Banking and Business Monthly – March 2017

DOES DODD-FRANK EXTEND ITS ANTI-RETALIATION PROTECTION TO INTERNAL WHISTLEBLOWERS?;  IS A THIRD PARTY BUYER LIABLE FOR DELINQUENT ASSESSMENTS TO A MORTGAGEE’S SUBSIDIARY?

A: NINTH CIRCUIT ADDS TO CIRCUIT SPLIT ON DODD-FRANK’S ANTI-RETALIATION PROTECTION OF INTERNAL WHISTLEBLOWERS

In Somers v. Digital Realty Trust Inc., No. 15-17352, 2017 WL 908245 (9th Cir. Mar. 8, 2017), the Ninth Circuit held that Dodd-Frank’s anti-retaliation protection extends to whistleblowers who report alleged unlawful activity internally but not to the Securities and Exchange Commission (“SEC”). The Ninth Circuit has sided with the Second Circuit (as well as the SEC) and against the Fifth Circuit on this issue.

Section 21F of the Dodd-Frank Act prohibits an employer from taking any adverse action, threatening, harassing or otherwise discriminating against any “whistleblower” who, among other things, makes “disclosures that are required or protected by” the Sarbanes-Oxley Act or any other “law, rule, or regulation subject to the jurisdiction of the Commission.” 15 U.S.C. § 78u-6(h)(1)(A)(iii). At issue in Somers was the meaning of the term “whistleblower.” Earlier in Section 21F, “whistleblower” is defined as follows:

The term ‘whistleblower’ means any individual who provides, or 2 or more individuals acting jointly who provide, information relating to a violation of the securities laws to the Commission, in a manner established, by rule or regulation, by the Commission.

15 U.S.C. § 78u-6(a)(6) (emphasis added). Because the plaintiff in Somers had only reported his concerns to his former bosses – and not to the SEC – at the time he was fired, his employer argued that he was not a “whistleblower” for Dodd-Frank purposes and that his retaliation claim under Section 21F must therefore be dismissed.

The Ninth Circuit disagreed and ruled that, for purposes of Dodd-Frank’s anti-retaliation prohibition, a “whistleblower” is any employee who makes a covered disclosure of potential violations, whether to the Commission or internally. The majority reasoned that subsection (iii), which added internal disclosures under Sarbanes-Oxley to the list of protected acts in the Dodd-Frank anti-retaliation provision, was added at the last minute with no legislative history, but nonetheless indicated a congressional intent to include internal reports of potential unlawful acts under the umbrella of Dodd-Frank protections. It added that the SEC, as the agency responsible for enforcing the securities law, had “resolved any ambiguity” through its Interpretive Rule coming to the same conclusion and that “its regulation is entitled to deference” under Chevron U.S.A. v. National Resources Defense Council, 467 U.S. 837 (1984).

The Ninth Circuit’s decision increases the likelihood that the U.S. Supreme Court will ultimately weigh in to resolve the conflict. All of these decisions highlight the need for a publicly held employer to carefully consider any adverse action against an employee who has made an internal complaint that might trigger Dodd-Frank’s protections.

B: ILLINOIS SUPREME COURT AGREES TO DECIDE WHETHER A THIRD PARTY BUYER IS LIABLE FOR DELINQUENT ASSESSMENTS TO A MORTGAGEE’S SUBSIDIARY

Section 9(g)(4) of the Illinois Condominium Property Act (“Act”) states that any purchaser of a condominium unit who acquires a property either at a foreclosure sale or by a post-foreclosure purchase from the mortgagee must pay the last six months’ worth of delinquent assessments on the unit. 765 ILCS 605/9(g)(4). At issue in Wing Street of Arlington Heights Condominium Association v. Kiss the Chef Holdings, LLC, 2016 IL App (1st) 142563, was whether a wholly-owned subsidiary of the mortgagee who was the purchaser at a foreclosure sale could be considered the “mortgagee” under Section 9(g)(4) of the Act, and therefore cause the subsequent purchaser from the subsidiary to be liable to pay back assessments.

In Wing Street, a bank foreclosed on its mortgage, and its wholly-owned subsidiary bought the condominium unit. The subsidiary paid the current assessments on the unit from January 2012 until it was sold to a third party on March 29, 2013. Neither the subsidiary nor the third party purchaser requested a paid assessment letter from the condominium association before the sale. Nine months after the property was sold, the condo association sued the third party buyer, alleging that because the subsidiary was a “mortgagee” under Section 9(g)(4), the new owner owed six months’ worth of back assessments.

The Appellate Court agreed, reasoning that the legislature’s intent in enacting Section 9(g)(4) was to provide that condominium associations would at least be able to recover a portion of the prior owner’s unpaid assessments when the unit is sold. It held that the subsidiary was a “mortgagee” within the meaning of Section 9(g)(4) of the Act, and because the third party purchaser failed to pay the past six months of unpaid assessments upon its purchase of the condominium unit, a lien for that amount arose, and the condominium association could enforce it directly against the third party purchaser. However, during this past January term, the Illinois Supreme Court agreed to consider an appeal of Wing Street and ultimately decide this issue. Expect a decision later this year.

Steven A. Migala is a partner at Lavelle Law and possesses over 20 years of providing excellent representation to banks, businesses and individuals in a variety of matters. He can be contacted at (847) 705-7555 and smigala@lavellelaw.com.