ACC Focus on the New Jersey Chapter - October 8, 2007 (Print All Articles)
The Subprime Litigation Explosion Is Here
David W. Phillips
The debacle in the subprime mortgage market has and will continue to affect many segments of the financial markets. A severe credit crunch has emerged across the board in the mortgage markets, both at the consumer level and in the secondary markets for mortgage loan re-sales. Several subprime mortgage units have closed or have been sharply curtailed, well beyond the well know events at Countrywide Mortgage. BNC Mortgage, a unit of Lehman Brothers, has closed its subprime business and laid off 2,000 employees, and Merrill Lynch’s First Franklin Financial Corp. is eliminating 2,800 mortgage related positions. The ripples will continue to spread through other segments of the financial industry – there are predictions that 10,000 Wall Street employees will lose their jobs this year, and many banks have cut back replacement hiring.
Like the downturn in the early 90’s, the repercussions have and will spread beyond the financial markets, and will affect many other segments of the economy. Already, the housing market also has been severely impacted by the credit crunch and lack of liquidity. Foreclosures are at appearing at historically high rates, and the number of leveraged buyouts have diminished.
There are any number of related businesses that will be effected, and exposed to litigation and potential liability. Some of the litigants will be:
One of the initial waves of litigation is the foreclosure of subprime mortgages. Even pre-suit, lenders will have regulatory obstacles to overcome, which will all have to be in exacting detail to avoid defensive hurdles raised by borrowers in sympathetic courts. Thus, lenders may have to comply with the Federal Fair Debt Collection Act, which requires particularized notices in efforts to collect a debt, and also with the New Jersey Fair Foreclosure Act, each requiring particularized notices to the borrower during collection activities and prior to any foreclosure.
Of course, these legal hurdles will be the tip of the iceberg as regards foreclosure of subprime mortgages. The homeowners will often be fighting for their financial lives, and will fight hard. Already, homeowners have interposed allegations that loans were obtained fraudulently because they were not aware of the terms of the loans. The basic claims are (1) inadequate disclosure of the amount, methodology and timing of interest rate adjustments; (2) predatory sales and/or lending, in that the buyers were known to be unqualified for the mortgages but were approved anyway; (3) predatory or unconscionable loan terms, such as prepayment penalties, interest rates or other fees; and (4) violations of various state and federal laws and regulations, such as the Truth in Lending Act or consumer fraud laws.
One of the allegations often used in predatory lending claims is that it is unconscionable for lenders to require a pre-payment penalty from residential mortgagors. However, these claims may be short lived. In 1996, the Office of Trust Supervision enacted a regulation that extended to state chartered lenders the ability to insert pre-payment penalties in mortgage transactions. New Jersey has a law forbidding prepayment penalties – but the Supreme Court held in 2004 that New Jersey law was preempted, and prepayment penalties in “alternative mortgage transactions,” which are variable rate loans and the like, that meet the federal guidelines cannot be prevented by State law. Conceivably, the same OTS regulation should permit prepayment penalties in other states as well.
In a case in New York, a Judge refused to permit a foreclosure to go forward, citing technical lapses in the lender’s papers, but also citing a long litany of complaint about subprime mortgages and connecting them to predatory lending practices. In Pennsylvania, a group of homebuyers was permitted to proceed with claims not just against the against developers and originating brokers who allegedly tricked them into predatory loans, but also against the initial assignees of the loans. The claims included the customary predatory lending claims, and also Racketeering claims under the federal RICO laws, permitting treble damages.
One new wrinkle is that the subprime mortgage documents often have arbitration clauses. North Carolina has upheld the clauses, and Pennsylvania upheld a clause which requires the borrower to bring all claims in arbitration, but permit the lender to sidestep arbitration and to foreclose in court, while a Court in Oregon found an arbitration clause to be unconscionable, and the lender was subject to a jury award for damages and punitive damages.
There will also be litigation in non- subprime lending. As residential foreclosures increase in subprime, credit will tighten in non-subprime lending. This will drive prices down, and thereby restricting sales and refinances. The initial effect, of course, is on the developers, who cannot market inventory. Already, upscale properties in the counties around New York City are being drastically discounted, some by several hundred thousand dollars. As the sale time of properties increases it will become increasingly necessary for developers to seek relief from lenders who have funded the development.
Foreclosures of unfinished and unsold developments will increase, as will foreclosures of non-subprime home mortgages.
There will also be increased governmental involvement in the private mortgage arena. For example, in August, the Illinois legislature passed a bill requiring that all borrowers contemplating entering into “non-traditional” mortgage loans must attend mortgage counseling prior to closing the loan. Now whether you think this is consumer protection or unnecessary government intrusion, the real effect may be to limit the ability of borrowers to assert claims against the lender – the fact that they went to counseling before entering the loan may shelter the lender from liabilities. But, these efforts are not necessarily new, as California passed anti predatory lending laws aimed at the subprime markets in 2001.
The Federal Government is likely to get involved as well. A package to rescue subprime borrowers was quickly announced by the White House, removing an obstacle to refinancing adjustable rate loans which were not current. On September 19, 2007, Sen. Robert Menendez, D-N.J., a member of the Senate Banking Committee, said he is exploring legislation to increase oversight of financial sectors and actors that may have contributed to the nationwide mortgage crisis: “It is time those responsible are held accountable – and until now, Wall Street has been getting a free ride. Enough is enough.” With this being an election year, the problems in subprime lending and the allegations of predatory lending to unwitting borrowers are sure to be campaign issues.
There may also be exposure to Securities and Exchange Commission investigations and enforcement actions. The sharp decline of the value mortgage backed securities has caused the SEC to become involved already. It has begun to probe the secondary markets for subprime loans, seeking information from mutual fund managers, lawyers, company executives and credit-rating analysts concerning their involvement in trading of securities that came from bundled mortgages. Areas of interest reportedly include collateralized debt obligations, the pools of mortgages sold to investors; the pricing of subprime debt; the role of the credit rating agencies in the subprime industry.
Many of these same business will be plaintiffs and defendants in civil actions seeking to apportion the losses from the subprime meltdown. Mutual funds, on the hot seat from investors, will sue the credit agencies, lawyers, lenders, brokers and appraisers seeing returns of funds, under a variety of theories, from negligence in fulfilling contractual roles, to malfeasance, i.e., perhaps knowing participation in predatory lending practices, or perhaps knowledge that the practices tainted in a pool of loans.
Each of these participants will in turn seek to shift any losses to others. To the extent the relationships are governed by contracts, these will be the subject of the litigation. The stakes may be large, such that parties may to driven to contest the meaning of and the extent of loss shifting provisions, such as buy-back arrangements and indemnity provisions. As a general legal principal, the only tort claims that will be permitted in a contractual relationship are for fraud, either in the entry into the contract, or in the performance of the contact. However, the general rule is not likely to stop claims for negligence and recklessness and perhaps other tort theories as well, from being advanced as affirmative loss shifting claims, or in avoidance of loss shifting lawsuits, and the general rule will not stop some courts from permitting such tort claims.
Like a train careening off its track, the subprime legal explosion has started and will continue expanding, and there may be no way for real estate professionals to completely shield their clients from at least some involvement.
Since 1986, David W. Phillips has been engaged in a general commercial litigation practice. He places particular emphasis on chancery practice, trademark and unfair competition litigation, lender liability defense, and real property litigation.
His practice concentrates on complex, sophisticated litigations in state and federal courts throughout the country. Mr. Phillips has extensive experience representing banks and other lenders in recovery of funds and defense of lender liability actions, in corporate dissolutions and shareholder rights actions, and in trademark and unfair competition litigation. His cases have taken him before state and federal courts, as well as the Trademark Trial and Appeal Board of the U.S. Patent and Trademark Office.
Mr. Phillips, who received his B.A. from Wilkes University and J.D. from Temple University, practices law in New Jersey, New York, Pennsylvania, and the District of Columbia. He is a member of the New Jersey, New York, District of Columbia, and American Bar Associations.
Questions about this article can be sent to Mr. Phillips at email@example.com.
Supreme Court to Address Exhaustion and Evidence Issues
David W. Garland
In its new term, the U.S. Supreme Court will consider two important employment law cases. In one, the Court will decide whether an intake questionnaire and affidavit submitted to the Equal Employment Opportunity Commission (“EEOC”) constitute a “charge” of discrimination satisfying the exhaustion requirements of the Age Discrimination in Employment Act (“ADEA”). In the other, the Court will consider whether an age discrimination plaintiff should be permitted to introduce “me, too” testimony of co-workers who also claim that the employer improperly used age as a factor in implementing a reduction in force (“RIF”).
Exhaustion Under the ADEA
Under the ADEA, an individual must file a charge of discrimination with the EEOC before filing a lawsuit in federal court. The ADEA dictates when the individual must file the charge and when he or she must then file a lawsuit.
In Holowecki v. Federal Express Corp., 440 F.3d 558 (2d Cir. 2006), fourteen current and former couriers sued the Federal Express Corporation (“FedEx”) for allegedly discriminating against them on the basis of their age in violation of the ADEA. They alleged that FedEx’s policies and practices led to the discharge of a disproportionately high percentage of older couriers.
The Supreme Court will focus on one of the plaintiffs, Patricia Kennedy, who, prior to the filing of the Complaint, filed an intake questionnaire and an affidavit with the EEOC detailing FedEx’s alleged discriminatory policies and practices. The EEOC did not investigate Kennedy’s allegations or notify FedEx of the filing, as it routinely does upon receiving a charge. Kennedy and the other plaintiffs then initiated the federal lawsuit.
FedEx filed a motion to dismiss Kennedy’s claim, arguing that her first submission was not a charge and her second submission was untimely. The district court agreed and granted the motion.
The Second Circuit reversed, explaining that the ADEA does not define the term “charge,” but the EEOC’s regulations set forth the “minimal” amount of information that a charge must contain. Under the regulations, according to the court, a charge must at least be a writing from (or on behalf of) the person making the charge, that “names the employer and generally describes the allegedly discriminatory acts.”
The court indicated that if a submission places the EEOC on notice of alleged discrimination and provides it with an opportunity to contact the prospective defendants and seek conciliation, the individual is “not foreclosed from federal suit merely because the EEOC fails to follow through with notifying the employer and attempting to resolve the matter.” The court concluded that Kennedy’s submission satisfied these requirements because it: (1) contained the information required by the statute and regulations; and (2) communicated her intent to “activate the EEOC’s administrative process.”
“Me, Too” Evidence
In Mendelsohn v. Sprint/United Management Co., 466 F.3d 1223 (10th Cir. 2006), the Tenth Circuit held that the trial court erred in barring an ADEA plaintiff from introducing “me, too” testimony of co-workers who claimed that they had also been discriminated against due to their age.
Plaintiff Ellen Mendelsohn was laid off from her job with defendant Sprint/United Management Co. (“Sprint”) as part of a company-wide RIF. She was fifty-one years old and alleged that Sprint selected her for discharge because of her age.
At trial, she sought to introduce testimony of five other employees over forty who were also laid off in the RIF and who also believed that Sprint had discriminated against them based upon their age. Sprint argued that any reference to alleged discrimination by anyone other than Mendelsohn’s supervisor was irrelevant to the issue of whether Mendelsohn’s age motivated the supervisor to terminate her. The district court agreed, ruling that only evidence regarding employees similarly situated to Mendelsohn was admissible.
According to the court, employees were similarly situated if they shared Mendelsohn’s supervisor and were terminated at approximately the same time. Because none of the other employees whose testimony Mendelsohn wanted to introduce shared her supervisor, their testimony was barred. The jury returned a verdict for Sprint.
The court distinguished this case from a discriminatory discipline case, in which a plaintiff seeking to establish a supervisor’s discriminatory intent may only present evidence that other employees were treated more favorably for the same conduct if those employees and the plaintiff reported to the same supervisor. According to the court, this “same supervisor” rule is inapplicable where the plaintiff alleges that she was the victim of a company-wide discriminatory RIF.
The court indicated that the testimony of other employees is “logically tied” to Sprint’s alleged motive in selecting Mendelsohn for the RIF because Mendelsohn and the other employees: (1) were all discharged within one year as part of a company-wide RIF; and (2) were members of the protected age group and were selected for the RIF based upon similar criteria. The court rejected Sprint’s argument that the evidence would have unfairly prejudiced the company by requiring it to effectively defend multiple discrimination claims. Although the court acknowledged that admitting the evidence would “inconvenience” Sprint, it concluded that this fact did not outweigh the probative value.
According to Sprint, the Tenth Circuit decision is contrary to decisions of the Second, Third, Fifth and Sixth Circuits holding that “me, too” evidence should be excluded as not relevant, and decisions of other circuits barring it on the ground that its probative value is outweighed by such concerns as potential prejudice, confusion of the issues and undue delay.
In granting certiorari in Holowecki and Mendelsohn, it appears that the Supreme Court will resolve the uncertainty regarding two significant employment law issues. Although these are both age discrimination cases, the principles that the Court articulates in deciding them may apply to other types of discrimination cases as well.
This article provides information on recent developments in the law. It, however, should not be relied on for legal advice in any particular matter.
For further Employment & Labor information, please contact:
In-House Counsel Attorney-Client Privilege in the European Union
Taysen Van Itallie
On September 17, 2007, in the case Akzo Nobel Chemicals Ltd. v. European Commission, the European Court of First Instance rejected all efforts to persuade it to modify the rule of European Union law that denies the protection of "legal professional privilege" to communications between business personnel of a company and that company's in house lawyers.
This means that, under European law, there continues to be no attorney-client or comparable privilege protecting communications between an in-house lawyer and any business personnel, or even between two in house lawyers for the same company.
The Akzo case arose out of a "dawn raid" by personnel of the European Commission, investigating a suspected violation of competition law, on the offices in England of Akzo Nobel's English subsidiary. In the course of the raid, the investigators found and seized, among other papers, copies of emails sent by the manager of that office to Akzo's in house competition lawyer, a member of the Dutch bar based in Akzo's office in the Netherlands, and the lawyer's responses. Those communications would have been protected as privileged under both English and Dutch law, but the Commission argued that they were not protected under European precedent, embodied in a 1982 decision by the European Court of Justice in a case called AM&S Europe Ltd. v European Commission. The AM&S decision stated two conditions for respecting legal professional privilege in any communication between business people and a lawyer: First, the lawyer must be "independent," which the court defined to mean not employed by his or her client. Second, the lawyer must be a member of the bar of a member country of the E.U. While the competition lawyer in the Akzo case met the second condition, he did not meet the first one. In many countries in Europe, however, notably France, lawyers employed by a company are still not permitted to be members of the bar.
The Court of First Instance, which is the court below the European Court of Justice, rejected the arguments of Akzo and a number of amici curiae that the law had evolved in many European countries since the AM&S decision in favor of respecting the confidentiality of communications between business managers and in house lawyers, and that there were compelling policy reasons why such communications should be protected by a privilege. There will likely be an appeal to the European Court of Justice asking it to change the law, but the Court of First Instance decision gives little reason to hope for any improvement.
General Counsel who have lawyers in Europe must therefore continue to assume that the European Commission will be able to read all written communications to or from in-house lawyers, except for communications with, or conveying advice given by, outside lawyers.
A number of multi-national companies have engaged in a several year effort through the U.S. Chamber for International Business to confront the EC authorities about the retrograde nature of their position on in-house counsel privilege, which is disadvantages in-house counsel's ability to advise their clients by failing to recognize the protection of legal privilege for their communications.
The Akzo decision requires us to redouble our efforts to correct what is truly an intolerable situation and one which reflects an antiquated but unfortunately deeply entrenched bias that in-house counsel lack sufficient independence to be accorded the benefit of legal privilege.
Taysen Van Itallie
NJCCA President's Message
by Lee Bream
Nothing is Constant Like Change
As my company is changing its name from Degussa to Evonik, I am reminded how often I and my NJCCA colleagues have gone through corporate reorganizations (whether voluntary, forced, or based on an acquisition, merger, or sale). It undoubtedly happens more than we would like. Nonetheless, it can be an exciting time and a lot can be learned about how a company functions and develops (or not) its unique culture.
Given the role lawyers play in corporate organization and reorganization, we are uniquely placed to help our corporate clients through change. This applies whether we are specialists in Intellectual Property, Governance, or Environmental, Health and Safety. Hopefully, our wise counseling can minimize known and avoid unanticipated problems.
But change can take a personal toll, whether it be the euphemistic downsizing or staffing adjustment or just the anxiety that can go along with any change, with a new corporation, or new management. We would hope that NJCCA (and ACC) could be a resource in-house counsel use to make it through periods of change. For example, our Career Management Committee provides resources for those in transition and our various networking events can allow attorneys to learn from the successes or the not quite successes experienced by others. Please tap these resources.
And if anyone wants some left over copies of Who Moved My Cheese, I’ve got a few copies lying around somewhere. See you at our Annual Dinner Meeting on November 14th.
Very truly yours,
Upcoming NJCCA Events
Register today for these relevant and insightful events.
Women's Networking Planning Meeting
Protecting the Corporation
The New USPTO Rules: Suggestions for Survival in a New Environment
Meeting the Challenges of Global Compliance
NJCCA Annual Dinner Meeting
Note to General Counsels: McNulty Made Your Jobs Harder
This practically oriented (hands on) seminar from two leaders in white collar defense will develop strategic and tactical processes you need to implement in the face of the McNulty Memorandum’s clouded message. Among the topics that will be developed for your use:
• Corporate Miranda: when necessary, who should do this and when;
NJCCA Officers, Board Members and Committee Leaders Planning Session
Protecting Trade Secrets
2008 Corporate Counsel Institute
Microinequities: The Power of Small
Third Annual Golf Outing
Supreme Court Committee Schedules Hearing on Mandatory CLE
New Jersey’s Supreme Court Ad Hoc Committee on Continuing Legal Education has scheduled two public hearings to receive input regarding mandatory continuing legal education (MCLE). The first, on October 17, is in Newark and the second, on October 30, is in New Brunswick. More information about the hearings is available at the following link:
NJCCA filed the attached letter with The Honorable Peter Verniero, who chairs the MCLE committee. If you’d like to collaborate with NJCCA’s leadership on MCLE issues, please contact Philip P. Crowley, Assistant General Counsel, Johnson & Johnson, at (732) 524-2451 or firstname.lastname@example.org.
Benchmarking Law Department Performance
Please complete the Legal Department Performance Benchmark Study from Bridgeway Research and be entered to win an iPod Touch (ARV:$299). The winner will be drawn, from among all eligible entries, at the conclusion of the ACC Annual Meeting in Chicago on 10/31/07.
You do not need to be present to win. Notice will be set to the winner at the email address he or she provides in the survey.
To complete the survey use the following link:
The New USPTO Rules: Suggestions for Survival in A New Environment
NJCCA's Intellectual Property Committee
Learn all about the new USPTO Rules
Co-chairs of NJCCA's Intellectual Property Committee Sylvia Ayler, Assistant
Speakers are Robert Fischer and Anthony Zupcic,
NJCCA Featured in Princeton Business Journal
There's no such thing as bad publicity!
In its October 2 issue, the Princeton Business Journal reports that NJCCA helps in-house counsel to tap quickly into resources that help them to address complex legal questions. The article is based on interviews with NJCCA Committee Leader Rob Levin, general counsel of Sarnoff Corporation, and NJCCA Member Jason Meyers, chief legal officer of Kaplan EduNeering.
Click here to read the full article
Swings Improve at NJCCA Golf Clinic
On August 30, a sold-out crowd of a dozen in-house counsel practiced drives
The Basking Ridge Golf Club's pro gives pointers to in-house counsel
on perfecting a "pendulum" swing to sink a put.
OVERRULED! by Aronds
As far as we know, the only Chapter Newsletter with its own in-house cartoonist!