Prior to any filing of a bankruptcy petition, careful consideration must be given to the anticipated benefits of filing, versus the costs and risks of filing. This is so regardless of whether the possible bankruptcy petition will be filed on behalf of a corporation, a married couple, someone hoping to save real estate or other assets with a Chapter 13 petition, or someone with nothing more than a pile of unsecured debt and the clothes on their back.For small corporations, the reason for filing is usually to put an organized end to the business and thereby avoid a multitude of lawsuits. Pesky lawsuits may require the officers and directors to respond to discovery requests, force them to appear at depositions to explain the downfall of the business, and may even require court appearances. A bankruptcy could avoid it all. However, prior to filing a corporate bankruptcy, it is very important to give close scrutiny to the company’s books and records. Often, checks are written to the shareholders as “draws” or as undefined “distributions.” This is perhaps the first concern we look at, and typically the most problematic. Unlike regularly stated wages to employees, including shareholder employees, “draws” and undefined “distributions” often lead to action by the trustee against the shareholder for recovery of such transfers within the prior year. The trustee may also attack payments made to family members and close friends or to trade suppliers to whom debt had been owing. The “look back” period for such transfers may be as short as 90 days for payment of preexisting debts to trade suppliers, to a year for transfers to family and friends, to as long as four years if the transfer does not appear to have been in return for value that was received. It does not matter whether the transfers were cash, cash equivalents, or hard assets.
Prior to any individual filing for bankruptcy, it is important that they are also screened for transfers to friends, family members, and others. Individuals are also questioned methodically in order to ascertain all of the exemptions that are allowed them under the law, and to determine whether they are better off filing a Chapter 7 petition (liquidation, typically concluded in four to six months) or a Chapter 13 petition (wage earner plan, requires monthly payments to a trustee for what is usually 60 months). If the individual has no real estate, then the hope and goal will be to file a Chapter 7 bankruptcy to rid you of all of the nagging debt. Unfortunately, some debt cannot be discharged and it is essential that the client understand that before filing. Additionally, available exemptions may not fully cover all of the property that the client wishes to keep. Obviously, for those times it is important that the client also understand the risk of possibly having to either give up some of the property to the trustee or “buy back” the property by either invading an exempted asset (ex. an IRA), getting help from a friend or family member, or finding a way to pay over time.
Chapter 7 bankruptcy is not always available to those who wish them, nor are they the best alternative in many cases. Depending on the income of the petitioning individual(s), Chapter 13 may be the only available option (i.e., when income exceeds a predetermined amount). Chapter 13 is also the correct option when: (a) the debtor desires to force a reinstatement of a mortgage, or (b) wishes to strip-off completely underwater second mortgages and subordinate liens such as homeowner association liens, or (c) when their exemptions are not sufficient to allow retention of necessary assets as is the case with sole proprietors of businesses, or (d) when seeking to deal with certain debts that are not dischargeable such as many IRS debts.
While bankruptcy may remove all debt, if not severely reduce debt, there are many issues that must be considered before proceeding. Sometimes it is best to wait before filing, and sometimes it is best not to file at all. No one wants the bankruptcy to cause them an unanticipated problem, or possibly heartache. A wrong decision early on could be very costly and upsetting down the road. Only a full analytical consultation with an experienced bankruptcy practitioner is likely to yield the best result possible.
Bankruptcy is a very complex area of the law. Even a very lengthy article would not likely cover every possible issue that might apply to a particular case. It is the facts and circumstances of the case that drive the analysis. We typically charge for initial consultations because at times we give valuable advice on protecting assets when bankruptcy is not a reasonable option. Often we spend more than an hour talking to the client in order to reach that determination. However, for a limited time, a free initial consultation is available to former clients and their referred friends and family members for personal bankruptcy issues. It is our way of saying “THANKS” for trusting us to give your referrals quality advice.
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Many government-sponsored programs to help distressed homeowners, which are here now, have gone, or are on the way, get set up in conjunction with the lending institutions. These programs are often stated to be designed for direct accessibility. In other words – NO ATTORNEY NEEDED. While it is very “noble” of the financial institutions to be offering this assistance, recall the fable of the Gingerbread Man.
I have an actual case in point. My client was struggling to pay her mortgage. Like many today she was squeezed, not because of any wrong decision she made, but because of an unexpected change in her life’s circumstances. She did the right thing, picked up the phone, and called her mortgage lender to inquire as to whether there was an assistance program to help her. So far — no harm, no foul. She didn’t need an attorney to make that call for her.
My client learned that she might qualify for the Home Affordable Modification Program (HAMP) and a package was mailed to her. A completed application was quickly returned following which my client received a congratulatory letter stating that she was accepted into the temporary program and could start making lower monthly payments. Thereafter, month after month, for more than a year, she made the new lower monthly payments. Imagine her shock when she received a pre-foreclosure letter. She called and wrote the lender that there must be some mistake, but to no avail. With little delay the bank then filed a foreclosure action even though she was up to date in her agreed payments. Finally, she sought my assistance.
It became apparent to me that my client was supposed to return a second set of documents. She understood the second set to be a different offer. She considered the second offer less beneficial, especially because it required a “balloon payment” and that scared her. A “balloon payment” is usually when the mortgage comes due for the full amount after just a few years. In fact, the paperwork was to finalize the HAMP program. The “balloon payment” term was misused by the lender. The lender was trying to explain that the difference in payments would be carried to the very end of the mortgage. Monthly payments under the “final arrangement” would have been less than those of the “temporary agreement.” Not one word in any of the paperwork suggests that the homeowner seek the advice of an attorney, despite the confusing language. No one from the bank called to suggest she retain counsel. No warning was given that the “temporary agreement” would end if she didn’t agree to the “permanent arrangement.” It made no difference to the bank that for the last year she paid them more than she would have paid them had she signed the final HAMP papers.
So, I had to go to court and fight the lender that made the “noble” offer to assist. Who needs that kind of assistance? Had my client sought my advice in review of all correspondence received from the lender, she would have signed onto the lower monthly payment offered by the “permanent arrangement.” Happily, following mediation, we obtained a successful resolution but at additional expense to the homeowner.
Do you ever scamper to avoid threats that pursue you? If so, be careful not to jump on the back of a fox to cross any rivers. You might get eaten! Please, call me before that happens or at least before you are completely devoured.
With so many real solutions available to distressed property owners, it’s sad that many fall victim to scams. In one type of scam the “solution specialist” states that they have investment buyers for distressed property. The investment buyers state that they will allow the distressed homeowner to continue living in the subject property and even repurchase it in the future. The homeowner enters into a short sale of the property with the investment buyer, but with an agreement allowing the homeowner to rent with a right to repurchase. That is a classic “short sale fraud” situation. While there may not be a state or federal law disallowing the homeowner to rent or buy from the investment buyer, it would almost certainly be a violation of the short-sale agreement. Nearly every lender agreeing to be cut by a short sale requires an affidavit known as an “Arm’s Length Affidavit” or “Good Faith Affidavit” in which both buyer and seller agree to such terms as: the sale was negotiated between a buyer and seller unrelated and previously unknown to each other, the sales price was the best price received for the property or that all offers received were disclosed to the distressed homeowner’s mortgage lender prior to the short sale, that after the sale the homeowner will have no legal or beneficial ownership in the subject property, that after the sale the homeowner will not be reacquiring any legal or beneficial ownership in the property for at least two years, as well as many other terms.
Another type of short sale fraud is the flop-flip. Usually, the flop-flip involves an unscrupulous real estate agent who convinces the short sale seller that a low ball offer is the best or even the only offer received for the property. The fraud may involve manufactured low ball comparables and an unscrupulous appraiser suggested by the agent. Higher offers for the property are withheld from disclosure to the seller, and consequently from the seller’s mortgage lender whose repayment gets cut short at sale. Thereafter the property is sold to the low ball buyer who is actually a straw buyer. The sale is a “flop.” Actually, seller’s real estate agent either has some ownership interest in the buying entity or receives an illegal commission from the scam buyer. Soon after the property is purchased, or as soon as possible thereafter, the property is “flipped” for a much higher price, possibly to one of the same entities that had made a higher offer than the scam buyer’s offer.
Homeowners with equity facing foreclosure may be subjected to a different scam. They are easily targeted because readily available public record information will disclose that they are in foreclosure proceedings, and that they have equity in their property. The “solution specialist” in this situation might also state that they have investors available who will allow the homeowner to stay in the property after sale. But, instead the fraudulent scheme does nothing more than result in the equity in the home being skimmed off. Sometimes, the underlying mortgage is not even satisfied and the pending foreclosure action proceeds along.
Yet another type of fraud involves entering into a complex trust agreement. The “solution specialist” in this type of scheme convinces the property owner to transfer title in the property to a trust carrying a very prestigious sounding name. In return, the trust makes the property owner the beneficiary of the trust and simultaneously agrees to use its lawyers, accountants, appraisers, analysts and experts to fight with the mortgage lender to lower the principal balance and payment terms. This is meant to attract property owners who see the trust transfer as a way of separating themselves from the resolution process thereby avoiding the frustration, time and effort that go with resolution. Often very boisterous claims are made that the trust is then able to void or cancel the outstanding mortgage. These trust instruments are often missing some important terms, like who receives rents from the property, who decides whether to sell the property, when to sell, how much to sell the property for, what to charge for rent, who pays for insurance, who pays for taxes, what the tax consequence is to the transferor (the prior title owner), who the trustee is, and how the trustee is compensated. As you might have guessed, the terms are missing because the trust then controls the property, receives the rents, and so forth. When such terms are stated, it is no different. Making it more outrageous is that many times the trust receives a payment in advance from the transferring property owner, and does nothing in return because the trust agreement never says that the trustee necessarily needs to do anything.
There are so many types of fraud committed against distressed property owners and so many variations of those types of fraud that an entire book could be written about the topic. Crooks who commit fraud are also fond of using lofty names like “short sale specialist,” “distressed property specialist,” “underwater property expert,” and at least another twenty like names. While even those with a law license, real estate license, or mortgage broker’s license sadly also involve themselves with such scams (rarely though), many times the “solution specialist” refers to no such license nor to any recognized certification. That should be a big red flag warning.
My use of the term “solution specialist” is both facetious and general. The wolf wears many styles of clothes, uses many different names, and is seen in the most unusual places. Don’t be a sheep. Ask lots of questions. It is possible to be both polite and firm while being suspicious, especially when it seems too good to be true. When it seems too good to be true, it’s almost certainly not real. “Get real!” If you or someone you know has the slightest doubt at any time before, during or even after a transaction, do not hesitate to call for a consultation.
Vidal -v- Liquidation Prop., No. 4D10-3358, slip op., (Fla. 4th DCA, October 31, 2012)
Following entry of summary judgment of foreclosure for the lender, the Vidals appealed arguing that affirmative defenses precluded such judgment. Among the defenses were lack of standing, Truth In Lending Act (TILA) violations, and two types of fraud. Having untangled the facts, the appellate court agreed with the Vidals that for the lender to have standing, the lender had to prove ownership and possession of the note on the date suit was filed. An assignment of mortgage was produced, but it transferred only the mortgage not the note, and as all should know “the mortgage follows the note.” An allonge to the note was produced but it was not dated. An affidavit by the lender attesting that it received transfer of the note prior to filing would have evidenced standing.
The appellate court also combed through Vidals argument as to the TILA defense and agreed with them. While the remedy of rescission has a three year statute of limitations, there is only a one year period for the remedy of recoupment unless brought by way of defense, as it was.
The defense of fraud allegedly arising from the lender’s knowledge that income was overstated was cut because one suffering from fraud cannot recover when they knew the statement to be false.
On the second fraud defense, wherein it was alleged that the lender had orally represented that the loan was a fixed rate when in fact it was adjustable, the appellate court found that such contention was expressly washed out by the written contract.
BONY Mellon -v- P2D2, No. 2D11-3661, slip op., (Fla. 2d DCA, October 31, 2012)
Lessee under a 100 year ground lease mortgaged the property. In all respects the mortgage instrument gives the appearance of a garden variety mortgage given by a land owner to secure a loan. Also signed on that date and handled by the same title agent was an assignment of the ground lease and the lessor’s consent thereto. When the lessee failed to pay rent to P2D2 an action was filed seeking possession, judgment for rent due, and a declaration quieting title, which action named as defendants the lessee (i.e the mortgagor) and the bank. P2D2 argued that the mortgage document was a nullity since, on its face, it purports to mortgage lands not owned by the lessee.
However, the appellate court found that when all the facts and circumstances were considered, the lessee had actually mortgaged its leasehold interest. The appellate court held for the bank on its appeal seeking to reverse entry of summary judgment on the quiet title count, but sustained entry of default against the bank under the count for possession. The Forcewas not with P2D2.
PLAKHOV -v- SEROVA, No. 4D11-3280, slip op. (Fla. 4th DCA, October 24, 2012)
During the residential tenancy agreement, the landlord Serova was faced with a foreclosure action and difficulty paying the monthly assessments on the condominium unit rented to Plakhov. The tenant, having received notice of both the foreclosure action and nonpayment of the association dues, grew worried. Unknown to the tenant, the landlord was in discussions with the mortgage lender to modify the mortgage, and subsequently made modification payments to the lender.
Also unknown to the tenant, the landlord had brought her condominium association payments current two months before the tenant decided it was in his best interest to move out. It took several months for the landlord to find a new tenant. Consequently, the landlord not only took the security deposit but also obtained a money judgment for $16,700 against Plakhov. While affirming the judgment, the appellate court rejected the tenant’s defenses which included allegations of constructive eviction created by the landlord’s defaulted payments.
PALM BEACH MARKETPLACE -v- ALEYDA’S MEXICAN, No. 4D12-570, slip op.(Fla. 4th DCA, October 24, 2012)
Petition for Mandamus was filed to compel the trial court to enter a default judgment and writ of possession. Tenant had failed to timely post rent into the court’s registry that came due and owing, as required by F.S. §83.232. The statute provides that failure to post rent alleged as past due, or that subsequently comes due, in an action for possession is an absolute waiver of defenses entitling the landlord to immediate default for possession.
This is a ministerial duty of courts, meaning there is no discretion beyond that stated in the statute. Although mandating entry of the writ of possession, the appellate court reminded the trial court that the statute only speaks to a default for possession and not to any entitlement to money damages or even to the funds previously deposited.
Blue Star -v- LED Trust, No. 3D12-1728, slip op. (Fla. 3d DCA, October 24, 2012)
LED Trust filed a lis pendens against property owned by the Blue Star group, an entity in which the LED Trust was investing. LED’s action turned on counts including breach of contract, violations of corporate statutory duties, fraud, conspiracy to commit fraud, and for an accounting. None of those counts could be plugged into the property owned by Blue Star. Other counts in equity were brought for declaratory and injunctive relief, imposition of a constructive trust or equitable lien, and for specific performance.
But, the appellate court found LED’s equitable claims to be dim in that they were lacking a necessary connection to the subject property. The appellate court illuminated that LED was really seeking damages arising from mere membership interests in an LLC. In conclusion, the appellate court found that LED’s claims failed to establish a fair nexus between the equitable or legal ownership of the subject property and LED’s claim. Accordingly, the lis pendens could no longer cast a shadow on the title.
It’s always nice to receive recognition in your business or profession. Rex E. Russo has received an award for providing quality litigation services to local businesses. You can see the award by clicking here.