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The banking industry expressed grave fears over the mortgage cramdown legislation that failed in a Senate vote last week, but a post-mortem on the scene makes that anxiety seem a little overhyped. With so many different groups vying to kill the legislation, the vote last week was never a nail-biter.
May 4 -
Anyone doubting the need for new strategy to combat the economic problems caused by the rising tide of foreclosures need look no farther than daily headlines: "Markets Fall on News of Layoffs;" "Governors Call for $1 Trillion Stimulus to Offset Budget Cuts," "How Will Schools´ Budget Cuts Affect Parents?" These, plucked randomly this week, have become an unending refrain. We can´t waste any more time.
January 23
While the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was rightfully heralded as an attempt to address many common abuses by debtors, the financial services industry still finds itself at a disadvantage to serial filers holding up the recovery process.
By repeatedly seeking the protection of the automatic stay, these distressed business owners and individual consumers are unnecessarily dragging out the process of getting money and property back to the creditors. As a result, financial institutions are all too often mired in these legal technicalities rather than providing new loans to more viable candidates who might be better positioned to help grow the economy.
Taking into consideration the concept of "schemes" for repeat filers in a nonresidential real estate arena was a giant step forward in 2005 and demonstrated that lawmakers understood these blatant abuses had been occurring. Under BAPCPA, the bankruptcy code requires showing that a case had been filed as part of a scheme to hinder, delay and default creditors in order to procure an in rem bar against future filings. As part of the updated Bankruptcy Technical Corrections Act of 2010, Congress further modified the bankruptcy code to provide that in rem relief can be granted if there are multiple bankruptcy filings in respect of a property that evidence a scheme to hinder, delay or defraud creditors. The word "and" was changed to "or" in an effort to ensure that Congress's intent was for relief to be granted even more liberally for the creditors. As a result, if a court found a pattern of multiple filings, there was no longer any need to demonstrate that the debtor intended to defraud its creditors.
There are many challenges that still persist for creditors and several key questions that remain unanswered. For example, there should more guidance to help determine how many times these debtors can be allowed to "try to reorganize" before the clock ultimately runs out. Common sense would seem to dictate that two filings should constitute enough of an opportunity for business owners or individual consumers to try to reorganize.
Additionally, clearer benchmarks should be developed for when the in rem bar can be imposed against the property in question versus the amorphous use of the word "scheme." The longer that the creditor has to wait for a return of finances and property also often means paying more insurance on the properties and facing the increased risk of never recovering the initial value of the investment; not to mention the burgeoning legal costs that go along with this process.
Overall, these would certainly be excellent first steps that could effectively lessen the excessive drain on judicial resources and creditors' pocketbooks, not to mention cutting down on all the time delays. These new reforms could also ideally better equip courts to objectively consider the futility of a case at an earlier stage. If the previous case failed because there was no ability to reorganize and the debtor took no steps to do so, the court could then logically conclude that a second filing, absent any new facts or change in circumstances, would be nothing more than another attempt to delay.
While a bankruptcy court has traditionally been a "debtors court" committed to helping grant debtors a fresh start, it should not allow for unchecked opportunities to hold the whole process hostage. Placing the burden solely on the creditor and requiring a showing of a scheme or pattern, which may warrant waiting for repeated filings, is simply inefficient and unproductive.
If Congress truly intended the relief to creditors to be liberally granted, as evidenced by the 2010 amendments, then guidelines establishing whose burden it is to show facts on a more streamlined basis need to be developed. Only by better balancing the needs of both the debtor with the creditor can fairer and more efficient results be achieved, and that is something all sides should be working towards.
Leslie Berkoff is a partner Moritt Hock & Hamroff.
