Commercial Law International

By: Carsten Lexa

In 2009 there were about 30 million credit card holders in the UK, holding about 58 million credit cards, down from 66 million credit cards in 2008. Beyond that, total household debt in the UK has reached a level of 1400 billion pounds sterling, of which 55 billion pounds sterling is on credit cards. When loooking at these numbers, one can easily figure out that the credit card business is “big business” in Britain.

And the credit card lenders are making big money. This is partly due to the general interest on the money borrowed to credit card holders and also due to various fees for using the credit cards. But it is also partly due to a lot of practices that are – carefully spoken – very favorable for the credit card companies. One specific industry practice is for example that repayments go towards credit card debt at the lowest interest rate, not towards debt with the highest rate.

The UK Government and several credit card companies and related associations have now announced a “new deal” that will change a lot of the industry practices unfavorable for credit card users. Most of the contents of the “new deal” will come into effect in January 2011. UK Government estimates that the changes based on the “new deal” will save customers about 300 million pounds sterling a year.

Here is what´s new for credit card owners:

1. Under the “right to repayment”, credit card issuers will use customers´ monthly repayments to pay their most expensive debt first. For customers opening new accounts, the minimum payment will always cover at least interest, fees and charges, plus 1% of the principal. Formerly, the minimum repayment often covered only interest and not repayment of the principal.

2. With the “right to control”, consumers will have the right to choose not to receive credit limit increases in future and the right to reduce their limit at any time. Additionally, if certain consumers are at risk of financial difficulty, credit card companies may be banned from extending the existing credit limit.

3. The “right to reject” will give consumers more time to reject increases in their interest rates or their credit card limit.

4. The customers will receive a “right to information”. This means that customers at risk of financial difficulties will be given guidance on the consequences of paying back too little and that all consumers will be given clear information on increases in interrest rates or credit card limit including the right to reject.

5. Finally, the “right to compare” will provide consumers with an annual statement that allows for easy cost comparison with other providers of credit cards.

These changes should allow credit card users (and store card users, because the changes will also effect these type of cards) to manage their finances and their debt more easily. It will also save them money, because repayments will now go towards debt with the highest interest rate, meaning interest payments will be reduced. However, the changes are only part of an agreement between the UK Government and the credit card industry. They are not elements of new legislation. But the UK Government promised to place the agreement on a statutory footing if credit card companies do not stick to the agreement. Hopefully, this will not be the case.

For inquiries please contact the author: kontakt@kanzlei-lexa.de

By: Ainsley Brown

When an industry approaches being worth close to a trillion dollars it can no longer be considered a passing fancy or fad – Islamic banking and finance (IBF) is real and is as much a part of the global financial system as “conventional” finance.

It is this realization that has prompted Australia to conduct a review of its tax laws and their impact on IBF. The aim of the review, to be conducted by the Australian Board of Taxation, is to strategically position Australia to take advantage of the growing IBF market. As much was acknowledged by Australia’s Assistant Treasurer Senator Nick Sherry, “Islamic finance is a rapidly growing part of the global financial system and Australia is in an excellent position to capitalize on that growth, but we have to ensure our tax system doesn’t unnecessarily prevent that from happening.” Moreover, according to Sherry, “if Australia continues down the path of accommodating this type of finance it will serve Australia in terms of capital attraction, jobs and growth.”

The review is less about giving IBF special treatment under the law and more about finding and then removing barriers that unnecessarily and unfairly burden IBF. In ordering the Board of Taxation to conduct this review the Assistant Treasurer made it clear that “this is not about special treatment or concessions for Islamic finance or its providers, but about securing that our system doesn’t unfairly disadvantage or preclude such instruments and, in doing so, deprive Australia of capital, jobs and growth.”

The review will be among the first to be conducted by an Organization of Economic Co-operation and Development (OECD) country.

When will it be Canada’s turn?

By: Ainsley Brown

The investment banker who turned down €7.9 million in severance to sue for over €10 million has won his case against the French bank Société Générale (SocGen).

The banker in question, Mr. Raphael Geys, was the head of SocGen’s London based European fixed income financial sales division until 2007 when he was given the sack. Mr. Geys argued in the English High Court that he was essentially dismissed because he was too successful – doubling the revenues of the division in three years – and that he was entitled to over €10 million in severance. The bank for its part offered Mr. Geys €7.9 million in severance but later withdrew the offer claiming that due to provisions in his employment contract Mr. Geys had disentitled himself  to any severance by initiating suit.

George Leggatt QC, sitting as Deputy Judge of the High Court, not only ruled the Mr. Geys was entitled to severance but that he was entitled to over €11 million’s worth. Judge Leggatt ordered an interim payment of €11 million immediately, leaving it up to the parties to come to settlement on the final sum. However, if the parties could not reach agreement, the final sum would be determined by the court.

At last report the bank was seeking leave to appeal the decision.

By: Eran D. Grossman,  Esq.

More problems are on the horizon between government regulators and local U.S. banks (smaller, regional and/or community banks) over how to handle falling commercial property values.  Currently, banks are holding roughly $1.9 billion in commercial real estate loans, which equals about a quarter of all outstanding loans, according to Moody’s.  The values of such loans have plummeted about 50% since their peak in 2007.

Why is this a problem?

This drastic reduction in value country-wide is disproportionally hurting the smaller bank since they tend to have a larger concentration of capital invested in commercial real estate loans.  These smaller institutions compose the majority of banks in the U.S. as they hold a majority of outstanding commercial real estate debt.  These smaller banks are less equipped to handle sharp and steady decreases in commercial property values than their larger institutional bank counterparts.  As a result, since many of these loans are underperforming and in default, smaller bank failure may be right around the corner as banks struggle to stay afloat.  Therefore, there is now mounting pressure from government regulators over how to handle falling commercial property value and to keep these smaller institutions buoyant and lending.

One contentious problem is what constitutes a performing loan.  Banks argue that so long as the borrower is making interest payments only, the loan should be rendered performing.  Regulators argue that banks should be more realistic in their assessments as to whether a loan will remain performing, given the decreases in value in the marketplace.  Further, regulators indicated that a loan should not be reclassified simply because the value of the property has dropped.  However, bankers have stated this is exactly what is happening.

Due to this overwhelming problem- banks suffocating on the bad loans they originated- they have less desire to continue lending.  In fact, Moody’s has estimated that many smaller banks will not be participating in the Obama Administration’s $30 billion initiative to encourage small business lending because of insufficient capital.

Solutions?  Regulators want these banks to writedown the troubled loans.  A writedown is when a banks recognizes the reduced value of an impaired asset (an asset’s current market value is less than the market value at the time of loan origination), also commonly known as an underwater asset.  The problem for the bank is that a writeoff will leave the asset with a lower value, thus lowering the value of the banks overall assets.  This also poses a problem for bank investors.  If investors realize that this will become a common bank practice, they will be less inclined to invest, thus resulting in banks being less inclined to lend.  Stay tuned as this problem will only get worse before it gets any better…

By: Ainsley Brown

Judge David Hammerschlag – German for hammer blow – does just that, delivers a hammer blow to the investment bank JP Morgan.

In the case of JP Morgan Australia Limited v. Consolidated Minerals Limited, Judge  Hammer Blow , sorry I just couldn’t resist, I mean Judge Hammerschlag has ruled that the fees the bank charged  Consolidated Minerals (ConMin) in the latter’s sales were “capricious, unreasonable and unjust.” Before I go any further I need to make a bit of a confession. In a previous post I accused the lawyers from ConMin of being either arrogant or capitulant in their decision not to call any witnesses or submit any documents to support the defense of their client. I was wrong, it was a brilliant move. In not having any witnesses or documents the lawyers avoided any potentially awkward or damaging moments in the public specter know as the courtroom. In so doing they effectively managed the ConMin brand and for that I Salute You!

The case, followed very closely by those in the investment banking community, has helped but not totally shined the spotlight on the fees investment banks charge during mergers and accusations, namely on their defense response fees. Defense response fees are basically the fees a bank would charge its client to ward off an unwelcomed takeover bid by for instance soliciting a rival bid.

Before ConMin was sold to Palmary Enterprises with its A$1.3 billion share cash offer a three way bidding war ensued between Palmary, Territory Resources and Pallinghurst which drove up the market value of ConMin. It is this rise in value that is at the centre of JP Morgan’s claim to compensation. The bank believed that its incentive, including its defense response fee ought to be based on the difference between the first take over bid which was made by Pallinghurst and the final and wining offer from Palmary. The judge however did not see it that way, according to Judge Hammerschlag as it pertain to the rival bids “there was no need for either of them to be repelled or warded off.”  Thus, JP Morgan’s fees ought to be based on the difference between Palmary’s first and winning offer.

What does this mean for JP Morgan?

It means that it will just have to be satisfied with the A$20 million that ConMin has already paid it. However, this may not be the end of this story for these two; the ruling is subject to appeal by the bank.

What does this mean for investment banks?

Investment banks will certainly be paying closer scrutiny to the language in their fees structure, namely with respect to incentive and defense response fees. I suspect that banks will seek/impose greater clarity in to the murky world of what they actually do vs. what eventually happens in takeovers. Additional, I also suspect that investment bank will be facing more and tougher questions from their clients who will want fees explained and justified.

By: Ainsley Brown

Wachovia bank has agreed to pay $160 million to US authorities in order to settle charges brought against it. The bank was accused by the US Justice Department and banking regulators of not having sufficient controls in place to prevent Mexican drug cartels from laundering millions of dollars through the bank using exchange houses –casas de cambio - that dot the US-Mexican boarder.

The Justice Department have agreed to stay the charges against Wachovia for 12 months, provided the bank fulfill its obligations under the settlement. A key plank of this agreement is for Wachovia to hand over the proceeds of narcotics sales being held in its coffers – $110 million – and it must also pay a $50 million fine to the US Treasury.

How did Wachovia find itself in this situation?  

With the ratcheting up of the drug trade and its related violence along the US-Mexican border there were growing concerns by many banks in the US for the potential for money laundering. To address these concerns many of the banks either or both put in place additional monitoring procedures or curtailed their dealings with the casas de cambio. However, this was not the case with Wachovia. Between 2004-2007, while other banks were pulling back from their dealings with the boarder exchanges, Wachovia increased its.

It is worthy of note that since its acquisition in 2008 by Wells Fargo, Wachovia has ended its dealing with the exchanges.

By: Ainsley Brown

What’s a few million euros between friends, right?

SocGen – Sociètè Gènèrale – one of France’s oldest and most respected banks is being sued in the English High Court by one of its former managing directors. Raphael Geys, the investment banker in question, was until November 2007 when his employment was terminated a managing director at SocGen and head of its European Fixed Income Financial Sales division based in London.

During his three year tenure the division enjoyed much success with gross revenues more then doubling to €440 million. In recognition of this but more importantly acknowledging its pay-incentive based contractual obligations to Mr. Geys, SocGen offered to pay Mr. Geys €7.9 million as severance upon his termination. The offer was resoundingly rejected by Mr. Geys – believing that he was owned more – initiating suit for €10 million plus damages.

In defense SocGen is advancing the theory that Mr. Geys is in fact now owned nothing. Yes, owned nothing. In reliance on its interpretation of the employment contract, the bank claims that in rejecting the severance offer and suing instead, Mr. Geys has forfeited his right to severance.

Like I said before, what’s a few million euros between friends?

By: Ainsley Brown

This forms part of the Middle Passage Law Series on Law Is Cool.

American International Group, better know by its acronym AIG, it seems these days can rarely catch a break. It just seems negative news follows negative news for this company. This time the negative news for this too big to fail company – deeply wounded by the global credit crunch and later recession – has two of its units being accused of racial discrimination in their lending practices.

It is important to note that AIG has not been found guilty of anything; in fact it wasn’t even accused of any wrong doing.

WHAT?

I know, I know, it seem like I am saying that AIG is involved yet not involved in this case. And yes that is exactly what I am saying.

All of this may seem totally contradictory but let me assure you it is not. What we have here is a classic illustration of legal reality vs. public perception of a company’s brand. In order to be successful companies have to be mindful of the differences between these two concepts and effectively manage their interrelation.

The Department of Justice (DOJ) allegations were never directed at AIG, the parent company, but were instead directed at two of its subsidiaries –AIG Federal Savings Bank (FSB) and Willmington Finance Incorporated (WFI). Both banks were accused of not sufficiently monitoring the activities of mortgage brokers who sold mortgages that they funded. The brokers were, according to the DOJ, offered African-American borrowers less favorably borrowing terms than similarly financially situated whites. The two have agreed to settle the case with the DOJ and have agreed to pay at least $US6.1 million without admitting liability as part of the terms of settlement.

The case broke no new ground as far as banks in the US being accused of racial against minorities, namely African-American and Latino-Americans, in fact similar settlements or even full blown litigation involving other US banks will surely be making the headlines in the near future. The case however did break new legal ground in that for the first time US authorities held a lender directly responsible for the racial discriminatory acts of brokers. As a consequence, from now on banks will have a positive duty to monitor the activities/policies of brokers that they fund, to the best of their ability, in order to ensure that they are not using race to determine borrowing terms. This duty also of course carries with the co-duty to take positive action whenever a bank believes that a broker is using race.

From a strict legal perspective AIG, the parent, hands remain totally clean is this matter. It is important to reiterate that AIG was never accused of anything; the allegations were solely directed at the two subsidiaries. And no this is not a simple matter of splitting hairs, while related all three companies are separate. The legal concept of the corporate veil - the independent legal identity of companies, even if related – is a fundamental one in corporate law. The corporate veil is best understood as a shield that is used to protect all the right that come with incorporation. This is not to say that it can never be lifted/pierced, for it can, but this is only done in rear and specific instances where for example fraud is alleged or where for some reason the directing/controlling mind of a corporation needs to be identified.

However, these allegations go beyond strictures of the corporate veil and this is where public perception of the brand and effective management of that brand become important.  AIG and its army of brand management specialists both know that the general public are often not so discerning as to make the distinction between parent and subsidiary; as far as the public is concerned AIG is AIG.  This is the reason I believe that there was such a quick settlement – the last thing AIG, the parent, needs is a protracted legal battle involving accusations of racial discrimination, albeit involving subsidiaries. This would be a public relations nightmare.

By: Ainsley Brown

The stage was for a very interesting court battle in Australia pitting advisor against former client; at stake the fees that the advisor could charge. While the case remains interesting the deep probing spotlight that it promised on investment banking fees alas may not materialize.

JP Morgan Chase, the investment bank is suing its former client Consolidated Minerals (ConMin), an Australian manganese miner, in Australian court for the balance of its advisory fees. The case is being followed very closely in investment banking circles because its risks exposing the normally highly confidential fee structure of one of the industry’s leaders. The case also comes as investment banks have come under greater scrutiny, namely because of what some claim are excessive fees.

It is not that disputes about the fees investment bank’s charge never happen or infrequent – on the contrary, I am sure they arise from time to time – it’s just that they are never this public. In fact the choice of the courts as the forum for dispute resolution is rare indeed, negotiations over the board room being the normal venue. What this tells me is that there has been a total break down in trust, trust being an essential if not the essential ingredient in an adviser-client relationship. When it breaks down, as is the case here, more than bitter feelings might ensue.

The case centers around JP Morgan seeking A$30.8 million representing the balance of it’s A$50 million fee it charged Consolidated Minerals when ConMin was up for sale in 2006. After a 14 month bidding war Palmary Enterprises, led by Ukrainian billionaire Gennadly Bogolyubov came out on top with a A$1.3 billion share cash offer. In 2008 after the new owners took control of ConMin, to their apparent astonishment, received a bill from JP Morgan in the amount of A$50.8 million for services rendered. At issue here wasn’t the bill itself – it was expected – but what was unexpected was its size especially since ConMin was operating under the notion that JP Morgan had agreed to cap its fees at A$7 million after an alleged phone conversation that took place in 2006. Although this was its understanding ConMin went ahead and paid JP Morgan A$20 million dollars in what it believed was full and final settlement for the latter’s services.

This brings us to the current situation, where JP Morgan is seeking to recoup the remaining A$30 million owning to it. In an unsurprising move, given the break down of trust, ConMin counter claimed by accusing JP Morgan of failure to deliver, being misleading and deceptive, reneging on the agreement to cap its fees and double and some times even triple charging for the same services.

Now as it turns out ConMin has now dropped its counterclaim after the lawyers for JP Morgan wrapped up its case. What is more, ConMin has now decided not to call any witness or submit any documents to aid its defense – yes you read correct no witnesses and no documents. This is either a case of arrogance or capitulation.

How so, could it not be the case that ComMin’s lawyers are just confident that JP Morgan’s lawyers have not proven their case?

If that were the case, then why not call for the case to be dismissed and move for summary judgment or have it dismissed as being frivolous and vexatious? Now I am not versed on the Civil Procedure Code of New South Wales but I am sure that they have such provisions in their code. Therefore, I will repeat this is either a bout of arrogance or capitulation.

Now all that remains is for both sides to prepare and submit their final submissions to the judge. What an anti-climax to a case that had the promise of so much.

By: Carsten Lexa

On August 13^th, 2009, I wrote an article here on Commercial Law International about the “secrets” of the US credit card business and about how the existing rules make it hard for customers to pay off their credit card debt. On November 3rd, 2009, I wrote in a the second article about a Goverment proposal regarding new legislation for the credit card business.

Now, coming into effect on February 22, 2010, the Credit CARD Act will apply to credit card contracts between banks and consumers. This Act adresses many of the criticisms consumers have had about credit cards and the high amount of credit card fees charged each year. Interestingly, the Act also applies to contracts made in the past. Let´s have a look at the most interesting new rules.

1. The Act requires card companies to give cardholders 45 days notice of any interest rate increases. In the past, interest rates could be changed within 15 days notice in most cases.

2. The Act gives cardholders the right to cancel their card and pay off their existing balance at the existing interest rate and repayment schedule if they get hit with an interest rate hike. Cardholders also have 3 billing cycles after the rate increase to say no to the new terms.

3. Beginning in February, the interest rate on existing balances can only be raised if a cardholder is more than 60 days late on payment. After a rate increase, if cardholders pay on time for six consecutive months, their interests rates must have returned to the rate it was before the rate increase.

4. The Act also adresses the problem of “payments above the minimum”. In the past, cardholders send in a payment for more than the minimum due – let´s say the minimum was $ 200,00 and they send in $ 300,00 and let´s also assume that they had two balances at different interest rates. The extra amount of $ 100,00, that was send in, would go to the card with the lowest interest rate.

The new law puts an end to that. According to the Credit CARD Act, the additional amount paid will go towards the higher-rated balance.

5. A long time ago, cardholders had 30 days from which to make their next payment. Over time, that grace period was reduced to 25 or even fewer days. The Credit CARD Act states that the grace period will be at least 21 days long from the date the credit card bill is delivered.

6. The Credit CARD Act finally improves the information the cardholder receives regarding the repayment of the balance. Let´s be true about that: Most cardholders have problems calculating the time they need to repay their credit card debt, if only the minimum is paid.

The Act gives cardholders mandatory information regarding repayment: It demands that creditors print on their statements if the debtor makes the minimum payment only (with no further increases in debt) how long it would take to retire the debt and how much the debtor would pay in interest combined. It also requires creditors to print on their statements the payment it would take thecardholder to retire the debt in three years, how much the debtor would pay in interest combined and the difference than if the debtor was to pay only the minimum payment.

This new Credit CARD Act is surely not the answer to everything regarding credit card debt and debt repayment. But it should relieve the US consumers of some of their burdens regarding credit card debt – and every bit helps.

For inquiries please contact the author: kontakt@kanzlei-lexa.de