Iowa Banking Law Blog

Iowa Bankers, You’re Not as Secure as You Think: Iowa Supreme Court Rules Feed Supplier’s Lien Has Priority Status

2012-01-06T11:00:58-05:00

In Oyens Feed & Supply Co. v. Primebank, the Iowa Supreme Court dealt a blow to financial institutions’ ability to secure first priority for livestock under Article 9. The case arose as a result of the competing security interests of the financial institution Primebank and the feed supplier Oyens Feed.

Primebank had extended credit to a farm, securing that credit with an interest in the farm’s livestock. Oyens Feed extended credit for the farm to purchase feed for the farm’s livestock. Pursuant to Iowa Code § 570A.3, Oyens Feed’s credit was secured by the livestock that consumed the feed—the same livestock securing Primebank’s credit extension.

The Iowa Supreme Court began its analysis by looking at the history of security interests in livestock. It noted that Chapter 570A was enacted during the depths of the farm crisis of the 1980s. The goal of that section was to ensure that farmers, even in difficult times, could always secure funds to purchase necessary farm inputs. Pursuant to § 570A.2, a farm dealer could then ensure it had a first priority security interest in the livestock by filing a certified request with any other lien holders.

The legislature then amended Chapter 570A in 2003 for the purpose of maintaining the priority status of agricultural liens over other security interests and liens. In other words, Oyens Feed’s security interest in the livestock would continue to trump Primebank’s interest in livestock to the extent that the livestock’s value was enhanced by Oyens Feed’s feed.

The dispute in this case arose over whether Oyens Feed’s security interest still took precedence over Primebank’s when Oyens Feed failed to file a certified request pursuant to § 570A.2. After analysis of the legislative history of Chapter 570A, the Court concluded that the overriding purpose of that chapter is to ensure that farmers are able to weather difficult times by guaranteeing access to credit for livestock feed. The Court explained that there is a specific rule—imposed by § 570A.5(3)—that livestock feed suppliers be granted special priority. Thus, a feed supplier’s lien will have first priority over all other liens, even prior perfected lien.

The decision has limitations that are worth noting. First, the Court made it clear that this special priority status only applies to feed supplied for livestock consumption, not crop inputs. Second, the Court did not address what actions a supplier must take in order to perfect its lien.

Nevertheless, financial institutions should pay close attention to a farmer’s operation where that farmer secures credit with livestock. An institution’s perfected security interest will have priority only up to the acquisition price of the livestock. A feed supplier will have priority over any value added as a result of the livestock’s feed consumption. If an institution wants to maintain its priority, it should consider extending credit on behalf of a farmer for the purchase of the feed. This ensures that a feed supplier will not gain a superior interest in the value added to the livestock.

For more information, please contact John Lande at 515-246-4509 / jlande@dickinsonlaw.com.

Social Media: The Risks and Benefits to Banks

2011-12-01T11:32:23-05:00

- Posted by Amy D. Plummer

We have all heard the hype about social media: Facebook, Twitter, LinkedIn, blogs, chat rooms. It’s the latest, greatest and most cost-effective way to market a business. But does it have the same benefits to the banking industry, and if so, what are the risks?

Banks primarily use social media as a marketing tool, and like any form of marketing, it is only as good as the fair message it delivers and the interest it generates among customers. Therefore, if your bank’s Facebook or Twitter page posts little more than your bank’s hours, locations and contact information, you may find yourself with very few followers. On the other hand, if your banking institution uses social media to provide incentive to its customers to regularly view and participate in its online forum, whether it be through stories about community involvement, providing relevant educational articles or videos on financial planning, or even job postings at local branches, your bank’s social media site may be the most popular in town.

As lawyers, we must offer a few words of caution. The risks of social media to banks are, to some extent, unknown. Federal regulations, litigation and case law have not kept up with the speed of social media development. Also, because of the broad reach of the internet, social media posts can be viewed in an unlimited number of jurisdictions. However, certain general rules do apply. From a regulations standpoint, marketing of bank products must comply with fair lending rules and Regulations E, Z and DD, whether such marketing appears in print form, online or through social media. A commercial message in any medium that promotes a credit transaction, either directly or indirectly, is treated as an advertisement for Regulation Z purposes. Remaining in compliance with traditional banking regulations may be challenging, however, when certain social media sites, such as Twitter, restrict the amount of content which may be included in each post.

One reason many banks have not yet jumped on the social media bandwagon is that they are uncomfortable with the lack of control over content written by users. While it is true that banks cannot fully control third party content, they can and should actively monitor what is being posted on their social media sites and on the internet in general. Banks should develop an internet policy as it relates to employee use of social media on the job. Employees should be prohibited from providing statements on blogs, forums or other forms of social networks regarding the availability, terms or conditions of the bank’s products or services. Such marketing information should be left to banking professionals knowledgeable in applicable marketing regulations. Further, any mention of the bank by employees should include a disclaimer statement that his/her opinions are personal, and not those of the bank. Of course, the easiest way to be sure this is enforced is to prohibit mention of the bank and its services or promotions in employees’ personal social media posts altogether. Finally, banks should educate employees as to the reason social media policies are in place and establish penalties for not complying with those policies.

Consulting with compliance officers and legal counsel is recommended to develop a well thought out social media marketing strategy. Keep in mind that regulators will be reviewing the bank’s social media practices during compliance examinations. With proper planning and oversight, social media can be a great marketing tool for banks and an effective way to communicate with current and potential customers.

For more information, please contact Amy Plummer at 515-246-4546 / aplummer@dickinsonlaw.com.

Takeaways from Badger Capital, LLC v. Chambers Bank of North Arkansas

2011-09-13T11:23:40-04:00

- Posted by John E. Lande

The Eighth Circuit recently clarified the duty banks owe to investors to disclose information regarding a bank’s involvement in an investment offering. In Badger Capital, LLC v. Chambers Bank of North Arkansas an investment company sent an offer to potential investors to purchase shares in a real estate development in Florida. The project was to be funded in part by a loan from the Chambers bank, and in part by shares sold to investors. The investment letter provided that Chambers would hold investor funds in escrow until the sale on the real estate closed. Aside from this letter, however, the investors had no further contact with Chambers. The real estate market subsequently turned sour, and Chambers ultimately had to foreclose on the property in Florida. The investors then sued Chambers and asserted that Chambers had a duty to disclose that: 1) not all of the investment shares had been sold before closing; 2) the investment company had obtained a loan from a separate bank in order to pay the closing fees on the real estate deal; and 3) one of Chambers’ employees secured an equity interest in the property without making any cash investment, although he did provide a personal guarantee on the loan from Chambers.

The Eighth Circuit, looking to Arkansas law, determined that Chambers did not have a duty to disclose any information to the investors. Under state law, a bank has a duty to disclose only where “special circumstances” exist. Those circumstances did not exist in this case because “there was ‘no evidence’ indicating that the Bank [Chambers] entered into an oral or written escrow agreement, or had ever seen the [the investment letter] or subscription agreement prior to closing the loan with the [investment company].” The investors never entered into an oral or written agreement with Chambers providing that Chambers would serve as the escrow agent. Thus, Chambers did not owe a special duty to the investors, nor did the investors create duty for Chambers when they sent checks to Chambers. The court explained that merely sending checks is not enough. The investors had to condition the deposit of their checks on Chambers acting as an escrow agent, which they did not. As a result, Chambers was not an escrow agent, and there was no special duty to disclose any information.

Changes in Iowa Law Affecting Banks

2011-08-19T10:54:23-04:00

- Posted by Howard Hagen

Below is a very brief summary of changes in the 2011 legislative session that could affect Iowa banks:

Loans to Borrowing Groups
Section 524.904 of the Code was amended to expand the universe of potential “groups” for purposes of loan limits. The concept of a “corporate group” for loan limit purposes has been replaced with a more expansive “borrowing group” concept. The Act includes a comprehensive definition of what constitutes a “borrowing group."

With respect to borrowing groups, banks must document a borrowing entity’s current ownership, the persons who have voting rights with respect to the entity, the names of the entity’s senior management, and the entity’s means of servicing the loan—including the specific reasons that support such assessment. In addition, loan files must contain financials, present and projected economic and financial performance, and the significance of financial support from borrowing group members and third parties.

The Superintendent of Banking is given the authority to approve a loan limit of up to 50% of aggregate capital if all the loans to any one borrower with a borrowing group otherwise meet the requirements of the 25% and 35% loan limit provisions, and the financial strength of any one group member is not relied upon as a basis for loans to any other group member.

With regard to renewals or loan restructurings, if a bank has made reasonable efforts to bring a loan into compliance, consistent with safe and sound banking practices, the loan will be exempted from the lending limits. However, such exemption will not be available if new funds are advanced, a new borrower replaces the original borrower, or the Superintendent concludes that the renewal or restructuring was done to evade lending limits.

Loan and Deposit Production Offices
The provision stating that a bank could not operate a loan production or deposit production office in the state unless it either had prior approval from the Superintendent or had operated the office before July 1, 2006, was eliminated.

Recordkeeping
The mandatory recordkeeping requirement for banks was reduced from 11 years to 7 years. The statute of limitations for claims based on written contracts or bank record entries was reduced from 10 years to 6 years.

Summary
The major change this past year was the change to loan limits vis-à-vis “borrowing groups.” These new limits could present new risks to lenders and may necessitate even greater scrutiny of borrowers and added due diligence. Such efforts should be undertaken to prevent inadvertent violations of the lending limit rules as a result of certain loans being combined on the basis of the borrowers constituting a “borrower group” under the expanded definitions. The possibility of increasing the loan limit to 50% of capital with the approval of the Superintendent is a welcome addition for Iowa community banks.

As with all new legislation, the Iowa Division of Banking may be consulted regarding specific questions or issues; in this case, particularly regarding the new borrowing group language.

For more information, please contact Howard Hagen at 515-246-4543 / hhagen@dickinsonlaw.com.

Partial “Payoff” of Prior Equipment Lien Without Assurance That Remainder of Lien Will Be Satisfied Proves Costly to Iowa Lender

2011-06-22T12:00:54-04:00

- Posted by Jon P. Sullivan

A case recently decided by the Iowa Court of Appeals illustrates the importance to purchase-money lenders of withholding any advances on a purchase money loan until receiving adequate assurance that the advances will result in the release of any prior liens on the property being financed by that lender. The National Bank (“TNB”) agreed to lend $193,500 to Freedom Transportation, Inc. (“Freedom”) for the purpose of purchasing five used trucks from Alliance Transportation Group, L.L.C. (“Alliance”). The trucks were subject to a lien of approximately $232,000 in favor of FCC Equipment Financing, Inc. (“FCC”). Freedom agreed with TNB that Freedom would satisfy the balance of the $232,000 FCC lien from its own funds – Freedom even provided TNB with a copy of a check, payable to FCC, for that difference of $38,784. In reliance on that understanding, TNB wired loan proceeds in the amount of $193,500 to FCC, which applied those funds to reduce the balance of its loan that was secured by the trucks. Unfortunately for TNB, FCC never received from Freedom the balance of what it was owed and accordingly refused to release its lien against the trucks. TNB then sued FCC for the return of the $193,500 it had wired to FCC.

The Iowa Court of Appeals refused TNB’s request for the return of the funds it wired to FCC. TNB based its request for the return of its wire on the theory that FCC knew that a full payoff was planned, not a partial one, so that FCC should have known that the partial payment it received from TNB by wire was a “mistake” that would “unjustly enrich” FCC. The Court of Appeals rejected that argument, observing that “it is one thing to say FCC anticipated [full payment], and quite another to say FCC knew the partial payment it had received from TNB was in error.” “In fact,” the Court went on to say, “TNB’s mistake lay not in wiring the $193,125 . . . its real error was that it sent that money without assuring the rest of the payoff would also be made.”

There are at least two simple precautions TNB could have taken that would have avoided the result in this case. First, TNB could have delayed wiring any funds to FCC until TNB knew that FCC had good funds from Freedom for the balance of the release price. Second, TNB could have communicated to FCC in writing, at or before the time it sent the wire, that FCC’s acceptance of the wire would create an obligation on FCC’s part to release its lien against the trucks. Because TNB failed to take either such precaution, FCC took the wired funds without notice that the payment was a “mistake” and was not required to return the wired funds to TNB.

For more information, please contact Jon Sullivan at 515-246-4522 or jsullivan@dickinsonlaw.com.

Phishing for Answers: Part Two

2011-06-14T16:17:48-04:00

- Posted by Mary A. Zambreno

A Michigan court has ruled against Comerica Bank and in favor of the bank’s customer, Experi-Metal, Inc., holding that the bank should have prevented fraudulent wire transfers from the customer’s account that totaled more than $1.9 million in wire transfer payment orders.

We first blogged about this case in March of 2010. In December 2009, Experi-Metal filed a complaint alleging that Comerica’s conduct caused the company to become the victim of a phishing attack that led to the criminal initiating of 97 wire transfer payment orders totaling more than $1.9 million. On January 22, 2009, an email was received by an employee of Experi-Metal instructing him to click on a link. Upon doing so, the employee was directed to a website where he responded to a request for his confidential secure token identification, Treasury Management Web ID, and login information. Over the course of the day, payment orders totaling $1,901,269.00 were executed using the employee’s user information and directed to accounts at banks in Moscow, Estonia, and China. J.P. Morgan Chase reported six suspicious wire transfers to Comerica, upon which Comerica learned that Experi-Metal had not processed any wire transfer payment orders that day. Comerica subsequently recalled all processed wires, stopped all future activity and flagged Experi-Metal’s accounts for review before processing. Comerica recovered all but $561,399.

Comerica moved for summary judgment with respect to Experi-Metal’s claim that the bank bears the risk of loss for the unauthorized wire transfer orders. The court, however, denied that motion because it found genuine issues of material fact related to whether Experi-Metal’s employee, whose confidential information was used to facilitate the fraudulent orders, was authorized to initiate wire transfer orders on behalf of the company, whether Comerica complied with its security procedure when it accepted the wire transfer order from this employee, and whether Comerica acted in good faith when it accepted the wire transfer orders.

A six-day bench trial was held. The trial court found the employee was indeed authorized to initiate wire transfer orders through Comerica’s online service and that Comerica complied with its security procedures when it accepted the wire transfer orders with his user information. The court reached this conclusion after analyzing the various paperwork and documents signed by Experi-Metal regarding the authority of certain individuals at the company to transact with the bank.

Unfortunately for Comerica, the case turned on whether the bank acted in observance of reasonable commercial standards of fair dealing. The court found that Comerica failed to present evidence satisfying its burden of demonstrating that it accepted the wire transfer orders in good faith. In reaching this conclusion, the court considered the volume and frequency of the payment orders, the $5 million overdraft created by the book transfers in what is regularly a zero balance account, the company’s limited prior wire activity, destinations and beneficiaries of the funds, and the bank’s knowledge of prior phishing attacks on the bank.

For more information, please contact Mary Zambreno at 515-246-4512 or mzambreno@dickinsonlaw.com.

Dickinson Receives High Marks from Chambers in Iowa Banking & Finance Law

2011-06-10T16:12:46-04:00

The 2011 edition of Chambers USA: America’s Leading Lawyers for Business was released today, and Dickinson, Mackaman, Tyler & Hagen, P.C. received high rankings from Chambers in the Corporate/M&A: Banking & Finance area. “This Des Moines firm has a strong practice in corporate and banking law,” writes the Chambers editorial team. “Clients praise its flexible approach that assembles the most appropriate lawyers at the firm to suit the job in hand. Sources say: ‘The group is highly organized, prompt, knowledgeable and confident, and gives excellent service to clients.’”

Three Dickinson attorneys received individual recognition in the area of Corporate/M&A, as follows:

Richard Malm is an "outstanding lawyer" who provides general corporate counsel alongside litigation advice. He co-chairs the corporate department alongside Marc Ward, a lawyer with a wide corporate and banking practice and a niche specialty in limited liability company issues. "He has a direct and straightforward style and gives guidance on issues likely to come up further down the line," say clients. Howard Hagen is championed as "one of the very top banking practitioners in the state right now." Chair of the banking department, he's praised for his "off-the-charts knowledge of the banking industry." He acts for banks and bank holding companies, and provides general corporate advice to businesses.

In addition, Howard Hagen was named a “Star Individual” in the area of Banking & Finance, the only attorney in Iowa to earn this distinction.

Chambers & Partners, the publisher of Chambers USA: America’s Leading Lawyers for Business, bases its rankings on in-depth interviews with attorneys and clients, giving greater weight to clients’ comments. Chambers & Partners considers its rankings and editorial comments to be independent and objective; inclusion in the Chambers USA publication cannot be bought. We sincerely thank our clients who took the time to speak to Chambers researchers last fall and who made it possible for our firm to be so well represented in this year's edition of Chambers USA. It truly is our pleasure and privilege to work with you, and we remind you that we always want to know how we can serve you better.

If you have any questions regarding the Iowa Corporate/M&A: Banking & Finance rankings in the 2011 edition of Chambers USA, please contact any member of Dickinson’s Banking Law Group or email bankinglaw@dickinsonlaw.com.

See Who Is Meeting with the Fed About Dodd-Frank

2011-06-09T15:50:45-04:00

The Federal Reserve’s website has a section for Dodd-Frank implementation matters. On this part of the site, the Federal Reserve posts summaries of its meetings with banks, trade associations, consumer groups, and other members of the public. This is a great way to see what is brewing in regulatory reform and what may soon come to a boil. New posts are generally made on Mondays.

For more information, please contact Allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520 or any member of Dickinson's Banking Law Group.

Senate Fails to Delay Implementation of Interchange Fee Caps

2011-06-08T15:37:23-04:00

- Posted by L. Allyn Dixon, Jr.

In a closely watched vote, legislation in the Senate that would have delayed the Federal Reserve’s implementation of the interchange (card swipe) fee caps of 12 cents per transaction beginning July 21 failed to muster the required 60 vote to force a delay. The final vote was 54-45 in favor of the legislation, just six votes shy of the number needed.

Current estimates show that the average swipe fee is 44 cents per transaction, and estimates of the cost to banks of the new caps are between $10 and $15 billion. Banks large and small worked hard to see the interchange fee provisions of Dodd-Frank changed. Although banks with less than $10 billion in assets are exempt from the caps, from a competitive standpoint, most small banks believe they will have to reduce fees to be in a position to compete with bigger banks for customers.

The Fed indicated it is set to introduce the new rules in a matter of days and has given no indication yet that it is inclined to set the fee cap higher than the earlier-proposed 12 cents per transaction.

For questions about the interchange fees, please contact Allyn Dixon at adixon@dickinsonlaw.com.

First Post Dodd-Frank Preemption Ruling

2011-05-12T11:59:47-04:00

Yesterday the 11^th Circuit ruled that JP Morgan Chase Bank does not have to comply with Florida consumer protection statutes limiting bank fees. This is the first preemption case to cite to Dodd-Frank. There has been much speculation about how Dodd-Frank changed the federal preemption landscape, with national bank advocates claiming very little change and state bank advocates claiming it would be more difficult for national banks to preempt state consumer laws.

In Baptista v. JP Morgan Chase Bank, Baptista filed a class action against Chase because Chase charges check cashing fees, which are prohibited under Florida law. In ruling that Florida’s check cashing fee law is preempted by federal law, the court pointed to OCC laws allowing national banks to charge customers non-interest charges and fees. In response to Baptista’s claim that she was not a customer of Chase, the court cited the OCC’s interpretation of “customers” as “any person who presents a check for payment.” The court adopted the Barnett conflict preemption standard.

Baptista is not a groundbreaking case, but it is an indication of how courts will interpret Dodd-Frank’s preemption standard in the future. There will almost certainly be numerous preemption cases in the next few years that will further define the federal preemption landscape for national banks. It will be interesting to see how much weight courts will give to the OCC’s interpretations. In Baptista, the OCC’s interpretation of “customers” was deemed “reasonable” and was integral to finding preemption. Generally, in matters of interpretation, one case cannot draw a line, however. Future preemption cases will begin to sketch a line as to deference given to the OCC. Whether that line will be straight or jagged remains to be seen.

For more information, please contact allyn Dixon at adixon@dickinsonlaw.com / 515-246-4520 or any member of Dickinson's Banking Law Group.