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Headlines and news coverage of the industries in which our clients operate.

Behind the Numbers – Home Improvement Lending in Cleveland

March 13th, 2012

The federal government and the attorneys’ general of 49 states recently reached a joint agreement on a historic $25 billion settlement with the country’s five largest loan servicers for claims involving foreclosure misconduct. With this agreement, we can now look forward to phase two of the economic recovery: expanding access to affordable credit to facilitate home repairs and neighborhood sustainability.

As recovery takes hold, preservation will become critical. For many, renovation and repair have been delayed and can no longer be postponed. For others, home ownership means repairing a home that was purchased in foreclosure.

In February, 2012, we set out to shift the conversation from home foreclosure to home preservation. The study assesses the general lending needs for the repair and rehabilitation of properties in northeast Ohio. Our research evaluates home improvement lending volume in the city of Cleveland, assesses opportunities to increase rehabilitation lending activity, and is being used to identify rehabilitation strategies that assist with the stabilization of the local real estate market. The study is available below.

Home Improvement Lending Activity in Cleveland: an Alternative Policy Response to the Foreclosure Crisis (Download the Report)

Crowdfunding Not Yet the Answer to Startup Cash Woes

June 20th, 2011

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Connecting your business to small investors has never been easier in today’s electronic age. Websites such as ProFounder.com, MicroVentures.com and PeerBackers.com make this possible. Gwen Moran, of Entrepreneur StartUps Magazine, offers a rundown of the three crowd-funding sites in her article, Crowdfunding Could be the Answer to your Cash Woes. As evidenced by this article, and many others as of recent, crowdfunding is once again demanding its seat at the regulatory table, hoping to establish itself as viable funding method for small companies. Though crowdfunding platforms paint an intriguing picture, they also bring to the forefront new concerns over complying with state and federal securities laws.

As capital-starved companies explore new funding options, entrepreneurs should recall the regulatory problems that plagued peer-to-peer lending platforms, such as Prosper.com and Lending Club, in 2008. These websites work by connecting individuals in need of financial support to other individuals willing to lend them capital by using an internet platform to connect the two parties.  Three years ago, peer-to-peer lending platforms were just going online and the rampant rise in number of these small-dollar loan facilitators caught the attention of the Securities and Exchange Commission (“SEC”).  The SEC determined that several of these peer-to-peer lending platforms had failed to comply with securities laws at both the state and federal level, including the registration, disclosure, and investor screening requirements.  As a result, the once-saturated peer-to-peer lending market quickly evaporated, as many of the lending platforms were voluntarily shutdown until compliance could be obtained.  Needless to say, many of these platforms never reopened.

Failing to comply with the securities laws could have potential devastating consequences for everyone involved, including lenders and investors and borrowers and issuers, not to mention the facilitating platform, such as the aforementioned crowdfunding platforms.  Among the most notable consequences, include lenders not being repaid and issuers facing lawsuits that allege securities fraud.  For startup companies looking to raise seed capital or engage in an early-stage funding round, failing to account for these concerns today could even inhibit subsequent funding rounds down the road.

In today’s era of global interconnectivity, it has never been easier to connect investors of all types [including angel investors, venture capitalists, and even friends and family investors] to capital-starved companies.  Nevertheless, it has also become much easier for regulators to observe these capital-raising efforts from the sidelines.  In Spring 2011, the SEC announced it would consider amending its regulations to allow for an exemption from the registration and disclosure requirements of the Securities Act of 1933, for issuances of less than $100,000 when a company intends to raise capital from a small group of private investors.  This would mark at least the second time in recent history that the SEC has formally considered a proposal to alleviate the regulatory burden on small businesses and early-stage, startup companies seeking an infusion of private capital.

Whether or not the SEC breaks new ground, suffice it to say that anytime your company is looking to raise capital, expect that the securities laws will be implicated.  Only your attorney can assess to what extent.  As your company embarks on its next funding venture, remember there is no quick and easy way to raise capital.  Pursuing this effort online is no exception.


Disclaimer:  This article discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented in this article without first seeking the advice of counsel in the relevant jurisdiction.  Laurentum Group and the author expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this article.

A Better Family Business Succession

June 18th, 2011

Whether you plan to leave your family business to one child or sell it to a third party, open communication with your children and family is key, writes Louis Pashman, who breaks down three possible succession scenarios.

A Better Family Business Succession – BusinessWeek

New Look for Employment Agreements as FDIC Seeks to Recover Compensation

March 20th, 2011

New Look for Employment Agreements as FDIC Seeks to Recover Compensation

Why “Best Efforts” Clauses are No Longer Sufficient

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On March 15, 2011, the FDIC confirmed it would actively seek to recover all compensation paid to directors and senior executive officers of certain failed financial companies. In particular, the FDIC announced it will pursue recovery from all individuals who are substantially responsible for the failed condition of a covered financial company and will seek to recover all compensation paid to these individuals during the two-year period preceding the failure, i.e., two years from the time the FDIC was appointed receiver, or during an unlimited time period in the case of fraud.

As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), the FDIC must provide for the “orderly liquidation” of covered financial companies predominantly engaged in financial activities. The FDIC provided substantive guidance in its March 15 Notice of Proposed Rulemaking (“NPR”), which also addressed those instances when the FDIC will seek to pursue recovery of compensation paid to certain directors and officers (Section 380.7). Although the NPR applies only to covered financial companies (e.g., bank holding companies and financial holding companies), all other financial companies, including insured depository institutions, should heed the FDIC’s prescient guidance.

Individuals Substantially Responsible for Failed Conditions

When the FDIC is appointed receiver of a covered financial company, to recover the compensation paid to an individual, the FDIC must demonstrate the individual is substantially responsible for the failed condition of the financial company. Significantly important is how this demonstration is made. Most notably, the FDIC confirmed it will presume substantial responsibility with respect to the following individuals: (1) Chairman of the Board of Directors; (2) Chief Executive Officer; (3) President; (4) Chief Financial Officer; and (5) any other individual who acts in any other similar role, regardless of title, if that person had responsibility for the strategic, policymaking, or company-wide operational decisions of the company.

The only exception to this presumption is for directors and senior executive officers who (i) were retained for the purpose of improving the financial condition of the covered financial company, and (ii) were retained during the two-year period prior to the FDIC being appointed receiver of the company. Although this presumption may be rebutted if the director or senior executive officer can clearly and convincingly demonstrate that she performed her duties with the requisite degree of skill and care required, such a showing requires time and resources, without guarantee of success. Moreover, there is no “line in the sand” to satisfy this showing; instead, an administrative proceeding will ensue whereby the individual must rely on legal precedent and industry best practices to make such a showing. Consequently, for newly hired directors and senior executive officers, it is critical that each be able to unambiguously demonstrate that he or she was retained for the purpose of improving the company’s financial condition, should the company later be placed in receivership.

Fitting the Exception: Employment Agreements and Retainer Agreements

Demonstrating that an individual was hired for the purpose of improving the financial condition of a company can, and should, be made in that individual’s employment agreement for senior executive officers or retainer agreement for directors. Specifically, to show this particular intent existed at the time of hire, these agreements should include a provision that expressly states the individual was retained for this particular purpose. While it is standard for employment and retainer agreements to include a generic description of the purpose for which the individual is being retained, these descriptions often exist in “form language” and will not be sufficient to avoid the FDIC’s wide-reaching presumption. For instance, it is standard to include language that requires the individual to act in the “best interest” of the company and to perform all duties using his or her “best efforts.” Going forward, although this form language will continue to be necessary, it will, by itself, be wholly inadequate to avoid the FDIC’s presumption of substantial responsibility.

Additionally, the director or senior executive officer must also have been retained within two years prior to the FDIC being appointed receiver. Because no individual or organization, including the FDIC, can predict with precision when exactly a covered financial company will enter receivership, every employment or retainer agreement should explicitly provide for this particular purpose of improving the company’s financial condition, regardless of the company’s then-existing financial condition.

Insured Depository Institutions

Although the FDIC’s proposed rule excludes insured depository institutions, such institutions should also consider including a similar provision in the agreements for their senior executive officers and directors. Notably, insured depository institution must have strong corporate governance standards in place, and part of satisfying this standard requires that insured depository institutions have measures in place to ensure that all incentive compensation arrangements for covered employees (not limited to senior executive officers) are appropriately balanced and do not jeopardize the safety and soundness of the institution. Deferring incentive compensation payments and requiring the repayment of incentive payments previously received (“clawback”) are two ways to achieve this balance. Likewise, expressly including a provision in an employment or retainer agreement that the individual is being retained to improve the financial condition of the institution is equally consistent with, and furtherance of, this regulatory expectation.

Going Forward

Ultimately, in the aftermath of Dodd-Frank, the employment agreements and retainer agreements for senior executive officers and directors of all covered financial companies must take on a new look. Likewise, the employment agreements for senior executive officers at insured depository institutions should also continue to evolve. As a result, financial companies, and also their senior executive officers and directors, should proactively plan for the FDIC to seek recoupment of compensation in the event of receivership. Changing how employment and retainer agreements are prepared, so as to affirmatively demonstrate the individual was retained for improving the institution’s overall financial condition, is but one fundamental place to start.


This article was prepared by David L. Moore.
Please contact him at [email protected] for further information.