The DirtLaw Blog

Mailbag with Julia - Collecting on Family Law Support Judgments

Recently a family law attorney in Southern California wrote to me to ask if child support judgment holders needed to also record a special request for notice (Civil Code Section 2924) after I wrote about the recent case of BANC OF AMERICA LEASING & CAPITAL, LLC, v. 3 ARCH TRUSTEE SERVICES, INC., [ (2009) 180 Cal. App. 4th 1090].

The answer is yes.  

    If you are a judgment holder, and you are behind a bank loan or mortgage (deed of trust), ie, your judgment is after or "junior" to the bank, when they begin their foreclosure process on the borrower (your judgment creditor), they do NOT have to provide you a notice of the trustee's sale.

    While you may have no intention of actually reinstating the loan and conducting your own sheriff's sale on the property to levy or collect on your judgment, you still want to be on the special request for notice list because if there are surplus proceeds from an overbid, you want the Trustee to send you a claim form.

    The form is not on the Judicial council website, but many title companies should have one.

Forcing a Debtor into Bankruptcy - It can go terribly wrong sometimes...

In a recent Ninth Circuit case, (In re : Southern California Sunbelt Developers, Inc. "SCSD" June 9, 2010), the Court whacked creditors by upholding the bankruptcy court's award to debtor of over $700k in attorneys fees and $130k in punitive damages.

Apparently, 13 creditors had forced IBT, Inc. and  SCSD into bankruptcy (petitions for involuntary bk), which the bankruptcy court later found to be unwarranted because a genuine dispute existed between the creditors and the "debtors".  Accordingly, after unwinding the bk, the debtors were able to seek attorney fees for their trouble, and the court hit the credits with sanctions awarded under  Bankruptcy Rule 9011 and the court's inherent power. Section 303(i). 

Unfortunately, the opinion did not cite the facts that the lower court considered that demonstrated bad faith on the part of the creditors.

Lesson to creditors - make sure the debtor is really insolvent before circling the wagons or it can be an extremely costly decision if the involuntary petition is sought prematurely.

California's Homestead Exemption - No Need for Continuous Ownership For Debtor to Claim Exemption

In the recent case of Tarlesson v. Broadway Foreclosure Investments, LLC (May 17, 2010), the California Court of Appeal upheld a debtor's homestead exemption despite the fact that she had deeded away the property at one point because it was deeded back to her.

It appears that the creditor attempted to have a judicial foreclosure or otherwise levy debtor's residence.  Debtor claimed a $150k exemption in the home (pursuant to California Code of Civil Procedure 704.740 and Article XX, section 1.5 of the California Constitution) and creditor objected on the grounds that Debtor had not owned the property continuously.

The Court upheld earlier precedent that since the debtor had continuously resided at the property, that was a sufficient equitable interest to claim a homestead exemption.

Additionally, the creditor argued that debtor should have only been entitled to $50k for her exemption, but the debtor gave evidence (a declaration) that she was single, over age 55, and earned less than $15k/yr to qualify her to a larger homestead exemption.

What is interesting about this case is that although the court looked at the "equitable" interest that debtor had in the property, there was no discussion of whether she had unclean hands or engaged in otherwise inequitable conduct in deeding her property back and forth.

You Made a Private Money Loan, Your Borrower has filed Bankruptcy - Now What?

Many private money (or "hard" money) lenders enjoyed the consistency of borrower payments during the economic boom.  The recession has put a real squeeze on borrowers and many are now defaulting on their loans.  While some may be angling for a "strategic default," many borrowers who wish to keep their home or their business will file a bankruptcy petition and seek the protection of the automatic stay to halt their creditors from foreclosing.

What does the Automatic Stay mean?  Exactly what it sounds like, it stays all creditor acts until or unless the bankruptcy court grants the creditor relief from the automatic stay.

How does a creditor seek "relief from the automatic stay"? In the traditional loan secured by real estate, the creditor can allege that they are not adequately protected by a sufficient equity cushion or that the debtor does not need the property as part of their reorganization (Section 362).  Often this requires an appraisal of the collateral to determine just what the equity cushion is.

Does the Debtor/Borrower have to make payments to the lender even during their bankruptcy? Depends. Again, this goes back to whether or not the Debtor is trying to reorganize their debt and their bankruptcy plan.  In a Chapter 13 ("Wageearner") filing, the debtor is obligated to make post-petition payments.  Alternatively, creditors can seek "adequate protection" payments in the alternative to terminating the automatic stay.

What if my loan is underwater? Beware the CRAMDOWN or LIENSTRIPPING.  Here in Santa Clara county, there has a been a flurry of lienstripping where underwater junior liens are "stripped" -- but that is a topic for another day.

Commercial Property Values in the Bay Area - Watch out!

I don't have a crystal ball.  My friends, family and colleagues often ask what my thoughts are about the economy and the real estate prices.  All I have is anecdotal evidence that suggests that we have just seen the beginning of the commercial slump, and I've been saying that since mid-2009. 

Sometimes it's bad to be right.  In my practice as a real estate attorney, we saw in early 2009 that commercial tenants were struggling to pay rents to landlords.  We saw some lease revisions reducing rent.  As the bankruptcy filings sky rocketed, we saw more commercial property loans defaulting and as creditor's attorneys, we were asking for relief from the automatic stay to go to foreclosure sale on those commercial properties.  The commercial loan defaults did not seem to be driven by the subprime mortgage meltdown, but the recession itself putting pressure on small business owners and borrowers.

Which brings me to the recent foreclosure sales of major commercial properties in Redwood City, Sunnyvale, San Jose and San Francisco.  Recently I read an article by Sharon Simonson (who used to write for the Silicon Valley Business Journal but now is with SF Registry.  On Feb. 2, 2010, she reported the following:

"Bank of America is widely expected to become owner of nearly 43 acres in North San Jose following a trustee sale scheduled for Feb. 3 on the Santa Clara County courthouse grounds. Borrower Tishman Speyer Properties used the land as collateral for an $86.2 million loan in March 2007. Tishman, which paid more than $60 a square foot for the site, or $114 million, has defaulted."

As I recall, Tishman bought that "prime" piece of San Jose property because it was smack dab in the heart of many Silicon Valley players such as BEA and Philips.  The plan was to develop almost 3M sq. ft. in office space.  Guess they scrapped those plans!

The article goes on to talk about other big recent foreclosures on commercial real estate:

"Meanwhile, the so-called Town & Country site in downtown Sunnyvale has gone back to its lender. The borrowers, San Mateo’s Peter Pau and San Francisco’s RREEF Funds LLC, owed more than $21 million for the tight block of 11 parcels adjacent to the failed Sunnyvale Town Center redevelopment, in which the two were also partners. The bank set a bidding floor of $15.9 million for the 4.61-acre site at a trustee sale Jan. 29. That’s a 25 percent discount to the loan’s face value. No one stepped forward with a check. The block is slated for 450 units of housing at nearly 80 units an acre, according to a city-sanctioned specific plan."

Looks like banks like East West bank and Pacific National are going to have a glut of inventory on commercial property.  Too much supply generally means, prices go down. 

Chase Manhattan forgets to record their Deed of Trust - Oops!

This case caught my attention.  Given the re-finance frenzy of mortgages in California and the surging real estate values here before the subprime meltdown, it's not a surprising fact pattern:

Borrower refinances her California condo three times, and on the 3rd one, Chase Manhattan bank neglects to record its deed of trust.  Now all Chase has is an unsecured loan based on the promissory note. This is bad for Chase (bad for any bank or lender!).

In the meantime, Borrower files a petition for Chapter 13 bankruptcy, and lists the unsecured lien to Chase in her bankruptcy schedules- theoretically good for Chase. 

The borrower's bankruptcy gets dismissed and she files again, this time a Chapter 7 (or what we fondly refer to as a Chapter "20"), and again lists her loan to Chase on her bankruptcy schedules.  Chase sues to quiet title and wins on the theory of equitable subrogation and that the previous bankruptcy gave constructive notice.  The Chapter 7 trustee takes it up on appeal and wins at the Bankruptcy Appellate Panel level.

Chase then appeals that BAP decision and the Ninth Circuit concludes: Bankruptcy Trustee wins, the strong arm powers to avoid any transfer characterize the trustee as if the trustee is a bona fide purchaser for value which trumps Chase's unrecorded security interest. [11 U.S.C. Section 544]

The 9th Circuit did not give the "equitable subrogation" theory any weight because it reasoned that you cannot do equity and defeat a bona fide purchaser with legal title. 

[9th Cir. Opinion - In the matter of Jill c. Deuel, Debtor, Chase Manhattan Bank v. Harold S. Taxel, Trustee] 2010 DJDAR 1531, January 29, 2010.]

Collecting on the Deficiency Judgment.

Below is an excerpt of an article that was published in the Winter 2008 Points of Interest for California Mortgage Broker Association members:

Sold Out Junior Lienholder With a Deficiency Judgment? Now It’s Time To Collect
by Julia M. Wei, Esq, The Law Office of Peter N. Brewer

If you were the prevailing party, the attorney who handled your litigation will usually prepare and record an Abstract of Judgment for you.  However, that is as far as their collection efforts often go.  It is then up to the judgment creditor to engage a collection specialist to enforce the judgment against the judgment debtor.

1.  The Sit and Wait Method Recording an Abstract of Judgment is a passive means of judgment enforcement.  It is a lien against the debtor’s real property in a particular county.  Accordingly, if the debtor owns property in multiple counties, a creditor should have multiple Abstracts of Judgment issued by the Court and record them in all the counties the debtor is believed to own real property.

TIP Abstracts are good for as long as the Judgment.  A judgment expires after 10 years if not renewed.  Accordingly, if the creditor knows the debtor has relatives that he or she may inherit real property from, the creditor should also record in that county because the abstract of judgment will attach to the new property at the time the conveyance.  The creditor should also set up a calendaring reminder to RENEW the judgment in a timely fashion.

Back in the heyday of refinance loans, creditors were often paid because the debtor eventually would take some equity out of their home and the new loan paid off the liens.  These days, that scenario is less likely.

Additionally, abstracts can be lost to foreclosure, wiped out by the senior lienholders, or expire after 10 years. Judgment creditors may want to be more aggressive. 

 

2. Examining the Debtor and Taking the Money Out of Their Wallet A judgment creditor can have the Court issue an Order to Appear for Debtor’s Examination (OEX) and serve post-judgment discovery regarding the debtor’s financial accounts. 

Service of the OEX and post-judgment discovery is also a way to get the Debtor to start calling the creditor, rather than the Debtor avoiding the creditor’s phone calls.

The OEX is challenging to execute because it must be personally served on the debtor and the debtor may be an expert at dodging service.  However, assuming service is accomplished, two things could happen.  1) the debtor could appear; or 2) the debtor could fail to appear and the Judge can issue a bench warrant.

TIP   If the debtor does appear (the OEX is conducted at the courthouse), then creditor’s counsel can slap a Turnover Order on the debtor and get whatever assets are present that day – i.e., debtor’s watch, car, cash in their wallet. 

3.  Seize Their Car and/or Boat This only works if the debtor actually owns their car.  However, once you have a judgment, you may also have grounds to have a licensed personal investigator make inquiries of the DMV records.  The first step in any seizure is to obtain a Writ of Execution from the Court after the asset report is obtained from an investigator.

The seizure method is costly but effective.  Seizure of personal property requires the Sheriff to get involved, and requires up front deposits with the Sheriff’s department.

TIP When the car is garaged, the creditor must obtain a seizure order that allows the deputy to enter private property (garage or marina) to seize the vehicle.

FOR THE FULL TEXT - GO HERE.

Mortgage Pool in Bankruptcy - What Can Investors Do?

For those of monitoring the Cedar Funding implosion, it was not surprising to see that Cedar Funding, Inc. filed for Chapter 11 bankruptcy last week.

Cedar Funding is now a Debtor-in-Possession (DIP), and no doubt David Nilsen will seek to remain in control of the organization, and avoid the receiver recently appointed by a California Superior Court judge. 

What can creditors do?

In cases of fraud or wrongdoing, creditors can seek to appoint a Chapter 11 Trustee.  This would prevent the DIP (in this case Nilsen) from having ongoing control and management of the business.  However, many creditors should recognize that there is a cost associated with this, much the same as having a receiver in place.

Additionally, for unsecured creditors, the US Trustee will circulate a request that a creditor's committee be formed.

All of these steps are to part of evaluating the DIP's ultimate plan for reorganization.  The committee has voting rights, and in addition to the Trustee can object to a plan that is unlikely to be successful or in the best interest of creditors.

More aggressive steps? Creditors can determine if they should bring a motion to convert the bankruptcy to a Chapter 7.  Upon a conversion, the bankruptcy estate is controlled by the Chapter 7 Trustee and the goal of the Chapter 7 is a liquidation of assets rather than an a "re-organization."  While it can seem draconian, in reality, most Chapter 11 bankruptcies fail and the sooner the debtor liquidates, the higher likelihood of some recovery before the estate is eaten away.

How can a creditor decide?  A DIP has the obgliation to prepare operating reports and in this case, the operating reports may be more detailed than the reports that the investors may have sporadically received in the past.  The failure to supply these reports can be an indication that there is something to hide or that the debtor lacks the ability to satisfy the requirements of remaining in a Chpater 11 bankruptcy.

At a bare minimum, creditors will need to prepare their proof of claim and can decide to take a wait and see approach.

What We Learned about Subprime Lending in 2007

Back in March of 2007, I noted on here at The DirtLaw blog that a domino effect was occurring, with local Californian company Central Pacific Mortgage getting little press.

Well, when Countrywide began imploding, it seems that national papers began to pay attention.

Things We Learned in 2007:

-  the bad underwriting practices of 2005 are coming back to haunt the industry.  Time to revert to tighter underwriting policies.

- when lenders are under water, likely scenarios include

1. the short sale,
2. the deed-in-lieu
3. the judicial foreclosure plus deficience judgment and
4. debtors surrendering collateral in bankruptcy
5. debtors walking away from the property and not bothering to file bankruptcy

All in all, we've had a busy year at the firm, and I expect to see an increase in the number of judicial foreclosure lawsuits and deficiency judgment activity as well as more loan modifications.

Let's see if my other predictions come to pass about legislation trying to:

a) craft stricter penalties for "predatory lending" (only now vaguely defined by the California Finance Code)

b) modify the anti-deficiency statutes to include re-finance and HELOC loans as well as purchase money loans (possibly with a sunset provision)

c) abridge or abolish the availability of the stated-income loan (think this is already happening, so score 1 for the DirtLaw Blog.)

Commercial Leasing - When a Tenant files bankruptcy

Recently I spoke at a Commercial leasing seminar in San Jose.  My portion dealt mainly with the scenario of the tenant filing bankruptcy.  A copy of my outline can be found here.  I hope you will find it useful, though it is not intended as a primer on bankruptcy law.

In a room full of property managers, not a one had experienced a tenant filing bankruptcy.  I thought that was interesting.

Instead, the hot topics were unlawful detainers and my personal favorite, enforcement of judgments.  Though not in my outline, I spoke a bit on the Order for Debtor's Examination (OEX), post-judgment discovery, and the power of a turnover order and the Writ of Execution to authorize the sheriff (or deputy) to levy or garnish wages.

Many law firms can take you to judgment, but without the success of collection, it is merely academic.