Protecting the Lender’s Security Interest
The two primary documents that are executed when financing the purchase of a home are the mortgage note and the mortgage itself. The mortgage note sets forth the obligation of the borrower to repay the loan, while the mortgage gives the lender a security interest in the home being purchased, to secure the repayment of the mortgage note. In order to protect the lender’s security interest, the mortgage is then recorded in the office of the register of deeds for the county where the property is located. While you can have a promissory note without a mortgage, you can’t have a mortgage without a note; the two are inseparable.

Mortgage Electronic Recording System (MERS)
The buying and selling of loans backed by mortgages has been a common investment vehicle for decades. Every time the right to collect the loan was bought by a new investor, the mortgage went with it, and a transfer of the mortgage had to be recorded in the register of deeds’ office. As the popularity of these investments grew, market demands made such recordings cumbersome. In 1993, several large participants in the real estate mortgage industry set up something known as the Mortgage Electronic Recording System (MERS), in order to track electronically the ownership interest in residential mortgages. Mortgage lenders, and others, pay annual fees to MERS for the electronic processing and tracking of ownership and transfers of mortgages. MERS members appoint MERS as their agent (or “nominee”) on all mortgages they register in the system, and such appointment is referenced in the mortgages.

Judicial Foreclosure
There are two (2) ways to foreclose mortgages in Michigan. With “judicial foreclosure,” the mortgage holder files a lawsuit in the circuit court for the county where the property is located, asking the court to foreclose the mortgage based upon the borrower’s default. That process takes about a year and is subject to all of the vagaries, complications and expenses of litigation.

Foreclosure by Advertisement
The second method is “foreclosure by advertisement” pursuant to a “power of sale” contained in the mortgage. By this method, the mortgage holder need only post a notice on the property that the mortgage loan is in default, publish the notice, and fulfill a number of other procedural requirements. If those requirements are met, and if the mortgage note is not paid by the specified deadline, the mortgage is deemed foreclosed and the property is sold at public sale. The defaulting borrower then has the right to “redeem” the property from foreclosure for a limited window of time after the public sale.

Foreclosure by advertisement was created by law and has been around for a very long time. Because it is so much faster, easier and cheaper, virtually every residential mortgage contains the statutorily prescribed “power of sale” clause, and foreclosures by advertisement are pretty much the norm.

By statute, foreclosure by advertisement can only be undertaken by someone who has an ownership interest in the indebtedness or is the servicing agent of the mortgage. Under the MERS system as it existed at the time, MERS never actually owned an interest in the debt, nor did MERS have the right to collect the debt on its own behalf or that of its members. Nor was MERS the servicing agent for the mortgage. As a result, and although MERS had regularly been conducting foreclosures by advertisement on behalf of its members, the Michigan Court of Appeals ruled that MERS had no authority under the statue to do so.

Statute of Limitations
The reaction within the industry was swift: some title companies canceled scheduled closings on foreclosed properties, some refused to insure title on properties foreclosed by MERS, class action lawsuits were filed, and homeowners who had purchased properties foreclosed by MERS were left wondering whether or not they actually owned the property. Because Michigan has a five year statute of limitations to bring litigation to challenge a foreclosure, some opined that every MERS foreclosure that had occurred in the preceding five years would have to be re-foreclosed.

Quick Action by the Supreme Court
The ruling was immediately appealed to the Michigan Supreme Court. On November 16, 2011, the Supreme Court issued its order reversing the Court of Appeals on the basis that the Court of Appeals ruling was inconsistent with established Michigan law. Stated in the most general possible terms, the Supreme Court found that because MERS had an interest in the mortgage, and because the mortgage and note must be construed together, MERS did have an interest in the indebtedness sufficient to allow it to conduct foreclosures by advertisement. While many have heralded this reinstatement of the status quo as a benefit to homeowners, others have characterized the ruling as an embarrassment and a sell-out to special interests. As is often the case, the truth is probably somewhere in the middle. Either way, quick action by the Supreme Court to get this resolved was certainly a good thing.

Further Reading
If you’re inclined to do more reading, the case is Residential Funding Co, LLC v. Saurman. Both the Court of Appeals and Supreme Court rulings can be found at: http://www.courts.michigan.gov/.

The Court of Appeals not only found the landlord’s self-help lockout to be unlawful, but it found the landlord’s retention of the tenant’s personal property to be statutory “conversion” and awarded the tenant triple the fair market value of the personal property, plus attorney fees. In rejecting the landlord’s argument that the tenant had abandoned its personal property, the Court relied on a Michigan statute that allows a person harmed through the unauthorized taking of his or her property to receive treble damages.

Landlords should act with caution when dealing with either a tenant in default or personal property that it perceives has been abandoned. A well-crafted lease can afford some protection with regard to abandoned personal property, but a formal eviction is the only option when a delinquent tenant refuses to either pay up or to vacate the premises voluntarily.

Lee Flaherty

The unlimited medical benefits derive from two sources. The injured driver’s insurance carrier pays the first $500,000 in benefits. If medical expenses exceed $500,000, the insurance carrier will pay the additional amounts but will then be reimbursed from the Michigan Catastrophic Claims Association (MCCA). Michigan drivers pay for these benefits in the form of a premium paid to the carrier and an additional assessment ($145 per vehicle for 2012) paid directly to MCCA. The current debate stems from the MCCA’s claim that the system is unsustainable and that the MCCA cannot afford to cover the spiraling costs of unlimited lifetime medical benefits. Consumer groups complain that the MCCA (which is operated by insurance industry executives) has not shared the data on which it bases its argument.

Pending legislation before the Michigan House would modify the current no-fault statute to impose limits on lifetime medical and rehabilitation benefits. Those limits (ranging from $500,000 to $5 million) would depend upon the level of insurance coverage drivers choose to purchase. Motorcyclists would have medical benefits capped at a maximum lifetime benefit of $250,000.

Assuming the Legislature implements the proposed changes, the question remains, “How will catastrophic claims beyond the available insurance coverage be paid?” If I opt for the cheapest available coverage and then end up in a catastrophic accident, where will I turn for medical benefits? One option is to purchase excess insurance coverage to protect against the risk. A more probable source for most drivers will be government benefits such as Medicaid. And of course, the possibility remains that the injured driver must forego treatment.

This is a complex, but extremely important, issue. Both sides of the debate raise valid questions that should be answered. Every Michigan driver should take some time to review the issue and understand the potential implications for herself, her household and the State of Michigan.

Dirk A. Beamer

In October, the IRS announced cost of living adjustments affecting dollar limitations for pension plans and other retirement-related items for the 2012 tax year. This is the first time since 2008 that the limits have been increased, which is mainly attributable to the fact that the cost of living in recent years either decreased or did not increase enough to trigger adjustments.

According to www.irs.gov, here are a few highlights of the changes (see below for expanded information):

• The elective deferral (contribution) limit for employees who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is increased from $16,500 to $17,000.
• The catch-up contribution limit for those aged 50 and over remains unchanged at $5,500.
• The limitation for defined contribution plans under Section 415(c)(1)(A) is increased in 2012 from $49,000 to $50,000.
• The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (AGI) between $58,000 and $68,000, up from $56,000 and $66,000 in 2011. For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $92,000 to $112,000, up from $90,000 to $110,000. For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000.
• The AGI phase-out range for taxpayers making contributions to a Roth IRA is $173,000 to $183,000 for married couples filing jointly, up from $169,000 to $179,000 in 2011. For singles and heads of household, the income phase-out range is $110,000 to $125,000, up from $107,000 to $122,000. For a married individual filing a separate return who is covered by a retirement plan at work, the phase-out range remains $0 to $10,000.
• The AGI limit for the saver’s credit (also known as the retirement savings contributions credit) for low-and moderate-income workers is $57,500 for married couples filing jointly, up from $56,500 in 2011; $43,125 for heads of household, up from $42,375; and $28,750 for married individuals filing separately and for singles, up from $28,250.
• The dollar limitation under Section 416(i)(1)(A)(i) concerning the definition of key employee in a top-heavy plan is increased from $160,000 to $165,000.
• The limitation used in the definition of highly compensated employee under Section 414(q)(1)(B) is increased from $110,000 to $115,000.

As always, if you have any questions, please contact Wright Penning & Beamer.

Julie P. Cotant

Current transactions involve distressed sales, foreclosures and short sales
While some believe that with the downturn in the economy there is not much going on with real estate these days, it is actually just the opposite. Unfortunately, the bulk of current transactions involve some sort of distressed sale, including foreclosed properties and short sales. These transactions take more time to close, are much more complicated and provide enhanced opportunities for fraud.

New statutory amendments to address growing fraud
While many have lost their homes, and the economy as a whole has suffered from unprecedented losses in the mortgage and real estate markets, others have found new and innovative ways to profit, sometimes illegally. In response, this past October the Michigan legislature passed, and Governor Snyder signed into law, a number of statutory amendments to address the growing problem of real estate and mortgage fraud. They include the following:

• Amendments to the Penal Code that provide that any person who falsely makes, alters, forges or counterfeits a deed, discharge of mortgage, power of attorney or other document that affects an interest in real property is guilty of a felony;
• Creates as a felony the new crime of residential mortgage fraud with penalties including fines, imprisonment and forfeiture of property used in connection with the crime, as well as invalidation of the fraudulent transaction;
• Increases the maximum prison terms for crimes involving obtaining money by false pretenses; and
• A ten (10) year statute of limitations for crimes involving false pretenses in connection with real property transactions, mortgage fraud, falsifying or forgery involving documents affecting an interest in real property.

Michigan Notary Public Act
In addition, the Michigan Notary Public Act has been amended to provide that it is now a felony punishable by a maximum fine of $5,000 and/or imprisonment for up to 4 years if a person knowingly violates the Notary Public Act when notarizing any document relating to an interest in real property or a mortgage.

All of these amendments take effect January 1, 2012. If you believe that you have been a victim of, or witness to, a fraudulent real estate transaction or mortgage fraud, please contact the Consumer Protection Division of the Michigan Attorney General’s office at 877-765-8388 or visit the Attorney General’s website.

Duane L. Reynolds

I learned about the website at a workshop Rob recently presented at a national conference. In his workshop, Rob spoke about legal hotspots for nonprofits and churches. One of the hotspots is related to the new requirement that ALL tax-exempt organizations other than churches and church-related organizations must now file some version of Form 990 annually. Organizations that fail to file for three consecutive years will automatically lose their tax-exempt status. As a result of this new law, more than 275,000 nonprofits lost their tax-exempt on October 15, 2010. (We’ve written about this previously, so hopefully the news about this filing requirement does not come as a surprise to you.)

You can find out if your organization’s tax-exempt status has been revoked by going to www.IRS.gov/charities. If your organization’s name is on the “Automatic Revocation of Exemption” list, be aware that your donors can no longer deduct their contributions to you. Also, know that we would be happy to help you in re-applying for tax-exempt status. This is a task you will not want to put off, as any income received between the date of revocation and the date of reinstatement may be taxable.

On a related note, Rob shared that the IRS believes that most small nonprofits and churches are violating the tax-exempt requirements. As a result, the IRS has not only published increased guidance to assist organizations in complying with the requirements (we’ve also written about that), but it is making it tougher for nonprofits to acquire tax-exempt status in the first place. For example, each successive version of the Application for Recognition of Exemption has contained increasingly detailed questions about matters such as governance policies and sources of support.

In addition to the change in IRS focus, Rob reported that Senator Charles Grassley’s new Senate Nonprofit and Church Law Commission is exploring a number of significant changes, such as:

• Whether the income tax exclusion for clergy housing allowances should be limited or eliminated;
• Whether churches should have to file the same detailed annual information that other nonprofits have to file;
• Whether there should be an excise tax imposed on nonprofit organizations, not just individuals, that engage in excess benefit transactions;
• Whether the rule preventing the IRS from randomly auditing churches should be repealed;
• Whether the prohibition against churches and other Section 501(c)(c3) nonprofits engaging in political campaigns should be modified or repealed;
• Whether we need new laws clarifying the tax treatment of “love offerings” paid by church attendees to ministers; and
• Whether the “rebuttable presumption” of reasonableness for transactions between nonprofits and their leaders should be modified or eliminated.

For the most part, these changes are meant to address abuses by large organizations. If adopted, however, some of them have the potential of significantly impacting the bottom line of small churches and their pastors.

Lee Flaherty

by JT (Tom) Buck
an old entrepreneur

Recently, a very good friend had the unfortunate situation of an employee embezzling funds from his company. This was not sneaking an extra $20 onto an expense report. It was a concerted effort over a long period of time to steal and hide the misappropriation of large sums of money.

The employee had literally stolen several thousand dollars per month over several years. The embezzlement was hidden in legitimate looking, duplicate vendor invoices, checks which were signed by an authorized signer; which then were altered on the payee line. The volume of checks and invoices handled on a monthly basis obscured the false transactions. My friend was shocked at the behavior of this trusted employee. He was fortunate that insurance provided a partial recovery and that the company’s long-term prospects for success were not harmed once this was discovered. However, the loss, the effort for recovery, and the damage done to their culture of trust was extreme.

My friend is a very smart and trusting man. This led to the success of the thief for many years, yet, following this experience, several financial procedures in his company were changed to prevent a future occurrence of this type of theft. This story and the following practices were gathered from a review of best practices as recommended by two leading CPAs in Southeast Michigan and are shared for the benefit of other business owners. If implemented, these practices will greatly reduce the probability of your company having a similar experience.

Practice Number 1 – Disbursement Review
These best practices start with a complete review of all funds going out of the company. This particular practice would have, most likely, prevented the embezzlement at my friend’s company. An owner must review every disbursement item on the bank statement, comparing each item to the related invoices or originating transaction, every month.

Practice Number 2 – Review Endorsements on Checks
For every check written, read the endorsements on the back to ensure they are going where intended. Some banks do not return the paper checks in efforts to become more paperless. This may require viewing the backs of checks on-line.

Practice Number 3 – Review Cash Transfers
Some of your transactions may be through automatic transfers or pre-authorized withdrawals. This practice requires a specific review, every month, of all other transactions involving cash transfers including but not limited to: ACH, Tax, 401k transactions and other payments. Make sure these amounts match the expected payments and originating documents.

Practice Number 4 – Enter all Debits and Credits into the Accounting System
Many times smaller credits or debits can go unnoticed in the busy activity of a month. These can be in the form of a refund on a vendor invoice, or a discount for early payment, or perhaps even a small expense item paid for out of petty cash. These transactions are often not tracked well in the accounting system because they are small or seem unimportant. These debit memos and credit memos must be entered into the accounting system to have accurate accounting and to prevent the possibility of the funds they represent being misappropriated.

Practice Number 5 – Enter all Payables into Accounting
A bill, which arrives the first of the month and is due within the month, may be placed into the payments file and just entered into accounting as an expense opposite a cash payment. To track these fully, they should be entered as an expense opposite (increasing) the payable account, then cash opposite (decreasing) the payable account. Otherwise, payables records will be incomplete.

Practice Number 6 – Follow the Rules
Create a culture of following the financial rules. Contrary to a world where we want to see ‘out of the box’ thinking to improve our products, our services and our relationships with customers, the financial reporting and management arena is one where following the rules keeps bad things from happening. Any deviations from these particular rules should be well understood and documented.

Practice Number 7 – Background Investigations
Establishing the practice of performing background checks on employees who work with the accounting system, financial payments and financial receipts is a way to insure that the people handling these transactions do not have a history of malfeasance. As intrusive as this may feel, it is incumbent on owners, for the success of the enterprise to employ talent with the highest ethics for work in finance and accounting.

Practice Number 8 – Enforce Vacation Policy
The discovery of the malfeasance in my friend’s company occurred while the employee was on vacation and another employee was covering their responsibilities. This points out the wisdom of enforcing a minimum of a one-week vacation per year, with another employee stepping in, for those with financial responsibilities in the organization.

If these eight practices are followed, the likelihood of an employee escaping with corporate funds is greatly reduced. Owners often find having a personal focus on sales and operations to be of the greatest satisfaction as they apply their time and energy in their organization. While delegation of financial responsibilities seems prudent, regular time allocated to these practices will improve the results and security of the company’s resources. The embezzler from my friend’s company is serving time in jail as of the timing of this writing. While this prospective consequence deters most employees from stealing, without the above practices it is possible they could escape.

Thanks to Jim Bauters of UHY Advisors, Inc. in Southfield, Michigan, and to Kevin McKervey of Clayton McKervey, P. C. also of Southfield, Michigan, for their suggestions and contributions to the creation of this article. Thanks also to my friend for being willing to share a terrible experience to help others avoid the problem.

Dirk A. Beamer

Starting November 14, 2011, most private sector employers will be required to add an additional notice poster on their breakroom wall. The new poster informs employees about their right to form or join a labor union. Employers can download the poster for free at the NLRB website.

Certain small businesses will be exempt from this requirement since the NLRB chooses not to exercise jurisdiction over companies that have minimal impact on interstate commerce. As a general rule, retailers and home builders that sell less than $500,000 a year will be exempt. Nonretail businesses that provide no more than $50,000 in goods or services to out of state customers – or who buy no more than $50,000 from out of state suppliers – are exempt. But when considering whether something was bought or sold “out of state,” the NLRB looks at is first origin or its ultimate destination. Thus, unless the good or service originates in, and never leaves, the same state as the company, it is part of interstate commerce. Practically speaking, this means most small businesses still fall under the NLRB’s jurisdiction and need to post the new notice.

Dirk A. Beamer

Individual mandate exceeds powers
Specifically, the Court found that the expansion of the Medicaid program in the Act was constitutionally sound, but that the individual mandate exceeded Congress’ powers under the Commerce Clause and Taxing and Spending Clause of the Constitution. Despite striking down the individual mandate, the Court did find that it could be severed from the remainder of the Act and therefore did not require invalidation of the Act’s other provisions.

Likely decision during summer of 2012 if reviewed
It is not yet known if the Supreme Court will take the case, although it is likely. In light of the 11th Circuit ruling and the division among the lower federal courts across the country as to the Act’s constitutionality, all sides appear to agree that Supreme Court review is necessary. If the Supreme Court agrees to review the Act, a decision will likely come down during the summer of 2012, with the presidential election only a few months away.

In the meantime, the Act will march on, although little on the timeline for the next year will change the current state of affairs for business and most individuals.

Julie P. Cotant

Providing for safe disposal of prescription drugs
In response to both the environmental and human aspects of the problem, the Safe and Secure Drug Disposal Act of 2010 was signed into law on October 12, 2010. This Act amended the federal, Controlled Substances Act and allows the Drug Enforcement Administration (DEA; an agency of the U.S. Department of Justice) to develop a process that provides for the safe disposal of prescription drugs. A key ingredient of that process are drug take back days. These events, overseen by the DEA in conjunction with local law enforcement agencies, are scheduled every six (6) months around the country. The first two such events took place in 2010 and involved more than 4,000 state and local law enforcement agencies. These two events resulted in 309 tons of pills being collected.

Finding drug collection sites near you
The next National Prescription Drug Take Back Day is scheduled for October 29, 2011. For more information contact you local law enforcement agency and visit the DEA Drug Take Back website. The website contains a useful link for finding collection sites near you.

Duane L. Reynolds