Wednesday, June 25, 2014

AMC Plenary Highlights Investment in Mexican Sea Port Expansion Signaling Opportunity for U.S. Based Sureties

Recently, Patrick F. Welch, an attorney at Jennings Strouss & Salmon, PLC, attended the 2014 Arizona-Mexico Commission (“AMC”) Plenary Session hosted by Arizona Governor Jan Brewer and Sonora Governor Guillermo Padrés in Phoenix, Arizona on June 19-20, 2014. The theme of the Plenary Session was "Arizona & Sonora: Evolution of a Region." The semi-annual event serves as a platform for meaningful international collaboration between the two states, with the ultimate goal of strengthening their bilateral partnership and enhancing the economic growth and quality of life in the Arizona-Sonora region.

The Plenary Session included a number of topics ripe for discussion that demonstrate how the region is evolving and how collaboration between Arizona and Sonora is increasing, including investment in Mexico’s sea ports, reforms to Mexican labor laws, structural reforms to key economic sectors (energy, fiscal, financial, telecom, education, and labor) crucial to driving economic growth in Mexico, and important international finance tools available to U.S. investors through the Ex-Im Bank and the Small Business Administration to promote U.S. exports to Mexico.

One of the highlights of the Plenary Session was the presentation made by the Mexican Office of the Secretaria de Comunicaciones y Transportes (Secretary of Communications and Transport). This presentation focused on the huge amount of public and private investment being made in Mexico’s Pacific and Gulf sea ports, and how such investment will be a catalyst for economic development and expansion not only for the county as a whole, but also for the State of Sonora. Earlier this year, Mexican President Enrique Peña Nieto pledged $58.6 billion pesos (USD $4.55 billion) to expand and modernize Mexico’s ports, and some of those funds will be invested in the Sonoran sea ports located in Guaymas and Puerto Peñasco.

The investment being made in the port of Guaymas – the key industrial port for Sonora, will focus on the construction of a new port to meet demand for mineral exports (copper, gold, silver, and other minerals from Sonora’s vast mining operations). The total investment being made in the port of Guaymas is $8,300 MPD, and will occur in three stages between 2014-2018. The construction of the new port of Guaymas is potentially very attractive to Arizona based businesses. With railway and highway infrastructure connecting Arizona with the port of Guaymas, Arizona based businesses will now have an attractive port alternative to its south that opens up many possibilities for greater collaboration between the public and private sectors in Sonora and Arizona.

The $600 million pesos (USD$45 million) planned investment just to the north of Guaymas in Puerto Peñasco, a key tourist destination for residents of Sonora, Arizona and California because of its beautiful beaches, fishing, and water sports, will be used to construct a new port terminal for cruise ships aimed at increasing tourism to the area. The new port terminal will have capacity for two cruise ships and a state-of-the-art terminal building for passengers to access Puerto Peñasco and surrounding tourist sites. Mr. Welch spoke with a number of AMC members from both Sonora and Arizona who commented that the opening of the Puerto Peñasco port to cruise ship traffic is likely to drive growth in the local real estate market as well – a prime destination for U.S. and Mexican beach goers.

The modernization of these two Mexican ports is likely to drive additional investment in the Arizona-Sonora region, particularly in the areas of construction and tourism. According to Mr. Welch, “For U.S. based sureties issuing surety bonds in Mexico, these major sea port projects and Mexico’s overall commitment to expanding and improving its infrastructure provide a strong indication that Mexico will continue to be a key market for surety companies in the years to come. Moreover, for U.S. based manufacturers looking to expand production operations into Mexico, these new ports will provide closer and more efficient access to global shipping lanes. The bottom line is that the pace and amount of investment being made into Mexican ports is an extremely positive sign for economic development in the State of Sonora, and the Arizona-Sonora region overall.”

Following the Plenary Session, Jennings, Strouss & Salmon hosted a barbeque at Mr. Welch’s home for AMC members and friends. The gathering at Mr. Welch’s home, which featured some Mexican twists on traditional barbeque favorites like: purple and green coleslaw with jalapeño, green onion, and avocado tossed in a lemon cilantro vinaigrette; and mesquite smoked baby-back pork ribs with a ancho chile rub prepared by Mr. Welch and his wife, Maribel, afforded guests an informal opportunity to further discuss opportunities for collaboration between Arizona and Sonora.

Mr. Welch is licensed to practice in the States of Arizona and Nevada, and the Commonwealth of Massachusetts. He focuses his practice in the areas of general and complex commercial litigation, construction litigation, fidelity and surety litigation, and U.S./Mexico cross-border business transactions and litigation, including surety claim investigations. Mr. Welch is fluent in Spanish, and is a member of the Arizona-Mexico Commission.

Governor Padres, Dianira Froeschle, Patrick Welch 

From left to right are: Patrick Welch (standing), Maribel Welch (seated), Rene Moreno (standing), Karli Moreno (standing), Dianira Froeschle (seated), Duane Froeschle (seated).

Monday, June 23, 2014

Jennings, Strouss & Salmon Adds Two New Attorneys

PHOENIX, Ariz. (June 23, 2014) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Alan P. Christenson and R. Steven Reed have joined the firm.
“We are excited to be experiencing growth in our corporate and real estate departments,” stated J. Scott Rhodes, the firm’s managing attorney. “In addition to the experience and knowledge Alan and Steven have in their respective areas, they fit nicely with the firm’s culture.”
Christenson focuses his practice on all aspects of real estate law, including restaurant, retail and commercial leasing; acquisition, sale and development; and financing. His experience includes representation of regional restaurant chains, a national insurance company, a national REIT, and a regional hospital with real estate transactions in over 20 states.
“I was attracted to Jennings Strouss because of the firm’s growing and sophisticated real estate practice,” said Christenson. “I’m proud to join a great group of attorneys with extensive experience in real estate law.
Reed concentrates his practice in the areas of general corporate law, mergers and acquisitions, securities, corporate finance, and real estate. His experience includes advising investors, businesses, business owners, start-ups, and emerging companies on a full-spectrum of corporate matters, including formation, acquisitions, capital raising transactions, shareholder relations, development and protection of intellectual property, and tax.
“I am fortunate to have the opportunity to work with the talented attorneys at Jennings Strouss,” stated Reed. “I look forward to expanding my practice and assisting the firm’s clients.”
About Jennings, Strouss & Salmon, PLC
Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in PhoenixPeoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; litigation; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit and follow us on LinkedInFacebook and Twitter.
The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit
Contact:  Dawn O. Anderson  ||  602.495.2806

Ready for the New Bulk Electric System Definition?


 The North American Electric Reliability Corporation (NERC) and its electric utility industry stakeholders are nearing the effective date of a definition that is critical to the role of NERC and everyone involved in the electric utility industry.  That critical definition is the definition of the Bulk Electric System itself (the BES Definition).  The BES Definition is important because it is used to determine the parts of the North American electric system that are “BES Elements” and critical to reliable operation of that electric system.  Due to the critical nature of the BES Elements, owners of BES Elements are required to comply with all applicable NERC Reliability Standards.  Failure to comply with the Reliability Standards can lead various sanctions, up to and including application of severe fines.

The core of the BES Definition is simple – “…all Transmission Elements operated at 100 kV or higher and Real Power and Reactive Power resources connected at 100 kV or higher. This does not include facilities used in the local distribution of electric energy”.  However, the complexity of the electric system can make application of the BES Definition difficult in some instances.  NERC has addressed that potential difficulty in several ways – first by adding to the BES Definition a list of Inclusions (classes of facilities automatically considered BES Elements) and Exclusions (classes of facilities automatically not considered BES Elements).  NERC and its stakeholders have also developed several guides and held a series of seminars to help asset owners in determining whether facilities are or aren’t BES Elements.  The guides and documents from seminars are publicly available on the NERC website.  The general BES definition site is here, while the seminar presentations are available here.

Further, in line with FERC direction, NERC has also developed a detailed Exception Process where facility owners and certain other entities involved in the reliability of the BES can request that a specific facilities that is not a BES Element under the BES Definition be changed registered as a BES Element.  The facility owner can also request the opposite – that a facility that is a BES Element under the BES Definition be removed from the list of BES Elements.

A recurring comment from FERC concerning the BES Definition was that the new definition should not result in significant registration or de-registration of BES Elements.  Regardless, all owners of electric facilities are required to perform a self-evaluation, using NERC’s hierarchical process, to develop a list of owned BES Elements.   The asset owners are then to register the results of their self-evaluation through a new web-based tool sponsored by NERC called “BESNet”.  Registration for BESNet began in May, 2014.  The tool is scheduled to “go live” on July 1, 2014.  While NERC allowed a period of 24 months after July 1 to come into compliance with the new BES Definition, all asset owners should perform their individual BES Element self-evaluation as soon as possible and enter the results into BESNet.  That way, if there is any disagreement on the BES Element status for any items on the owner’s list, there will be time to hold discussions with the asset owner and affected reliability entities and, if necessary, file an Exception Request well before the compliance deadline.

Friday, June 20, 2014

FERC Changes ROE Methodology for Public Utilities

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On June 19, 2014, the Federal Energy Regulatory Commission (“FERC”) issued an order significantly revising its methodology for determining the base Return on Equity (“ROE”) for jurisdictional electric utility companies. FERC applied its new methodology for the first time in deciding a pending complaint proceeding that involved a challenge to the 11.14 percent ROE currently being received by transmission owners that participate in the New England Independent System Operator (“NE-ISO”) regional transmission organization. The decision is captioned Opinion No. 531, Martha Coakley, Massachusetts Attorney General et. al. v. Bangor Hydro-Electric Co., et al., 147 FERC ¶ 61,234 (2014).

The complainants in the New England ROE case alleged that the current 11.14 percent ROE is unjust and unreasonable because capital market conditions have significantly changed since the ROE was set in 2006.  The complainants’ expert witness presented an analysis showing that the cost of equity for the NE-ISO transmission owners is no greater than 9.2 percent.  The administrative law judge hearing the case issued a decision last August reducing the ROE from 11.14 percent to 9.7 percent prospectively.  All parties and the judge relied on the Commission’s well-established Discounted Cash Flow (“DCF”) methodology, which for a number of years has pegged the ROE for electric utilities to the sum of the dividend yield and short-term earnings growth rates for a group of proxy companies. FERC’s long-standing practice also has been to update the ROE when it issues its decision in order to reflect changes in 10-year Treasury bill rates between the close of the record and the date of its decision.

In its June 19 decision, FERC revised its ROE methodology in two important respects. First, FERC dropped its sole reliance on short-term growth rates in the DCF analysis, opting instead to use a two-step DCF methodology (combining short-term and long-term earnings growth rates) similar to the one FERC uses in setting rates for natural gas and oil pipelines.  Opinion 531 makes a tentative finding that the long-term growth projection should be based on forecasted growth in U.S. Gross Domestic Product (“GDP”), but it established a “paper hearing” process to consider what source FERC should use for the long-term growth rate.  Second, FERC announced that it will no longer engage in post-record ROE updating.  The reason given for this shift is that changes in Treasury bill rates are no longer a reliable indicator of changes in the cost of common equity for electric utility companies.

FERC stated that it expects its new two-step methodology will narrow the “zone” of reasonable ROEs produced by the DCF analysis. Importantly, FERC also clarified that it will continue to apply its policy that the total ROE including any incentive ROE is limited to the zone of reasonableness. This means according to FERC that: “when a public utility’s ROE is changed, either under section 205 or section 206 of the FPA, that utility’s total ROE, inclusive of transmission incentive ROE adders, should not exceed the top of the zone of reasonableness produced by the two-step DCF methodology.”

In applying its new DCF methodology to the New England case, FERC found that that the just and reasonable base ROE is 10.57 percent. This value is halfway between the 9.39 percent midpoint of the zone of reasonableness and the 11.74 percent top of that zone. While it normally would have adopted the 9.39 percent midpoint, FERC instead approved a “middle of the upper half” ROE based on its belief that current capital market conditions are “anomalous.” The 10.57 percent ROE awarded to the NE-ISO transmission owners is subject to the outcome of the “paper hearing” on the appropriate source for the long-term growth forecast to be used in the new two-step DCF methodology.

FERC Commissioner John Norris dissented in part from Opinion No. 531 based on his view that the 10.57 percent ROE is higher than necessary and may result in unjust and unreasonable rates.  In pointed language, Commissioner Norris asserted that: “the decision to grant New England transmission owners an ROE at the midpoint of the upper half of the zone of reasonableness is unjustified, lacks reasoning to support it, and sets troubling precedent.”

Although interested parties may still be absorbing FERC’s lengthy decision, it seems almost certain that rehearing will be sought. Given the financial impacts of FERC’s change in methodology, it also seems likely that, if FERC stands its ground, one or more petitions for review eventually will be filed in federal court.

EPA Publishes New Regulations On Greenhouse Gas Emissions

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The United States Environmental Protection Agency (“EPA”) published this week its two proposed regulations addressing greenhouse gas (“GHG”) emissions from existing fossil fuel-fired Electric Generating Units (“EGUs”): (i) the Carbon Pollution Standards for Modified and Reconstructed Stationary Sources (“GHG Standards”); and (ii)the Carbon Pollution Emission Guidelines for Existing Stationary Resources (“GHG Guidelines”). The proposed GHG Standards directly impose carbon dioxide (“CO2”) emission limits on certain “affected” modified or reconstructed EGUs. The GHG Guidelines establish CO2 reduction goals for states and provide guidance on the plans that the States must develop to comply with these goals.

These rules emanate from the June 25, 2013 Presidential Memorandum that directed the EPA to address carbon pollution from the power sector. Comments to these rules may be submitted to the EPA by October 16, 2014. The EPA will be conducting four hearings: July 29, 2014 in Atlanta, Georgia, and in Denver, Colorado, July 30, 2014 in Washington, DC, and July 31, 2014 in Pittsburgh, Pennsylvania.

The proposed GHG Standards set forth CO2 emission limits from certain affected EGUs: (1) modified or reconstructed fossil fuel-fired utility boilers and Integrated Gasification Combined Cycle (“IGCC”) units; and, (2) modified or reconstructed natural gas-fired stationary combustion turbines. EGUs owned by municipalities, the federal government or Native American Tribal Governments are subject to the new CO2 performance standards. Consistent with the CO2 performance standards proposed for newly constructed natural gas-fired stationary combustion turbines on January 8, 2014, the GHG Standards are in the form of “limits to units of mass of CO2 per unit of gross energy output.” Compliance will be calculated based on the sum of the emissions for all operating hours divided by the sum of the useful energy output over a rolling 12-operating-month period. However, the EPA is soliciting comment on the possibility of utilizing net output-based standards and calculating compliance on a calendar year rather than a 12 operating-month period. The GHG Standards are proposed under the authority of the Clean Air Act (“CAA”) section 111(b).

The proposed GHG Guidelines comprise two elements: (i) state-specific goals for reductions of CO2 emissions from existing fossil fuel-fired EGUs, and (ii) guidelines for states to follow in developing plans to achieve the state-specific goals. The EPA believes this rule will by 2030 reduce carbon dioxide emissions from 2005 levels by approximately 30%, nationally. EPA’s proposed goals are expressed in the form of state-specific, adjusted output-weighted-average pounds of CO2 per net MWh from all affected fossil fuel-fired EGUs (i.e., rate-based goals). States are authorized to translate the form of the goal from the EPA proposed rate-base goals to a mass-based form (e.g., a cap on tonnage of CO2 emissions). States may achieve their goals individually or through a regional compliance approach as long as the translated goals achieve the same degree of emission limitation. The states may choose to develop plans that place full responsibility for actions achieving reductions entirely upon emitting EGUs (e.g., allowance trading programs). Alternatively, the states may develop plans under which the state itself takes responsibility in emission reductions through measures and policies such as demand-side energy efficiency programs and adoption of renewable portfolio standards. The GHG Guidelines are proposed under the authority of the CAA section 111(d).

Wednesday, June 18, 2014

Jeffrey D. Gardner Elected Chair of Securities Regulation Section of State Bar of Arizona

PHOENIX, Ariz. (June 18, 2014) – Jennings, Strouss & Salmon, PLC, a leading Phoenix-based law firm, is pleased to announce that Jeffrey D. Gardner has been elected Chair of the Securities Regulation Section of the State Bar of Arizona.
“It is quite an honor to have been selected to serve as chair of the Securities Regulation Committee,” states Gardner. “I am following in the footsteps of many fine attorneys, including my fellow partner at Jennings Strouss, Brad Martorana, who is currently finishing his term as chair.”
Having back-to-back chairs of the committee reflects Jennings Strouss’ dedication to, and depth of experience in, the areas of securities and business law.
“Jeff has been a de facto leader on the securities council, and it is only natural that he steps into the role as chair,” states Martorana, who focuses his practice in the areas of corporate, mergers and acquisitions, securities, health care transactions and tax.
Gardner, vice-chair of the firm's Commercial Litigation department, focuses his practice in the areas of securities litigation, class actions, employment, real estate and intellectual property. His experience also includes commercial and public finance law, as well as broker-dealer and registered investment advisor regulation and compliance. A litigator with extensive experience, Gardner has successfully represented businesses and individuals in investigations and enforcement actions brought by the United States Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), the Arizona Corporation Commission Securities Division, the Arizona Department of Financial Institutions, and numerous other regulatory agencies throughout the United States.
Gardner is also the co-chair of the Class Actions and Derivative Suits Committee of the American Bar Association. He received his J.D. from Chicago-Kent College of Law, and B.A. from the University of Minnesota.
About Jennings, Strouss & Salmon, PLC
Jennings, Strouss & Salmon, PLC, has been providing legal counsel for over 70 years through its offices in PhoenixPeoria, and Yuma, Arizona; and Washington, D.C. The firm's primary areas of practice include agribusiness; bankruptcy, reorganization and creditors’ rights; construction; corporate and securities; employee benefits and pensions; energy; family law and domestic relations; health care; intellectual property; labor and employment; litigation; real estate; surety and fidelity; tax; and trust and estates. For additional information please visit and follow us on LinkedInFacebook and Twitter.

The firm’s affiliate, B3 Strategies, assists clients with lobbying and public policy strategy at the local, state, and federal levels. For more information please visit
Contact:  Dawn O. Anderson  ||  602.495.2806

Wednesday, June 11, 2014

Housing Bust Bad Loans May Still be an Issue for Lenders

For most, the Arizona residential mortgage foreclosure crisis has passed; however, legal issues that arose as a result are still being resolved by the courts.
In Steinberger v. McVey, No. 1 CA-SA 12-0087 (Ariz. Ct. App. Jan. 30, 2014), a decision by the Court of Appeals of Arizona addressed issues that continue to impact both lenders and borrowers, including challenges regarding the authority of parties seeking foreclosure.
In making the decision, the Court of Appeals considered three principal questions:
  1. Are there any circumstances under which a person who is facing a foreclosure may challenge the authority of the party seeking foreclosure? (The court answered affirmatively)
  2. If there are such circumstances, what are the requirements, if any, for the party seeking foreclosure to establish its authority? (The court outlined the requirements)
  3. If the lender or its agent offers to modify the payment to assist the homeowner, is the lender/agent required to act reasonable in processing the loan modification? (The court answered affirmatively)
The facts underlying the challenge for lack of authority are reflective of what was occurring during that era. In July 2008, Steinberger sought a loan modification on her residential mortgage because, due to negative amortization, the monthly payments had nearly doubled. For the next year, Steinberger had a series of confusing communications with the various entities servicing the loan. In the summer of 2009, IndyMac Mortgage told Steinberger that she had been granted a forbearance agreement, which reduced her monthly payments until she qualified for a loan modification. IndyMac Mortgage acknowledged that it had received her loan modification paper work and indicated what the new monthly payment under the loan forbearance agreement would be.

Within days, IndyMac Mortgage informed her that a trustee’s sale would take place because Steinberger had failed to submit the loan modification paperwork and loan forbearance agreement. Steinberger redoubled her efforts in contacting IndyMac Mortgage and eventually was advised that the trustee’s sale was canceled and she could continue to make payments under the forbearance agreement until the loan modification application was processed. Months later, IndyMac Mortgage advised Steinberger that, in fact, it had not received the proper paperwork, rejected her payments under the loan forbearance agreement, and reissued notice of a trustee’s sale.

Steinberger filed suit against IndyMac Mortgage and other financial entities, including Mortgage Electronic Registration Systems, Inc. (MERS). She also obtained a temporary restraining order prohibiting the trustee’s sale from going forward. The basis of her claim was that IndyMac lacked the authority to foreclose on her home, and the notice of trustee’s sale was null and void.

The original note was held by IndyMac Mortgage. MERS was named as the beneficiary on the Deed of Trust. MERS assigned its interest in the Deed of Trust to IndyMac Mortgage within days of its creation. Steinberger argued that the person who executed the assignment was not an employee of MERS and had no authority to execute the assignment. In addition, the signature on the assignment was not notarized until six weeks after it was signed. Steinberger claimed that a third issue with the assignment was that IndyMac Mortgage did not exist at the time of the assignment because it had been liquidated by the FDIC.

In addition to other problems with the Notice of Substitution of Trustee, Steinberger alleged that since MERS’ assignment of its beneficial interest was void, IndyMac Mortgage had no authority to substitute the trustee. Since Steinberger alleged that the initial assignment of the beneficial interest was void, all subsequent events in the purported chain of title were invalid and there was no authority to conduct the trustee’s sale. The Court of Appeals held that Steinberger pled a viable cause of action regarding lack of authority and remanded the case so that the banks would have an opportunity to present evidence of completed links in the chain of title establishing the requisite authority to conduct the trustee’s sale.

IndyMac filed, and was granted, a Motion to Dismiss Steinberger’s complaint in Superior Court. Steinberger then filed a special action and, after hearing oral argument, the Court of Appeals accepted jurisdiction and ordered that the restraining order remain in place. IndyMac claimed that the loss of Steinberger’s home in a trustee’s sale was moot, because after the petition was filed and following oral argument in the Court of Appeals, the trustee’s sale was cancelled. They also stated their intention to re-notice a trustee’s sale in a manner that would “cure and/or address” each of the issues alleged by Steinberger.

The Court concluded that the special action was not moot, and that Steinberger’s claims raised substantive issues that could not “be cured by re-noticing a trustee’s sale.” The Court also indicated that the legal issues in this case, involving trustee’s sales and foreclosure requirements, are of statewide importance and the Superior Court erred in dismissing all of the allegations in the Steinberger complaint.

Addressing the first principal question regarding whether there are any circumstances under which a person who is facing a foreclosure may challenge the authority of the party seeking foreclosure, the Court concluded that Steinberger “pled a valid cause of action to prevent/avoid the trustee’s sale based on the IndyMac’s alleged lack of the authority to conduct a trustee’s sale of her home”; however, Steinberger bears the burden of proving her claim, and IndyMac may rebut the claim by providing evidence that indicated they are the true beneficiary or trustee of the deed of trust.

To do so, and addressing the second question regarding what requirements, if any, must the party seeking foreclosure provide to establish its authority, the Court indicated that “such proof may consist of documents in the chain of title tracing IndyMac’s beneficial interest from the original beneficiary, such as assignments, substitutions or a power of attorney.” The Court indicated that if such documents were not available, affidavits or deposition testimony from the individuals involved in the transfers “may suffice as evidence of the chain of title.”

The Court confirmed, in consideration of whether the lender/agent is required to act reasonable in processing the loan modification, that the parties seeking foreclosure could be liable for failing to exercise reasonable care when processing Steinberger’s loan modification paperwork. Since the lender was not obligated to modify the loan, but instead volunteered to modify the loan, its action came within the “Good Samaritan Doctrine.” Even though the harm to Steinberger was economic, not physical, the Court determined that the lender was obligated to act in a non-negligent manner under the Good Samaritan Doctrine.

The Court emphasized the factors for application of the Good Samaritan Doctrine in a loan foreclosure: 1) the lender or its agent induces the borrower to default on the mortgage by promising a loan modification if she defaults; 2) the borrower relies upon the promise to modify the loan and defaults on the mortgage; 3) after default, the lender or its agent negligently processes or fails to process the loan modification or due to the negligence of the lender or its agent, the borrower is not granted the loan modification; and 4) the lender subsequently forecloses on the trust property. The case was remanded to the Superior Court in order to give Steinberger an opportunity to present the evidence meeting the four-part test.

Additional issues addressed by the Court that may be of particular interest to realtors, lenders and mortgage brokers concern procedural unconscionability. Steinberger alleged that the terms of the original loan were not explained to her elderly father, who initial borrower, and that, due to his advanced age, he did not understand what he was signing; therefore, there was “unfair surprise” when discovering it was a negative amortization note. In addition, she claimed that the loan was substantively unconscionable because the adjustable rate note was not explained to her father, it was a contract of adhesion, and her father did not understand the consequences of a negative amortization note. The Court agreed that she sufficiently pled an action for procedural unconscionability on both accounts.

Although Steinberger did not obtain a final judgment on her claims, it is significant that the Court of Appeals recognized she sufficiently pled viable causes of action that could not only prevent the foreclosure of her house, but could also expose the lender and its agent to significant liability.

As the Arizona residential mortgage foreclosure crisis winds down, most of the issues regarding risky mortgages to under qualified borrowers have been resolved; however, as witnessed in the Steinberger case, some of those loans still exist. Holders of the notes and beneficiaries of the deeds of trust should careful examine the history of the loan before proceeding with a trustee’s sale or foreclosure.

Monday, June 9, 2014

Data Brokers: Collecting A Thousand Points Of Light (Data Segments) On Nearly Every U.S. Consumer

Do you ever feel like someone is watching you?  If so, rest assured that you are neither delusional nor paranoid.  You are in fact being watched – much more closely than you might even suspect.  And, no – It’s not just the National Security Agency doing the watching.  A new actor has emerged in the surveillance arena, namely the data broker.
Last month, the Federal Trade Commission (FTC) issued a report titled Data Brokers; A Call for Transparency and Accountability (link title to  In this report, the FTC discusses the results of an in-depth study of nine data brokers – companies that collect consumers’ personal information and resell and share that information with others.  Because data brokers generally never interact with consumers, most people are often unaware of their existence, much less the variety of practices in which they engage.  Accordingly, the report seeks to shed light on this mostly unregulated and opaque industry.
Here are some of the FTC’s findings:
  • Data brokers collect vast amounts of data about consumers, largely without consumers’ knowledge, to form a detailed composite of the individual consumer’s life and to predict the consumer’s likely behavior.
  • Data brokers collect and store “billions of data elements covering nearly every U.S. consumer.”
  • One of the nine data brokers studied has a database containing 3000 data points for nearly every U.S. consumer.
  • Another data broker is adding three billion new records to its databases each month.
  • Data brokers combine and analyze data about consumers to make inferences about them, including potentially sensitive inferences about consumers’ ethnicity, income levels, and health related conditions.[1]
  • Data brokers use this information to target consumers online.
  • Although the products offered by data brokers offer benefits to consumers, they also pose certain identifiable risks.
  • Long term storage of data by data brokers may create security risks for consumers and further enable identify thieves and other unscrupulous individuals.
  • To the extent consumers have a choice about how their data is utilized, such choices are largely invisible and incomplete.
The report concludes with the following observations and recommendations:
Many of the above findings point to a fundamental lack of transparency about data broker industry practices.  Data brokers acquire a vast array of detailed and specific information about consumers; analyze it to make inferences about consumers, some of which may be considered quite sensitive; and share information with clients in a range of industries.  Much of this activity takes place without consumers’ knowledge.  In light of these findings, the Commission unanimously recommends that Congress should consider enacting legislation that would enable consumers to learn of the existence and activities of data brokers and provide consumers with reasonable access to information about them held by these entities.
Currently, consumers generally have no federal right of access, correction, or control with respect to the information being compiled and sold by data brokers. Whether the FTC’s report and recommendations will spark action by Congress to empower and protect consumers in this new industry is to be seen.

[1] A 2013 report prepared by the U.S. Senate Committee on Commerce, Science, and Transportation, Office of Oversight and Investigations titled A Review of the Data Broker Industry: Collection, Use, and Sale of Consumer Data for Marketing Purposes (link title to found that data brokers create products specifically designed to identify, categorize and target financially vulnerable populations. Examples of some of these categories created by data brokers include:
  • Burdened by Debt: Singles
  • Ethnic Second-City Strugglers
  • Rural and Barely Making It
  • Very Elderly
  • Fragile Families