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Complex Closing Stories Part I

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Complex Closing Stories Part I Foreclosures, Bankruptcy & Creditors Rights in the Mean Streets Foreclosure The effect of a foreclosure is: Foreclosure Foreclosure ... – PowerPoint PPT presentation

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Title: Complex Closing Stories Part I


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Complex Closing StoriesPart I
  • Foreclosures, Bankruptcy Creditors Rights in
    the Mean Streets

3
Foreclosure
  • The effect of a foreclosure is

To extinguish interests of borrower/owner and
most junior lien holders
4
Foreclosure
  • Foreclosure
  • DOES NOT extinguish
  • Matters with record priority
  • Ad valorem taxes
  • Junior 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!
5
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)

6
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.
7
Emergency Foreclosure Reduction Program EFRP
  • 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.
8
Emergency Foreclosure Reduction Program EFRP
  • 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.
9
Emergency Foreclosure Reduction Program EFRP
  • 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.

10
Emergency Foreclosure Reduction Program EFRP
  • EFRP - File with AOC
  • Within 3 days of sending Notice
  • Certain information with respect to borrower and
    loan
  • AOC to create database

11
Emergency Foreclosure Reduction Program EFRP
  • Commissioner of Banks to review
  • Commissioner selects loans appropriate for
    foreclosure avoidance efforts
  • Commissioner may extend foreclosure filing date
    up to 30 days

12
EFRP Certification
  • 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

13
More EFRP
  • 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

14
EFRP Best Practice!!
  • Foreclosing parties submit information on all
    loans to AOC
  • Can obtain a Non-Subprime Loan Certificate

15
Deeds in Lieu of Foreclosure
  • High Scrutiny
  • Ripe for duress
  • Courts look for conveyances
  • by grantors own free will
  • for adequate consideration (debt forgiveness is
    not per se adequate)

16
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

17
Deeds in Lieu of Foreclosure
  • Affidavit of Grantor reqd by title insurer.

18
Deeds in Lieu of Foreclosure
  • Intervening Matters
  • Junior DTs, judgments, claims of lien
  • NOT cut off by deed in lieu
  • Must be cancelled/satisfied

19
Deeds in Lieu Bankruptcy
  • 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??????

20
Deed in Lieu with a Twist?
  • At lenders 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
21
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.

22
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-debtors property

23
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

24
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

25
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?

26
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?

27
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

28
Loan WorkoutsALTA 11
  • Requirements for an ALTA 11
  • Recordation of satisfactory modification
    agreement AND
  • Update on attorneys certification of title
    (including any amendments, modifications,
    assignments or other matters affecting the
    insured deed of trust)

29
Loan WorkoutsALTA 11
  • Novation
  • Do any intervening matters (even potential
    intervening matters) exist
  • Do changes create a novation?
  • What becomes of priority???

30
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
31
Loan WorkoutsNovations
  • 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
32
Loan WorkoutsNovations
  • 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
33
Loan WorkoutsNovations
  • 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
34
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 companys consent in advance
    (endorsement)

35
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

36
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

37
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

38
Creditors RightsFraudulent Transfers
  • 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 its
    business

39
Creditors RightsPreferences
  • 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

40
Creditors RightsTitle Coverages
  • 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

41
Creditors RightsALTA 21-06 Endorsement
  • 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

42
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)

43
Creditors RightsALTA 21-06 Endorsement
  • 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

44
Creditors Rights
  • Use of Funds as a factor
  • How are the funds being used?
  • Acquire or improve borrowers property
  • Disbursement to shareholders, members
  • Repayment of loans (institutional or individual
    investors)

45
Creditors RightsALTA 21-06 Endorsement
  • 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

46
Creditors Rights
  • Based on our fact pattern
  • Owners coverage at the time Uptown Condos
    acquires the property
  • Demonstrate that the transaction is arms-length
    and for fair market value

47
Creditors Rights
  • Based on our fact pattern
  • Lenders 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

48
Creditors Rights
  • Based on our fact pattern
  • Lenders 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 - Uptowns financial difficulties may offset
    the structure.
  • Unrecorded loans more information needed
  • Cash-out is an issue

49
Creditors Rights
  • Based on our fact pattern
  • Lenders 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.

50
Creditors Rights
  • Based on our fact pattern
  • Lenders 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).

51
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

52
Creditors Rights
  • Transaction Structures with Slight Risk
  • Refinances of existing mortgages
  • Refinancing of existing unsecured debt by a
    different lender
  • Purchase money mortgages
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