Bank Litigation: California’s New Elder Abuse Law is being Abused

With great fanfare, the California Legislature passed a bill in 2008 that amends the State’s Elder Abuse Law. Neither the legislators nor Governor Schwarzenegger must have paid much attention to this legislative travesty, given the ongoing budget crisis, because this bill is a real doozy. No one wants to see financial abuse of the elderly, certainly not the mainstream responsible banking community. The California banking community has long taken appropriate steps to spot and guard against the financial abuse of seniors and other disadvantaged persons. Most institutions have procedures in place to verify the source of questionable transfers, and most provide training to their employees to help combat financial abuse. Nevertheless, thanks to the new Elder Abuse Law, our bank clients are now being hit with nasty lawsuits accusing them of the financial abuse of elders when nothing of the sort has taken place.

Our experience is that financial abuse of senior citizens and mentally challenged persons generally occurs at the hand of a trusted caregiver, often a relative. The caregiver figures that the senior won’t be needing his or her money for long, so they start helping themselves. Often, they open joint accounts with the senior, purportedly to make it easier to buy the “necessities” of life – such as “gifts” of investments, vehicles, clothing and jewelry for the doting caregiver. By the time these are discovered, both the caregiver and the senior’s assets may be long gone.

So why is the new law such a problem? The simple answer is because the new Elder Abuse Law unnecessarily expanded a well-meaning law that thoughtfully addressed the financial abuse of elders. In doing so, it turned a protective law into an offensive weapon for those people – or their heirs – who don’t want to repay their just debts.

The old law required proof that the elder’s property had been taken for a wrongful use or with intent to defraud the elder. The new law broadened the grounds for financial abuse in two significant ways. First, it added “undue influence” as a basis for proving financial abuse. Under California law, undue influence involves taking unfair advantage of an elder’s weakness of mind or the confidence that the elder placed in the wrongdoer. Of course, the concept of undue influence makes sense and is nothing new to California. The statute defining undue influence was passed in 1872 and it has been applied to the financial abuse of elders ever since!! Undue influence provides a victim with ground to rescind the contract and get back the property or money that was taken by a wrongdoer.

The problem now is that under the revised Elder Abuse Law, seniors who have second thoughts about a financial transaction now do not have to prove that the other party had a wrongful purpose or intended to defraud the older person. In fact, the reason for the underlying transaction is now virtually irrelevant. All the senior now has to show is that the other party knew or should have known that the transaction would likely be “harmful” to the elder.

The result is that our bank clients are being sued by their older customers and their families to recover the collateral that was pledged to secure a loan when the investment or the business does not work out. They are alleging that the bank knew or should have known when the loan was made that the elder should not have borrowed money to purchase property or for his business because there was a risk that the loan would not be paid off and the collateral might have to be sold to pay back the loan. Amazingly, they argue that it shouldn’t matter that the elder has been operating his business successfully for 50 years and has renewed his credit line for many years, or that the failure of the investment must be the fault of the lender even though the senior sought independent counsel from a lawyer, accountant or other legitimate business advisor before entering into the transaction.

The JMBM Special Assets Team™ has now seen a rash of “elder abuse” claims in response to troubled commercial and real estate loans made to seniors or guarantied by them. The one consistent factor is that these lawsuits are orchestrated by the heirs of the older person, who are trying to defend against collection efforts for an obvious reason – they want to protect their inheritances.

The true abuse here is by those counseling the older borrowers and guarantors. Many of the elderly people are bank customers of long standing. They have track records of paying their bills and dealing squarely with their creditors. Ironically, the abusers are, once again, the caregivers, usually adult children or other relatives who would rather see Mom or Dad spend their twilight years litigating against the bank instead of making arrangements to pay their debts honorably.

Tough times often bring about unnecessary litigation. While our clients try hard to nip these claims before they are brought, it is important to know the rules that now define financial abuse of an elder and to impress upon those who wrongfully try to hide behind these well-meaning laws that the bank is not going to tolerate being abused, either.

JMBM’s Special Assets Team™ and the workout professionals we represent are dealing with these distasteful strike suits. It takes a combination of skill and care to handle these cases with dignity and professionalism. Many of these cases can be dealt with at the motion stage, and often, a strong initial response is the best way to bring a meritless lawsuit to an end. Careful attention to the facts and to the often long-time relationship between the bank and its customer is also critical to a favorable result. Call us if one of your older business borrowers is being led astray by someone who wants to transform the bank’s source of repayment into an inheritance.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.