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Tangling over top producers.

Are you fighting an urge to lure away that top producer down the street? Then read this to make sure your hiring stays on the high groud.

AS EFFORTS TO OFFSET RUNOFF WITH NEW LOAN PRODUCTION REACH A frenzied pace, the hiring of top loan officers and branch managers from competitors intensifies. Jilted employers, facing the loss of both portfolios and best producers, often turn to litigation to redress the perceived harm.

Where should you draw the line? When does normal recruiting turn into a predatory raid? This article outlines some general guidelines that a mortgage company should consider when recruiting branch managers and loan officers.

As a general rule, any company has a right to hire employees and compete for labor. Likewise, most employees are "at-will employees," free to accept or terminate employment whenever, and for whatever reason, they choose. Some employees, however, may have entered into contracts with provisions that address their term of employment, conditions for contract renewal or termination, or conditions regarding post-term competition.

The legal principles generally governing the recruiting and hiring of personnel are set by state law. As a result, the rules vary from state to state. These limitations principally arise under a state's common law, which is derived from court decisions. The case law in the area of employee recruitment appears highly fact-driven, with small variations in specific facts, timing or intent, often determining the outcome of a claim.

A number of states have enacted a version of the Uniform Trade Secrets Act. This model law seeks to legislate the type of information that has independent economic value worthy of protection by law. The model law also seeks to balance the interests of employer and employee with respect to the ownership of information and experience gained over the course of employment.

As for the recruiting of branch managers and loan officers, the risk of liability to a mortgage company arises primarily from one of three types of claims: (1) tortious interference with contract ("contract interference"), (2) tortious interference with prospective business relations ("business interference") or (3) the theft of "trade secrets." The full extent of potential exposure to a lawsuit in a given situation cannot be determined without examining pertinent state law and the factual circumstances. Moreover, a mortgage company can't protect itself completely from litigation regardless of the hiring and recruitment policies and procedures followed. Nevertheless, certain general guidelines are useful.

Won't compete covenants

The existence of an employment contract or a compensation agreement with an unexpired term or a "post-term covenant not to compete" is the principal limitation on an employee's ability to join a competing company. A postterm covenant not to compete merely is a promise that an employee will not compete with the previous employer after termination of the employment. Such agreements usually last for a limited period of time within a limited geographic territory.

Covenants not to compete often are not enforced by the courts. However, courts have upheld them when they are found to protect legitimate business interests. An employer, for example, has legitimate and widely recognized interests in protecting the following: customer relationships, particularly long-term relationships; goodwill; confidential information in general; trade secrets, customer lists and other confidential customer information; and training with respect to unique, special or extraordinary skills. To be enforceable, however, a covenant not to compete must restrict competition no more than is reasonably necessary to protect the employer's legitimate interests, in terms of the agreement's duration, geographic scope and the prohibited activities.

In terms of mortgage banking, there are several circumstances that might warrant a mortgage lender seeking to protect its interests by entering into a contract with a branch manager not to compete upon termination. Such circumstances would exist if, for example, a branch manager had access to a special list of real estate brokers working a niche market, or possessed information on the pricing arrangements of his or her employer, or would be able to trade unfairly on the lender's goodwill after termination or had been trained to provide certain unique services. Depending on the facts, and the scope and extent of the restrictive covenant, a court might find such a covenant valid and enforceable.

On the other hand, a number of circumstances might make a covenant against competition unenforceable under a particular state's law. A covenant could be deemed overly broad in scope or duration. For example, if a post-term covenant does not have geographic limitations, then it might be considered unenforceable as written.

The length of time that the prospective recruit has been employed is another circumstance that might bear on the enforceability of a covenant. If a new employee recently entered into a contract with a covenant not to compete, the employer might have a difficult time substantiating a claim that its business interests would be harmed if the covenant were not enforced.

A number of states have enacted laws that under certain circumstances void post-term employment covenants. Section 16600 of the California Business and Professions Code, for example, makes all post-term, noncompete covenants void, unless the covenant is ancillary to the sale of a business or to a partnership dissolution agreement. This means that loan officers and branch managers in California can't be restricted by a noncompetition agreement if they elect to compete directly with their former employer after they leave. This is why the rules on enforceability of noncompete covenants should be examined on a state-by-state basis.

Hiring can create liability

Although the employee is subject to the contractual restrictions, the risk to a prospective employer in hiring that employee is potential liability for improper contract interference. Such liability arises when a party intentionally and improperly interferes with the performance of a contract by inducing or otherwise causing the employee not to comply with contractual obligations to the former employer.

The more active and aggressive the recruitment of an employee subject to a contractual restriction, the more likely it is that a case can be made that the recruiter acted improperly and induced a breach of contract. It is important to note, however, that the breach of an existing contract is a necessary element to an action for contract interference. Accordingly, a mortgage company does not take on liability merely by talking with an applicant under contract with another lender.

Before a court will impose liability for contract interference, it must be proven that the party doing the recruiting knew of the contract, intended to improperly interfere with the contract (i.e., without legal justification) and induced or otherwise caused the nonperformance of the contract.

Although a company ordinarily can't be held liable for contract interference if it didn't know the contract existed, this defense is often ineffective. The recruiting company need not know the specifics of a noncompetition provision to satisfy the element of knowledge. Rather, the awareness of the general existence of a contract may be sufficient.

Even if a mortgage company does not ask or know about either an applicant's employment contract or a covenant not to compete, it won't necessarily be spared litigation. An existing employer facing the loss of key personnel may sue, forcing a mortgage company to prove that it had no knowledge of the contract.

Better to ask

On balance, we believe it is best to inquire whether a prospective employee has an employment contract or a compensation agreement with a covenant not to compete. If a recruit is not subject to a contract or to a post-term covenant not to compete, then the threat of litigation is diminished substantially (but not necessarily eliminated entirely).

If, however, a candidate is subject to a fixed-term employment contract or a contractual post-term covenant not to compete, then the recruiting employer should find out the extent, duration and enforceability of the contract or covenant. A mortgage company may decide to postpone further discussions with the branch manager or loan officer until one of several circumstances occurs. The company might want to wait until the current contractual obligations expire in accordance with their terms; or wait until the person being recruited obtains a written release from contractual obligations, or wait until the prospective employer concludes definitively that the restrictive covenant is unenforceable.

In some states, even interference with unenforceable contracts can be cause for legal action. Alternatively, if a contract includes some type of "buy-out" provision that can be exercised without additional penalty or fear of litigation, a mortgage company may want to evaluate the costs associated with the buy-out when considering the candidate.

A third alternative is to work around the contractual proscription. For example, if a covenant is limited in geographic scope, hiring the employee to work in another region of the country would not breach its terms.

To be liable for interference with a contract, a defendant must interfere intentionally and improperly with the performance of that contract. It is not necessary that the defendant act with the purpose of interfering with the contract. Interference may be established if the defendant recognized that interference was substantially certain to result from its actions. Although the interference must be improper, the impropriety need not be heavy handed or malicious. Impropriety is determined by balancing a variety of factors, and any determination will depend on the particular facts and circumstances. Generally, however, there is a strong risk that any interference with an existing contract will be found "improper" unless the contract is deemed unenforceable.

A defendant also must induce the nonperformance of the contract. Inducement of the nonperformance of a contract could include any act by which the interfering party persuades the employee not to perform under the contract. Evidence of inducement may be found on the basis of initiating contact with the prospective employee, offering an unusually good bargain or benefit as an incentive to breach the contract or offering to indemnify the employee against a breach of contract claim.

Factors that may weigh against "inducement" include proof that the employee was predisposed to terminate his or her contract, had taken steps to do so or that the interfering party generally advertised its staffing needs or intentions to recruit, rather than targeting the employee in question.

Interference with business relations

Even if no contract exists between the prospective employee and his or her present employer, and the person is free to leave (i.e., an at-will employee), a company that seeks to hire away a competitor's employees may risk, under certain circumstances, a claim of improper business interference. This claim often arises when a company is perceived as having "raided" the employees of a competitor for the purpose of harming that particular company.

The courts generally begin from the premise that a business has a legitimate interest in competing for talent. If, however, it can be shown that the purpose of the recruiting was to injure the competitor or that the recruiting methods used were otherwise wrongful, a defendant may be held liable for interference with business relations. The key element in a claim of business interference is that the conduct was "improper." As with a claim of contract interference, the impropriety need not be malicious. A violation of business ethics or recruiting customs could be argued as an unfair or improper method of recruitment.

An employer who seeks to penetrate a market and disadvantage a competitor by targeting the competitor's office, or who recruits a key employee for the purpose of that person inducing others to leave, would risk liability from a claim of business interference. If, however, a firm seeks to advance its own interests rather than to harm its competitor and, in so doing, competes fairly for the talents of an employee and does not induce a breach of contract, then liability for business interference is unlikely. While competition for employees is in a sense "privileged" in the absence of inducement of breach of a contract, the "privilege" is not as readily recognized when the breach is considered induced.

Trade secrets

A mortgage company also should be sensitive to issues involving a competitor's proprietary business information to avoid a claim that it is attempting to misappropriate confidential information or "trade secrets." Obviously, not all business information known by a prospective employee would be deemed confidential and protectable. To the extent information is available to the public, such as a list of real estate brokers, addresses and phone numbers available through a telephone directory, the information should not be deemed confidential. To the extent a list of real estate brokers has been cultivated to identify brokers working a certain "niche market," then the list might have some value and may be considered confidential.

In the mortgage banking industry, trade secrets also could include such information as details of specialized loan programs; specially developed computer programs; business and marketing plans; developer, builder or investor lists; or servicing lists involving high interest rate or government loans. Matters of public knowledge in the mortgage finance business, however, cannot be appropriated by one lender.

In addition to determining whether the information is available in the marketplace, courts ordinarily will look to see if the employer acts as if the information is confidential. Business information that is not treated as confidential, or is made available to third parties, may not warrant protection. For business information to be considered confidential and protected by law, courts generally have held that an employer must take steps to protect its interests beyond merely labeling the information as confidential.

Recruiting and hiring

In its recruiting efforts, a mortgage company can consider using several different approaches, including general advertising, use of headhunters, "cold calls" and referrals. A mortgage lender also may want to evaluate opportunities presented by the departure of substantially all of the employees of a single branch office.

Placing a general, nontargeted advertisement in a trade or general-distribution publication is a low-risk recruiting approach. Before a mortgage company starts recruiting specific individuals in a particular region, it should consider general advertising of its staffing needs. Advertising can generate inquiries and provide evidence that the mortgage company intended to recruit generally in a given area. It is much harder to criticize a hire, or fabricate a claim, if it can be shown that recruits are responding to a general advertisement. Mortgage companies should document inquiries made in response to their advertisements and maintain such information in an employee's file.

General advertisements aimed at the mortgage finance audience might extol the benefits of working for a mortgage company and provide information about a mortgage company and its business objectives. Advertisements should avoid opinions or views about competing mortgage companies, or lenders in general, that could give rise to claims of commercial disparagement.


There is nothing illegal or improper in retaining a headhunter, provided the process of recruiting is handled correctly. Use of a headhunter raises concerns, however, because the risks associated with soliciting an employee are greater than if that employee contacts a prospective new employer on his or her own. The risk of liability increases if an attractive candidate or key employee is pursued aggressively by a headhunter and, as a result, is induced to breach a contract with his or her current employer.

A mortgage company should discourage headhunters from pursuing candidates who have expressed no interest in response to initial inquiries and from disparaging the current employer. A mortgage company should also have some degree of comfort that the headhunter it retains follows procedures to identify employees with contractual restrictions and avoids making any offer or suggestions that would induce such an employee to breach his or her contract.

In a specialized profession such as mortgage finance, the reputation of a particular branch manager or loan officer may be well known. Information about branch managers or loan officers seeking to change employment may also be available through an informal network. It is not uncommon to identify candidates through referrals or word of mouth. There is nothing inherently improper in contacting a candidate identified through a referral or recommendation. However, as with the use of a headhunter, the risks associated with a mortgage company calling and soliciting an employee are greater than if the employee responds to a general advertisement.

In recruiting qualified branch managers and loan officers, a mortgage company should not target (and should avoid the appearance of targeting) competitors' organizations or a group of employees working for another lender. Targeting a branch office and aggressively soliciting the employees of that office invites litigation. Thus, a mortgage company should not focus its recruitment efforts in any region on one group of employees, or from region to region on a particular lender's employees.

Multiple defections

Situations where an entire branch office independently undertakes to "defect" to another lender are not uncommon in this business. Although a mortgage company may not have initiated the branch office defection, or engaged in any improper conduct, the recruitment of all or a significant number of employees from one office increases the risk of litigation because the harm to the former employer is so immediate and substantial. A loan production office may have a recognized value in the marketplace, thereby compelling an employer to seek compensation for its loss.

If in response to an ad placed for general readership a branch manager contacts a mortgage company out of personal interest and on behalf of a group of loan officers, the hiring lender's interests would be protected best if the candidates were encouraged to apply individually. If these employees desire to pursue employment as a group and a mortgage company wants to consider hiring the group, then additional concerns should be addressed. At that point, it would merit looking carefully at the law for that jurisdiction and managing the negotiations with the defecting group with particular care.

Although the opportunity may appear attractive, a mortgage company should understand the heightened risk of hiring loan officers through branch managers it may wish to recruit. A branch manager may possess confidential information about a loan officer, such as information regarding his or her salary or performance evaluations, which the branch manager can use to persuade the employee to leave his or her current employer.

Consequently, a mortgage company should not make an offer to a branch manager contingent on that manager recruiting one or more loan officers. In interviewing a branch manager candidate, a mortgage company should not suggest that it hopes to recruit loan officers through the branch manager or ask questions that suggest it wants the branch manager to solicit his or her loan officers. Beyond the normal rules just discussed, branch managers are often officers of the lending company that employs them. If so, the branch manager would owe a fiduciary duty to the company. Suggesting that a branch manager solicit his or her loan officers, therefore, could lead to a claim that the recruiting lender induced a breach of fiduciary duty.

While risk remains if the recruiting of loan officers is pursued even after a branch manager has left his or her former employer, the risk is mitigated if some time has elapsed between the prior employment and the contact. This is the case if the loan officers are simply notified of vacancies and not pursued actively, or if the branch manager merely identifies good loan officers to senior management. Moreover, loan officers often voluntarily wish to follow their branch managers. While the risk of litigation may be increased, there is nothing inherently improper or illegal in hiring all or some loan officers from a branch who seek on their own to follow a branch manager.


Before engaging in any substantive discussions with a branch manager or loan officer who has approached the recruiting lender independently, in response to a general circulation advertisement, or in response to a solicitation from a mortgage company or a headhunter, a mortgage company should find out some important facts. Those details include:

* Why the applicant has reached a decision to leave his or her employment. Or, if an applicant's contract is due to expire, why doesn't that person wish to renew the agreement?

* Whether the applicant has recently sought employment with other mortgage lenders.

* Whether the applicant currently is a party to a written contract of employment or compensation agreement, and, if so, whether the contract or compensation agreement includes any post-term covenants against competition.

* If an employment contract exists, whether or not the applicant has sought to terminate it.

* Whether or not the applicant is subject to a post-term covenant not to compete in connection with a former employer.

* What the term is of applicant's present contract, conditions for termination, and the duration and scope of any covenants not to compete. For this purpose, it is preferable to obtain a copy of the agreement.

If the prospective employee is subject to a contract or covenant not to compete, a mortgage company may wish to inform the employee that it can't hold further discussions without getting information about the termination and renewal provisions or any restrictions on competition. Once a mortgage company has this information, it can decide whether or not further discussion is appropriate.

A recruiting mortgage company should not make any statements to the applicant or take any action that would encourage or induce the applicant to breach an existing contractual obligation. A mortgage company also should not offer to indemnify a prospective employee against liability for breach of contract with its present employer.

If further discussions are warranted, given these precautions, a lender may proceed with its usual recruitment presentation. A mortgage company should confirm the existence of factors or the absence of restrictions that make further discussions possible, and document them for its records. While a recruiting mortgage company will necessarily inquire about the experience and responsibilities of the applicant, it should avoid questions that would elicit information about the current employer's business. A recruiting lender may provide accurate information about the benefits and advantages of joining its organization, but should avoid negative comments or disparaging remarks about the applicant's current employer.


A mortgage company also may want to discuss with a prospective employee the handling of his or her departure from the current employer. The hiring lender may want to discuss the way to advise the current employer and the best timing for giving notice and for making the actual departure.

If a decision is made to hire the candidate, arguably the potential exposure is less if the current employer is told as soon as possible. That way fewer opportunities arise for confidentiality to be breached. The employee may offer to remain for a period of time to "wind down" current responsibilities, complete the processing of loans in the pipeline, afford sufficient time to find a replacement, and otherwise arrange for an orderly transition. The prospective employee should be advised to make arrangements with the former employer for handling and being compensated for any "pipeline loans" he or she originated.

There is no way to purge prospective employees of their knowledge or experience. But a recruiting lender should take steps to ensure that a future hire does not take or convey any business information or opportunities that belong to the former employer. A mortgage company should strongly discourage future hires from bringing any such information with them and should not consider hiring loan officers because they have "loans in process."

Moreover, a mortgage company should direct any newly hired branch managers or loan officers to leave any loans in process with former employers, whether borrowers have made application or only inquiries. Prospective employees should recognize that if loan applications are diverted from their former employers, both the recruiting mortgage company and the employee could be exposed to liability.

Hiring established loan officers may help a mortgage company kick start a loan production operation. But if mishandled, that process can create potential legal exposure. Furthermore, the use of improper hiring methods can end up being a serious drag on loan production operations, as productive time is diverted away from originating and spent instead on litigating. This yields a no-win situation for everybody.

Peter J. Klarfeld and Laurence E. Platt are principals of Brownstein Zeidman and Lore, Washington, D.C., a professional corporation. Mr. Klarfeld specializes in commercial litigation, and Mr. Platt specializes in mortgage finance.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:recruitment of branch managers and loan officers
Author:Klarfeld, Peter J.; Platt, Laurence E.
Publication:Mortgage Banking
Date:Oct 1, 1993
Previous Article:No paper tiger.
Next Article:The perils and profits of production.

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