COVID-19 EFFECT ON LENDER LIABILITY

By: Catherine Di Lorenzo, Esquire

Each day new federal and state legislation are issued establishing new accommodations for borrowers due to COVID-19. The Cares Act has created many restrictions on lenders and how they can protect their own interests and enforce their rights. Failing to properly navigate the red tape could result in future liability litigation for lenders.

Before enforcing a mortgage default, a lender should consider whether a borrower’s default is attributable to COVID-19.  Lenders should ask themselves whether acting would be consistent with the covenant of good faith and fair dealing given the effects of COVID-19, the industry response, and regulatory action.

The Cares Act has created an array of new claims borrowers could assert in a foreclosure.  A key contract defense that will impact contractual performance and liability is a force majeure clause. This provision provides an excuse not to perform due to events outside the contractual parties’ control. COVID-19 may force courts to interpret force majeure clauses and their applicability to a lender’s obligations to perform while a borrower’s ability to perform remains “impossible.”

More and more borrowers are requesting loan modifications and forbearance plans due to Covid-19.  Lenders must be very careful that they are considering the borrower’s application and supporting documents carefully.  Lenders also must be aware of what they tell their borrowers regarding eligibility for these programs.  To the extent the lender makes any representations or omits material information from the borrower, such comments or omissions may form the basis of a negligent or fraudulent misrepresentation claim.

If lenders and their vendors fail to adhere to the accommodations in the Cares Act, they may subject themselves to future liability. Such liability, however, would be contingent on courts finding that borrowers have a private right of action to enforce the CARES Act. Courts may also extend liability under the CARES Act based on a contractual representation/warranty in which both parties agree to adhere to all applicable state and federal law.

Lenders can protect themselves and take steps now to avoid liability.  All communications with borrowers should be well documented and employees should be reminded of the importance of properly maintaining such records.  Lenders need to regularly revisit their protocols and procedures to determine whether changes need to be made or temporary practices need to be implemented.  Lenders should provide training to employees so that they understand the impact of new legislation that may alter regular procedures (i.e. credit reporting, foreclosure referrals). Resources for customers should be readily attainable for customers too as appropriate (e.g., who to contact for relief; documentation, if any, needed to demonstrate financial hardship).  Lenders should consider what industry leaders and trade associations are doing and advising so they are not materially deviating from the industry behaviors set by their peers.

If we learned anything from the 2008 mortgage crisis, it’s that new claims always arise following a financial crisis.  The best defense is to anticipate them and take steps to eliminate the potential for liability.

NJ Landlords Sue Governor Murphy & Cabinet Members for Alleged Abuse of Authority

By: David Lambropoulos, Esquire

Governor Phil Murphy, his Attorney General (Mr. Gurbir S. Grewal) and Health Commissioner (Ms. Judith Persichilli) were recently named in a lawsuit filed on behalf of a group of landlords.  The lawsuit challenges Executive Order 128, which was signed in April of 2020.  Executive Order 128 allows tenants to use their security deposits to cover back rent during the pandemic, but does not require that they make another security deposit unless their underlying lease is extended.  Landlords who violate the order may be fined up to $1,000.00 and / or sentenced to a prison term of up to 6 months. The preamble of Executive Order 128 explains that enabling individuals to pay portions of their rent with their security deposit will “mitigate the consequences regarding evictions and accumulation of interest and late fees…and thus is plainly in the public interest.”

The matter – Charles Kravitz, et. al. v. Phillip D. Murphy, et. al. (L-000774-20)  – was initially filed in the Superior Court, Law Division of Cumberland County in December of 2020. Jurisdiction was subsequently transferred to the Appellate Division on January 26, 2021.  According to the complaint, “this case focuses explicitly on whether the New Jersey Governor can rely on his own declared public health emergency to assume authority neither the state Constitution nor the legislature ever granted to waive or amend provisions in private contracts, as well as to override and amend explicit statutory provisions as he chooses.”

The landlords are being represented on behalf of the New Civil Liberties Alliance (“NCLA”).  The NCLA’s website asserts that “without statutory authority to do so, Governor Murphy has interfered with the contractual rights and obligations of private citizens under the Civilian Defense and Disaster Control Act.  However, none of the authority granted to Governor Murphy…includes any mandate even remotely connected to a power to modify the terms of residential leasehold contracts or to waive the statutory provisions relating to those leases.”  The NCLA claims that Governor Murphy has unfairly scapegoated landlords in a manner that undermines freedom of contract, due process and equal protection of the laws.

Lawsuits of this sort have been filed in numerous jurisdictions nationwide and present interesting questions regarding the limit of gubernatorial authority during a declared public health emergency.  The Appellate Division’s decision – which promises a heightened level of controversy regardless of its ultimate finding – is eagerly anticipated.

What You Need to Know About the New Jersey Foreclosure Prevention Act

By: Salvatore Carollo, Esquire, Senior Litigation Attorney

New Jersey has recently introduced bill A-5130, which is known as the “New Jersey Foreclosure Prevention Act”.  This new legislation is seeking to establish the “New Jersey Residential Foreclosure Prevention Program” within the New Jersey Housing and Mortgage Finance Agency (“HMFA”) and would authorize the agency to purchase eligible properties and mortgage assets in an effort to reduce foreclosures and assist municipalities with the rehabilitation of vacant homes.  Under the bill, “eligible property” is defined as a residential property or mortgage note owned by an institutional lender as a result of a mortgage foreclosure judgment or a foreclosure, owned by a municipality as the result of a tax foreclosure judgment, or that is subject to a nonperforming loan from an institutional lender.  The bill is intended to give the HMFA the ability to allocate grants to non-profits, municipalities, and other governmental agencies to purchase eligible properties for redevelopment into new affordable homes.

The co-sponsor of the bill, Assemblywoman Mila Josey has stated that it was introduced to mitigate loss and stave off foreclosures from the wave of the pandemic-impacted housing crisis. In an effort to fund this program, the bill proposes collecting a new $350 fee from purchasers of foreclosed properties at a sheriff’s sale.  However, this proposal is likely to create an even greater strain on institutional lenders during the ongoing pandemic since these same lenders make up the majority of successful purchasers at foreclosure sales.  It becomes increasingly difficult to reconcile how the collection of an additional fee following the completion of a foreclosure sale will be an effective tool in mitigating high foreclosure rates in New Jersey.  There has also been no discussion as to how the rehabilitation of vacant or abandoned homes will result in a net reduction of foreclosures.  There is already a mechanism in place through the real estate owned (REO) process where a lender takes ownership of a foreclosed property when it fails to sell at the amount sought to cover the loan balance.  These REO properties are often rehabilitated and sold at a significant discount by the lender to compensate for the condition of the property.  Logically, it would then seem that foreclosure prevention and/or mitigation efforts should instead be focused on reducing the likelihood that homeowners will become delinquent in the first place.

Perhaps, the more effective approach would be to create programs that allocate public funds towards the cure or reinstatement of delinquent loans for impacted homeowners.  Another viable strategy for our legislators to consider is to offer property tax abatements to eligible households.  It’s no secret that state and municipal property taxes in New Jersey are amongst the highest in the nation.  A significant reduction in these taxes for households negatively impacted by the pandemic would presumably go much further in assisting distressed homeowners versus the benefits of this yet unproven legislation.  Ultimately, only time will tell if this bill proves to be an effective measure in combatting the projected onslaught of foreclosures as we continue to navigate through the pandemic.  Regrettably, the time expected for our state agencies to become proficient in the real estate resale industry is a luxury that many of our citizens facing imminent foreclosure simply do not have.

 

Have You Considered Refinancing Your Mortgage?

by: Zachary H. Champion, Esquire, Managing Attorney for REO/Retail Closings

Have you considered refinancing your mortgage?  Now may be a good time.  This week, Zillow’s economist Matthew Speakman informed the Wall Street Journal that “[m]ortgage rates fell this week . . . [a]fter months of barely budging.”  Access the full article here.   If you are interested in refinancing, reach out to our settlement department today at reostatus@sterneisenberg.com. Stern & Eisenberg offers full-service closing and title services in NY, NJ, PA, DE, MD, WV, and DC.

Our law firm can streamline your closing/settlement while working with our preferred lenders and title department.  You may be eligible for cash-out options with certain lenders.   In Maryland, we can actually conduct the closing inside your home—removing the need for you to travel.

New Federal Legislation Extends Qualified Personal Residence Indebtedness Income Exclusion

By: Thomas E. Shea, Esquire

Originally passed as part of the federal Mortgage Forgiveness Relief Debt Relief Act of 2007, Congress added Section 108(a)(1)(E) was added to the Internal Revenue Code, creating the Qualified Principal Residence Indebtedness (QPRI) exclusion. With this exclusion, if any mortgage debt on a homeowner’s principal residence is forgiven, that homeowner could exclude from their taxable income up to $2 million of that forgiven debt ($1 million for single taxpayer and $2 million for married taxpayers).

Over the years, that exclusion was extended by Congress, eventually through the end of 2017. The exclusion expired at the end of 2017 when Congress failed to extend it again. However, with the passage of the federal Taxpayer Certainty and Disaster Relief Act of 2019, the QPRI exclusion was extended through December 31, 2020, and further was applied retroactively to the 2018 and 2019 tax years.

Without a further extension, the QPRI exclusion was set to expire at the end of 2020. However, as part of the recently passed federal Congressional Appropriations Act of 2021, which also included significant COVID-19 related relief provisions, the QPRI exclusion has been extended again, through 2025. However, the QPRI limits have been reduced from $1,000,000 single/$2 million married to $375,000 single/$750,000 married limits.

For homeowners who received a 1099-C from their lender as part of a workout of the mortgage loan on their primary residence, this extension may provide significant and welcome relief, and we encourage you to consult your tax advisor about this relief provision.

Enforcing Prepayment Premiums in New Jersey Commercial Mortgage Foreclosures

By: Lucas Anderson, Esquire

Prepayment Premiums are common features of commercial loan contracts. These provisions are generally used to compensate lenders in cases where a borrower pays off a loan early, thus depriving the lender of the stream of interest income for which they had originally bargained.  Crucially, lenders often seek to enforce prepayment premiums after a borrower has defaulted and the loan has been accelerated.  This is true despite the fact that, where the borrower has defaulted, there has been no literal “prepayment”.

Historically, prepayment premiums were generally disfavored by courts as unenforceable penalties.  However, more recent New Jersey court decisions have found that prepayment premiums are presumptively reasonable when included in a commercial contract between sophisticated parties.  Norwest Bank Minnesota v. Blair Rd. Associates, L.P., 252 F. Supp. 2d 86, 94 (D.N.J. 2003) (quoting Metlife Capital Fin. Corp. v. Washington Ave. Assocs., L.P. 159 N.J. 484at 496).

Despite our courts’ receptiveness to enforcing prepayment premiums in the commercial loan context, there do remain some obstacles to enforcing these provisions through a mortgage foreclosure action.  In New Jersey, commercial foreclosure actions are overseen by the Office of Foreclosure.  The Office of Foreclosure generally permits lenders to include a modest prepayment premium (up to 5% of the unpaid principal balance) in the amount due under the foreclosure judgment.  However, to the extent that the lender seeks a greater prepayment premium, they must apply to the vicinage court for an order permitting inclusion of the prepayment premium in the amount due.

In cases in which an application to the vicinage court is necessary, the court will first look to the language in the loan documents to determine whether the prepayment premium is enforceable.  Therefore, where a lender seeks to enforce a prepayment premium through a foreclosure action, it is critical for the prepayment premium provision to specifically include default and acceleration as one of the events which triggers the prepayment premium.  If this language is not included, a court could determine that the prepayment premium has not been triggered by the borrower’s default because a default does not involve a literal “prepayment”.  Other factors that will make a court more likely to enforce a prepayment premium are indications that the provision was made clear to the borrower (e.g. by including a disclaimer in large, bold font and by urging the borrower to have the loan agreement reviewed by an attorney of their choice).  By considering these issues when drafting their loans, lenders can maximize the probability that their prepayment premiums will be deemed enforceable and included in the foreclosure judgment.

Despite Vaccine, New Jersey’s Landlords Continue to be Plagued by Gubernatorial Policy, are left with few meaningful remedies to deal with Non Paying Tenants*

by: David Lambropoulos, Esquire

 

It goes without saying that this has been a difficult year for everyone. This is particularly true with respect to New Jersey’s landlords, who have borne the full brunt of government imposed lockdowns and the predictable payment defaults they have caused.  Landlords now find themselves in a vulnerable position that was once unimaginable.

For the 10th time since March, 2020, Governor Murphy recently issued an Executive Order extending New Jersey’s Public Health Emergency through January, 2021.  This extension, when read in conjunction with Executive Order # 106, prohibits Sheriffs’ Officers from removing tenants solely due to non payment of rent through March of 2021.  It takes little creativity to envision an 11th, 12th or 13th extension in the months to come.  Landlords therefore find themselves in a precarious position where they have few options to deal with tenants who may be over a year past due in their rental obligations.  Although Landlords may initiate eviction proceedings, their inability to remove non-paying tenants for the foreseeable future is heavily straining their resources.  Landlords’ mortgage payments and New Jersey’s notoriously high property tax obligations remain due and owing, though the revenue streams they rely on to satisfy them have been dammed up by these Gubernatorial actions.

What is a landlord to do if they find themself in this predicament?

Unfortunately, there is no magic bullet, one size fits all solution or other metaphor to come to the rescue.  Landlords who still have a mortgage on their rental property should first look to their lenders for assistance. Depending on whom their lender is, they may be eligible for payment forbearance or similar assistance.  Landlords with federally backed mortgages are generally eligible for up to one year of payment forbearance if they are suffering from a covid related hardship.  Although all payments will eventually come due, federally backed mortgage lenders are required to work with their borrowers to either modify or extend the loan at the conclusion of the forbearance period.  Conventional borrowers are entitled to less protections and therefore must work with their lenders to see what programs are available to them.  In either case, the landlord needs to be proactive to protect their ownership interest, their credit and their sanity.

Landlords should also try to work with their tenants.  Though many tenants are themselves struggling due to lost employment or wages, they may be able to make partial payments until they get back on their feet and can satisfy all outstanding arrearages.  If negotiations fail, a Landlord might consider initiating an eviction action predicated on non-payment. Even though lockouts are generally prohibited  courtesy of Governor Murphy’s Executive Orders, getting the process started now should put them towards the front of the line when normal processes resume. Landlords should also keep in mind their recourse against a non-paying tenant is always two fold: they have the ability to evict to re-claim the property and to sue the tenant for all sums due and owing under the lease.  Though the latter option has historically not been exercised because the eviction process was relatively swift, it now warrants consideration.  Filing a breach of contract / unjust enrichment suit may motivate a non paying tenant to vacate the premises or bring them to the table to negotiate an amicable financial resolution.  If the Landlord’s goal is to facilitate an expedient and dignified exit from the property, initiating a monetary lawsuit may advance those interests.

It is imperative that landlords consult an experienced attorney to help them through this process.  Though lockouts predicated solely on non-payment are currently prohibited, there are a few exceptions to that general rule.  Successful navigation of these trying times requires landlords to be patient, compassionate and creative.  On a positive note, there do appear to be at least two glimmers of light at the end of the proverbial tunnel: (1) an effective vaccine is being distributed;  and (2) Governor Murphy must defend his seat in November of 2021.

David Lambropoulos is the managing attorney of Stern & Eisenberg’s New Jersey office. He has significant experience representing landlords and property owners and is available for a consultation to discuss the specifics of your case.

*This article is for informational  purposes only and does not constitute (and should not be inferred as providing) legal advice.  Every case is unique and must be evaluated by a qualified attorney before a meaningful recommendation can be provided.*

Governor Murphy’s Executive Order No. 106: What does this mean for NJ Foreclosures & Evictions?

By: Salvatore Carollo, Esquire, Senior Litigation Attorney

Beginning with Governor Murphy’s Executive Order No. 106, every county sheriff in New Jersey has either cancelled or suspended scheduled foreclosure sales and refused to schedule new sale dates. Most sheriffs have taken the position that the executive order prevents them from enforcing all judgments for possession, warrants of removal and writs of possession involving residential properties. However, there is significant debate as to whether the operative language incorporated in Gov. Murphy’s Order legally prohibits foreclosure sales from being scheduled and taking place and if the removal protections in the order are being exploited by individuals who neither rent nor own residential properties.

Specifically, the text of Executive Order No. 106 directs that any lessee, tenant, homeowner or any other person shall not be removed from a residential property as the result of an eviction or foreclosure proceeding. While the executive order is quite clear that lockouts resulting from eviction proceedings are expressly prohibited, the same cannot be said for foreclosure sales since a sheriff’s sale in and of itself does not directly result in the occupant(s) being removed from the property. Despite this ambiguity, New Jersey sheriffs have seemingly adopted the more conservative approach that Executive Order No. 106 and Gov. Murphy’s subsequent orders extending the public health emergency have created a state wide moratorium on both the scheduling and holding of foreclosure sales.

The plain language of Executive Order No. 106 defines “residential property” as any property rented or owned for residential properties. The clear intent of the Order is to prevent the removal of individuals from residential properties through the eviction or foreclosure processes during the time the Order is in effect. Yet, there is a sizable group of individuals occupying residential properties in our State that neither own nor rent these properties. These individuals have traditionally been referred to as “squatters” and arguably fall outside the moratorium protections. Regardless, our courts and law enforcement officers are often unwilling or unable to make this distinction and have opted rather to provide blanket coverage for these individuals. Fortunately, the executive order has carved out an exception to allow for removal of individuals from residential properties if the court determines on its own motion or motion of the parties that enforcement “is necessary in the interest of justice.” By including this language, at a minimum, there is a mechanism in place to ensure that potentially dangerous or criminal behavior by illegal occupants is not permitted to continue unchecked at certain residential properties.

Act Notice in 2021

Pennsylvania announced the Act 6 Base Figure for 2021 as $263,975. What is the base figure and how does it impact your foreclosure in Pennsylvania? For any lender bringing a foreclosure in Pennsylvania, one of the two statutory Notices they need to be aware of is Act 6 (41 P.S. §§ 101, 403). The base figure is important for two reasons: first it determines who gets the notice and second it determines the amount of attorney fees that are collectible pre-foreclosure complaint. In Pennsylvania Residential Mortgage borrowers are entitled to an Act 6 notice. A Residential Mortgage is defined as a property with less than two residential units and an original principal less than or equal to the base figure. The second impact is after the expiration of the Act Notice but prior to foreclosure a lender is limited to attorney’s fees that do not exceed .1% of the then existing base figure. 68 Pa. Stat. and Cons. Stat. Ann. § 2311 (West). For 2021, .1% of the base figure is $263.98. After a complaint is filed, the lender may seek reasonable attorney’s fees in accordance with the loan documents and Pennsylvania Case Law.  Please feel free to reach out to Andrew Marley, Esquire or Ed McKee, Esquire for additional information or questions regarding your Act 6 notices.

Split Dollar Life Insurance Arrangement As Part Of A Key Employee Retention Plan: Not Just For High-Profile College Coaches

By: Thomas E. Shea, Esquire, Director of Estate Planning

According to published reports, since 2016 University of Michigan football coach Jim Harbaugh’s contract includes a split-dollar life insurance arrangement. Since that time, other published reports indicate that other high-profile college coaches have similar split-dollar life insurance arrangements as part of their contracts, including since 2017, Dabo Swinney of Clemson football and Dawn Staley of South Carolina women’s basketball, and more recently within the past year, Ed Orgeron of 2020 NCAA national champion LSU football and James Franklin of Penn State football, in each case as part of their contract extensions. While these high-profile cases from the world of college sports attract media attention, split-dollar life insurance benefit planning can be an effective key employee retention strategy and we can show you how.

 

What is a split-dollar insurance arrangement? How does it work?

The use of split-dollar life insurance arrangements for key employees is not a new concept, either as an alternative to a deferred compensation plan or combined with a qualified or non-qualified deferred compensation arrangement. The split-dollar life insurance plan often involves a strategy where the employer loans money on favorable terms to a key employee over a period of years. The loan proceeds are invested in, or used to pay the life insurance premiums of, a permanent cash value or cash accumulation life insurance policy. The split-dollar policy design is one where the plan is to pay a high premium for the lowest death benefit. This may seem counterintuitive since most people buying traditional life insurance want to produce the highest death benefit for the lowest premium. However, the split-dollar strategy is often designed to grow cash value quickly by minimizing policy charges with a lower death benefit. At some point as part of this split-dollar strategy the employer’s loan gets repaid either out of the policy cash value during the employee’s lifetime or out of the death benefit at the employee’s death. The life insurance policy cash value or cash accumulation that is in excess of the employer’s loan balance can be accessed by employee income tax free, making this strategy a form of non-qualified retirement plan to supplement and increase the employee’s retirement benefits.

These split-dollar plans typically provide that if the employee leaves employer, he/she will be required to promptly repay the employer any program premium loans. Harbaugh’s split-dollar plan apparently provides that the employer loans are non-interest bearing, which requires Harbaugh to report and pay income tax annually on the imputed income equal to the interest Michigan would have charged him if the loan carried interest at a rate at least equal to the IRS minimum rate. While this interest free strategy may have made sense back in 2016 when Harbaugh and Michigan agreed to the plan, based on 2016 interest rates in place at the time, whether or not to have an interest rate component as part of a key employee split-dollar plan today should of course be evaluated in the context of current interest rates.

 

What is the purpose of a split-dollar life insurance loan arrangement in the employment context?

As can be seen in these high-profile college coach cases, the motivation is simple, retain key talent in a way that can maximize benefits to the key employee in exchange for an intended long-term commitment to the employer. Perhaps though, at least in the cases of football coaches Harbaugh, Orgeron, and Franklin, given the current 2020 woes of their respective football programs, their employers may not view them as “key” as they used to be…

Again, while these high-profile cases may garner a lot of media attention, it is important to note that split-dollar life insurance planning is not just for highly paid college coaches. The split-dollar life insurance strategy can be an effective planning and retention strategy in many contexts, in both for-profit and non-profit organizations, and as a succession planning strategy for family businesses, perhaps even more so in the current Covid-19 pandemic era where business owners may be looking for ways to keep key talent to stabilize their business and interest rates are at historic lows. Further, as the split-dollar plan involves a life insurance policy is involved, it can and often is incorporated into the key employee’s estate plan.

 

How well does such a key employee split-dollar program work?

While they always look great on paper at plan inception (why do them otherwise), eventually their success depends on factors related to both economic and employee/employer circumstances over time, such as applicable interest rates, life insurance policy projections vs. results, loan repayment provisions and employee job performance and security. There are also many alternative key employee retention planning strategies. For example, it has been publicly reported that coach Nick Saban of Alabama football has a generous term life insurance policy as part of his contract providing a significant death benefit for his family. The policy premiums are paid for by the school, although Saban must report the premium payment by the school as taxable income. Saban’s plan is a simpler planning strategy than the split-dollar plan. However, keep in mind that simpler is not necessarily better, for example Saban’s plan may not provide any lifetime tax-favored retirement benefits to Saban as a term life insurance policy does not have a cash value or cash accumulation component as a split-dollar plan policy does.

 

It is critically important that any split-dollar planning strategy be structured properly and tax compliant.

If you have any questions as to whether a key employee split-dollar planning strategy may make sense for any key employees of your business, or if you are a key employee who has been offered a split-dollar plan as part of your incentive employment plan, we may be able to help. Contact Thomas Shea, Esquire or reach out via SternEisenberg.com if you want more information or need additional questions answered.