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Debtors Cannot Void Junior Liens on Underwater Property in Chapter 7

On June 1, 2015, the Supreme Court released its opinion in Bank of America, N.A. v. Caulkett, No. 13-1421, 575 U.S. ____ (2015), in which it held that a Chapter 7 debtor may not void a junior mortgage under Section 506(d) of the Bankruptcy Code merely because the debt owed on a senior mortgage exceeds the present value of the property and the creditor’s claim is secured by a lien and allowed under Section 502. For now, this opinion cuts off a Chapter 7 debtor’s ability to “strip off” an underwater junior lien.

In Caulkett, the debtor had two mortgage liens on his home; Bank of America held the junior lien. The amount owed on the senior mortgage exceeded the value of the home, rendering Bank of America’s junior mortgage fully “underwater,” or with no current economic value. Generally, where the value of a creditor’s interest in its collateral is zero, a creditor’s claim cannot be a “secured claim,” and the lien securing the junior mortgage can be voided in a Chapter 7 case.

The authority for this voiding procedure lies in Section 506 of the Bankruptcy Code. Under Section 506(a), “[a]n allowed claim of a creditor secured by a

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Ninth Circuit Decides Issue of First Impression, Protects Insider Guarantor from Preference Liability

In a case of first impression for any district or appellate court, the Court of Appeals for the Ninth Circuit (the “Court”) held that “when an insider guarantor has a bona fide basis to waive his indemnification rights against the debtor in bankruptcy and takes no subsequent actions that would negate the economic impact of that waiver, he is absolved of any preference liability to which he might otherwise have been subjected.” As discussed below, the case provides a list of factors for courts to consider in determining whether an indemnification waiver should be considered valid for purposes of exempting an insider guarantor’s preference liability.

In Stahl v. Simon (In re Adamson Apparel, Inc.), the Court decided whether a personal guarantor of corporate debt may be liable for preferences where that guarantor is an insider of the debtor but validly waived his rights to indemnification against the debtor. The debtor Adamson Apparel, Inc. (the “Company”) was the borrower under a multi-million dollar loan. The Company’s President and CEO Arnold H. Simon (“Simon”) personally guaranteed the Company’s obligations under the loan. At the same time, Simon waived his rights against the Company for indemnification, for reimbursement of any amounts Simon paid

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Will your claim in bankruptcy withstand the test?

Within the past year bankruptcy courts and federal courts adjudicating bankruptcy appeals have further developed the law governing claims in bankruptcy which are generally governed by Sections 501 and 502 of Title 11 of the United States Code (the “Bankruptcy Code”) and related Federal Rules of Bankruptcy Procedure. Below is a discussion regarding two distinct cases that discuss the validity and priority of claims in bankruptcy.

Consumer Debt Buyers Beware: Think Before Filing A Proof of Claim

The Eleventh Circuit Court of Appeals held that a Chapter 13 debtor could prosecute an adversary proceeding against a consumer debt buyer for violating the Fair Debt Collections Practices Act (“FDCPA”) based on the creditor filing a proof of claim on debt which was uncollectible under the Alabama statute of limitations. Crawford v. LVNV Funding, LLC, 758 F.3d 1254 (11th Cir. 2014).

It appears the Eleventh Circuit’s decision comes in response to a significant increase in the number of consumer debt buyers “armed with hundreds of delinquent accounts purchased from creditors” who are filing proofs of claims on debts which are unenforceable pursuant to state statutes of limitation.

Factual And Procedural Background

Stanley Crawford, the Chapter 13 debtor and plaintiff in the adversary

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Inside The N.D. Ill.’s Broad Reading Of Section 546(e)

May 11, 2015

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In what appears to be a case of first impression, the United States Bankruptcy Court for the Northern District of Illinois has concluded that payments to a master servicer of a commercial mortgage backed securitization (a “CMBS”) could not be avoided as either allegedly constructively fraudulent transfers or as allegedly preferential transfers because the securities contract “safe harbor” under section 546(e) of the Bankruptcy Code precluded such claims. Krol v. Key Bank Nat’l Ass’n. (In re MCK Millenium Centre Parking, LLC), 2015 Bankr. LEXIS 1432 (Bankr. N.D. Ill. Apr. 24, 2015). A Bryan Cave team, led by New York partner Larry Gottesman, represented the defendants.

The background of the decision is straightforward. The chapter 7 trustee of the debtor brought an adversary proceeding against Key Bank (“Key”), as master servicer, and the related CMBS trust, alleging that the debtor had made loan payments on a loan owed by the debtor’s affiliate. The plaintiff alleged that these payments were avoidable as both intentional and constructive fraudulent transfers under the Bankruptcy Code and analogous provisions under Illinois state law, as well as constituting preferential transfers. The defendants moved to dismiss the amended complaint on a variety of grounds, including that all claims

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Spring Cleaning, Avoidance Actions, and Time to Tweak the Loan Forms, Just In Case

Winter is over; time for spring cleaning. Alas, your authors are so desperate to put off such drudgery that they decided to write about avoidance actions, and form language for notes and security agreements. If you represent lenders, try taking five from the cluttered garage, dust-bunnied closet, or bursting kitchen junk drawer, and read this; you may save your lender client a buck or two.

The Basics: Workout lawyers all agree on certain principles. For instance, fully secured creditors with undisputed claims deserve to be paid. Further, if the collateral value exceeds the amount of the secured creditor’s claim then payment must include interest, costs, and attorneys’ fees, if the loan documents so provide.[1]

The Wrinkle: But add a wrinkle – the kind of wrinkle rarely considered when structuring a loan, in the glorious salad days of the lending relationship. That wrinkle: Upon the obligor’s bankruptcy, what if the obligor, or its bankruptcy trustee, sues the lender to recover a preference or fraudulent transfer to the lender made prior to the bankruptcy?[2] If the lender defeats such an action, then surely the principles listed above would allow the lender to automatically add its defense costs to

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Second Circuit Decision Reminds Us to Double-Check Documents

Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal No. 13-2187 (2nd Cir. Jan. 21, 2015)

Second Circuit Decision Reminds Us to Double-Check Documents

In a decision that sent a shiver down the spine of attorneys and lenders alike, on January 21, 2015, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) ruled that JPMorgan Chase Bank, N.A. (“JPMorgan”) had released its security interest on a $1.5 billion loan to General Motors (“GM”) by inadvertently filing a UCC-3 termination statement. The Second Circuit held that although JP Morgan and GM did not intend to terminate the security interest at issue, the termination was effective because JP Morgan authorized the filing of the UCC-3 termination statement.

In October 2001, GM entered into a synthetic lease financing transaction (“Synthetic Lease”), by which it obtained approximately $300 million in financing from a syndicate of lenders (the “Lenders”) including JPMorgan who served as the administrative agent. The Synthetic Lease was secured by mortgages on several pieces of real estate, which were perfected by the filing of two UCC-1 financing statements by JPMorgan (the “Synthetic Lease UCC-1s”). Separately, GM entered into an unrelated term loan

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A Look At Committee v. JP Morgan

By now, every secured lender and attorney that represents secured lenders should be familiar with the opinion from the Second Circuit Court of Appeals styled Official Committee of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, N.A. (In Re Motors Liquidation Co.) Covered in articles with titles such as “JP Morgan Loses $1.5 Billion Feud with Creditors of GM Forerunner,”[1] the opinion sent a shock wave through the lending community. As our finance colleagues have rightly noted, this case is a stark reminder that best practices require transactional attorneys to “measure twice, cut once.”[2] However, the case also offers important lessons for workout and restructuring professionals, who are often in the position to correct documentation mistakes before a subsequent bankruptcy filing makes the mistakes devastatingly permanent.

Factual Background

To recap the Motors Liquidation/General Motors case, in September 2008, the lender and the borrower entered into a loan repayment and release, which included the termination of certain UCC-1 financing statements in favor of the lender. Both the lender and the borrower retained sophisticated counsel to document the transaction. The errant UCC-3 termination statement was drafted by borrower’s counsel, and it referenced three

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The Stern Files: A Review of In re Fisher Island Investments, Inc.

March 9, 2015

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The latest in Stern analysis can be found in a fascinating story of mystery, money, and international intrigue. Last month, the Eleventh Circuit in In re Fisher Island Invs., Inc., No. 12-15595, 2015 WL 729689 (11th Cir. Feb. 20, 2015), upheld the bankruptcy court’s ruling as to the ownership of putative debtors, despite a party’s objection to the bankruptcy court’s constitutional authority to decide the putative debtors’ ownership under Stern v. Marshall.[1]

Fisher Island Investments is merely one part of the global litigation following the unexpected death of Arkadi Patarkatsishvili regarding the disputed ownership of three trusts—purportedly worth billions of dollars—between two competing groups: the Redmond Group and the Zeltser Group. Following litigation in the Republic of Georgia, the United Kingdom, Liechtenstein, the British territory in Gibraltar, and state litigation in the United States, a group of six entities (the “Petitioning Creditors”) filed three separate involuntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the Southern District of Florida against the three trusts (the “Alleged Debtors”) based on an unpaid promissory note purportedly executed by the Alleged Debtors. Two sets of attorneys, one representing the Redmond Group and the other representing the Zeltser

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Good News for Rent-Stabilized Debtors in New York

Late last year, the New York Court of Appeals issued an interesting opinion: In Mary Veronica Santiago-Monteverde v. John. S. Pereira, 24 N.Y.3d 283 (2014), the Court held that a bankruptcy debtor’s interest in her rent-stabilized apartment is exempted from her bankruptcy estate as a “local public assistance benefit.”

The debtor lived in Manhattan for 40 years in a rent-stabilized apartment. In 2011, after her husband passed away, she became unable to pay her credit-card debts, which totaled about $23,000, and she subsequently filed for Chapter 7 bankruptcy. In her initial filing, the debtor listed her apartment lease as an ordinary unexpired lease.

The debtor’s landlord offered the trustee a deal: The landlord would pay the $23,000 credit-card debt in exchange for the debtor’s interest in the lease and would continue to let the debtor live in the apartment at the rent-controlled rate of $703 a month for the rest of her life. The “catch,” so to speak, is one that anyone living in any of New York’s approximately one million rent-controlled apartments would quickly recognize: If the debtor’s interest in the lease were regained by the landlord, then the debtor’s son, who shares her apartment, would not be able

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