Foreclosure: Deed in lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt. 

     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters: 

     1. Value of the property vs. the amount of the debt. 

     2. Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens. 

Bankruptcy: Plan Confirmation - Value of Vehicle

     In the case of In re: Rodnok the United States Bankruptcy Court at Richmond, Virginia, sustained a creditor's objection to the debtors' second modified Chapter 13 plan based upon the valuation of collateral. 

     In Rodnok the creditor, who had a Ford Aerostar van as collateral, filed a proof of claim stating the value as $13,075, which the debtors had not objected to. The debtors argued that the value of the van was already decided in the approved first modified plan to be $9,300, and that a redetermination was barred by the doctrine or res judicata. The creditor argued that the Court was not bound by the value determined in the first modified plan when it was determining approval of the second modified plan. 

     The Court stated that in determining whether a secured creditor should be bound to the value of its collateral as provided for in a confirmed Chapter 13 plan, the Court had to look at Bankruptcy Code §506 (a). This code section states that a claim is a secured claim to the extent of the value of the creditor's collateral and is unsecured as to the extent that the debt owed to the creditor exceeds the value of the collateral. Value of the collateral can be determined in any hearing concerning the disposition or use of the collateral or the confirmation of a plan affecting the secured creditor's interest. Bankruptcy Rule 3012 requires that notice of the hearing be given to the holder of the secured claim before a court may determine the value of that creditor's collateral. 

     In Rodnok the Court determined that the creditor was not provided the appropriate notice that the debtors were going to modify their secured claim, and therefore the creditor cannot be bound by the value assigned in the debtors' first modified plan, which was book value. 

     The Court found that the value of the van was $12,000. The creditor based its determination that the van had a value of $13,075 on the N.A.D.A. As evidenced by the certificate of title, the van came with numerous extras, adding to the overall value of the vehicle. The debtors claimed a deduction for excessive mileage, but the Court noted that at the first meeting of the creditors the debtors stated that the van had only 25,000 miles on it. Overall, the Court found that the value of the van more closely resembled that proposed by the creditor. Accordingly, the Court sustained the creditor's objection to the debtors' second modified plan. 

     The lesson of Rodnok, as it is in so many cases, is that creditors should retain the serves of counsel who has extensive experience in creditor representation.

Foreclosure: Deed in lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt. 

     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters: 

     · Value of the property vs. the amount of the debt. 

     · Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens. 

Bankruptcy: Retirement Plan Exemptions - IRA - SEP - Pension Plan in Chapter 7

     The United States Bankruptcy Court, in Alexandria, in the case of In re: Bissell, ruled that where a debtor has an IRA, an SEP and an ERISA-qualified pension plan, his exemption under Virginia Code §34-34 is computed without regard to the pension plans. The Bankruptcy Court rejected the creditor’s attempt to apply the value of the ERISA-qualified plan to the amount exempt under Virginia law, so as to wipe out the exemption for the IRA or the SEP and obtain an additional $71,538 for the bankruptcy estate.

     The debtor asserted that the maximum exemption allowable under Virginia Code §34-34 for his individual retirement account and his simplified employer plan was computed without regard to his ERISA-qualified pension plan. He aggregated the value of the IRA and the SEP and applied the maximum allowable under exemption, $52,955, against this amount. He acknowledged that since the IRA and SEP have a total value of $71,538.52, the excess over the maximum allowable exemption of the IRA and SEP, $18,583.52, was not exempt under Virginia Code §34-34. The ERISA-qualified pension plan does not form a part of the computation because it, unlike the IRA and SEP, is not property of the estate.
     The creditor asserted that the value of the ERISA-qualified pension plan must first be applied to the $52,955 amount exempt under Virginia Code §34-34. Since the pension plan had a value of $363,915.13, this method of computing the allowable exemption would exhaust the $52,955 exemption allowed under §34-34. There would be no exemption remaining available for the IRA or the SEP and the full value of the two accounts, $71,538.52, would be turned over to the trustee. 
     The Bankruptcy Court found that the creditor’s interpretation of §34-34 was contrary to the commonly accepted practice. The Bankruptcy Court ruled that the definition of “retirement plan” in Virginia Code §34-34 must be read narrowly to exclude ERISA-qualified pension plans. To hold otherwise would invoke federal preemption which would exclude ERISA-qualified pension plans in any event and possibly preempt the entire statute. It would frustrate the General Assembly’s intent to protect retirement plans.
     The Bankruptcy Court ruled that the Virginia General Assembly confronted the inherent problems in using §55-19 and spendthrift trusts to protect retirement plans. It sought for the first time to comprehensively remedy the problems and to provide greater and better protection for retiree’s pension plans, in particular ERISA-qualified pension plans. The General Assembly’s chosen route was the establishment of a uniform exemption for all retirees. The Supreme Court’s subsequent decision in Patterson v. Shumate changed one of the underlying assumptions of the General Assembly by definitively holding that ERISA-qualified pension plans were not property of the bankruptcy estate. Had the General Assembly intended to adhere to the uniform exemption for retirees, it could have easily amended Virginia Code §34-34 to expressly reduce the exemption of non-ERISA-qualified pension plans, such as IRAs and SEPs, that were covered by Virginia Code §34-34 by the amount of any ERISA-qualified pension plan excluded from the bankruptcy estate or exempt from creditors in a state court proceeding. It did not. It accepted that ERISA-qualified pension plans could be reached by neither bankruptcy trustees in bankruptcy nor creditors in state court and it expanded the exemptions available based, in part, on this premise. The 1996 General Assembly protected rollover contributions. In 1999, the General Assembly added Roth IRAs. With some restrictions, the 1999 amendment also placed IRAs, SEPs, and Roth IRAs on the same footing as 401 plans and other ERISA-qualified pension plans. This partially reduced the inequality between those plans, although it did not completely eliminate it. The Bankruptcy Court ruled that the creditor’s position in this case ran counter to the expanding protections provided by the General Assembly over the last decade and the judicial role of liberal construction of exemption statutes. Its implicit construction contracts the exemption and magnifies the very inequality the General Assembly sought to minimize.
     The Bankruptcy Court overruled the creditor’s objection to debtor’s claim of exemption. The amount of the exemption of the IRA and the SEP under Virginia Code §34-34 was computed without regard to the ERISA-qualified pension plan. The IRA and SEP were exempt in the aggregated amount of $52,955 plus any additional amount allowable under Virginia Code §34-4.

Foreclosure: Deed in Lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.

     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:
     A. Value of the property vs. the amount of the debt.
     B. Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.

Bankruptcy: Redemption - An Introduction

     In this and future blogs I will explore Redemption.
     In general. Bankruptcy Code §722 provides debtors with the right to redeem property. The redemption option is being exercised more often (as opposed to reaffirmation) because collateral loan balances are frequently much greater than the value of the underlying collateral, and, because redemption financing options are growing. The code states:
     [a]n individual debtor may, whether or not the debtor has waived the right to redeem under this section, redeem tangible personal property intended primarily for personal, family, or household use, from a lien securing a dischargeable consumer debt, if such property is exempt under section 522 of this title or had been abandoned under section 554 of this title, by paying the holder of such lien the amount of the allowed secured claim of such holder that is secured by such lien in full at the time of redemption.
     Financing options. In the past redemption has been rare, as what debtor in bankruptcy has the ability to raise money for a lump sum purchase price, and what lender would make such a loan? There is, however, an option available for debtors, and debtor attorneys are aware of it. The option is to borrow the redemption price from “specialized” lenders, such as the company called “722 Redemption Funding, Inc.” This company is based in Cincinnati, Ohio. The company has been in business for a number of years and has expanded into other states - Virginia is one of them. Once the loan is made, this company takes a non-purchase money security interest in the vehicle and has first priority since the debtor has redeemed from (and therefore extinguished) the lien if the prior lender. To add insult to injury, this company uses another Cincinnati company (Collateral Valuation Services, L.L.C.) to prepare a vehicle condition report in an effort to determine the lowest possible value for the vehicle. If you have yet to see redemption by this method, I am sure that you will see one soon.
     How do you value the collateral? This is a good question that does not always have a clear answer. To make it complicated, the method for determining redemption value differs in Chapters 7 and 13.
     To determine collateral value in Chapter 7 cases, the case law is clear that the retail value should be used. The law is not so clear, however, in Chapter 13 cases. In 2004 I tried two cases before Judge Tice in the United States Bankruptcy Court, Eastern District of Virginia, Richmond Virginia, involving this very issue. The debtors’ attorneys filed motions for redemption proposing to pay the trade-in value rather than the retail value. I objected to the motions, arguing that they were not proposed in good faith based upon these proposed values, and, that the creditors would be irreparably harmed. In doing the legal research it became clear that there was no preexisting Virginia decision controlling the decision, and that different states were taking different positions – some states use the wholesale value, some use the retail value, and, some use something other value determined by either an average of the two or utilizing other factors, such as the expected return to the creditor from a disposal of the collateral in a commercially reasonable manner. Of course I argued that it is unfair to place the entire burden and the risk of loss on the creditor, especially since it was the debtor who was in default! Ultimately, Judge Tice, having reviewed all of the tests applied across the country, wrote a detailed opinion. Judge Tice ruled that debtors should not be forced to redeem at retail valuation because the purpose of Bankruptcy Code §722 is to allow debtors to avoid having to pay the cost for replacing a vehicle. He ruled that a close approximation to the wholesale or liquidation value would be fair to creditors given the fact that creditors will save the cost of repossession and resale – that the redemption value should resemble an amount which the secured creditor would expect to recover upon the repossession and reasonable commercial disposition of the property.
      Since these decisions, the law has not become clearer. Judge Tice was presented with a similar issue in In re Hutchinson, where the court found that the fair redemption value was to be determined after considering the varying appraisals submitted. The court did not choose the trade in appraisal or the retail appraisal, but stated that debtors should not have been forced to redeem their car at a retail valuation (replacement value) of the property. Further, a close approximation to the wholesale or liquidation value was fair to the creditor in light of the fact that the repossession and resale costs would not have been incurred in light of the redemption. The court held that the redemption value should resemble an amount which the secured creditor would expect to recover upon repossession and reasonable commercial disposition of the property. The fair redemption value ultimately was determined to be a value between the trade in appraisal and the retail appraisal.

Foreclosure: Deed in lieu of Foreclosure

     In certain cases it may be more practical for the lender to seek or accept from the borrower a deed in lieu of foreclosure rather than incur the expense of foreclosure – this is at the lender’s discretion. If the lender agrees, in return for voluntarily surrendering the property, the borrower will seek either partial or complete satisfaction of the debt.
     Considerations. Before accepting the deed in lieu of foreclosure, the lender must consider many matters:
     1. Value of the property vs. the amount of the debt.
     2. Other debts on the property. A deed in lieu of foreclosure does not extinguish prior or junior liens or encumbrances. Thus the lender, in accepting the deed, accepts the property with the liens. It is possible for the lender to structure the deed in lieu of foreclosure so that it does not release the deed of trust so as to preserve a future foreclosure to extinguish subordinate liens.