Foreclosure, Bankruptcy & Creditors' Rights: Mean Streets Complex Closing Stories

2. Foreclosures, Bankruptcy & Creditors’ Rights in the Mean Streets Complex Closing StoriesPart I

3. The effect of a foreclosure is: Foreclosure To extinguish interests of borrower/owner and most junior lien holders

4. Foreclosure DOES NOT extinguish: Foreclosure • 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!

5. 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)

6. 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.

7. 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.

8. 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.

9. 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.

10. EFRP - File with AOC Within 3 days of sending Notice Certain information with respect to borrower and loan AOC to create database Emergency Foreclosure Reduction Program “EFRP”

11. Commissioner of Banks to review Commissioner selects loans appropriate for foreclosure avoidance efforts Commissioner may extend foreclosure filing date up to 30 days Emergency Foreclosure Reduction Program “EFRP”

12. 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 “EFRP” Certification

13. 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 More “EFRP”

14. Best Practice Pointer Foreclosing parties submit information on all loans to AOC Can obtain a “Non-Subprime Loan Certificate” “EFRP” Best Practice!!

15. High Scrutiny Ripe for duress Courts look for conveyances by grantors’ own free will for adequate consideration (debt forgiveness is not per se adequate) Deeds in Lieu of Foreclosure

16. Best Practice Pointer 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 Deeds in Lieu of Foreclosure

17. Affidavit of Grantor req’d by title insurer. Deeds in Lieu of Foreclosure

18. Intervening Matters Junior DT’s, judgments, claims of lien NOT cut off by deed in lieu Must be cancelled/satisfied Deeds in Lieu of Foreclosure

19. 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?????? Deeds in Lieu & Bankruptcy

20. At lender’s 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… Deed in Lieu with a Twist? continued

21. Bankruptcy court will focus on consideration to the grantor So long as debt is being forgiven by parent lender, the conveyance should pass muster. Deed in Lieu with a Twist?

22. 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-debtor’s property Bankruptcy &Local Transfer Taxes

23. § 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 BankruptcySales Free & Clear

24. 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 BankruptcyDeposits by Contract Purchasers

25. 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? BankruptcyDeposits by Contract Purchasers

26. 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? Loan Workouts

27. 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 Loan WorkoutsALTA 11

28. Requirements for an ALTA 11: Recordation of satisfactory modification agreement; AND Update on attorney’s certification of title (including any amendments, modifications, assignments or other matters affecting the insured deed of trust) Loan WorkoutsALTA 11

29. Novation Do any intervening matters (even potential intervening matters) exist Do changes create a novation? What becomes of priority??? Loan WorkoutsALTA 11

30. 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 Loan WorkoutsNovations Continued

31. 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 Loan WorkoutsNovations Continued

32. 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. Loan WorkoutsNovations Continued

33. 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 Loan WorkoutsNovations Continued

34. Best Practice Pointer 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 company’s consent in advance (endorsement) Loan Workouts & Title Policies

35. 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 Cram Downs and Lien Stripping

36. 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 Creditors’ Rights and Title Coverage

37. 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 Creditors’ Rights

38. 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 it’s business Creditors’ RightsFraudulent Transfers

39. 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” Creditors’ RightsPreferences

40. 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] Creditors’ RightsTitle Coverages

41. 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 Creditors’ RightsALTA 21-06 Endorsement

42. 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) Creditors’ RightsALTA 21-06 Endorsement

43. 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 Creditors’ RightsALTA 21-06 Endorsement

44. Use of Funds as a factor: How are the funds being used? Acquire or improve borrower’s property Disbursement to shareholders, members… Repayment of loans (institutional or individual investors) Creditors’ Rights

45. 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 Creditors’ RightsALTA 21-06 Endorsement

46. Based on our fact pattern: Owner’s coverage at the time Uptown Condos acquires the property: Demonstrate that the transaction is “arms-length” and for fair market value Creditors’ Rights

47. Based on our fact pattern: Lender’s 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 Creditors’ Rights

48. Based on our fact pattern: Lender’s 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 - Uptown’s financial difficulties may offset the structure. Unrecorded loans – more information needed Cash-out is an issue Creditors’ Rights

49. Based on our fact pattern: Lender’s 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. Creditors’ Rights

50. Based on our fact pattern: Lender’s 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). Creditors’ Rights