Brunini Law

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Community Banks to America: “The Reports of My Death Were Greatly Exaggerated.”

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We all know the story and ultimate conclusion, right? Commercial banking is becoming more complex, regulations are multiplying exponentially each passing day, commercial activity and related loans are migrating more and more to metropolitan areas, so therefore small town, community banks are quickly becoming a thing of the past. They simply can’t keep up. Not only are they losing loans to banks in faster growing, more populated areas, but they also are struggling to hire sufficient staff to comply with regulation, much less chase loans. They just don’t have the economies of scale or markets to support the inevitable overhead explosion and attract the top talent to their slow growing, rural economies. Sadly, their days are numbered. Within a decade or two, rural community banks with assets less than $1 billion will go the way of the dinosaur, victims of that terrible meteor named Dodd-Frank.

This must be the truth, right? Everything we learned in macroeconomics demands it. Bigger banks have more economies of scale to support the rising fixed costs associated with commercial banking, and smaller banks will eventually tap out. Metropolitan banks have more access to capital, loans, and growing deposit bases and therefore have an inherent advantage over their rural cousin the country bank. As a former CFO and COO of a rural, community bank, I know I bought it hook, line, and sinker. Looking at growing overhead, shrinking loans, and aging management, I was convinced this storyline was the only possible one. Heck, it’s a big reason why I decided a future in community banking was not for me, opting instead to return to the much more stable world of practicing law (note the presence of my tongue which is firmly implanted in my cheek).

The problem is, five years after the end of the great recession, the bank statistics published in the Uniform Bank Performance Reports (“UBPR”) by the Federal Financial Institutions Examination Council (“FFIEC”) simply don’t support this idea that small town community banks are dead, or that they are even dying. As a matter of fact, there is some argument to the contrary, at least in certain contexts.

In reaching this conclusion, I examined the UPBR average peer group data from the last five years for each of the 15 major peer groups for insured commercial banks. I excluded the peer groups related to De Novo banks created in the last five years which had the potential to skew the analysis due to the unique challenges faced by De Novo institutions. These 15 different peer groups, which included 5,619 banks, are delineated as follows:

Peer Group 1: Insured commercial banks in excess of $3 billion
Peer Group 2: Insured commercial banks between $1 billion and $3 billion
Peer Group 3: Insured commercial banks between $300 million and $1 billion
Peer Group 4: Insured commercial banks having assets between $100 million and $300 million, with 3  or more full service banking offices and located in a metropolitan statistical area
Peer Group 5: Insured commercial banks having assets between $100 million and $300 million, with 3 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 6: Insured commercial banks having assets between $100 million and $300 million, with 2 or fewer full service banking offices and located in a metropolitan statistical area
Peer Group 7: Insured commercial banks having assets between $100 million and $300 million, with 2 or fewer full service banking offices and not located in a metropolitan statistical area
Peer Group 8: Insured commercial banks having assets between $50 million and $100 million, with 3 or more full service banking offices and located in a metropolitan statistical area
Peer Group 9: Insured commercial banks having assets between $50 million and $100 million, with 3 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 10: Insured commercial banks having assets between $50 million and $100 million, with 2 or fewer full service banking offices and located in a metropolitan statistical area
Peer Group 11: Insured commercial banks having assets between $50 million and $100 million, with 2 or fewer full service banking offices and not located in a metropolitan statistical area
Peer Group 12: Insured commercial banks having assets less than $50 million, with 2 or more full service banking offices and located in a metropolitan statistical area
Peer Group 13: Insured commercial banks having assets less than $50 million, with 2 or more full service banking offices and not located in a metropolitan statistical area
Peer Group 14: Insured commercial banks having assets less than $50 million, with 1 full service banking office and located in a metropolitan statistical area
Peer Group 15: Insured commercial banks having assets less than $50 million, with 1 full service banking office and not located in a metropolitan statistical area

As of December 31, 2014, the average number of banks per peer group was 374.6 banks. The largest peer group by far was Peer Group 3 (i.e., banks between $300 million and $1 billion), which included 1,254 banks. The smallest peer group was Peer Group 12 (i.e., banks less than $50 million located in a metropolitan area and having 2 or more full branches), which contained 63 banks. The median peer group was Peer Group 2 (i.e., banks between $1 billion and $3 billion) with 321 banks.

This UBPR data separates banks into peer groups that distinguish them not only on the basis of size, but also based upon the number of full service branches operated by a bank as well as whether the bank is located in a metropolitan or non-metropolitan area. For the purposes of clarification, it is important to note that a bank may be classified as a non-metropolitan bank and still have full service branches in a metropolitan area, and vice versa. For example, a $150 million commercial bank whose main office is in a non-metropolitan area but who also operates another full service branch in a metropolitan area is part of Peer Group 7, which includes banks between $100 million and $300 million of assets that have 2 or fewer branches and are not located in a metropolitan area. Therefore, it is the main office location of the bank that controls and not the location of its branches. For the purposes of the UBPR, a metropolitan area is one classified as a Metropolitan Statistical Area by the Office of Management and Budget.

I first stumbled upon the truths presented by the UBPR while I was analyzing the performance data of a client. With the same prejudices in mind that I stated in the opening two paragraphs, I decided to compare that bank’s data to statistics for banks in “larger” peer groups. What I discovered astonished me and interested me to the point that I decided to dig deeper. Not only did the bank’s statistics compare more favorable to the data of “larger” peer groups than it did to statistics of its own peer group, but the average numbers for the bank’s peer group 7, which is assigned to relatively smaller, rural banks, seemed to soar well above some of its larger, more metropolitan cousins.

Peer group 7, which, as mentioned above, is reserved for banks between $100 million and $300 million in assets that are located in a non-metropolitan area and have 2 or fewer branches, averaged the highest Return on Equity (“ROE”) (i.e., 10.47%) and Return on Assets (“ROA”) (i.e., 1.16%) of any peer group over the last five years. What about the next highest ROE and ROA? Well those belonged to “rural, community” banks as well. Peer Group 11 (i.e., $50 million to $100 million, 2 or fewer branches, and non-metropolitan area) boasted the next highest ROA of 0.99%, and Peer Group 5 (i.e., $100 million to $300 million, 3 or more branches, and non-metropolitan area) claimed second place in ROE with 9.12%. Third place in each category also belonged to Peer Groups 11 and 5, just in reverse with respect to the category. Peer Group 1, the peer group for the nation’s largest banks (i.e., more than $3 billion in assets), doesn’t show up on either list until you look down to fourth place, where it finished with an average ROE of 7.79% and an average ROA of 0.88% over the last five years. In my next post, we will start to examine what could be the explanation of this and what secrets it could reveal to you regarding operating a community bank in this challenging environment.

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7 Diversity Jurisdiction Questions

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Below are seven questions regarding diversity jurisdiction.  The answers and supporting case law will be added soon.

  1. Case is filed in Mississippi federal court.  Texas plaintiff and Delaware plaintiff.  The four defendants are residents of Louisiana, Mississippi, Delaware, and California.  Is diversity jurisdiction present?
  2. Case is in Mississippi state court.  Mississippi plaintiff.   Alabama defendant and Mississippi defendant.  The Mississippi defendant settles and is dismissed.   Is the case removable?
  3. Case is filed in Mississippi state court.  The plaintiff and defendant are diverse.  The complaint seeks to quiet title in a $600,000 piece of property.  The complaint seeks “less than $75,000 in damages and specifically seeks $30,000 in damages and attorneys’ fees.”  Is the case removable?
  4. Case is filed in Mississippi state court.  Mississippi plaintiff.  A corporation (engaging in tire distribution) is the defendant.   The corporation has shareholders in Mississippi, Louisiana, and Alabama.  The state of incorporation is Louisiana.  The central office is in Louisiana, and the central office is where the executives work and the policy and financial decisions take place.  The tire distribution centers are in both Louisiana and Mississippi, but 80% of the tire distribution centers are in Mississippi.  The Secretary of State of Mississippi lists Jackson, Mississippi, as the principal office for the corporation.  Is the case removable?
  5. Case is filed in Mississippi state court.  Louisiana plaintiff.  The five defendants are residents of Alabama, Tennessee, Arkansas, Mississippi, and Florida.  Is the case removable?
  6. Case is in Mississippi state court.  Mississippi plaintiff.  Louisiana defendant and Mississippi defendant.  The Mississippi defendant files a motion to dismiss and is dismissed.  Is the case removable?
  7. Case is in Mississippi state court.  Mississippi plaintiff.  An LLC is the defendant.  The state of “registration” or “incorporation” for the LLC is Mississippi.  The members of the LLC are residents of Louisiana.  The executive offices for the LLC are in Mississippi.  The primary place of business or principal place of business is in Louisiana.  Is the case removable?

Check back later for the answers!

Diversity Jurisdiction Questions. Answered!

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** Note: This is part two of a two-part series.

  1. Case is filed in Mississippi federal court.  Texas plaintiff and Delaware plaintiff.  The four defendants are residents of Louisiana, Mississippi, Delaware, and California.  Is diversity jurisdiction present?

No.  There is a Delaware plaintiff and a Delaware defendant.  Complete diversity is not present. KeyBank Nat. Ass’n v. Perkins Rowe Associates, L.L.C., 539 Fed. Appx. 414, 416 (5th Cir. 2013) (“28 U.S.C. § 1332(a)(1) . . . requires complete diversity between all plaintiffs and all defendants.”) (quotingLincoln Prop. Co. v. Roche, 546 U.S. 81, 89 (2005)).

  1. Case is in Mississippi state court.  Mississippi plaintiff.   Alabama defendant and Mississippi defendant.  The Mississippi defendant settles and is dismissed.   Is the case removable?

Yes.  The “voluntary dismissal by a plaintiff of all defendants whose citizenship is not diverse from that of the plaintiff, through settlement or otherwise, renders the case removable by any remaining defendants whose citizenship is diverse.” Horton v. Scripto-Tokai Corp., 878 F. Supp. 902, 907 (S.D. Miss. 1995) (“So, plaintiff’s voluntary dismissal of Hawkins, the sole original non-diverse defendant, from this lawsuit transformed this case from one not proper for removal to one that met the removal prerequisite.”); see also Estate of Martineau v. ARCO Chemical Co., 203 F.3d 904, 911 (5th Cir. 2000)(holding that case was properly removed after settlement with non-diverse defendant and recognizing that “a case may be removed based on any voluntary act of the plaintiff that effectively eliminates the nondiverse defendant from the case”) (quoting Vasquez FDIC v. Abraham, 137 F.3d 264, 269 (5th Cir. 1998)).

The case must be removed within 30 days of the time the removing defendant receives a “motion, order or other paper.”  28 U.S.C. § 1446(b)(3).

  1. Case is filed in Mississippi state court.  The plaintiff and defendant are diverse.  The complaint seeks to quiet title in a $600,000 piece of property.  The complaint seeks “less than $75,000 in damages and specifically seeks $30,000 in damages and attorneys’ fees.”  Is the case removable?

Yes. “When the validity of a contract or a right to property is called into question in its entirety, the value of the property controls the amount in controversy.” Waller v. Prof’l Ins. Corp., 296 F.2d 545, 547–48 (5th Cir. 1961); see also Celestine v. TransWood, Inc., 467 Fed. Appx. 317, 319 (5th Cir. 2012) (recognizing that the “amount in controversy for jurisdictional purposes is determined by the amount of damages or the value of the property that is the subject of the action”) (citing Hunt v. Wash. State Apple Adver. Comm’n, 432 U.S. 333, 347 (1977)); see also Dillard Family Trust v. Chase Home Finance, LLC, 2011 WL 6747416, at *4 (N.D. Tex. 2011) (recognizing in a quiet title action that since the value of the property set by Dallas County was over $75,000 that the amount in controversy was satisfied); White v. BAC Home Loans Servicing, L.P., 2011 WL 3841952, at *2 (S.D. Tex. 2011) (same holding where Harris County placed a value for the property greater than $75,000).

A Complaint that states that the amount in controversy is less than $75,000 is not determinative of whether the amount in controversy threshold is in fact met.  Jackson v. Balboa Ins. Co., 590 F. Supp. 2d 825, 827-28 (S.D. Miss. 2008) (denying remand where amount in controversy was satisfied despite the allegation in plaintiff’s complaint that the “Complaint filed by the Plaintiff herein specifically states that he is not seeking monetary relief in excess of $75,000,” and finding that “[s]uch statements do not set forth a specific monetary demand.”) (citing Manguno v. Prudential Property and Cas. Ins. Co., 276 F.3d 720, 722-23 (5th Cir. 2002)).

  1. Case is filed in Mississippi state court.  Mississippi plaintiff.  A corporation (engaging in tire distribution) is the defendant.   The corporation has shareholders in Mississippi, Louisiana, and Alabama.  The state of incorporation is Louisiana.  The central office is in Louisiana, and the central office is where the executives work and the policy and financial decisions take place.  The tire distribution centers are in both Louisiana and Mississippi, but 80% of the tire distribution centers are in Mississippi.  The Secretary of State of Mississippi lists Jackson, Mississippi, as the principal office for the corporation.  Is the case removable?

Yes.  The corporation is a citizen of Louisiana because Louisiana is home to the corporation’s nerve center, and the corporation was incorporated in Louisiana. “A corporation may simultaneously be a citizen of two states, the place of incorporation and the state of its principal place of business.” Maxey v. Security-Connecticut Life Ins. Co., 2006 WL 1791151, at *2 (N.D. Miss. 2006) (citing 28 U.S.C. § 1332(c)(1)). The “nerve center” test controls the principal place of business.  Hertz Corp. v. Friend, ––– U.S. ––––, ––––, 130 S.Ct. 1181, 1192, 175 L.Ed.2d 1029 (2010) (adopting the “nerve center” test as the appropriate test for determining the principal place of business and rejecting the other tests used by numerous Circuits including the Fifth Circuit’s “total activities” test).

A corporation can have “one and only one principal place of business.”  J.A. Olson Co. v. City of Winona, Miss., 818 F.2d 401, 406 (5th Cir. 1987).  To determine the “nerve center,” one looks to “where a corporation’s officers direct, control, and coordinate the corporation’s activities.”  Hertz, 130 S.Ct. at 1192.  This location “should normally be the place where the corporation maintains its headquarters—provided that the headquarters is the actual center of direction, control, and coordination.” Id.

The fact that the corporation listed Mississippi as its principal office in corporate filings is relevant, but these filings are not outcome determinative since such filings “would create opportunities for jurisdictional manipulation” as the Supreme Court warned about such corporate filings in the Hertzdecision.  See also Teal Energy USA, Inc. v. GT, Inc., 369 F.3d 873 (5th Cir. 2004) (filings with IRS and Texas secretary of state stating the “principal place of business” were indicative of the principal place of business for diversity jurisdiction purposes, but these filings by themselves were not outcome determinative); N. California Power Agency v. AltaRock Energy, Inc., 2011 WL 2415748 (N.D. Cal. June 15, 2011) (remanding action to state court since defendant “produce[d] no evidence save a print-out from the California Secretary of State’s web site,” and defendant’s could produce no “other evidence,” then this [Secretary of State filing] has the hallmark of “jurisdictional manipulation” the Court warned of in Hertz.”); Guitar Holding Co. v. El Paso Natural Gas Co., 2010 WL 3338550 (W.D. Tex. Aug. 18, 2010) (rejecting argument that secretary of state filings constituted an admission by a party opponent since the declarations were made “for other purposes,” and although admissible as evidence, they “are amenable to rebuttal,” and “ the Supreme Court [in Hertz] has explicitly held that corporate form filings indicating a corporation’s principle office, without further explanation, are not dispositive regarding a corporation’s nerve center.”); Darrough v. LTI Trucking Services, Inc., 2012 WL 1149158 (S.D. Ill. Apr. 5, 2012) (same); etradeshow.com, Inc. v. Netopia Inc., 2004 WL 515552, at *1-2 (N.D. Tex. 2004) (“While a corporation’s statements made to a state’s secretary of state are not binding on the Court, they are relevant to its inquiry.”)

  1. Case is filed in Mississippi state court.  Louisiana plaintiff.  The five defendants are residents of Alabama, Tennessee, Arkansas, Mississippi, and Florida.  Is the case removable?

No.  The case is filed in Mississippi and there is a Mississippi defendant.  The forum defendant rule prevents removal.  A case “may not be removed if any of the parties in interest properly joined and served as defendant is a citizen of the State in which such action is brought.” 28 U.S.C. § 1441(b)(2).  “This exception is commonly referred to as the forum-defendant or in-state-defendant rule.”  McGee v. Willbros Const., US, LLC, 825 F. Supp. 2d 771, 775 (S.D. Miss. 2011) (citing In re 1994 Exxon Chemical Fire, 558 F.3d 378, 391 (5th Cir. 2009)).  “It is well-settled in this circuit that the forum-defendant rule concerns not whether the district court has subject matter jurisdiction over the controversy, rather it is a procedural limitation that prevents removal of an action that would otherwise be removable on the basis of diversity jurisdiction.” Id. “As such, whether defendants to a lawsuit are diverse, or are residents of the forum state, are two separate inquiries which are treated differently for purposes of remand.”  Id.

This is a procedural rule and not a jurisdictional rule.  As a result, if the plaintiff is agreeable to the removal (and agrees to not file a motion to remand) then the removal may be allowed. Chaves v. Exxon Mobil Corp., 2007 WL 911898, at*1 (D. Conn. 2007) (“we have held that, even if removal was statutorily improper, a party opposing removal must move to remand within the 30 day limitation or the objection will be forfeited (except for objections that implicate constitutional subject matter jurisdiction such as a lack of diversity or a federal question”) see also Williams v. AC Spark Plugs Div. of Gen. Motors Corp., 985 F.2d 783 (5th Cir.1993); Air–Shields, Inc. v. Fullam, 891 F.2d 63, 65–66 (3d Cir. 1989) (finding that district court’s sua sponte decision to remand on procedural grounds more than 30 days after the filing of the notice of removal exceeded the court’s authority).

6.  Case is in Mississippi state court.  Mississippi plaintiff.  Louisiana defendant and Mississippi defendant.  The Louisiana defendant files a motion to sever and the plaintiff opposes the motion to sever.  The state court grants the motion and severs the Mississippi defendant into a separate state court case.  Can the Louisiana defendant remove?

Yes. There is “the judicially-created ‘voluntary-involuntary’ rule whereby ‘an action nonremovable when commenced may become removable thereafter only by the voluntary act of the plaintiff.’”Crockett v. R.J. Reynolds Tobacco Co., 436 F.3d 529, 532 (5th Cir. 2006); Weems v. Louis Dreyfus Corp.,380 F.2d 545, 547 (5th Cir. 1967).  However, when a diverse state court defendant is severed then this presents an exception to the voluntary-involuntary rule and the diverse defendant can remove the case. Crockett, 436 F.3d at 533 (5th Cir. 2006) (“removal on the basis of an unappealed severance, by a state court, of claims against improperly joined defendants is not subject to the voluntary-involuntary rule. Accordingly, removal jurisdiction existed in this case upon the severance of Crockett’s claims against the nondiverse in-state health care defendants.”)

  1. Case is in Mississippi state court.  Mississippi plaintiff.  An LLC is the defendant.  The state of “registration” or “incorporation” for the LLC is Mississippi.  The members of the LLC are residents of Louisiana.  The executive offices for the LLC are in Mississippi.  The primary place of business or principal place of business is in Louisiana.  Is the case removable?

Yes.  The citizenship of an LLC is determined by the citizenship of its members.  Harvey v. Grey Wolf Drilling Co., 542 F3d 1077, 1080-81 (5th Cir. 2008) (the authorities “overwhelmingly support the position that a LLC should not be treated as a corporation for purposes of diversity jurisdiction. Rather, the citizenship of a LLC is determined by the citizenship of all of its members. Under this approach, Grey Wolf is a citizen of Nevada and Texas (the residences of its members), not Louisiana (Grey Wolf’s state of organization, resulting in complete diversity.”)

U.S. EEOC Challenges Standard Severance Agreements

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Recently, the U.S. Equal Employment Opportunity filed suit against CVS Caremark—the nation’s second largest drugstore chain, challenging the company’s standard severance agreement.  In the lawsuit, the EEOC specifically challenged six (6) separate provisions contained in CVS’ severance agreements:

(1)    A Cooperation Clause – a clause requiring the former employees to promptly notify the company of any subpoena, deposition notice, interview request or other process relating to any administrative investigation;

(2)    A Non-Disparagement Clause – a clause in which the former employees promise not to make any statements that would “disparage,” or harm the business reputation of the company and the company’s officers/directors (even if the statements are true);

(3)    A Non-Disclosure Clause – a clause in which the former employees agree to not disseminate information about staff, wages and benefit structures, succession plans and affirmative action plans (without the prior written authorization of the company);

(4)    An Attorneys’ Fees Clause – clause in which the former employees promise to promptly reimburse the company for any legal fees it incurs as a result of a breach of the agreement by the former employee;

(5)    A Covenant Not to Sue – a promise from the former employees no to sue (including the filing of any company with any agency); and

(6)    A General Release – a release by the former employees of any claim, including claims of unlawful discrimination.

If these provisions sound familiar, there’s a good reason—virtually all employers rely on these provisions to end the threat of potential lawsuits.  In exchange, the departing employees receive money or other consideration.  According to CVS, more than 650 former employees entered into separation agreements with the company based on the challenged severance agreement.

The EEOC claims that CVS’ severance agreement contracts interfere with a worker’s rights to bring charges with the agency.  But CVS said the EEOC’s suit is “unwarranted” because its severance agreement includes language “to state that it does not prohibit employees from doing so.”  It is too soon to predict the outcome of this litigation—so the suit is definitely worth monitoring.

Mississippi’s New Construction Lien Law

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Effective April 11, 2014, the Governor signed into law legislation that  substantially revises and expands construction lien law in Mississippi.  This article discusses some of the most important features of that legislation.

The new law grants a “special lien” upon the real estate or other property for which labor, services, materials, tools, appliances, machinery or equipment was provided by prime contractors, first and second tier subcontractors, materialmen (including equipment suppliers), registered architects and land surveyors and professional engineers.  This lien may attach to the owner’s real property if the labor, materials, etc. were furnished at the request of the owner, design professional, prime contractor or first tier subcontractor.  The lien is limited to the amount due the lien claimant under a written or oral contract and includes interest on the principal amount due.  No such lien, however, exists for a prime contractor or first or second tier subcontractor not properly licensed by the State Board of Contractors or for a party who contracts with such unlicensed entity.  At the owner’s request, proof of proper licensing must be provided.

This legislation requires compliance with filing procedures; failure to comply results in the lien being unenforceable.  First, assuming there has been substantial compliance by the claimant with its contract obligations, the claim of lien must be filed with the chancery clerk in the county where the property is located within 90 days after the claimant last performed labor or services or provided materials or equipment.  The lien must include a statement that the claim of lien expires and is void within 180 days of its filing if no “payment action” is filed within that time.  (A “payment action” is defined as “a lawsuit, proof of claim in a bankruptcy case, or a binding arbitration.”)  The lien must also notify the owner of the property on which the lien is filed of the owner’s right to contest the lien.  A section of the law provides language for the lien filing, including the date for its potential expiration and the owner’s right to contest it.

Second, not later than 2 business days after the lien is filed, the claimant must send a copy of the lien to the owner by registered or certified mail or by overnight delivery through the postal service or commercial delivery company with directions for delivery on the next business date following the date it is received by the courier service.  If the owner is an entity on file with the Secretary of State’s office, a copy of the lien should be sent to that entity’s address or to that entity’s registered agent’s address.  If the owner’s address can’t be found, a copy should be sent to the prime contractor as agent for the owner.  If the lien claimant is not the prime contractor, a copy of the lien must also be sent to the prime contractor or its registered agent in the same manner prescribed for sending notice to the owner.

Third, a “payment action” must, within 180 days from the date of filing the claim of lien, be commenced in county, circuit or chancery court against the party with whom the claimant contracted.  When the payment action is commenced, a lis pendens notice must be filed with a copy sent to the owner and prime contractor.  The lien statutes do not affect the parties’ right to arbitration but arbitration must be commenced within 180 days of filing a claim of lien.  Commencement of a “payment action” is not required if the owner has not paid the prime contractor and the claimant cannot secure a final judgment against the party with whom it contracted because (a) that party has been adjudicated a bankrupt, (b) is dead or (c) there is an enforceable “pay-if-paid” clause making payment not yet due the claimant.

If the debtor-party has been adjudicated a bankrupt, is dead, or there exists an enforceable pay-if-paid clause, the lien claimant may proceed in an action against the owner of the property, if such action is filed within the same 180 day period and the claimant files a lis pendens notice with a copy to the owner and prime contractor.  Any judgment entered in such action attaches only against the real property and imposes no personal liability on the owner of the property.  Certain rights and defenses such as specified due diligence steps are unaffected by an action against the owner.

A claim of lien may be amended by filing an amendment in the prescribed form and the amendment relates back to the original date of filing.  Notice of the amendment must be given in the same manner as an original claim of lien.

The lien is subordinate to tax liens, superior to all other liens, deeds of trust, mortgages and encumbrances filed after the notice of lien, but subordinate to those filed prior to the notice of lien.  Foreclosure of any prior deeds of trust or other liens extinguishes subordinate construction liens but such subordinate liens have rights in any excess proceeds received by the foreclosing lienholder.

The law recognizes a category of “construction mortgages,” i.e., deeds of trust,  mortgages, assignments of leases and rents, fixture filings and other security agreements affecting real property to the extent they secure a loan to acquire, or finance the repair or construction of an improvement to, real property.  If a construction mortgage is filed prior to the notice of claim of lien, it is superior to the latter if the construction mortgagor either obtains a sworn statement from the owner that no work has been performed on, or no materials or equipment have been delivered to the real property or a sworn statement from the prime contractor, or owner, if no prime contractor  regarding payment for work, materials, equipment or services provided.  Priority for such construction mortgages extends to loan advances made both before and after the filing of a notice of claim of lien.

Assuming compliance with filing requirements, in any proceeding against the owner to enforce the lien, the party with a direct contractual relationship with the lien claimant need not be joined as a necessary party but may be made a party.  At any time prior to judgment, any other interested parties may intervene to oppose establishing the lien or to assert any claim they may have against the lien claimant.  If the lien claimant prevails, judgment shall be entered for the amount of the claim, plus interest and cost.  In its discretion, the court may award reasonable costs, interest and attorneys’ fees to the prevailing party in any such action against the owner to enforce a lien against the property.

All liens created by the new law “shall have an equal priority” and be paid first out of the proceeds of the sale of the property or money collected from the owner and, if such proceeds are insufficient to satisfy the liens in full, the proceeds and money shall be distributed pro rata or as otherwise ordered by the court.  The aggregate amount of liens shall not exceed the contract price between the owner and prime contractor.  Moreover, if payments have been made in reliance upon lien waivers issued by lien claimants or sworn statements of the prime contractor that the agreed price or reasonable value of the labor, services or materials have been paid or waived in writing by the claimant, the total amount of all liens in favor of subcontractors and material suppliers not in privity of contract with the owner shall not exceed the unpaid balance of the contract amount between the owner and prime contractor at the time the first notice of lien is filed.

Likewise, if payments have been made in reliance upon lien waivers issued by lien claimants or sworn statements by the contractor that the agreed price or reasonable value of the labor, services or materials have been paid or waived in writing by the claimant, the total amount of liens in favor of design professionals not in privity of contract with the owner shall not exceed the unpaid balance of the contract price between the owner and design professional in privity with the owner at the time the first notice of lien is filed.

Upon written request of the owner, the prime contractor is required to provide a list of all first and second tier subcontractors, material and equipment suppliers.  Upon written request by the prime contractor, all first and second tier subcontractors are required to provide the prime contractor the same information.  Any party willfully refusing to provide the requested information within a reasonable time forfeits its lien right.  Any prime contractor or first or second tier subcontractor who fails to pay any materialman, equipment supplier or subcontractor having direct privity with it, in accordance with the terms of any written agreement, shall forfeit its right to a lien.

Any person having a right to a lien but not in privity with the prime contractor, or if no prime, with the owner, who provides labor, services, materials or equipment to improve the property shall give written notice to the prime contractor or, if no such prime, to the owner, within 30 days of first providing labor, services, materials or equipment.  The notice is required to be by email (with a confirmed receipt), registered or certified mail or by the postal service or other overnight courier service and must include the name, address and telephone number of the potential lienor, the name and address at whose instance the party furnished such goods or services, the name and location of the subject project and a description of the goods or services and, if known, the contract price or anticipated value of such goods or services.  Any person not in privity with the prime contractor who fails to provide the required 30 day notice forfeits its right to a lien, but this requirement for the 30 day notice to the prime contractor does not apply to single-family residential construction.

If a waiver and release is executed, for example by a subcontractor, and the owner pays the prime contractor who fails without good cause to pay the subcontractor the amount set out in the waiver and release, the prime contractor will be liable to the unpaid subcontractor for 3 times the amount in the waiver and release.  “Good cause” includes any defense available pursuant to the terms of the contract between the parties.  This treble damage provision, however, does not apply to single family residential construction.

Special rules apply for single family residential construction.  If an owner pays the prime contractor or design professional in privity with the owner, such payment shall be an absolute defense to any claim of lien to the extent of the payment and to the extent the owner has not received a pre-lien notice at least 10 days before a claim of lien is filed.

Special rules also relate to improvements to real property made under a contract with the property’s lessee.  If the improvement is not in violation of the lease, the lien attaches to the improvement and to the unexpired term of the lease, and the lienor has the right to avoid forfeiture of the lease by paying rent to the lessor and may, under some circumstances, remove the building or improvement, if it can be done without injuring the real property.

The lien created by the new legislation shall be dissolved and unenforceable if either the owner, the purchaser from the owner or the construction lender can show that payment by either of them was made in reliance upon a lien waiver signed by a claimant or was made in reliance upon a sworn statement by the prime contractor that the agreed price or reasonable value of the labor, services, materials or equipment has been paid or was waived in writing by the lien claimant.  If the prime contractor’s sworn statement is willfully and falsely made, any party injured by it has a cause of action against the prime contractor for 3 times their actual damages that result from the false statement.

The law provides a method for bonding off a lien.  Before or after foreclosure proceedings are begun, the owner or prime contractor may discharge the lien by posting a bond in the amount of 110% of the amount claimed by the lien.  The party filing the bond is required to give the lien claimant statutory notice of the bond within 7 days, including providing the claimant a copy of the bond.

Any waiver of a right to claim a lien or file a claim against a bond is unenforceable and void if the waiver is in advance of furnishing labor, services or material.  When, however, a claimant is requested to execute a waiver and release in exchange for a progress or final payment, the form shall substantially follow the terms set out in the statute.

If a lien claimant fails to commence a lien action within 180 days from the date of filing the claim of lien, the lien becomes unenforceable.  The lien could also expire “within 90 days after a notice of contest is filed” if no notice of commencement is timely filed in response to a notice of contest.  When the lien is fully satisfied, the lien holder is required to file a cancellation with the chancery clerk and failure to file the cancellation within 15 days after written demand to do so subjects the lien holder to liability of no less than $500 per day plus attorneys’ fees and costs to any party injured thereby.

An owner (or its agent or attorney) or prime contractor (or its agent or attorney) may shorten the 180 days for commencement of a payment action by recording in the chancery clerk’s office the notice substantially set out in the statute, along with proof of delivery to the lienor and by sending a copy of the notice of contest to the lien claimant via the statutory method of delivery, within seven days of filing the same.  Thereafter, the lien shall be extinguished by law upon the earlier of 90 days after filing the notice of contest or 180 days from the date of the lien if no payment action is filed in that period.

The new law prescribes the method for computing time and the method for judgments establishing the lien and ordering the property sold for satisfaction of the judgment by special writs of execution.  A penalty for falsely and knowingly filing a claim of lien maybe assessed at 3 times the amount of the claim, to be recovered by every party injured thereby, if an action is brought within 180 days of the filing of the claim of lien.  In addition, a person injured by the wrongful filing of a claim of lien may, on 7 days’ notice, ask a court to expunge the lien.

Significantly, when a prime contractor gives a payment bond with the same protection for subcontractors and material suppliers as required for public work the payment bond stands as substitution for the lien rights of first and second tier subcontractors and material suppliers.

Brunini Welcomes George O’Connor

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Brunini, Grantham, Grower & Hewes, PLLC (Brunini) announced that George O’Connor, former trial attorney with the Federal Energy Regulatory Commission (FERC) and former Vice President for Entergy Corporation, is joining the law firm.  O’Connor will bring his extensive energy and regulatory experience to Brunini’s Washington, D.C. office.

“George knows Washington, energy litigation and federal energy policy,” said Brunini’s Curt Hebert, Jr who is former Federal Energy Regulatory Commission Chairman.  “Our country’s energy revolution is powering the American manufacturing renaissance.  George, with his extensive FERC experience, including his leadership role on the drafting and passage of the Energy Policy Act of 2005, as well as his corporate and private legal practice background, is the right person to assist our clients in taking advantage of that revolution. George has the objective experience to see clients’ needs through many prisms and we are delighted George has chosen to join Brunini.”

O’Connor served as an advisor to the Federal Energy Regulatory Commissioner Charles A. Trabandt from 1985-1993 prior to working in FERC’s Office of General Counsel.  George’s experience includes regulatory practice, FERC and Senate staff leadership and he has a proven record of working with Congress and at the FERC.  From March 2008-November 2010, he was hired by Entergy Corporation as Vice President of Federal Governmental Affairs.

Brunini’s Energy Practice is regarded as a premier regulatory practice.  In rating Brunini as a Band 1 Firm, Chambers USA 2012 Client’s Guide notes:  “[The Firm] has a wealth of experience in energy regulation and litigation.  Over the years, the team has undertaken a number of large projects throughout the South, providing a full range of services, including regulation, permitting, financing, real estate and contract advice.”

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CMS to Publish Physician Payment Data for Public Access

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The Centers for Medicare & Medicaid Services (“CMS”) will soon allow patients to compare their physicians with other physicians around the country.  On April 2, 2014, CMS announced that it will publish billing data on more than 880,000 health care professionals in all 50 states.  In a letter to the American Medical Association, the Principal Deputy Administrator at CMS, Jonathan Blum, said CMS intends to publish the data publicly on April 9 or earlier.

In the letter, Blum wrote:

Over the past 30 years, the landscape has changed with respect to physician information that is available to the public. The passage of the Affordable Care Act in 2010 extended health insurance coverage to millions of additional people and included a range of provisions which use transparency in the health care system as a tool to improve health care quality.  As a result, the health care system is changing from a system dominated by a dearth of usable, actionable information to one where care coordination and dramatically enhanced data availability and data exchange will power greater innovation, higher quality, increased productivity and lower costs.

Finally, Blum wrote that ” the data to be released would assist the public’s understanding of Medicare fraud, waste, and abuse, as well as shed light on payments to physicians for services furnished to Medicare beneficiaries . . . .”

For the full blog post and a copy of the letter to the American Medical Association, click here.

Brunini’s Hébert Contributes Article to Special Report for CNBC.com

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Curt Hébert, a partner at Brunini, Grantham, Grower & Hewes, PLLC was featured as a guest contributor for CNBC.com March 31, 2014. The article is titled “Risky business: Protecting US energy supplies”

Hébert is the former chairman of the Federal Energy Regulatory Commission and currently serves as the a co-chair of the Bipartisan Policy Center’s Electric Grid Cybersecurity Initiative.

Click here to read the article from CNBC.com

OIG Allows Premium Credits for Network Hospital Patients Under Medigap Policy

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Medical background with stethoscope and doctors prescription pad on heartbeat symbol background.The U.S. Department of Health & Human Services, Office of Inspector General (OIG) issued its second Advisory Opinion of the year on February 12, 2014.  In this opinion, the OIG concluded that it would not impose sanctions under the anti-kickback statute or civil monetary penalty law on Medicare supplemental health insurance (Medigap), preferred provider organizations (PPO’s) and hospitals participating in PPO networks.  The OIG conducted analyses under both the anti-kickback statute and civil monetary penalty law.The OIG determined that the arrangement failed to meet the safe harbor for waivers of beneficiary coinsurance and deductible amounts, or the safe harbor for health plan reduced premium amounts under the anti-kickback statute analysis.   Nevertheless, the OIG found the Proposed Arrangement presents a low risk of fraud or abuse because:  (1) Medicare payments for inpatient services are fixed and would not affect waivers or reductions in beneficiary cost sharing; (2) the arrangement was not likely to increase utilization because the amount waived by the hospital was owed by the insurer, not the patient; (3) hospital competition would not be adversely impacted because participation in the PPO networks would be open to all Medicare-certified hospitals that meet state law; (4) the remuneration would not affect medical judgment because patient would not incur any additional cost based on their hospital selection and the physicians and surgeons would receive no remuneration; and (5) the Policyholders would be informed that they may select any hospital without penalty or increased cost.The OIG next analyzed the arrangement under the civil monetary provision because the premium credits were incentives to choose a network hospital.  OIG concluded the premium credits are sufficiently similar in purpose and effect to differentials in coinsurance or deductible amounts and therefore, excepted from the definition of remuneration. The OIG also noted that the arrangement had the potential to decrease the costs to certain Medigap Policyholders without increasing costs to others and the potential to reduce state-insurance rates.

HHS Releases Guidance on Sharing Mental Health Information

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healthcare and medical concept - doctor and nurse with patient in hospital

healthcare and medical concept – doctor and nurse with patient in hospital

Recently, the U.S. Department of Health and Human Services (“HHS”) released guidance on the HIPAA Privacy Rule and sharing information related to mental health treatment.  While the information provided in the guidance was not new, HHS provided concise, practical advice on sharing protected health information of minors and individuals receiving mental health treatment.

HHS reiterated that a health care provider is permitted to communicate with a patient’s family, friends, or others who are involved in the patient’s care about the patient’s protected health information in a limited number of circumstances.  Typically, upon receiving treatment at a hospital or other health care entity, patients are provided an opportunity to designate other individuals, if any, who may be contacted with information regarding the patient’s health care treatment. At other times, patients may indicate their consent, express or implied, to a provider sharing information with family or friends who are present in a treatment room with the patient when the provider discusses the patient’s health care treatment.  Finally, when a patient is not present or is incapacitated, HHS acknowledged that a health care provider can share the patient’s information with family, friends, or others involved in the patient’s care or payment of care as long as the provider has determined, based on his professional judgment, that it is in the patient’s best interest to disclose the information.  However, for disclosures to individuals other than the patient, a provider should always limit such disclosure to the protected health information that is directly related to that individual’s involvement in the patient’s care or payment for care.

HHS also noted that special considerations are given under HIPAA to certain protected health information regarding mental health treatment.  Subject to a few exceptions, an individual must give a separate authorization for disclosure of psychotherapy notes even when the psychotherapy notes are being disclosed to another health care provider.  The Privacy Rule refers to psychotherapy notes as those notes recorded by a mental health professional during a private counseling session or a group, joint, or family counseling session.  Psychotherapy notes are kept separate from the remainder of a patient’s medical records.  These notes, however, may be disclosed without authorization if required by law, such as in the case of mandatory reporting of abuse or mandatory “duty to warn” situations in which threats of serious and imminent harm are made by the patient.  In situations where a health care provider believes a patient may harm himself or others, the Privacy Rule permits the provider to disclose necessary information about the patient to law enforcement, family, or other persons when the threat of serious and imminent harm is present and the health care provider believes in good faith that a warning is necessary to prevent or lessen the imminent threat to the health or safety of the patient or others.

In its guidance, HHS also addressed when a patient is considered “incapacitated” under the Privacy Rule such that the patient does not have the capacity to agree or object to a health care provider sharing information with the family member.  HHS stated that the permission to make disclosures in a patient’s best interests “clearly applies when a patient is unconscious.”  Nonetheless, it noted that there may be other situations when a health care provider, using his professional judgment, determines the patient does not have the capacity to agree or object to the sharing of protected health information and that the sharing is in the patient’s best interests.  For example, when a patient is suffering from temporary psychosis or is under the influence of alcohol or drugs, a patient may not be considered to have the capacity to make a decision regarding disclosures.  However, in these circumstances, HHS encourages the physician to take the patient’s prior expressed preferences regarding disclosures of their information into consideration.  Further, if and when a patient regains capacity, the provider should offer the patient the opportunity to decide whether future disclosures would be authorized.

To review the complete guidance from the HHS, click here.