Title: Complex Closing Stories Part I
1(No Transcript)
2Complex Closing StoriesPart I
- Foreclosures, Bankruptcy Creditors Rights in
the Mean Streets
3Foreclosure
- The effect of a foreclosure is
To extinguish interests of borrower/owner and
most junior lien holders
4Foreclosure
- 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!
5Foreclosure
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)
6Foreclosure
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.
7Emergency 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.
8Emergency 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.
9Emergency 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.
10Emergency 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
11Emergency 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
12EFRP 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
14EFRP Best Practice!!
- Foreclosing parties submit information on all
loans to AOC - Can obtain a Non-Subprime Loan Certificate
15Deeds 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)
16Deeds 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
17Deeds in Lieu of Foreclosure
- Affidavit of Grantor reqd by title insurer.
18Deeds in Lieu of Foreclosure
- Intervening Matters
- Junior DTs, judgments, claims of lien
- NOT cut off by deed in lieu
- Must be cancelled/satisfied
19Deeds 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??????
20Deed 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
21Deed 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.
22Bankruptcy 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
23BankruptcySales 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
24BankruptcyDeposits 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
25BankruptcyDeposits 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?
26Loan 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?
27Loan 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
28Loan 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)
29Loan WorkoutsALTA 11
- Novation
- Do any intervening matters (even potential
intervening matters) exist - Do changes create a novation?
- What becomes of priority???
30Loan 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
31Loan 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
32Loan 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
33Loan 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
34Loan 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)
35Cram 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
36Creditors 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
37Creditors 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
38Creditors 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
39Creditors 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
40Creditors 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
41Creditors 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
42Creditors 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)
43Creditors 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
44Creditors 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)
45Creditors 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
46Creditors 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
47Creditors 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
48Creditors 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
49Creditors 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.
50Creditors 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).
51Creditors 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
52Creditors Rights
- Transaction Structures with Slight Risk
- Refinances of existing mortgages
- Refinancing of existing unsecured debt by a
different lender - Purchase money mortgages