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California DBO takes action against company for PACE fraud
On May 27, the California Department of Business Oversight (CDBO) filed an order to ban an Encino-based company from the Property Assessed Clean Energy (PACE) industry for allegedly engaging in fraudulent behavior. According to the press release, the CDBO received 30 complaints from 2018 to 2019 alleging the company solicited homeowners by advertising a “free government program,” but used the homeowners’ personal financial information to submit contracts to PACE program administrators with forged electronic signatures. Additionally, complaints alleged various other fraudulent and illegal actions including, (i) the creation of false email accounts to have the PACE financing documents routed to the agents instead of the homeowners; and (ii) the impersonation of homeowners’ voices on state law required completion calls. The CDBO also asserts that the company sold products at three to five times the usual industry rate and used “high-pressure” sales tactics directed at the elderly and non-primary English speakers. In addition to the Desist and Refrain Order, which demands the company discontinue illegal practices and stop soliciting PACE contract, the CDBO notes that a similar but separate order will also be filed against the company president, who is a PACE solicitor agent.
California Department of Business Oversight highlights risks of exempt securities offerings
On May 26, the California Department of Business Oversight issued an investor alert on exempt securities offerings, aka “private placements,” during Covid-19. The alert outlines the reasons why such offerings carry a higher risk of fraud and offers suggestions for potential investors to protect themselves.
Special Alert: California Assembly to introduce legislation for Covid-19-related relief for mortgage loans, vehicle-secured credit, PACE financing, and deferred deposit transactions
We understand that the California State Assembly will shortly propose amendments to Assembly Bill No. 2501 to create the “COVID-19 Homeowner, Tenant, and Consumer Relief Law of 2020.” As of posting of this Alert, the proposed legislation is not available on California’s legislative service website. The proposed law would provide relief to homeowners, tenants, and vehicle owners by prohibiting creditors and loan servicers from taking specified actions, including initiating foreclosures or repossessions, during the period from the date of enactment of the proposed law through the 180-day period following the date that California Governor Gavin Newsom declares the emergency related to Covid-19 has ended. Additionally, the proposed law would require servicers to place certain loans that become delinquent into automatic forbearance for a period of at least six months.
The proposed law appears similar to portions of an appropriations bill, “Take Responsibility for Workers and Families Act,” which was introduced in the U.S. House of Representatives on March 23, 2020, prior to the enactment of the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and failed to pass. We understand that the proposed law is scheduled to be heard before the California State Assembly Banking Committee on May 19.
California Supreme Court: No jury trial for UCL and FAL claims seeking civil penalties in addition to injunctive or other equitable relief
On April 30, the California Supreme Court issued an opinion holding that under the state’s Unfair Competition Law (UCL) and the False Advertising Law (FAL), government enforcement actions seeking civil penalties in addition to injunctive or other equitable relief should be decided by a judge instead of by a jury. The decision overturns a Court of Appeal decision holding that a jury must weigh in when civil penalties are involved. The decision stems from a suit filed in 2015 by the California Department of Business Oversight and several district attorneys (collectively, “People”) against a national debt payment service operation for alleged violations of the UCL and FAL. While the debt payment service operation demanded a jury trial, the People filed a motion to strike, which the trial court granted. The Court of Appeal overturned the trial court decision, holding that under certain provisions of the California Constitution the debt payment service operation had a right to a jury trial.
The California Supreme Court disagreed with the Court of Appeal concluding that, among other things, (i) the causes of action established by the UCL and FAL at issue in this case are equitable rather than legal actions, which should be tried by a court rather than by a jury; and (ii) the U.S. Supreme Court’s decision in Tull v. United States, relied upon by the Court of Appeal, does not govern this case for various reasons, including that the U.S. Supreme Court’s interpretation of the civil jury trial provision of the Seventh Amendment of the U.S. Constitution applies only to federal court proceedings—not state court proceedings—and that the “constitution right to a jury trial in state court civil proceedings is governed only by the civil jury trial provisions of each individual state’s own state constitution.” (Emphasis in the original.)
California issues guidance for the reopening of real estate businesses
On May 7, California issued updated guidance for real estate transactions and an accompanying checklist for the real estate industry intended to minimize the spread of Covid-19 as these business gradually reopen as part of Stage 2 of the state’s roadmap for modifying the stay home order. The guidance includes protocols for the workplace and shown properties.
California suspends penalties for late payment of property taxes for certain taxpayers
On May 6, California issued an executive order suspending until May 6, 2021, certain provisions of the California Revenue and Taxation code that would impose penalties, costs, or interest for a failure to pay property taxes, provided that certain conditions are satisfied. For example, the property for which the taxes were not paid must either be residential real property occupied by the taxpayer or real property owned and operated by the taxpayer that qualifies as a small business under the Small Business Administration’s regulations. The taxpayer must also demonstrate that the taxpayer has suffered economic hardship, or was otherwise unable to pay in a timely fashion, due to Covid-19 or any local, state, or federal government response to Covid-19.
California small business sues nonbank lender over PPP prioritization
On May 6, a small California business filed a proposed class action against a nonbank lender, accusing the lender of a “scheme to enrich itself at the expense of small businesses in connection with the federal government’s Paycheck Protection Program (PPP),” in violation of California’s Unfair Competition Law. In the complaint, the plaintiff alleges she submitted an application for less than $25,000 to the lender on March 28 and received an email response that same day acknowledging receipt of her application. On March 29, the plaintiff received another email from the lender, which asked her to gather documentation and stated that she would receive an invitation to a secure portal in the next “48 business hours.” According to the complaint, however, by April 13, the plaintiff had not yet received a link to the portal, but the lender had sent an email acknowledging the delay. The complaint states that the plaintiff “informed and believes, and on that basis alleges” that the lender “chose to prioritize higher loans that would yield higher fees,” and did not disclose to the public that “it was prioritizing loans not on a first come, first served basis, but on criteria relating to the value of the loan.” The plaintiff alleges she would have chosen a different lender had she known the lender was going to prioritize larger loans. The complaint seeks injunctive relief, restitution, as well as compensatory and punitive damages.
Lawsuit claims Treasury, SBA PPP loan eligibility guidance is contrary to CARES Act
On May 4, a group of businesses filed a lawsuit in the U.S. District Court for the Central District of California against the Small Business Administration (SBA) and the U.S. Department of Treasury (defendants) challenging guidance issued by the defendants in April that they claim “directly contradicts and changes the CARES Act.” The guidance, issued in the form of FAQs #31 and 37 (covered by InfoBytes here and here), addresses whether businesses owned by large companies or private companies with adequate sources of liquidity are eligible for a Paycheck Protection Program (PPP) loan. Among other things, the guidance instructs borrowers to consider other sources of liquidity other than PPP funds, and states that while lenders may rely on the borrower certification of need, a borrower must still certify in good faith that their PPP loan request is necessary.
The plaintiffs argue that the guidance is contrary to the CARES Act because it imposes a requirement that borrowers must be unable to get credit elsewhere before they can qualify, and suggests that businesses may be ineligible for PPP loans if they qualify for “other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” The consequences of the guidance, they argue, is that they may now be required to repay PPP funds with money they either do not have or must borrow since they could have obtained “credit elsewhere,” thus damaging their financial stability. The plaintiffs seek injunctive relief enjoining the defendants from enforcing the guidance, as well as a declaration that the guidance is contrary to law and must be withdrawn.
California executive order exempts Covid-19 assistance payments from garnishment
On April 23, Governor Newsom issued an executive order which provides that, with certain exceptions, CARES Act financial assistance payments and any other federal, state or local government assistance provided to individuals in response to the Covid-19 outbreak are exempt from garnishment, attachment, levy, or execution. The exemption extends to assistance funds placed into any account. The executive order also prohibits financial institutions from executing any lien or exercising any right of setoff against these funds.
States offer relief to student loan borrowers not covered by CARES Act
On April 23 and 21, nine states announced a multi-state initiative to provide student loan relief options for borrowers with privately held student loans not covered by the CARES Act. California, Colorado, Connecticut, Illinois, Massachusetts, New Jersey, Vermont, and Washington outlined within their announcements specific measures for borrowers with commercially-owned Federal Family Education Loan Program loans and borrowers with private student loans who are struggling to make payments due to the Covid-19 pandemic. The announcements also noted that Virginia is participating in the initiative as well. These relief options, offered in conjunction with the listed private student loan servicers, include (i) a minimum 90-days of forbearance relief; (ii) a waiver of late fees; (iii) no negative credit reporting; (iv) a 90-day moratorium on collection lawsuits; and (v) enrollment in applicable borrower assistance programs, such as income-based repayment. The states cautioned that enrollment in these relief options is not automatic, and recommended borrowers contact their student loan servicer to see what options best suit their needs.
In addition, California, Colorado, Connecticut, New Jersey, Vermont, and Washington recommended that regulated student loan servicers with limited ability to take these actions due to investor restrictions or contractual obligations “should instead proactively work with loan holders whenever possible to relax those restrictions or obligations.”