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Banking & Finance Law Report

Ohio Supreme Court Confirms That A Foreclosure Plaintiff May Submit Proof Of Standing Subsequent To Filing The Complaint

Posted in Collection and Foreclosure, Real Estate

In what most pundits agreed would be a swift reversal, the Ohio Supreme Court did in fact unanimously reverse the Ninth District Court of Appeals in Wells Fargo Bank, N.A. v. Horn, Slip Opinion No. 2015-Ohio-1484, a 20-paragraph decision that helps to explain a sometimes-misunderstood line from Schwartzwald.

In Horn, Wells Fargo filed the foreclosure complaint on its behalf as “successor by merger to Wells Fargo Home Mortgage, Inc. fka Norwest Mortgage, Inc.”  Both the note and the mortgage identified Norwest Mortgage as the lender and the Horns as the borrowers.  The Horns, first acting pro se and later with the assistance of counsel, defended against the complaint and Wells Fargo’s ensuing motion for summary judgment by asserting that Wells Fargo was not the real party in interest and lacked standing.  Wells Fargo then submitted the affidavit of a “Default Litigation Specialist” employed there, who averred that in 2000, Norwest Mortgage, Inc. had changed its name to Wells Fargo Home Mortgage, Inc., that Wells Fargo Home Mortgage, Inc. had later merged into Wells Fargo, and that Wells Fargo was the holder of the note and mortgage at the time it filed the complaint.  The trial court granted Wells Fargo’s motion for summary judgment and issued a decree of foreclosure in Wells Fargo’s favor.  The Horns appealed, but did not challenge the trial court’s conclusion on standing grounds.  Nevertheless, the Ninth District sua sponte considered the issue of standing.  Seizing on the language in Schwartzwald that standing is “determined as of the filing of the complaint,” 134 Ohio St.3d 13, 2012-Ohio-5017, 979 N.E.2d 1214, ¶ 3, the court of appeals held that a plaintiff in a foreclosure action must attach to its complaint documents that prove that it has standing at the time the complaint is filed.  Because Wells Fargo had failed to attach such proof to its complaint, the Ninth District held that Wells Fargo lacked standing and remanded the case to the trial court to dismiss the complaint without prejudice.

After accepting Wells Fargo’s discretionary appeal, the Supreme Court agreed with various decisions from other courts of appeals holding that proof of standing may be submitted subsequent to filing the complaint.  The Court confirmed that Schwartzwald does not require proof of standing at the time of filing.  Further, because Ohio is a notice-pleading state, the Court reasoned, at ¶ 13, that “[t]o require a plaintiff to attach proof of standing to a foreclosure complaint would also run afoul of Ohio’s notice-pleading requirements.”  Therefore, the Court held that although the plaintiff in a foreclosure action must have standing at the time suit is commenced, proof of standing may be submitted after the filing of the complaint.  Horn should end the spate of erroneous sua sponte dismissals at the pleadings stage, particularly by trial courts within the Ninth District, which have perplexed foreclosure litigators for some time.  Horn affirms that the accepted and proper practice is for a merged plaintiff to prove standing—at the summary judgment stage—by submitting an affidavit, together with proof that it has succeeded to the rights of its predecessors.  Nevertheless, in situations analogous to Horn, it remains good practice to allege in the complaint that the plaintiff is the successor by merger to the original payee of the promissory note.

Volcker Alliance Report Ignores Community Banks (For The Most Part)

Posted in Bank Regulation

There is much to like in the recently released report of the Volcker Alliance.  Unfortunately, however, there is little discussion of those banking institutions commonly referred to as community banks.

At roughly the same time last month, the Independent Community Bankers Association of America highlighted in a press release the importance of community banks in helping small businesses gain financial stability.  The release said there are roughly:

6,000 community banks, including commercial banks, thrifts, stock and mutual savings institutions. Assets may range from less than $10 million to $10 billion or more. Across the nation, community banks operate 52,000 locations, employ 700,000 Americans and hold $3.6 trillion in assets, $2.9 trillion in deposits and $2.4 trillion in loans to consumers, small businesses and the agricultural community.

The relative unimportance of the community banking industry, notwithstanding employment of roughly 700,000 people, to those who prepared the Volcker Alliance report on regulatory reform suggests just how concentrated in large banking organizations the financial services industry has become following the Great Recession.  The draftsmen just had bigger fish to fry.

Implementation of the Volcker Alliance report’s recommendations would benefit community banks in two main ways.  First, the role of the Federal Reserve as the primary banking industry regulatory would be clarified and limited to monetary policy and the drafting of financial regulations. Second, and perhaps most significant, regulatory consolidation would result in one supervising regulatory agency referred to in the report as the PSA (Prudential Supervisory Agency).  All of the supervisory functions of the FDIC, the OCC and the Federal Reserve would be combined into the PSA.

And the PSA would have a special division for the regulation of “true” community banks.  The report fails however to say what it means by the term “true.”  At note 16, the report correctly notes, as one example of the inconsistency of the current regulatory framework, that community banks are defined differently by Federal Reserve, the OCC and the FDIC.

Notwithstanding the foregoing, the report, which is available at www.volckeralliance.org, is worth a review if only to deepen your understanding of the current regulatory framework which the report persuasively demonstrates is in need of simplification and re-organization.  It is policy research at a very high level.

Another recent study examines more thoroughly the nature of community banking within the context of the current regulatory environment:  Lux and Greene, The State and Fate of Community Banking,  Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government (February 2015) (Associate Working Paper No. 37), available at http://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp37.  Among other conclusions of this study:

Our findings appear to validate concerns that an increasingly complex and uncoordinated regulatory system has created an uneven regulatory playing field that is accelerating consolidation for the wrong reasons.

Id. at 3.

The dawn of .sucks — protecting your brand

Posted in Intellectual Property

Our colleagues at Porter Wright’s Technology Law Source blog have watched the launch of hundreds of new generic top-level domains (gTLDs) through the past several months. Introduced to increase competition in the domain name market, and enhance the Internet’s stability and security, these new gTLDs are projected to change the face of the Internet and how we use it. Today, our attorneys share an article that should be of interest to anyone with a recognizable brand: The .sucks gTLD entered its sunrise period. What does that mean? If unclaimed, brand owners could wake up to a full-fledged — and completely legal — gripe site come September. Read more

FDIC Guidance on Brokered Deposits

Posted in Bank Regulation, Community Banking

Late last year, the FDIC released guidance on brokered deposits in the form of a series of frequently asked questions and answers (FAQs).  The guidance is available here: https://www.fdic.gov/news/news/financial/2015/fil15002a.pdf

The ostensible purpose of the guidance is to collect previously scattered views on various questions related to two primary subjects: what are brokered deposits and how they should be reflected on bank call reports. Brokered deposits impact assessments for deposit insurance.  For some institutions, the FAQs may have little impact but for others the FAQs will be important and required reading.

Although the FDIC called the release “guidance,” some commentators have suggested the material contains the first expression by the agency on a number of issues, including in particular further discussion on an important exception to the definition of deposit broker, the so-called “primary purpose exception” discussed below.

The basic regulation of brokered deposits has been clear for some time. Under Section 29 of the Federal Deposit Insurance Act, a brokered deposit is any deposit obtained through a deposit broker. So the definition of deposit broker is critical.  Essentially, the term means any person engaged in the business of placing or facilitating the placement of deposits of third parties with insured depository institutions. There are a number of specific exceptions however.

Under the current deposit broker regulatory scheme, only a bank that is “well capitalized” may accept, renew or rollover broker deposits. See 12 C.F.R. §337.6. “Adequately capitalized” financial institutions can do so if they have been granted a waiver by the FDIC. “Undercapitalized” banks may not do so and the FDIC is not authorized to grant waivers. Accordingly, a change from well capitalized to adequately capitalized, means that brokered deposits, if present in the insured financial institution, may not be increased.

The FAQs address to a number of frequently emphasized points: 1) the definition of deposit broker is broad; 2) the overuse of brokered deposits and the improper management of broker deposits have contributed to bank failures; 3) the term “placing deposits” and “facilitating the placement of deposits,” which are key to the definition of deposit broker, must be considered carefully in light of the rise of deposit design firms and reciprocal deposit placement firms; and 4) referring clients to a bank, activities common for insurance agents, lawyers and accountants, makes those referral sources potentially deposit brokers if they are facilitating the placement of deposits.

One exception to the definition of deposit broker discussed at length in the FAQs is the so-called “primary purpose exception.” Under the applicable regulation, an entity is not a deposit broker if its primary purpose is not the “placement of funds with depository institutions.” The FDIC has noted this exception is governed by the intent of the third party. If its primary purpose is to promote another goal than the placement of deposits, then that entity is not a deposit broker. The distinction is sometimes hard to fathom. For example, a retail store that sells and distributes general purpose pre-paid cards are not covered by the primary purpose exception even though they are obviously engaged in a business activity (retail sales) other than the placement of insured deposits.

Consider your nearby college.  If a college identification card provides access to funds in a bank account, is the card distributor, i.e. the college, a deposit broker? The answer is maybe. The FAQs indicate the FDIC will consider three factors: 1) the stated purpose of the college in distributing and marketing the debit cards, 2) features of the card, such as whether the card is reloadable and whether the card will provide access to a permanent account at an insured depository institution and 3) the compensation received by the college from the bank for distributing the cards. If these three conditions are present, the FAQs indicate the college would be a deposit broker, and accordingly, the deposits would be brokered deposits.

On the other hand, corporations that distribute pre-paid cards to part of a rebate program are not considered to be deposit brokers. In this case, the access device, the pre-paid card, is considered by the FDIC to be no different than the distribution of rebate checks.

The depth and detail of the FAQs make it required reading for those bankers who have – and those who may have — brokered deposit positions.

 

The Modernization of Ohio’s Receivership Statute

Posted in Collection and Foreclosure, Commercial Law, Ohio Law, Real Estate

I.  Introduction

Effective March 23, 2015, Ohio’s antiquated receivership statute (Ohio Rev. Code Chapter 2735) will be modernized, particularly as it relates to the appointment of a receiver in commercial mortgage foreclosures and the ability of a receiver to sell real estate free and clear of liens.

 II.  Appointment of a Receiver

Previously, commercial mortgagees were a bit hamstrung because only two of Ohio Rev. Code Section 2735.01’s provisions for appointment of a receiver typically potentially applied, Section 2735.01(B) (“In an action by a mortgagee, for the foreclosure of his mortgage and sale of the mortgaged property, when it appears that the mortgaged property is in danger of being lost, removed, materially injured, or that the condition of the mortgage has not been performed, and the property is probably insufficient to discharge the mortgage debt”) and Section 2735.01(F) (“In all other cases in which receivers have been appointed by the usages of equity”).  In situations where it was unclear whether the property was worth less than the unpaid mortgage balance, some courts struggled with the decision of whether to appoint a receiver, even in cases where the borrower agreed in the mortgage to appointment of a receiver upon the occurrence of an event of default and without regard to the value of the property.  Although in recent years many courts used such contractual language to hold that the borrower waived the operation of Section 2735.01(B)’s valuation requirement, and many courts appointed receivers pursuant to Section 2735.01(F) in instances where the mortgage called for the appointment of a receiver upon an event of default but did not contain any language waiving the valuation requirement, the revised statute removes any doubt about the situations in which a receiver can be appointed. Continue Reading

Tax Considerations in Settlement Agreements Regarding Cancellation of Debt

Posted in Commercial Law, Tax Law

Although not every settlement agreement has to be reviewed by a tax lawyer if you are representing a creditor or a debtor and the subject matter of the settlement involves the compromise of a debt or a cancellation of an indebtedness, there are some basic tax matters which must be considered.

If you are representing the creditor, you should consider whether the cancellation or compromise of the debt will be deemed income for tax purposes.  This consideration will lead to a determination of whether the creditor must issue a Form 1099-C to the IRS and to the debtor.

If you are representing the debtor, you must consider whether the settlement qualifies as a contested liability dispute.  If the debtor-taxpayer, in good faith, disputes the liability of the obligation, then a subsequent settlement of the disputed debt may not result in income, and thus, the creditor would not have to issue a Form 1099-C.

The recent Sixth Circuit case of McClusky v. Century Bank, FSB, 2015 U.S. App. LEXIS 1419 (2015) concerns the consequences of failing to consider possible tax issues, and provides an excellent summary of the law applicable to the settlement of a dispute involving the cancellation or discharge of an indebtedness.  Although the creditor ultimately won a reversal of the District Court’s summary judgment, each side incurred substantial post-settlement attorneys’ fees which could have been avoided by including a tax-treatment clause in the settlement agreement.

In the McClusky case, the creditor-bank sued the debtors for breach of the promissory note and foreclosure of the mortgage securing the debt.  Ultimately, the property was sold at a sheriff’s sale for $280,000.00.  Three months after the sale, the purchaser flipped the property for $386,550.00.

After the sheriff’s sale, a deficiency judgment was entered against the debtors. Thereafter, the debtors filed a motion to set aside the deficiency judgment based on the failure of a creditor to mitigate its damages.  Specifically, the debtors alleged that the creditor failed to pursue two higher offers on the property prior to the sale.  Thus, the motion was filed to contest liability.

By agreement, the parties reached a settlement whereby the deficiency judgment was released and vacated in exchange for the debtors paying $5,000.  The terms of the compromise were incorporated into a settlement agreement.

After the settlement, the creditor issued a Form 1099-C to the debtors and to the IRS stating that the creditor had cancelled a debt of $159,478.87 arising from the settlement.  The IRS credited this amount as income and the debtors paid $68,660.00 for taxes on the amount forgiven.

Thereafter, the debtors sued the creditor for breach of the settlement agreement by reporting the cancelled debt as income and to recover bad faith attorneys’ fees.

The trial court determined that the creditor had breached the settlement agreement by reporting the cancelled debt as income.  Further, the trial court set the matter for a hearing on the legal fees to be assessed against the creditor for breaching the settlement agreement.

The creditor appealed and was saved by the Sixth Circuit.  The Sixth Circuit held that because the settlement agreement did not address any issues dealing with taxes or reporting the transaction to the IRS, the creditor was free to issue the Form 1099-C to the debtors and to the IRS.

Although the creditor eventually won, it could have avoided the litigation if its legal counsel would have included one simple provision in the settlement.  Further, debtors’ counsel could have protected his clients by negotiating for the inclusion of a contested liability provision.

If you are representing the creditor and wish to guard against a lawsuit alleging that the issuance of the Form 1099-C breached the settlement agreement, consider adding this tax treatment language:

The parties hereby agree that creditor shall report the cancelled indebtedness to the IRS by disclosing the amount on Form 1099-C.

If you are representing a debtor, and you believe the debt was cancelled in good faith and pursuant to a contested liability dispute, consider adding this language:

The parties hereby agree that the settlement of the dispute related to a contest liability and was made in good faith.  As such, the excess of the original debt over the amount of the settlement shall not be considered as income and creditor shall not issue a Form 1099-C.

Under the McClusky decision, if the settlement agreement does not specifically contain language regarding the tax consequences of the cancellation of the debt, then the creditor is free to report the cancelled debt as income.  If you are representing a debtor and recognition of the cancellation of debt as taxable income is not the intent of your client, then you must negotiate a tax-treatment provision in the settlement.  Otherwise, you risk a malpractice claim.

UPDATE: FDIC joins in on IOLTAs for CRA consideration

Posted in Bank Regulation, Regulation and Compliance

Editor’s Note: This post was prepared by Susan A. Choe, Deputy Director & General Counsel, The Ohio Legal Assistance Foundation.

As an update to our guest blog post of April 10, 2014, the Ohio Legal Assistance Foundation is pleased to report that the Federal Deposit Insurance Corporation (FDIC) will join the Ohio Office of the Comptroller of the Currency and the Federal Reserve Board of Cleveland, in reviewing on a case-by-case basis interest paid above market rates on Ohio IOLTAs (interest on lawyer trust accounts) for potential positive CRA consideration.

Constructively charged with having retroactive actual notice when challenging an improperly recorded defective mortgage…wait, what?

Posted in Commercial Law, Real Estate

Great cases…make bad law” declared Supreme Court Justice Oliver Wendell Holmes Jr. in his dissenting opinion in the Northern Securities antitrust case of 1904. One of the most oft-quoted phrases any aspiring lawyer will hear in law school, this maxim stands for the proposition that decisions in cases of great importance from a public or social perspective make a poor basis upon which to construct a general law. Although an otherwise innocuous adversary bankruptcy proceeding (Daren A. Messer, et al. v. JPMorgan Chase Bank, NA (In re Messer), Adv. Pro. No. 13-2448) can hardly be called a matter of high social importance, it did result in the United States Bankruptcy Court for the Southern District of Ohio certifying two novel questions of state law for consideration by the Ohio Supreme Court that “could potentially affect tens of thousands of [mortgages]” in Ohio. The Ohio Supreme Court has not yet ruled on this matter, but given the implications I felt it worth putting on people’s radar at this time.

In a nutshell, the questions can be summarized as follows: O.R.C. §5301.01 requires that all mortgages be acknowledged in the presence of a notary, and further provides that the recording of said mortgage shall operate as constructive notice of its existence to all persons. In other words, you can’t “avoid” a properly-recorded mortgage – whether as a bankruptcy trustee, as a junior creditor or as a good faith purchaser for value – simply because you did not have actual notice of the existence of that mortgage. This concept forms the foundation upon which the public land records system is constructed. Conversely, documents that are improperly recorded – whether by virtue of a simple defect such as a missing acknowledgement, or if that document was not entitled to be recorded under O.R.C. §317.08 – do not operate as constructive notice, and could be avoided by a person taking an interest in the subject property without actual knowledge of the existence of that instrument.

O.R.C. §1301.401, passed into law in December of 2012, seems to flip this structure on its head by declaring that anyone challenging the validity or effectiveness of a “public record” (such as those documents to which O.R.C. §317.08 refers) shall be “considered to have discovered [i.e., have actual knowledge] of that record as of the time that the record was first…tendered to a county recorder for recording.” Simply put, by challenging the validity of a defectively executed mortgage, the challenging party is then deemed by operation of law to have actual knowledge of the existence of the mortgage and its terms, retroactive to the date upon which that instrument was created. In other words, this statute appears to do away with the question of whether an improperly acknowledged mortgage could provide the basis for constrictive notice, and instead says that the law will assume that a party will be deemed to have had actual knowledge of that instrument, whether or not that was true at the time, should they later dare to challenge its effectiveness under the ordinary constructive notice scheme.

So back to Justice Holmes. Here we have a situation where the Bankruptcy Court declined to make a decision because the conflict between these two statutory schemes was apparently a case of first impression in Ohio, and declining to follow the lender’s interpretation of O.R.C. §1301.401 could negatively affect the noted “tens of thousands” of mortgages in Ohio even if only “1%” of the millions of Ohio mortgages were executed improperly. As someone who routinely practices in the areas of real estate finance and foreclosure, I wouldn’t be surprised to discover that the 1% figure cited by the court is rather conservative. On the other hand, upholding O.R.C. §1301.401 as written would seem to wholly eviscerate O.R.C. §5301.01’s requirement that mortgages be acknowledged, provided the county recorder accepts that instrument for recording. So the Ohio Supreme Court is basically being asked to balance the enforceability of “tens of thousands” of mortgages with the longstanding principle that mortgages must be acknowledged to be recorded and enforceable. Good cases make bad law – indeed.

Examining the Enforceability of Prepetition Waivers of the Automatic Stay

Posted in Bankruptcy

Recently, a bankruptcy court for the district of Puerto Rico held that a debtor’s waiver of the automatic stay contained in a pre-petition forbearance agreement was enforceable. In re Triple A & R Capital Inv., Inc., 519 B.R. 581 (Bankr. D.P.R. 2014). Unfortunately, the case adds little to the debate over the enforceability of pre-petition agreements impacting bankruptcy rights for one simple reason — the court’s holding was premised on the fact that the pre-petition forbearance agreement waiving the automatic stay was enforceable because the debtor, as part of a post-petition stipulation permitting the use of cash collateral, had ratified and agreed to be bound by the forbearance agreement.

Nonetheless, the court did briefly look at the treatment of pre-petition waivers of the automatic stay lacking post-petition ratification. Its examination provides a good opportunity to review the state of the law on this issue.

Before deciding the issue on its ratification grounds, the court noted that bankruptcy courts that have examined the enforceability of pre-petition waivers of the automatic stay:

[H]ave used different approaches with conflicting results. Three basic approaches have emerged: (1) uphold the stay waiver in broad unqualified terms on the basis of freedom of contract; (2) reject the stay waiver as unenforceable per se as against public policy; and (3) treat the waiver as a factor in deciding whether “cause” exists to lift the stay.

Id. at 584. The court further noted that “[a] review of the cases nationwide that addressed this issue indicate a trend that appears toward the enforcement of stay waivers.” Id.

Both of these observations oversimplify the issue.

Courts have refused to enforce prepetition stay waivers on a number of grounds, including: (1) a pre-petition debtor’s lack of “capacity to waive the rights bestowed by the Bankruptcy Code upon a Chapter 11 debtor in possession,” e.g., In re Pease, 195 B.R. 431, 433 (Bankr. D. Neb. 1996); (2) as a disguised ipso facto clause, e.g. id.; (3) as depriving third-party creditors of the protections of the bankruptcy code, e.g., In re South East Fin. Assocs., 212 B.R. 1003, 1005 (Bankr. M.D. Fla. 1997); and (4) as a violation of public policy, which, especially in the case of a single asset case, is said to closely approximate an unenforceable agreement not to file bankruptcy. In re DB Capital Holdings, LLC, 454 B.R. 804 (Bankr.D.Colo. 2011); In re Jenkins Court Assocs. Ltd. Partnership, 181 B.R. 33, 37 (Bankr. E.D. Pa. 1995).

Nonetheless, for those courts considering the issue, the modern trend appears to be to find “cause” to modify the automatic stay, based at least in part on a debtor’s prepetition agreement to waive the benefits of the automatic stay. However, typically a pre-petition stay wavier is not held to be per se enforceable. E.g., In re Frye, 320 B.R. 786, 787 (Bankr. D. Vt. 2005) Indeed, most courts will consider a stay waiver appearing only in a forbearance agreement or loan modification, and not in the original loan documents. E.g., Wells Fargo Bank, N.A. v. Kobernick, 2009 U.S. Dist. LEXIS 126723, 20-22 (S.D. Tex. May 28, 2009). Courts often consider the circumstances in which the stay waiver was agreed upon and changes in circumstances following such agreement, including:

  1. the sophistication of the party making the waiver;
  2. the consideration for the waiver, including the creditor’s risk and the length of time the waiver covers;
  3. whether other parties are affected including unsecured creditors and junior lienholders;
  4. the feasibility of the debtor’s plan.

SouthWest Ga. Bank v. Desai (In re Desai), 282 B.R. 527, 532 (Bankr. M.D. Ga. 2002);

  1. whether there is evidence that the waiver was obtained by coercion, fraud or mutual mistake of material facts;
  2. whether enforcing the agreement will further the legitimate public policy of encouraging out of court restructurings and settlements;
  3. whether there appears to be a likelihood of reorganization;
  4. the extent to which the creditor would be otherwise prejudiced if the waiver is not enforced;
  5. the proximity in time between the date of the waiver and the date of the bankruptcy filing and whether there was a compelling change in circumstances during that time; and
  6. whether the debtor has equity in the property and the creditor is otherwise entitled to relief from stay under § 362(d).

In re Frye, 320 B.R. 786, 791 (Bankr. D. Vt. 2005).

Importantly, courts hold that such stay waivers are not self-executing, such that the stay is not automatically lifted and a motion to lift stay is still required. Id. at 790. Furthermore, such stay waivers are typically considered alongside other legitimate grounds for stay relief. And, in most cases, a stay waiver will not prevent a court from considering an objection from a third-party creditor. E.g., In re Atrium High Point Ltd. Partnership, 189 B.R. 599, 607 (Bankr. M.D.N.C. 1995).

Finally, it should be noted that the modern trend does not include any circuit court opinions, and in fact includes only a handful of cases in total. Furthermore, the modern trend appears inconsistent with the dicta of several circuit courts, including the Second Circuit, Commerzanstalt v. Telewide Sys., 790 F.2d 206, 207 (2d Cir. N.Y. 1986) (considering a post-petition waiver and stating, “[s]ince the purpose of the stay is to protect creditors as well as the debtor, the debtor may not waive the automatic stay.”), the Third Circuit, Constitution Bank v. Tubbs, 68 F.3d 685, 691 (3d Cir. Pa. 1995) (considering a post-petition wavier and stating, “[t]he automatic stay cannot be waived.”); Maritime Electric Co. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991 (considering a post-petition waiver and stating, “[b]ecause the automatic stay serves the interests of both debtors and creditors, it may not be waived and its scope may not be limited by a debtor.”); Ass’n of St. Croix Condominium Owners v. St. Croix Hotel Corp., 682 F.2d 446, 448 (3d Cir. 1982), and the Ninth Circuit, Continental Ins. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation Co.), 671 F.3d 1011, 1026 (9th Cir. Cal. 2012) (citing In re Pease approvingly and invalidating pre-petition waiver of Bankruptcy Code provisions invalidating prepetition anti-assignment clauses.); Bank of China v. Huang (In re Huang), 275 F.3d 1173, 1177 (9th Cir. Cal. 2002) (considering pre-petition waiver of dischargability and stating, “[i]t is against public policy for a debtor to waive the prepetition protection of the Bankruptcy Code.”). But see, In re Wheaton Oaks Office Partners, 1992 U.S. Dist. LEXIS 18781 (N.D. Ill. Dec. 9, 1992) (considering and rejecting applicability of Commerzanstalt and Ass’n of St. Croix Condominium Owners to pre-petition waivers, explaining “[n]either case stands for the proposition that a bankruptcy court can never find such a waiver to constitute cause to grant relief from the automatic stay.”).

Given the uncertain state of the law, lenders would be wise to (1) exclude such stay waivers from their original loan documents, (2) consider including stay waivers in their forbearance agreements, and (3) not rely exclusively on such waivers in their motions to lift stay.

 

An Ohio Alternative – Foreclosure Sales Conducted by a Special Master

Posted in Collection and Foreclosure, Commercial Lending

Lenders can typically credit bid at sheriff’s sales in an amount well in excess of the minimum bid requirements, as a result of which some real estate investors shy away from attending and bidding at sheriff’s sales because they feel like they won’t necessarily get a “bargain”.  Accordingly, lenders are typically the successful purchaser at sheriff’s sales.  However, the epic credit meltdown that began in 2008 resulted in lenders’ REO (real estate owned by the lender) spiking to the point where, beginning in 2009 or 2010, lenders—especially on the residential real estate side–no longer wanted to be the purchaser at foreclosure sale.   This caused them to consider—particularly after being bombarded with pitches from real estate auction houses–using a “special master” instead of the sheriff to conduct foreclosure sales, with the thought that the sales would be well attended by buyers not concerned with being outbid by the first mortgagee.

Pursuant to Revised Code § 2329.34, a master commissioner may be appointed by the court to sell real property. Such sales often work more like a private auction than a public sale, with specialized brokers performing targeted advertising prior to the sale.  Although auction companies usually don’t mention this when marketing their services to lenders, the scenarios under which a court may appoint such a special master are limited, however, to those situations where “there exists some special reason why the sale should not be made by the sheriff of the county where the decree or order was made, which reason, if the court finds any to exist, shall be embodied in and made part of the judgment, order or decree for such sale.”  See Huntington National Bank v. Conservatory Associates, LLC, 2011-Ohio-3249 (order for master commissioner sale overturned because trial court did not specifically incorporate special reasons for the sale into the final judgment, but rather glossed over the issue by indicating that the plaintiff’s motion was “well taken” and “granted”). Examples of possible “special reasons” may include:

1.         An inordinate length of time in a particular county between the date foreclosure decree is entered and the date of the foreclosure sale;

2.         The property was previously offered at sheriff’s sale but resulted in a “no bid no sale”; and

3.         The nature of the property is such that it would be best for all parties that it be sold by a master commissioner instead of the sheriff.

It is important for lenders to make sure they support any motion for sale by special master with appropriate reasons why the particular property ought to be sold by a special master instead of the sheriff, and for the court order granting that motion to contain specific findings with respect to those reasons.  Otherwise, the sale could be attacked by the borrower after the fact, or a title company might refuse to insure the buyer’s title.