Rogers Towers, PA welcomes readers to its new Florida Banking Law Blog! A product of the firm’s Banking and Financial Services Practice Group, the blog will serve as a convenient way for us to share our expertise in banking-related legal issues. We represent banks and other providers of financial services in a broad range of matters throughout the state of Florida. As a result of our significant experience, we will have much to share in the upcoming blog posts and we hope that you will find these posts to be informative and beneficial to you in your respective positions in the industry. We appreciate your interest in the field and in Rogers Towers, PA and we look forward to your comments in response to our blog. Again, welcome to the Florida Banking Law Blog!
On Monday, December 8, 2014, the American Bankruptcy Institute’s Chapter 11 Reform Commission, which is tasked with recommending reforms to the nearly 40-year-old bankruptcy regime, released a report which found that the current Chapter 11 system has fallen behind the times. The Commission’s report urges Congress to provide troubled businesses with a better chance at rebuilding through Chapter 11.
The report is three years in the making, and is in direct response to practitioners’ and lawmakers’ observations that the Chapter 11 system has not kept pace with changing financial trends and modern finance, which leaves struggling businesses with diminished opportunities to reorganize. Of the nearly two hundred and forty recommendations, many seek to streamline the Chapter 11 process, making the reorganization process cheaper, fairer and more effective.
Commentators have noted that this sweeping reform is sure to cause heartburn in the commercial lending industry, which has largely suggested that the Chapter 11 system merely needs tweaks instead of a complete overhaul. This consternation is due in part to the recommendation of the elimination of a key requirement for cramming down a contested restructuring over the objections of senior creditors, which also creates a mechanism to “funnel” recoveries to junior classes of creditors. Still other recommendations would change the way that certain creditors’ payments are valued, potentially cutting into the senior creditors’ recoveries. One of the more concrete recommendations of interest to the brick-and-mortar retailers considering bankruptcy is a proposal to extend the deadline for debtors to keep or reject commercial property leases.
Of particular note to commercial lenders, senior creditors may be required to pay “out-of-the-money” junior lenders, even when the first-out creditors are not paid in full. Under this proposal, the junior creditors would receive a recovery if a court determines that the debtor’s business might be worth more over a three-year stretch than at the current moment. This proposal is aimed to hand junior creditors some of the long-term restructuring value that only senior currently receive.
According to the Commission, the reforms are required because secured creditors have increasingly driven a great number of reorganizations to a quick, pre-negotiated “fire sale” liquidation, instead of comprehensive reorganizations into “smaller but healthier” entities. The Commission notes that the goal of the reform is to make Chapter 11 not a deterrent to struggling companies, but instead a mechanism to save jobs during restructuring. Secured creditors have warned that such reform is likely to raise credit costs across the economy, especially if the absolute priority rule is affected as proposed.
Commercial lenders and secured creditors should not fret immediately, as the Commission notes that it is likely that the recommendations would not be ready for congressional action until at least 2018 – exactly forty years since the last major bankruptcy reform. During this time, there will be significant opportunity for banks and secured lenders to negotiate with the Commission and Congress to ameliorate some of the less palatable changes which may have significant impacts on commercial lending.
On January 1, 2015, United States District Judge Hinkle issued an Order ruling that all Florida counties are to start issuing marriage licenses to same-sex couples as of January 6, 2015. The implications of this ruling are significant for same-sex couples, and their creditors as well. There are various legal aspects to consider as Florida law adjusts to incorporate same-sex married couples into the fold, but one question is whether the protections of The Equal Credit Opportunity Act (the “ECOA”) will apply to individuals married under Florida law.
The ECOA is a federal law which prohibits creditors from discriminating on the basis of marital status, as well as on the basis of race, national origin, religion, sex, or age. The Consumer Financial Protection Bureau has the authority to enforce compliance with the ECOA and its implementing regulations. Even though this is an issue of federal law, we have seen the ECOA come up in Florida litigation where a defendant seeks to avoid liability on a guaranty, alleging a violation of the ECOA. As of the date of this post, Florida courts have not considered whether individuals in a same-sex marriage who raise an ECOA defense in state court litigation will be entitled to do so. However, there is no reason to believe that Florida courts would treat same-sex married couples differently from other married individuals in the context of the ECOA.
Given many of the gender-neutral provisions of the law and its regulations, there may be no statutory basis on which to differentiate same-sex married couples. For example, the language of ECOA’s Regulation B merely references the “applicant’s spouse” which would implicitly include same-sex spouses. However, even where the ECOA does use the phrase “husband and wife,” the Consumer Financial Protection Bureau has indicated that it would not treat any gender-specific language as limiting. Rather, it would treat any term related to family or marital status to include same-sex marriages and married same-sex spouses. This is consistent with statements issued by other federal agencies, such as the Office of the Attorney General and the Internal Revenue Service. These agencies are interpreting terms related to family or marital status to include married same-sex couples, if the individuals are lawfully married under state law.
It would be wise for creditors to be aware of this change in Florida law. Creditors should revise any internal ECOA policies and procedures in order to provide equal treatment to married individuals applying for credit, regardless of the gender of their spouse. Additionally, if any internal policies use gendered terms such as “wife” or “husband,” creditors should consider using gender neutral terms such as “spouse” or “marriage.”
In Florida, it is well settled that a Chapter 7 debtor who does not claim or receive the benefit of the homestead exemption on his bankruptcy schedules is entitled to claim the “wildcard” exemption pursuant to Fla. Stat. § 222.25(4). The “wildcard” exemption provides that a debtor can exempt up to $4,000 in personal property if the debtor does not “claim or receive the benefit of” the homestead exemption under Article X, Section 4(a)(1) of the Florida Constitution. This issue recently came up in the context of a Chapter 13.
In Littleton, co-debtors filed a Chapter 13 bankruptcy petition. In their schedules, the co-debtors listed residential property valued at $127,000 with a mortgage of $140,000. The co-debtors chose not to claim the homestead exemption for the residential property. Instead, the co-debtors chose to exempt certain personal property pursuant to the “wildcard” exemption. In their Chapter 13 plan, the co-debtors proposed to retain the residential property and pay their mortgage outside of their plan.
The Trustee objected to the co-debtors’ election of the “wildcard” exemption and argued the co-debtors were in fact “receiving the benefit of” the homestead protection despite not claiming it in their schedules. The Court agreed with the Trustee and based its conclusion on the differences between a Chapter 7 and Chapter 13 case. In a Chapter 7, a debtor who chooses to retain his residence and claim the wildcard exemption is effectively surrendering his residence to the Trustee for administration. He is not “receiving the benefit of” the homestead exemption because non-exempt property automatically becomes property of the estate subject to administration by the Trustee in a Chapter 7 case. However, in a Chapter 13 case, the debtor’s residence never becomes subject to administration by the Trustee regardless of whether the exemption is claimed. Instead, all non-exempt property is retained and treated under a Chapter 13 plan, and the Trustee is merely tasked with ensuring the debtor’s performance under the plan.
Based on the fundamental differences between Chapter 7 and Chapter 13, the Court determined that a Chapter 13 debtor is not entitled to the “wildcard” exemption if the debtor retains his residential property, even if the debtor does not claim the homestead exemption.