By Alan Steven Wolf of The Wolf Firm By Alan Steven Wolf of The Wolf Firm After many years of debtor victories in the Bankruptcy Courts,
within the last year the United States Supreme Court provided three resounding victories
for lenders. In Nobleman v. American Savings Bank (124 L.Ed. 228, 113 S.Ct. 2106), the
Supreme Court provided that a Chapter 13 plan cannot cramdown the interests of a real
property lender where the lender's note is secured solely by real property which is the
principal residence of the debtor. In Rake v. Wade (124 L.Ed 424, 113 S.Ct 2187), the
Supreme Court determined that lenders are entitled to interest on Chapter 13 plans. Most
recently, the Supreme Court determined that a foreclosure sale cannot be set aside as a
fraudulent conveyance under the Bankruptcy Code if the property were sold pursuant to
state law. (BFP v. Resolution Trust Corporation- see recent article in the USFN Network
News, Vol. 5, No.3)
The good news continues with Senate Bill 540, pending bankruptcy
legislation specifically designed to offset some of the advantages given to debtors under
the current Bankruptcy Code. Senate Bill 540 proposes numerous changes to the Code, four
of which are directly relevant to mortgage servicing.
The first change deals with cramdowns. Before Nobleman, a residential
real property lender whose lien was partially unsecured could effectively have the
unsecured portion of its loan "discharged" through a Chapter 13 cramdown plan.
The legislation, written before the Nobleman decision, makes it clear that you cannot
cramdown a residential real property loan secured by the principal residence of the
debtor. The wording in the bill is broader than the Nobleman decision and may provide help
in those Circuits which, even after Nobleman, allow cramdowns by finding that the standard
mortgage document is not solely secured by real property.
The Bill also deals directly with a growing Chapter 11 cramdown
problem. While Nobleman precluded Chapter 13 cramdowns, no Code provision or case has yet
precluded the cramdown of residential real property loans in the context of Chapter 11.
Indeed, the complex provisions of Chapter 11 are ideally suited to the cramdown of real
property loans. Shrewd debtors, recently faced with plummeting interest rates, often
sought to refinance their homes through Chapter 11 instead of traditional methods because
the costs involved in a Chapter 11 case were less than the points and other closing costs
associated with refinancing. Senate Bill 540 expressly provides that in a Chapter 11 case,
a Debtor cannot cramdown a residential real property loan secured by the debtor's
principal residence.
The next relevant change proposed by the Bill
involves Chapter 13 eligibility. Current law provides that a debtor does not qualify for
Chapter 13 protection if the debtor's secured debt is greater than $350,000. In high home
value states such as California, many homeowners were denied Chapter 13 protection by
virtue of their high balance jumbo loans. Accordingly, these people were forced to file
under the much more complex, and strikingly more expensive Chapter 11. Under the Bill, the
debt ceiling for Chapter 13 cases is raised to $1,000,000 allowing debtors a much less
expensive alternative to Chapter 11. Although this can be viewed as a debtor provision, in
reality it serves the creditor. In a Chapter 11 case, there is no requirement that regular
post petition payments be made, nor is there any set deadline for the filing of a plan; in
short, the Debtor can just sit and delay while it pays its attorney as opposed to the
creditor. In a Chapter 13 case, the debtor is required to make all post petition payments,
has to file a plan within fifteen (15) days of the bankruptcy filing, and it is much
easier to get relief from stay in a Chapter 13 case.
The third proposed change involves the Motion For Relief From Stay
procedure. Current law requires that a hearing on the Motion For Relief From Stay be held
within thirty (30) days of the date the Motion is filed and that if the first hearing is
treated as a preliminary hearing, the final hearing must be commenced within thirty (30)
days after the preliminary hearing. Under this provision, debtor oriented judges would set
the first hearing as a preliminary hearing, commence a final hearing thirty (30) days
thereafter but not conclude that final hearing or render a decision for months thereafter.
Senate Bill 540 changes the procedure, requiring the judge, with limited exceptions, to
conclude the final hearing within thirty (30) days of the preliminary hearing.
The forth major change affecting our industry deals with the issue of a
lender's post petition right to rents under the assignment of rents clause. Currently,
there is a dispute as to whether or not lenders have the right to rents and other profits
from property after a bankruptcy case has been filed. There are a number of heady legal
issues involved in this analysis including whether or not a continuing lien survives
bankruptcy, perfection of liens and cash collateral. The proposed legislation solves these
problems essentially providing that if a lender has an assignment of rents clause, it has
an absolute right to post petition rents and profits.
Senate Bill 540 was passed unanimously in the Senate several months ago
and the House has passed similar legislation. The conference committee is now meeting on
the bill and most experts expect the conference committee will act quickly and that new
Bankruptcy legislation will be ready for the President's signature by late October.
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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