Complex Closing Stories Part I

Complex Closing StoriesPart I

Foreclosures, Bankruptcy & Creditors’ Rights in the Mean Streets

Foreclosure

The effect of a foreclosure is:

To extinguish interests of

borrower/owner and most junior

lien holders

ForeclosureForeclosure

DOES NOT extinguish:

Matters with record priorityAd valorem taxesJunior IRS liens (filed w/in 30 days)

-must give 25 days notice-subject to redemption period

But proceed with CAUTION…If the foreclosed borrower is the grantee at

the foreclosure sale, all matters subordinate to the foreclosure will re-attach!

Foreclosure

In 2007 & 2008 calls for reform and protection for borrowers were

widespread.

Mod in a Box (FDIC, IndyMac Loan Modification Model)

Troubled Assets Relief Program (“TARP”)

Temporary Liquidity Guarantee Program (“TLGP”)

Proposed Senate Bill (expanding “cram down” provisions)

Foreclosure

In North Carolina, the General Assembly passed the

Emergency Foreclosure Reduction Program “EFRP”

Designed to reduce the number of foreclosures

Allows Commissioner of Banks to use funds for prevention

EFRP focuses primarily on subprime loans

Continued.


Subprime loan defined in NCGS §45-101:

Originated on or after 1-1-05, but before 12-31-07

Meets definition of rate spread home loan under NCGS § 24-1.1F(a)(7)

Chart by Office of Commissioner of Banks reflecting rate triggers for rate spread home loans

Continued.


If loan is “subprime” then it must comply with the following criteria in foreclosure:

Notice 45 days PRIOR to FILING Notice of Hearing (See NCGS § 45-102) including: Itemization of ALL past due amounts;

Itemization of any other charges that must be paid in order to bring the loan current;

A statement that the borrower may have options available other than foreclosure and with whom the borrower could discuss those options

Continued.


If loan is “subprime” then it must comply with the following criteria in foreclosure:

Notice 45 days PRIOR to FILING Notice of Hearing (See NCGS § 45-102) including: Contact information for the mortgage lender and

mortgage servicer or an agent for either who is authorized to work with the borrower to avoid foreclosure;

Contact information for one or more HUD-approved counseling agencies to assist borrowers in NC avoid foreclosure; AND

Contact information for the Consumer Complaint section of the Office of the Commissioner of Banks.

• EFRP - File with AOC • Within 3 days of sending Notice• Certain information with respect to borrower

and loan• AOC to create database


•Commissioner of Banks to review •Commissioner selects loans appropriate for foreclosure avoidance efforts

•Commissioner may extend foreclosure filing date up to 30 days


• NCGS § 45-107 requires foreclosure notices include certification that:– Notice under § 45-102 and information under §

45-103 have been provided; AND – Time periods have elapsed– Note: a material, inaccurate statement on

certification results in:• Dismissal with prejudice; and• Payment of borrowers costs

“EFRP” Certification

• Fifth Element under NCGS § 45-21.16(d)– Clerk must determine if

– Debt is not a subprime loan as defined in § 45-101(4); OR

– If subprime loan - pre-foreclosure notice was provided and all time periods have elapsed

More “EFRP”

• Foreclosing parties submit information on all loans to AOC

• Can obtain a “Non-Subprime Loan Certificate”

“EFRP” Best Practice!!

Best Practice Pointer

• High Scrutiny• Ripe for duress• Courts look for conveyances

• by grantors’ own free will• for adequate consideration (debt

forgiveness is not per se adequate)

Deeds in Lieu of Foreclosure

• Language for Deed in Lieu:• Absolute conveyance• Fair and adequate consideration• Including satisfaction of deed of trust

(recoding info)• Grantor declares conveyance is freely and

fairly made• Tax Stamps – Amount of obligation released

plus any additional consideration


Best Practice Pointer

Affidavit of Grantor req’d

by title insurer.


• Intervening Matters– Junior DT’s, judgments, claims of lien– NOT cut off by deed in lieu– Must be cancelled/satisfied


• If Borrower files for bankruptcy AFTER having given a deed in lieu:– Can deed in lieu be set aside?– Was there adequate consideration?– Was there duress?– …in other words was the deed fraudulent as to

other creditors of the borrower?

• Old Rule of Thumb – consideration must be at least 80% of appraised value.

• Old Rule still valid??????

Deeds in Lieu & Bankruptcy

Deed in Lieu with a Twist?

At lender’s instruction, borrower conveys to 3rd party LLC

•LLC is wholly owned by lender

•LLC was created to take title to property for liability purposes

•However, LLC pays nothing for the property…

continued

Deed in Lieu with a Twist?

Bankruptcy court will focus on consideration to the grantor

So long as debt is being forgiven by parent lender, the conveyance should pass muster.

Bankruptcy &Local Transfer Taxes

• Chapter 11 Plan approves conveyance of property• Under §1146(a) of the Code conveyances are to be

made without imposition of stamp tax or similar tax

• But see: – Florida Dept of Revenue v. Piccadilly Cafeterias

• Plan must be confirmed for exemption to apply

– State of Florida v. TH Orlando, Ltd• Exemption applied to the transfer of a non-debtor’s

property

BankruptcySales Free & Clear

• § 363(f) • Court orders property sold free and clear

of all liens under §363(f) of the Code• Subject to 10 day appeal period• Reliance on order “transferring liens to

proceeds”• Clear Channel Outdoor, Inc. v. Nancy

Kupfer held sales are not free and clear if timely appealed

BankruptcyDeposits by Contract Purchasers

• What happens to deposits?• If held by escrow agent – terms of

contract should control• Terms not clear - escrow agent will

require consent of all parties (and including bankruptcy court/trustee) to release

BankruptcyDeposits by Contract Purchasers

• What happens to deposits?• If held by contract seller/debtor, then

bankruptcy court & trustee are involved

• Is contract purchaser an unsecured creditor?

• What if funds are used to improve property?

Loan Workouts

• Inspired by threats of foreclosure and bankruptcy

• Parties may agree to some form of workout

• Modification of the loan terms and a forbearance agreement

• Affect the priority of the loan/deed of trust?

Loan WorkoutsALTA 11

• Lender requests an endorsement, such as an ALTA 11

• ALTA 11 acknowledges an amendment to the terms of the loan and states the priority has not changed


Requirements for an ALTA 11:• Recordation of satisfactory modification

agreement; AND • Update on attorney’s certification of title

(including any amendments, modifications, assignments or other matters affecting the insured deed of trust)


• Novation

• Do any intervening matters (even potential intervening matters) exist

• Do changes create a novation?

• What becomes of priority???

Loan WorkoutsNovations

• What is a Novation?• NC case law is fairly vague. • Novation is “a substitution of a new contract

or obligation for an old one which is thereby extinguished… novation implies the extinguishment of one obligation by the substitution of another.” Tomberlin v. Long

Continued


• Requisites for a novation:– a previous valid

obligation – agreement of all

parties to a new contract

– the extinguishment of an old contract; AND

– the validity of the new contract.” Anthony Marano Co. v. Jones

– Intent is also considered

Continued


• Novation - Anthony Marano Co. case– Defendant executed a first note to his

lender– A year later the defendant executed a

second “demand note” to the same lender

– Interest rate was reduced – Change was only a modification - did not

extinguish and replace the original obligation.

Continued


• Advancement of New Funds

• New funds not covered by the original note/deed of trust: – will result in a

novation; or – at least a new

priority for those new funds

• Changes that create new money or otherwise replace original agreements must be highly scrutinized

• Subordinations may be required

Continued

Loan Workouts & Title Policies

• What if a lender makes concessions in a workout?

• Condition 9(c) of 2006 ALTA Loan Policy:– The Company shall not be liable for loss or

damage to the Insured for liability voluntarily assumed by the Insured…(also in 1992 Loan Policy)

• If modifications weaken or create defects in insured interest – Defense for title company

• Obtain title company’s consent in advance (endorsement) Best Practice Pointer

Cram Downs and Lien Stripping

• Ability to remove Deeds of Trust• Title companies willing to insure interests

that are consistent with proper order• Proposed Senate Bill allows bankruptcy

judges to:• Lower interest rates, • Reduce principal, and/or • Shorten the term of the primary mortgage/deed of

trust on a home residence

• Bill gives troubled homeowners leverage

Creditors’ Rights and Title Coverage

• Requested by owners and lenders• Lender on Construction loan to

Uptown Condos may require• A purchaser from Uptown Condos

may require• Prior approval needed• Considered ultra-hazardous title

coverage

Creditors’ Rights

• What interests are involved?– Rights of unsecured creditors which may

become superior to the rights of purchasers and secured creditors

– Result of actions taken by a debtor prior to entering bankruptcy

– Actions are seen as unreasonably harmful to unsecured creditors

– May include certain transfers of property interests which become voidable

– Two types: Fraudulent transfers and Preferences

• Intentional – Done to hinder, delay or defraud a creditor

• Constructive – No intent to defraud, but any of the following exists:

• the transfer is made when the transferor is insolvent;

• the transfer renders the transferor insolvent; or

• the transfer leaves the transferor with unreasonably small capital to continue it’s business

Creditors’ RightsFraudulent Transfers

• Insolvent grantor makes a transfer before entering bankruptcy – transfer favors fewer than all

creditors• Time periods for preferential

transfer:– 90 days prior to bankruptcy

filing– 1 year if transfer is to an

“insider”

Creditors’ RightsPreferences

• Basic Coverages under 2006 Policies– Limited Current Transaction – Current

transaction being treated as a preference as a result of (1) Failure to timely record or (2) Failure to impart notice to third parties [Covered Risk 9(b) Owners; Covered Risk 13(b) Loan]

• Prior Transactions – Challenge to prior transaction in the title chain

based upon creditors’ rights, including fraudulent and preferential transfers [CR 9(a) Owners; CR 13(a) Loan]

Creditors’ RightsTitle Coverages

• Coverages beyond those contained in the 2006 Policies require an endorsement

• ALTA 21-06 provides coverage for the avoidance of an insured interest based the occurrence of a fraudulent transfer or preference on or before the Date of Policy

Creditors’ RightsALTA 21-06 Endorsement

• Issuing ALTA 21-06– High risk coverage for title companies– Claims – Not big numbers, but big

dollars– Information not of record - credit risk

determination– Difficult to issue (especially in current

climate)


• Information required for underwriting:– Structure of transaction– Parties involved (related?)– Consideration to be paid– Intended use of loan proceeds– Financial status of borrower and/or seller– Any other information that may affect

the nature of the risk


Use of Funds as a factor:• How are the funds being used?• Acquire or improve borrower’s

property• Disbursement to shareholders,

members…• Repayment of loans (institutional or

individual investors)

Creditors’ Rights

• Information required for underwriting:– Structure of transaction– Parties involved (related?)– Consideration to be paid– Intended use of loan proceeds– Financial status of borrower and/or seller– Any other information that may affect

the nature of the risk


Based on our fact pattern:• Owner’s coverage at the time Uptown

Condos acquires the property:– Demonstrate that the transaction is

“arms-length” and for fair market value

Creditors’ Rights

Based on our fact pattern:• Lender’s coverage at time that

Uptown Condos takes out the original construction loan:– Confirm that all loan proceeds are being

used to improve the property, then the structure is favorable for approval

Creditors’ Rights

Based on our fact pattern:• Lender’s Coverage at the time Uptown

Condos refinances its construction loan:– Proceeds used to pay off the existing loan and

further improve the property, then the structure is favorable.

– Note - Uptown’s financial difficulties may offset the structure.

– Unrecorded loans – more information needed– Cash-out is an issue

Creditors’ Rights

Based on our fact pattern:• Lender’s coverage if lender

forecloses, purchases at foreclosure, takes title (or has related entity take title) and requests a new policy:– Demonstrate no equity (the loan

balance equal to or greater than the property value) in the property.

Creditors’ Rights

Based on our fact pattern:• Lender’s coverage at the time

Uptown Condos refinances and the funds are used to purchase other property for a related entity:– Strong financials statements would be

required for the parties involved (indemnitor would probably be required).

Creditors’ Rights

Transaction Structures with Risk:• Leveraged Buyouts (Corporate or

Partnership)• Mortgages to pay dividends or

partnerships distributions (i.e. “cash-out” refis)

• Mortgages cosigned by different entities• Mortgages to repurchase corporate stock• Mortgages securing unsecured pre-

existing debts to same lender

Creditors’ Rights

Transaction Structures with Slight Risk:• Refinances of existing mortgages• Refinancing of existing unsecured

debt by a different lender• Purchase money mortgages

Creditors’ Rights

Documents

Complex Closing Stories Part I