October 30, 2012

Charlene Hicks, Senior Attorney, National Legal Research Group

In recent days, federal officials have launched an all-out effort to halt the fraud and corruption plaguing the nation's bank mortgage industry.  On October 9, 2012, the Federal Trade Commission ("FTC") filed three separate federal court lawsuits against allegedly phony mortgage-relief companies.  These suits accuse the companies of having engaged in deceptive business practices by falsely assuring struggling homeowners that they could save their homes from foreclosure, charging thousands of dollars in up-front fees, and then providing little or no actual assistance.  On the same day, the U.S. Attorney General, the Federal Bureau of Investigation ("FBI"), and the Department of Housing and Urban Development ("HUD") announced the results of the Distressed Homeowner Initiative, a year-long, coordinated, multilevel investigation targeting predatory foreclosure-rescue and mortgage-modification schemes.  Meanwhile, on another front, the U.S. attorney's office in Manhattan filed a mortgage fraud lawsuit against Wells Fargo, accusing the major bank of having engaged in improper underwriting of home loans for over a decade.  The following day, October 10, the FTC announced that it had reached a settlement with Equifax on allegations concerning the improper sale of information on late borrowers.  The FTC alleged that Equifax had sold more than 17,000 lists of consumers who met specific criteria, such as being late on their mortgage payments, to Direct Lending Source, which, in turn, had sold the lists to various third parties.

A major source of ammunition in these federal efforts against mortgage fraud is the newest provision of the FTC's Mortgage Assistance Relief Services ("MARS") Rule, which was issued in November 2010.  See 12 C.F.R. § 1015.5.  This Rule prohibits mortgage-relief companies from collecting any fees until the homeowner has a written offer from his or her lender or servicer that the individual deems acceptable.  Mortgage-relief services that charge advance fees to consumers may be held civilly or criminally liable for violation of the MARS Rule.  See id. § 1015.10.

Notably, attorneys are generally exempt from MARS Rule prohibitions.  Id. § 1015.7.  To qualify for exemption from all MARS disclosure rules except the advance-fee ban, an attorney must satisfy three conditions:  (1) The attorney must be engaged in the practice of law; (2) the attorney must be licensed in the state where the consumer or dwelling is located; and (3) the attorney must comply with state laws and regulations governing attorney conduct relating to the MARS Rule.  Id. § 1015.7(a).  To qualify for an exemption from the ban against advance fees, the attorney must also meet a fourth requirement: Any up-front fees collected must be placed in a client trust account, and the attorney must abide by state laws and regulations governing such accounts.  Id. § 1015.7(b).

Broadly speaking, the sweeping actions just taken by various federal agencies may signal a general change in attitude from one that is "procreditor" to a more lenient "prodebtor" perspective.  Such a shift in the law could potentially benefit debtors seeking relief from seemingly harsh creditor-imposed penalties of all types.

The Lawletter Vol 37 No 7

Charlene Hicks, Senior Attorney, National Legal Research Group

Precision is essential in drafting effective legal contracts of any type.  If the contract language is not sufficiently expansive to include a particular party or situation, contractual obligations that were intended to be binding may be set aside as inapplicable.  At the same time, however, there has been a great movement toward "plain language" contracts as opposed to agreements comprised of "legalese."  The interplay between these potentially conflicting themes was recently highlighted by the First Circuit's opinion in Gove v. Career Systems Development Corp., 689 F.3d 1 (1st Cir. 2012), a case involving the applicability of an employer's mandatory arbitration clause to an unsuccessful job applicant.

In that case, Ann Gove applied for a job with Career Systems Development Corporation ("CSD").  The final section of the electronic job application contained the following arbitration clause:

CSD also believes that if there is any dispute between you and CSD with respect to any issue prior to your employment, which arises out of the employment process, that it should be resolved in accord with the Dispute Resolution Policy and Arbitration Agreement ("Arbitration Agreement") adopted by CSD for its employees.  Therefore, your submission of this Employment Application constitutes your agreement that the procedure set forth in the Arbitration Agreement will also be used to resolve all pre-employment disputes.

Id. at 3.  Gove duly checked the "accept" box next to the statement, indicating that she accepted the terms of the agreement, including the arbitration clause.

Gove was pregnant throughout the period in which her job application was processed.  After she was not hired by CSD, Gove filed an employment discrimination lawsuit in federal district court against CSD.  CSD moved to compel arbitration on the basis of the arbitration clause contained in the electronic job application.  The district court denied CSD's motion on the grounds that the arbitration clause was ambiguous as to whether it applied to Gove, a job applicant who was never hired, and the ambiguity had to be construed against CSD as the drafter of the clause.

On appeal, the First Circuit affirmed.  In reaching this decision, the court began by emphasizing that the dispute concerned "the scope of the arbitration clause, not its validity."  Id. at 5.  In other words, the arbitration clause was clearly valid and effective in at least some circumstances.

In analyzing the scope of CSD's arbitration provision, the court noted that the arbitration clause was devoid of any reference to job "applicants."  Id. at 6.  "Instead, every reference is to 'your employment,' 'the employment process,' or 'pre-employment disputes.'"  Id.  Based on this language, the court determined that a reasonable basis existed for Gove's conclusion that she would be bound by the arbitration clause only in the event that she was ultimately hired.

October 9, 2012

Brett Turner, Senior Attorney, National Legal Research Group

In 2007, the Hague Conference on Private International Law finished work on a new multilateral convention on the enforcement of child and spousal support.  See  Hague Convention on the International Recovery of Child Support and Other Forms of Family Maintenance, Nov. 23, 2007 [hereinafter the "Convention"].  The United States signed the Convention, and on November 29, 2010, the Senate ratified it.

The Convention is implemented in a revised article 7 of the Uniform Interstate Family Support Act ("UIFSA"), which some States have already begun to adopt.  Adoption of UIFSA is, of course, a condition upon receipt of federal child support enforcement funding, see 42 U.S.C. § 666(f) (Westlaw current through P.L. 112‑142 (excluding P.L. 112‑140 and 112‑141) approved 7‑9‑12), and while the federal statute presently requires adoption of UIFSA only as it existed in 1996, it is likely that the federal statute will ultimately require adoption of the 2008 version as well.

The Convention adopts into international law the principle of continuing exclusive jurisdiction ("CEJ"), which lies at the heart of UIFSA.  Article 18 of the Convention provides:

(1)        Where a decision is made in a Contracting State where the creditor is habitually resident, proceedings to modify the decision or to make a new decision cannot be brought by the debtor in any other Contracting State as long as the creditor remains habitually resident in the State where the decision was made.

Convention art. 18(1).  Thus, when a child support order is entered in the support provider's habitual residence, support proceedings cannot be brought elsewhere unless the support provider's habitual residence changes.  Jurisdiction over support matters, once acquired, is exclusive.  See also UIFSA § 711 (specifically applying the CEJ concept to orders from nations that have signed the Convention).  There is a series of exceptions, Convention art. 18(2), that apply when the parties agree in writing to give another country jurisdiction, when the support provider voluntarily submits to another country's jurisdiction, when the country with CEJ refuses to rule, or when the original support order cannot be recognized in another country.

Article 20 of the Convention is a broad jurisdictional provision, allowing jurisdiction in the habitual residence of the support provider, the habitual residence of the support recipient, or the habitual residence of the child.  The latter two bases are fundamentally inconsistent with American law, which provides that the court cannot make a support order unless it has personal jurisdiction over the support provider, even if the support recipient and the child are domiciled within the court's jurisdiction.  Kulko v. Super. Court, 436 U.S. 84 (1978).  The Senate resolution ratifying the Convention provides as follows:

The advice and consent of the Senate under section 1 is subject to the following reservations, which shall be included in the instrument of ratification:

(1)        In accordance with Articles 20 and 62 of the Convention, the United States of America makes a reservation that it will not recognize or enforce maintenance obligation decisions rendered on the jurisdictional bases set forth in subparagraphs 1(c), 1(e), and 1(f) of Article 20 of the Convention.

The Lawletter Vol 37 No 6

Brad Pettit, Senior Attorney, National Legal Research Group

In recent years, recreational and social clubs have experienced declines in membership and the corresponding reductions in revenues that they derive from their members' dues and other payments.  As a result, these clubs have begun allowing nonmembers to use their facilities.  Currently, clubs receive significant revenues from the use of their facilities by nonmembers.  The tax question that arises when a club decides to supplement its income by allowing nonmembers to use its facilities is how much revenue it can receive from nonmembers before it loses its tax-exempt status.

The Internal Revenue Code (the "Code") provides that "[c]lubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder," 26 U.S.C. § 501(c)(7) (Westlaw current through P.L. 112‑142 (excluding P.L. 112‑140 and 112‑141) approved 7‑9‑12) (emphasis added), are "exempt from taxation under this subtitle unless such exemption is denied under section 502 or 503," id. § 501(a).  Notwithstanding the "substantially all" language of § 501(c)(7) of the Code, the Treasury Regulations currently state that "[t]he exemption provided by section 501(a) for organizations described in section 501(c)(7) applies only to clubs which are organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes[.] " 26 C.F.R. § 1.501(c)(7)-1(a) (Westlaw current through Sept. 6, 2012; 77 FR 54838) (emphasis added).  The current Regulations also say that "[a] club which engages in business, such as making its social and recreational facilities available to the general public or by selling real estate, timber, or other products, is not organized and operated exclusively for pleasure, recreation, and other nonprofitable purposes, and is not exempt under section 501(a)."  Id. § 1.501(c)(7)-1(b) (emphasis added).

The Lawletter Vol 37 No 6

Alistair Edwards, Senior Attorney, National Legal Research Group

In light of the recent and ongoing residential foreclosure crisis, the use of loan/mortgage modification agreements in the mortgage industry has become commonplace. However, homeowners will often believe that they have executed a binding loan modification with their mortgage lender, only to discover that the lender is continuing with the foreclosure of the home. 

For example, in Barroso v. Ocwen Loan Servicing, LLC, No. B229112, 2012 WL 3573906 (Cal. Ct. App. Aug. 21, 2012), a California Court of Appeal analyzed whether the borrowers had a valid and enforceable loan modification agreement.  The lender—actually, the loan servicer—after being sued by the borrower following the alleged wrongful foreclosure of the home, argued that there was no binding loan modification since the servicer had unilaterally failed to sign and send executed copies of the mortgage modification agreements to the borrower.  Per the express terms of the loan modification, it would not take effect unless both the borrower and the servicer had signed the agreement and a fully executed copy had been returned to the borrower.  Despite these defects, and despite the express requirement in the agreement that it would not take effect unless signed by the servicer and returned to the borrower, the court found that a valid contract had been formed.  The court concluded that failing to find contract formation would make the contract extraordinary, harsh, unjust, or inequitable because it would grant the servicer sole control over the formation of the contract despite the borrower's alleged full performance.  The court stated:

The Lawletter Vol 37 No 6

Sandra Thomas, Senior Attorney, National Legal Research Group

The Supreme Court of Iowa has permitted a man (Dier) who was falsely charged with fathering a child, and who then voluntarily provided support to the child and the mother (Peters), to seek recovery of those support payments in an action alleging common-law fraud.  Dier v. Peters, 815 N.W.2d 1 (Iowa 2012).

The child was born to Peters in February 2009.  Peters knew that Dier was not the biological father, but she told him that he was.  Based on Peters's representations, Dier provided financial support for both Peters and the child.

Dier filed an application seeking custody of the child; when Peters realized she might not get custody, she requested a paternity test.  The test excluded Dier as the biological father.

Dier then filed a petition seeking reimbursement from Peters of money given to her, money given to support the minor child, and money spent litigating custody.  Peters moved to dismiss the petition, stating that Iowa did not recognize an action for "paternity fraud" and that Dier had therefore failed to state a claim on which relief could be granted.  Dier opposed the motion, alleging that all the elements of fraud were present.  The trial court granted Peters's motion to dismiss, and Dier appealed.

The Iowa Supreme Court recognized that the "sole issue on appeal is whether Iowa law allows a putative father to bring a paternity fraud action against a biological mother to obtain reimbursement of payments that were voluntarily made."  Citing authority from other jurisdictions, the court stated that "paternity fraud" occurs when a mother "makes a representation to a man that the child is genetically his own even though she is aware that he is not, or may not be, the father of the child."  Id. at 4 (internal quotation marks omitted).  The court noted, however, that Dier "seeks only reimbursement of payments that he made without court compulsion."  Id. at 4-5.

The Iowa court recognized that the courts of other jurisdictions are divided on whether to recognize such claims.  The courts that do not allow such claims cite considerations of public policy and child welfare.  The courts that permit such suits reason that paternity fraud is not unlike other tort claims and should be allowed to go forward if the elements of the tort are met.