What is a Chapter 11 BK or Bankruptcy Reorganization?

What is a Chapter 11 BK or Bankruptcy Reorganization?

May 23, 2014 Mike Sperling Leave a comment

Heney and Associates does not represent client in Chapter 11s.   We do have a referral network with good attorneys that specialize in Chapter 11s.

Reorganization Under the Bankruptcy Code

The chapter of the Bankruptcy Code providing (generally) for reorganization, usually involving a corporation or partnership. (A chapter 11 debtor usually proposes a plan of reorganization to keep its business alive and pay creditors over time. People in business or individuals can also seek relief in chapter 11.)

  • Background

A case filed under chapter 11 of the United States Bankruptcy Code is frequently referred to as a “reorganization” bankruptcy.

An individual cannot file under chapter 11 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court, or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d)-(e). In addition, no individual may be a debtor under chapter 11 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

  • How Chapter 11 Works

A chapter 11 case begins with the filing of a petition with the bankruptcy court serving the area where the debtor has a domicile or residence. A petition may be a voluntary petition, which is filed by the debtor, or it may be an involuntary petition, which is filed by creditors that meet certain requirements. 11 U.S.C. §§ 301, 303. A voluntary petition must adhere to the format of Form 1 of the Official Forms prescribed by the Judicial Conference of the United States. Unless the court orders otherwise, the debtor also must file with the court: (1) schedules of assets and liabilities; (2) a schedule of current income and expenditures; (3) a schedule of executory contracts and unexpired leases; and (4) a statement of financial affairs. Fed. R. Bankr. P. 1007(b). If the debtor is an individual (or husband and wife), there are additional document filing requirements. Such debtors must file: a certificate of credit counseling and a copy of any debt repayment plan developed through credit counseling; evidence of payment from employers, if any, received 60 days before filing; a statement of monthly net income and any anticipated increase in income or expenses after filing; and a record of any interest the debtor has in federal or state qualified education or tuition accounts.11 U.S.C. § 521. A husband and wife may file a joint petition or individual petitions. 11 U.S.C. § 302(a). (The Official Forms are not available from the court, but may be purchased at legal stationery stores or downloaded from the Internet at www.uscourts.gov/bkforms/index.html.)

The courts are required to charge a $1,000 case filing fee and a $46 miscellaneous administrative fee. The fees must be paid to the clerk of the court upon filing or may, with the court’s permission, be paid by individual debtors in installments. 28 U.S.C. § 1930(a); Fed. R. Bankr. P. 1006(b); Bankruptcy Court Miscellaneous Fee Schedule, Item 8. Fed. R. Bankr. P. 1006(b) limits to four the number of installments for the filing fee. The final installment must be paid not later than 120 days after filing the petition. For cause shown, the court may extend the time of any installment, provided that the last installment is paid not later than 180 days after the filing of the petition. Fed. R. Bankr. P. 1006(b). The $46 administrative fee may be paid in installments in the same manner as the filing fee. If a joint petition is filed, only one filing fee and one administrative fee are charged. Debtors should be aware that failure to pay these fees may result in dismissal of the case. 11 U.S.C. § 1112(b)(10).

The voluntary petition will include standard information concerning the debtor’s name(s), social security number or tax identification number, residence, location of principal assets (if a business), the debtor’s plan or intention to file a plan, and a request for relief under the appropriate chapter of the Bankruptcy Code. Upon filing a voluntary petition for relief under chapter 11 or, in an involuntary case, the entry of an order for relief, the debtor automatically assumes an additional identity as the “debtor in possession.” 11 U.S.C. § 1101. The term refers to a debtor that keeps possession and control of its assets while undergoing a reorganization under chapter 11, without the appointment of a case trustee. A debtor will remain a debtor in possession until the debtor’s plan of reorganization is confirmed, the debtor’s case is dismissed or converted to chapter 7, or a chapter 11 trustee is appointed. The appointment or election of a trustee occurs only in a small number of cases. Generally, the debtor, as “debtor in possession,” operates the business and performs many of the functions that a trustee performs in cases under other chapters. 11 U.S.C. § 1107(a).

Generally, a written disclosure statement and a plan of reorganization must be filed with the court. 11 U.S.C. §§ 1121, 1125. The disclosure statement is a document that must contain information concerning the assets, liabilities, and business affairs of the debtor sufficient to enable a creditor to make an informed judgment about the debtor’s plan of reorganization. 11 U.S.C. § 1125. The information required is governed by judicial discretion and the circumstances of the case. In a “small business case” (discussed below) the debtor may not need to file a separate disclosure statement if the court determines that adequate information is contained in the plan. 11 U.S.C. § 1125(f). The contents of the plan must include a classification of claims and must specify how each class of claims will be treated under the plan. 11 U.S.C. § 1123. Creditors whose claims are “impaired,” i.e., those whose contractual rights are to be modified or who will be paid less than the full value of their claims under the plan, vote on the plan by ballot. 11 U.S.C. § 1126. After the disclosure statement is approved by the court and the ballots are collected and tallied, the court will conduct a confirmation hearing to determine whether to confirm the plan. 11 U.S.C. § 1128.

In the case of individuals, chapter 11 bears some similarities to chapter 13. For example, property of the estate for an individual debtor includes the debtor’s earnings and property acquired by the debtor after filing until the case is closed, dismissed or converted; funding of the plan may be from the debtor’s future earnings; and the plan cannot be confirmed over a creditor’s objection without committing all of the debtor’s disposable income over five years unless the plan pays the claim

What is a Chapter 13 Bankrupcy? What does chapter 13 mean?

What is a Chapter 13 Bankrupcy? What does chapter 13 mean?

May 30, 2014 Mike Sperling Leave a comment

CH 13

A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.” (1) If the debtor’s current monthly income is greater than the applicable state median, the plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years. 11 U.S.C. §1322(d). During this time the law forbids creditors from starting or continuing collection efforts.

This chapter discusses six aspects of a chapter 13 proceeding: the advantages of choosing chapter 13, the chapter 13 eligibility requirements, how a chapter 13 proceeding works, making the plan work, and the special chapter 13 discharge.

  • Advantages of Chapter 13

Chapter 13 offers individuals a number of advantages over liquidation under chapter 7. Perhaps most significantly, chapter 13 offers individuals an opportunity to save their homes from foreclosure. By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time. Another advantage of chapter 13 is that it allows individuals to reschedule secured debts (other than a mortgage for their primary residence) and extend them over the life of the chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Finally, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 protection.

  • Chapter 13 Eligibility

Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $383,175 and secured debts are less than $1,149,525. 11 U.S.C. § 109(e). These amounts are adjusted periodically to reflect changes in the consumer price index. A corporation or partnership may not be a chapter 13 debtor. Id.

An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor’s willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy court to recover property upon which they hold liens. 11 U.S.C. §§ 109(g), 362(d) and (e). In addition, no individual may be a debtor under chapter 13 or any chapter of the Bankruptcy Code unless he or she has, within 180 days before filing, received credit counseling from an approved credit counseling agency either in an individual or group briefing. 11 U.S.C. §§ 109, 111. There are exceptions in emergency situations or where the U.S. trustee (or bankruptcy administrator) has determined that there are insufficient approved agencies to provide the required counseling. If a debt management plan is developed during required credit counseling, it must be filed with the court.

Can A Chapter 7 Trustee Hold a Case Open Indefinitely Waiting For Assets?

Can A Chapter 7 Trustee Hold a Case Open Indefinitely Waiting For Assets?

June 2, 2014 Mike Sperling Leave a comment

Well, not indefinitely, but if they are pursuing assets, a Trustee can keep it open as long as necessary.

There are limits, but in the above case there was a definite starting date for the loan repayment (albeit 3 years after the bankruptcy case was filed) and the rights to receive those payments existed prior to the Chapter 7 case being filed, so the Trustee was well within his/her rights to wait for the payments to begin, and take them directly from the ex-husband.

The key here is that this asset (i.e. the right to receive payments from the ex-husband) existed on the date the bankruptcy case was filed.

A trustee can also wait to see if property values increase after a bankruptcy case is filed, such as for real estate, to see if equity is created above any exemptions.  As a practical matter, most Trustees will file paperwork (known as a “no asset report”)  stating they have no interest in any of the assets if they don’t believe there will be sufficient value, even after waiting, to benefit the creditors.

Can the vacant land that abuts my lot be acquired through Adverse Possession?

Can the vacant land that abuts my lot be acquired through Adverse Possession?

June 9, 2014 Mike Sperling Leave a comment

Can the vacant land that abuts my lot be acquired through Adverse Possession?

Answer:  Most likely, but there are limited examples of real estate that are not subject to Adverse Possession claims.

Attorney Heney is an experienced Adverse Possession Attorney and has filed and defended several Adverse Possession Claims in the Massachusetts Land Court.  Recently, Attorney Heney was retained by a client with a unique title issue. The clients home was Recorded Land and the abutting property is Registered Land.  The home had clearly met all the requirements of an Adverse Possession, but was pre-empted from filing an Adverse Possession Claim because the subject property was Registered Land (Massachusetts Gen. L. c. 185, §51).  See below for a definition of Adverse Possession and other examples of types of Real Estate not subject to Adverse Possession claims.

Adverse Possession (Massachusetts):  Adverse Possession is “a method of acquiring complete title to land as against all others, including the record owner, through certain acts over an uninterrupted period of time, as prescribed by statute. It is usually prescribed that such possession must be actual, visible, open, notorious, hostile, under claim of right, definite, continuous [and] exclusive.”

Statutory Basis.
The statutory basis for adverse possession in Massachusetts is Mass. Gen. L. c. 260, §21, which provides for a twenty (20) year statute of limitations to recover possession of land.

Types of Real Estates over which there is no Adverse Possession.
There are certain types of real estates that are not subject to adverse possession claims. Some examples include (i) registered land (Massachusetts Gen. L. c. 185, §51), (ii) state highways (Mass. Gen. L. c. 81, §22), (iii) conservation land owned by non-profit corporations (Mass. Gen. L. c. 260, §21), (iv) land owned by the Commonwealth of Massachusetts and used for conservation or other public purposes (Mass. Gen. L. c. 260, §31), (v) land owned by the United States (United States v. Hato Rey Bldg. Co., 886 F.2d 448 (1st Cir. 1989)), (vi) land owned by railroads (Mass. Gen. L. c. 160, §88), and (vii) public burial grounds (Commonwealth v. Viall, 84 Massachusetts (2 Allen) 512 (1861)).

Preventing Adverse Possession.
A petition to register land interrupts or terminates adverse possession. Snow v. E. L. Dauphinais, Inc., 13 Massachusetts. App. Ct. 330 (1982). Note that the posting of a notice under Massachusetts. Gen. L. c. 187, §3 which is effective in preventing the acquisition of easements by adverse possession, has been held not to necessarily interrupt the period of adverse possession where the intent is to acquire complete ownership (fee simple) interest. Rothery v. MacDonald, 329 Mass. 238 (1952).

Insurability of Land Acquired Through Adverse Possession.
Title which is dependent on adverse possession is not insurable unless and until there is decree or judgment of a court of competent jurisdiction adjudging that the title is vested in the plaintiff. While a proposed insured may make a valid argument that his or her family has been in possession of the locus for the last fifty (50) years, nevertheless, adverse possession does not establish a marketable title.

When developing a condominium association do I need a site plan and unit plans?

When developing a condominium association do I need a site plan and unit plans?

June 27, 2014 Mike Sperling Leave a comment

In Massachusetts condominiums are governed by Massachusetts General Law Chapter 183A. Up until January 2008, all condominiums were required to have a condominium site plan prepared and recorded with the master deed at the time the condominium was created. After that date only properties that are in the Registered Land division (Land Court) are required to have a condominium site plan. Heney and Associates always defers to the Registered Land Division requirements.  Therefore, we recommend  that a condominium site plan be prepared for each new condominium. A condominium site plan can prevent problems with future owners in that it provided a visual record of what are the common areas, what are their uses, the locations of individual units and provides an overall image of the property that comprises the condominium.

Condominium floor plans are still required for each condominium unit. They are covered by MGL Ch.183A: Section 9, which reads as follows:

Section 9. Deeds of units shall include the following particulars:—

(a) An indication that the deed relates to a condominium and is subject to the provisions of this chapter. If the condominium relates to a lease which is submitted to the provisions of this chapter, the name of the condominium shall contain the word lease or leasehold and the deed or assignment or each unit shall indicate that the condominium relates to a lease.

(b) A description of the land as provided in section eight, or the post office address of the property, in either case including the book, page and date of recording of the master deed.

(c) The unit designation of the unit in the master deed and any other data necessary for its proper identification.

(d) A statement of the use for which the unit is intended and the restrictions, if any, on its use.

(e) The undivided interest appertaining to the unit in the common areas and facilities.

(f) Any further provisions which the grantor and grantee may deem desirable to set forth, consistent with the master deed and this chapter.

Condominium floor plans are used to identify the size, shape, total area of each individual unit and their relationship to other units and common areas. Condominium floor plans are usually ordered by real estate developers and not the public at large.

When do I need to review my estate plan?

When do I need to review my estate plan?

July 4, 2014 Mike Sperling Leave a comment

Although there’s no hard-and-fast rule about when you should review your estate plan, the following suggestions may be of some help:

  • You should review your estate plan immediately after a major life event
  • You’ll probably want to do a quick review each year because changes in the economy and in the tax code often occur on a yearly basis
  • You’ll want to do a more thorough review every five years

Reviewing your estate plan will not only give you peace of mind, but will also alert you to any other changes that need to be addressed.

There will be times when you’ll need to make changes to your plan to ensure that it still meets all of your goals. For example, an executor, trustee, or guardian may change his or her mind about serving in that capacity, and you’ll need to name someone else.

Other reasons you should do a periodic review include:

  • There has been a change in your marital status (many states have laws that revoke part or all of your will if you marry or get divorced) or that of your children or grandchildren
  • There has been an addition to your family through birth, adoption, or marriage (stepchildren)
  • Your spouse or a family member has died, has become ill, or is incapacitated
  • Your spouse, your parents, or other family member has become dependent on you
  • There has been a substantial change in the value of your assets or in your plans for their use
  • You have received a sizable inheritance or gift
  • Your income level or requirements have changed
  • You are retiring
  • You have made a change in your estate plan (e.g., you created a trust or executed a codicil to your will)

Or

Periodically I like to remind my clients to think about their estate plans and any changes that may be needed. But, unfortunately, not all estate planning attorneys follow this type of process. here’s a list of the top six reasons why you should consider updating your estate plan.

  1. Change in Marital Status

A change in your marital status will require significant changes to your estate plan. If you’ve recently married, then a whole new set of gift and estate tax planning opportunities have become available to you and your new spouse, including tenancy by the entirety, community property, Trusts, children and step children. Some of these new options will depend on if you own real estate and if children are involved. Or, if you’ve recently divorced, then your estate plan should be updated to insure that your former spouse is removed as a beneficiary and fiduciary and you’ll also need to update the beneficiary designations for your life insurance and retirement plans, including IRAs and 401(k)s, to insure that your spouse is removed there as well.

  1. Change in Financial Status

A change in your financial status will require significant changes to your estate plan. If you’ve recently won the lottery or received an inheritance, then you’ll need to reevaluate if your estate is taxable at both the state and federal levels and, if it is, then explore techniques that will minimize these taxes. You should also fund your winnings or inheritance into your Revocable Living Trust so that these assets won’t need to be probated. Aside from this, you should segregate your winnings or inheritance from your marital assets if you don’t want them snatched up in a divorce. On the other hand, if your estate has declined in value, then you should review your plan to insure that it still makes sense in view of your lower net worth.

  1. Birth,  Death or Change of Circumstances regarding a Beneficiary or Fiduciary

If a beneficiary or fiduciary named in your estate plan has died, then you should update your plan to remove the deceased person’s name. If you don’t, then years from now your Personal Representative or Successor Trustee will have to track down an original death certificate for the deceased person, and this can become time-consuming and costly. If your spouse has died, then your plan may need to take on a whole new structure. On the other hand, if you or a beneficiary has adopted or had a child, then you should review your plan to insure that the new child is, or perhaps isn’t, included. Suffice it to say that the birth or death of a beneficiary or fiduciary will most likely lead to significant changes in your estate plan.   Circumstances in your life or the beneficiaries or fiduciary’s life may change the manner in which they are treated in your estate plan.   While significant changes in your own life will require changes in your estate plan, so will changes in the lives of your beneficiaries or fiduciaries. If your children were minors when you initially set up your plan, then as they get older you should assess whether they’re ready to be named as your fiduciaries. If a beneficiary or fiduciary moves away or you simply lose touch with them, then you should reevaluate your plan to insure that your property is still going where you want it to go and that you’ve named the right fiduciaries. Suffice it to say that you should monitor the changes in the lives of your beneficiaries and fiduciaries to determine if these changes will have any affect on the goals and structure of your estate plan.

 

  1. Purchase or Sale of a Business

If you have recently purchased a business, then you should meet with your estate planning attorney to insure that your estate plan is structured properly to deal with the business if you become disabled or after you die, and also to put together a comprehensive business exit plan. On the other hand, if you’ve recently sold a business, then you should meet with your estate planning attorney to insure that your plan is properly structured now that you don’t own a business, that the sale proceeds are titled in the name of your Revocable Trust, and to determine if your estate is no longer, or has become, taxable. If it has become taxable, then you’ll need to figure out how the taxes will be paid as well as ways to minimize the estate tax bill.

  1. Moving to a New State

Moving to a new state is one of the most important reasons to update your estate plan by meeting with an estate planning attorney in your new state. Why? Because state laws dictate what estate planning documents need to include and how they need to be signed. The last thing that you want is for your estate plan that would have worked well in your old state to be declared ineffective or simply invalid in your new state because of one wrong provision or one missing signature. Aside from this, if you move from a state that imposes an estate tax to one that doesn’t, or vice versa, then your plan will need to be updated to take into consideration this change in the taxable status of your estate.

  1. Bankruptcy, Incarceration or Disability

If you, your spouse a beneficiary or fiduciary have suffered one of life’s unfortunate events you will need review your estate plan.

Should I Get Out of My Chapter 13 Plan Early?

Should I Get Out of My Chapter 13 Plan Early?

November 21, 2014 Mike Sperling Leave a comment

Chapter 13 plans may last from 36-60 months. This is a long period of time to be in an active bankruptcy, and it is not uncommon for clients to experience changes in their income over the duration of their plan.

I have had many clients inquire about the pros and cons of exiting a chapter 13 plan early. It may be in your best interest, but there are several factors to consider before you make such a decision.

You must be aware that if you have the means to pay off a plan early, you will need to clarify where you got the money to do so. To get out of the plan early, you have to file a motion with the court and serve it on all creditors. That is the easy part.

Issues may arise if any creditors object, which is certainly possible. If they object, the argument against early payoff would likely be that the creditors will lose the benefit of any potential increase in your disposable income over the life of your Chapter 13 plan. In other words, if you are allowed to complete the plan early, your creditors could lose the benefit of an increased plan payment if you have received a pay raise, bonus, inheritance, or decrease in expenses.

The creditors or the trustee may argue that these funds are property of your bankruptcy estate which should be used to increase your payment to creditors and not to shorten the duration of your Chapter 13.

This scenario is more likely to occur in plans where unsecured creditors are receiving only a nominal dividend. In cases where unsecured creditors are being paid back in full, it is not likely to be an issue.

If you have experienced fluctuations in your income or expenses during the life of your plan, you should contact your attorney to review the particulars of your circumstances.

US Supreme Court and Right to Rescind

US Supreme Court and Right to Rescind

March 12, 2015 Mike Sperling Leave a comment

I want to share a recent Supreme Court Case ruling with you.    The United States Supreme Court recently ruled on a case that turned on how broadly the borrower is entitled to interpret the right of cancellation of a residential mortgage loan under the Truth In Lending Act (“TILA”).

Background:
Plaintiffs Larry Jesinoski and Cheryle Jesinoski (“the Plaintiffs”) closed on a $611,000.00 residential mortgage refinance transaction on February 23, 2007. Exactly three years later, they mailed Bank of America Home Loans (successor to Countrywide Home Loans, Inc.) (collectively, “the Defendant”) notice of cancellation of the 2007 transaction, based on their argument that they had not received valid disclosures at their closing.

Defendant disputed the validity of Plaintiffs’ notice and refused to cancel the loan. Thereafter, on February 24, 2011, Plaintiffs filed suit against Defendant in Federal District Court seeking a declaratory judgment on the issue of the rescission, and also claiming monetary damages against the Defendant on the basis that the Defendant had violated the provisions of TILA.

Defendant maintained the position that Plaintiffs were unable to cancel the transaction due to their failure to file the lawsuit within TILA’s permitted three-year time period. Defendant was able to support its position by citing to a recently decided Eighth Circuit case, Keiran v. Home Capital, Inc., in which the court held that where validity of notice of cancellation is disputed, borrowers were obligated to commence legal proceedings within three years of closing in order to preserve their alleged right to cancel the transaction.

In its review, however, the Supreme Court relied on the statutory borrower rights under TILA (15 U.S.C. s. 1601, et seq.), beginning with s. 1635(a), which states that a borrower has the right to cancel a residential mortgage loan transaction “until midnight of the third business day following the consummation of the transaction” or the delivery of the proper notice of right to rescind disclosures, whichever is later, “by notifying the creditor … of his intention to do so.”

The Court also noted that s. 1635(f) described the borrower’s right to cancel as expiring “three years after the date of consummation of the transaction or upon the sale of the property, whichever comes first,” regardless of whether proper lender disclosure was ever given to the borrower.

While the Court acknowledged that other sections of the statute were worded in a way that seemed to imply litigation between borrower and lender, s. 1635(a) was worded unambiguously and obligated only notice to the lender in order to preserve the borrower’s right to cancel the transaction. Further, s. 1635(f) was silent as to how notice should be given and merely described the applicable time frame in which to do so.

Conclusion:
The Supreme Court reversed the Eighth Circuit and remanded the case (also overturning Keiran), agreeing with the borrower that TILA requires the borrower entitled to rescind only to provide notice of such cancellation to the lender within three years, regardless of whether the lender disputes the validity of the notice. There is no requirement to commence legal proceedings within the same time period.

What this means to the industry:
We need to make sure that we comply with statutory borrower rights under TILA (15 U.S.C. s. 1601,
et seq.), beginning with s. 1635(a), get the right to rescind executed and close the day the documents are dated.  As you know from working with my office. We pay attention to detail and do not back date documents.

The idea that a borrower of such a large sum of money could declare three years from closing that the transaction was void, is tough to reconcile. This case highlights how harrowing it can be for a real estate attorney who routinely close loan transactions, since it was evident from the Defendant’s arguments (or lack of argument) that the borrowers never did receive a proper statutory notice of their right to rescind at closing.  Not to mention the pressure to close loans with “back dated documents”.    Surely, every closing attorney has missed a borrower’s signature on a document at one point or another, or has discovered a problem with bank documents after a closing, and every closing attorney has been asked to close loans with back dated documents during the rescission period.  The good attorneys stand their ground and refuse to close with “back dated” documents. At the time, the mistake or “back dated documents”  may seem very minor in scope and harmless accommodation.  It is not minor.

However, given that the seemingly small misstep of failing to obtain the borrower’s signature on the notice of the right to rescind, or failing to have it acknowledged where required, could lead to severe consequences for both the lender and the closing attorney, it is worth reviewing your office’s procedure with respect to handling closing documents.

For instance, prior to closing, confirm that the lender’s list of loan documents corresponds to what the lender actually sends. Also, if there is a question as to whether the borrower’s loan falls within the scope of the TILA notice requirements, raise the issue with the lender and obtain confirmation. After the closing, have a second set of eyes review the signed documents before sending them back to the bank. Finally, after delivering a copy of the signed loan documents back to the borrower, confirm with the borrower that the notice was in the package that the borrower received. Following these basic steps and adopting other minor safeguards will help protect you from the enormous liability stemming from a single error in a closing.

 

U.S. Supreme Court Weighs in on Borrower Right of Rescission
Jesinoski et ux. v. Countrywide Home Loans, Inc., et al.
No. 13-684
(Decided January 13, 2015)

Why lenders and Closing Attorneys should be wary of mortgages executed under Power of Attorney?

Why lenders and Closing Attorneys should be wary of mortgages executed under Power of Attorney?

April 29, 2015 Mike Sperling Leave a comment

A recent Decision in the United States Bankruptcy Appellate Panel for the First Circuit, BAP No. MS 13-012, Steven Weiss, Chapter 7 Trustee, Plaintiff-Appellant v. Wells Fargo Bank, N.A., Defendant-Appellee has caused “notary hysteria” in some parts of the conveyancing community.

After a review of the Decision by members of the REBA Board, the belief is that the Court “got it right,” and the Decision has no impact on any instrument that is not executed under a Power of Attorney. The case continues to support the use of the Executive Order Notary format as compliant with the statutory requirement for acknowledgments.

In this case, the Mortgagors executed a Mortgage to Wells Fargo Bank pursuant to a Power of Attorney given to a representative of the Lender, LSI. The Trustee maintained that the acknowledgment suffered from “‘three fatal flaws’: (1) the use of the phrase “personally appeared,” when in fact it is undisputed the Debtors did not appear; (2) the failure to specify in the appropriate blank space the method by which the notary identified the signer (or signers) of the Mortgage; and (3) the failure to indicate whose free act and deed the notary
was verifying.”

The Court cited the seminal acknowledgment case in Massachusetts, McOuatt v. McOuatt, 69 N.E.2d 806, 810 (Mass. 1946): “[n]o particular words are necessary as long as they amount to an admission that [the grantor] has voluntarily and freely executed the instrument.”

The issue is not whether the language in the Executive Order format is sufficient to comply with the statutory requirement (which it clearly is), but whether it was clear that the mortgage was executed as the voluntary act of the mortgagors, rather than the voluntary act of their attorney in fact.

The Court states: “We agree with the Trustee’s third argument, however, namely that the foregoing language fails to unequivocally express that the execution of the Mortgage was the free act and deed of the principals, i.e., the Debtors, and that this flaw is, indeed, fatal. Here, the preprinted form utilized by the notary combined with her failure to attend to the blank space and the inapplicable verbiage creates ambiguity concerning whether the execution of the Mortgage was the voluntary act of the Debtors. Although the acknowledgment contains a recitation that the Mortgage was signed “voluntarily for its stated purpose,” we are left to speculate whether the voluntariness relates to the principals (the Debtors) or to the attorney-in-fact Obringer).

What is the proper way to execute and acknowledge a mortgage signed under power of attorney? See Masschusetts Land Court Guideline # 15. http://www.mass.gov/courts/docs/courts-and-judges/courts/land-court/guidelines-registered-land.pdf