Complex Closing Stories Part I

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Complex Closing StoriesPart I

• Foreclosures, Bankruptcy Creditors Rights in
  the Mean Streets

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Foreclosure

• The effect of a foreclosure is

To extinguish interests of borrower/owner and
most junior lien holders
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Foreclosure

• Foreclosure
• DOES NOT extinguish

• Matters with record priority
• Ad valorem taxes
• Junior IRS liens (filed w/in 30 days)
• -must give 25 days notice
• -subject to redemption period

But proceed with CAUTION If the foreclosed
borrower is the grantee at the foreclosure sale,
all matters subordinate to the foreclosure will
re-attach!
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Foreclosure
In 2007 2008 calls for reform and protection
for borrowers were widespread.

• Mod in a Box (FDIC, IndyMac Loan Modification
  Model)
• Troubled Assets Relief Program (TARP)
• Temporary Liquidity Guarantee Program (TLGP)
• Proposed Senate Bill (expanding cram down
  provisions)

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Foreclosure
In North Carolina, the General Assembly passed
the Emergency Foreclosure Reduction Program
EFRP

• Designed to reduce the number of foreclosures
• Allows Commissioner of Banks to use funds for
  prevention
• EFRP focuses primarily on subprime loans

Continued.
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Emergency Foreclosure Reduction Program EFRP

• Subprime loan defined in NCGS 45-101
• Originated on or after 1-1-05, but before
  12-31-07
• Meets definition of rate spread home loan under
  NCGS 24-1.1F(a)(7)
• Chart by Office of Commissioner of Banks
  reflecting rate triggers for rate spread home
  loans

Continued.
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Emergency Foreclosure Reduction Program EFRP

• If loan is subprime then it must comply with
  the following criteria in foreclosure
• Notice 45 days PRIOR to FILING Notice of Hearing
  (See NCGS 45-102) including
• Itemization of ALL past due amounts
• Itemization of any other charges that must be
  paid in order to bring the loan current
• A statement that the borrower may have options
  available other than foreclosure and with whom
  the borrower could discuss those options

Continued.
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Emergency Foreclosure Reduction Program EFRP

• If loan is subprime then it must comply with
  the following criteria in foreclosure
• Notice 45 days PRIOR to FILING Notice of Hearing
  (See NCGS 45-102) including
• Contact information for the mortgage lender and
  mortgage servicer or an agent for either who is
  authorized to work with the borrower to avoid
  foreclosure
• Contact information for one or more HUD-approved
  counseling agencies to assist borrowers in NC
  avoid foreclosure AND
• Contact information for the Consumer Complaint
  section of the Office of the Commissioner of
  Banks.

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Emergency Foreclosure Reduction Program EFRP

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

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Emergency Foreclosure Reduction Program EFRP

• Commissioner of Banks to review
• Commissioner selects loans appropriate for
  foreclosure avoidance efforts
• Commissioner may extend foreclosure filing date
  up to 30 days

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EFRP Certification

• NCGS 45-107 requires foreclosure notices
  include certification that
• Notice under 45-102 and information under
  45-103 have been provided AND
• Time periods have elapsed
• Note a material, inaccurate statement on
  certification results in
• Dismissal with prejudice and
• Payment of borrowers costs

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More EFRP

• Fifth Element under NCGS 45-21.16(d)
• Clerk must determine if
• Debt is not a subprime loan as defined in
  45-101(4) OR
• If subprime loan - pre-foreclosure notice was
  provided and all time periods have elapsed

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EFRP Best Practice!!

• Foreclosing parties submit information on all
  loans to AOC
• Can obtain a Non-Subprime Loan Certificate

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Deeds in Lieu of Foreclosure

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

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Deeds in Lieu of Foreclosure

• Language for Deed in Lieu
• Absolute conveyance
• Fair and adequate consideration
• Including satisfaction of deed of trust (recoding
  info)
• Grantor declares conveyance is freely and fairly
  made
• Tax Stamps Amount of obligation released plus
  any additional consideration

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Deeds in Lieu of Foreclosure

• Affidavit of Grantor reqd by title insurer.

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Deeds in Lieu of Foreclosure

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

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Deeds in Lieu Bankruptcy

• If Borrower files for bankruptcy AFTER having
  given a deed in lieu
• Can deed in lieu be set aside?
• Was there adequate consideration?
• Was there duress?
• in other words was the deed fraudulent as to
  other creditors of the borrower?
• Old Rule of Thumb consideration must be at
  least 80 of appraised value.
• Old Rule still valid??????

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Deed in Lieu with a Twist?

• At lenders instruction, borrower conveys to 3rd
  party LLC
• LLC is wholly owned by lender
• LLC was created to take title to property for
  liability purposes
• However, LLC pays nothing for the property

continued
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Deed in Lieu with a Twist?

• Bankruptcy court will focus on consideration to
  the grantor
• So long as debt is being forgiven by parent
  lender, the conveyance should pass muster.

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Bankruptcy Local Transfer Taxes

• Chapter 11 Plan approves conveyance of property
• Under 1146(a) of the Code conveyances are to be
  made without imposition of stamp tax or similar
  tax
• But see
• Florida Dept of Revenue v. Piccadilly Cafeterias
• Plan must be confirmed for exemption to apply
• State of Florida v. TH Orlando, Ltd
• Exemption applied to the transfer of a
  non-debtors property

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BankruptcySales Free Clear

• 363(f)
• Court orders property sold free and clear of all
  liens under 363(f) of the Code
• Subject to 10 day appeal period
• Reliance on order transferring liens to
  proceeds
• Clear Channel Outdoor, Inc. v. Nancy Kupfer held
  sales are not free and clear if timely appealed

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BankruptcyDeposits by Contract Purchasers

• What happens to deposits?
• If held by escrow agent terms of contract
  should control
• Terms not clear - escrow agent will require
  consent of all parties (and including bankruptcy
  court/trustee) to release

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BankruptcyDeposits by Contract Purchasers

• What happens to deposits?
• If held by contract seller/debtor, then
  bankruptcy court trustee are involved
• Is contract purchaser an unsecured creditor?
• What if funds are used to improve property?

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Loan Workouts

• Inspired by threats of foreclosure and bankruptcy
• Parties may agree to some form of workout
• Modification of the loan terms and a forbearance
  agreement
• Affect the priority of the loan/deed of trust?

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Loan WorkoutsALTA 11

• Lender requests an endorsement, such as an ALTA
  11
• ALTA 11 acknowledges an amendment to the terms of
  the loan and states the priority has not changed

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Loan WorkoutsALTA 11

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

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Loan WorkoutsALTA 11

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

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Loan WorkoutsNovations

• What is a Novation?
• NC case law is fairly vague.
• Novation is a substitution of a new contract or
  obligation for an old one which is thereby
  extinguished novation implies the extinguishment
  of one obligation by the substitution of
  another. Tomberlin v. Long

Continued
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Loan WorkoutsNovations

• Requisites for a novation
• a previous valid obligation
• agreement of all parties to a new contract
• the extinguishment of an old contract AND

• the validity of the new contract. Anthony Marano
  Co. v. Jones
• Intent is also considered

Continued
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Loan WorkoutsNovations

• Novation - Anthony Marano Co. case
• Defendant executed a first note to his lender
• A year later the defendant executed a second
  demand note to the same lender
• Interest rate was reduced
• Change was only a modification - did not
  extinguish and replace the original obligation.

Continued
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Loan WorkoutsNovations

• Advancement of New Funds
• New funds not covered by the original note/deed
  of trust
• will result in a novation or
• at least a new priority for those new funds

• Changes that create new money or otherwise
  replace original agreements must be highly
  scrutinized
• Subordinations may be required

Continued
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Loan Workouts Title Policies

• What if a lender makes concessions in a workout?
• Condition 9(c) of 2006 ALTA Loan Policy
• The Company shall not be liable for loss or
  damage to the Insured for liability voluntarily
  assumed by the Insured(also in 1992 Loan Policy)
• If modifications weaken or create defects in
  insured interest Defense for title company
• Obtain title companys consent in advance
  (endorsement)

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Cram Downs and Lien Stripping

• Ability to remove Deeds of Trust
• Title companies willing to insure interests that
  are consistent with proper order
• Proposed Senate Bill allows bankruptcy judges to
• Lower interest rates,
• Reduce principal, and/or
• Shorten the term of the primary mortgage/deed of
  trust on a home residence
• Bill gives troubled homeowners leverage

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Creditors Rights and Title Coverage

• Requested by owners and lenders
• Lender on Construction loan to Uptown Condos may
  require
• A purchaser from Uptown Condos may require
• Prior approval needed
• Considered ultra-hazardous title coverage

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Creditors Rights

• What interests are involved?
• Rights of unsecured creditors which may become
  superior to the rights of purchasers and secured
  creditors
• Result of actions taken by a debtor prior to
  entering bankruptcy
• Actions are seen as unreasonably harmful to
  unsecured creditors
• May include certain transfers of property
  interests which become voidable
• Two types Fraudulent transfers and Preferences

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Creditors RightsFraudulent Transfers

• Intentional Done to hinder, delay or defraud a
  creditor
• Constructive No intent to defraud, but any of
  the following exists
• the transfer is made when the transferor is
  insolvent
• the transfer renders the transferor insolvent or
• the transfer leaves the transferor with
  unreasonably small capital to continue its
  business

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Creditors RightsPreferences

• Insolvent grantor makes a transfer before
  entering bankruptcy
• transfer favors fewer than all creditors
• Time periods for preferential transfer
• 90 days prior to bankruptcy filing
• 1 year if transfer is to an insider

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Creditors RightsTitle Coverages

• Basic Coverages under 2006 Policies
• Limited Current Transaction Current transaction
  being treated as a preference as a result of (1)
  Failure to timely record or (2) Failure to impart
  notice to third parties Covered Risk 9(b)
  Owners Covered Risk 13(b) Loan
• Prior Transactions
• Challenge to prior transaction in the title chain
  based upon creditors rights, including
  fraudulent and preferential transfers CR 9(a)
  Owners CR 13(a) Loan

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Creditors RightsALTA 21-06 Endorsement

• Coverages beyond those contained in the 2006
  Policies require an endorsement
• ALTA 21-06 provides coverage for the avoidance of
  an insured interest based the occurrence of a
  fraudulent transfer or preference on or before
  the Date of Policy

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Creditors RightsALTA 21-06 Endorsement

• Issuing ALTA 21-06
• High risk coverage for title companies
• Claims Not big numbers, but big dollars
• Information not of record - credit risk
  determination
• Difficult to issue (especially in current climate)

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Creditors RightsALTA 21-06 Endorsement

• Information required for underwriting
• Structure of transaction
• Parties involved (related?)
• Consideration to be paid
• Intended use of loan proceeds
• Financial status of borrower and/or seller
• Any other information that may affect the nature
  of the risk

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Creditors Rights

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

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Creditors RightsALTA 21-06 Endorsement

• Information required for underwriting
• Structure of transaction
• Parties involved (related?)
• Consideration to be paid
• Intended use of loan proceeds
• Financial status of borrower and/or seller
• Any other information that may affect the nature
  of the risk

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Creditors Rights

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

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Creditors Rights

• Based on our fact pattern
• Lenders coverage at time that Uptown Condos
  takes out the original construction loan
• Confirm that all loan proceeds are being used to
  improve the property, then the structure is
  favorable for approval

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Creditors Rights

• Based on our fact pattern
• Lenders Coverage at the time Uptown Condos
  refinances its construction loan
• Proceeds used to pay off the existing loan and
  further improve the property, then the structure
  is favorable.
• Note - Uptowns financial difficulties may offset
  the structure.
• Unrecorded loans more information needed
• Cash-out is an issue

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Creditors Rights

• Based on our fact pattern
• Lenders coverage if lender forecloses, purchases
  at foreclosure, takes title (or has related
  entity take title) and requests a new policy
• Demonstrate no equity (the loan balance equal to
  or greater than the property value) in the
  property.

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Creditors Rights

• Based on our fact pattern
• Lenders coverage at the time Uptown Condos
  refinances and the funds are used to purchase
  other property for a related entity
• Strong financials statements would be required
  for the parties involved (indemnitor would
  probably be required).

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Creditors Rights

• Transaction Structures with Risk
• Leveraged Buyouts (Corporate or Partnership)
• Mortgages to pay dividends or partnerships
  distributions (i.e. cash-out refis)
• Mortgages cosigned by different entities
• Mortgages to repurchase corporate stock
• Mortgages securing unsecured pre-existing debts
  to same lender

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Creditors Rights

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