Archive for June, 2014

Contractors, Lawsuits, and Incarceration – Lessons from Local and National Headlines.

Contractor Sentenced Today to Imprisonment
Today the Department of Justice reported  that Roderic J. Smith, a subcontractor for the federal government, was sentenced to 48 months in prison for bribing a public official. See the press release here.
According to the press release:
Smith was the co-founder and president of a contracting company located in Chesapeake, Virginia, that sought contracting business from the United States Navy Military Sealift Command.   In approximately November 2004, Smith joined an extensive bribery conspiracy that spanned four years, involved multiple co-conspirators, including two different companies, and resulted in the payment of more than $265,000 in cash bribes, among other things of value, to two public official.
In local Grand Rapids news…
A local construction contractor is being sued by a customer, and didn’t appear in Court. You can visit the article here
This was happening a lot more in 2008 – 2010. I would say that it appears that the downturn in the economy weeded out a lot of the disreputable contractors and builders.
For most contractors, the risk isn’t quite that they are going to end up like Roderic Smith, but if contractors don’t have their procedures in order they run the risk of doing a poor job, or potentially violating Michigan law, including Builder Trust Fund Act violations, which come with criminal penalties.
A recent Sixth Circuit court of Appeals case high lights some of the complicating issues involved in a real estate development project.  The case is Performance Contracting Inc v DynaSteel Corp, No. 13-1364, 2014 WL 1663077 (CA 6 April 28, 2014)
I. Facts
“This case concerns the interplay between three parties:
  • a general contractor,
  • the owner of a power plant, and
  • a subcontractor.

The general contractor—and a defendant is DynaSteel, a company that had operations in Tennessee and Mississippi.

(Just to recap, 3 different parties involved in a project, involving multiple jurisdictions.)
The facts get a little complicated, as these cases usually are.   To summarize Consumers Energy paid DynaSteel over $2.9 million for DynaSteel’s work, but DynaSteel did not reimburse PCI for PCI’s work, owing PCI $1,542,890.
DynaSteel had also not reimbursed PCI for PCI’s work done on a few other projects,  Instead of paying PCI the remaining money it owed or segregating the funds into a separate trust, DynaSteel placed the funds it received from Consumers Energy into a general account in which DynaSteel allegedly comingled it with funds from other projects.

In sum, it ended up in one big mess.
Builders Trust Fund Act
The Builder Trust Fund Act is found at MCL 570.151 and provides that:
In the building construction industry, the building contract fund paid by any person to a contractor, or by such person or contractor to a subcontractor, shall be considered by this act to be a trust fund, for the benefit of the person making the payment.

Contractors: When you are paid for a job – the funds are to be held in “trusts” for the benefits of the person making the payment.
The  elements of a civil cause of action” under the Trust Fund Act as follows:
(1) the defendant is a contractor or subcontractor engaged in the building construction industry,
(2) a person paid the contractor or subcontractor for labor or materials provided on a construction project,
(3) the defendant retained or used those funds, or any part of those funds,
(4) for any purpose other than to first pay laborers, subcontractors, and materialmen,
(5) who were engaged by the defendant to perform labor or furnish material for the specific project.
Performance Contracting Inc v DynaSteel Corp, No. 13-1364, 2014 WL 1663077 (CA 6 April 28, 2014)
The possible penalties include reimbursement of amounts wrongfully converted, being convicted with a felony, incarceration, and fines. MCL 570.152.
Most people in business probably don’t start out with an intent to steal from their clients. As these headlines from local and national news demonstrate, some people do end up in those situations. I would imagine that it starts with simply cutting corners, and making small compromises. Then the small compromises add up and  one day you find yourself defrauding a home owner and violating the MBT, or serving a federal sentence for defrauding the federal government!
These are extreme examples, but now is the time to get your procedures and protections in order so that you know you are doing the right things with your business. Don’t make small compromises. Your reputation is too important to compromise.
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Real Estate Brokers and Salespersons: New Law Will Ease CE Preapproval and Reporting Requirements Effective January 1, 2015

2015 will be less burdensome on Real Estate Brokers and Agents from a Continual Education reporting standpoint.

Real Estate Rama Reports the  significant changes that will affect RE Brokers and Agents.

Beginning January 1, 2015, continuing education courses will no longer require preapproval by LARA and schools will not be required to report the hours as a condition of renewal of a real estate broker or sales-person license. Licensees will continue to be required to complete at least 18 clock hours of continuing education per 3-year license cycle, with 2 hours per calendar year involving law, rules, and court cases regarding real estate.

go to the link for the full story.


For a detailed review of all of the impacts of Senate Bill 641, you can check out the House Fiscal Agency’s Legislative Analysis here




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RE Professionals take heed: Fed Govt’s Billion Dollar Settlement with Sun Trust Related to Mortgage Loan Abuse


The Department of Justice issued a press release today regarding a billion dollar settlement it reached with Sun Trust, you can see that press release here.


This, and other settlements entered into as a result of DOJ litigation against financial giants should, at a minimum, serve as a good reminder of why real estate investors and servicers should always reflect on their business procedures and practices to make sure everything is above board.


The Sun Trust Admissions

The Press release has the full story, but I find the following admissions of particular interest:

  • SunTrust admitted that between January 2006 and March 2012, it originated and underwrote FHA-insured mortgages that did not meet FHA requirements;
  • that it failed to carry out an effective quality control program to identify non-compliant loans, and
  • that it failed to self-report to HUD even the defective loans it did identify. 
  • SunTrust also admitted that numerous audits and other documents disseminated to its management between 2009 and 2012 described significant flaws and inadequacies in SunTrust’s origination, underwriting, and quality control processes,
  • and notified SunTrust management that as many as 50 percent or more of SunTrust’s FHA-insured mortgages did not comply with FHA requirements.



Other Billion Dollar Settlements

Sun Trust isn’t the only mortgage loan servicer to go under federal government scrutiny.

December 13, 2013 the Department of Justice sued Ocwen Loan Servicing over similar deficiencies in loan servicing and foreclosure practices.

The Consumer Finance Protection Bureau issued a statement on its home page in this regard:


“The CFPB and its partner states believe that Ocwen was engaged in significant and systemic misconduct that occurred at every stage of the mortgage servicing process. According to the complaint filed in the federal district court in the District of Columbia, Ocwen’s violations of consumer financial protections put thousands of people across the country at risk of losing their homes.” – Consumer Finance Protection Bureau, press release December 19, 2013¹



In fact, check out this May 20, 2014 article about a recent class action lawsuit filed in Pennsylvania against Ocwen.


Non-Originators and Subsequent Loan Servicers – Take Heed

There are various federal and state laws that are intended to protect consumers from unfair debt collection practices, including the  Fair Debt Collection Practice Act 15 U.S.C. 1692 et seq and  the Michigan Collection Practices Act.



under the FDCPA, the debt collector pursuant to 1692(a)(6)(F)(iii) includes any non-originating debt holder that either acquired a debt in default or has treated the debt as if it were in default at the time of acquisition.’ It matters not whether such treatment was due to a clerical mistake, other error, or intention. In re Tolliver, No. 09-21742, 2012 WL 2952239 (Bankr ED Ky July 19, 2012).

Therefore, a non-originating note holder (or servicer) could find itself implicated by the FDCPA, as well as the MCA.



The MCA is violated by a “regulated person” who, among other things, “mak[es] an inaccurate, misleading, untrue, or deceptive statement or claim in a communication to collect a debt.” M.C.L. § 445.252(e). “A state or federally chartered bank when collecting its own claim” is a “regulated person” under the Act. M.C.L. § 445.251(g)(ii) Martin v. Bank of Am., N.A., 2014 U.S. Dist. LEXIS 66662, at *5-6 (May 14, 2014).


What to make of these settlements?


I think these settlements are a good sign that hopefully will lead to sound business practices for lending and servicing institutions.


For those investors who are purchasing/servicing loans in default, the fact that the DOJ is coming down on these financial industry giants should also give them pause to review their own practices. At a minimum, protect yourself from borrowers/debtors who might be quick to raise these claims without merit.  Knowing that a loan holder could be implicated in violating the FDCPA or the  MCA should give you pause to make sure you are doing the right things in your business.



My contact info:





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Business Owners: Understand the Legal Role of your Board of Directors/Managers.


Even in small businesses, understanding who is responsible for making business decisions in an organization is an important piece of an effective business. Sometimes the distinction between roles/powers can be blurred.

Corporations: The board, not the owners, make the decisions.

In corporations, there is a distinction between ownership (shareholders) and management (directors).

Under the Michigan Business Corporation Act, MCL 450.1501 “The business and affairs of a corporation shall be managed by or under the direction of its board…A director need not be a shareholder of the corporation.”



The Directors owe the owners a fiduciary duty to act in the Company’s best interest.

“The directors of a private corporation stand in a fiduciary relation to its stockholders” which means that they “are bound to act in good faith for the benefit of the corporation.” Wagner Elec Corp v Hydraulic Brake Co, 269 Mich 560, 564; 257 NW 884, 886 (1934).


How much authority does the board have in making decisions of the company?

Virtually absolute.

“It is a well-settled rule of law that the authority of the directors is absolute when they act within the law, and that questions of policy and internal management are, in the absence of nonfeasance, misfeasance, or malfeasance, left wholly to their decision.” Ayres v Hadaway, 303 Mich 589, 594; 6 NW2d 905, 907 (1942).

What happens if an owner of a business questions the decision of the board of directors?

Not much.

“It is only when the officers are guilty of willful abuse of their discretionary powers or of bad faith or of neglect of duty or of perversion of the purpose of the corporation or when fraud or breach of trust are involved that the court will interfere. Id.

A Court’s deference to the decisions of a board of directors is sometimes known as the “Business Judgment Rule”.

Take away: When shareholders/owners of a corporation name a board of directors they are leaving the decision making authority to the board, and only a serious breach of fiduciary duty will make the board liable.

Otherwise, it takes a majority votes of the shareholders to remove a director, unless the bylaws provide otherwise. MCL 450.1511.


Limited Liability Companies: Owners and Directors are Usually the Same.

Unlike a corporation, the owners (members) of the limited liability company manage the business of the company. MCL 450.4401.

This essentially gives ownership complete control and decision-making authority, unless the members name a “manager” in which case the Company is more similar to a corporation.

A manager must discharge its duties “in good faith, with the care an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner the manager reasonably believes to be in the best interests of the limited liability company.” MCL 450.4404.

Takeaway: There is a reason that most small businesses in Michigan operate as LLCs – it provides limited liability, just like a corporation, but it has the added benefit of being flexible and leaving decision-making to the owners, unless the LLC is set up as a manager-managed LLC. Either way, the owners still each other owner a fiduciary duty to act in the best interest of the owners and the Company. The Business Judgment Rule Still applies.






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