Glass & Goldberg | Financing, Property & Bankruptcy Law

Wells Fargo, the nation’s largest mortgage lender, has announced that it will pay $1.2 billion to settle claims that it misclassified some FHA loans as qualifying for federal insurance when they did not, and failed to inform housing regulators about the misclassification prior to filing insurance claims.

Wells Fargo reached the agreement with the U.S. Department of Justice, the U.S. Attorney’s offices for the Southern District of New York and Northern District of California, and the Department of Housing and Urban Development for civil claims regarding the bank’s FHA lending program from 2001 to 2010. The agreement settles a suit filed by the DOJ in October 2012 seeking damages and civil penalties under the False Claims Act.

Prosecutors alleged that Wells Fargo issued thousands of FHA loans that did not meet program requirements for minimum incomes and credit scores for borrowers. The government said that when the loans went bad, Wells Fargo kept the problem loans a secret while collecting insurance payments for defaults. According to the DOJ lawsuit, the bank’s internal review identified more than 6,500 problem loans, but only 238 of those problem loans were reported.

In 2014, JPMorgan Chase and Bank of America agreed to settlements of $614 million and $800 million respectively in connection with their FHA loan programs.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) has ruled that the absolute priority rule — which requires debtors to pay dissenting creditors in full before they can retain pre-petition property — applies to all individual Chapter 11 bankruptcy reorganizations.

In Zachary v. California Bank & Trust, debtors David Zachary and Annmarie Snorsky filed a joint Chapter 11 bankruptcy petition in 2011, listing $1.6 million in assets and $1.2 million in liabilities. In 2012, they filed an amended reorganization plan that would allow them to keep their primary residence as well as a rental property in Lake Tahoe. Their largest creditor, California Bank & Trust, objected to the amended plan, saying it violated the absolute priority rule.

In a departure from the Ninth Circuit’s 2012 ruling in In re: Friedman — which held that a 2005 Bankruptcy Code amendment to the priority rule allowed Chapter 11 debtors to retain all their property — the bankruptcy court sustained the bank’s objection. Zachary and Snorsky appealed to the Ninth Circuit, which upheld the bankruptcy court’s ruling.

In its January 28, 2016, ruling, the Ninth Circuit made note of the different judicial applications of the absolute priority rule since the 2005 amendments to the Bankruptcy Code. A majority of courts have taken a narrow view, while a few have taken a broad view of the rule. At issue was the joint interpretation of Section 1115, which expanded a Chapter 11 debtor’s estate to include property acquired post-petition, and Section 1129(b)(2)(B)(ii), which provides that individual Chapter 11 debtors may retain property included in the estate under Section 1115.

The majority of courts that have taken a narrow view have interpreted Sections 1115 and 1129(b)(2)(B)(ii) to allow individual Chapter 11 debtors to retain only that property which was acquired post-petition. The Ninth Circuit concurred with the narrow view, holding that individual Chapter 11 debtors may not retain pre-petition property when creditors are not fully paid. In doing so, the Ninth Circuit joined the Fourth, Fifth, Sixth and Tenth Circuits in adopting the narrow view of the absolute priority rule.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) has ruled that debts discharged in a prior Chapter 7 bankruptcy cannot be included when determining a debtor’s eligibility for Chapter 13 relief.

The case — In re Free — involved debtors whose home was valued at $425,000 in their Chapter 7 schedules. The home secured three debts that totaled more than $900,000. The first lien holder was owed more than the value of the home. After receiving a Chapter 7 discharge, the debtors sought to strip off the two unsecured subordinate liens by filing Chapter 13.

The Chapter 13 trustee moved to dismiss the case, contending that the two unsecured subordinate liens should be included in determining eligibility, which would make the debtors ineligible for Chapter 13 relief. The bankruptcy court sided with the trustee and dismissed the case. The debtors appealed.

Upon appeal, the Ninth Circuit BAP considered the definitions of “debt” and “claim” in section 101 of the Bankruptcy Code. The BAP found that since debt is defined as liability on a claim, and claim is defined as a right to payment, “there is no ‘unsecured debt’ unless a creditor has the ‘right to payment’ on an unsecured basis.”

The result of the debtors’ Chapter 7 discharge, the BAP reasoned, was that they no longer had personal liability for the unsecured subordinate liens. Therefore, the liens could not be included in determining the debtors’ eligibility for Chapter 13 relief.

The BAP also addressed two prior U.S. Supreme Court decisions in Chapter 13 lien stripping efforts by debtors: Dewsnup v. Timm and Bank of America v. Caulkett. In Dewsnup, the Court held that a Chapter 7 debtor couldn’t strip down a partially unsecured lien to the value of the collateral. In Caulkett, the Court extended its Dewsnup holding to wholly unsecured junior liens.

The BAP noted that, since those two decisions, litigants have argued debtors that first file Chapter 7 and receive a discharge and then file Chapter 13 to strip off remaining claims are acting in bad faith. The BAP said that it refused to consider this issue since it was not raised in the appeal, but said that such an argument should be raised by filing a motion to dismiss a Chapter 13 filing as a bad faith filing, not to determine the eligibility of a debtor to file for Chapter 13 relief.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The Tenth Circuit Bankruptcy Appellate Panel (“BAP”) recently affirmed a bankruptcy court’s approval of a settlement agreement between a foreclosing lender and Chapter 7 trustee despite the objections of the debtor.

In In re Lisa Kay Brumfiel, U.S. Bank initiated foreclosure proceedings against borrower Brumfiel, who had defaulted on her mortgage loan. Brumfiel argued that she was not obligated to pay because the promissory note had been improperly assigned to U.S. Bank. Brumfiel filed a Chapter 7 bankruptcy petition and received her personal discharge after her case was deemed a “no asset” bankruptcy. Brumfiel then filed a wrongful foreclosure action against the bank in federal district court, which temporarily halted the non-judicial foreclosure. The lender then filed a judicial foreclosure action.

The federal court ruled it was the bankruptcy estate, not the debtor, which had standing to pursue the claims alleged in the debtor’s complaint. Brumfiel appealed the order and also reopened her bankruptcy case. In an effort to get rid of the debtor’s claims, the Chapter 7 trustee filed a motion to abandon the claims on behalf of the estate. However, the bank objected to this. The trustee then agreed to accept $10,000 to settle the claims. Brumfiel appealed, arguing that the trustee had abandoned her claims.

In its ruling, the Tenth Circuit BAP found that the Brumfiel’s claims could not have been abandoned because they were not included on her original Chapter 7 petition. As to Brumfiel’s argument that the settlement order was void because the bankruptcy court did not have jurisdiction, the BAP said that “by statute the Bankruptcy Court has ‘exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of [the] case, and the property of the estate.’  Once Debtor filed her [Chapter 7 Petition], she could not divest the bankruptcy court of jurisdiction over property of the bankruptcy estate simply by filing claims against the lender in other courts.  Additionally, subsequent to Debtor’s appeal to this Court of the Bankruptcy Court’s Order Approving Settlement Agreement, both the appeal pending before the Colorado Court of Appeals and the appeal pending before the Tenth Circuit were decided.”

In addition, the court noted, “A bankruptcy court’s order approving a negotiated settlement is entitled to deferential review, and this Court can only reverse the Order Approving Settlement if there has been an abuse of discretion.  Debtor points to no specific finding or conclusion in the bankruptcy court’s analysis that constitutes error, and we see none.”

The BAP concluded that the bankruptcy court had jurisdiction to approve the settlement agreement between the foreclosing lender and the trustee.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The U.S. Court of Appeals for the Ninth Circuit has ruled that a Chapter 7 debtor’s life insurance policies are “an interest of the debtor” in property and cannot be excluded from the bankruptcy estate.

In a decision that affirmed a district court ruling, the Ninth Circuit agreed that the bankruptcy trustee could recover the market value of the life settlements from the banks that purchased them — assets that the debtor failed to report in his bankruptcy filing.

The case — Gladstone v. U.S. Bancorp — involved a Chapter 7 debtor, David Green, who filed his bankruptcy petition in 2007. In that petition, he failed to disclose several assets, including three life settlements that were purchased by U.S. Bank and Coventry First for $507,000. Five months after filing bankruptcy, Green died and the banks collected $9 million in death benefits.

The Chapter 7 trustee instigated an adversary proceeding against the banks to recover the life settlements as fraudulent transfers. The bankruptcy court granted the banks’ motion for summary judgment and the trustee appealed. A district court reversed the bankruptcy court’s judgment. The banks appealed to the Ninth Circuit, which upheld the district court.

The question before the Ninth Circuit was whether “the debtor’s interests in the term life insurance policies, including the secondary market value of the policies and resulting life settlements, constitute a recoverable ‘interest of the debtor in property’” under the law. The district court had ruled properly that they are, the Ninth Circuit said:

“In short, all equitable and legal interests that the debtor has when the bankruptcy petition is filed become property of the estate, unless excluded by statute or properly exempted by the debtor. If no exclusion or exemption applies, or if the debtor has failed to claim qualifying property as exempt, then the debtor’s interest in the property remains property of the bankruptcy estate.”

The banks had argued that the life settlements were exempt because California has opted out of the federal exemption schedule — an argument that the Ninth Circuit said was “dubious, at best” since Green did not claim them as exempt in his bankruptcy petition and the banks lack standing to raise the issue.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

In a unanimous decision, the California Supreme Court has ruled distressed homeowners that engaged in lender-approved short sales prior to 2010 — when the state enacted an anti-deficiency law for short sales — are entitled to anti-deficiency protection and cannot waive that protection.

The case — Coker v. JP Morgan Chase — involved condo owner Carol Coker, who purchased her San Diego area condo in 2004 with a $452,000 loan from JP Morgan Chase. Several years later, Coker defaulted on her loan and Chase began foreclosure proceedings in March 2010. The bank agreed to allow Coker to sell the condo for $400,000 in a short sale if she remitted all proceeds to Chase and agreed to be responsible for any deficiency. After she sold the condo and paid Chase, the bank demanded she pay the balance remaining on her loan, a total of $116,686.

California’s anti-deficiency law (Cal. C.C.P. § 580b) did not address short sales when Coker’s condo was sold. Anti-deficiency protection was extended to short sales in 2010 (Cal. C.C.P. § 580e). Chase argued that the anti-deficiency statute did not apply here because short sales are not involuntary like a foreclosure.

However, the state high court disagreed, finding that the anti-deficiency statute applies to all sales of property acquired with a purchase money mortgage. In addition, the court held that anti-deficiency protection could not be waived.

“For more than half a century, this court has understood the statute to limit a lender’s recovery on a standard purchase-money loan to the value of the security,” the court said, noting that a short sale, “like a foreclosure sale, allowed Chase to realize and exhaust its security” in the property.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

The U.S. Court of Appeals for the First Circuit has vacated a Securities and Exchange Commission (SEC) order that imposed sanctions against two State Street Bank and Trust Co. executives, saying that the SEC had abused its discretion in assessing liability to the two bankers.

In Flannery v. SEC, the SEC brought charges against State Street Bank and Trust Co. executives James D. Hopkins and John P. Flannery for allegedly misleading investors regarding an unregistered fund managed by the bank, the Limited Duration Bond Fund. The fund, which was offered solely to institutional investors, included mostly asset-backed securities and had underperformed substantially beginning in mid-2007 amid the subprime mortgage crisis.

After a hearing on the matter, an SEC administrative law judge (ALJ) dismissed the complaint, find that the documents at issue did not include misleading or materially false statements and that neither Hopkins or Flannery were responsible for the documents.

The SEC appealed to the Commission, which reversed the ALJ’s decision and imposed sanctions on Hopkins and Flannery that included suspending them from any association with an investment adviser or company for one year as well as monetary fines. In making its ruling, the Commission relied on a slide presentation Hopkins made to an investor in the fund that included a slide entitled, “Typical Portfolio Exposures and Characteristics—Limited Duration Bond Strategy.” The slide, one of 20 or more, showed ABS allocation at 55% when the actual fund’s investment in ABS was almost 100%. The Commission found this particular slide to be misleading.

Hopkins and Flannery appealed the Commission’s finding to the First Circuit. In reviewing the slide in question, the First Circuit found that “context makes a difference,” and noted that the slide was only one in 20 and that the fund’s actual allocation was readily available to investors through other documents. The court also found expert testimony that a typical investor would not rely solely on a slide presentation persuasive.

In addition, the court noted that there was no testimony from actual investors in the fund to support the Commission’s findings of materiality. The court vacated the SEC order against Hopkins and Flannery, saying the SEC failed to meet its burden of proof.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Last month, the U.S. Supreme Court reversed a California state court’s refusal to enforce a contract’s arbitration clause that included a class action waiver, finding that the California decision was a violation of the Federal Arbitration Act.

In DirecTV Inc. v Imbrurgia, two DirecTV customers filed suit against the company in California, saying that DirecTV’s early termination fees violated California law. A provision in DirecTV’s customer agreement required that all disputes be handled through binding arbitration and prohibited the consolidation of any claims in arbitration. However, the agreement also stated that the arbitration provision would be unenforceable if the “law of your state” voided the prohibition against class arbitration.

DirecTV sought to compel arbitration on the grounds that the U.S. Supreme Court’s landmark 2011 decision in AT&T Mobility LLC v. Concepcion — which found that the FAA preempts all state-law rules that prohibit arbitration of a specific type of claim — superseded California law.

A California trial court denied DirecTV’s motion to compel arbitration, and the California Court of Appeal affirmed. DirecTV appealed to the California Supreme Court, which denied discretionary review, and then to the U.S. Supreme Court.

The issue before the high court was whether California law made class action waivers unenforceable. Since the court’s Concepcion ruling had already pre-empted a 2005 California Supreme Court decision in Discover Bank v. Superior Court that class action waivers in consumer contracts were unenforceable, the Supreme Court ruled 6-3 that DirecTV’s arbitration clause was valid and that the class action waiver was enforceable.

The Court noted that, “the view that state law retains independent force even after it has been authoritatively invalidated by this Court is one courts are unlikely to accept as a general matter and to apply in other contexts.”

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

A recent opinion from the Seventh Circuit Court of Appeals that the Bank of New York Mellon Corp. should be treated as an unsecured creditor for a $312 million loan it made to bankrupt Sentinel Management Group serves as a cautionary tale to lenders to investigate red flags.

The case — In re Sentinel Management Group, Inc. — concerns cash management firm Sentinel, which invested money lent to it by its customers in liquid, low-risk securities. Sentinel also borrowed funds from Bank of New York and Bank of New York Mellon Corp. to trade on its own account. As collateral, Sentinel pledged the securities it had purchased for its customers. This violated federal law as well as Sentinel’s own customer agreements.

Sentinel filed Chapter 11 bankruptcy in 2007, and BNY Mellon asserted a secured claim for $312 million. When BNY Mellon notified the bankruptcy trustee that it planned to liquidate the collateral pledged for the loan, the trustee instituted an adversary proceeding alleging that the transfer of the customers’ securities as collateral for the loan was a fraudulent transfer intended to defraud current or future creditors. A district court found for Sentinel without additional findings of fact, ruling that the company did not intend to defraud its creditors.

On appeal, the Seventh Circuit partially reversed the district court ruling, saying that the lower court should have ascertained if the bank had knowledge that would lead a reasonable person “suspicious enough to conduct a diligent search for possible dirt.” In reviewing the record, the appeals court found evidence that the bank should have put Sentinel on inquiry notice. Nevertheless, the court affirmed the district court’s refusal to subordinate the bank’s unsecured claim because the bank’s “negligence” was not “an adequate basis for imposing equitable subordination.”

The case has been returned to the lower court for further proceedings.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.