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BoA v. Caulkett, 13–1421 (Jun 1) Supreme Court of the United States

Background

This case came to the Supreme Court due to a Circuit split on the issue of “Lien Stripping.” In this pair of cases the Debtors both filed Chapter 7 Bankruptcy cases, owned houses encumbered with senior mortgages and “underwater” junior mortgages held by the Petitioner banks. Because the amount owed on each senior mortgage was greater than each house’s current market value, the Banks would have received nothing if they foreclosed on the junior liens (i.e. underwater).

Debtors sought to void their junior mortgage liens under the terms of Bankruptcy Code §506, which provides that “To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void.” 11 USC §506(d). In each case, the Bankruptcy Court granted the Debtor’s respective motions, and both the District Court and the Eleventh Circuit Court of Appeals affirmed.

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Dual 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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If 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

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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:

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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.

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We represent many consumers in Bankruptcy, and getting our Clients back on their feet afterwards is a big part of what we do. Often, cases are driven by upside-down home loans or even reasonable loans in which payments have become too high because the homeowner lost their job or had to take a lower paying job as a result of the Great Recession. One option for those who’ve gone through Bankruptcy and are looking to borrow again is the FHA Loan.

Before the housing bubble burst in 2008 FHA loans were considered the choice for buyers with little credit or bad credit; or an option for those with low incomes. But since everyone’s home value began falling – often taking their credit standing with it – FHA mortgages have become more widely appealing, especially when compared to conventional loans that require private mortgage insurance (“PMI”). PMI is the mortgage lender’s way of ensuring it gets paid following default. It is insurance for which the borrower pays the premium, adding to the cost of the loan.

For those considering an FHA Loan, keep these points in mind:

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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).

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