale, and if so, enter an order confirming the sale. The owner has a right to redeem the property even after the sale is complete, until the order confirming the sale is entered.
The objective of having the property sold by public auction is to derive the maximum sale price, for the benefit of the creditors, who are seeking the maximum recovery, and also for the owner, who is entitled to the excess proceeds, if any, and who may be liable for a deficiency judgment.
In appropriate cases, the court may appoint a receiver to protect and manage the property, and to collect rents from any tenants while the foreclosure is pending. Occasionally, while the case is pending, the receiver might identify a party interested in purchasing the property for a favorable price. Although the law states that a receiver may “generally do such acts respecting the property as the court authorizes,” it does not expressly give the court the authority to circumvent the statutory scheme for foreclosures by authorizing the receiver to sell the property privately, free and clear of the interests of all parties. Would such a conveyance by a receiver, even with the express authority of an order of the court, nevertheless be vulnerable to attack?
The Court of Appeals for one district in Ohio recently approved such a sale in Park National Bank v. Cattani, Inc., 187 Ohio App. 3d 186, 2010 – Ohio – 1291 (12th District, Warren Count). A mortgage holder filed the foreclosure on commercial property containing a gas station, a convenience store, and a fast-food restaurant, and the court appointed a receiver to preserve and protect the property. The order appointing the receiver stated, “The receiver may sell the property at one or more public or private sales on notice to the parties to this action and such other notice as the receiver deems appropriate.”
The plaintiff and the receiver filed a joint motion to grant the receiver authority to sell the real and personal property by private sale “free and clear of all liens and encumbrances,” and the court granted the motion, despite the objection of another lienholder, who then filed an appeal to the court of appeals prior to the closing of the sale.
Some facts cited by the trial court judge supported the argument that the sale by the receiver would be particularly appropriate. The gas station had ceased to operate and the convenience store also had to be shut down because it was unable to renew its liquor license, and therefore, was not financially viable. In addition, the operator of the fast-food restaurant testified that he saw a significant decrease in business when the accompanying gas station and convenience store were closed, and therefore, the restaurant would also be forced to close unless the property was sold promptly. The receiver testified that the purchase price was the best opportunity for creditors to make a recovery.
The Court of Appeals agreed with the trial court, and upheld the validity of the sale, noting that a receiver is “an officer of the court and at all times subject to its order and discretion,” and may “generally do such acts respecting the property as the court authorizes.” The Court of Appeals cited the Ohio Supreme Court’s interpretation of the receivership statute “as enabling the trial court to exercise its sound discretion to limit or expand a receiver’s powers as it deems appropriate.”
Hence, because the receivership statute does not contain any restrictions on what the court may authorize when it issues orders regarding receivership property, the Court of Appeals held that this includes the power to authorize a receiver, under certain circumstances, to sell property at a private sale free and clear of all liens and encumbrances. Because the Court of Appeals found that trial court did not abuse its discretion in its order, the Court of Appeals decided not to disturb the trial court’s judgment.
Although this case is not binding authority on any of the other districts in Ohio, and it relied in part on the particularly significant facts, it can be cited in support of a similar motion to authorize a receiver in other cases to sell the property free and clear of the interests of all parties.
For a complete copy of the case, go here.
Weltman, Weinberg & Reis Co., LPA will keep you advised of further developments with regard to this issue, as we continue to seek alternatives to achieve the maximum results in foreclosure cases.
If you have any questions or would like to discuss this issue in more detail, please contact Larry Rothenberg at (216) 685-1135 or via email at firstname.lastname@example.org. Larry is the partner-in-charge of the Cleveland real estate and foreclosure department of Weltman, Weinberg & Reis Co., LPA. He is the author of the Ohio Jurisdictional Section contained within the treatise, “The Law of Distressed Real Estate”, published by The West Group. The firm handles foreclosures and related litigation throughout Ohio, Kentucky, Indiana, Illinois, Pennsylvania, Michigan and Florida.