California Business Lawyer Blog

House Democrats on October 29, 2009 closed in on the votes they need to pass sweeping health care legislation, as party leaders introduced a 1,990-page bill designed to guarantee near-universal medical coverage for the first time in the nation's history.

The legislation, which House Speaker Nancy Pelosi of California officially unveiled in a ceremony outside the U.S. Capitol, represented a historic milestone for Democrats and advocacy groups. For almost half a century, they have argued in vain that the nation's health care system was in need of a major overhaul especially on availability of coverage.

Pelosi expects to send the legislation to the House floor as early as next week.

The House plan would cover an additional 36 million people by 2019, leaving only 4 percent of the nation without coverage, compared with the estimated 17 percent of Americans who currently do not have health insurance, according to a preliminary analysis by the nonpartisan Congressional Budget Office.

"Leaders of all political parties, starting over a century ago with President Theodore Roosevelt, have called and fought for health care and health insurance reform," Pelosi said. "Today, we are about to deliver on the promise of making affordable, quality health care available for all Americans."

Pelosi and her lieutenants have been working for months to find the 218 Democratic votes they need to get a health care bill through the House, negotiating a series of compromises that form the backbone of the legislation they introduced Thursday. Wednesday.

Rep. Earl Pomeroy, D-N.D., for example, had been a fierce critic of an earlier provision in the bill that would have created a new government insurance plan with payment rates to hospitals and other providers tied to Medicare. But Pomeroy was among those who crossed over Thursday.

"There's been a lot of give and take," said Pomeroy, expressing support for a change in the bill that requires the government plan to negotiate its rate with providers, much as commercial insurers do. "This bill represents a distinct improvement over the status quo."

Similar compromises were made to win over other potential "no" votes, including Rep. Gerry Connolly, D-Va., who had been concerned about that a surtax on wealthy taxpayers could have a huge impact on his district in suburban Washington. Senior Democrats scaled back the tax in the version introduced Thursday.

Senior Democrats are still trying to resolve several divisive issues, including provisions to prevent the use of federal funds for abortion services, a priority for many socially conservative House Democrats.

They also face questions about the cost of the legislation, which by one measure exceeds the $900 billion benchmark set by President Barack Obama, even though Democrats say the new spending is fully offset over the next decade with cuts and new revenues.

The Congressional Budget Office has estimated that the bill will reduce the deficit by $104 billion over the next decade.

Few, if any Republicans are likely to back the House bill or its counterpart in the Senate, as party leaders continue to lambaste the Democratic health care campaign as a "government takeover."

"Over the last several months, the American people have spoken, and it's pretty clear that our Democrat colleagues have not listened," House Minority Leader John Boehner of Ohio said Thursday. Americans, Boehner said, "let members of Congress from both sides of the aisle know that they wanted no part of a government-run health care plan."

Democrats also face opposition from the insurance industry and from many business groups, 10 of which wrote a letter to lawmakers Thursday saying the legislation "falls short of the bipartisan goal of controlling costs and jeopardizes employer-sponsored coverage."

Many business groups oppose provisions in the bill that require larger employers to provide a minimum set of benefits to their employees or pay a penalty; they worry that the bill does not do enough to control the rising cost of health care.

But the legislation introduced Thursday swayed a number of wavering Democrats.

"I feel very confident we will have the votes necessary," said Rep. James Clyburn, D-S.C., who as the party's whip has responsibility for counting votes.

If the House approves the bill next week, it will have to be reconciled with whatever Senate Democrats can get through their chamber.

Continue reading "The Business of Health Care" »

Federal Reserve Chairman Ben S. Bernanke called on Congress to ensure that the costs of closing down large financial institutions are borne by the industry instead of taxpayers.

The Fed chairman called for a "credible process" for imposing losses on the shareholders and creditors, saying "any resolution costs incurred by the government should be paid through an assessment on the financial industry."

Bernanke's remarks coincide with central bank efforts to step up supervision of banks and crack down on compensation practices that fuel excessive risk-taking. As Congress considers the biggest overhaul of financial regulation since the 1930s, Bernanke said it's "critical" for lawmakers to close regulatory gaps and provide supervisors with the tools to manage risks throughout the financial system.

Bernanke said all large, inter-connected firms, whether they're banks or not, should be subject to "consolidated supervision" that requires "tougher" capital, liquidity and risk management practices. He didn't say the Fed should have the main responsibility for that supervision.

The Fed yesterday proposed new guidelines on pay practices at banks and said it will launch a review of the 28 largest firms to ensure compensation packages don't create incentives for the kinds of risky investments blamed for the financial crisis.

Pay Cuts

The plan followed an Obama administration call for pay cuts of an average of 50 percent and caps on benefits for top executives at seven companies, including Citigroup Inc. and Bank of America Corp., that received billions of dollars in taxpayer- funded bailouts.

Bernanke didn't comment on the economic outlook or the path of interest rates in his prepared remarks.

The yield on the two-year Treasury note was up five basis points to 0.98 percent at 1:59 p.m. in New York after Federal Reserve Bank of Philadelphia President Charles Plosser yesterday told Bloomberg Radio his "instinct is the time for raising rates will be before many of my colleagues" think it is.

The Federal Open Market Committee next meets in Washington Nov. 3-4. Officials said at their last meeting that the economy had "picked up," while maintaining their pledge to keep the target interest rate exceptionally low for an "extended period."

Revamping Inspections

U.S. central bankers are revamping bank inspections, comparing analysis of individual firms with macroeconomic models run by quantitative research teams.

The Fed expanded the scope of its supervision during the crisis by allowing Goldman Sachs Group Inc. and Morgan Stanley to become bank holding companies and by deciding to intensify scrutiny of non-bank subsidiaries within large financial organizations.

Supervisors are also reviewing the capital structure of banks, and Bernanke said he supported international efforts to make banks boost their equity in times of prosperity.

"Countercyclical standards would require firms to build larger capital buffers in good times and allow them to be drawn down -- but not below prudent levels -- during more-stressed periods," Bernanke said.

The Fed chairman said regulators are also considering a capital tax or "surcharge" for the largest, most inter- connected firms whose failure would disrupt financial stability. Other options include requiring those firms to issue debt-like securities that convert to equity in times of stress.

Open to Debate

Bernanke, replying to a question by former U.K. central banker John Gieve, said he is open to the debate on whether regulators would restrict the size and scope of the biggest institutions.

"My own initial take on this is that we can address these issues in a way that doesn't destroy the economic value of large, complex, multifunction firms," Bernanke said.

The government could design "tough" resolution regimes and "living wills" that state beforehand how large firms would be unwound, and apply "appropriate" capital requirements for trading, he said.

Risk Management

"We should leave open the possibility that if a supervisor decides that a particular firm does not have the managerial risk-management capacity to deal with a particular type of business -- putting aside any capital requirements -- there should be the ability to say you can't do this activity," Bernanke said.

Bank of England Governor Mervyn King suggested on Oct. 20 it might be valuable to separate banking from riskier activities in financial institutions. King said it's "hard to see why" such proposals are "impractical."

In a separate speech at the same conference today, Fed Vice Chairman Donald Kohn said there is no consensus yet on how to avoid international spillovers from the resolution of large financial institutions. Among the "promising proposals" supervisors could consider are changes "to simplify the organizational structures of systemically important firms."

Kohn said if the Fed is given the responsibility for financial stability, it also needs tools to do the job, such as broader authority over the U.S. payments system.

Federal Reserve Act

"I would be very concerned about putting a remit in the Federal Reserve Act if we weren't given the tools and authority to carry it out," Kohn said in response to a question.

Bernanke this month told lawmakers the Fed should be the regulator for systemically important non-bank companies, backing the Obama administration's proposed regulatory changes.

The Fed's supervision expertise make it "well suited" to regulate the biggest non-bank financial companies that weren't bank holding companies under its umbrella, he said in Oct. 1 remarks to the House Financial Services Committee.

Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and Richard Shelby, the panel's senior Republican, both oppose the Obama administration's plan to expand the Fed's oversight to include systemically important financial firms. Dodd plans to propose combining the Fed and other banking regulators into one agency.

Continue reading "Costs of Closing Down large Financial Institutions Should Not be Borne by the Taxpayers" »

Many many small business owners have not been able to get a small-business loans, and have walked the treacherous lines of relying on using credit cards and 401(k)'s to fund their businesses.

Business has gone well, sales are up, but they have been able to receive or acquire an expansion loan.

Complete frustration has set in, nobody is considering small business owners seeking loans so that they may expand their business.

The initiatives announced last week by President Obama, and a separate proposal this month by Sen. Mark Warner, D-Va., aim to fix such quandaries.

Warner wants to create a $50 billion loan fund for small businesses by taking $40 billion of the remaining Troubled Asset Relief Program money and adding $10 billion that would be raised from banks of all sizes. The president's plan would increase the top limits on Small Business Administration loans and provide lower-cost capital to community banks, credit unions and community development financial institutions. He's asked the Treasury Department and SBA to confer with Congress members, lenders and small-business leaders to determine additional steps to help businesses.

Many small-business owners and industry experts praise the proposals but say they are a little late in coming.

Until the latest proposals, the government has given TARP funds to major banks so they could be strengthened and help stimulate the economy.

But that just resulted in banks hoarding cash and providing an insufficient number of loans to small businesses, says Terry Brandt, executive director of Albina Opportunities Corp., a non-profit organization that provides entrepreneurs access to capital. Community-based lenders have been shortchanged in the process, he says, even though they are the primary source of most small-business loans.

And while much of the attention has been on SBA loans, which are primarily for business expansion, most small-business owners need a short-term line of credit to pay for contracts and workers, says Todd McCracken, president of the National Small Business Association.

"That is where the biggest crunch seems to be right now," he says. And those revolving lines of credit traditionally come from a local bank. Warner says that his plan could be used for short-term bank financing that can fill the gap until the market recovers.

James Daigle, a small-business owner of Sports Systems Services in Fort Lee, N.J., says that he has been laughed off when he has asked banks for a line of credit. But he needs working capital for day-to-day operations and to hire five more people. He says he needs it right now.

Warner says he understands such urgency. "We've got to move quickly," Warner says. "This is something that is a real time problem for small businesses across America."

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced small busines lawyer and visit us on-line at www.premierlegal.org.

President Obama said that he will shift spending of the government's multibillion-dollar financial bailout away from large financial institutions and toward smaller banks in an effort to bolster small business, which he says forms "the backbone of the American economy."

Speaking at a family-owned storage business in suburban Washington, Obama said smaller financial institutions are in greater need of capital to grow and expand -- and that the country's large banks have moved past their need for what's left of the $700-billion Troubled Asset Relief Program.

"The major banks that were in critical condition a year ago need no new assistance from the government," Obama said, "and so we are winding down that portion of the TARP program."

In order to spur lending to small businesses, he said, it is "essential that we make more credit available to the smaller banks and community financial institutions that these businesses depend on. These are the community banks who know their borrowers, who gave them their first loan, who have watched them grow from down the street, not from Wall Street."

The shift comes just more than a year after Congress approved the bailout; the fund has about $138 billion left to dole out. The U.S. Treasury will decide how much of that should go to smaller financial institutions by the end of the year after talking it over with community bankers around the country.

The amount of money still on hand is enough to significantly boost lending to small business, a senior administration official said today.

In addition to the shift in bailout spending, Obama is asking Congress to increase the maximum size of Small Business Administration loans, including those designed to encourage them to invest in machinery, equipment, land and buildings and to expand their payrolls.

Increasing the maximum loan size of so-called micro-loans to $50,000 from $35,000 will help start-up companies in particular, administration officials predict.

"America's 29 million small businesses have been hard hit in this recession," Small Business Administration chief Karen Mills said. "Increasing maximum loan sizes will allow the SBA to ensure that more small-business owners and entrepreneurs can get access to the credit they need to expand their operations and create jobs."

Continue reading "Smaller Banks to Receive Troubled Asset Relief" »

California has joined nearly two dozen other states in prohibiting foreclosure rescue companies from collecting advance fees for helping homeowners negotiate mortgage loan modifications.

Gov. Arnold Schwarzenegger on Oct. 11 signed into law a bill, SB 94, that prohibits any person from demanding or collecting an advance fee from a consumer for loan modification or mortgage loan forbearance services.

California had previously allowed real estate brokers and their licensed agents to collect advance fees for negotiating with lenders on behalf of borrowers -- but only after entering into written agreements with their clients, using forms and procedures that had been reviewed by the Department of Real Estate. Fees collected in advance had to be placed in escrow to be drawn on as services were performed.

According to the Department of Real Estate's Web site, more than 1,000 real estate brokers had submitted forms for review and obtained "no objection" letters from the state to collect advance fees for loan modification services before SB 94 took effect.

Nearly 500 companies have also been accused of providing loan modification services without a license, or collecting advance fees without first obtaining a "no objection" letter from the state.

Real estate brokers with "no objection" letters who entered into agreements with borrowers before Oct. 11 to collect advance fees for providing loan modification or other mortgage loan forbearance services may continue to provide those services under the terms of those contracts, but cannot collect additional advance fees from those clients, the Department of Real Estate said in a published notice.

Real estate licensees are still permitted to provide loan modification services to consumers if their fees are collected after those services are provided, the notice said.

Some companies that charge borrowers for loan modification services have defended the practice, saying they have the contacts and persistence needed to work with lenders. Some nonprofits that provide such services at no charge are overwhelmed, they say.

But critics charge that many foreclosure rescue and loan modification companies are making unsubstantiated claims about their success rate, while making little or no effort to help borrowers.

The Federal Trade Commission and state attorneys general have sued dozens of foreclosure rescue and loan modification companies, and the FTC is reportedly considering a federal ban on the collection of advance fees by such companies. The Associated Press reported last month that 20 states have banned foreclosure rescue companies from collecting fees in advance.

Continue reading "California Bans Advance Fees for Loan Modifications" »

Under some circumstances, the attorney should not undertake joint representation of parties to a buy-sell agreement, or of other persons interested in the agreement, even if the disclosure and consent requirements of the Rules of Professional conduct have been met.

Although obtaining informed written consent may allow the attorney to represent multiple parties in a given conflict situation, practicial considerations, e.g., the number of clients involved and the difficulty in communicationg with them, will often dictate a different result.

Similarly, if there is an actual conflict that will probably be litigated, or if it is likely that the parties' interests or the parties themselves will become hostile in the future, the attorney may be forced to withdraw from representing any of the parties, even if disclosure was made and consent obtained.
(Even if inform conset is obtained, counsel may still be disqualified when an actual, present conflict exists at hearing or Trial). In these circumstances, the client's best interests may require the attorney to suggest that all parties seek independent counsel.

Continue reading "When Joint Representation Buy-Sell Agreements May Be Inadvisable: California Business Attorney" »

An attorney who is asked to represent more than one party to a buy-sell agreement must address certain fundamental conflict issues that arise in all joint representations. these issues concern the idenity of the conflict, its suitability for waiver, and the procedures for establishing a valid waiver.

A critical initial step in representing any client is to consider whether a conflict of interest exists. In most buy-sell situations, it is unlikely that there will be a complete absence of conflict.

For example, a disparity in the ages of the partners or shareholders or in their individual net worth could significantly influence the structure of the buy-sell agreement. Simiarly, disparate funding obligations of buy-sell terms for the shareholders may lead to a conflict.

If a conflict does exist, the attorney must determine whether the conflict can be resolved by obtaining the written consent of one or more of the parties. Under the proper circumstances, having a single attorney represent multiple parties may result in a simpler transaction, reduced legal fees, and certainly a more harmonious relationship than if each party is in fact represented by separate counsel.

Continue reading "Joint Representation: Buy-Sell Agreement Waivers by a California Business Lawyer" »

Gov. Arnold Schwarzenegger signed nine housing bills into law this week. One in particular, Senate Bill 94, consumer advocacy groups are calling a clear victory for California's many troubled homeowners facing foreclosure.

The bill, sponsored by Sen. Ron Calderon (D-Montebello) aims to reduce fraud against desperate borrowers looking to save their homes. It bans all foreclosure consultants, including loan modification firms and attorneys who specialize in loan mods, from asking for any fees or compensation before fully completing the services contracted, whether the mod is successful or denied by the servicer.

Because it was labeled an "urgency measure," the bill is effective immediately. It remains in effect until January 1, 2013. One local paper in Sacramento said the government's swift action on the issue follows a colossal number of complaints made to the state's Department of Real Estate by borrowers who said they paid up to $4,000 upfront to firms that abandoned them.

According to the Del Mar-based American Mitigation Law Group, the new law will force many loan modification companies to close their doors, while many others will scramble to come into compliance.

Assembly Bill (AB) 260, by Assemblyman Ted Lieu (D-Torrance), takes effect January 1, 2010, and caps yield spread premiums so mortgage brokers can't "steer" borrowers into high-risk, high-interest loans. It also outlaws negative-amortization mortgages and limits prepayment penalties to no more than 2 percent of the loan balance.
The governor vetoed similar legislation last year at the urging of several industry trade groups, but Lieu successfully argued this go-around that the measure was now more important than ever to stem the tide of foreclosures in California.

According to Walnut Creek, California's PMI Mortgage Insurance, a third bill - SB 291 - could provide regulatory relief to residential mortgage insurers in the state, and go a long way to support the market's housing recovery.

The measure, which takes effect in California January 1, 2010, is similar to legislation enacted by Arizona last month and North Carolina in July 2009. It gives the state's insurance commissioner added flexibility in assessing the strength of mortgage guaranty insurers, with discretion to permit such companies to continue to transact new business if capital falls below government-prescribed levels. Prior law required mortgage insurers to automatically cease conducting new business if they failed to meet the mandated capital levels.

Other mortgage-related bills signed by Schwarzenegger:

- SB 36, by Calderon, establishes standardized licensing requirements for all residential loan originators.

- SB 237, by Calderon, creates a registration program for appraisal management companies (AMCs).

- SB 239, by Sen. Fran Pavley (D-Agoura Hills), makes it a felony to commit fraud on a mortgage loan application, punishable by up to a year of jail time.

- AB 329, by Assemblyman Mike Feuer (D-Los Angeles), requires lenders to provide seniors with "a clear and informative" written disclosure of the risks and suitability of reverse mortgages.

- AB 957, by Assemblywoman Cathleen Galgiani (D-Livingston), allows buyers of foreclosed homes to choose local escrow officers, rather than being forced to use the company chosen by the seller.

- AB 1160, by Assemblyman Paul Fong (D-Cupertino), requires that mortgage loan documents be translated into the same language used in verbal negotiations.

Continue reading "New California Housing Legislation Signed into Law" »

New York financier J. Michael Cline set out to build a billion-dollar empire in the realm of consumer-debt disputes. His firm would stand at the center of a complex arrangement linking America's biggest arbitrator of consumer credit-card disputes with another business that collects debts in some of those same cases.

Instead, his grand plans have unraveled, turning the world of consumer arbitration on its head.

Amid a congressional investigation, regulatory complaints and lawsuits from consumers, Mr. Cline's woes are prompting a major shift in the way many U.S. consumer-debt disputes are settled.

For more than a decade, most credit-card companies have required customers to use arbitration, rather than the courts, to resolve disputes over unpaid bills. Minneapolis-based NAF has mediated the vast majority of these claims. But both NAF and another arbitrator have stopped hearing arbitrations of consumer-debt cases, and major banks are dropping arbitration requirements.

"I actually think there is a fairly significant change afoot," says Richard Reuben, a law professor and arbitration specialist at the University of Missouri. Banks "don't need the taint that comes with mandatory arbitration."

It's a big comedown for Mr. Cline, who helped found online movie-ticket vendor Fandango and pledged millions of dollars to save Asian tigers from extinction.

In 2006, he and his private-equity firm, Accretive LLC, set out to acquire a stake in the National Arbitration Forum, the nation's largest consumer-debt-arbitration body. An Accretive executive told NAF the organization had the potential to blossom into a billion-dollar business. By expanding beyond credit-card disputes to resolving disagreements between hospitals and patients, NAF had the potential to be "the center of a broad arbitration ecosystem," Mr. Cline's firm said, according to an Accretive presentation to NAF.

At the same time, Mr. Cline was quietly making another big bet on the debt business. Through its funds, Accretive created a separate debt-collecting business. That firm, Axiant LLC, ran call centers and helped collect consumer debt following NAF arbitrations.

In a July complaint, the Minnesota attorney general's office alleged NAF deceived consumers and engaged in false advertising. Consumers didn't realize NAF was financially affiliated with "one of the country's major debt collection enterprises," the complaint alleged. Accretive created Axiant in tandem with employees of Mann Bracken, a debt collector that represented credit-card companies in NAF arbitrations, the complaint alleged. At the same time, Accretive funds and NAF Inc. jointly own the back-office entity for NAF, called Forthright.

This structure, the complaint alleged, obscured Accretive's efforts to dominate both sides of the debt-collection business: arbitration and debt collection. While telling consumers that it was an impartial arbitrator, NAF worked closely with creditors, the regulator claimed, including drafting claims against consumers.

NAF says its arbitration system is fair. It provides "the most inexpensive option for consumers to resolve a dispute," rather than going to court, according to an NAF statement. An Accretive spokesman says that Forthright and Axiant provide information technology and processing for NAF and Mann Bracken, respectively. But Accretive doesn't control either NAF or Mann Bracken.

The 49-year-old Mr. Cline and his firm weren't named defendants in the Minnesota complaint. There is nothing in the complaint alleging Accretive and Mr. Cline condoned improper arbitration methods at NAF and Forthright. Mr. Cline declined requests for comment.

NAF settled the case with Minnesota Attorney General Lori Swanson in July without admitting the charges. It agreed in the settlement to stop arbitrating credit-card cases nationwide.

The case has made waves. Another consumer-debt-arbitration body, the American Arbitration Association, which handled far fewer of the cases than NAF, has also stopped hearing such cases. The AAA said its decision wasn't related to NAF's case, but it decided to stop those arbitrations after an evaluation revealed "weaknesses in the consumer debt collection arbitration process," according to its Web site.

The exit of the nation's two main debt arbitrators is part of a larger shift by banks away from requiring unhappy customers to arbitrate disputes, rather than go to court. In August, Bank of America Corp., which had used NAF to handle disputes, said credit-card holders now are free to go to court rather than being forced into arbitration. J.P. Morgan Chase & Co., citing recent events, ceased filing new arbitration credit-card claims in July and is evaluating whether to continue to include an arbitration clause in consumer contracts.

Arbitration and mediation have existed as ways to resolve disputes in the U.S. for more than 200 years. They became the standard practice in the financial world after 1987, when a Supreme Court decision gave securities firms the go-ahead to require arbitration to resolve brokerage-account disputes.

In a typical case, a bank refers an unpaid credit-card bill to a debt collector. If the collector is unsuccessful at recovering it, it refers the case to an arbitration body. Arbitration bodies, such as NAF and AAA, which generated revenue by charging fees to the parties involved, use retired judges and attorneys as arbitrators who decide the cases. If the arbitrator rules for the creditor, the collector can ask a court for a judgment to collect. Because a debt collector can earn up to a third of the debt outstanding when the ruling is in the bank's favor, it can be in a collector's interest for an arbitrator to rule against the card holder.

Former arbitrators, a congressional subcommittee, consumers and government suits are now alleging that NAF has been systematically ruling against consumers for years. Banks prevail over consumers in 94% of debt-collection arbitrations, an NAF official said in recent testimony to a congressional subcommittee. Arbitration advocates defend those results, citing studies that show debtors lose at a similar rate in court. They say that there is typically a long paper trail proving that customers owe the amounts in dispute.

A congressional subcommittee, which began an investigation last year to study the fairness of mandatory arbitration, concluded in July that the current arbitration system is "ripe for abuse." Arbitration, as "operated by NAF, does not provide protection for those consumers," the committee said.

A sweeping overhaul won't occur unless Congress decides whether to pass laws limiting how arbitration can be used. But arbitration experts now expect that more collection claims will be funneled into the courts.

Mr. Cline, a Harvard MBA and former McKinsey & Co. associate, formed Accretive in 1999. The firm, which counts some high-profile names such as Seagram heir Edgar Bronfman Jr. as general partners, has focused on launching new technology companies and helping spin off the information-technology operations of larger companies.

Accretive has a record of successful ventures. In 2000, it teamed up with General Atlantic, a private-equity firm where Mr. Cline was a general partner for 10 years, and started Fandango, a Los Angeles Web site that sells movie tickets and advertising. Fandango grew into one of the country's largest online movie-ticketing services before it was acquired in 2007 by cable operator Comcast Corp. for an undisclosed sum.

Mr. Cline also developed a passion for wild tigers, having served as a trustee of the Wildlife Conservation Society and a board director of Panthera, where he helped lead the Tigers Forever initiative to conserve the tiger population in Asia. Several years ago, Mr. Cline pledged $5 million to Tigers Forever over a 10-year period.

In 2006, his firm began wooing NAF. Created in 1986, NAF had become the go-to arbitrator for consumer-credit disputes, handling the bulk of such cases in the U.S. in 2006, or 214,000 claims.

Accretive had ambitious plans for NAF, according to documents presented in the Minnesota case. In established markets, such as credit cards, "arbitration should capture at least 50% of the volume currently placed in litigation," Accretive said in a presentation to NAF in August 2006, according to documents in the case. NAF could expand into new lines of business, such as helping hospitals collect bills, the documents added.

"We believe Accretive would be a great partner to help NAF become a billion dollar company," Accretive principal Madhu Tadikonda said in an email to NAF officials following a June 2006 meeting. Mr. Tadikonda, who has since left Accretive, declined to comment.

NAF earned much of its revenues from fees it charged credit-card companies. Filing an arbitration costs companies from $19 to as much as $1,750 for claims of $75,000 or more. Other fees apply to companies and consumers depending on whether an in-person hearing is sought, for instance.

While negotiating with NAF, Accretive also was finalizing the creation of a collection-processing firm in partnership with employees of Mann Bracken. Mann Bracken, a law firm, worked closely with NAF at the time. Along with another firm it would acquire, Mann Bracken filed 58% of the 214,000 consumer-debt arbitration claims sent to the NAF in 2006, according to the Minnesota complaint.

NAF "executives recognized the problems that would arise if Accretive's investment in the [NAF] -- and its ties to the Mann Bracken law firm -- became public," the complaint said.

In fall 2006, Michael Kelly, NAF's chief operating officer, emailed Accretive's Mr. Tadikonda, recommending that any Accretive stake in NAF be acquired through "a new fund as the investment vehicle," according to a copy of the email included as an exhibit in the Minnesota case. There should be "no public information connecting Accretive with the fund that ultimately acquires and holds the minority interest" in NAF.

Mr. Kelly, a former executive for the Minnesota Vikings football team and a lawyer, told Accretive officials that they would need to establish an "on-going Chinese wall between Mann Bracken and the" NAF. "I cannot overstate our concern over the Mann Bracken relationship," Mr. Kelly added in the email.

Mr. Cline had a solution, the Minnesota complaint alleges: forming several entities called Agora, "in order to conceal the conflicts inherent" with the Accretive/NAF transaction.

Mr. Kelly said through a statement from NAF that he addressed concerns about Mann Bracken by taking "very specific" actions, including establishing separate office space with secure key-card access and separate information-technology infrastructure. After taking these actions, Mr. Kelly said, he decided there were no longer any conflicts and proceeded with Accretive. Mann Bracken had no comment.

Accretive and NAF signed a letter of intent on a deal in early 2007, according to the complaint. Several weeks later, Mr. Cline set up four enterprises in Delaware. The general partner of all the entities, Agora Fund I GP LLC, shared the address of Mr. Cline's private-equity firm. The Agora entities then acquired a stake in a new company called Forthright that handled back-office and marketing duties for NAF. That step created a layer hiding Mr. Cline's partnership with NAF, according to the Minnesota complaint.

An Accretive spokesman said documents detailing the partnerships were filed with state authorities and are publicly available. The spokesman said the Delaware partnerships were created for tax-planning purposes.

Since its settlement with the Minnesota attorney general, NAF has focused on other forms of arbitration such as domain-name disputes. It has been hit by numerous complaints alleging it favored its corporate clients in credit-card disputes.

A former part-time NAF arbitrator, Harvard University law professor Elizabeth Bartholet, testified before the Senate Judiciary Committee last year that NAF discontinued sending her cases in 2004 shortly after she ruled in favor of a consumer.

Before that case, she had ruled in favor of credit-card companies 18 consecutive times, she told the committee. She says she finished several pending NAF cases after she ruled for the card holder, but then wasn't given more cases. The official reason the NAF gave for canceling more work was scheduling conflicts. But Ms. Bartholet said in an interview that an NAF manager told her she was likely removed because she ruled for the debtor. "Someone else will fill NAF's vacuum if Congress doesn't reform the [arbitration] system," Ms. Bartholet said.

NAF's Mr. Kelly said Ms. Bartholet has "testified to the fairness of arbitration and arbitrators in subsequent legal depositions."

NAF, which has a database of more than 1,000 attorneys and retired judges whom it hires as arbitrators, says it is unbiased. In Houston, NAF arbitrator James Carmody says he spent up to three hours in cases where consumers decided to fight a debt claim. When consumers didn't fight, the lawyer could clear a case in 15 minutes.

"I have bent over backward to listen to the arguments of the credit-card holder," Mr. Carmody says. Often, consumers didn't respond to the arbitration notice. "I would say in the vast majority of cases the credit-card company wins because in the vast majority of cases, the person ran up the debt on the card."

Continue reading "Arbitration No Longer the Avenue to Resolve Credit Card Disputes" »

New data suggest that foreclosures are rising in more expensive housing markets.

About 30% of foreclosures in June involved homes in the top third of local housing values, up from 16% when the foreclosure crisis began three years ago, according to new data from real-estate Web site Zillow.com. The bottom one-third of housing markets, by home value, now account for 35% of foreclosures, down from 55% in 2006.

The report shows that foreclosures, after declining earlier this year, began to accelerate in the late spring and that more expensive homes have more recently accounted for a growing share of all foreclosures. "The slope of that curve in recent months is much sharper than it was recently," said Stan Humphries, chief economist for Zillow. Rising foreclosures among more-expensive homes could create added pressure for a housing market that has shown signs of stabilizing in recent months as sales of lower-priced homes pick up.

The Zillow research compared homes against the median values for their local market and broke each market into three tiers by value. Zillow then looked at the share of monthly foreclosures in each tier over the past decade.

Foreclosures are rising in more expensive markets as home values in those areas fall, leaving more homeowners with mortgages that exceed the value of their properties. Prime loans accounted for 58% of foreclosure starts in the second quarter, up from 44% last year, according to the Mortgage Bankers Association. Subprime mortgages accounted for one-third of foreclosure starts, down from one-half last year.

The prime category includes so-called exotic mortgages that were increasingly used to buy more expensive homes, including interest-only mortgages that allowed borrowers to defer principal payments during an initial period. Borrowers often aren't able to refinance out of these products because the drop in home values has left them with little equity in their homes.

Default rates are particularly high and expected to rise on option adjustable-rate mortgages, which allow borrowers to make minimum payments that may not cover the interest due. Monthly payments can increase to sharply higher levels after five years or when the outstanding balance reaches a certain level. A study by Fitch Ratings found that 46% of option ARMs were 30 days past due last month, even though just 12% of such loans have reset to higher monthly payments.

Continue reading "Foreclosures are Rising in the More Affluent Housing Markets" »

In another promising sign of economic recovery, the torrid pace of personal and business bankruptcies slowed during the third quarter. In the first quarterly decline since the overhaul of bankruptcy laws in 2005, commercial, or business, bankruptcy filings fell 4.5 percent to 22,710 in the third quarter from 23,782 in the second quarter, according to data compiled by Automated Access to Court Electronic Records, an Oklahoma City bankruptcy management and data company. The 7,405 business petitions filed in August and the 7,215 in September were the first back-to-back monthly declines since November and December of 2006, AACER data show. According to AACER, consumer bankruptcy filings from July to September continued a streak of 15 consecutive quarterly increases dating to enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in October 2005.
However, the third-quarter increase - up 2 percent from the second quarter - was smaller than the 15.4 percent spike from the first quarter to the second quarter of 2009. The third-quarter increase also was the smallest quarterly increase since AACER began tracking the data in 2006.

The ebb in filings doesn't mark an end to the recession - not with unemployment approaching 10 percent, commercial credit still tight, a new round of adjustable-rate mortgages that reset next year and tepid consumer spending amid continuing job losses.

When coupled with rising home mortgage applications and a slowdown in new jobless benefit claims, however, the bankruptcy slowdown offers more hope that the economy is starting to stabilize.

"It's certainly not bad news that they're leveling off," said Robert Lawless, a law professor at the University of Illinois and a bankruptcy expert. "When filings are going down it's an indication that things are probably doing better. But if you want to use (bankruptcy) filings as an indicator of the economy, we have to recognize they're a weak indicator and a lagging indicator at that."

Continue reading "Pace of Bankruptcies is Slowing Down" »

California now has new laws that are supposed to protect homeowners and homebuyers from mortgage fraud.

Legislation to increase protections for consumers in the lending market and provide law enforcement with more tools to crack down on deceitful mortgage practices was signed into law Sunday by Gov. Arnold Schwarzenegger.

The bills are supposed to:

• Strengthen California's reverse mortgage laws by providing senior homeowners with greater consumer protections when considering reverse mortgage agreements,

• Make it a felony to commit fraud in connection with a mortgage application. and

• Promote responsibility and accountability in the real estate market.

Fraudulent mortgage practices have become more prevalent as a result of the national foreclosure crisis that negatively impacted California's housing market and economy," says Mr. Schwarzenegger. "This legislation helps crack down on abusive lending practices by giving law enforcement the tools to effectively investigate mortgage fraud crimes and provides Californians with greater consumer protections to promote homeownership in a safe and accountable environment."

Specifically, the bills signed are:

• AB260 by Assemblyman Ted Lieu, D-Torrance will enact the Higher-Priced Mortgage Loan Law which would codify a fiduciary duty for mortgage brokers, authorize California's mortgage regulators to apply specified federal mortgage lending laws and regulations to their licensees and cap prepayment penalties and yield spread premiums on higher-priced loans.

SB 36 by Sen. Ron Calderon, D-Montebello to establish standardized licensing requirements for all individual loan originators who offer or negotiate residential mortgages.

SB 239 by Sen. Fran Pavley, D-Santa Monica to make it a felony to commit fraud in connection with a mortgage application. This bill makes individuals who engage in mortgage fraud guilty of a public offense punishable by imprisonment in the state prison or in a county jail up to one year. The bill also provides law enforcement with the necessary tools to make it easier to obtain a search warrant for real estate records and documents believed to contain evidence of mortgage fraud.

AB 329 by Assemblyman Mike Feuer, D-Los Angeles to establish the Reverse Mortgage Elder Protection Act of 2009 to provide senior homeowners with greater consumer protections to ensure that they are fully informed about the consequences of entering into a reverse mortgage agreement. Specifically, the bill requires lenders to provide prospective borrowers with a clear and informative written disclosure statement and a written checklist pertaining to the risks and suitability of a reverse mortgage, prior to borrower attending loan counseling.

SB 237 by Sen. Ron Calderon, D-Montebello to create a registration program for appraisal management companies (AMCs) and prohibits any person or entity from acting in the capacity of an AMC without first obtaining a certificate for registration from the Office of Real Estate Appraisers.

AB 957 by Assemblywoman Cathleen Galgiani, D-Livingston to mandate that buyers of foreclosed homes would have the choice of using a local escrow office to handle the transaction. It also prohibits a seller of residential property from requiring the buyer to use an escrow service company or purchase title insurance chosen by the seller and would also prohibit a seller of residential property from, without good cause, disapproving the use of a title or escrow company chosen by the buyer.

Continue reading "California Protections For Homeowners and Homebuyers" »

A crucial issue for a closely held business that wishes to buy out one of its principal ownwrs is whether it will have the funds to do so. Because so few business have sufficient cash or other resources to fund a buyout, the seller usually must accept an installment payout and continue to share the risks of the future profitability of the business unless the business has provided for a fund to buy out the major owner.

There are essentially three methods for funding a buyout: borrowing from a party, setting up a shrinking fund or reserve, or acquiring insurance.

if the business has the borrowing capacity or available cash to fund a buy-sell agreement, the cost of life insurance should be comparted with the cost of borrowing money or using the company's own funds. Insurance contracts are extremely competiviely priced and usually very cost effective. However, there are many factors to consider in making a comparison, including the ages and health of the insureds, which might push premium rates to the point that other options should be seriously considered, and the fact that the insurace may never be collected should retirement occur before death.

Continue reading "Life Insurance Funding of Buy-Sell Agreements" »

Unless the partners have entered into a written agreement that provides otherwise, dissolution of the partnership will result from (1) a partner's death (Corp. Code Section 1503194); although the court could authorize the deceased's partner's personal representative to continue as the general or limited partners; (2) Bankruptcy (Corp. Code Section 15031(5), unless bankruptcy laws provide to the contrary; (3) withdrawal (Corp. Code Section 15031(7).

Any event that causes a general partner of a limited partnership to cease to be a general partner will also cause dissolution of the limited partnership unless:
(a) there is at least one other general partner and the partnership agreement permits the limited partnership to be continued by the remaining general partner or partners or (b) aamjority in interest of the limited partners (or the greater interest provided in the partnership agreement) agree in writing to continue the limited partnership and to admit at least one new general partner.
However, the death of the withdrawal of a limited partner or the transfer of a limited partner's interest will not cause the dissolution of a limited partnership.

Contact Steven Peck's Premier Legal toll free at 1.866.999.9085 to talk to an experienced business law attorney and vist us on-line at www.premierlegal.org.

Bureaucratic bungling, red tape and political gridlock don't come cheap -- especially when they get in the way of paying California's bills.

The state has shelled out more than $8 million in late-payment penalties to vendors, contractors and others over the last two years because Sacramento did not send the checks when they were owed, records show.

The late budget last year was one reason bills didn't get paid when they were due, but not the only one. Confusion over which offices should make payments, delays in invoices being sent from field offices to headquarters and shortages of staff to pay the bills also are responsible.

At a time when the state is slashing services to parks users, the disabled and domestic violence victims, taxpayer advocates said Monday that the waste of millions of dollars on late fees is inexcusable.

"There shouldn't be any reason why the state can't pay its bills on time," said David Kline, of the watchdog group California Taxpayers' Assn. "It's disappointing that tax dollars are being wasted on penalties that should be avoidable."

The penalties are mandated under the California Prompt Payment Act, which requires state agencies to pay properly submitted, undisputed invoices within 45 calendar days of receipt. Every department is required to report annually how many invoices were paid late and the sum of penalties incurred.

For the two-year period ending June 30, state agencies reported paying more than 38,800 invoices late. With a budget some three months overdue last year and 50 days overdue in 2007 because of political gridlock, the state ran out of cash and stopped paying its bills.

"The Legislature failed to produce an on-time budget after the state controller said for months it would cause late fees," said Aaron McLear, a spokesman for Gov. Arnold Schwarzenegger.

That problem was cited by the Department of Corrections and Rehabilitation to explain much of its $3.4 million in late fees during the last two years.

Tardy payments, according to agency spokesman Gordon J. Hinkle, "are unfortunately a reality" in a state with little reserves and constant budget deadlock.

Lawmakers blamed one another Monday. A spokeswoman for Senate President Pro Tem Darrell Steinberg (D-Sacramento) said the governor and Republicans dragged their feet on needed budget measures.

Senate minority leader Dennis Hollingsworth (R-Murrieta) responded: "As soon as budget problems became apparent, cuts needed to be made quickly and decisively. Instead, Democrats delayed the inevitable, costing taxpayers millions more."

The Justice Department, which paid $403,000 in late fees during the last two years, estimated that 38% of its penalties last year and 25% the year before were caused by the late budget. But a system that was not sufficiently computerized was also an issue, according to Scott Gerber, a department spokesman.

The department said it has installed an electronic payment processing system for big vendors "to reduce our interest penalties in future years," according to its annual report.

The Department of Health Care Services said its $288,218 in penalties in the 2007-08 fiscal year were caused, at least in part, by "confusion" over which agency should pay the bills after a reorganization split functions between multiple offices.

The Department of Rehabilitation, which serves the disabled, said in its report that $11,790 in penalties were incurred partly because "we were short-staffed."

At the Department of Parks and Recreation, about 6% of the late payments during the last fiscal year, involving 100 invoices, were attributed to "processing issues," according to Sheryl Watson, a spokeswoman for the agency.

"The invoice came to us late from the district office," Watson said, citing one problem. "Or it came to us on time but not all of the documents came with it," or other information was missing.

The problem of late payments has been known for a long time. An internal audit of the state Parks and Recreation Department last year found that it had incurred late payment penalties of $232,000 in the preceding two years.

"The payment of late payment penalties represents resources that could be better used in furtherance of the department mission," the audit said.

McLear said he was unaware of any red-tape problems. "If there are bureaucracy issues that are keeping us from paying our bills on time we will absolutely correct this," he said.

Those who do business with California government say they incur significant inconvenience when the state pays late, even if it also pays a penalty.

"As a small business, when it comes time to make payroll, it makes it very difficult," said John Riley, co-owner of Sacramento Technology Group, which saw delayed payments of about $750,000 in payments on computer-related contracts. "It can cause us to have to borrow money to meet the credit crunch."
patrick.mcgreevy @latimes.com

Continue reading "California Continues in Business Financial Turmoil" »