Bankruptcy/Creditor's Rights Issues

 A highly significant ruling involving fraudulent transfers recently decided by the Eleventh Circuit could have a far-reaching impact on distressed lending and investing.   In Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA, Inc.), 2012 WL 1673901 (11th Cir. May 15, 2012), the Eleventh Circuit Court of Appeals reversed the district

            As the filing of Chapter 11 cases continues to be rare, state court alternatives for liquidation of assets continue to grow in popularity. State court alternatives typically provide a more expeditious and less expensive forum for secured lenders to direct the liquidation of their collateral—for example, state court receivership sales avoid the United States Trustee

A recent case from the Sixth Circuit Bankruptcy Appellate Panel, In re Buttermilk Towne Center, LLC, 2010 Bankr. LEXIS 4563 (BAP 6th Cir. 2010), appears to have strengthened the undersecured lender’s hand in single asset real estate Chapter 11 cases. An undersecured lender is one whose collateral is worth less than the amount the debtor

Ohio is one of the few remaining states that still enforce cognovit provisions in promissory notes and other loan documents. A cognovit provision allows a creditor to take judgment immediately against a borrower upon the borrower’s default without having to endure the time, expense, and risk of a lawsuit. Cognovit provisions are only enforceable in

The Cleveland Plain Dealer has reported that Fannie Mae, a player in the national secondary mortgage market and unwitting owner of numerous abandoned properties in the Greater Cleveland area, has reached a deal with the newly formed Cuyahoga County Land Reutilization Corporation to sell properties to it for $1 each.

Compared with our last report

One of my business law professors often started the class with an anecdote that had nothing to do with anything on our syllabus. One morning he entered the class and told of the frustrations he had in trying to execute a deed on behalf of his wife who was out of the country and for whom he held a perfectly drafted and executed power of attorney. Alas, the title company refused to accept the deed. 

I have had issues of power of attorney pop up in three different contexts of my practice recently. First, two underwriters refused to insure title to a property because the vesting deed was a transfer on death deed (ugh, see my prior comments about the dreaded transfer on death deed) executed by a power of attorney. Although there is no statutory prohibition with respect to the validity of such a transfer, initially, neither underwriter would insure title. One underwriter was swayed by the fact that the deceased’s will provided the same disposition for the property as the deed (although with the hassle of probate), the other underwriter was unmoved. 

 

Second, it is common for commercial leases to provide that if a tenant refuses to execute a tenant estoppel or a subordination agreement, then the landlord has a power of attorney to execute the documents on behalf of the tenant. When I represent tenants, I regularly strike this language. However, practically speaking, lenders will not accept documents executed by a power of attorney. With respect to estoppel certificates, the lenders already have the information from the lender—they want to hear directly from the tenant. With respect to the subordination, using a power of attorney leaves open too many openings for the tenant to push through in the event the subordination becomes an issue in the future. For example, a judge may find that the power of attorney should have been recorded when given or may refuse to enforce certain provisions for equitable reasons which the judge may have been more likely to enforce had the tenant been the party executing the subordination directly.    

 

 


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Following an era of relaxed standards for issuing loans, lenders must be aware of a bankruptcy court’s ability to subordinate liens for equitable reasons. On May 13, 2009, in In re Yellowstone Mountain Club, the Bankruptcy Court for the District of Montana issued an order subordinating the secured lender’s $232 million claim below the (i)

The rights of owners and tenants in post-foreclosure property have been dramatically altered by new legislation signed by President Obama. On May 20, 2009, President Obama signed the “Helping Families Save Their Home Act,” which contained provisions to aid renters whose landlords go through foreclosure. Title VII of the Helping Families Act (the “Act”) is

               On November 26, 2008, LandAmerica Financial Group, Inc. (“LandAmerica”) and its affiliate, LandAmerica 1031 Exchange Services, Inc. (“LES”) filed for Chapter 11 protection from creditors.  LES abruptly ceased its 1031 exchange intermediary business two days prior to the bankruptcy filing and LandAmerica sold its Lawyers Title and Commonwealth Title underwriting subsidiaries to Fidelity Title and Chicago Title shortly after the petition date. 

Monday, April 6, was the deadline for creditors in each case to file their bankruptcy claims.  A review of the filed claims in each case tells quite a tale of woe, with the 1031 exchange customers of LES hit exponentially hard. 

As a 1031 intermediary, LES held proceeds from the sale of its customer’s “relinquished property” for 180 days or until “replacement property” was purchased if earlier.  For an extended period, LES had been investing its customer’s sales proceeds in auction rate securities (“ARS”), the market for which froze in February 2008.  By November, LandAmerica could no longer fund the cash needs for replacement property purchases and this led to the Chapter 11 filing.

Customers who were in the middle of their 180-day replacement period awoke to find that their cash proceeds were not only unavailable (and likely tied up long term in illiquid investments) but that they would not be able to obtain their planned tax deferral under Section 1031 of the Revenue Code.  If that was not injury enough, many of these customers already had replacement properties firmly under contract and suffered the insult of potential breach lawsuits by the sellers of those properties. 

One LES creditor’s claim is reflective of the many similarly situated customers.  Deblu Realty Corporation had almost $1.5 million deposited with LES from the sale of relinquished property, but its proof of claim was not only for that amount but for $373,000 in lost deferral of taxes (at capital gains rates), $3.7 million in potential lost profits on the thwarted acquisition of replacement property as well as yet to be determined amounts for alternate financing costs and legal fees. 

 


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