bankruptcy and its strong arm - stewart

BANKRUPTCY AND ITS STRONG ARM

KERIN LYN KAMINSKI

EDWARD A. PROCTOR

GIFFEN & KAMINSKI, LLC

Overview of the Rules related to Title Issues.

What Did The Court Decide?

BANKRUPTCY

A Bankruptcy commences with the filing of a petition.

Upon the filing of a petition, a new estate is created with very specific legal rights.

COMMENCEMENT OF BANKRUTPCY

Debt relief for the person/entity filing.

Preservation of assets for unsecured creditors.

Distribution of assets in an organized way to unsecured creditors.

BANKRUPTCY-WHAT IS THE PURPOSE?

**Chapter 7—Liquidation

Chapter 9—Municipality

Chapter 11—Reorganization of Business

Chapter 13—Individual Reorganization

BANKRUPTCY

In a liquidation, the Trustee collects property and assets and uses them to pay unsecured creditor claims.

At the end, the Debtor is discharged from the debts that they had before filing.

CHAPTER 7-LIQUIDATION

A plan for the repayment of debts is submitted to and approved by the Court.

The plan can include repayment of both unsecured and secured debt.

The Debtor is discharged from all or a portion of the debts they had before filing.

CHAPTER 11 and 13-REORGANIZATION

The Debtor is relieved of pre-bankruptcy obligations. The estate continues after the discharge in order to handle the collection and distribution of assets. A discharge does not mean that the estate’s interest in real property has been abandoned by the Trustee.

WHAT IS DISCHARGE?

In order to raise money for the bankruptcy estate either through sale of the property or by settlement of the attack.

WHY DO THE TRUSTEES ATTACK MORTGAGES?

The Trustee is compensated for services based upon the size of the estate.

WHY DO TRUSTEES ATTACK MORTGAGES?

In a Chapter 7 or 11 case, the compensation is structured as follows:

> 25% for first $5,000

> 10% for amount in excess of $5,000 < $50,000

> 5% for amount in excess of $50,000 < $1M

>3% for amount in excess of $1M

WHY DO TRUSTEES ATTACK MORTGAGES?

Types of Attacks:

1. Avoidance

2. Preference

3. Fraudulent Transfer

ATTACKS ON MORTGAGES

Avoidance actions are brought pursuant to the “Strong Arm Clause” of the Bankruptcy Code. Under the “Strong Arm Clause,” the Trustee has the status of a hypothetical bona fide purchaser, without regard to any actual knowledge of the Debtor or the Trustee.

AVOIDANCE

The execution of a mortgage must comply with the statutorily required formalities to be considered valid.

In Ohio, a mortgage which is not properly executed is not entitled to be recorded.

AVOIDANCE

If an invalid mortgage is recorded, the mortgage is treated as though it had not been recorded.

If not recorded, there is no notice to subsequent purchasers.

Consequently, a bona fide purchaser (Trustee) can avoid the mortgage.

AVOIDANCE

Preference actions are brought by the Trustee to set aside any attempt by the Debtor or others (the bank) to convey away property and thereby “prefer” one creditor over another.

PREFERENCES

Preferences can be in battle with the doctrine of Lis Pendens.

Lis Pendens arises when a complaint is filed against real property, all third parties are charged with notice of the pending action.

While the complaint is pending, no interest can be acquired by third persons in the real estate at issue in the case.

LIS PENDENS

Dallas gives a power of attorney to his wife Shirley.

Shirley grants a mortgage on their jointly-owned property.

Shirley signs the mortgage as herself and in her capacity as power of attorney.

The Trustee seeks to avoid the mortgage for improper execution of the notary acknowledgment.

WHAT DID THE COURT DECIDE?

William Todd Drown v. National City Bank, 2011 U.S. App. LEXIS 15046 (6th Cir. July 20, 2011).


Charles gives Gina a power of attorney.

Gina is not married to Charles.

Gina signs a mortgage on behalf of Charles pursuant to the valid power of attorney.

The acknowledgment clause contains Charles’ name, but not Gina’s.

The Trustee seeks to avoid the mortgage for improper execution of the notary acknowledgment clause.


McClatchey v. GMAC Mortgage, LLC, 483 B.R. 126; 2012 Bankr. LEXIS 5572 (S.D. Ohio, 2012).


Joyce grants a mortgage on the subject property.

The notary public fails to apply his notary seal.

The notary’s name is not printed, typewritten or stamped legibly on the document.

The notary does not list the expiration date of his term.

The Trustee seeks to avoid for improper execution of the notary acknowledgment clause.


Brent Stubbins v. BAC Home Loan Servicing, LP, 2011 Bankr. LEXIS 3696 (S.D. Bk Sept. 23, 2011).

Recently followed in Roger Luring v. Midland Mortgage Company, 465 B.R. 146, 2012 Bankr. Lexis 764 (S.D. Bk Feb. 2012).


Tim and Lorie grant a mortgage on jointly owned property.

Lorie appears in the notary acknowledgment clause and not Tim.

The Trustee seeks to avoid the mortgage as to Tim’s half interest in property.


Susan Rhiel v. Huntington National Bank , 445 B.R. 830 (S.D. BK March 4, 2011).

Followed by Thomas R. Noland, Trustee v. Annette Gail Wiggins, 2012 Bankr. LEXIS 1578 (S.D. BK April 10, 2012).


Richard grants a mortgage on the subject property.

Richard defaults on his mortgage.

The bank files a Complaint in Foreclosure on December 9, 2008.

Richard files a Petition in Bankruptcy on January 21, 2009.

The notary fails to include Richard’s name in the notary acknowledgment clause.

Trustee wants to avoid the mortgage and seeks to defeat lis pendens with a preference action.


Eric Goering v. Green Tree Financial Services Corp., 2011 Bankr. LEXIS 1676 (S.D. BK May 2, 2011).

Cited by: Mason v. Ocwen Loan Servicing, 2012 Bankr. LEXIS 553 (N.D. Oh., Feb. 17, 2012).


Todd and Zeta grant a mortgage on jointly owned property.

The granting clause only names Todd, not Zeta, as a borrower of the mortgage.


(B) "Borrower" is

TODD S. PAYNE, MARRIED


Both Todd and Zeta initialed each page of the mortgage.

Todd’s name was pre-printed below the signature line.

Zeta wrote her name below the line and signed her name.

The Trustee seeks to avoid the half interest of Zeta.


Clyde Hardesty v. Huntington National Bank, 450 B.R. 711 (S.D. BK March 31, 2011).


Jeremy transfers the property by Warranty Deed to Debra and Jamal Scott.


Debra Scott grants a mortgage to Real Living Mortgage, LLC.

The Mortgage is recorded in the land records of Franklin County, Ohio.


THIS MORTGAGE (“Security Instrument”) is given on MAY 17, 2005. The Mortgagor is DEBRA L. SCOTT, A MARRIED PERSON.


THIS MORTGAGE (“Security Instrument”) is given on MAY 17, 2005 The Mortgagor is DEBRA L. SCOTT, A MARRIED PERSON AND JAMAL T. SCOTT, HER HUSBAND

Jamal and Debra file bankruptcy.

The Trustee files an Adversary Proceeding.


* The Deed conveying property to Debtors in invalid because of notary clause.

* The Mortgage does not encumber Jamal’s one-half interest since he is not “Borrower” and signs solely to release dower.

* The Re-filed Mortgage in invalid since it needs a new acknowledgment clause.


Drown v. Wells Fargo Bank, N.A., 424 B.R. 315 (S.D. March 2, 2010).

Affirmed and adopted by Drown v. Frost, 2011 U.S. Dist. LEXIS 38090 (S.D. Ohio, Mar. 29, 2011).


It depends……

TO SETTLE OR NOT TO SETTLE?

GIFFEN & KAMINSKI, LLC Attorneys at Law

1300 East Ninth Street, Suite 1600 Cleveland, Ohio 44114 Phone: 216.621.5161

Fax: 216.621.2399 [email protected] [email protected]

www.thinkgk.com

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bankruptcy and its strong arm - stewart

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