Rogers Towers, P.A. welcomes you to its Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, P.A., and we look forward to your comments in response to our blog.
Through the economic turmoil of the late 2000s, borrowers came up with creative (and at times, inequitable) ways to protect their investments. One such method—the borrower’s indirectly purchasing and foreclosing a senior lien to rid the investment of junior liens—was recently rejected by Florida’s Third District Court of Appeal.
In CDC Builders v. Biltmore-Sevilla Debt Investors, LLC, 151 So. 3d 479 (Fla. 3d DCA 2014), a real estate investor, McBride, owned a large development through a group of companies he formed and controlled. The development was financed through a mortgage with SunTrust, and McBride’s companies hired a contractor to construct homes on the development. When McBride’s companies could not pay the contractor for the last eight homes constructed, the contractor recorded statutory construction liens against the development.
While the contractor’s sought to enforce its construction liens, McBride formed a new company, BSDI, which purchased SunTrust’s first mortgage. BDSI (the new company formed by McBride) then filed a foreclosure action against McBride’s companies that owned the property and the contractor. The trial court entered summary final judgment of foreclosure against the contractor, and the contractor subsequently appealed to the Third DCA.
On appeal, the Third DCA reversed the summary judgment ruling, explaining that a borrower cannot obtain and foreclose a senior mortgage to rid his investment of junior liens. Additionally, the Third DCA explained that a borrower cannot do indirectly (i.e., through a company he forms and controls) what he cannot do directly. Thus, a borrower may not create a company for the purpose of purchasing the first mortgage on his investment and foreclosing out junior liens.
Based on this principle, the Third DCA remanded to the trial court to determine whether McBride had formed BDSI for the purpose of foreclosing out the contractor’s liens. The Third DCA noted several facts as particularly relevant to McBride’s intent, including:
- There was evidence that McBride controlled both the developers and BDSI;
- It appeared that McBride may have personally guaranteed the loan used to purchase the SunTrust loan;
- BDSI was not formed until the contractor sought to foreclose its liens;
- SunTrust’s file stated the loan was “repaid by the borrower buying our documents,” despite SunTrust’s willingness to refinance; and
- McBride could not provide any legitimate reason for forming BDSI.
In short, lenders need to be keenly aware of the types of creative ways borrowers may attempt to protect their investments as real estate values continue to increase. As shown in CDC Lenders, in certain cases, a lender may have a remedy to avoid what it perceives as an inequitable result.
On July 22, 2015, the Department of Defense (DOD) issued its final rule implementing the Military Lending Act (MLA). Enacted in 2006, the MLA seeks to protect active-duty military members and their dependents from predatory lending in high-cost consumer credit transactions. The DOD exercises rule-making authority to delineate which types of transactions are covered by the law.
Important provisions for lenders to note include:
36% cap on interest and fees. The MLA limits the annual interest rate on covered loans to 36 percent. Known as the Military Annual Percentage Rate (MAPR), this cap includes all interest and fees associated with a loan, including credit default insurance and debt suspension plans. This definition of MAPR is broader than the APR calculation required by the Truth in Lending Act (TILA) or Regulation Z.
Prohibited terms. The final rule prohibits lenders from requiring active-duty military members in covered consumer credit transactions to waive their rights under the Servicemembers Civil Relief Act (SCRA) for products covered by TILA, to submit to mandatory arbitration if a dispute occurs, to provide a payroll allotment as a condition of obtaining credit, to refinance a payday loan, or to provide a lender access to a bank account or car title as a condition of certain loans.
Covered consumer credit transactions. The final rule defines “consumer credit” to include most loans offered to military borrowers for personal, family, or household purposes and which are subject to a finance charge or payable in over four installments. This definition includes installment loans, deposit advance loans, unsecured open end lines of credit, payday loans, vehicle title loans, tax refund anticipation loans, and credit cards. However, the MLA excludes loans secured by real estate or loans used to finance the purchase of a vehicle.
Covered borrowers. Lenders must take steps to accurately determine whether a potential borrower is covered by the MLA. The Defense Manpower Data Center provides certificates of current active duty service at https://www.dmdc.osd.mil/appj/scra/. The final rule also affords safe harbor to lenders who rely on a consumer report from a nation-wide consumer reporting agency to confirm the military status of prospective borrowers.
TILA disclosures. Lenders dealing with military members in covered consumer transactions must provide TILA disclosures.
Implementation period. The final rule takes effect on October 1, 2015 and applies to covered consumer credit transactions or accounts created after October 3, 2016. Open-ended accounts and credit card are exempt from the final rule until October 2, 2017.
Penalties and compliance. Any loan that violates the MLA is void from inception. Knowing violations of the MLA constitute misdemeanors. In addition, the MLA authorizes lawsuits seeking damages of not less than $500 per violation plus punitive damages and reasonable attorneys’ fees.
Lenders should review their financial products to determine which ones may be affected by the MLA. Also, financial institutions should review their procedures to verify the military status of borrowers, to accurately calculate MAPR, and to ensure that prohibited terms are not embedded in loan agreements with military borrowers. Failure to verify compliance may result in voided transactions, reputation damage, and financial liability.
The final rule is available at http://www.gpo.gov/fdsys/pkg/FR-2015-07-22/pdf/2015-17480.pdf.
Securities claims subject to arbitration proceedings are subject to the same statute of limitations as any other judicial action. In holding that section 95.011, Florida Statutes, applies to arbitration proceedings, the Florida Supreme Court effectively cut the time investors have to file a claim by up to two-thirds.
Using statutory interpretation, the Florida Supreme Court in Raymond James Fin. Servs., Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013), concluded that the Florida Legislature intended to subject arbitration proceedings to Florida’s general statute of limitations set forth in chapter 95 of the Florida Statutes. The Court determined the applicability of section 95.011 to “civil actions” should be broadly defined to encompass all civil proceedings, which includes arbitration
Securities arbitration is the primary way that investors seek redress against financial advisors for improper investments. Typically, the claims include fraud, breach of fiduciary duty, unsuitability, breach of contract, or negligence. Prior to this decision, the Financial Industry Regulatory Authority (“FINRA”) set the time limit for parties who contractually agreed to settle disputes through arbitration at six years. Following the Raymond James holding, however, the time limitation set forth in section 95.11 controls. Now, pursuant to section 95.11(4)(e), an “action founded upon a violation of any provision of chapter 517” (governing securities transactions) must be brought within two years from when the party discovered or should have discovered the violation. The statute of limitation for negligence is a bit longer, at four years pursuant to § 95.11(3)(a). Additionally, financial institutions should recognize that while a violation under chapter 517 must be filed within two years after being discovered, investors are capped at a five-year maximum from the date the violation occurred. Fla. Stat. § 95.11(4)(e).
The Raymond James decision is far reaching as it applies to arbitration proceedings in general, not just in the context of securities disputes. Therefore, parties seeking to resolve claims through arbitration should understand that their claims are subject to the same statutes of limitations as any other civil action or proceeding in Florida.