It should surprise no one that the 2012 case that will have the biggest impact on businesses in Kentucky is not a Kentucky case but rather the U.S. Supreme Court ruling upholding key provisions in the federal Patient Protection and Affordable Care Act. The case, National Federation of Independent Business et al. v. Sebelius, was brought by Florida and 12 other states, and joined by 13 more states, some individuals and the National Federation of Independent Businesses to challenge key provisions of the ACA, including the mandate to have health insurance coverage. On June 28, 2012, in a 5-4 decision, the court upheld the insurance mandate while striking down the requirement that states must expand Medicaid as provided by the act.
The effect on Kentucky residents and businesses is significant.
First and foremost, employers must provide basic health insurance coverage to employees or pay a tax. Individuals with incomes higher than 100 percent of the federal poverty level must also obtain coverage or pay a tax.
Second, the cost of that coverage is expected to increase from 15 percent to 50 percent, largely because of additional benefits and the community rating to which most of the policies will now be subject. Third, some of those employers who now get their coverage through associations will no longer be able to do so unless the association can qualify as an ERISA-sponsored (Employee Retirement Income Security Act) plan.
Individuals and small employers in Kentucky will be able meet these requirements by shopping for insurance coverage through Kentucky’s Health Benefit Exchange, a state-operated, web-based marketplace. Specifically, the exchange will allow for comparison of available insurance plan options and provide information on eligibility for programs like Medicaid and Children’s Health Insurance Program.
Some employers may not be prepared for the increased costs coming their way in 2014. All employers who currently offer health insurance to their employees should do the analysis so they can make a decision on an informed basis whether to pay the tax or to continue to offer health insurance in 2014.
Mortgage Electronic Registration Systems Inc. v. Roberts, 366 S.W.3d 405 (Ky. 2012)
In this case, the Kentucky Supreme Court effectively eliminated a century-old legal doctrine – the doctrine of equitable subrogation – often relied upon by courts to achieve fair results in disputes among creditors over competing mortgages. For example, equitable subrogation allows a lender that pays off another lender’s mortgage obligation to assume the original lender’s priority/payoff position.
In Roberts, the homeowners refinanced their property with lender No. 1 in 1998 and a mortgage was correctly recorded. In 2000, a judgment lien was recorded by Roberts. In 2003, the proceeds of a refinance with lender No. 2 were used to pay off lender No. 1’s 1998 loan, but the title search did not discover the judgment lien. After the borrowers defaulted on the refinance, lender No. 2 filed a foreclosure action. Roberts claimed that his judgment lien had priority over lender No. 2’s mortgage because the judgment lien was recorded before the 2003 mortgage. As a practical matter, this meant that Roberts got paid in full before lender No. 2 received anything for its mortgage.
The court rejected the majority approach, which allows equitable subrogation unless lender No. 2 had actual knowledge of the intervening lien, and held that equitable subrogation is not available where the new lender has actual or constructive knowledge (i.e., lien records) of an intervening lien. The court felt that Kentucky precedent had not clearly adopted the doctrine, and that the economic policy balancing called for by equitable subrogation is “more properly and effectively done by the legislature.”
Since this holding takes Kentucky out of step with its neighboring states, the General Assembly should accept the court’s invitation and seriously consider legislation adopting equitable subrogation, which would give the courts appropriate tools to effect just results in disputes involving the land records system.
Christian County Clerk v. Mortgage Electronic Registration Systems Inc.
2012 U.S. Dist. LEXIS 21380 (W.D. Ky. Feb. 21, 2012)
This federal court decision protects the interests of banks and other financial institutions that rely on the services of Mortgage Electronic Registration Systems Inc. (MERS), an electronic registry that tracks the ownership and servicing rights of millions of mortgage loans. Under this system, a MERS member lending institution can transfer its mortgage interest electronically to another MERS member without the delays and expense of recording a paper assignment in county real estate records.
The state’s county clerks filed a class-action lawsuit against MERS and a group of members, claiming that MERS illegally circumvents Kentucky’s recording statutes. The thrust of the suit was that the MERS system deprives the clerks of assignment recording fees that would normally be paid whenever a mortgage interest is passed from one lender to another by paper assignment.
The federal district court dismissed the case on the basis that county clerks don’t have rights to enforce state recording statutes. The outcome is significant because it protects the validity of MERS, a system affecting billions of dollars of mortgage loans that are often sold and transferred on the secondary market. The decision is now on appeal to the Sixth Circuit Court of Appeals.
Dean v. Commonwealth Bank & Trust Co., 2012 Ky. App. LEXIS 58 (Ky. Ct. App. 2012)
Customers occasionally request their banks to reimburse them for unauthorized charges and withdrawals from their bank accounts. This case shows that banking customers don’t have an unbridled right to reimbursement or other damages if they don’t notify the bank quickly enough.
In Dean, the bookkeeper/secretary of a corporate banking customer illegally diverted funds from the company’s bank account over a period of years. Upon learning of the employee’s bad acts, the company filed suit, claiming the bank failed to protect the company’s account from theft.
The court dismissed the suit against the bank, citing the customer’s own failure to inspect its bank statements and to notify the bank of the unauthorized withdrawals within one year of the time the statements were made available to it. This case underscores the responsibility of the bank customer to review account statements and to promptly dispute unauthorized charges.
Berghaus v. U.S. Bank, 360 S.W.3d 779 (Ky. Ct. App. 2012)
The mortgage crisis has resulted in many challenges to the lender’s right to recover a real property through foreclosure. In this case before the Kentucky Court of Appeals, the borrower in default tried to assert a counterclaim under the Truth in Lending Act against the purchaser of her mortgage loan.
In December 2003, the borrower signed a note and mortgage in favor of an originating lender, who later sold the mortgage loan to U.S. Bank. After the borrower defaulted, U.S. Bank sought to foreclose and sell the property. The borrower filed a counterclaim against U.S. Bank, alleging that the originating lender had failed to make loan disclosures required by the Truth in Lending Act, thereby wrongfully inducing her to sign the loan documents.
U.S. Bank was successful in getting the borrower’s counterclaims dismissed by showing that these claims could only be made against the initial lender, not against an assignee. The court confirmed that an assignee can only be liable for violations that are “apparent on the face” of the loan documents. This result helps protect the secondary mortgage market and keep mortgages affordable.
Janet Craig, Kelly Bryant White, Rick Vance and Brian Bennett are attorneys with Stites & Harbison.