Coming into effect on January 1, 2010, the homestead exemption protecting a homeowner’s equity from judgment creditors has been increased by $25,000 across the board to $75,000 for individuals, $100,000 for married couples or family units as specified, and $175,000 for persons over 65 years, disabled, or over 55 years with limited income as specified. (Assembly Bill 1046)
Over the past year I have been asked by many clients about renegotiating their home mortgage. They assume that because I specialize in bankruptcy and real estate that I possess the secrets that will help them get a good deal from their lender. Unfortunately this is not true for the average case. You need a lawyer only if there is a real dispute.
Lenders are as interested avoiding foreclosures as are borrowers. I recently spoke with the regional head of the renegotiation department of a major bank. He said that he was expected to renegotiate as many loans as possible. He only heard from upper management when his department was not renegotiating enough loans. He found that most loan renegotiation consultants got in the way, and they never negotiated a deal better than the homeowner could have received had they dealt directly with his department. Lenders know what they are willing to do and what government help might be available, better than anyone else. They are the experts on their own loans and truly want to work with you. If you meet the requirements for a renegotiation, they are more than happy to let you do it. Renegotiation is good for everyone.
If you do not meet the requirements, the Lender is not going to budge. Lawyers and threats of litigation are unlikely to help get the best deal. Thus, a borrower in trouble is best advised to consult directly with the lender. There may be some issues dealing with the lender’s bureaucracy, but most with some patience, can cut through a lender’s red tape. The most often complaint I hear from clients is the trouble they are having getting the lender on the telephone or getting any response.
For those who cannot deal directly with their lender, there are consultants who are less expensive than lawyers. They can assist you in getting your financial information together and making calls, but that is about it. If you really need a consultant, finding a good one is very difficult. There are many people who profess to be experts and make promises. They ask for advance payments of $3,500 or more. At best consultants get the borrower the deal they could have received had they simply called the lender. At worst the consultant does nothing and takes the money. Personally, I do not have anyone to whom I can refer a client. I usually talk my clients into dealing directly with the lender. Bank representatives tell me that any consultant that is charging more than $1,000 is probably not earning the money.
Fraudulent mortgage renegotiation consultants have become such a problem that the legislature recently passed an emergency law that was signed by Governor Schwarzenegger on October 11, 2009 and went into effect immediately. It prohibits anyone from claiming any compensation for negotiating or arranging a loan modification until after that person fully performs each and every service as promised. Aimed at combating loan modification scams, this ban applies to upfront fees collected by real estate agents and attorneys. The ban expires on January 1, 2013. Also effective immediately, anyone who negotiates or arranges a loan modification must give the borrower a specified notice that paying a third-party for loan modification services is unnecessary.
These new requirements apply to mortgage loans secured by residential property up to four units, with certain exceptions for lenders and loan servicers acting on their own behalf. Violations can be penalized by, among other things, a $10,000 fine plus one-year imprisonment for individuals, or a $50,000 fine for businesses. Real estate brokers with existing Advance Fee Loan Modification Agreements reviewed by the Department of Real Estate can no longer, as of October 11, 2009, enter into these agreements or collect advance fees. Agreements entered into and advance fees collected before October 11, 2009 are not affected.
When a seller reneges on a contract to sell real estate, the aggrieved buyer can tie-up the property in court until the dispute is resolved. In fact, whenever there is a lawsuit involving title or the right to possession of real property, the plaintiff may record a “Notice of Pendency of Action” with the County Recorder. This notice, which is usually referred to as a lis pendens, gives constructive notice to the world of the pending legal action. Anyone who takes a legal interest in the property is deemed to have notice of the pendency of the action and is subject to the judgment of the Court. The lis pendens severely affects the owner’s ability to sell or encumber the property. Since every piece of real property is unique, the lis pendens is essential to protect the rights of persons who have been, or might be, deprived of title or possession of the real property.
If someone has a real property claim, it is important to file a law suit and record a lis pendens as soon as possible to prevent the defendant from selling, or otherwise encumbering, the property before the case is resolved in court. Many lawyers and their clients think that as soon as the lis pendens is recorded, the real property claimant is protected. California Code of Civil Procedure § 405.24 provides:
“From the time of recording the notice of pendency of action, a purchaser,
encumbrancer, or other transferee of the real property described in the
notice, shall be deemed to have constructive notice of the pendency of the
noticed action….”
Reading this section alone is misleading and can give a real property claimant false confidence. Once a document is deposited with the county recorder, it must be indexed so that others can locate it in a proper search of the records. Real property purchasers and mortgagers can “be charged only with notice of those documents which are located by search of the proper indexes.” Hochstein v. Romero, 219 Cal. App. 3d 447, 452 (1990). In the recent case of Dyer v. Martinez, 147 Cal. App. 4th 1240 (2007) the California Court of Appeal found that “a lis pendens does not import constructive notice until it has been indexed.” In that case, Kristina Dyer claimed to have a contract to purchase a house from Mr. & Mrs. Rojas. When the Rojas’ refused to close the sale, Ms. Dyer filed suit and recorded a lis pendens on September 9th. However, the county recorder did not index the lis pendens until September 14th. On September 9th, the Rojas’ deeded the house to the Martinezes who had no knowledge of the pending lawsuit. Further, the Martinezes financed their purchase of the property with a mortgage which was also recorded on September 10th.
The Court found that the lis pendens did not affect the Martinezes’ title or the liens of the mortgages, even though it was recorded first. “Because the lis pendens could not have been located through diligent search…the purchaser’s had no constructive notice of the pending action at the time they closed escrow.”
In Los Angeles County, as in many other counties, documents are not indexed for at least five business days after they are recorded. The five day rule is only applicable to documents that are “walked-in.” If the document is mailed to the recorder, it is not indexed for nine weeks. If a real property claimant waits to file suit until just before a defendant sells or encumbers real property, the recording of the lis pendens may not be effective to protect the property. To be certain that the real property claimant’s rights are protected, a plaintiff should file suit promptly and attempt to give actual notice to any potential adverse interest. This might entail faxing, and/or personal delivery of the lis pendens to any known potential buyers and pending escrow. Keep in mind that the county recorder is considered the agent of the person recording the lis pendens. Therefore, the responsibility for properly recording and indexing, falls upon the person recording the lis pendens.
In civil disputes getting a judgment often is only half the battle. Collecting a civil judgment can be very expensive, time consuming, and fruitless. Just ask Fred Goldman who has yet to realize anything from his $34 million judgment against O.J. Simpson.
The simplest, and least expensive, way to collect a judgment against a party that owns real property, is to record an abstract of that judgment. For an $15.00 clerk fee and a $9.00 recording fee, a judgment creditor can obtain and record an abstract judgment which creates a lien against any real property owned or later acquired by the judgment debtor. After the abstract is properly recorded, the judgment creditor need do nothing except sit back and renew the judgment every ten years. It may take a while, but if property owned by the judgment debtor ever changes hands or is used as collateral to secure a loan, the judgment creditor will get an urgent call from an escrow agent that is very eager to secure a quick release of the lien by paying the judgment in full plus 10% interest.
The abstract is a simple form and the procedure so easy, there has to be a catch; and there is. The form has to be filled out properly and accurately. Recently the bankruptcy appellate panel for the 9th Circuit in the case of Alcove Investment, Inc. v. Conceicao, 331 B.R. 885 (2005) affirmed a ruling by the bankruptcy court to deny a $50,200 secured claim because the judgment creditor failed to put the judgment debtor’s social security number on its recorded judgment. California Code of Civil Procedure §674(a)(6) requires an abstract of judgment to contain the social security number and the driver’s license number of the judgment debtor, if known. The Bankruptcy Appellate Panel did not agree with the judgment creditor’s contention that this was a mere technicality. Rather, the court held, it was a statutory requirement that helped prevent confusion of judgment debtors.
In the case of Keele v. Reich, 169 Cal.App.3d 1129 (1985) the judgment creditor thought it would be easier simply to indicated that the social security number was unknown. When it was later shown that this was a misrepresentation, and that the judgment creditor in fact knew the social security number, the California Court of Appeal refused to recognize the judgment lien.
The lesson to be learned is that the social security number and drivers license number are important to success in litigation. If you did not get that information when you entered into a transaction, it is absolutely necessary to get the information early in discovery when litigation begins. Drivers License number is an optional questions (2.03) on the approved California Form Interrogatories. A special interrogatory should be used to get the social security number. While an opposing party may object on the grounds of privacy, the court should overrule the objection because of the requirements of California Code of Civil Procedure §674.
In an opinion issued today, the Ninth Circuit Court of Appeals has held that in calculating a landlord’s claim for breach of a lease, the proceeds of a letter of credit held as a security deposit must be deducted from the “capped” damages claim under Bankruptcy Code Section 502(b)(6), and not from the gross amount of the claim. AMB Property, L.P. v. Official Creditors for the Estate of AB Liquidating Corp. (In re AB Liquidating Corp.), Case No. 03-16979 (9th Cir. July 19, 2005). The full text of this opinion may be viewed at: http://www.ca9.uscourts.gov. (Click on “Opinions”.)
In California, property acquired during the course of a marriage is community property. If one spouse files bankruptcy, all community property becomes property of the bankruptcy estate and is subject to liquidation by the trustee for the benefit of the creditors. However, if property is held by husband and wife as joint tenants, only the interest of the spouse who files a bankruptcy petition becomes property of the bankruptcy estate. This distinction is important when planning to protect the family home from creditors. If a husband and wife own a home with up to $150,000 in equity, the home would be exempt from creditors of one spouse, if it was held in joint tenancy, but not if it was community property.
For example, Harold and Wendy have a young son and own a home worth $450,000. There is a $300,000 mortgage on the home. Harold has $500,000 in debts relating to his business, but Harold and Wendy’s mutual credit card debt is only $20,000. If Harold and Wendy own the home as joint tenants, Harold can discharge all of his business debt by filing a Chapter 7 bankruptcy. The $150,000 equity remaining after a theoretical sale would be split. Wendy would keep a her $75,000. The remaining $75,000 would be protected by Harold’s homestead exemption. Harold and Wendy would keep the house, but Wendy would still be liable for the $20,000 in credit card debt. Note also, that if Harold and Wendy had no other family members in the home, Harold would only get a $50,000 exemption. See: In re McFall, 112 B.R. 336 (9TH B.A.P. 1990).
On the other hand, if the house were owned by Harold and Wendy, husband and wife as community property, the entire $150,000 equity would be part of the bankruptcy estate. Harold and Wendy would have a $75,000 homestead exemption even without other family members at home, but the remaining $75,000 of equity would be available to pay the creditors. In this case, Harold and Wendy would file a joint petition in bankruptcy and discharge both Harold’s business debt and the mutual credit card debt. However, their home would most likely be sold to obtain the $75,000 for the creditors. They would receive $75,000 from the proceeds of the sale to cover their exemption.
Thus, in bankruptcy there is a substantial advantage for debtors who own their home as joint tenants, rather than as community property.
Recently, a bankruptcy trustee attempted to sell a home that was owned in joint tenancy by a debtor and his spouse, who did not file a bankruptcy petition. The trustee argued that, since the home had been purchased with community property funds, it should be considered community property and the entire equity made available to creditors. The Ninth Circuit Court of Appeals, in the case of In re Sumners, 278 Bk.Rptr. 808 (2002), disagreed with the trustee. It held that when property is acquired from a third party in joint tenancy, it cannot be presumed to be community property simply because community property funds were used to purchase it.
The automatic stay provisions of the United States Bankruptcy Code, § 362, are designed to protect a debtor’s property so that it may be reorganized or liquidated by a bankruptcy trustee. If a tenant has a lease that is in default, the Bankruptcy Code gives the tenant or the trustee the opportunity to cure the default and preserve the value of the lease or the tenancy.
However, when there is no lease or default to cure, the delay and opportunity to cure provided by the Bankruptcy Code is pointless. The extra time will never result in the debtor or the trustee preserving any value for creditors, since there was no value to preserve. Nevertheless, many residential tenants, often advised by unlicenced, “eviction advisors,” file bankruptcy to stall the eviction process. Without proper legal advice, many debtors do not understand the long-term consequences of filing a bankruptcy petition. They often do not discharge very much debt while only delaying the eviction process by as little as a week. On the other hand, landlords can be subject to long delays and great expense without the debtor obtaining the relief for which the Bankruptcy Code was designed.
In 1984, Congress attempted to work on this problem by adding Bankruptcy Code § 362(b)(10), which exempted from the automatic stay “any act [to obtain possession] by a lessor … under a lease of nonresidential real property that has terminated by the expiration of the stated term of the lease before the commencement of or during ‛a bankruptcy case.” This solved the problem for commercial leases that had exprired. But It did not address the problem of non payment of rent or residential leases.
Accordingly, the California legislature went further in 1994 by enacting Code of Civil Procedure § 715.50, which provides that “a writ of possession issued pursuant to a judgment for possession in an unlawful detainer action shall be enforced…without delay, notwithstanding receipt of notice of the filing by the defendant of a bankruptcy proceeding.” The California Court of appeal upheld this statute in the case of Lee v. Baca, 73 Cal. App. 4th 1116 (1999). “The unlawful detainer judgment extinguishes the residential tenant’s interest in the property and that a postjudgment bankruptcy filing does not affect the landlord’s right to regain possession of his property–because it is not, at that point, property of the tenant/debtor’s estate.” Thus, the eviction would proceed regardless of the tenant’s bankruptcy.
This all changed in March, 2002, when the Bankruptcy Court for the Central District of California decided the case of In re Buttler 271 Bank.Rptr. 867 (Russell). The Court found the California Code of Civil Procedure § 715.050 was unconstitutional and unenforceable because it was preempted by the federal bankruptcy law. The Court decided that a debtor in possession of real property had an interest that was subject to the automatic stay provided for by the Bankruptcy Code.
That ruling, issued by a single bankruptcy judge in Los Angeles, holds that a landlord is still required to obtain an order from the bankruptcy court if the tenant files a bankruptcy petition before the sheriff can actually remove that tenant from the premises.
However since the ruling has yet to be adopted by an appellate court, it is not president. The Los Angeles County Sheriff is not treating it as the law. Instead the Sheriff is giving landlord’s the option of proceeding with an eviction even if a bankruptcy is filed after a judgment for eviction by a state court. The who landlord elects to proceed with the eviction after the bankruptcy could be exposed to being held in contempt depending upon the Bankruptcy Judge and future appellate rulings.
Business & Professions Code § 708.5 requires that contractors pay any subcontractor no later than 10 days after receipt of a progress payment. Violation of the section subjects the contractor to a penalty of 2% per month plus the payment of attorney’s fees and costs. Until recently there was a question whether the penalty could be collected in a civil suite by an aggrieved subcontractor, or only by the Contractors’ State License Board.
The issue was recently settled in the case of Morton Engineering & Construction v. Patscheck (2001) 87 Cal.App.4th 712. The California Court of Appeal ruled that Business & Professions Code § 708.5 applied to civil actions by subcontractors against contractors for failure to pay promptly amounts due. Moreover, according the to the Court of Appeal, an aggrieved subcontractor can collect prejudgment interest on the penalty as well as the amount due.
If there is a good faith dispute with the subcontractor, the contractor will not be liable for the penalty if no more than 150% of the amount due is withheld.
The owner of real estate can be held liable to his lender for unpaid real estate taxes, even though the loan is non-recourse. In the case of Nippon Credit Bank Ltd. v. 133 North California Blvd., 86 Cal.App.4th 486 (2001), the defendant partnership had developed an office building which secured its $73 million non-recourse loan. During talks to renegotiate the loan, the defendant distributed $683,000 to its partners on the day the property tax payment of $358,000 was due. The property tax was not paid. The loan negotiations failed and the lender foreclosed with a credit bid, acquiring the property subject to a lien for the unpaid taxes.
The lender then sued the borrower for the unpaid property taxes alleging that the failure to pay them was bad faith waste of the property. The Court found that the failure to pay the property taxes was a separate tort, unrelated to the contractual provisions of the loan. It awarded the bank the $358,000 in property taxes, along with punitive damages. While the jury awarded $8.3 million in punitive damages, the Court found the amount excessive and ordered a new trial to determine the amount of punitive damages. The Court said it was not proper for the borrower to milk the real property security when there is an non-recourse loan.
Background
Debtors file bankruptcy to obtain a fresh start. In exchange for a discharge of debts, debtors are required to turn over their assets to a trustee who liquidates them for the benefit of creditors. An individual debtor, however, is entitled to exempt from the bankruptcy estate and retain certain assets that the law has provided are necessary for the debtor to have a “fresh start.” For example, household furnishings and clothing are usually exempt as is a limited amount of equity in a home or automobile.
When filing a bankruptcy petition, the debtor schedules a complete list of assets and then claims which of them are exempt. Bankruptcy Code § 341(a) requires that a debtor meet with a trustee and his creditors to answer questions about his schedules and claimed exemptions. All creditors are notified of this “meeting of creditors” or “341(a) meeting” when they are first notified of the debtor having filed a bankruptcy petition. The law further provides that the creditors and bankruptcy trustee have until thirty days after the conclusion of the 341(a) meeting to object to the assets the debtor claims is exempt.
The Court’s Decision
Often debtors’ schedules are not complete, or the trustee learns of information at the 341(a) meeting that requires further investigation. The bankruptcy law allows the trustee to “adjourn” a meeting by “announcement at the meeting of the adjourned date and time.” Thus, a meeting does not have to be concluded at the first meeting, so as to extend the time for creditors and the trustee to object to exemptions.
In the case of In re Smith, 2000 Daily Journal D.A.R. 8721 (August 8, 2000), the trustee adjourned a meeting “until further notice.” Since the date and time of the adjourned meeting was not announced, the debtor claimed that this was not a proper adjournment, that the meeting was concluded, and the thirty-day period for objecting to his exemptions had started to run. The Ninth Circuit Court of Appeals decided in favor of the creditors who claimed that they could object to the exemptions more than thirty days after that meeting. The Court held that unless the debtor moves to conclude a 341 (a) meeting, it is possible for a trustee to extend it indefinitely and thus, the period to object to exemptions.
Why This Case Is Important
In practice, 341(a) meetings are conducted very quickly, usually lasting less than five minutes. If an issue comes up that interests the trustee, he or she will usually adjourn the meeting to a date certain. Now, the trustee can simply say I will give you notice when I will hold a further hearing.
Trustees are often not clear at the end of a meeting. They may simply say “Thank you,” not state a further date, and move onto their next case. It is now important for debtors’ counsel to be certain that the meeting is “concluded” on the record.
Creditors have a new weapon. A creditor who hopes to develop information to use against the debtor can now suggest to the trustee that he or she will develop and provide further information and ask the trustee to keep the meeting open “until further notice.” In short, the debtor’s attorney has new burdens to be certain to conclude 341(a) meetings on the record. Creditors may have more opportunities to challenge exemptions.
