Articles Posted in Debt

Dual TrackingDual Tracking is the industry name for the practice of letting a foreclosure case tick on even while the homeowner seeks to modify their mortgage loan. The idea is simple: the Bank will take whichever solution comes through first – a modification or a foreclosure. The problem is that the Bank holds all the cards: the Bank’s Loss Mitigation Department decides how long it takes to review and approve an application to modify your loan, while the Foreclosure process in Court has been greatly simplified and streamlined for the benefit of the Banks. Illinois mortgage foreclosure laws, even Illinois Supreme Court Rules, now permit foreclosing banks to roll over homeowners and get to a judgment.

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Mortgage-Word-CloudIf you live in Illinois you know that the Economy has been sputtering: struggling valiantly but with little to show for it. Case in point: Is your home still underwater? For most people the answer is still yes – even as markets around the country rebound. So today we address a deceptively simple question: What is a mortgage and how does it work? Why don’t mortgages relate to the value of our homes? Here are a few things to consider: a mortgage is a loan secured by real estate. While the term “mortgage” is used colloquially to refer to both the loan and the security, there are actually 2 separate legal documents at work here: a Note and a security instrument – the Mortgage lien.

Note: When money is borrowed to purchase real estate, some States title the underlying property in the name of the Lender and permit that interest to hypothetically transfer over time to the Borrower. The arrangement is a bit like lay-a-way. These States are using the “Title Theory.” But Illinois, like many other States, places the underling property in the name of the homeowner and gives the Lender a lien on the owner’s interest – these States are using the “Lien Theory.”

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Today’s post features a pair of cases in which a foreclosure defense Attorney seems to have gone too far. Foreclosure defense has become a veritable cottage industry over the past decade and it is common for Clients to expect their lawyer to do more than fight. They want to delay “by any means necessary.” But the Courts still regard the law as a genteel profession. This means that what Clients see as run of the mill zealous lawyering comes off to the Judge as unprofessional or worse. This pair of cases highlights that point.

Case #1: In re Wendy A. Nora

Facts

Nora was known for using tactics to prolong her Clients’ cases. Here she had removed a matter to Federal Court based on what she called “recently uncovered research” to the effect that Freddy Mac was the true party in interest. The case was already 4 years old. But the District Court rejected her argument and remanded back to State Court, awarding PNC its Attorney’s fees and costs.

Nora moved for reconsideration. The Court did not change its position and called her pleading “frivolous” because she made “no good faith argument for changing existing law and offered no meritorious arguments for reconsidering the decision to award fees.” The Court went on to say that Nora “repeatedly used procedural feints to delay the foreclosure” and noted that she’d been suspended from practice in Minnesota for that very reason.

Back in State Court Nora continued her tactics: accusing the Judge and the Court Reporter of manipulating transcripts even as she asserted that the District Judge had pursued a campaign of libel and Opposing Counsel engaged in “civil fraud” and “racketeering.” Nora also made repeatedly references to rejected arguments from prior motions and stated that if she were given an evidentiary hearing she would be vindicated.

Findings

In her defense, Nora characterized her comments as mere rudeness. The Court disagreed, stating that her repeated and factually baseless accusations of criminal conduct were “unacceptable.” It then found that:

  • Nora’s actions were meant solely to delay her Clients’ foreclosure; and that
  • Her outbursts  were “unbecoming a member of the bar” in violation of Rule 38 of the Rules of Federal Appellate Procedure.

Holding

The Court Imposed sanctions of $2,500 on Nora and ordered she be suspended from practicing before it. The holding was forwarded to the Office of Lawyer Regulation of the Wisconsin Supreme Court, where a disciplinary case is underway.

Case #2: Nora v. HSBC Bank USA, N.A.

Facts

HSBC initiated a Wisconsin foreclosure against the Rinaldis, who counterclaimed alleging that certain paperwork had been fraudulently altered and that HSBC lacked standing to enforce the mortgage. The Rinaldis lost at summary judgment and did not appeal. HSBC later agreed to modify its mortgage and the Court vacated the Judgment of Foreclosure. The Rinaldis filed a new suit reasserting their counterclaims. Before the Court could rule on HSBC’s motion to dismiss, the Rinaldis filed Bankruptcy. HSBC filed a Proof of Claim in the Bankruptcy, but the Rinaldis objected and filed Adversary claims alleging fraud, abuse of process, tortious interference, breach of contract, and violations of RICO and the Fair Debt Collection Practices Act.

Holding

The Bankruptcy Court recommended denial of the Adversary action and the District Court agreed.The Court also warned the Rinaldis that if they filed additional frivolous claims they would be sanctions due to the “vexatious and time and resource-consuming” nature of their “nigh-unintelligible” filings.

Did that deter the Rinadldis? Perish the thought. Following several additional filings of the same type the Rinaldis voluntarily dismissed their Bankruptcy but their Attorney, Nora, filed additional motions. Consequently the Court ordered a sanction of $1,000 against Nora, which the 7th  Circuit upheld on appeal.

The Upshot

Lawyers are asked to be advocates, but how zealous is too zealous? While cases such as the ones above could answer that question, it is not clear that they do. Was Nora too zealous in this case or just too rude? Should she not have stepped into a Courtroom to begin with? Should she have done more diligence or tossed out her Client because they were asking for too much? Sadly, the simple fact is that even if an Attorney is prepared to draw the line, they can bet there is another lawyer around the corner that won’t.

No wonder Shakespeare wrote “The first thing we do, let’s kill all the lawyers.”

Your Turn

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For Debtors, Chapter 7 Liquidation is the ultimate relief, while Chapter 13 and 11 Reorganization offers an opportunity to reduce their Debtor’s payments in light of their income. In either type of case however, the Creditor is not entitled to anything until it has filed is Proof of Claim.

What Is a Proof of Claim?

The Proof of Claim or “PoC” is the means by which Creditors state:

  • How much they are owed by this Debtor;
  • Why they are owed that much to begin with; and
  • Whether debt is secured by property of the Estate.

Different types of cases contain strict deadlines for filing a PoC, and each PoC should be accompanied by supporting documentation such as a calculation of sums due, a copy of a Judgment Order, etc.

Will The Claim Be Paid?

Once filed, the Creditor’s PoC represents what could be paid to it, presuming:

  • The Debtor has sufficient assets to liquidate in order to pay the Creditor’s Claim; or
  • The Debtor’s Reorganization provides for full payment of creditors – a “100% Plan.

But in the overwhelming number of cases the reality is:

  • The Debtor has few if any assets to liquidate, resulting in a “No Asset” finding; or
  • The Debtor’s Plan of Reorganization involves paying only a small fraction of debts.

What If The PoC Is Wrong?

If a Debtor believes that a Creditor filed a materially false or inflated Claim, that Debtor may file an Objection to Proof of Claim. The Objection will require the Creditor to support, clarify, or defend its Claim. Creditors that fail to do so may lose their Claim altogether. As in the case of the PoC, there is a strict time limit in which to file Objections. Failure to do so is fatal to the Objection and permits the Creditor to pursue whatever amount it seeks.

The Upshot

For Creditors whose Debtors file Bankruptcy, the key to collecting is diligence and proactive planning. For Debtors whose Creditors continue to pursue them even past a Bankruptcy filing, it is critical to know what a Creditor can legitimately seek, what it cannot, once a Bankruptcy has been filed.

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Sleazy Lawyer

Gasunas vs. Yotis, 14-321 (Nov.24) ND IL ED (J. Schmetterer)

The Facts

Yotis, a former Illinois Attorney, borrowed over $50,000 from his Client Gasunas using various tricks and subterfuge: from outright lies to misrepresentations and material omissions of fact designed to manipulate his “friend” and benefactor. Once he had the money, Yotis filed a Chapter 13 Bankruptcy.

The Adversary Complaint

Gasunas fought back against the Bankruptcy by filing a 4-count Adversary Complaint challenging Yotis’ Chapter 13 discharge under a variety of statutory fraud theories under 11 U.S.C. 523(a) including

  • Fraudulent Pretenses;
  • False Representations;
  • Actual Fraud; and
  • Fraud While a Fiduciary

Yotis, in turn, brought a Motion to Dismiss the Adversary Complaint sounding in 11 U.S.C. 12(b)(6) in an effort to have his case confirmed over the objections of his former Client.

The Opinion

In a carefully written and exhaustive Opinion, Judge Schmetterer of the Bankruptcy Court for the Northern District of Illinois, Eastern Division, evaluates each of the arguments in the Motion to Dismiss and applies them to all 4 counts of the Adversary Complaint. Ultimately the Court dismissed Counts I and II without prejudice and with leave to re-plead, while Counts III and IV are allowed to stand without any changes.

Aside from the precise way in which it examines everything from the Federal Rules of Civil and Bankruptcy Procedure to the substantive law of Bankruptcy Fraud and the Relation-Back Doctrine, the Opinion is notable for its recitation of the truly underhanded things that Yotis is alleged to have done in order to weasel money from his Client, including:

+ Crying about his wife and daughter leaving
+ Claiming to need money to pay his mortgage
+ Lying about visiting his sister in an institution
+ Cajoling even while professing false friendship
+ And many other examples of how not to behave

 The Upshot

This Opinion is a solid primer and review concerning the types of Bankruptcy Fraud available through 523(a) – a mainstay of Bankruptcy litigation. Here, the fact that the Debtor was an Attorney and the Plaintiff/Creditor was his former Client simply makes the case that much more of an object lesson.

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In re Meier (Ch. 11) )(Nov.24) 14-10105 ND IL ED (J.Schmetterer)

The Facts

Bob and Martha Meier divorced and entered into a Marital Settlement Agreement (“MSA”) that provided for $4 million in maintenance payable in monthly installments over 10 years; plus a $400,000 property settlement. Bob filed for Chapter 11 sometime later and Martha filed a proof of claim (“PoC”) in the case seeking the rest of her $4 Million as well as the $400K as a “priority as a domestic support obligation” per 11 U.S.C. §507(a)(1)(A).

The Issue

Of course domestic support obligations are exempt from discharge in Bankruptcy, and entitled to priority payment in a plan of reorganization. The tricky part however, is determining just what constitutes a “domestic support obligation” entitled to special treatment, and what does not. For instance, would a spouse’s Attorneys’ Fees be entitled to special treatment? How about interest on unpaid sums? Court sanctions for unpaid support?

The Opinion

Regardless of how much of Martha’s PoC was entitled to priority, one thing was for certain: it would definitely put a crimp in Robert’s Plan of Reorganization. So it is no surprise that Ed Shrock, one of Bob’s creditors under the Plan, objected to Martha’s PoC. According to Shrock, in order for Martha’s claim to be valid, all the domestic support obligations would have to be due at once – not the case here. By contrast, domestic support obligations due in the future like the installments here are NOT allowable claims in Bankruptcy. In response to the Ojection, Martha amended her PoC to reflect $2,333,333 as a “domestic support obligation” and $400,000 as a “property settlement.” Apprently, that amendment did not satisfy Shrock, who believed that none of Martha’s claim was entitled to priority over the debt owed to him.

Following a thorough discussion about jurisdiction, whether the disputed amount constitutes a domestic support obligation in whole or part, whether a Proof of Claim is a “judicial admission,” and the proecess by which PoC’s can be amended under Federal Law, the Court ultimately sustained Shrock’s objection as the amended $2.3 Million domestic support claim – rather than the original $2.7 Million claim – but overruled it as to the property settlement. Ultimately, Martha was left with a claim for the $400K and in potential future claims that would not mature until they were due and owing.

The Upshot

While the numbers in the Meier divorce are large and impressive, the facts and reasoning in this case apply accross the board. Domestic support is still the #1 source of exempt claims in Bankruptcy, as well as a persistent source of confusion to Family Law practitioners and their Clients.

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bankruptcy-court-seal

Settlers’ Housing Service, Inc. v. Bank of Schaumburg
Adversary No. 13 A 01328 Issued: November 18, 2014
Judge: Jack B. Schmetterer

Settler’s, a not-for-profit supplier of immigrant housing, bought property in DuPage County, Illinois with a loan from the Bank of Commerce. When Settler’s eventually sought Chapter 11 protection, it blamed the Bank for its troubles and alleged that it had inserted documents into the stack signed at Closing by its President (who was apparently in between flights), including a line of credit and cross-collateralization of the newly-acquired properties with existing ones. When Settler’s eventually had to borrow from the Bank to make its mortgage payments, the house of cards collapsed, the Bank began foreclosing, and Bankruptcy was the only plausible way to reorganize.

The Adversary Complaint

Settler’s had asserted its version of events in an Adversary Complaint, First Amended Adversary, and Second Amended  Adversary. All prior versions of its Adversary Complaint had been dismissed in whole or part. Now, the Bank sought to dismiss its 3rd Amended Complaint, which consisted of 14 Counts – not all of them entirely new:

1. Equitable Subordination
2. Aiding and Abetting Breach of Fiduciary Duty
3. Fraudulent Misrepresentation
4. Fraudulent Concealment
5. Breach of Illinois Consumer Credit Act
6. Fraud, Illegality and Unenforceability
7. Constructive Fraud
8. Setoff
9. Unjust Enrichment
10. Conspiracy to Defraud and Civil Conspiracy
11. Tortious Interference With Contract
12. Breach of Fiduciary Duty
13. Conversion and Accounting
14. Improper Post–Petition Interest and Receiver’s Fees

Opinion

The Court’s discussion is thorough, beginning with a jurisdiction section (usually a rubber-stamp) that refers to the Supreme Court’s Stern v. Marshall ruling, the 7th Circuit’s narrow interpretation of Stern in Executive Benefits Insurance Agency v. Arkinson, Section 157(b)(2)(C) of 28 US Code, and a consideration of what constitutes a “final and appealable” order.

The balance of the Opinion is equally detailed, featuring count-by-count evaluations under both Federal and Illinois law. The issues taken up in the opinion range from fraudulent misrepresentation, fraudulent concealment, consumer fraud and constructive fraud, to conspiracy, breach of fiduciary duty, and even the statute of limitations applicable to counterclaims.

The Court also notes in the Opinion that the parties’ Attorneys were rehashing issues ruled on already: either by attacking counts that previously withstood a motion to dismiss, or reasserting arguments that previously failed. In either case, warned the Court, the result was a sanctionable waste of time.

Ruling

Ultimately the Bank’s motions wre granted in part and the following counts dismissed with prejudice (the Court noting that to amend would be “futile”):

Count 2 Aiding and Abetting
Count 4 Fraudulent Concealment
Count 7 Constructive Fraud
Count 12 Breach of Fiduciary Duty
Count 13 Conversion and Accounting
Count 14 Improper Charges

No certification of “no just reason for delay of a final ruling” per FRCP 54(b) and FRBP 7054 was given, as the Court observed that Federal practice favors waiting until all issues have been ruled on before any single ruling is taken up on interlocutory appeal. See In re Manhattan Investment Fund, 288 B.R. 52, 56 (S.D.N.Y. 2002) (discouraging interlocutory appeal). And while the Court doesn’t issue sanctions here, it obviously wants to avoid any further waste of time and resources – even if have the same argument over and over does make Attorneys seem determined to their clients. The Court just wasn’t having it.

The Upshot

This Opinion showcases the interplay of Federal and State law in a complex commercial scenario. It also displays the characteristic desire of Federal Courts to keep things clear and simple: which is unfortunately the opposite of how convoluted factual and legal situations play out in State trial courts.  Finally, the Opinion reminds lawyers to refrain from being overzealous. The tactic may make clients happy in the short run, but if the end result is to tick off the Court, nobody wins.

Your Turn

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bankruptcy-court-sealShmeglar v. PHM Financial et al., 14-121 (Interpleader Plaintiffs)
Bankruptcy Court, Northern District of Illinois, Eastern Division
Issued November 18, 2014 by Judge Jack B. Schmetterer

In this Memorandum Opinion the Bankruptcy Court pries apart a Fed. R.  Civ. Pro. 12(c) Motion for Judgment on the Pleadings brought by banks and servicers who claim to be entitled to mortgage payments from the Debtor. In the process, the Court peers down the rabbit hole of securitized mortgages – the process of bundling loans into trusts, slicing trusts into securities, and trading the securities on Wall Street. And what the opinion reveals isn’t pretty.

Ultimately, this case is like thousands across Illinois, and tens of thousands across the country, in the past 10 years that arise from the clash between the big-money business of securitization and the reality of the subprime mortgage debacle. At the root of it all there was always this simple, but previously unthinkable, question:  Who owns my mortgage note and who should I be paying?

Whose Mortgage Is It Anyway?

So who should a homeowner be paying when their mortgage has been securitized, sold, transferred, allonged, and robo-signed? The gaggle of interpleading banks and mortgage services in this case thought it was obvious based on the documents on file with the Court that they were the right ones to pay. But was it really obvious based on documents alone? According to the Court, no it was not.

Every Trick In The Book

Indeed, these facts read like the Forrest Gump of the mortgage mess – virtually everything that had plagued homeowners across the country had happened here, too. No wonder the opinion covers nearly every hot-button tactic used by desperate homeowners over the years to keep from paying their mortgages: the impenetrable mortgage trust, the confusing and misleading array of servicers and transferees, the notes, allonges, and  robo-signed transfers in blank: it’s all here!

But wait, there’s more! This case even involves a Cook County foreclosure case in which judgment that was entered but no sale took place – so no “final confirmation” was issued. The result was an incomplete judgment and a lurking Stern v. Marshall problem. Oh no! And last but not least, even the Illinois enactment of the UCC was called on by the Opinion.

The Upshot

Following its thorough analysis, what does the Court conclude? Can the Debtor/Mortgagor rest easy knowing to whom he must make out his mortgage payment? Nope. Instead, the Opinion confirms that the mortgagee banks and servicers here, like others around the country, have tied themselves into a knot that can only be untangled following an evidentiary hearing (and maybe not even then).

So while there is no final answer to the Debtor’s question of who to pay, at least the Court seems to make the banks put their money where their mouth is. That’s got to count for something, right?

Your Turn

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Detroit SkylineThe Announcement

Recently Steven Rhodes, the Judge tasked with managing the largest municipal Bankruptcy in American history, cleared Detroit to emerge from reorganization and put to bed a series of hard-fought battles between creditors, citizens, employees, and pension recipients. Before approving the move though, Judge Rhodes issued a heart-felt plea to all involved: “move past your anger” and “fix the Motor City. What happened in Detroit must never happen again.” He also observed that “Detroit’s inability to provide adequate municipal services… is inhumane and intolerable, and must be fixed.”

Politicians and civic leaders, including Michigan’s Republican Governor Rick Snyder, hailed Friday’s decision as a milestone and a “fresh start” for the Motor City. Indeed, it was Snyder who originally agreed with State-appointed Emergency Manager Kevyn Orr to take the City into Chapter 9: a last-resort he had promoted during his re-election campaign.

Lightning Fast Recovery

By Bankruptcy standards Detroit’s case finished in a flash thanks to a series of deals between the City and major creditors, especially retirees who agreed to smaller pension checks (after the Judge reminded them that they had no protection under the Michigan Constitution) and bond insurers who relented on their push to sell the City’s art collection despite being owed more than $1 Billion. By contrast it took more than 2 years for Stockton, California to get out of Bankruptcy, while tiny San Bernardino is still operating under Chapter 9 more than 2 years after filing.

An Innovative Plan

Detroit’s Plan of Reorganization involves cutting pensions of non-public-safety retirees by 4.5%, completely discharging $7 Billion of debt, and spending over $1.7 Billion to demolish blighted buildings and improve basic services. In particular, Judge Rhodes praised the way contentious issues in the Plan were resolved: such as the deal to avoid selling artwork from the Detroit Institute of Arts, and to keep pension cuts from getting worse. In fact, while he said the pension deal bordered on “the miraculous,” he acknowledged that the necessary cuts would cause hardship for the many who would now have to get by on less than $20,000 a year.

Ultimately Judge Rhodes had to accept or reject Detroit’s Plan in full rather than cherry-picking sections. He relied on the advice of an expert, who deemed the Plan “feasible” and predicted that its success would depend on the fiscal skills of the Mayor and City Council, as well as a City Hall technology overhall. Maybe the most unusual feature of the Plan was its reliance on $816 Million put up by the State, foundations, philanthropists, and the Institute of Arts, in order to forestall even deeper pension cuts and avert the sale of art – a step the Judge warned “would forfeit Detroit’s future.”

What Went Wrong In The First Place

In retrospect, perhaps this was inevitable. After all, Detroit’s economy was clearly at the center of a “Perfect Financial Storm” consisting of municipal corruption, fiscal mismanagement, the long, slow decline in the auto industry, and widespread urban flight that strangled the population from 1.2 Million to 688,000 by 1980, turning whole neighborhoods into boarded-up wastelands. Adding insult to injury, despite encompassing more square mileage than Manhattan, Boston, and San Francisco combined, Detroit couldn’t even count on sufficent tax revenue to cover pensions, retiree benefits like health insurance, and debt service on funds borrowed to meet its budget burden. Still, the nail in Detroit’s coffin was the horrible debt deal made by former Mayor Kwame Kilpatrick, which locked it into paying high rates on its debt even as interest rates fell during the recession

Light At The End of The Tunnel

Detroit Regional Chamber President and CEO Sandy K. Baruah declared Detroit to be “on the cusp of a new era and primed to reinvent itself in a way many people did not think possible.” True. But what really matters is that the Motor City has a new direction and a long, hard, clean-up job ahead. Sure, Bankruptcy was the catalyst for change, but only the City and its residents – businesses, individuals, religious institutions, and government – can affect real change. Here’s hoping, Detroit. We’re all pulling for you.

Your Turn

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Gift CardIn the recent case of Beeman et. al. v. Borders Liquidating Trust et al. from the Circuit Court for the Southern District of New York decided on October 29, that Court examined what ought to happen when relief that could be granted, for practical reasons is not.

This controversial policy, referred to as “Equitable Mootness” means certain judgments will not be issued – even though they could – because doing so upsets the established order in a Bankruptcy case. It is obviously a touchy subject, but squarely within a court’s discretion.

Here, more than $17 Million had been distributed to creditors of Borders Bookstores in its Chapter 11 reorganization when 3 of its customers whose store gift cards became useless when it went bankrupt sought to be placed in a special “class” of claimants. The Plaintiffs started in the Bankruptcy Court but did not get traction there, so they proceeded in District Court.

In the Bankruptcy case below, the Court determined due to a variety of factors, including timing of the claims and the stage reached in the case, that Equitable Mootness should kick in.  The District Court agreed and clarified that the doctrine applied not only to ongoing reorganizations but to the ones, like this, that ended in liquidation – a s0-called “Liquidating 11.”

In its Opinion the District Court did point out the exceptions to the Equitable Mootness doctrine articulated in the 1993 case of Frito‐Lay v. LTV Steel(In re Chateaugay Corp.). But the Court also made it clear that this situation did not satisfy those conditions.

In the end, the decision in this case was complex, as were the legal principals, but the basic idea could be reduced to this: if you are a creditor in a Bankruptcy , act fast, be timely, and don’t let up. If you can’t do that, stay home and save yourself the Attorneys’ fees.

If you are a Creditor in a Bankruptcy case, call us in confidence at 630-378-2200 or via e-mail at mhedayat[at]mha-law.com.