October 08 Newsletter

OCTOBER NEWSLETTER

Vol. 3, Issue 7 October, 2008

FDIC CHANGES RULES ON LIVING TRUSTS

Because of the recent high profile bank failures, there has been considerable concern on the part of holders of so-called "living trusts" funded in excess of $100.000.00 by deposits in FDIC protected institutions. In a press release dated September 26, 2008, the FDIC passed emergency rules concerning protection for payable on death and living trust accounts held in FDIC protected institutions:

"The FDIC's Board of Directors today adopted changes to simplify the rules for determining the coverage available on revocable trust accounts – commonly called payable-on-death accounts or living trust accounts. The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.

"Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary. For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary.

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair. "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records."

The new rules are effective as of today and apply to all existing and future revocable trust accounts at FDIC-insured institutions."

THE TRUE STORY OF THE McDONALD's COFFEE CASE

One of the great mythis of the tort reform movement is the McDonald's Coffee case. Here are the facts:

79-year-old Stella Liebeck of Albuquerque, New Mexico was in the passenger seat of her grandson's stopped car when she was severely burned by spilled McDonald's coffee. She was not driving the car as alleged.

Stella suffered 3rd-degree burns over 6% of her body, including her inner thighs, genitals, and buttocks. She was hospitalized for eight days, undergoing skin grafts.

Stella, a Republican, had never filed a lawsuit in her life and didn’t want to. She offered to settle for the cost of her medical expenses (somewhere under $20,000.00) , but the company refused even after a mediator suggested they should settle.

In court, it was revealed that McDonald’s deliberately kept its coffee 20 degrees hotter than industry standards and was aware from 700 prior incidents that this practice could result in severe burns. Even after suit was filed, the company decided not to reduce its temperature and not to warn its customers of any risk.

In the end, McDonald’s behavior outraged jury members who were skeptical of the case. Even the judge – who reduced the jury verdict by more than 80% – called McDonald’s conduct reckless, callous, and willful.

BEWARE OF THE FINE PRINT IN LOAN AGREEMENTS

A lot of small businesses are going to be restructuring their credit in the next two quarters. As the new economic situation settles in, many companies will find it necessary to tighten up their financial position to accomodate new financial realities.

In good financial times, many small business owners don't pay a lot of attention to the fine print on their loan documents. If the amount is right, the term is right and the rate is reasonable, they assume that they have driven a good deal with their lenders. But be advised, you had better read the fine print now or you may find yourself in an unpleasant position.

One of the fine print "gotchas" in some modern loan agreements is the cross collateralization clause. This clause holds that all of your loans with an institution are collateralized by all of the collateral on all of your other loans with that institution. For example, if you pay off an older truck in the fleet and decide to sell it, you may not be able to because it is still serving as collateral on the newer trucks financed through the same lender. You will need the lender's permission to dispose of it and you cannot use it as collateral on other loans with other institutions until the lien is cleared.

Two more of the fine print "gotchas" in modern loan agreements are the personal guarantee and rate escalation clause. These clauses can be particularly difficult in line of credit and business credit card agreements. They work this way. Suppose, God forbid, you have a bad quarter and can't pay everyone. So, being the responsible business person you are, you make the payments on your business equipment, your business credit cards, office rent, etc. but let the payments slide on your personal toys.

You may think that you have covered the bases but you forgot that one or more of your lenders asked you to sign a personal guarantee on your business lines of credit. In this case, not paying your personal debts can trigger a slow or bad credit report which in turn allows your lenders, both business and personal, to increase your rate on everything. So, you may suddenly be looking at a 27% or worse rate on ALL of your credit including your business. And that is an unsustainable situation for any length of time.

You need to read your existing credit agreements very carefully in light of the current economic conditions. If you are a typical small business person, you probably already have some credit agreements with these provisions. You need to understand the implications of these clauses before you make what may be costly financial decisions.

The Bill Kumpe Law Firm