Author Archive for Beth Schenz

Business Bankruptcies: Outlook for 2010 and What You Should Know

Published
by
Beth Schenz
on February 5, 2010
in Bankruptcy Filings and Chapter 11
. 0 Comments

While they became stronger in 2009 (yes they became stronger), the financial institutions were more willing to write off the bad debts of companies and were less likely to restructure debts when companies became delinquent.  The result became a substantial increase in business bankruptcy filings in 2009.  The number of businesses filing for bankruptcy in 2009 increased by 38% from the numbers reported in 2008(1). 

The other factor that contributed to the substantial increase in business bankruptcy filings is the economy.  With the high costs of gas, materials and food coupled with low consumer turnout in the marketplace, businesses’ profit margins were unable to meet the demands of the companies’ debts. 

Along with the increase in business bankruptcy filings in 2009, companies’ default rates hit a record high in 2009(2).    While some experts predict that the growth of business bankruptcies will taper off in 2010, the majority of experts think otherwise.  Such factors as being unable to find financing, being unable to instill consumer confidence due to high unemployment and foreclosures and being unable to handle defaults in the commercial real estate industry, means that a slowdown in business bankruptcy filings is unlikely.  The industries that are most suspect to seeing business bankruptcy filings are retail, media, commercial real estate and transportation. 

With the increase number on business bankruptcy filings, creditors need to monitor accounts closer.  The following are some general tips to make sure you are on top of the situation.

Tips for Chapter 11 Creditors with Claim:

  1. Have a game plan on what you as a lender want from the company.  What will yield the best return for you- liquidation or being patience to see if the company will become viable
  2. If you have a first lien on all the business assets, you will need to seek attorney representation to begin negotiations with the debtor in possession(3).   Many times these negotiations may take place prior to the filing.  The most important items as a first lien holder are to protect your first lien position post bankruptcy filing as well as receiving adequate protection payments while waiting for the Chapter 11 Plan to be confirmed.  Look out for a Motion to Use Cash Collateral, which generally is one of the first motions filed after a bankruptcy petition
  3. All creditors holding a secured claim need to make sure that the Debtor in Possession does not attempt to modify the loan contrary to bankruptcy law.  Consult an attorney if you do not agree with any treatment of your claim.  Look out for Disclosure Statements, Chapter 11 Plans or any Motions that might affect your claim (Motion to Sell Property, Motion to Avoid Lien)
  4. File your Proof of Claim
  5. Be on the Creditor’s Committee, if applicable

—————————–

(1)Information pulled from Automated Access to Court Electronic Records (AACER)

(2)Information pulled from Standard & Poor’s

(3)Debtor in Possession is a technical term used in bankruptcy.  In essence, the Debtor in Possession is the debtor

Debtors Not Allowed to Retain If Current

Published
by
Beth Schenz
on October 7, 2009
in 2005 BAPCPA, Chapter 7 and Motor Vehicle
. 0 Comments

Most creditors are familiar with the phrase, “retain and pay”.  The bankruptcy code provides for certain treatment of debt, which is secured by personal property in Chapter 7 bankruptcies.  Specifically, the bankruptcy code provides that debtors must either reaffirm the existing debt, redeem the collateral or surrender the collateral (or assume or reject the lease.)  Prior to the amendments of the bankruptcy code in 2005, most debtors opted for the unwritten fourth option, “retain and pay.” 

However the 2005 amendment, “clearly provides that the debtor shall not only file a statement of intentions but also follow through with her express intent.”  If the intent is not followed through by the debtor in the statutory number of days, the automatic stay terminates and the property is no longer property of the estate. 

The Ninth Circuit Court of Appeals recently ruled that the “retain and pay” option is no longer viable.  If a debtor opts for this unwritten alternative then the debtor will fail to meet his/her statutory obligation and the automatic stay will be terminated.  The mere termination of the automatic stay, however, is not enough to authorize the Creditor to repossess the collateral. 

In the case before the Ninth Circuit, the debtor’s failure to adhere to the code allowed for the stay’s termination.  Once the stay is terminated, the right to repossess the collateral then goes to the parties’ contract, in conjunction with state law to determine when the debtor has a default on the automobile loan and if that default allows repossession.  The debtor’s contract in the Ninth Circuit case contained an ipso facto clause that provided a default if the debtor filed for bankruptcy.

There is a bankruptcy code provision that, “generally renders unenforceable any contractual term which purports to create a default solely based on the commencement of a of a bankruptcy case.”(1)  However, the 2005 amendment overrides the provision that renders ipso facto clauses unenforceable when debtors fail to state an applicable intention and also fail to perform that intention.

Learning Points

  • Offer reaffirmation agreements (If a reaffirmation is offered but denied by the Bankruptcy Court then the creditor cannot repossess if debtors are current after bankruptcy)
  • Contracts should contain ipso facto clauses
  • Know your state law to make sure you can repossess the collateral
  • The above statutory provisions only apply to personal property

(1) Dumont v. Ford Motor Credit Company, Appellate Case No. 08-60002 (September 15, 2009 9th Cir.)

Not Gone and Not Forgotten: Bankruptcy Reform and Cram Down

Published
by
Beth Schenz
on August 26, 2009
in Bankruptcy Act 2009 and Real Estate
. 0 Comments

Last month, House Financial Services Committee Chairman Barney Frank (MA- D) indicated that he would revive the bankruptcy legislation that would allow debtors to cram down first mortgages.  Specifically, if the banks did not increase their efforts to modify existing home loans, Franks stated that he would revisit the bankruptcy cram down legislation. 

Not only is the House threatening bankruptcy cram down legislation but the Senate Committee on the Judiciary, Subcommittee on the Administrative Oversight and Courts is also reviewing recommendations on modifying mortgages in bankruptcy.  

On August 20, 2009, the Senate Committee scheduled a hearing on “Mortgage Modifications during the Foreclosure Crisis: Is there a Role for Bankruptcy Courts?” At the August 20, 2009 hearing, testimony was taken from multiple homeowners on their negative experiences with loan modifications.  Also, Susan Bodington, Deputy Director for Programs, Rhode Island Housing testified that, “[b]ankruptcy reform could provide the incentive or pressure to expedite workouts and collaborate more effectively, but it should be structured in such a way that it does not penalize responsible lenders who made fair loans that were in the best interest of the customers when the loan was made, and who have worked with their customers compassionately to keep them in their homes.”  In his testimony, John Rao, attorney for National Consumer Law Center, strongly urged the need for bankruptcy reform.  Mr. Rao stated, “[a]doption of court-supervised mortgage loan modifications would sidestep many of the structural barriers in the servicing industry that today are preventing mass loan modifications from occurring.”

Before recess on July 23, 2009, the Senate Committee took testimony on “The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform?” (See previous blog entry).

While such government agencies like the Federal Housing Finance Agency have taken the unofficial position that forcing people into bankruptcy is the wrong solution and loan modification is the solution, loan modifications still remain low.  Currently, the treasury department is reporting that only 9% of eligible borrowers received modifications. 

The continuing rise in foreclosures, the high level of unemployment and the lack luster of loan modifications are creating pressure for Congress to revisit bankruptcy reform.  While once bankruptcy practitioners felt that the bankruptcy reform that would allow debtors to “cram down” their mortgage debt to the value of the real property was defeated in Congress, the case for bankruptcy reform still looms.

Still Looming: Bankruptcy Reform and Cramdown

Published
by
Beth Schenz
on July 24, 2009
in Bankruptcy Act 2009 and Real Estate
. 0 Comments

On July 23, 2009, the Senate Committee on the Judiciary, Subcommittee on Administrative Oversight and the Courts scheduled a hearing on “The Worsening Foreclosure Crisis: Is It Time to Reconsider Bankruptcy Reform?” Due to the rise in foreclosures and continuing high level of unemployment, Democratic senators are attempting to revisit the bankruptcy reform that would allow debtors to “cramdown” their mortgage debt to the value of the real property.

Those who presented testimony before the Committed were as follows:

Proponents for the Cramdown

Alys Cohen, staff attorney for the National Consumer Law Center, indicated that, “[u]nless HAMP both increases its reach and mandates principal reductions, Congress should pass legislation to allow bankruptcy judges to modify home loans in bankruptcy and also should consider further reforms to the servicing industry.”

Adam J. Levitin, Associate Professor of Law at Georgetown University Law Center opined that bankruptcy cramdowns are the only tool left to stabilize the foreclosure crisis. Mr. Levitin stated, “[b]ankruptcy courts are capable of immediately handling a large volume of filings, and the bankruptcy automatic stay would function like a foreclosure moratorium until cases could be sorted through.”

Proponent Against the Cramdown

Mark A. Calabria, Ph.D., Director of Financial Regulation Studies at the Cato Institute, stated that, “[i]t is not exploding ARMs or predatory lending that drives the current wave of foreclosures, but negative equity driven by house prices declines coupled with adverse income shocks that are the main driver of defaults on primary residences. Defaults on speculative properties continue to represent a large share of foreclosures. Accordingly for any plan to be successful it must address both negative equity and reductions in earnings. Cramdown fails on both accounts.”

General Comments

Richard Genirberg, J.D., M.B.A., M.A., who represents consumers and creditors in Chapter 7 and Chapter 13 bankruptcy cases offered that cramming down residential real estate loans would benefit his debtor clients. Also, Mr. Genirberg stated that, “[l]egislating cramdown of residential real estate would create a veritable ‘license to steal’ from mortgagees. Mr. Genirberg suggested Congress needed to decide what would be beneficial for the American economy.

The Ranking Member of the Committee, Senator Jeff Sessions (R-Alabama) opposes such cramdown provision. However, Senator Richard J. Durbin (D-Illinois) continues to press for mortgage cramdowns in bankruptcy. Congress is expected to break for recess in the second week in August, 2009.

United States Trustee’s Scrutiny of Mortgage Creditors (N.D. Ohio)

Published
by
Beth Schenz
on March 20, 2009
in Local Procedures & Rules and Proof of Claim
. 0 Comments

Yesterday, representatives from the United States Trustee’s Office (“UST”) conducted a town hall meeting with representatives from the creditor’s bar to provide details on a new initiative they are moving forward with called the “Credit Abuse Program.”  During the meeting, the UST indicated that it will be more closely scrutinizing documentation submitted by mortgage lenders with their proofs of claim, Reaffirmation Agreements and attachments to Motions for Relief from Stay.  This increased scrutiny will not just be limited to the Cleveland Bankruptcy Court, but will extend to all five (5) courts in the Northern District of Ohio.  The UST will be focusing its inquiry on the following issues:

  • Whether the collateral was properly perfected
  • Whether the moving party is entitled to enforce the claim
  • Whether payments were misapplied
  • Whether escrow was miscalculated
  • Whether certification attesting to lost notes is in a blank form
  • Whether certification attesting to missed payments was pre-signed
  • Whether the documents filed with the courts are legally and factually sufficient

If an issue comes to light, the UST will informally contact creditors by phone or letter to correct an issue or provide additional documentation.  Also, the UST may formally make its requests through objections to proof of claims or objections to motions for relief and abandonment.  In extreme situations, the UST indicated that it would file motions for an order to show cause or motions for sanctions to correct an issue or provide additional documentation.

 
Specific Areas of Concern

The UST is paying particular attention to the following issues that come up with mortgage creditors:

  • Failure to attach assignments of mortgage
  • Failure to attach documents showing who owns the claim
  • Failure to itemize statement of amounts (UST is requesting the items be specific)
  • Failure to take out improper fees or fees that are vague, estimated, excessive or unsubstantiated by law or contract
  • Miscalculation of arrearage
  • Failure to attach supporting documents
  • Attaching boilerplate affidavits of lost note
  • Disclosing personal identifiable information in violation of Rule 9037

What does this mean to mortgage creditors? 
With closer scrutiny by the UST, it is imperative to have your documents together before any timelines or deadlines come due.  Also, review the documents you are providing to the court and omit any items that are not appropriate.  If this additional work is not done on the front end, the result may very well be increased cost and time in attempting to respond to and comply with UST inquiries and/or requests.

What does this mean to all creditors? 
Documentation is important to substantiate your claim.  All creditors should make it a practice to attach the appropriate documentation and make sure all personal identifiable information is omitted or risk contact from the UST seeking remedial action.