At a meeting of the Board of the Colorado Department of Human Services held on May 7, 2004, a new rule (9CCR 2504-6.90.5) was adopted, which became effective July 1, 2004, and which pertains to the treatment of levies on joint accounts by the Division [...]]]> By: John E. Burrus, Esq., Bieging Shapiro & Burrus LLP

At a meeting of the Board of the Colorado Department of Human Services held on May 7, 2004, a new rule (9CCR 2504-6.90.5) was adopted, which became effective July 1, 2004, and which pertains to the treatment of levies on joint accounts by the Division of Child Support Enforcement for past due child support obligations.

In general, the rule provides as follows:

• When a bank receives a levy of this type, it is required to immediately freeze 50% of the assets on deposit in the account. The bank must do this no matter how many joint account holders there are and no matter what knowledge the bank may have as to the source of deposits into the account.

• The other owner or owners of the account are given thirty (30) days within which to file an appeal with the Department contesting ownership of the funds which have been frozen. To prevail on this appeal, the other owner or owners must show “net contribution” of more than the 50% frozen by the levy. The rule does not address how these “net contributions” are computed, in terms of such things as how withdrawals or payments from the account are to be allocated between the child support obligor and the other owner or owners.

• If the appeal is granted, the Department will release its lien on the amount it determines to be appropriate and will require payment of the balance to the Department. If no appeal is taken or if the appeal is denied, the Department will collect the entire amount frozen by the levy. It is interesting to note that the rule does not address a situation where the child support obligor has contributed more than 50% to the account. Even in these instances, only 50% will be subject to levy and collection.

C.R.S. §16-3-301.1 was passed in the 2002-2003 legislative session and will have an impact on banks and other financial institutions whose customers are involved in criminal investigations. Prior to the passage of this statute, the only tool which sheriffs, police departments and other investigators had to compel production of documents [...]]]> By: John E. Burrus, Esq.

C.R.S. §16-3-301.1 was passed in the 2002-2003 legislative session and will have an impact on banks and other financial institutions whose customers are involved in criminal investigations. Prior to the passage of this statute, the only tool which sheriffs, police departments and other investigators had to compel production of documents in connection with a criminal investigation was a search warrant. These agencies had no subpoena powers and unless the investigation was being pursued by a grand jury or a state agency with subpoena powers, the available investigative procedures were often unsatisfactory. A search warrant does not specify particular documents to be produced but merely permits a law enforcement official to search premises. This search warrant power was sometimes abused by certain officials who have threatened to shut down entirely the premises to be searched (including banks) unless the owner of the premises cooperated in delivering documents being sought. This often placed banks in a difficult position, particularly after passage of Regulation P pertaining to customer privacy rights. If the bank voluntarily turned over records, then there was at least some issue as to whether this violated the privacy regulations and the bank’s own privacy policy unless the possibility of this type of voluntary surrender of information was revealed to customers in the privacy policy, in which case the customers may have had the right to “opt out” from such disclosures. On the other hand, if the bank refused to turn over the documents, the law enforcement officer had the legal right to search the premises himself and even to take possession of such objects as computer terminals which might contain the information. An additional problem existed with respect to institutions whose records were stored electronically at an offsite facility, particularly when the storage facility was located in another state outside the jurisdiction of the court issuing the search warrant.

The new statute helps to resolve these difficult issues. It permits a court to issue an order for the production of records “in the actual or constructive control” of a business entity provided certain grounds and criteria are met. These grounds and criteria are the following:

• The records being sought must be within certain categories, one of which is that the records “would be material evidence in a subsequent criminal prosecution in this state, another state or federal court”. This is the category that most orders of this type directed to bank records would usually fall within.

• The order can be issued only on receipt by the court of an affidavit (usually by the investigating officer) setting forth various facts identifying the records sought and the grounds upon which they are sought.

• If sufficient grounds are shown, the order is issued and must identify or describe the entity which is believed to have possession or control of the records, identify or describe the records, state the grounds or probable cause for issuance, and state the names of the persons whose affidavits or testimony have been taken in support of the order.

The order is then served on the business entity believed to have the records during normal business hours within 10 days after the date of the order. It is served in the same manner as other legal process. The entity served with the order has 30 days to deliver the records or copies of the records. The records must be accompanied by a notarized statement that they represent complete and accurate copies of all records identified in the order in the possession or control of the entity. If certain records are not produced, they must be identified. The affidavit must be signed by the “records custodian or an officer or director of the business entity, who shall attest to the truth of the statement to the best of that person’s knowledge, information and belief”.

In lieu of producing the records, the bank may file a motion stating reasons why the order cannot be complied with. A request for extension of time may also be filed and a hearing thereon held within 10 days unless the investigator seeking the documents agrees to production at a later time.

The records may be produced in any form or format convenient for the business entity which may be accessed by the investigator. The person being investigated may be ordered to pay the costs of production. An entity complying with the statute is given immunity against claims relating to the production of the records.

In general this new statute seems to provide a more definitive and orderly process for a bank’s production of records needed in criminal investigations and should help remove many of the uncertainties which existed under the prior practice.

The following are some answers to frequently asked questions regarding the Family Medical Leave Act (“FMLA”):

Do I have to comply with FMLA if I have less than 50 employees?

No. FMLA applies only to employers with 50 or more employees. 29 C.F.R. § 825.104(a). However, you should be aware that [...]]]> BY: Julie Trent, Esq.

The following are some answers to frequently asked questions regarding the Family Medical Leave Act (“FMLA”):

Do I have to comply with FMLA if I have less than 50 employees?

No. FMLA applies only to employers with 50 or more employees. 29 C.F.R. § 825.104(a). However, you should be aware that employees can potentially rely on any policies, whether written or not, regarding health/childcare-related leave. So, for example, if you provide six weeks of maternity leave to some employees, you could be legally obligated to provide six weeks of maternity leave to all employees. It is therefore a good idea to regularly review your policies (whether written or merely “this is how we’ve done it in the past”) to make sure that they accurately reflect the benefits you intend to provide.

If I have 50 or more employees, under what circumstances do I have to grant FMLA leave, who is eligible for such leave, and is it paid or unpaid?

If you have 50 or more employees, you must grant FMLA leave to any “eligible employee” under the following four scenarios: (1) for the birth of a child; (2) when a child (or an adult who is incapable of “self care”) is adopted or placed with an employee for foster care; (3) to care for a spouse, son, daughter or parent with a serious health condition (in some instances including substance abuse treatment); and (4) when the employee has a serious health condition that makes him or her unable to perform their job functions (also including substance abuse treatment in some instances). 29 C.F.R. § 825.112. Leave for any one of the above situations is available to eligible male and female employees equally. 29 C.F.R. § 825.112(b). “Eligible employees” are those employees who have been employed for at least 12 months and 1,250 hours during the 12-month period preceding the leave. Such employees are allowed to take up to 12 weeks of job-protected, unpaid leave in a given year. 29 C.F.R. §§ 825.100(a), 825.110(a), and 825.207. Note that the unpaid nature of FMLA leave does not preclude an employee from using accrued paid sick or vacation days during their leave. 29 C.F.R. § 825.207.

When can I hire a replacement employee to perform the job duties of someone on FMLA leave?

The answer is: anytime. However, the catch is that the employee on FMLA leave is entitled to return to the “same or equivalent” position with equivalent pay, benefits and working conditions at the conclusion of the leave.” 29 C.F.R. § 825.100(c). While this can obviously create havoc with an employer’s internal structure, hiring practices, and division of job duties, it is clear that “[a]n employee is entitled to such reinstatement even if the employee has been replaced or his or her position has been restructured to accommodate the employee’s absence.” 29 C.F.R. § 825.214(a) (emphasis added). “Equivalent position” means “one that is virtually identical to the employee’s former position in terms of pay, benefits and working conditions . . . [and] must involve the same or substantially similar duties and responsibilities, which must entail substantially equivalent skill, effort, responsibility, and authority.” 29 C.F.R. § 825.215(a).

There is one notable exception to an employer’s duty to reinstate an employee after FMLA leave: “an employer may deny job restoration to salaried eligible employees (‘key employees’ . . .) if such denial is necessary to prevent substantial and grievous economic injury to the operation of the employer . . .” 29 C.F.R. § 825.216(c). Very few employees fit the “key employee” description contained in 29 C.F.R. § 825.217. To be a “key employee,” the employee must be salaried and, more importantly, among the highest paid 10% of all employees employed by the employer within 75 miles of the worksite. 29 C.F.R. § 825.217(a).

At the end of the leave, “if the employee is unable to perform an essential function of the position because of a physical or mental condition . . . the employee has no right to restoration to another position under the FMLA. However, the employer’s obligations may be governed by the Americans with Disabilities Act.” 29 C.F.R. § 825.214(b).

Can an employee who is on FMLA leave be terminated/laid-off, or do I have to wait until they return from their leave?

An employee is not protected from termination, lay-offs, etc. while on FMLA leave. “An employee has no greater rights to reinstatement or to other benefits and conditions of employment than if the employee had been continuously employed during the FMLA period.” 29 C.F.R. § 825.216(a). The burden is on the employer to demonstrate that the employee would have been laid-off/terminated regardless of being on leave. Id. “If an employee is laid off during the course of taking FMLA leave and employment is terminated, the employer’s responsibility to continue FMLA leave, maintain group health benefit plans and restore the employee cease[s] at the time the employee is laid off,” assuming there is no collective bargaining agreement to the contrary in place. 29 C.F.R. § 825.216(a)(1).

Contact Julie Trent at jtrent@bsblaywers.com

What do Enron, Worldcom, Qwest and Anytown Community Bank have in common? The answer is that each can be expected to feel the impact of the Sarbanes–Oxley Act of 2002, regardless of whether it is a publicly-traded company.

Congress’s response to corporate fraud, greed, and slip-shod accounting practices was quick [...]]]> By: I. Thomas Bieging, Esq.

What do Enron, Worldcom, Qwest and Anytown Community Bank have in common? The answer is that each can be expected to feel the impact of the Sarbanes–Oxley Act of 2002, regardless of whether it is a publicly-traded company.

Congress’s response to corporate fraud, greed, and slip-shod accounting practices was quick in election year 2002. The Sarbanes-Oxley Act of 2002 passed by Congress on July 30, 2002 was Congress’s response to the headlines appearing daily in the business sections of newspapers chronicling corporate mismanagement and SEC laxness. The response was not unlike one with which all bankers are familiar.

In 1989, Congress responded to the savings and loan crisis with a “quick response”, which has come to be known as FIRREA – the Financial Institution’s Reform, Recovery and Enforcement Act of 1989. While both pieces of legislation can be criticized for their excesses, one thing is certain. Just as the effects of FIRREA have lingered over a decade and have permeated all levels of the financial institution industry, so will the effects of Sarbanes-Oxley be felt for years to come and ultimately impact both publicly and non-publicly traded financial institutions. The purpose of this article is to provide the managers and directors of non-publicly traded financial institutions with a “heads up” as to how they may experience the impact of Sarbanes-Oxley.

Predictions such as those contained in this article are not difficult in light of current pronouncements from various regulatory agencies. Recently, a panel of federal regulators in Ohio made up of representatives of the Office of the Comptroller of the Currency, Federal Reserve and Federal Deposit Insurance Corporation speaking to a group of accountants stated that corporate governance would be a “chief supervisory concern” in the year to come. In this same vein, FDIC Chairman Powell announced in October that the FDIC was considering mandating that all FDIC-insured banks comply with the new law. The Federal Reserve has already advised financial institutions that it is working to develop policies in accordance with Sarbanes-Oxley. Recently, Federal Reserve Governor Susan S. Bies, commenting to the National Conference on Banks and Savings Institutions conducted by the American Institute of Certified Public Accountants, stated that recent events leading to Sarbanes-Oxley serve as a “wake up call” to corporate boards, management, accountants and auditors. From these opening salvos, the handwriting on the wall is apparent: Be aware of the provisions of Sarbanes-Oxley.

Financial institutions that are affected directly by Sarbanes-Oxley fall into two categories. First are those institutions (banks, thrifts and their holding companies) that have a class of securities registered under Section 12 of the Securities Act of 1934, or are otherwise required to file periodic reports (10-K’s and 10-Q’s) under Section 15d of the Securities and Exchange Act of 1934. A second category of banks, thrifts, or holding companies that will be affected, somewhat less, are those top tier holding companies required to file forms FRY-6 and that have total assets of $500,000,000 or more, or insured depository institutions with total assets of $500,000,000 or more.

The statutory and regulatory requirements do not extend to community banks that are outside the categories described above. However, based on the regulators’ comments, we anticipate that certain provisions of Sarbanes-Oxley will indirectly have an impact on all financial institutions through adoption of analogous “safety and soundness” standards similar to Sarbanes-Oxley by the various financial institution regulatory agencies.

Those sections of Sarbanes-Oxley which we are referencing, and a brief description of their potential impact on non-reporting financial institutions are described below:

1. Section 201. SERVICES OUTSIDE THE SCOPE OF PRACTICE OF AUDITORS. This section limits the role of auditors to that of auditing. A public accounting firm that provides auditing services may not provide such additional services such as bookkeeping, development of financial information systems, appraisals, fairness opinions, internal audit outsourcing or management functions. The trends at all levels will be to assure that independent auditors are not auditing the impact of their other services to their audit customers. Non-reporting companies should review their auditor relationships and consider whether additional relationships between the auditor and the financial institution may adversely impact independence and the quality of the audit.

2. Section 204. AUDITOR REPORTS TO AUDIT COMMITTEES. This section requires that the public accounting firm report directly to the audit committee all critical accounting policies and practices; alternative treatments of financial information that have been discussed with management, including the ramifications of the use of such alternative treatments; and any material written communications between the public accounting firm and management (e.g., the management letter). This section is consistent with the theme of Section 203 and may be deemed advisable as a way to ensure that the board is fully aware of material accounting issues and to benefit the financial institution with the perspectives of non-management directors.

3. Section 206. CONFLICTS OF INTEREST. Reporting companies are prohibited from employing a public accounting firm if the reporting company’s chief executive officer, controller, chief financial officer, or chief accounting officer was employed by the public accounting firm within one year of the date of the initiation of the audit.

4. Section 302. CORPORATE RESPONSIBILITY FOR CORPORATE REPORTS. This is the section of Sarbanes-Oxley that requires the principal executive officer and principal financial officer of a reporting company to certify annual reports. The certification indicates that to the officer’s knowledge, the report does not contain any untrue statements of material fact or omit material facts. Additionally, among other requirements, the signing officer must indicate that in his or her opinion the financial report fairly presents in all material respects the organization’s financial condition and results of operation. Boards of directors of non-reporting financial institutions may well request of their own senior management such assurances in this era of renewed accountability to shareholders by management and boards of directors.

5. Section 404. MANAGEMENT ASSESSMENT OF INTERNAL CONTROLS. The effectiveness of internal controls has been a concern for financial institution regulators since at least the enactment of the Federal Deposit Insurance Corporation Improvement Act of 1991. Sarbanes-Oxley has a similar theme requiring that a reporting company’s annual report contain a section regarding the responsibility of management for establishing and maintaining adequate and internal controls along with an assessment of the effectiveness of those controls. Renewed emphasis can be expected at all levels of the financial institution industry on such internal controls.

6. Section 407. DISCLOSURE OF AUDIT COMMITTEE FINANCIAL EXPERT. Reporting companies are required to have at least one member of the audit committee who is deemed to be a “financial expert”. Such financial experts are considered to be someone who, through education and experience as a public accountant, auditor or principal financial officer, has an understanding of generally accepted accounting principles and financial statements, along with experience in the preparation or auditing of financial statements of generally comparable organizations. With the increased responsibilities and accountability of boards of directors, the wisdom of including a “financial expert” on any board cannot be challenged. The devil is in the detail as to how to attract such a financial expert in the current environment.

While the Sarbanes-Oxley Act of 2002 limits its scope of applicability to reporting banks, thrifts and holding companies there can be little doubt that the principles contained in the Act will be carried down by federal regulatory agencies to all levels of the financial institution industry. Those banks, thrifts and holding companies that begin now to assess their corporate governance in light of Sarbanes-Oxley will be in a better position to respond to regulatory concerns which will be expressed in the months and years come.

©2002, Bieging Shapiro & Burrus LLP. All rights reserved.

Contact I. Thomas Bieging, Esq. at tb@bsblawyers.com

On April 1, 2001, regulations became effective which apply to financial institutions’ consumer insurance activities. This article will outline the principal areas of coverage but should not be used as a substitute for the regulations themselves. The regulations can be found at 12 C.F.R. Part 14 (OCC); 12 C.F.R. Part [...]]]> By: John E. Burrus, Esq.

On April 1, 2001, regulations became effective which apply to financial institutions’ consumer insurance activities. This article will outline the principal areas of coverage but should not be used as a substitute for the regulations themselves. The regulations can be found at 12 C.F.R. Part 14 (OCC); 12 C.F.R. Part 208 (Federal Reserve); 12 C.F.R. Part 343 (FDIC); and 12 C.F.R. Part 536 (OTS).

What Do the Regulations Generally Apply To?

• The sale, solicitation, advertisement or offer of an insurance product or annuity by a “covered person” to a “consumer”.
• “Insurance product or annuity” is not defined.
• A “consumer” means an individual who purchases, applies to purchase, or is solicited to purchase an insurance product or annuity primarily for personal, family or household purposes.

Who is affected by the regulations?

• A “covered person” is defined as:
  • Any financial institution; or
  • Any other person who sells, solicits, advertises or offers an insurance product or annuity to a consumer at an office of a financial institution or on behalf of a financial institution.
• An activity is done “on behalf of” a financial institution if:
  • A representation is made to a consumer that the activity is by or on behalf of a financial institution; or
  • A financial institution refers a consumer to another person under a contractual arrangement to receive commissions or fees from the sale of an insurance product or annuity; or
  • Documents evidencing the activity identify or refer to a financial institution.

What is Prohibited?

• Any practice which would lead a consumer to believe that an extension of credit is conditioned upon either (i) the purchase of an insurance product or annuity from a financial institution or its affiliates, or (ii) an agreement not to obtain or a prohibition on obtaining an insurance product or annuity from an unaffiliated entity.
• Any activity which could mislead a person with respect to:
  • The fact that an insurance product or annuity is not “backed by” the federal government or the bank and is not insured by the FDIC; or
  • For products involving investment risk, the fact that there is a risk, including the potential that principal may be lost and the product may decline in value.
  • The fact that an extension of credit to a consumer may not be conditioned on the purchase of an insurance product or annuity from the financial institution or its subsidiary and that the consumer is free to purchase the product from another source.
• The sale or offer for sale (as principal, agent or broker) of any life or health insurance product with regard to which underwriting, pricing, renewal or scope of coverage is affected by the insured’s status as a victim of domestic violence or as a provider of services to victims of domestic violence.
• The failure to keep segregated the area where the financial institution conducts transactions involving insurance products or annuities from areas where retail deposits are routinely accepted, or to identify and clearly delineate insurance product or annuity sales areas from retail deposit-taking areas.
• A financial institution’s permitting any person to sell or offer for sale any insurance product or annuity in any part of its office or on its behalf unless the person conducting such activity is appropriately qualified and licensed.

What must be disclosed?

• In connection with the initial purchase of an insurance product or annuity, the following must be disclosed:
  • That the product is not a deposit or other obligation of or guaranteed by the financial institution or its affiliate.
  • That the product is not insured by the FDIC or any other federal agency or by the financial institution or its affiliate.
  • For products involving investment risk, that there is investment risk associated with the product, including the possible loss of value.
• In connection with a credit application which includes the solicitation, offer or sale of an insurance product or annuity, disclosure must be made that the financial institution may not condition an extension of credit on either (i) the consumer’s purchase of an insurance product or annuity from the financial institution or its affiliate, or (ii) the consumer’s agreement not to obtain, or a prohibition on the consumer from obtaining, an insurance product or annuity from an unaffiliated entity.
  • The required disclosures must be made both orally and in writing before completion of the initial sale of the product or at the time the consumer applies for an extension of credit associated with the solicitation, offer or sale of an insurance product or annuity.
  • Oral disclosures are not required if the product is sold by mail or the application for credit is taken by mail.

• Special rules apply to sales conducted and applications taken by telephone or by electronic transmission.
• Disclosures must be “readily understandable” and “meaningful”. These terms are defined in greater detail by the regulations.
• Written acknowledgement of receipt of the disclosures must be received from the consumer. Acknowledgements may be received “electronically or in paper form.”
• For telephone transactions, acknowledgement of receipt may be received orally provided that the financial institution maintains “sufficient documentation” to show receipt of acknowledgment and makes “reasonable efforts” to obtain written acknowledgement from the consumer.
• The required disclosures must be included in advertisements and promotional material except those of a general nature describing or listing the services or products offered by the institution.

Contact John E. Burrus at jeb@bsblawyers.com

(Updated as of August 20, 2002)

A recent article circulated by Kansas Bankers Surety Company has prompted questions from a number of IBC members concerning a bank’s right of setoff against deposited Social Security benefits and for advice on approaches which might be taken on overdrafts by Social Security recipients.

On July 1, 2002, several amendments to the Colorado Public Trustee’s Foreclosure Act, C.R.S. § 38-38-101, et seq., and other related laws, will become effective pursuant to Senate Bill 02-161. These amendments, as more fully explained below, contain a number of significant changes to the foreclosure process. Some of the pertinent [...]]]> By: John Burrus, Esq.

On July 1, 2002, several amendments to the Colorado Public Trustee’s Foreclosure Act, C.R.S. § 38-38-101, et seq., and other related laws, will become effective pursuant to Senate Bill 02-161. These amendments, as more fully explained below, contain a number of significant changes to the foreclosure process. Some of the pertinent amendments expand a creditor’s liability for failing to record a release of a deed of trust, permit banks to provide the public trustee with a copy of the promissory note or other evidence of debt along with a certification in lieu of the original note, extend the time periods in which the public trustee must mail notices of the foreclosure sale and the right to cure and redeem, shorten the time in which a notice of intent to cure must be filed, shorten the time in which the foreclosing party must provide cure figures, revise the figures that may be contained in a foreclosure bid, clarify the consequences for holding a foreclosure sale in violation of the automatic stay in bankruptcy, and clarify the requirements and establish deadlines for redeeming the property. The following is a summary of some of the relevant changes.

Pursuant to C.R.S. § 38-35-124 (Requirements Upon Satisfaction of Indebtedness), when the promissory note or other evidence of debt secured by real property is paid and the creditor or holder receives the requisite sum from the debtor for preparing and recording a release, then the creditor or holder must record with the county clerk and recorder the documents necessary to release the lien of record within ninety (90) days after the note and fee are paid. The amendment to this provision extends the creditor or holder’s liability for its violation, to the owner and any other person liable on the note or indebtedness, for all actual economic loss incurred in enforcing this provision, including reasonable attorneys’ fees and costs.

The amendment to C.R.S. § 38-37-108 (Form of Payments to Public Trustee), permits payments made to the public trustee for redemption or cure to be in the form of cash, wire transfer to the public trustee’s account established for that purpose, certified check, cashier’s check, teller’s check, or a draft denominated as an official check that is a teller’s check or a cashier’s check (as defined under the Uniform Commercial Code), and certified or issued by a federally-chartered or state-chartered financial institution licensed to conduct business in Colorado.

A new provision, C.R.S. § 38-37-118 (Checking account – custodial funds), was added to allow the public trustee to establish and manage a checking account or similar banking service with a bank which account will be designated as an eligible public depository. The moneys received by the public trustee for a bid, cure, excess funds, or redemption, shall be held as custodial funds for the party entitled to receive such funds but that no contractual relationship exists between the public trustee and such party.

The amendment to C.R.S. § 38-38-101 (Owner of Evidence of Debt May Elect to Foreclose – Notice – Record of Sale – Withdrawal), permits only certain entities (including, among others, banks, industrial banks, an S&L, a supervised lender, a public entity, a FHA approved mortgagee, a credit union, and a federal government agency) as the owner of the evidence of debt who seeks to foreclose on its deed of trust to provide the public trustee with one of the following, in lieu of the original promissory note or other evidence of debt: (i) a corporate surety bond one and one-half times the original note; or (ii) a copy of the promissory note or other evidence of debt with a certification as to the owner’s status. After the foreclosure sale, the owner must provide the public trustee with a copy of the promissory note or other evidence of debt, either marked as cancelled or noting the deficiency amount, attached to a duplicate certification of purchase which shall be recorded by the public trustee. An entity foreclosing without the original promissory note or other evidence of debt will have agreed to indemnify and defend any person liable for repayment of the debt and any person who sustains a loss, resulting from claims arising out of the original evidence of debt. A claim regarding ownership against the owner of the original evidence of debt is limited to indemnification and a claim against real property is prohibited.

The amendment to C.R.S. § 38-38-101 (Owner of Evidence of Debt May Elect to Foreclose – Notice – Record of Sale – Withdrawal), extends the time period in which the public trustee must mail a copy of the notice of first publication of the foreclosure sale to the grantor from ten (10) days to twenty (20) days after the date of first publication of the foreclosure sale.

The amendment to C.R.S. § 38-38-103 (Combined Notice of Right to Cure and Right to Redeem), increases the time period in which the public trustee must mail a copy of the notice of right to cure and right to redeem to the grantors, subsequent owners, current owner and any other person having such right from ten (10) days to twenty (20) days after the date of recording of the notice of election and demand, or not less than sixteen (16) days nor more than twenty-five (25) days after the entry of a decree of foreclosure or the issuance of a writ of execution to the sheriff. The amendment further adds that the notice of right to cure and right to redeem must contain, among others: (i) a statement that the notice of intent to redeem must be filed at least fifteen (15) calendar days prior to the date of the owner’s redemption period; and (ii) a statement that the notice of intent to cure must be filed at least fifteen (15) calendar days prior to the date of the scheduled foreclosure sale.
The amendment to C.R.S. § 38-38-104 (Right to Cure When Default is Nonpayment – Right to Cure for Certain Technical Defaults), extends the time period in which the party entitled to cure a payment default must provide written notice of intent to cure to the public trustee from seven (7) calendar days to fifteen (15) calendar days prior to the scheduled date of foreclosure. The public trustee must promptly transmit the notice by fax to mail to the foreclosing party. Upon receipt of the notice of intent to cure from the public trustee, the foreclosing party must provide cure figures no later than 12 noon on the seventh (7th) calendar day prior to the scheduled date of foreclosure or the public trustee will postpone the foreclosure sale. If the foreclosure sale is postponed for six (6) months under C.R.S. § 38-38-109(1) and the cure figures are not received by 12 noon on the seventh (7th) calendar day prior to the last possible foreclosure sale date, the public trustee will deem the foreclosure withdrawn and the foreclosing party must submit a written withdrawal of the notice of election and demand which will be recorded by the public trustee and the public trustee is entitled to collect the withdrawal fee and all of its incurred expenses.
The amendment to C.R.S. § 38-38-106 (Written Bid Required – Form of Bid), clarifies the items that may be included in a foreclosure bid and provides a bid form to be used. The bid may include: (i) general or special taxes, or ditch or water assessments, and any governmental or quasi-governmental lien, fine, penalty or assessment; (ii) premiums for property, casualty, general liability and title insurance acquired to protect the holder’s interest or the improvements; (iii) sums due on any prior lien to encumbrance, including homeowners’ assessment liens and sums due under any lease of the property; and (iv) reasonable costs and expenses of defending, protecting, securing, maintaining and repairing the property or the holder’s interest or the improvements and receiver’s fees, inspection fees, court costs and attorneys’ fees. Appraisal fees are excluded from the bid figures.
The amendment to C.R.S. § 38-38-109 (Continuance of Sale), clarifies that if the foreclosing party completes the foreclosure sale in violation of the automatic stay in bankruptcy, the debt and the deed of trust will be reinstated, even if the bankruptcy court subsequently grants relief from the automatic stay to such foreclosing party. If the owner of the reinstated debt or deed of trust notifies the public trustee or sheriff in writing within sixty (60) days of the entry of an order dismissing the bankruptcy case or an order granting the owner relief from stay, then the public trustee or sheriff shall set a new foreclosure sale date at least twenty-four (24) days but not more than thirty-nine (39) days after receipt of the notice.
The amendment to C.R.S. § 38-38-301 (Purchaser Paying Charges – Redemption), authorizes the holder of the certificate of purchase to pay and recover upon redemption, expenses and charges relating to the property, including those entered as part of the foreclosure bid.

The amendment to C.R.S. § 38-38-302 (Redemption Within Specified Period – Procedure), provides that the owner of the subject real property or any other person liable after the foreclosure sale for the deficiency must file a notice of intent to redeem with the public trustee or sheriff fifteen (15) calendar days prior to the expiration of the owner’s redemption period (i.e. seventy-five (75) days after the foreclosure sale date, if the property is not agricultural) and pay the requisite interest amount and other proper charges. To prove that the property is not agricultural (to calculate the proper redemption period), the foreclosing party may provide the public trustee or sheriff with proof that the property (i) is in whole or in part either platted as a subdivision or located within the incorporated limits of a town, city or city and county, or (ii) is not valued and assessed as agricultural land. The public trustee or sheriff must promptly transmit the notice by fax or mail to the holder of the certificate of purchase. The public trustee or sheriff is authorized to accept a notice of intent to redeem after the fifteen (15) calendar day period upon written consent of the holder or the certificate of purchase or his attorney. The holder of the certificate of purchase must provide the public trustee or sheriff with initial redemption figures the earlier of: (i) seven (7) calendar days prior to the expiration of the redemption period; or (ii) within ten (10) calendar days following the public trustee’s notice of intent to redeem. The redemption figures may be amended to reflect additional sums advanced but may not be amended during the seven (7) calendar days prior to the expiration of the redemption period. If the holder of the certificate of purchase fails to provide the redemption figures by the applicable deadline, then the public trustee or sheriff is authorized to calculate the redemption figures by adding to the successful bid amount the accrued interest based on a 365 day basis for the actual number of days from the foreclosure sale date to the redemption date and transmitting these figures to the redeeming party five (5) calendar days prior to the expiration of the redemption period.
The amendment to C.R.S. § 38-38-303 (Time of Redemption by Lienor), clarifies that a redeeming party which is identical to the prior redeeming lienor must only pay the costs and fees required for redemption. Also, the amendment sets forth the requirements for a lienor entitled to redeem, including that: (i) such lienor must hold a lien that is a mortgage or deed of trust or is otherwise recognized by statute or by a court judgment; (ii) such lien must be recorded prior to date the redeeming party must file the notice of intent to redeem; (ii) such lienor has timely filed its notice of intent to redeem with a recorded copy of the instrument evidencing its lien and affidavit setting forth the figures to redeem such lien. The amendment clarifies which costs a redeeming lienor may incur and add to the amount owing on the lien, allows the redeeming lienor to amend its affidavit under special circumstances, and permits an award of attorneys’ fees and court costs to the prevailing party contesting the redemption amount set forth on the redeeming lienor’s affidavit. The redeeming party is authorized to pay and recover expenses and charges relating to the property, including those entered as part of the foreclosure bid. The amendment requires that the holder of a consensual lien granted by the owners of the property must record such consensual lien at least fifteen (15) calendar days prior to the end of the owner’s redemption period and only permits the three most senior consensual lien holders to redeem. Persons providing closing and settlement services are permitted to rely on written payoff statements provided by the lien holder and the lien holder shall release the lien upon receipt of the amount set forth in the written payoff. Damages and attorneys’ fees may be assessed against a lien holder who fails to release as required. The debt holder may pursue the obligor for personal liability if an error is made in a written payoff.

In summary, Senate Bill 02-161 incorporates a significant number of changes to the foreclosure process that will require extensive review. It is advisable that any holder of a note or other evidence of debt secured by real property understand the revisions and the impact of the bill prior to engaging in any foreclosure after July 1, 2002. [00004112.doc; 2]

Contact John Burrus at jeb@bsblawyers.com

The validity and enforceability of electronic records and signatures has been the subject of recent statutory changes.  The “Electronic Signatures in Global and National Commerce Act” (15 U.S.C. §7001, et seq.) was passed in 2000.   The Colorado legislature, in its last session, passed the “Uniform Electronic Transactions Act” (C.R.S. §24-71.3-101, [...]]]> By:  John E. Burrus,  Esq.

The validity and enforceability of electronic records and signatures has been the subject of recent statutory changes.  The “Electronic Signatures in Global and National Commerce Act” (15 U.S.C. §7001, et seq.) was passed in 2000.   The Colorado legislature, in its last session, passed the “Uniform Electronic Transactions Act” (C.R.S. §24-71.3-101, et seq.).  Recent revisions to the Uniform Commercial Code also address this issue.

The effect of these statutes is generally, with some exceptions, to make “electronic records” and “electronic signatures” equivalent to normal “writings” and “signatures” and to give them the same legal effect.  An “electronic record” is generally a facsimile transmission or a record generated by, stored on and/or transferred by computer.  An “electronic signature” is either a facsimile signature or a method of signing by computer.

There remain a few types of documents which should be accepted only in their “original” and “signed” versions.  The ones with which a bank would have primary concern are the following:

• Negotiable instruments, including promissory notes and amendments of promissory notes.
• Documents which must be filed in the real estate records, such as mortgages, deeds of trust, deeds, assignments of mortgages or deeds of trust, leases and memoranda of leases.
• Stock certificates taken as collateral.

As for other types of documents, a degree of judgment is required.  Loan documents other than those mentioned above, such as guarantees, security agreements and loan agreements, can all be contained in facsimile documents bearing facsimile signatures and will have the same legal effect as ordinary “originals” bearing ordinary “signatures”.  In these instances, the issue is not the validity or enforceability of the documents per se, but whether the bank would be able to establish that a particular party did, in fact, sign the documents when this is done out of the presence of any bank official.  This issue is no different from that which would arise if the bank were to permit a customer to take loan documents or account documents away from the bank for execution by another party.

The better policy is to have any loan, account or other documents executed in the presence of a bank representative when this is practical.  However, when this is impractical, it would be permissible to accept either facsimile documents or ordinary originals which have been executed outside the presence of a bank representative when the loan or account officer is satisfied that the customer’s execution of the documents either will not be questioned by the customer or, if questioned, can be established to the satisfaction of a court if the issue arises.  Evidence which would be relevant to establishing the authenticity of a customer’s signature would include the signature itself (as compared to other signatures on file with the bank), oral communication with the customer in which the customer acknowledges execution, a notary’s attestation of execution, and the means of transmittal of the document – e.g., by a fax machine showing the customer’s fax number or by transmittal letter on the customer’s letterhead.

In summary:

• Always require ordinary “originals” bearing ordinary “signatures” for negotiable instruments, documents which must be recorded in the real estate records and certificated stock held as collateral.
• As a general rule, require execution of other loan and account documents in the presence of a bank representative.  If it is impractical to impose these requirements, facsimile documents can be accepted if a responsible bank representative determines that the fact of a customer’s execution either will not be questioned or, if questioned, will be supportable in court if the issue is raised.

Contact John E. Burrus at jeb@bsblawyers.com

During her two-year tenure as Colorado Secretary of State, Donetta Davidson has implemented a number of valuable on-line services to the public through its Business Division. The Secretary of State’s website may be found at www.sos.state.co.us/. From this main page, customers of the Secretary of State may do any of the [...]]]> By: John Burrus, Esq.

During her two-year tenure as Colorado Secretary of State, Donetta Davidson has implemented a number of valuable on-line services to the public through its Business Division. The Secretary of State’s website may be found at www.sos.state.co.us/. From this main page, customers of the Secretary of State may do any of the following on-line:

Entity Searches and Forms.

Customers may search the Secretary of State’s business database for a particular business entity, entity tradename, and trademark. The search results provide the user with the entity’s registered agent, principal address, filing history and scanned copies of filed documents, including, for example, an entity’s articles of incorporation or organization, any amendments thereto, periodic statements, and changes in its principal address, registered agent, and registered agent’s address.

The Secretary of State also offers various forms on-line, in either PDF Adobe Acrobat® or a downloadable word-processing format, for the creation of entities in Colorado. For example, the forms available for corporations include, among others, Application for Reservation of Name, Articles of Incorporation, Articles of Amendment to Articles of Incorporation, Articles of Dissolution, and Application for Authority to Transact Business (for foreign corporations). Limited liability companies (LLC) may use the Application for Reservation of Name, Articles of Organization, and Articles of Amendment to Articles of Organization. There are also forms available for limited partnerships (LP), limited liability partnerships (LLP), and limited liability limited partnerships (LLLP).

Good Standing Certificate.

An invaluable resource provided by the Secretary of State is the ability of an on-line user to search an entity’s current status with the Secretary of State and view and print a Certificate of Good Standing for such an entity without cost. This Certificate of Good Standing includes a validation number which, if typed into the website’s Certificate of Good Standing validation query window, will validate such Certificate by providing the user with a date and time matching that found on the Certificate itself.

Periodic Reporting.

An entity may also file its periodic report on-line with the Secretary of State. Pursuant to the new law, C.R.S. § 7-90-501(4)(c), periodic reporting for certain entities is required annually as of January 1, 2002. Failure to timely file such reports may affect the entity’s standing with the state and the entity’s ability to conduct business and obtain loans. To accommodate this new law, the Secretary of State has dramatically reduced the fees for e-filing compared to paper filing to encourage e-filing. Fees may be paid by credit card or by establishing a pre-paid account with the Secretary of State using the form available on-line.

UCC Financing Statements: Search, Forms, and E-Filing.

With regard to liens against personal property filed with the Secretary of State, an on-line user may search, by entity name or tradename, for any Colorado Uniform Commercial Code (UCC) and EFS (farm products) financing statements filed with the Secretary of State. UCC and EFS forms, including instructions for use, are also available on-line and many may be completed and filed on-line. As with the periodic reports, the fees for searching and filing such financing statements may be paid by credit card or pre-paid account.

Additional Services.

In addition to the above services, the Colorado Secretary of State will launch the following on-line services in 2002: (i) prepaid account establishment and replenishment; (ii) additional forms which may be completed and filed on-line; (iii) additional UCC search options; (iv) implementation of on-line credit card payment system for applications, searches, and filing.

Contact John Burrus at jeb@bsblawyers.com

Most lenders are probably aware that it is risky to assume complete control of a defaulted business debtor. One of the greatest risks is the potential for the debtor’s unpaid withholding under Internal Revenue Code §6672, which imposes liability for the full amount of the withholding tax on a person [...]]]> By: John E. Burrus, Esq.

Most lenders are probably aware that it is risky to assume complete control of a defaulted business debtor. One of the greatest risks is the potential for the debtor’s unpaid withholding under Internal Revenue Code §6672, which imposes liability for the full amount of the withholding tax on a person required to collect and pay over income and social security taxes of an employee. The IRS has not often been successful in imposing liability on a lender under this section since lenders seldom assume the degree of control over the debtor necessary for liability to arise. One court has suggested that application of this section requires that a lender assume virtually total control over a debtor’s funds and over decisions of which creditors are to be paid and which are not.

The IRS has been more successful in imposing liability on lenders under another code section. Section 3505 deals directly with the liability of lenders (among others) for unpaid withholding and imposes that liability in two situations:

• Where the lender pays payroll directly to a debtor’s employees; and
• Where the lender indirectly pays payroll by loaning money for this specific purpose and, in addition, has “actual” knowledge that the debtor will not or cannot pay withholding.

Under the first situation a lender may be liable for the full amount of taxes owed. Under the second, the lender’s liability is limited to 25% of the amount loaned for payroll purposes. Under this second alternative the liability of lenders has been recognized even for honoring overdrafts for payroll when circumstances indicated that certain bank officers had reason to know that the withholding taxes would not be paid.

The regulations adopted under §3505 state that an ordinary operating line-of-credit is not sufficient to impose liability under this section even if the lender knows that some portion of the line will be used for payroll. However, the reported cases make it unclear how far this regulation can actually be relied on. If bank officers become aware of facts indicating that withholding taxes will not be paid, care should be taken in how any workout arrangement is structured to protect the bank, as far as possible, from direct liability for those taxes.

Contact John E. Burrus at jeb@bsblaywers.com