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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, 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.
New bankruptcy rules are set to go into effect on December 1, 2011. Of concern to secured creditors and mortgage lenders are requirements imposed on filing proofs of claims secured by the debtor’s principal residence and claims based on writings. The changes are to the Federal Rules of Bankruptcy Procedure Rule 3001 and 3002.1.
Changes under 3001, which affect secured lenders when a claim or interest in property of the debtor is based on a writing, require the filing of the original document or duplicate with the claim. If the writing is lost or destroyed, a statement of circumstances of loss must be attached to the proof of claim. The claim must itemize interest, fees, expenses, and all charges incurred before the petition was filed. If a default is alleged, the amount to cure the default must also be provided. An escrow statement reflecting the escrow amount as of the date of filing the bankruptcy petition must be attached to the proof of claim as well.
Originally, the rule change required filing the last account statement with the proof of claim; however, this rule was withdrawn after public comment. Instead, rule 3001(c) was added and will go into effect on December 1, 2012. The change affects claims based on open-end or revolving consumer credit agreements. When filing the proof of claim, the creditor must include the name of the entity from whom the creditor purchased the account, the name of the entity to whom the debt was owed at the time of the last transaction, date of the last transaction, date of the last payment, and the date when the account was charged to profit and loss.
Changes under rule 3002.1, which affect mortgage lenders, require mortgagees to notify the debtor, debtor’s attorney, and the trustee of any change in the mortgage payment, interest rate, or escrow adjustment no later than 30 days before the change is set to occur. The holder of the claim must also file a notice itemizing all fees, expenses, or charges incurred in connection with the claim occurring after filing the bankruptcy case which the holder asserts are recoverable against the debtor or the residence. This notice must be filed no later than 180 days after the fees are assessed. Another important change requires the trustee to file a notice of final cure payment no later than 30 days after making the final payment of any cure amount on a claim secured by the debtor’s principal residence. If an amount to cure exists, the holder must respond within 21 days to the notice and file a statement to supplement the claim itemizing any amount still owed.
The consequences of failing to follow the new rules could result in a creditor losing the right to present the omitted evidence at any hearing, contested matter or adversary proceeding. Moreover, the court can also sanction the creditor reasonable expenses and attorney fees for failing to comply.
These new procedures place burdens on creditors that may be difficult to meet. Creditors already must use the official forms and timely file claims no later than 90 days after the first date set for the meeting of creditors. It may be difficult for creditors to file a timely claim with the added documentation and itemization requirements. Jurisdictions vary on whether there is a deadline for filing a secured proof of claim. Secured creditors, absent exceptional circumstances, should file the claim within 90 days or file a motion to extend the time to file the secured proof of claim. Even if the secured creditor files the proof of claim, it must be monitored for objections to the claim.
A bankruptcy court in Oregon has taken the issue of failing to respond to an objection to the proof of claim to an extreme. In that case, the mortgage lender filed a secured proof of claim, however the chapter 13 trustee objected to the claim as the trustee was not satisfied with the documentation attached to the claim. No response was filed to the objection and the claim was disallowed. The debtors subsequently completed their chapter 13 plan and received a discharge. The holder then sought to enforce the debt and foreclose on the property. The debtors reopened their bankruptcy case and argued that the lender was in violation of the discharge order. The court held that the mortgage lien was stripped as the claim was not an allowed secured claim, and thus was discharged in the chapter 13.
Creditors should be proactive in ensuring they have the best procedures for obtaining a correct itemization of the account and the official forms used to file claims. Creditors must also make sure they have a procedure in place to monitor filed claims for objections by the trustee or debtor. At best, creditors will face difficulty in complying with these new requirements.
David H. Yunghans is an associate in the Bankruptcy Group located in the Cincinnati office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 513.723.2211 or .
In a previous advisory, titled “Lien Stripping Prohibited if Debtor is Ineligible for Discharge”, the discussion centered on emerging case law that prohibits a debtor from stripping liens on wholly unsecured mortgage claims when that debtor is ineligible for a Chapter 13 discharge. A recent case out of the Northern District of Illinois Bankruptcy Court adds another barrier to stripping wholly unsecured liens – when property is held in a tenancy by the entirety, and only one spouse seeks to strip the lien.[1]
In this case, both the husband and the wife filed a Chapter 13 bankruptcy, but the husband was ineligible for a Chapter 13 discharge because he received a Chapter 7 discharge within four years of filing the case. The wife, however, was eligible for a discharge, and so could conceivably strip the lien. The plan proposed to strip the second mortgage as wholly unsecured, and an adversary proceeding was filed to determine the secured status of the mortgage lien. If the husband could not strip the lien, the question became: could the wife do it for both, or only as to her interest? The creditor argued that she could not do either, and the court agreed.
Most states recognize tenancy by the entirety as a form of property ownership. Each state may vary its characteristics. But the fundamental aspect remains the same – only married couples may hold property in a tenancy by the entirety. This is an ancient form of property ownership which, while it recognizes two individuals as owners of a property, it also recognizes only one tenant of the property, that is, the marriage. In other words, neither spouse has an individual slice of the property. Both together own it all.
Spouses may only affect the property by acting together, but individually they cannot. For example, neither can mortgage the property without the other’s consent, but together they both can. Conversely, a creditor cannot hold a lien on only one spouse’s interest, only on the whole of the marital entity’s interest, the whole property.
Using this reasoning, the judge held that when property is held as a tenancy by the entirety, a lien strip may occur only when both spouses are acting as one. In this case both spouses signed the note and granted a second mortgage on their residence. But, because only one spouse could conceivably strip the lien due to the other’s ineligibility for discharge, neither spouse could do it.
When only one spouse seeks to strip a lien, determine whether the property is held in a tenancy by the entirety. If only one spouse seeks to strip a lien, research whether the property is held in a tenancy by the entireties. If both spouses seek to strip a lien, verify that neither is ineligible for a discharge. Consult with your local bankruptcy counsel to review the state law as to tenancy by the entirety and advise you how to proceed.
If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 or .
[1]Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)
Following the trend of a majority of the Circuit Courts, the United States Bankruptcy Court for the District of New Jersey concludes that a Chapter 7 debtor may not void a lien under §506(d) where the claim is wholly unsecured. This is an important decision for creditors as it solidifies the principle that a wholly unsecured lien on real property will survive a Chapter 7 bankruptcy unaffected. For example, a Chapter 7 debtor owns real property with a fair market value of $125,000, which is encumbered by two liens. The first mortgage is in the amount of $150,000 and the second is in the amount of $35,000. Based on the ruling of a majority of jurisdictions, the second mortgage (which is wholly unsecured) would survive the bankruptcy unscathed.
In this New Jersey case, a Chapter 7 debtor filed a motion to reclassify a wholly unsecured second mortgage on his primary residence from a secured claim to unsecured, relying on §506(a) and (d). Section 506(a) bifurcates and reclassifies claims into secured and unsecured status. The claim is secured to the extent of the value of the creditor’s interest in the property, and unsecured to the extent that the amount of the claim exceeds the value of the creditor’s interest in the property. Section 506(d) provides for a mechanism to avoid a lien that secures a claim that is not an allowed secured claim.
The court observed that although the debtor’s motion was styled as a motion to “reclassify,” the debtor was actually attempting to void the lien under §506(d). Citing to the Supreme Court’s decision in Nobelman v. American Savings Bank and the Third Circuit’s ruling in In re McDonald, the Chapter 7 debtor attempts to draw a distinction between “stripping off” and “stripping down” a wholly unsecured lien. However, the court rejects the debtor’s argument, concluding that the Supreme Court’s decision in Dewsnup v. Timm, precludes the voiding of a lien under §506(d) in a Chapter 7 case where the claim is wholly unsecured.
To reach this conclusion, the court analyzes several Supreme Court and Circuit Court decisions. In Dewsnup, a Chapter 7 debtor sought to avoid the unsecured portion of a mortgagee’s lien. Reading §506(a) and §506(d) together, the debtor argued that because under §506(a), a claim is secured only to the extent of the judicially determined value of the real property on which the lien is fixed, a debtor can void the lien pursuant to §506(d) to the extent the claim is no longer secured and thus is not an “allowed secured claim.” The Supreme Court disagreed and held that §506(d) does not allow debtor’s proposed “strip down,” because the mortgagee’s claim is secured by the lien and has been fully allowed pursuant to §502, and therefore, cannot be classified as “not an allowed secured claim” for the purposes of §506(d). The Court rejected the debtor’s position that the words “allowed secured claim” must take the same meaning in 506(d) as in 506(a), that is to be read as allowed “secured claim.” The Court reasoned that Congress must have had a full understanding of the pre-Code rule that liens pass through the bankruptcy unaffected, and, “given the ambiguity in the text, the Court was not convinced that Congress intended to depart from that rule.” 502 U.S. 410, 112 S. Ct. 773, 116 L.Ed. 2d 903, (1992). “The words in 506(d) need not be read as indivisible terms of art defined by reference to 506(a) but should be read term-by-term to refer to any claim that was, first, allowed—as in the case at hand has been pursuant to 11 U.S.C 502—and second, secured, thereby voiding liens only when the claims they secure have not been allowed.” Id. at 417.
In Nobelman v. American Savings Bank, a Chapter 13 debtor, relying on §506, sought to bifurcate an understated claim, make regular payments toward the “secured” portion of the claim, while paying zero to unsecured creditors, which included the bifurcated “unsecured” portion of the claim. Nobelman v. American Savings Bank, 508 U.S. 324, 113 S. Ct. 2106, 124 L.Ed.2d 228 (1993). The Supreme Court held that the debtor’s proposed plan is prohibited under §1322(b)(2), which provides that a Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured by a security interest in real property that is the debtor’s principal residence.” In other words, this section prohibits the modification of an undersecured claim against a debtor’s principal residence. Id. at 328. The court again looked at the wording of the statute and concluded that the use of the phrase “claim secured …by” instead of “secured claim,” in §1322(b)(2), indicates an intent to “encompass both portions of the undersecured claim.” Id. at 331.
Thus, under Nobelman, if there is some value in the debtor’s principal residence to which the creditor’s lien may attach, the antimodification provision in §1322(b)(2) will protect the creditor’s rights as they relate to both the secured and unsecured portions of the claim.
The question presented by this New Jersey debtor is whether a “strip off” rather than a “strip down” of a wholly unsecured lien is permissible in a Chapter 7 case. A majority of courts addressing this issue concluded that there is essentially no distinction between “stripping off” and “stripping down” wholly unsecured liens, and that both actions are prohibited by the Supreme Court’s decision in Dewsnup.
The vast majority of courts do not allow the avoidance of wholly unsecured or undersecured liens in Chapter 7 proceedings. However, a minority of courts still reason that Dewsnup is limited by its facts to the application of cases of partially secured claims, and, therefore, allow the avoidance of wholly secured claims.
In Ryan v. Homecomings Fin. Network, 253 F.3d 778 (2001), the Fourth Circuit Court of Appeals held that although junior lien holders have limited opportunity to recover their unsecured claims, the parties bargained for their positions with knowledge that a superior lien existed. Nonetheless, “under a Chapter 7 proceeding, they are entitled to their lien position until foreclosure or other permissible final disposition is had.” Id.
In In re Talbert, 344 F.3d 555, the Sixth Circuit set forth three bases for the Supreme Court’s holding in Dewsnup: “(1) any increase in the value of the property from the date of the judicially determined valuation to the time of the foreclosure sale should accrue to the creditor” (otherwise it would create a “windfall for debtors); “(2) the mortgagor and mortgagee bargained that a consensual lien would remain with the property until foreclosure; and (3) liens on real property survive bankruptcy unaffected.”
Applying these principles, the court held that to allow a “strip off” would be in contradiction to the pre-Code rule that real property liens pass through the bankruptcy unaffected. Additionally, a “strip off would rob the mortgagee of the bargain it struck with the mortgagor”, i.e., that the consensual lien would remain with the property until foreclosure.
In In re Laskin, the Ninth Circuit Bankruptcy Panel drew a distinction between the application of §506(d) in a Chapter 7 and that in a Chapter 13. The court noted that unlike in a Chapter 13, where the claim must be allowed or disallowed to determine what is paid through the plan, and where the determination of a creditor’s secured status is relevant, “the allowance of a secured claim, or determination of secured status is meaningless in a Chapter 7 where the trustee is not disposing of putative collateral.” In re Laskin, 222 B.R. 872 (B.A.P. 9th Cir. 1998).
Rejecting the debtor’s argument that Nobelman and McDonald compel the voiding of a lien in a Chapter 7 where the lien does not attach to some existing value in the property, the New Jersey Bankruptcy court reasoned that the question of voiding a lien on a wholly unsecured claim depends on whether the debtor’s case is filed under Chapter 7 or Chapter 13. In Chapter 13, there must first be a determination whether a junior lien holder has a secured claim for purposes of §1322(b)(2). In a Chapter 7 context, determination of the value in the collateral is irrelevant for purposes of §506(d), as long as the claim is allowed under §502. Thus, the court concluded that in the instant matter, the claim sought to be avoided is both allowed and secured by the debtor’s property.
A major policy consideration in rejecting the debtor’s position is the implication “strip down or strip off” would have on the creditor’s right in the property. The courts conclude that even the “fresh start” policy cannot justify an impairment of the creditors’ property rights because the fresh start does not extend to a claim against the property, but rather, is limited to a discharge of personal liability of the debtor. Another consideration for disallowing the relief sought by the debtor is the potential windfall a “strip off” would create. Because the unsecured creditor would lose any increase in the value of the property by the time of the foreclosure sale, the increase in value would accrue to the benefit of the debtor.
This is an important decision because it precludes debtors from divesting the creditors’ of their rights in the property. This decision supports the principle that wholly unsecured liens pass through the Chapter 7 bankruptcy unaffected.
As more and more courts consider this issue, Weltman, Weinberg & Reis Co., LPA will continue to monitor the status of the lien avoidance cases and keep you apprised of the trends and new developments in the law.
If you have any questions on this matter, please contact Ms. Karina Velter, Esq. Karina is an associate in the Bankruptcy Group of the Weltman, Weinberg & Reis Co., LPA Philadelphia office. Karina can be reached at (215) 599-1500 or via email at .
