Recent Entries

Foreclosure Fraud and the One Percent Interest

Published on April 6, 2012 in Bankruptcy Filings and Real Estate. 0 Comments

By Stephen R. Franks, Esq.

On March 16, 2012, Frederic Alan Gladle will be sentenced for his role in a nationwide foreclosure-rescue fraud scheme that charged homeowners facing foreclosure fees in exchange for fraudulently postponing foreclosure sales.   Gladle’s role in the scheme netted him more than $1.6 million in fees from homeowners and delayed the foreclosure sales of approximately 1,128 properties.  Gladle could be facing as much as seven years in federal prison as the crime of bankruptcy fraud carries a statutory maximum sentence of five years, and aggravated identity theft carries a mandatory sentence of two years.   

Gladle’s role involved orchestrating a scheme whereby homeowners facing an impending foreclosure sheriff’s sale, would deed a 1% interest in their property to a bankruptcy debtor. The bankrupt individuals would have no idea that they were receiving the interest in the property.  As a result of the 1% transfer, an automatic stay would be imposed.  The creation of the automatic stay would force the sheriff’s sale to be cancelled and relief from stay would then need to be sought in order to continue with the foreclosure process.  This scheme would then be repeated with another bankrupt debtor once relief from stay had been obtained.  The homeowner facing foreclosure would then find another debtor in bankruptcy and deed another 1% interest to that individual.  The cycle would begin again as the creditor would need to seek relief from stay in this bankruptcy case.  Many foreclosures were postponed for years as a result of this scheme.

Fortunately, Gladle was caught and is facing punishment for his involvement in the foreclosure fraud scheme.  However, there remain many similar schemes that continue to frustrate foreclosure efforts. In order to protect yourself from similar delays, the most important action you can take is to bring any suspicious activity to the attention of your attorney.  Your attorney can then review the foreclosure and transfers of property to help determine if the debtor is engaging in a scheme of foreclosure fraud.

Another pro-active action is to report any suspicious activity to the United States Trustee.  As part of the Financial Fraud Enforcement Task Force, the United States Trustees are actively working to investigate and prosecute financial crimes.   

Finally, if you believe that your loan is part of a foreclosure fraud scheme, request that your attorney file for In-Rem Relief from Stay.  In-Rem Relief is codified in Section 362(d)(4) of the Bankruptcy Code and provides that real property be excluded from any bankruptcy that is filed within two years subsequent to relief being obtained.  Therefore, the next time the borrower transfers the property to a bankruptcy debtor, no stay would go into effect as the property would not be included in that bankruptcy.  The two year bar gives creditors the time needed to complete a foreclosure sale.   

Stephen is an associate in the Bankruptcy Group based in the Brooklyn Heights office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 216.739.5645 and .

 

Is a Debtor’s Ability to Strip Off Second Mortgages Expanding?

Published on March 30, 2012 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

Recent holdings in the Southern Bankruptcy District of Florida[1] and elsewhere demonstrate that debtors are seeking to expand their ability to strip off junior liens on real property in a Chapter 13 reorganization after having received a prior Chapter 7 discharge, and the Courts are beginning to step out of the way.

Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) in 2005, most courts have ruled that debtors in so-called “Chapter 20″ cases (in which a debtor who has received a discharge in a Chapter 7 bankruptcy files a subsequent Chapter 13 petition for relief within the ensuing 4 years) cannot strip off a wholly undersecured junior lien on real property. BAPCPA was enacted in part to reform the eligibility for personal bankruptcy and prevent abuse of the bankruptcy process.

“Lien stripping” is a process authorized by the Bankruptcy Code that permits a debtor to extinguish a junior lien on real property when the equity in the property is less than the amount of the first mortgage. In brief, because there is no equity to secure the junior lien, the Code permits the Court to extinguish the lien upon the debtor receiving a discharge through the bankruptcy process, leaving the junior lien holder with only an unsecured claim. Thus, the second mortgage holder must aggressively defend an attempted lien strip, or it risks a near complete loss.

“Chapter 20″ is a term for a debtor who has already availed himself of relief under Chapter 7, which allows him to liquidate his assets to satisfy his debts to the greatest extent possible, upon which he receives a discharge canceling his personal liability for his debts. The debtor then files another bankruptcy petition under Chapter 13, which allows him to reorganize and repay his remaining debts through a 3- or 5-year plan. However, under the revisions enacted in BAPCPA, if the debtor files a Chapter 13 within four years of receiving a Chapter 7 discharge, he/she is not eligible for another discharge.

Courts have not allowed Chapter 20 debtors to strip off junior liens because such a debtor is ineligible for a discharge in the Chapter 13 case. Previously, Florida Bankruptcy Courts have held that the plan confirmation requirements of the Bankruptcy Code do not allow confirmation of any plan that does not provide for secured claimants to retain their lien until the debtor receives a discharge. This requirement was applied to attempts to strip off junior liens in Chapter 20 cases because if a secured claimant must retain its lien through discharge, and the debtor was ineligible, then the secured claimant cannot be stripped and must retain its lien and survive the completion of the Chapter 13 plan.

However, recent decisions in several other circuits outside of Florida cast doubt on this precedent. These decisions hold that there is no specific requirement in the Bankruptcy Code conditioning the right to lien strip on the debtor’s eligibility for discharge. Additionally, as argued in In re Vigo in the Southern District of Florida, where a debtor’s personal liability on an undersecured junior mortgage has been discharged in a Chapter 7, eligibility for discharge in the subsequent Chapter 13 would place a redundant and unnecessary requirement on the debtor’s ability to lien strip.

Although the Courts appear more willing to entertain these novel arguments for lien stripping in Chapter 20 cases, In re Vigo is the first case in the Southern District of Florida that we are aware of where the Court has allowed such a lien strip. It is not clear whether the granting of such a motion was due to the absence of opposition from the secured creditor, or because the Court agreed with the novel argument presented, but it remains as important as ever that junior lien holders continue to assert their rights and oppose such attempts. Recent prior cases in the Southern District of Florida have held the opposite of Vigo, that ineligibility for discharge is a threshold consideration that precludes avoidance of wholly unsecured junior liens. Under this and other similar decisions, the wholly unsecured junior lien holder retains its lien until the debtor pays off the underlying debt pursuant to nonbankruptcy law, a much better result for the secured creditor.

Secured creditors’ rights are being threatened by this expansion of a debtor’s rights. The economic realities of underwater properties and wholly unsecured junior mortgages and equity lines are being exacerbated by unopposed efforts of debtors’ attorneys making novel arguments to extinguish secured debt. The vigilant secured creditor can stem this debtors’ rights boom by relying on precedent and challenging the Chapter 20 debtor’s lien stripping efforts.

If you would like more information on Chapter 20 bankruptcies, the lien-stripping process and your rights as a secured creditor under the Bankruptcy Code, please contact Mr. Mark E. Steiner, Esq. Mark is an associate who practices in the Real Estate Default Group of Weltman, Weinberg & Reis Co., LPA located in the Ft. Lauderdale, FL office. He can be reached at 954.740.5276 and .

[1] In re Vigo, Case No. 11-32092-EPK (Bankr. S.D.Fla. January 18, 2012)

Another Jurisdiction Allows Lien Stripping After Chapter 7 Discharge

Published on March 16, 2012 in Bankruptcy Filings and Real Estate. 0 Comments

The United States District Court for the Eastern District of California In Re Frazier has turned the tides on the split decisions in the Eastern District of California pertaining to the ability of a Debtor to strip second mortgages that have no value in a Chapter 13 proceeding after the Debtor has obtained a discharge in a Chapter 7 proceeding.  The District Court’s holding becomes another case in the Country where there is split authority whether the Debtor has the ability to strip a lien under these circumstances.  The Courts rational is that the ability to strip the lien is not based upon the Debtor’s lack of ability to obtain a discharge in the Chapter 13 due to the prior Chapter 7 discharge, but rather, is based upon the Debtor’s completion of all the requirements in a Chapter 13 case. 

As authority continues to be split around the Country, the chances of this case being brought to the Supreme Court seem very plausible.  In addition, we believe that we will see an increase in the Chapter 13 filings in the Eastern District of California after the Debtor has already obtained a discharge in a Chapter 7 case.  Chapter 20’s will once again be a proactive measure by Debtors in those Bankruptcy Courts. 

When faced with a situation where the Debtor is attempting to strip a lien in a Chapter 13 proceeding where the underlying obligation was previously discharged in a Chapter 7, it is crucial that the following steps be taken.  Confirm the value on the property by obtaining an appraisal.  Verify the outstanding balance on any mortgages ahead of the mortgage to be stripped to ensure that the amounts set forth by the Debtor are truly the amounts owed.  Finding $1.00 of equity will allow your mortgage to survive and be paid in full.  In addition, it may be time to determine whether the Chapter 13 proceeding was filed in good faith or solely for the purpose of stripping the second mortgage.  The status of the first mortgage on the property will play a large role. 

Weltman Weinberg and Reis Co., L.P.A. will continue to the monitor the case log throughout the Country as it pertains to the ability to strip a lien after the Debtor has obtained a Chapter 7 discharge.  Unfortunately, Chapter 20 proceedings may be alive and kicking once again. 

If you have any questions on this matter, please contact Alan C. Hochheiser, Managing Partner of the Bankruptcy Group at Weltman, Weinberg & Reis Co., LPA. Al can be reached at 216.739.5649 and .

Should This Mortgage Be Saved?

Published on October 11, 2011 in Real Estate. 0 Comments

With residential loans defaulting at a record pace, Congress proposed or passed various bills to staunch this consequence of the economic dive-bomb.  The Home Affordable Modification Program (“HAMP”) was enacted to prevent foreclosures through loan modifications.    The general consensus is that this program has not produced the number of loan modifications as hoped.  The process has proved burdensome for both creditors and debtors.  Other bills proposed in an attempt to prevent foreclosures would have changed the Bankruptcy Code and permit Chapter 13 debtors to “cramdown” and bifurcate underwater residential mortgages.  For good reasons, including the probable disastrous effect this would have on our already damaged economy, these bills were defeated.

Some are predicting we are on the cusp of yet another foreclosure wave.  While this looms in the background, Congress may not extend HAMP when it is set to expire on December 31, 2012, and there will no longer be a federal loss mitigation program.  There is a bill pending on the Senate calendar (which means it is awaiting action in the Senate) that would give each bankruptcy court the power to set up its own loss mitigation program. Senate Bill 222 was born on its Sponsors’ premise that mortgage servicers are bad guys because they profit from foreclosure losses, while the investors are good gals because they want to mitigate losses to protect the value of their portfolios, and so will engage in negotiations.

The bill would permit each court to establish its own program for consensual loss mitigation on loans secured by debtors’ homes. The bill in its current form would not require creditors to engage in loss mitigation.  However, this might not deter some courts from establishing programs or creating complicated requirements that would delay hearings on motions for relief for loss mitigation. This would be especially harmful when the debtor has no realistic chance of a successful modification.

Additionally, because each court could establish its own program, there could be a complex patchwork of programs throughout the country.  While loss mitigation is a worthy goal when both parties can agree, a decree from Congress to require it in bankruptcy could only delay the inevitable relief from stay in the majority of cases while further harming a creditor’s position.

Monette Cope is a Junior Partner practicing in Bankruptcy. She focuses her practice within the Consumer Bankruptcy and Commercial Bankruptcy Groups located in the Chicago office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 312.253.9614 and .

MERS Under Fire

Published on October 6, 2011 in Real Estate. 0 Comments

MERS, Mortgage Electronic Registration Systems, Inc., is the ostensible nominee for numerous lenders on countless mortgages. Like many in the lending industry, this behemoth is now under fire in courtrooms across America, emerging from a variety of challenges, some as a victim and some as a victor.

MERS itself is a nationwide database that facilitates the buying, selling and transfer of mortgages. While the real estate market was sunny and foreclosures were the exception, MERS was a member-based valuable service that allowed the tracking of servicing and ownership of over 30 million loans,[1] and nearly 60 million homes.

Adding confusion to an already murky legal situation are the various legal challenges that are brought against MERS, meaning that a ruling “against” MERS may only pertain to some issues or rights and not others. These include but are not limited to issues of conveyance based on blank endorsements, assignments made by “officers” under the authority of corporations that no longer exist, the issue of whether MERS has a legal or beneficial interest in the note, and whether the circumvention of recording fees constitutes an illegal purpose.[2] These issues all result in consistent challenges – that MERS mortgage transfers are invalid, and the ostensible holders should be stripped of enforcement remedies.

Some states are still interpreting MERS as holding authority, whether to hold or convey mortgages. New Hampshire upheld MERS as a nominee and determined that they have clear rights to convey.[3] Other states that have also upheld the rights of MERS are Kansas, California, and Georgia. However, other states, including New York, have ruled in the opposite direction, invalidating a foreclosure.

The results of invalidating MERS transfers would be staggering. MERS is a central registry for loans, it allows borrowers to locate servicers and track the owner of their note. It also assists public servants in determining who is responsible for vacant properties and in the detection of mortgage fraud.[4]

Keep an eye on this issue, as it is possible that the issue may find itself in higher courts as the nation strives for some kind of consistency in the current tumultuous real estate environment. However, property law in the United States has historically been left largely to the states and thus fragmented and disparate approaches are likely, at least in the short term.  Be sure to consult your Real Estate Default attorney for questions as to how this affects you.

Emily Honsa Hicks is an Associate practicing in the Real Estate Default Group based in the Cleveland office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 216.685.1083 or .
[1] Remarks of R.K. Arnold President and CEO of MERSCORP, Inc. Before the Senate Committee on Banking, Housing and Urban Affairs, (November 16, 2010), http://banking.senate.gov/public/index.cfm?FuseAction=Files.View&FileStore_id=1a958f85-bd10-4ac7-b5e1-9ad0c43d97c6.

[2] Richard Kessler,10 Headaches for MERS, JDSupra (Nov. 4, 2010). http://www.jdsupra.com/post/documentViewer.aspx?fid=9e461996-08a3-4eac-9aad-72f80ee52e66

[3] Jason Philyaw. New Hampshire court latest to uphold MERS right to transfer mortgage, HousingWire (Feb. 25, 2011), http://www.housingwire.com/2011/02/25/new-hampshire-court-latest-to-uphold-mers-right-to-transfer-mortgage

[4] Supra at 1.