Trott Law, P.C. welcomed three new attorneys to the firm. Scott Gies joined our Bankruptcy group in Michigan, bringing with him 23-plus years of experience. He is admitted to both the Eastern and Western District of Michigan. Aaron Bayliss joined our Michigan Litigation group. Bayliss is a University of Detroit Mercy Law School graduate with eight-plus years of litigation experience. Additionally, Sung Woo Hong joined the Minnesota office. He is a University of Minnesota Law School graduate and is practicing primarily foreclosure and litigation.

@2023 USFN Winter Report

Scott & Corley, P.A. (USFN Member – SC) is proud to announce that Reginald "Reggie" P. Corley, President & Managing Attorney, and Ronald “Ron” C. Scott, Firm Chairman, have been recognized in the 2023 edition of BEST LAWYERS in AMERICA® (Woodard-White Inc.) for the State of South Carolina. This is Corley’s sixth consecutive year for selection for Mortgage Banking Foreclosure Law, and Scott’s 14^th consecutive year, dating back to his inaugural selection in the category created by BEST LAWYERS in 2010.

@2023 USFN Winter Report

Foundation Legal Group: Combined Strengths of Wilson & Associates and Hutchens Law Firm to Deliver Comprehensive Creditors' Rights Legal Services in Five States

LITTLE ROCK, AR (September 1, 2025) – The mortgage servicing industry is gaining a powerful new partner with the launch of Foundation Legal Group, a mortgage banking law firm specializing in comprehensive creditors' rights services. This development unites the extensive experience and trusted reputations of two long-standing and highly respected entities in the mortgage banking sector: Hutchens Law Firm and Wilson & Associates.

Foundation Legal Group will leverage the deep industry knowledge and proven track records of both firms to provide legal support to mortgage servicers across five states: Arkansas, Mississippi, North Carolina, South Carolina, and Tennessee.  Current clients can expect a seamless transition and a continued commitment to the high-quality legal services they have come to rely on from Hutchens Law Firm and Wilson & Associates.

"This is a significant step forward in enhancing the services we can offer to our valued clients in the mortgage servicing industry," said Jillian Wilson, Co-Managing Partner of Wilson & Associates. "By bringing together the strengths and expertise of Wilson & Associates and Hutchens Law Firm, Foundation Legal Group is positioned to provide top quality legal services and efficient solutions to our clients that will not just meet, but will exceed, industry expectations.”

The attorneys that make up Foundation Legal Group are very experienced in all facets of creditors' rights, possessing a deep understanding of the complexities and regulatory landscape of the mortgage servicing industry. The formation of this new company ensures that clients will continue to receive expert legal counsel and representation, backed by the collective history and trust built by both Wilson & Associates and Hutchens Law Firm over several decades of service.

"Our clients will benefit from the combined resources and the number of experienced attorneys at Foundation Legal Group. We are committed to upholding the legacy of excellence established by Wilson and Hutchens, and look forward to serving their needs under this new banner,” said Hilton Hutchens, Managing Partner of Hutchens Law Firm.

Foundation Legal Group is dedicated to providing:

·       Comprehensive creditors' rights services tailored to each client.

·       Experienced and knowledgeable attorneys with a proven track record.

·       A continued commitment to the high-quality legal services clients have come to expect.

·       Services across Arkansas, Mississippi, North Carolina, South Carolina, and Tennessee.

The launch of Foundation Legal Group marks an exciting new chapter, building upon a strong foundation of trust to serve the evolving needs of the mortgage servicing industry.

“Our focus at Wilson has always been to provide exceptional service to our clients. Seeing that commitment expanded through this partnership is exciting, and will undoubtedly benefit our clients,” said Jennifer Wilson-Harvey, Co-Managing Partner of Wilson & Associates.

About Foundation Legal Group

Foundation Legal Group is a law firm specializing in creditors' rights services for the mortgage servicing industry. Formed through the unification of Wilson & Associates and Hutchens Law Firm, two long-standing and highly-respected companies in the mortgage banking sector, Foundation Legal Group provides comprehensive legal solutions across Arkansas, Mississippi, North Carolina, South Carolina, and Tennessee. Our experienced attorneys are dedicated to upholding a tradition of high-quality legal services and delivering exceptional results for our clients. For more information, please visit: www.TheFoundationLegalGroup.com.

About Wilson & Associates:

Wilson & Associates has been a trusted provider of legal services to the mortgage banking industry for over 45 years. With offices in Arkansas, Tennessee, and Mississippi, Wilson & Associates provides legal services in the real estate and financial industries. Founded by Robert M. Wilson, Jr. in 1978, Wilson & Associates has built a powerful reputation, primarily through the firm’s expertise in real estate and mortgage banking law. Today, its attorneys provide expertise in many other practice areas of the law, and dedicates the same passion and commitment to its clients. For more information about the firm, please visit www.TheWilsonLawFirm.com.

About Hutchens Law Firm:

Hutchens Law Firm has a long history of providing high-quality legal services to the mortgage servicing sector for over 40 years. Opened in 1980 by H. Terry Hutchens, their main office is located in Fayetteville, NC. Since opening, they have expanded across the Carolinas with over 35 lawyers in 15 locations. Their lawyers provide legal services in a variety of practice areas. For more information about the firm, please visit: www.hutchenslawfirm.com.

HWM firm merges with Nebraska-based Eric H. Lindquist

• As of Feb. 1, 2024, Halliday, Watkins & Mann, P.C. (HWM), a leading mortgage default law firm, has merged with Eric H. Lindquist, P.C., L.L.O. (Lindquist), a prominent Nebraska-based law firm specializing in mortgage default cases. The strategic merger brings together two firms with over 70 years of combined experience assisting mortgage default clients across 12 states.
•  
• Together, HWM and Lindquist will provide full-service default legal representation and counseling with approvals from government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac in Alabama, Alaska, Colorado, Idaho, Minnesota, Mississippi, Montana, Nebraska, North Dakota, South Dakota, Utah, and Wyoming.
• 
  
• "We're thrilled to join forces with the talented team at Lindquist,” said Benjamin J. Mann, Partner at Halliday, Watkins & Mann. “This merger combines our firms’ mortgage default expertise and expands our capabilities to better serve clients. Together, we'll continue to deliver top-tier service and counsel to mortgage default clients across our multi-state footprint."
  
  The merger brings Lindquist’s entire staff to HWM, including Founder Eric H. Lindquist, who has over 35 years of mortgage default legal experience.
• 
  “Halliday Watkins & Mann has an outstanding reputation, and we’re excited to merge our knowledge and resources to provide enhanced value to clients,” said Eric H. Lindquist, Founder of Eric H. Lindquist, P.C., L.L.O. “This merger allows us to leverage our joint capabilities to continue delivering the highest quality counsel and representation to mortgage default clients."
•  

By Phyllis A.Ulrich, Esq.

Carlisle Law

USFN Member (OH)

On September 28, 2022, Sen. Elizabeth Warren and Rep. Jerrold Nadler reintroduced the Consumer Bankruptcy Reform Act (the “CBRA” or “Bill”) seeking to: reduce paperwork; simplify the filing process for debtors; and decrease the cost of filing. The Bill was previously introduced on December 6, 2020, but never made it to a floor vote during the 116^th Congressional session. Warren and Nadler reintroduced the bill as originally written.

The Bill would eliminate Chapters 7 and 13, replacing them with a hybrid under new Chapter 10 (11 U.S.C. §1001, et. seq.). The new Chapter 10 retains the mechanism for a Chapter 7-like discharge and provides various plans of reorganization for claims, as provided for in the current Chapter 13. The automatic stay mirrors that provided for in current Chapter 13, including a separate co-debtor stay upon the filing of a case (11 U.S.C. §1009).

There are three types of plans of reorganization referenced in 11 U.S.C. §1022, all of which can be filed by debtor(s) in a single case.

One plan type –  the Residence Plan (11 U.S.C. §1022(b)) –  addresses debts secured only by the principal residence of the debtor. The plan can modify the rights of the holders of these claims (including first mortgage loans) or provide for sale of the residence in the plan, but it can only deal with debts secured by the residence.

Another plan type –  the Property Plan (11 U.S.C. §1022(c)) –  addresses all other claims secured by property, not including the debtor’s residence.

Though the third plan type –  the Repayment Plan (11 U.S.C. §1022(a)) – does not have the same categorical purpose, it provides for repayment of the debtor’s unsecured debts.

At first glance, the provisions of the Bill appear to allow the debtor to pick one of the three plans to file, which would certainly streamline and simplify the current case flow. However, a closer reading indicates that the debtor can file all three plans in one case at the same time. For example, 11 U.S.C. §1021(b)(A) states a debtor may file one or more plans. 11 U.S.C §1023(c) provides for a single hearing on confirmation if the debtor files more than one plan under 11 U.S.C. §1021.

The Bill is made more complex by the debtor’s option to elect a “limited proceeding.” If the debtor elects a limited proceeding under 11 U.S.C. §1051, they could select certain claims secured by specific property to include for reorganization. Such limited proceedings would only give rise to a limited automatic stay - only applicable to the creditors whose claims are secured by the selected property. Once again, the debtor may file one or more of the plans provided for under §1022.  The debtor may elect to convert the limited proceeding to a general proceeding if the court fails to confirm a plan under the limited proceeding pursuant to 11 U.S.C. §1053(b). Upon conversion to a general proceeding, the automatic stay and co-debtor stay applies to all creditors of the debtor.

One plan to address all claims under the current Chapter 13 is more compact and tidier. With a National Form Plan, that is used for the most part, in many bankruptcy jurisdictions, it is now comfortable for the creditor to scan the plan under familiar provisions to determine treatment of its claim. The possibility of three plans being filed in one case, results in a situation where a creditor must carefully read each plan that a debtor files in a case to determine which plan applies to its claim. The Chapter 10 Trustee will be busier than ever attempting to address all the plans to ensure each complies with the Bankruptcy Code and Rules.

While proposed Chapter 10 may theoretically create a simpler and less expensive process from a debtor’s perspective, it is likely to create more questions (and perhaps litigation) for most everyone involved in a case. The end result may be a drawn-out and litigated bankruptcy case, which equates to more expenses and complication for the debtor. Ironically, a previous Chapter 10 Bankruptcy option, available for corporations, was eliminated by the Bankruptcy Reform Act in 1978 due to its complexity.

The CBRA may or may not get to the floor for a vote in this 117^th Congress. However, if enacted, it would radically change the state of current bankruptcy proceedings and practice of today.

Copyright @2022 USFN

December 2022 USFN e-Update

By JaniceNakano – Incoming Chair of the DEI Section

Aldridge Pite,LLP *

USFN Member (AK, CA, FL, GA, HI, ID, NY, OR, UT, WA)

When I was younger, I was a runner and competed in sprints and relays in school. My favorite races were the relays. The hand off of the relay bar is the most important part of the race. It involves keeping up with the speed and pace of the runner before or after you and timing the handoff just right. What I really love about relay races is that you have to work as a team and each runner is dependent on the other to succeed.

When I joined USFN’s Diversity & Inclusion group, we were a smaller group of members with the idea and hope to educate our fellow members. Each member of our section is as valuable as each member of the relay race. While we don’t all run at the same speed, the passion and dedication to our mission is the same: education, enlightenment, and action. Our wee group grew into a larger group, and we eventually became an official section! We renamed the section, Diversity, Equity & Inclusion (DEI), and Sally Garrison has led us since its creation. I took over the role of Vice Chair in 2021 and have been working hard to be worthy of taking over from Sally as she vacates her seat this year.

I can honestly say that while our mission is to provide information and to help educate our colleagues, I realized that I personally had a lot to learn about DEI. I struggled a little with some of the new terminology and had to restructure my thinking about biases. But this is what our section is all about, right? We aim to educate, enlighten, and take action. While our society is being saturated with all things related to DEI, it’s easy to become overwhelmed by the abundance of information, however it’s more important now than ever to keep the momentum going.

Over the next few years, I plan to lead our group forward as we navigate through new and expanding topics which are born from increased awareness and discussion. I still have a lot to learn, but couldn’t be happier knowing that the members of this section are passionate and dedicated to our mission. As Nelson Mandela once said, “Education is the most powerful weapon which you can use to change the world.”

Copyright @2022

December 2022 USFN e-Update

by Michael J. McKeefery, Esq.

Cohn, Goldberg & Deutsch, LLC *

USFN Member (DC, MD)

            For years now, all mortgage holders in the District of Columbia (“D.C.”) have had to simply accept that a Condominium Association (“COA”) could swoop in and sever a mortgage holder’s interests in a property. Under D.C. law, if a COA forecloses on a “super priority” lien, then a priority mortgage holder’s interest in the property would be wiped out in its entirety. Despite this bleak backdrop, a case has finally emerged from the United States District Court for the District of Columbia that offers some solace to a certain group of mortgage holders. 

            Before this case, the landscape for all mortgage holders in D.C. had been a treacherous one. In 2014, the Court of Appeals for the District of Columbia issued its decision in Chase Plaza Condominium Ass’n v. JP Morgan Chase Bank, N.A., 98 A.3d 166 (D.C. 2014), finding that a COA is permitted to foreclose on a six-month condominium assessment lien, and that such a foreclosure wipes out any and all other liens on the property, including any previously recorded first mortgage lien. In Liu v. U.S. Bank, N.A., 179 A.3d 871 (D.C. 2018), the D.C. Court of Appeals found that a COA foreclosure sale wiped out all other liens, even when there was explicit notice to all potential buyers that the sale was to be conducted “subject to the first mortgage or deed of trust.” In 4700 Conn 305 Trust v. Capital One, N.A., 193 A.3d 762 (D.C. 2018), the Court found that, even in the context of a COA lien that amounted to more than just the six-month super-priority lien, all liens were wiped out including previously recorded first mortgage liens.

            However, now, hope shines brightly for a particular group of first priority mortgage holders, thanks to the United States District Court for the District of Columbia’s recent decision in M&T Bank v. Delphina N. Brown, 2022 WL 7003740. The facts of this case are reasonably straightforward. In 2006, Ms. Brown took out a loan to finance the purchase of a condominium unit commonly known as 512 Ridge Road, SE, #206, Washington, DC (the “Property”). Freddie Mac purchased this loan in 2007, and M&T Bank (“M&T”) became the servicing agent for Freddie Mac. In 2016, the Ridgecrest Condominium Owners Association (“RCOA”) executed and recorded a lien concerning the Property. Thereafter, RCOA foreclosed on its lien and sold the Property via public sale to a third-party purchaser. It is uncontested that, at the time of RCOA’s foreclosure sale, Freddie Mac was the owner of the 2006 loan, and neither Freddie Mac nor the Federal Housing Finance Agency (“FHFA”) consented to the sale. In 2017, M&T filed a Complaint for Judicial Foreclosure regarding the Property and amended that complaint in 2019 to add Freddie Mac as a plaintiff in the action. M&T and Freddie Mac then removed their case to the United States District Court for the District of Columbia and filed a Motion for Partial Summary Judgement with the Court, requesting that the Court find that the COA foreclosure did not extinguish Freddie Mac’s interest in the Property. 

            Primarily, in its analysis, the Court focused upon the interplay between the Federal Foreclosure Bar and the D.C. Condominium Act (DC Code § 42-1903.13). The Federal Foreclosure Bar provides that “[n]o property of [an FHFA conservatorship] shall be subject to levy, attachment, garnishment, foreclosure, or sale without the consent of the Agency.” 12 U.S.C. § 4617 (j) (3) (emphasis added). The D.C. Condominium Act grants eligible COA liens a “super-priority” status, permitting a COA with such a lien to foreclose on a property and extinguish all other liens. The Court found that the D.C. Condominium Act is preempted by the Federal Foreclosure Bar. Essentially, the Court found that it was impossible to reconcile the Federal Foreclosure Bar’s explicit provision that no property of an FHFA conservatorship shall be subject to foreclosure without consent of the Agency with a local law that authorizes the foreclosure of FHFA property without its consent. Therefore, the Court found that, from the text of the federal provision alone, it was clear that Congress intended for the Federal Foreclosure Bar to displace state laws such as the D.C. Condominium Act.

The Court then considered the purposes and objectives of the Federal Foreclosure Bar. The Federal Foreclosure Bar was enacted as part of the Housing and Economic Recovery Act of 2008 (“HERA”).  HERA “authorized the Director of FHFA to appoint FHFA as either conservator or receiver for Fannie Mae and Freddie Mac;” and, thus, the Federal Foreclosure Bar prevents entities from extinguishing Freddie Mac’s property through foreclosure. Perry Cap. LLC v. Mnuchin, 864 F,3d 591, 599-600 (citing 12 U.S.C. § 4617 (a) (1)).

HERA was enacted after the 2008 mortgage crisis, and Congress chose to “authorize extraordinary measures to resuscitate” Fannie Mae and Freddie Mac, including granting the FHFA authority to appoint itself as their conservator. Id. at 599-600. Congress made it clear that it provided this power to FHFA to “preserve and conserve the assets and property” of Fannie Mae and Freddie Mac.” Id. at 600 (citing 12 U.S.C. § 4617 (b) (2) (B) (iv)). Since the D.C. Condominium Act works against preserving and conserving such assets and property, the Court found that the D.C. Condominium Act was preempted by the Federal Foreclosure Bar and could not extinguish Freddie Mac’s lien in this case. 

Thus, Brown stands for the principle that, in D.C., the foreclosure of a COA lien does not extinguish a priority lien held by an FHFA conservatorship, such as Fannie Mae or Freddie Mac. However, it is important to note that this decision does not alter the fact that a private entity’s priority lien would still be wiped out by the foreclosure of a COA’s super-priority lien in D.C.

Copyright @2022 USFN

USFNews - Nov. 16

* Denotes firm is a 2021 Award of Excellence recipient.

Jillian Wilson has been named Co-Managing Partner of Wilson & Associates, PLLC (USFN member – AR, MS, TN). Wilson previously served as the supervising attorney for the firm’s Arkansas and Mississippi foreclosure legal departments. She received her B.A from George Washington University and her J.D., cum laude, from the University of Arkansas School of Law and is currently pursuing her Master of Business Administration from the University of Arkansas Walton College of Business. She is a member of multiple industry-related organizations and is a frequent contributor to panel discussions for national mortgage banking events and conferences.

Copyright 2022

USFN Fall Report

by Lance Olsen

McCarthy Holthus, LLP *

USFN Member (AZ, AR, CA, CO, ID, NV, NM, OR, TX, WA)

In the summer of 2020, the Oregon legislature passed House Bill 4204 addressing foreclosure during the time of the Covid-19 emergency. In addition to prohibiting most foreclosure activity during a defined emergency period, the bill also restricted a lender’s ability to pass through certain costs of default.  Further, the bill compelled deferment to maturity any amounts that came due during the emergency period unless the borrower agreed otherwise.

By its specific language, HB 4204 was automatically repealed on March 31, 2021, 90 days after the end of the emergency period created by the bill.

Recently, the United States District Court for the District of Oregon had the opportunity to rule on the impact of that repeal as well as the continuing effect of HB 4204.

As described in the facts of Corvallis Hospitality, LLC v. Wilmington Trust, National Association et. al, 2022 WL 10475079, between May and October of 2020, Corvallis Hospitality, LLC, the owner and operator of the Corvallis Hilton Garden Inn, faced pandemic-related hardships and defaulted on monies owed to their lender. Corvallis at *2. On October 7, 2020, the lender advised the hotel owners that they were in default, imposing late fees, interest on past due payments, and accelerating the note. Efforts at a workout followed, but by April of 2021, the lender moved forward with non-judicial foreclosure. Id.

On December 14, 2021, the hotel owners filed suit against their lender alleging, among other things, that the lender had violated HB 4204. Id. Specifically, the hotel owners argued that their lender had improperly assessed charges associated with the default and had not deferred to maturity all amounts that came due during the emergency period. Id.

Under HB 4204, a borrower who suffers an ascertainable loss of money or property because a lender took an action prohibited by the Act is allowed to bring an action to recover actual damages, as well as the borrower’s court costs and attorney fees.

On June 22, 2022, the defendant lender moved for judgment on the pleadings arguing that no cause of action remains under HB 4204. The court agreed. Id.

The court noted that on June 1, 2021, the Oregon legislature expressly repealed Section 1 of HB 4204 in its entirety without provision of a savings clause or any preservation of any part of that section. Id. at *3. This repeal included the remedies section of HB 4204 under which the hotel’s action had been brought.  Because after June 1, 2021, HB 4204 ceased to exist, no action can be brought alleging violation of HB 4204 after that date. Whether the alleged misconduct occurred during a time when the bill was in effect is not relevant when the entirety of the bill has been repealed.

The District Court noted that if the legislature had intended for claims arising under HB 4204 to survive, it would have expressly preserved those claims in HB 2009, a successor bill that specifically repealed HB 4204. Id. at *4. The legislature having chosen not to do that, the court declined to read into the law a contradiction to the actual words in the law.

It should be noted that this opinion is subject to appeal, and thus, it is possible that we have not heard the last word in Oregon. However, as of today, it would appear any action based on HB 4204 that was not pending before June 1, 2021 (and possibly as early as March 31, 2021) cannot survive.

Also of note is HB 2009, enacted by the legislature on June 1, 2021, provides largely identical restrictions and remedies that had been provided by HB 4204. Although no subsequent bill repealed HB 4204 in the same way that HB 2009 repealed HB 4204, Section 12 of HB 2009 provides that Section 1 of HB 2009, the section that includes a borrower’s remedy for violation of the Act, is repealed 90 days after the expiration of the emergency period. Thus, after March 31, 2022, any action brought under HB 2009 would seem to be subject to the same arguments that terminated causes of action under HB 4204.

There are other state and federal cases pending that seek to define the terms and boundaries of both HB 4204 and HB 2009. As case law develops, further articles and analysis will be offered.

Copyright @2022

USFNews - Nov. 2

* Denotes firm is a 2021 USFN Award of Excellence recipient

By Sonia J. Buck, Esq.

Brock & Scott,PLLC *

USFN Member (AL, CT, FL, GA, KY, ME, MD, MA, MI, NH, NJ, NC, OH, PA, RI, SC, TN, VA)

The Maine Law Court has requested amici briefs in an appeal filed by J.P. Morgan Mortgage Acquisition Corp., regarding key issues in Maine foreclosure law: strict statutory compliance with Maine’s demand letter statute and the res judicata effect of a judgment for a defendant based on a finding that a mortgagee’s demand letter failed to strictly comply.

The Oxford County (Maine) Superior Court ruled that J.P. Morgan failed to comply with 14 M.R.S.A. § 6111 (Maine’s comprehensive and unforgiving foreclosure demand letter statute), based on a discrepancy with respect to the total amount due. J.P. Morgan Mortgage Acquisition Corp., v. Camille J. Moulton, SOPDC-RE-19-02 (November 24, 2021, J. Tammy Hamm-Thompson, at page 7). Not only did the Superior Court find for the defendant homeowner, but the Court’s opinion further ruled that res judicata forever precluded a second foreclosure. Id. at pg. 9.  Going further, the Superior Court specifically ordered that judgment “shall enter for the Defendant, declaring that she holds title to the real property at issue, unencumbered by the mortgage and promissory note.” Id.

The Court relied on prior Maine case law that has resulted in “free homes” to defendants for even technical or minor noncompliance by the plaintiff with respect to the demand letter. That prior case law, most notably, FNMA v. Deschaine, 2017 ME 90, and Pushard v. Bank of America, 2017 ME 230, now has the potential to be overturned.

Although the request for the amici briefs centers around the preclusive effect of a judgment for the defendant based on the demand letter statute, it remains to be seen whether the Law Court will also provide guidance in Moulton as to the level of scrutiny the itemization and other components of a Maine demand letter will be subject to going forward.

Will minor defects in a demand letter render a note and a mortgage forever unenforceable? Stay tuned.

Copyright @2022

USFN e-Update

by Todd Garan, Esq.

AldridgePite, LLP *

USFN Member: (AK, CA, FL, GA, HI, ID, NY, OR, UT, WA)

For the third time this year, on September 21, the Federal Reserve increased the federal prime rate by three-quarters of a percent to 6.25%.^[1]  Further, the Federal Reserve signaled additional increases are likely until inflation subsides. With each rate increase, an opportunity arises to seek a higher interest rate in Chapter 11 and Chapter 13 Bankruptcy Plans for secured creditors faced with a potential “cramdown.” This article will focus on the impact of rate increases on the formula prescribed by In re Till,^[2] addressing risk factors posed by the debtor and/or the collateral itself, and case strategy for obtaining a higher interest rate in bankruptcy cases as the Federal Reserve continues to raise the prime rate.

I.                The Till Formula and why Bankruptcy Courts Rely Upon it?

In the Chapter 11 context, §1129(b)(2)(A)(i)(II) requires a debtor's plan to provide the secured creditor with “deferred payments” having a "present value" in the full amount of the creditor's secured claim.^[3]   The same rationale applies to secured claims in the Chapter 13 context.^[4]  See, 11 U.S.C. § 1325(a)(5)(B)(ii).

Given the applicability of the present value analysis to secured claims under both Chapter 11 and Chapter 13 plans of reorganization, most courts’ interest rate methodology starts with a review of the Supreme Court's plurality decision in Till v. SCS Credit Corp., 541 U.S. 465 (2004). In Till, the Supreme Court adopted a two-part “prime-plus” formula for determining the proper interest rate a debtor should pay on a creditor’s secured claim that complies with the “cramdown” provisions of the Bankruptcy Code Till v. SCS Credit Corp., 541 U.S. 465, (2004). The Supreme Court in Till stated that:

“the approach begins by looking to the national prime rate, reported daily in the press, which reflects the financial market's estimate of the amount a commercial bank should charge a creditworthy commercial borrower to compensate for the opportunity costs of the loan, the risk of inflation, and the relatively slight risk of default. Because bankrupt debtors typically pose a greater risk of nonpayment than solvent commercial borrowers, the approach then requires a bankruptcy court to adjust the prime rate accordingly. The appropriate size of that risk adjustment depends, of course, on such factors as the circumstances of the estate, the nature of the security, and the duration and feasibility of the reorganization plan.”^[5]

In proposing this method, the Court in Till was motivated primarily by what it viewed as the method’s simplicity and objectivity.^[6] First, the method minimizes the need for costly evidentiary hearings, as the prime rate is reported daily, and as “many of the factors relevant to the [risk] adjustment fall squarely within the bankruptcy court’s area of expertise.”^[7] Second, the approach varies only in “the state of financial markets, the circumstances of the bankruptcy estate, and the characteristics of the loan” instead of inquiring into a particular creditor’s cost of funds or prior contractual relations with the debtor.^[8]  Third, while courts often acknowledge that Till’s infamous Footnote 14 appeared to endorse a “market rate” approach for Chapter 11s if an “efficient market” for a loan substantially identical to the cramdown loan exists, courts almost invariably conclude that such markets are lacking.^[9]

Thus, the prime-plus formula is particularly helpful in Chapter 13 cases, but also in individual Chapter 11 cases, where the majority of the loans in question are residential, including 1 to 4 unit properties. A creditor can utilize what evidence is readily available in the bankruptcy case to help bolster, or further elaborate on the risk factors to adjust the prime rate upwards to appropriately compensate a creditor for the risk associated with the debtor’s proposed Chapter 11 or Chapter 13 Plan of reorganization, serving to minimize costly experts, or lengthy evidentiary hearings. This is something all parties can appreciate, given the forum.

II.             Who Has The Burden of Proof?

In discussing the “prime-plus” interest rate calculation, the Till Court went on to explain that in starting from a concededly low estimate and adjusting upward, the evidentiary burden is placed squarely on the creditors, who are likely to have readier access to any information absent from the debtor's filing.^[10] Thus, it is up to the creditor to argue how and why the proposed interest rate should be increased above the prime rate for any additional risks.

III.           Determining the Federal Prime Rate

Fortunately, ascertaining the federal prime rate for purposes of a bankruptcy proceeding is straightforward and cost effective as this information is readily available through well-known public sources, including the internet. As a result, the federal prime rate may be subject to judicial notice,and is capable of accurate and ready determination by resort to reliable sources.^[11]  As of September 21, 2022, the Federal Prime rate was 6.25%.^[12] The chart below outlines the federal prime rate adjustments since March 2020:

Notably, because the prime rate is readily available, a creditor can quickly review a debtor’s Chapter 11 or Chapter 13 Plan of reorganization to determine if the cramdown rate is below the current federal prime rate. If so, the plan is likely unconfirmable, and a creditor may proceed with a plan objection without a full analysis of the debtor’s perceived “risk factors.”  However, a creditor seeking an interest rate above the prime rate will need to proceed with the “plus” portion of the Till formula through an examination of “risk factors.”

IV.           Evidence Available in the Bankruptcy Case to Assist the Risk Factor Analysis

As discussed above, the burden of proof for adjusting the proposed cramdown rate lies with the creditor. In other words, once the appropriate prime rate is determined, the burden falls on the creditor to convince the court risk factors warrant a rate adjustment above the prime rate. The key is to use the most cost effective means available to help build up the risk factors and achieve a more fair and appropriate interest rate for the secured claim. Creditors may utilize what evidence is already available in the bankruptcy case to avoid the need for additional expert testimony and attendant costs. So, where can a creditor find this information?

A.        Debtors’ Schedules. First, a creditor may examine any risks outlined in the Debtor’s Schedules and Statements. This seems obvious, but it is equally important to understand a debtor’s bankruptcy schedules and statements are executed under oath and can be treated as admissions of fact of which a court can also take judicial notice.^[13] As such, the schedules provide useful information with an evidentiary basis about the debtor, debtor’s operating history, and information to test the veracity of debtor’s good faith intent and financial projections.

B.        Monthly Operating Reports. Second, monthly operating reports are unique to Chapter 11 Cases, including in the Subchapter V context. The filing of monthly operating reports are mandatory pursuant to the Federal Rules of Bankruptcy Procedure, associated with U.S. Trustee’s guidelines, and are often adopted through local bankruptcy court rules as well.^[14]  Operating reports are very helpful in the risk assessment process because the reports readily allow a creditor and court to view the actual and historical income and expense information for a property, including, but not limited to, property taxes, any debt payments, insurance, homeowners’ association dues, property management fees, and maintenance and repair costs over the course of the case. 

C.        Debtor’s Financial Projections. Third, debtors are often required to provide financial projections in support of a plan of reorganization, particularly in a Chapter 11, to support how a debtor will make payments under the plan to prove feasibility, a required element of plan confirmation.^[15] These projections should, though do not always, provide income and expense information on a property-by-property basis, in addition to a debtor’s personal income and expenses, and payments proposed under the plan of reorganization.

            The above information is within the “four corners” of the debtor’s bankruptcy case to provide a creditor with admissible evidence to support the risk factors below and build on the federal prime rate to appropriately compensate a creditor for risks under a proposed plan of reorganization.

V.              The Risk Factors and Putting it Altogether

In addition to the information gathered from the debtor’s bankruptcy filings, additional risk factors may be evident based on: (i) the history of the debtor; (ii) the nature of the debtor’s proposed restructuring; or (iii) the collateral itself. Generally, the appropriate size of the risk adjustment depends upon such factors as the circumstances of the debtor’s estate, the nature of the security (collateral), and the duration and feasibility of the proposed reorganization plan.  These factors may be further refined and/or expanded on by considering: (a) the quality of debtor's management; (b) the commitment of the debtor's owners; (c) the health and future prospects of the debtor's business; (d) the quality of the lender's collateral; and (e) the feasibility and duration of the plan.^[16] However, in many ways, these are merely factual refinements within the three factors initially discussed by the Till Court.

A.        The Debtor’s Pre-Bankruptcy History.  Generally, information about the debtor or debtor’s history may not factor heavily in terms of an upward risk adjustment since it assumes the debtor struggled financially to end up in bankruptcy. However, there are certain instances where evidence should be referenced to make it more of a factor or less neutral to the court. A debtor is expected to manage and perform under the proposed plan of reorganization, after all, so what has gone on before should not be completely ignored and could serve to test the veracity or even the good faith of debtor’s proposed plan of reorganization.

For example, is the debtor a repeat filer, or does the debtor have a history of filing for bankruptcy protection every few years, or defaulting on previously confirmed plans? In essence, is there a greater likelihood debtor may drag creditors through a bankruptcy case seeking the benefits of a modification, but fail to follow through in completing a plan of reorganization to term or discharge?  Accordingly, the debtor’s pre-petition history could provide grounds for an upward risk adjustment.

Another red flag involves a newly formed entity with no operating history or substantive assets beyond the real property in question versus an ongoing business with a decent operating history, cash reserves, or other substantive assets. The former is riskier because the debtor is a self-contained unit with very limited business prospects absent the real property rental income, and thus, warranting a risk adjustment upwards in the court’s risk analysis.

Thus, creditors and the court should not ignore the debtor’s pre-petition history and debtor’s historical management of the assets as the perspective can provide some argument for an upward risk adjustment.

            B.        The Nature of the Debtor’s Proposed Operations.  A creditor should examine the debtor’s plan of reorganization itself, and how all the assets and income/expense projections will be treated post-confirmation. In assessing risk, it is important to understand whether the debtor’s assets have sufficient equity to be liquidated in a time of disruption. For instance, if the debtor proposes to “cramdown” all loans to the fair market value of each asset at plan confirmation, thereby creating a portfolio of 100% loan-to-value debt, how will the debtor handle a downturn post-confirmation?  While it is true a debtor may benefit from cramdowns over time, if there is a disruption shortly after confirmation, a debtor may find it difficult to refinance or even sell certain real property that is in default with no equity. An upward market may provide some relief, while a flat or falling market would obviously pose challenges for the reorganized debtor. Thus, it is important to examine the risks of the debtor’s proposed plan of reorganization itself.

Further, it is crucial to thoroughly review and scrutinize a debtor’s financial projections and overall substantive cash flow under the plan, including the net cash flow of each real property asset. Are there substantive cash reserves available after the payment of administrative claims following confirmation of the plan? Is the debtor expected to operate at a negative cash flow for any substantive period post-confirmation, or does it appear any of the real property assets will fail to generate sufficient net income after expenses? Are there expenses that are patently missing from the debtor’s projections, or are those expenses overly simplistic?  Indeed, while the overall plan may appear feasible on its face, it may be that certain real property assets are in fact problematic, requiring debtor to compensate by reallocating funds. In such a scenario, courts should consider the risks of default as to the subject property, and other assets as well.  This in turn could lead to a cascading effect in the debtor’s performance under the plan, particularly where debtor is not able to quickly liquidate or refinance assets to deal with defaults or disruptions. It is worthwhile to note these issues for the court based upon evidence already before it, as it serves to provide a reality check on debtor’s plan projections overall.

C.        The Collateral Itself.  Arguably, the property itself is one of the most important factors for the court to consider in assessing risk adjustment above the federal prime rate. A rental property may be inherently riskier than a debtor’s residence, which makes sense because in a time of distress or disruption, a debtor is more likely to use income from other sources, including the rental property, to pay the mortgage on a home than the rental property obligations. Similarly, a debtor will be less likely to dip into personal net income to cover the expenses for that rental property when there is a disruption in the rental income stream, thereby shifting the expenses and risk to the creditor. Some of this risk may be mitigated depending upon the type of rental property in question. For example, a 1 to 4 unit property with multiple tenants may fare better in terms of handling income disruptions due to a vacancy, unlike a single-family residence with only one tenant. At the same time, multi-unit properties can be more costly given common area expenses and maintenance, so thorough verification of expense information is very important.

In addition, the occupancy status and vacancy rate of the property should be examined as risk factors. Will the real property be occupied and generate rental income by the effective date of the plan?  If not, debtor would invariably have to either forgo meeting such projected expenses post-confirmation for a period, thereby creating a deficit, or pull funds from elsewhere to cover any shortfall, which may make debtor’s ability to perform under the plan generally, or other real property obligations, more precarious.

Similarly, creditors should scrutinize the specific property projections against historical income and expense information in the monthly operating reports or schedules to ensure all regular and ongoing expenses are considered, along with a sufficient cushion for disruptions, vacancy and/or repairs for the property. If the debtor’s current projections only consider the mortgage payment, taxes, and insurance, with little to no net income, this is largely a red flag, and suggests the debtor’s projections are far too simplistic and will not be able to handle any disruptions. This is certainly a notable risk adjustment.

A less common example that would give rise to an upward risk adjustment, but an important one, is whether the property or collateral requires repairs before it can become habitable and generate income to meet the debtor’s proposed expenses under a plan. If the debtor’s financial projections do not allow for, or anticipate how those repairs will be made, and/or when the repairs would be completed, then any chance of the debtor being able to meet those projections by the effective date is likely illusory, at best, given funds from elsewhere under the plan would need to be utilized.

Accordingly, while the burden of proof to establish cause for a rate adjustment falls on creditors, many reorganizations present ample evidence and perceived risk factors to justify a higher interest rate above the federal prime rate.

VI.           Final Outlook: The Increasing Federal Prime Rate Should Be Utilized To Compensate for Risk and Provide Creditors with Leverage

As the Federal Reserve continues to raise the base prime rate, creditors seeking a higher cramdown interest rate should closely monitor for upcoming rate increases. It may be wise to postpone any stipulated agreement regarding the appropriate market rate until closer to the confirmation date if the Federal Reserve has signaled an intent to raise rates in the near future.  Further, each rate increase presents a creditor with increased leverage in plan negotiations and an opportunity to negotiate more favorable plan terms.

 Further, by utilizing the risk factors discussed above, and the information readily available to the court in the debtor’s bankruptcy case, creditors may bring these risks to the court’s attention easily and thereby present an opportunity to obtain a 1- to 3-point increase above the federal prime rate to compensate the creditor more appropriately for the anticipated risks.  For example, if the prime rate is currently at 6.25%, it is possible for a creditor to obtain a rate of 6.50% to 10.50% by utilizing evidence that is already before the court.

            In addition to compensating for risk under a debtor’s plan, there is a secondary benefit.  If the court agrees with a creditor’s analysis, then a debtor must rework the proposed financial projections at the adjusted interest rate. If this occurs, a debtor may conclude retention of the collateral provides more of a burden than a financial benefit, which may result in the court blocking confirmation, or a stipulated surrender of the collateral.  At the very least, it makes the debtor more amenable to a creditor’s preferred stipulated claim treatment terms. Likewise, a debtor may be forced to convert or dismiss a case if the appropriate interest rate adversely affects the feasibility of the proposed plan. Again, higher interest rates result in increased creditor leverage. Something most creditors prefer, particularly in the Chapter 11 context.

            Thus, by using trending increases to the federal prime rate to recalculate the Till formula, and by utilizing the evidence within the debtor’s bankruptcy case to support upward rate adjustments due to perceived risk factors, creditors can obtain more favorable loan terms under the debtor’s proposed plan of reorganization, or block a cramdown or reorganization altogether.

Copyright @2022

Fall 2022 USFN Report

By Victor Kang, Esq.

Rubin Lublin,LLC*

USFN Member (AL, GA, MS, TN)

As we move into the post-COVID world where companies are battling staffing shortages and remote workforce demands, a new struggle for employers is how best to meet these challenges by leveraging technology. By now, everybody in the default services workforce has most likely used Zoom, Webex, Go-To-Connect, and probably has had nightmares with that incessant Teams notification rattling in your brain (bumm-bumm-bloop-bloop-dahbumm-bumm). No matter how the workforce is structured, there are elements of technology that intrude into all areas of work.

With that in mind, what do you do if you have employees who refuse to learn or adapt to this new era of communication? What are your options if an employee continues to ignore company policies that attempt to automate or create efficiencies through use of new advances? As an important, but often ignored, aspect of DEI, ageism is something that all employers must be careful to not perpetuate in their human resource decisions.  In 2020, more than 20,000 age discrimination complaints were filed with the U.S. Equal Employment Opportunity Commission. The AARP says that almost two out of three workers who are 45-plus years old- have seen or experienced age discrimination in their workplace. In the same survey, 91% of those respondents said that age discrimination is common.

Inevitably, there will be situations where you may have to move forward and separate from an employee due to their inability to adapt. Here are some pointers on how to avoid potential discrimination lawsuits or challenges to your company’s policies.

1.      Document Everything!

Under the Age Discrimination in Employment Act of 1967 (“ADEA”), workers ages 40 and over are protected from age discrimination in the workplace. This means that an employee cannot face harassment, discrimination, termination, or pressure to retire because of their age. This protection should be factored into all actions taken to remediate or correct an employee who is protected. Additionally, depending on your jurisdiction, terminated employees may ask for a reason or documentation. Even for states that are at-will employment, the terminated employee can (and often will) file a complaint with state or federal authorities (State Department of Labor or the Equal Employment Opportunity Commission). It is paramount that your managers document effectively that the employee was given proper trainings, re-trainings, and other remedial measures to give them every chance to learn the new skills.

2.      Provide Trainings and Skill Assessments

When you hold trainings on new technologies, do not exclude older workers. Make sure that trainings are crafted to all skill levels; do not assume that all staff have similar backgrounds.  Some may require more personalized trainings, and age should not factor into who gets more attention. Document each additional training and require acknowledgement from the staff; require read receipts or written signatures as part of your training. Prepare knowledge and skill tests that require a passing score. With more layers of training documentation and skill assessments, you can document that any potential remedial actions are justified and based solely on skill set and aptitude.

3.      Review Potential Accommodations Within Reason

If you come across situations where staff members cannot or will not learn the new skills, a potential alternative is to see if there are any other job functions that may require less technical skills. Perhaps there are roles that require more manual duties. This form of accommodation, especially for protected classes, can show that you exhausted all options. Be careful, however, not to allow certain people to be held to a different standard of duties. Even though staff under 40 may not be protected from age discrimination, you may unintentionally create a toxic work environment if any staff member is immune from client systems or online meetings. Ironically enough, the thought of not forcing an older worker to learn newer technology to prevent ageism claims might backfire and lead to MORE discrimination because of resentment from co-workers. You might start hearing derogatory nicknames because other staff members have to create workarounds for the employee. 

4.      Stay Consistent Among ALL Staff

When you are ready to move forward with a write-up, consult with your HR manager to create a clearly worded action plan. Make sure to list out all trainings, meetings, one-on-ones, and other proof that the employee was given the same (or additional) training. Including additional verbiage to clarify that these new tasks are a result of client/court requirements (i.e., using BKFS, Serengeti, e-File, PACER, Tempo, etc.) or essential communication tools for remote work will demonstrate that you are not arbitrarily creating processes to target the employee’s lack of skills. For example, if an employee is a fully remote worker, you have justification to require them to use Zoom, Teams, or other communication tools to facilitate contact with them. Requiring the use of other technology, like logging billable hours through web-based applications, using e-faxes, scanners, and webcams can all be an essential part of the job if the requirements are equally applied.

5.      Spread The Wealth

Termination is not the only time age discrimination can occur under ADEA. In considering promotions and compensation, age cannot be a factor in your analysis. One question all companies and firms may deal with is how to compensate or account for aging employees who may show decline in efficiency and productivity as they age. An employment attorney, in conjunction with your HR manager, should be able to help navigate this conundrum. But, as with all other areas, focus solely on the skill set and utility of the worker. Use measurable metrics (files touched, accuracy rates, internal performance scorecards) that cannot be attributed solely to age to avoid challenges of discriminatory promotions or raises.

6.      Hire Younger? Not So Fast!

Perhaps by only hiring younger applicants, you think you can avoid some of the issues touched on above? That’s definitely not the right way to proceed. Another area under the ADEA that can be a potential issue is discriminating applicants based on their age. Searching the internet for an applicant’s age or looking at the year a candidate received their degree on a resume, are major missteps and something that ADEA does not allow. The recommendation is to have blind resume reviews where school graduation dates are obscured. Also, to avoid age discrimination, create knowledge or skill-based tests that can be used to differentiate prospective candidates based solely on ability and not age. For example, use a combination of basic knowledge tests (math/grammar/attention to detail) and computer skills aptitude tests (create dummy files in your client system and give them simple instructions to locate a file by loan number, typing speed tests, internet- and MS Office-skills tests). Most recruiting sites like Indeed, ZipRecruiter, SimplyHired and Monster will have examples of skill tests.

7.      Don’t Underestimate An Ageism Claim

While ageism claims are viewed as sometimes harder to successfully prove compared to other discrimination suits, bear in mind that a plaintiff who successfully sues an employer for age discrimination under the ADEA can potentially recover back pay, lost benefits, and equitable relief including front pay, along with attorney’s fees and damages. Front pay covers the loss of income that may continue to occur after the trial is over. Some examples of damages paid include $15.4 million from the LA Times to a sportswriter and $11 million from Google to over 200 plaintiffs. These damages can cripple a company, so the risk is extremely high and worth avoiding at all costs. The root of most of these cases originated from mass layoffs. Unfortunately, during the COVID pandemic, almost every firm and company was affected by the moratoria against foreclosure and eviction actions.  Hopefully, we never experience that again, but if you find yourself having to undertake layoffs, make absolutely certain that age is not a factor. You must not consider how soon they may be near retirement age; while it may seem logical to force someone out with an early retirement, an involuntary termination can lead to potential claims.

Companies ultimately want to avoid all forms of discrimination. In addition to the federal protections offered under the ADEA, consult with an employment attorney to make sure any actions you undertake do not run afoul of any state or local guidelines. Some jurisdictions may have additional constraints on top of state or Federal guidelines. Ageism and technology, unfortunately, are linked at the hip, so take the time to foster a collaborative environment for all backgrounds. Steer clear of stereotypes and have a diverse workforce. Consult your HR manager and employment attorney when implementing new policies that could be viewed as targeting those over 40. In the end, just like with any other protected class, equal treatment of all is the basic tenet to avoid issues.

Copyright @2022

Fall 2022 USFN Report

By Brian H.Liebo, Esq.

Liebo, Weingarden, Dobie & Barbee, PLLP

USFN Member (MN)

The mortgage is in default and in foreclosure. Coincidentally, the house mysteriously burns down. What appears to be just terribly bad luck for a borrower may turn out to be far more sinister-- arson. In these instances, a mortgage servicer needs to quickly focus on hazard insurance claim issues, in addition to foreclosing the mortgage.  A critical issue with fire damage cases, and other hazard insurance, is whether the foreclosure should be completed without regard to a pending hazard insurance claim.

When a home in foreclosure burns down, the mortgage servicer should not automatically rush to complete the foreclosure. Instead, the mortgage servicer should fully resolve the hazard policy claim and obtain the claim proceeds before having the sheriff’s sale conducted. Speeding to sale and improperly handling the hazard claim process can have more than one detrimental impact, including full loss of coverage. Specifically, the Minnesota Court of Appeals has held that where a mortgagee forecloses its mortgage after the date of the hazard loss and bids full debt, the mortgagee may forfeit its separate rights under the mortgage clause of a fire insurance policy.

In the pivotal case, Margaretten & Co. v Illinois Farmers Ins. Co., 526 N.W.2d 389 (Minn. Ct. App. 1995), a fire destroyed the mortgaged property. The insurer denied the homeowner’s claim for insurance proceeds because the owners caused the fire. The mortgagee filed a claim for its own insurance benefits under the terms of the hazard insurance policy. However, the insurer also denied the mortgagee’s claim because the mortgagee refused to give the insurer a partial assignment of the mortgage equal to the insurance benefits payment. The insurer was trying to preserve its own right of subrogation for the arson. The mortgagee ultimately foreclosed on the delinquent mortgage and bid in the full debt amount at the sheriff’s sale. After the lender sued to recover the insurance proceeds, the Court held the insurer was right to deny the claim, and it was justified in requiring the mortgagee to give a partial assignment of the mortgage that would have balanced the parties’ interests. This result makes clear that a mortgage servicer with a pending hazard loss should not complete a foreclosure until it is sure it has satisfied all insurance policy requirements and fully resolved its claim with the insurer.

It is important to note that Minnesota has a short, two-year statute of limitations period for insurance loss claims.  In fact, it is necessary to not just make a claim within two (2) years from the date of loss, but also commence a lawsuit within two years from the date of loss to compel coverage and ensure all policy rights are preserved by the lender.

While a foreclosure can be a complicated enough process, throwing in a large hazard loss such as arson can create a process full of pitfalls and peril. Hence, the safest approach, wherever possible, is for a servicer to fully resolve hazard-loss claims and funds with both the insurers and borrowers, respectively, before completing foreclosures. Doing so may help prevent not only losses of coverage, but also protracted litigation.

Copyright @2022

Fall 2022 USFN Report