Articles Posted in Debt

bankruptcy-court-sealShmeglar v. PHM Financial et al., 14-121 (Interpleader Plaintiffs)
Bankruptcy Court, Northern District of Illinois, Eastern Division
Issued November 18, 2014 by Judge Jack B. Schmetterer

In this Memorandum Opinion the Bankruptcy Court pries apart a Fed. R.  Civ. Pro. 12(c) Motion for Judgment on the Pleadings brought by banks and servicers who claim to be entitled to mortgage payments from the Debtor. In the process, the Court peers down the rabbit hole of securitized mortgages – the process of bundling loans into trusts, slicing trusts into securities, and trading the securities on Wall Street. And what the opinion reveals isn’t pretty.

Ultimately, this case is like thousands across Illinois, and tens of thousands across the country, in the past 10 years that arise from the clash between the big-money business of securitization and the reality of the subprime mortgage debacle. At the root of it all there was always this simple, but previously unthinkable, question:  Who owns my mortgage note and who should I be paying?

Whose Mortgage Is It Anyway?

So who should a homeowner be paying when their mortgage has been securitized, sold, transferred, allonged, and robo-signed? The gaggle of interpleading banks and mortgage services in this case thought it was obvious based on the documents on file with the Court that they were the right ones to pay. But was it really obvious based on documents alone? According to the Court, no it was not.

Every Trick In The Book

Indeed, these facts read like the Forrest Gump of the mortgage mess – virtually everything that had plagued homeowners across the country had happened here, too. No wonder the opinion covers nearly every hot-button tactic used by desperate homeowners over the years to keep from paying their mortgages: the impenetrable mortgage trust, the confusing and misleading array of servicers and transferees, the notes, allonges, and  robo-signed transfers in blank: it’s all here!

But wait, there’s more! This case even involves a Cook County foreclosure case in which judgment that was entered but no sale took place – so no “final confirmation” was issued. The result was an incomplete judgment and a lurking Stern v. Marshall problem. Oh no! And last but not least, even the Illinois enactment of the UCC was called on by the Opinion.

The Upshot

Following its thorough analysis, what does the Court conclude? Can the Debtor/Mortgagor rest easy knowing to whom he must make out his mortgage payment? Nope. Instead, the Opinion confirms that the mortgagee banks and servicers here, like others around the country, have tied themselves into a knot that can only be untangled following an evidentiary hearing (and maybe not even then).

So while there is no final answer to the Debtor’s question of who to pay, at least the Court seems to make the banks put their money where their mouth is. That’s got to count for something, right?

Your Turn

Want to share your thoughts on this post? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Detroit SkylineThe Announcement

Recently Steven Rhodes, the Judge tasked with managing the largest municipal Bankruptcy in American history, cleared Detroit to emerge from reorganization and put to bed a series of hard-fought battles between creditors, citizens, employees, and pension recipients. Before approving the move though, Judge Rhodes issued a heart-felt plea to all involved: “move past your anger” and “fix the Motor City. What happened in Detroit must never happen again.” He also observed that “Detroit’s inability to provide adequate municipal services… is inhumane and intolerable, and must be fixed.”

Politicians and civic leaders, including Michigan’s Republican Governor Rick Snyder, hailed Friday’s decision as a milestone and a “fresh start” for the Motor City. Indeed, it was Snyder who originally agreed with State-appointed Emergency Manager Kevyn Orr to take the City into Chapter 9: a last-resort he had promoted during his re-election campaign.

Lightning Fast Recovery

By Bankruptcy standards Detroit’s case finished in a flash thanks to a series of deals between the City and major creditors, especially retirees who agreed to smaller pension checks (after the Judge reminded them that they had no protection under the Michigan Constitution) and bond insurers who relented on their push to sell the City’s art collection despite being owed more than $1 Billion. By contrast it took more than 2 years for Stockton, California to get out of Bankruptcy, while tiny San Bernardino is still operating under Chapter 9 more than 2 years after filing.

An Innovative Plan

Detroit’s Plan of Reorganization involves cutting pensions of non-public-safety retirees by 4.5%, completely discharging $7 Billion of debt, and spending over $1.7 Billion to demolish blighted buildings and improve basic services. In particular, Judge Rhodes praised the way contentious issues in the Plan were resolved: such as the deal to avoid selling artwork from the Detroit Institute of Arts, and to keep pension cuts from getting worse. In fact, while he said the pension deal bordered on “the miraculous,” he acknowledged that the necessary cuts would cause hardship for the many who would now have to get by on less than $20,000 a year.

Ultimately Judge Rhodes had to accept or reject Detroit’s Plan in full rather than cherry-picking sections. He relied on the advice of an expert, who deemed the Plan “feasible” and predicted that its success would depend on the fiscal skills of the Mayor and City Council, as well as a City Hall technology overhall. Maybe the most unusual feature of the Plan was its reliance on $816 Million put up by the State, foundations, philanthropists, and the Institute of Arts, in order to forestall even deeper pension cuts and avert the sale of art – a step the Judge warned “would forfeit Detroit’s future.”

What Went Wrong In The First Place

In retrospect, perhaps this was inevitable. After all, Detroit’s economy was clearly at the center of a “Perfect Financial Storm” consisting of municipal corruption, fiscal mismanagement, the long, slow decline in the auto industry, and widespread urban flight that strangled the population from 1.2 Million to 688,000 by 1980, turning whole neighborhoods into boarded-up wastelands. Adding insult to injury, despite encompassing more square mileage than Manhattan, Boston, and San Francisco combined, Detroit couldn’t even count on sufficent tax revenue to cover pensions, retiree benefits like health insurance, and debt service on funds borrowed to meet its budget burden. Still, the nail in Detroit’s coffin was the horrible debt deal made by former Mayor Kwame Kilpatrick, which locked it into paying high rates on its debt even as interest rates fell during the recession

Light At The End of The Tunnel

Detroit Regional Chamber President and CEO Sandy K. Baruah declared Detroit to be “on the cusp of a new era and primed to reinvent itself in a way many people did not think possible.” True. But what really matters is that the Motor City has a new direction and a long, hard, clean-up job ahead. Sure, Bankruptcy was the catalyst for change, but only the City and its residents – businesses, individuals, religious institutions, and government – can affect real change. Here’s hoping, Detroit. We’re all pulling for you.

Your Turn

Want to share your thoughts on the largest municipal Bankruptcy in U.S. history? Need to discuss your own situation? Call us in confidence at 630-378-2200 or reach us via e-mail at mhedayat[at]mha-law.com.

Gift CardIn the recent case of Beeman et. al. v. Borders Liquidating Trust et al. from the Circuit Court for the Southern District of New York decided on October 29, that Court examined what ought to happen when relief that could be granted, for practical reasons is not.

This controversial policy, referred to as “Equitable Mootness” means certain judgments will not be issued – even though they could – because doing so upsets the established order in a Bankruptcy case. It is obviously a touchy subject, but squarely within a court’s discretion.

Here, more than $17 Million had been distributed to creditors of Borders Bookstores in its Chapter 11 reorganization when 3 of its customers whose store gift cards became useless when it went bankrupt sought to be placed in a special “class” of claimants. The Plaintiffs started in the Bankruptcy Court but did not get traction there, so they proceeded in District Court.

In the Bankruptcy case below, the Court determined due to a variety of factors, including timing of the claims and the stage reached in the case, that Equitable Mootness should kick in.  The District Court agreed and clarified that the doctrine applied not only to ongoing reorganizations but to the ones, like this, that ended in liquidation – a s0-called “Liquidating 11.”

In its Opinion the District Court did point out the exceptions to the Equitable Mootness doctrine articulated in the 1993 case of Frito‐Lay v. LTV Steel(In re Chateaugay Corp.). But the Court also made it clear that this situation did not satisfy those conditions.

In the end, the decision in this case was complex, as were the legal principals, but the basic idea could be reduced to this: if you are a creditor in a Bankruptcy , act fast, be timely, and don’t let up. If you can’t do that, stay home and save yourself the Attorneys’ fees.

If you are a Creditor in a Bankruptcy case, call us in confidence at 630-378-2200 or via e-mail at mhedayat[at]mha-law.com.

CFPB

Recently I got an e-mail from the newly-formed Consumer Financial Protection Bureau (CFPB). You remember the CFPB, right? No? That’s alright. But you probably remember the agency’s public face, now-Senator Elizabeth Warren of Massachusetts.

So, after coming out of the shoot a few years with the President’s blessing and much fanfare, the CFPB has released the first of several consumer-friendly web-based guides. This one is its Guide to Owning and Buying a Home.

The 3 primary resources offered on the CFPB site are:

Guide to Loan Options: For those just starting their home and mortgage search. Provides necessary information to choose the right mortgage.

Closing Checklist: For those closer to the end of the process, this guide helps prepare them to close.

Closing Forms-Explained: The CFPB breaks down the standard documents used at real estate closings and tells users what to look out for.

On the whole this isn’t a bad first offering. In fact, it could set an entirely positive footprint as the nation moves into the post-Great Recession era.

If anyone gives these resources a try please call or e-mail me with your thoughts.

Money Fight

So you’re doing business as usual and notice that payments from your customer are getting later and later. Turns out that customer is struggling to navigate in the sputtering economy. Waiting for your money is bad enough; but what if you receive a demand to refund what you’ve been paid? And not because of anything you’ve done but because your customer has filed for Bankruptcy?

Sound like a nightmare? Actually, it happens everyday. So what do you do if you’re next? That was the question addressed in the recent New York case of Davis vs. Clark-Lift, in which a reorganizing Chapter 11 Debtor paid vendors later and later as it listed towards Bankruptcy. But even those lucky creditors who got paid could not escape the demand of the Trustee (Davis) to fork over what they had received.

As the Court in Davis explained, to set aside a payment as a “Preferential Transfer” under Section 547(b) of the Bankruptcy Code the moving Creditor or Trustee must established that the Debtor made it:

(1) To an  existing creditor to satisfy an existing debt;
(2) While it was actually, or presumptively, insolvent;
(3) Within 90 days before filing its Bankruptcy case; and
(4) The payee therefore gets more than it otherwise would.

So if you got paid within 90 days before your customer filed Bankruptcy, it’s all over right?

Not exactly. Even if a payment qualifies as a Preferential Transfer the recipient can assert defenses. If successful, the payee retains the money. One of the most frequently-used strategies is the “Ordinary Course of Business” defense found in Section 547(c)(2) of the Code, which provides that a payment made in the ordinary course of business will not be avoided as a preference. The idea behind the defense is to permit a reorganizing Debtor to maintain a semi-normal relationship with some creditors: because rebuilding goodwill is key to a successful reorganization.

In the Davis case the Court’s analysis was primarily focused on what the “ordinary course of business” was; which in turn meant determining the most common and frequently-used payment terms for vendors during the relevant 90-day period. This means looking at all vendors at first; then vendors of a certain type; then payments of a certain type; and finally a comparison between terms bef0re the 90-day period began running and afterwards.

The decision in the Davis case, like many similar cases, was that the vendor had to disgorge what it was paid. What would it get in return? Perhaps a return of its goods so it could resell them and offset its losses? Nope. In return for disgorging the payment the vendor got a claim in the Debtor’s case. Most likely, it wouldn’t see the money. So now the vendor was out both its money and its property. Isn’t the law grand?

If you have seen situations like this or are yourself the subject of such a situation, call us in confidence at 630-378-2200 or reach us at mhedayat[at]mha-law.com.

foreclosure

The Federal Reserve and Government forecasters agree: the Great Recession is over. But is it? Not for millions of Americans whose homes remain underwater thanks to the sub-prime mortgage scandal. Nor is it over for the millions more who lost their jobs and have only been able to secure part-time work with less pay and no benefits.

For many the ultimate insult is when their bank refuses to work with them and turns a few missed payments into a full-blown foreclosure. So here are a few options for those who want to know their options.

Alternative #1: Short Sale

When you sell your home, you pay off the current mortgage with the buyer’s loan. But what if your home’s value has plummeted below the face amount of your loan? In that case a buyer’s offer wouldn’t even retire your mortgage – much less provide the down payment on a new home. So you’re stuck, right?

Wrong. If you secure a bona fide offer your lender must take it seriously: it must decide whether to hang on to your home and potentially foreclose, or take a “short payoff.” And it turns out that virtually all banks are willing to take a short payoff under the right circumstances. The result is a short sale.

If your lender agrees to the short sale price it will release its mortgage lien – most times without asking you to make up the difference. But to convince the lender, you typically need to list your house for at least 90 days and meet a gauntlet of conditions. To enhance your chances of success, choose the right advisors. Experienced Real Estate Brokers and Attorneys make the process much easier and radically increase your chance of success.

Alternative #2: Deed in Lieu

As the name implies, it is possible to give your lender permission to take your home – that is, tender the deed– instead (“in lieu”) of making the lender foreclose. To qualify for this remedy a homeowner must submit a hardship letter and follow a battery of steps. Note: in order for a deed in lieu to work there cannot be junior liens on the property.

Advantages:

Unlike a short sale, lenders do not take steps to obtain a deficiency judgment when a deed is tendered in lieu of foreclosure. This is a difference and an advantage (in theory) over short sales. But in reality, short sales rarely generate deficiencies anyway.

The deed in lieu also permits the homeowner to avoid the publicity, expense, and time commitment involved in a foreclosure action.

Disadvantages:

The primary disadvantage of the deed in lieu is that homeowners lose their property, including all equity, immediately. On top of that, both the conveyance of the house to the lender and the forgiveness of the deficiency are taxable events that can generate thousands in unforeseen liability for the homeowner.

Alternative #3: Bankruptcy

Most people think of Bankruptcy as the end of the road: the last stop on the spiral to the bottom. But hold on! Bankruptcy isn’t the deep, dark hole many believe it to be. In fact, when it comes to saving your home, it may just be the best thing that ever happened to a homeowner. Here’s why.

First, Bankruptcy is tax neutral. Unlike all the options above, absolutely no tax liability arises when debts are written off in Bankruptcy.

Second, regardless of the type of Bankruptcy employed – liquidation or reorganization – the result is to stop the foreclosure freight train in its tracks. And if the homeowner can manage to repay what they’re behind, the foreclosure can be stayed indefinitely.

Third, for those who don’t realistically expect to catch up, a liquidation Bankruptcy will relieve them of the mortgage debt permanently, and without causing any unwanted tax repercussions.

In fact, Chapter 13 Reorganization enables homeowners pay down mortgage arrears via a payment plan over as many as 60 months (5 years). During that time, all foreclosure activity is stayed. Homeowners can file for Chapter 13 Bankruptcy relief right up until the confirmation of the Sheriff’s Sale of their home.

Light at the End of the Tunnel

The short list in this post does not even get into the maze of regulations known as HAMP, HARP, and other government programs such as the Reverse Mortgage. These are also possible ways to go about saving your home from foreclosure. To learn more, drop us a line at mhedayat[at]mha-law.com or call for a confidential consultation. We are always happy to be of service.

Discharging Taxes in Bankruptcy

In response to questions we get over and over, here is our totally unofficial Guide to Discharging Taxes in Bankruptcy. We’ve gathered many of the tried-and-true rules on the topic but beware! The rules and decisions are constantly evolving, so take this guide with a grain of salt and always consult a competent Bankruptcy Attorney before making any decisions. Okay, enough disclaimers. Here it is:

Chapter 7 Liquidation

In a Chapter 7 liquidation Bankruptcy – whether an individual or a business entity – taxes can be discharged as long as:

(1) They relate to a return due 3+ years before a filing;
(2) That tax return was filed 2+ years before the filing;
(3) They weren’t assessed within 240 days before filing;
(4) That return was not fraudulent or frivolous; and
(5) Taxpayer/debtor not found guilty of evading tax laws.

Note: Even if the tax debt in question does not qualify under these criteria, penalties may still be discharged in Chapter 7 if the events that gave rise to the penalties occurred 3+ years before the filing date.

In such a situation the whole claim, including penalties and interest, would be listed on Schedule E and bifurcated into the non-dischargeable and dischargable portions.  The non-dischargeable portion would be listed in the “Amount Entitled to Priority” column of Schedule E, while the dischargable balance would be identified as “non-priority” and listed in the “Amount Not Entitled to Priority” column. The non-priority penalties do not get listed again on Schedule F.

Chapter 13 Reorganization

Taxes that do not qualify for discharge in Chapter 7 can stll be paid over 3 to 5 years in Chapter 13

(1) Interest stops accruing the moment the Chapter 13 bankruptcy is filed so payments are interest-free.
(2) Most tax penalties are treated as non-priority, unsecured debt and typically discharged or 10-15 cents on the dollar or less.
(3) In such case, tax penalties area still bifurcated from the priority tax claim and listed as “non-priority, unsecured” claims.

Note: If a tax lien has been recorded against the debtor’s real or personal property prior to the bankruptcy filing date, then the tax claim should be listed on Schedule D as secured – not on Schedule E as unsecured priority. That lien will be eliminated if there is no equity in the underlying property, or reduced to the present equity value of the debtor’s interest in that property as of the filing date of the case.

Want to know more about tax discharge strategies in Bankruptcy? Contact M. Hedayat & Associates, P.C. for your confidential consultation.

Chapter 13 Bankruptcy

[T]here are known knowns… known unknowns … and unknown unknowns… things we do not know we don’t know.—US Secretary of Defense Donald Rumsfeld

When it comes to Bankruptcy, many Debtors don’t know what they don’t know about real estate taxes. Confused? So were the District Courts until the 7th Circuit Court of Appeals addressed the issue in the case of In re LaMont, Opinion 13-1187 (January 7, 2014).

The 7th Circuit began its analysis in LaMont by acknowledging the 2 kinds of real estate taxes with which Debtors must deal:

(a) Sold; and (b) Unsold.

The 2 are treated differently under State law and receive distinct treatment in a Plan of Reorganization as well:

Unsold taxes can be paid through the Plan in the same way that a Debtor would pay arrears to a secured creditor like a mortgage company. The rationale for such treatment is that the taxing body – the County – is presumed to have a secured lien in the subject property for its taxes. Moreover, those axes cannot be sold once a Bankruptcy Petition is filed. Such taxes generally get paid directly to the County Treasurer via the Plan.

Sold taxes are trickier. They can be paid through the Plan like unsolid taxes, but only so long as the “redemption period” has not expired. Even if the redemption period expires during the Plan, sold taxes can still be paid over the rest of the Plan period. And while that is taking place, the Automatic Stay will remain in effect to prevent Tax Buyers from redeeming the sold taxes or forcing a sale of the underlying property (the typical State law remedy).

In LaMont the issue was sold taxes. The LaMont Debtors owed real property in Minooka, Illinois on which the Village had levied a special assessment that they hadn’t paid. The Court noted that in this context a special assessment was deemed a property tax. Thus, the unpaid assessments were disposed of at a tax sale. Shortly afterwards the Debtors filed Chapter 13 and their Plan provided for payment of the assessment directly to the Village. However, the Plan did not identify. nor did notice go out to, the tax buyer. Nonetheless, the Plan was confirmed and the Debtors made payments to the Trustee who distributed them to the creditors including the Village.

But was the tax buyer bound by the terms of the confirmed Plan even though he had not been notified? In answering the questions the Court conducted a thorough analysis of the Illinois property tax system including tax sales and redemption periods – treating the sold special assessments the way they would sold property taxes.

The upshot of the analysis was that for the entirety of the redemption period – usually 2 to 2 ½ years, – a property owner could redeem his or her sold taxes by paying the County Clerk the past due amount, plus penalties and interest. Between 3 and 6 months before the expiration of the redemption period, a tax buyer had to file a Petition for Tax Deed with the Circuit Court, then take the resulting Order to the County Clerk to secure a Tax Deed, which then had to be recorded within a year. If those steps were not followed the tax buyer would lose his interest in the subject property. That is time enough for the property owners to act, but here the time period was tolled because of the Bankruptcy. Still, the Debtors neither identified the proper party to pay nor made adjustments to their Plan of Reorganization.

The LaMont the tax buyer filed his Petition for Tax Deed with the Circuit Court 3 years after the Debtors filed Bankruptcy and the Circuit Court denied it. The tax buyer then filed a Lift Stay Motion in the Bankruptcy Court, which denied the Motion because he was ostensibly being taken care of in the Plan. The tax buyer appealed, arguing that the Stay should not apply since he was not given notice of the case. But the District Court affirmed the Bankruptcy Court.

The tax buyer had also argued that his interest was in the real property, so it was not an interest against the Debtors. In other words he argued that his interest automatically divested the Debtors of their interest in the property after the redemption period expired. In response the 7th Circuit first examined whether or not the tax buyer had a claim, concluding that he did even though there wasn’t a traditional creditor-debtor relationship present. Nonetheless, the Court found that the tax buyer did not have an executory interest in the property itself: he merely had a tax lien on the property.

In reaching its decision the LaMont Court reviewed Illinois case law in concluding that, while there were differences, precedent favored the treatment of sold taxes as a lien. Since the tax buyer’s claim was deemed to be a lien, it could be modified under Section 1322(b)(2) of the Bankruptcy Code and the Debtors could force him to take payments even past the redemption date as long as the Plan was in effect.

In short, sold taxes can be addressed in a Plan of Reorganization but notice should be given to the payee or the Debtors risk paying into their Plan for 5 years only to end up with no credit towards their sold property taxes – and in the end stand to lose their home. Sad but true.

This piece from the Wall Street Journal’s Real Time Economics site answers the question with charts galore! The short answer comes in 3 parts:

1) For working people, 2013 was more of the same slow, jobless recovery;
2) For high net-worth individuals and corporations it was a bonanza; and;
3) The housing sector underwent a slow, painful, and uneven half-recovery.

Check it out here.

WSJ Real Time Economics 2013 Graph