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!
The principle behind the absolute priority rule is simple: unsecured creditors should be paid before the debtor is entitled to retain property of the bankruptcy estate. In a corporate setting the absolute priority rule operates to ensure that an unsecured creditor is paid in full before a shareholder is able to retain its ownership interest in a corporate debtor. Although straightforward in the corporate setting, application of the absolute priority rule is more complex in individual chapter 11 bankruptcy cases.
Prior to the 2005 BAPCPA amendments, the absolute priority rule applied similarly to both individuals and corporations. However, post-BAPCPA, a debate has arisen over whether the absolute priority rule has been abrogated in individual chapter 11 bankruptcy cases. As we discussed in a previous post (Caveat Creditor), a minority of courts have adopted a so-called “broad view,” which provides that individual chapter 11 debtors may retain both pre-petition property and post-petition earnings without having to pay unsecured creditors in full. In effect, this “broad view” abrogates the absolute priority rule in regards to individual debtors. Nevertheless, the majority of courts have adopted a “narrow view,” which provides that an individual may retain only post-petition earnings without paying unsecured creditors in full. Under the “narrow view,” the absolute priority rule continues to apply to pre-petition interests or assets.
In the case of In re Martin, the Bankruptcy Court for the Middle District of Florida recently confirmed its adherence to the narrow view. In Martin, the debtor proposed to pay its unsecured creditors 5% of the value of their claims, while retaining three non-exempt investment properties upon confirmation. The debtor argued that the absolute priority rule had been abrogated by the BAPCPA amendments, and the class of unsecured creditors cried foul.
As Judge Jenneman held in In re Gellin, Judge Williamson adopted the “narrow view.” In making its determination, the court noted that one of the overarching congressional purposes of the BAPCPA amendments was to impose greater burdens on Chapter 11 debtors and to promote greater payouts to creditors, and abrogation of the absolute priority rule would run contrary to this purpose.
What should creditors and bankruptcy practitioners take away from Martin? First, under both the “broad view” and “narrow view” interpretations, individual chapter 11 debtors may retain post-petition earnings without paying unsecured creditors in full. Second, even though Martin represents a majority view on the subject, creditors should be prepared to encounter contrary case law. Because application of the absolute priority rule is critical to the treatment of unsecured creditors, we will continue to follow bankruptcy courts locally and nationally and inform you of any changes or shifts in the law.
Mortgages are big business. When mortgages are assigned, however, the mortgagor often is a non-party to the assignment. Thus, within certain jurisdictions, mortgagors have historically lacked the requisite standing to challenge the validity of the assignment.
Recently the First Circuit handed down the decision of Culhane v. Aurora Loan Services of Nebraska, in which they faced the question whether or not a mortgagor has standing to challenge the assignment of her mortgage – an assignment to which she is not a party and of which she is not a third party beneficiary. Ultimately the court found that the mortgagor did have standing to raise a legal challenge to the assignment.
The case was a matter of first impression for the First Circuit, and it has interesting implications both to real estate and contract law. Ordinarily, a non-party who does not benefit from a contract generally lacks standing to assert right sunder such contract. Nevertheless, the court found that a mortgagor has a legally cognizable right to challenge a foreclosing entity’s status “qua mortgagor,” which may include, in certain instances, challenging the validity of an assignment that purports to transfer the mortgage to a successor mortgagee.
Further narrowing their holding, the court noted that a mortgagor has standing qua mortgagor to challenge a mortgage assignment as invalid, ineffective, or void, but lacks standing when the assignment is merely voidable at the election of one party but otherwise effective to pass legal title.
Lenders should keep track of the impact that Culhane may have in their jurisdictions, as it potentially opens the courthouse doors to mortgagors who in the past would have lacked standing to challenge the validity of the assignment of their home’s mortgage.
The oral summary of Bankruptcy Judge Steven Rhodes’s opinion lasted roughly ninety minutes, and the forthcoming written opinion is rumored to be over one hundred and forty pages in length. In making his decision the Detroit bankruptcy judge green-lighted the City’s hopeful recovery through Chapter 9 bankruptcy.
The court noted that “this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start.” That Judge Rhodes allowed Detroit to continue under the protection of Chapter 9 is not overly surprising to anyone who has closely followed the case. In fact the major unions and creditors opposed to the continuation of the bankruptcy proceeding had already threatened to directly appeal the decision to the Sixth Circuit Court of Appeals, far in advance of the ruling.
What is surprising to many is Judge Rhodes’ holding that he would entertain pension cuts to finance Detroit’s “Plan of Adjustment,” the City’s proposal to restructure its debt and reshape government operations, through which it hopes to emerge from Chapter 9. Still, he emphasized that he would not agree to pension cuts in the City’s final Plan unless the entire Plan was fair and equitable.
As we explained in our prior post on Detroit’s bankruptcy filing, the court was faced with four main considerations to allow the bankruptcy to proceed. First, the court found that Michigan Governor Rick Snyder legally gave the city permission to file for bankruptcy in July. Second, the court found “that the city was generally not paying its debts as they became due. The court finds that the city of Detroit was and is insolvent.” The third and fourth elements concerning good faith were a bit less black and white.
Regarding whether the City negotiated in good faith, the court held that allowing only a month to negotiate was not enough, and the City did not request counter-proposals. Thus, the City’s creditors “cannot be faulted for failing to offer counter proposals when they did not have enough information to evaluate the city’s initial vague proposal.” Even though the court ruled that Detroit did not negotiate in good faith, they nevertheless filed the petition for bankruptcy in good faith. Importantly, Judge Rhodes found that the distance between both sides made it impractical to negotiate in good faith.
The court has set a deadline of March 2014 for the City to file its first Plan of Adjustment. To give a potential time frame on the resolution of the Detroit case, on the same day that Judge Rhodes handed down his opinion, Jefferson County Alabama, which had been the largest municipality to file for Chapter 9 relief before Detroit, declared an end to its $4.2 billion case filed in November 2011.
As the proceedings move forward, we will keep you updated on what may prove to be the most influential Chapter 9 proceeding in history.