Recent Entries

Defective Mortgages and Trustee Avoidance

Profile ImageBy Stephen Franks, Attorney

Defective mortgages and Trustee avoidance actions may be a thing of the past in Ohio. The Ohio Supreme Court recently accepted the certification of questions of law relating to Ohio Revised Code (O.R.C) Section 1301.401. On March 27, 2013, O.R.C. § 1301.401 became effective. This code section purports to cure any mortgage defects of recorded mortgages and provide constructive notice to third parties. The question before the Supreme Court is whether this statue applies retroactively to all recorded mortgages. If the Supreme Court does indeed apply the statute retroactively, all recorded mortgages will have any defects cured. This outcome could have a major impact on a Chapter 7 Trustee’s ability to recover funds for the estate, but would also provide security for mortgage lenders. The parties have yet to brief the issue, so an answer from the Court is still some time away. However, the potential outcome for lenders is well worth the wait.

Mandatory Mediation Procedure in NJ

Profile ImageBy: Karina Velter, Attorney

In May 2014, the Board of Judges of the United States Bankruptcy Court for the District of New Jersey adopted a comprehensive, Court-supervised mediation program for all contested matters and adversary proceedings. Local Ruel D.N.J. LBR 9019-2 sets forth the procedure for this program.

The rule provides that once an answer is filed, all adversary proceedings shall be referred to mediation. An exception has been carved out for pro se litigants, parties seeking a temporary restraining order or preliminary injunction, or for actions initiated by the US Trustee. These parties may submit to meditation at the request of the parties or by order of Court. Furthermore, any contested matter (non-adversary) may be referred to mediation either by joint request of the parties or by the Court.

Why is this important to our clients?
While in many instances the mediation process has a direct benefit for the parties (facilitating a resolution and settlement, saving time, and avoiding substantial litigating expenses), there is, however, a cost associated with this benefit. The Board of Judges has established a registry of approved mediators, whose rates range between $250 and $500 per hour. That means, a party may incur fees upwards of $10,000.00 before the case even gets to trial.

Some examples of how this new requirement has created an undue hardship for certain creditors:

The first instance is where a represented debtor files an adversary complaint pursuant to 11 USC 523(a)(8) seeking a hardship discharge of his/her student loans. The problem arises because defending a student loan adversary is costly enough, without adding several thousand dollars of mediator fees into the mix. On the other hand, when the loan amount in question is substantial enough, or the debtor’s case is strong in favor of discharge, an impartial third party may be in the best position to point out the strengths and weaknesses of each party’s case and propose a compromise that is acceptable to the litigants.

Another example is where a creditor files a complaint objecting to the dischargeability of certain debt pursuant to 11 USC 523(a)(2)(A) or (C) and the amount in controversy may not justify the cost of proceeding with mediation. The creditor may find itself in a position where the hourly fees to be paid to the mediator are double or triple those paid to the creditor’s counsel. Clearly, this is not a cost effect method for such creditor to proceed.

What to do?
The rule provides that where a party seeks to be excused from the mediation process, the party may file a motion pursuant to D.N.J. LBR 9013-1 seeking that relief, or notify all parties to the adversary proceeding and the Court, at least seven days prior to the pretrial conference to be held pursuant to D.N.J. LBR 7016-1, that an objection to mediation will be raised at the hearing. The court will then hear the party’s reasons for seeking to be excused from mediation and enter the appropriate order.

Where the parties are in agreement and do not seek to be excused from mediation, they must file Joint Mediation Order together with the Joint Order Scheduling Pretrial Proceedings and Trial. The parties must then confer and select a mediator. If the parties cannot agree on a mediator, the Court may designate a mediator.

The Mediation Process
Mediation must commence within sixty days after the entry of an order assigning a matter to mediation. Parties may seek an extension of time to conduct the mediation by Consent Order, or by motion, after notice and hearing.

Prior to the date scheduled for mediation, each party is required to submit a Mediation Statement, which should contain (1) legal or factual issues, (2) the history of any prior settlement discussions, and (3) an estimate of the cost and time to be expended for further discovery, pretrial motions and trial.

The parties are required to personally appear at the mediation. For corporations or governmental entities, a representative, who is not the party’s attorney, is required to attend, unless excused by the mediator or the Court. The representative appearing at the mediation must have full authority to negotiate and settle the matter on behalf of the party. Failure to appear at the mediation, without justifiable cause, may result in sanctions imposed by the Court.

Following the conclusion of the mediation, the mediator shall have seven days to report to the Court in writing whether the matter has been settled. If a settlement is reached, the written fully executed agreement (signed by all parties and counsel) must be presented to the court. If the matter is not resolved, a pretrial conference will be scheduled within thirty days.

Do Casinos Really Deserve Bankruptcy Protection?

Profile ImageBy: Anne M. Smith, Attorney

Recently, Caesars Entertainment Corporation filed for bankruptcy protection. It is seeking to freeze lawsuits and actions of creditors, and permit reorganization of debts and assets so the business can continue with day to day operations.

Is a casino entitled to protection from its creditors? While this may ultimately be more of a moral question, since this business entity is entitled to the remedies provided by our laws, the question of whether it’s the best remedy for all parties, not just Caesars. And frankly, is it fair?

In the face of involuntary bankruptcy as pushed by three creditors in Delaware, Caesars has filed its own chapter 11 in Illinois, where it may be easier for the casino owners to be protected from liability. There have been allegations of inside deals and possible fraud regarding transfer of assets, and I have no doubt that the Court will scrutinize every aspect of every transfer in recent years relating to this $20 billion bankruptcy. The basis for the chapter 11 is Caesars’ claim that it carries more debt than any other U.S. casino-hotel company, and that its owners have been reluctant to spend money on up-growth in gambling markets. Poor management decisions and staggering debt have led this faction of Apollo Global Management LLC and TPG Capital LP to seek protection. So the question is whether these parent companies foisted more debt on this single entity to bolster their own bottom lines, and should they be able to seek protection with such a cloud of suspicion.

When a casino is involved, it is difficult to be unbiased about its right to ask for bankruptcy protection. Why would a casino ever need help to restructure debt, when its very existence acts as a vice to so many consumers? The reasoning behind this filing may certainly be problems and debts of the casino owners’ own making, but can’t that be said of many debtors? Remember that our laws allow this protection and aid when it is deserved, as determined by our judges. The court bears the burden of making sure the laws are followed, without determination of morality or judgment by the public.

A quick search of Pacer for Caesars reveals 87 filings since January 12, 2015. Caesars’ initial voluntary petition lists assets totaling over $12 billion, and debts exceeding $19 billion. The list of creditors is staggering, as are the amounts owed to each. If the house always wins, why do so many casinos end up in bankruptcy?

Below is the link to Wikipedia’s entry for Caesars Entertainment Corporation, for more specific information about their operating expenses and company history.


Creditors with Education Receivables should Review Chapter 13 Cases Carefully

Profile ImageBy Matthew G. Burg, Attorney

Since United Student Aid Funds, Inc. v. Espinosa [1] was decided by the United States Supreme Court in 2010, many education loan creditors have begun reviewing Chapter 13 plans to see if there is any provision specifically attempting to discharge any of the otherwise non-dischargeable education loan. How specific does that provision need to be?

In In Re Haney [2] , a debtor filed a Chapter 13 bankruptcy listing a student loan creditor as her only creditor in her petition. Her plan proposed that creditors holding allowed unsecured claims “to the greatest extent possible from payments made by the debtor over a period sixty months.” Her plan was confirmed without objection. The educational loan claim was timely filed, and was allowed. The education loan was not paid off in the debtor’s Chapter 13 bankruptcy. When the creditor attempted to collect the remaining debt owed, the court held that the remainder had not been discharged in the debtor’s bankruptcy. In so holding, the court noted that the debtor’s plan did “not contain an express provision purporting to discharge the debtor’s student loan debt.” The bankruptcy court noted that the plan in the Espinosa case “contained an express provision proposing to pay the principal of the student loan debt and discharge the accrued interest.”

However, that is just one bankruptcy court’s ruling. Other bankruptcy judges may not read the Espinosa case as requiring such a specific plan provision, specific to a creditor’s student loan, to consider the debt discharged. Espinosa can be read differently – that a general provision, specifically discharging any unsecured debt that is not paid through the plan, operates to discharge student loan debt even without an adversary proceeding being filed.

In this situation, if an education loan creditor attempts to collect on that debt, the creditor may have violated the discharge injunction, subjecting itself to sanctions. A third-party debt collector may violate the Fair Debt Collections Practices Act when it attempts to collect on such a debt. Class action demands may be made if there is no procedure in place to safeguard against this. If there is a question in either the debtor’s plan, or the confirmation order, or the discharge order, as to wording that may be interpreted to discharge your education loan receivable, it may be wise to have your bankruptcy attorney or general counsel involved at that time. Filing an adversary proceeding in the bankruptcy court requesting declaratory judgment, is a way to bring some certainty to the question of whether your education loan receivable was discharged in the bankruptcy. Your bankruptcy attorney may also be able to negotiate repayment terms through the debtor’s bankruptcy attorney, to avoid litigating further.

[1] United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260 (2010)
[2] In Re Haney 97-70937, ADV. CASE NO. 11-7024, 2011 Bankr. LEXIS 4746


Supreme Court to Decide on Lien Stripping in Chapter 7

Profile Imageby Monette Cope, Junior Partner

The Eleventh Circuit is the only Circuit which permits Chapter 7 debtors to strip wholly unsecured mortgage liens.[1]   All other circuits follow the Supreme Court’s decision in Dewsnup v. Timm and do not allow it.[2]   The Supreme Court of the United States recently agreed to hear an appeal of two of the Eleventh Circuit’s recent cases permitting lien stripping in Chapter 7 to resolve the circuit split of opinions.[3]

In Dewsnup, A Chapter 7 debtor sought to void the unsecured portion of a mortgage lien on her residence.  She argued that the unsecured portion of the claim was void under § 506(d)[4]  which states “to the extent that a lien secures a claim…that is not an allowed secured claim, such lien is void”. (Italics added).  The crux of her argument was that the unsecured portion was void because it was not an allowed secured claim.  Under §506(a)[5]  a claim is an allowed secured claim to the extent of the value of the collateral.

The Supreme Court found that Congress, when drafting the Code, did not intend to abandon the ancient bankruptcy maxim that liens pass through bankruptcy unaffected.  The definition of an allowed secured claim in §506(d) is not the same as what defines a secured claim in §506(a).

An “allowed secured claim” in §506(a) is defined by §502.[6]   Claims are “allowed” unless objected to, and §502(b) lists the grounds on which bankruptcy courts may disallow proofs of claims. Claims may not be disallowed simply because the lien is partially unsecured.

Therefore, an allowed secured claim under §506(d) is one that has a valid state law lien and has not been disallowed under §502.  Liens are only void under §506(d) if the claim was disallowed under §502.

The Eleventh Circuit bases its allowance of voiding wholly unsecured liens under §506(d) on a case it decided before Dewsnup[7]  and its own “prior panel precedent rule”.  That rule requires the court to follow its own precedent unless a Supreme Court decision that is “clearly on point” overrules it.  Because Dewsnup was decided in the context of using §506(d) to strip down a mortgage and the Eleventh Circuit’s case permitted §506(d) to void a wholly unsecured mortgage, it held that Dewsnup was not “clearly on point” so that it was required to follow its own precedent.

The Supreme Court will now decide if §506(d) can be used to void wholly unsecured liens in Chapter 7 as the Eleventh Circuit now permits.

[1] The Eleventh Circuit consists of Alabama, Georgia and Florida.
[2] Dewsnup v. Timm, 502 U.S. 410 (S. Ct. 1992)
[3] Bank of America v. Caulkett, 566 Fed Appx. 897 (11th Cir. 2014) and Bank of America v. Toledo-Cardona, 556  Fed. Appx. 911 (11th Cir. 2014)
[4] 11 U.S.C.§506(d)
[5] 11 U.S.C.§506(a)
[6] 11 U.S.C.§502(a) and (b)
[7] Folendore v. U.S Small Bus. Admin., 862 F.2d 1537,(11th Cir. 1989).