The Latest Clues on Whether the Senate Will Pass the Bankruptcy Mortgage Cramdown

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

With the Senate poised for a floor vote this week on the mortgage cramdown legislation, here are the very latest clues as to whether or not it will pass there.

The Most Recent Negotiations & Tactics

Early in the Congressional Easter Recess which ended a week ago, Senate Majority Leader Harry Reid made a statement that if the cramdown bill did not have the votes for passage, he would be willing to drop it from other housing-related legislation. One intent of this was to put pressure on the negotiators to come up with a compromise during the recess. No deal was reached and negotiations continued last week after Congress returned. No breakthrough was achieved, and instead the news focused on indications of continued dispute--including dueling announcements midweek by the National Association of Federal Credit Unions that it could not support the legislation on the table and by the larger Credit Union National Association arguing that the negotiations were progressing productively. In a news conference on Thursday, April 23, Senator Reid announced that the bill would be brought to the Senate floor for a vote this week. He did not provide details about the cramdown terms or whether it would be packaged with other housing provisions as the successful House bill had been. Negotiations continued over this last weekend.

Standing on Principle vs. Compromising

From my review of countless articles over the past few weeks, the dynamic at play appears to be that the key proponents of the legislation ardently believe that restricting mortgage cramdown to a relatively limited pool of loans--such as subprime or Alt-A ones--would limit its impact so severely as to have it fail in its purpose. At the same time the most ardent opponents--the Mortgage Bankers Association, American Bankers Association, the Financial Services Roundtable--appear to be against mortgage cramdown in any form, and have virtually every Republican Senator in that camp. There are very few Republican Senators, and a few more conservative Democrats, who are somewhat more open to the bankruptcy cramdown concept, state that they are very nervous about the economic impact of a broad applied cramdown, and are only willing to sign on to a restricted version. The votes appear to be sufficient for passage if a restricted version would be put to the Senate floor, but there is no present indication that will be happening.

The Legislative Packaging

Whether the cramdown bill will be packaged with other provisions the credit industry favors will indicate how aggressively the Senate Democratic leadership is willing to push to have the bill pass, and how likely it would pass.

Back during the Easter recess, a Wall Street Journal editorial referred to a bill that banks are hoping for, a huge temporary increase in the FDIC's borrowing authority from the Treasury, which could mitigate an onerous increase in the FDIC's deposit-insurance fee. The editorial said that "[w]e're told that Senate assistant majority leader Dick Durbin is telling banks that if they want that extra credit-line for the FDIC, they'd best sign on to cramdown. A spokesman for Mr. Durbin denies threatening banks, but we also know he refuses to give the FDIC credit increase a stand-alone vote."

The question now is whether the cramdown measure will be part of the package including the FDIC borrowing authority increase, or whether it will be offered as a stand-alone amendment, thus much more easily voted against. The latter would also give Democrats both political cover as to their constituents and talking points for future battles, by enabling them to blame Republicans more directly for the legislation's failure to pass. As an indication of this, in a news conference on April 23 the Democratic leadership, including Senators Dick Durbin and Harry Reid, attacked the Republicans for their purported inflexibility. Thus, more likely the cramdown provisions will not be combined with creditor-attractive legislation but will be voted on directly in a proposed amendment to a broader housing-related bill.

And If It Does Not Pass?

If the cramdown does not survive the Senate floor vote, Sen. Durbin, who has been pushing similar legislation for years, asserts that he would continue trying to pass some version. Who knows whether that is a face-saving comment or is true, and even if true whether the best time for potential passage would have come and gone. However, considering that home foreclosures will almost certainly continue at a heart-breaking pace for months if not several years to come, the public pressure for direct relief through bankruptcy cramdowns will continue.

NOTE:

There have been no committee hearings whatsoever in the Senate, and no formal action on Senate Bill 61 at all since the day Sen. Durbin introduced it on January 6, 2009 at the very beginning of this legislative session. On that same day it was referred to the Judiciary Committee, where nothing further has occurred. Instead the House took the lead, debated an identical and then amended bill in committee and an amended one on the House floor, and passed that amended version in early March.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Bankruptcy Cramdown Headed for Senate Vote Next Week, Likely to Defeat?

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

The Associated Press and Reuters are both reporting as of late afternoon today that Senate Majority Leader Harry Reid has announced that the bankruptcy mortgage cramdown bill is heading for a vote on the Senate floor likely either Wednesday or Thursday of this coming week. The Associated Press story is further stating that the bill is "headed for defeat." The AP story does not state specifically the basis for this prediction, except to cite the statements of two Democratic Senators who are saying they intend to vote against the legislation, Jon Tester of Montana and Ben Nelson of Nebraska.

Throughout this week there have been indications of the intense ongoing negotiations coordinated mostly through Senator Dick Durbin's office, in which he sought creditor industry support primarily from some of the largest banks and from credit union organizations. The goal had been to have a deal in place as a way of persuading all or virtually all Democratic Senators to get behind the bill, along with a handful of Republicans, to reach the filibuster-proof 60 votes. There has been no announcement of such a deal.

Instead the consistent story of the week has been the lack of progress in the negotiations, punctuated by a midweek story that received a great deal of publicity, a statement by the National Association of Federal Credit Unions that it could not support the legislation in the form being negotiated. This produced a public retort by the much larger Credit Union National Association, with its president chiding the rival trade group for no longer participating in the negotiations.

Treasury Secretary Timothy Geithner did not help the cause earlier in the week with his less than enthusiastic endorsement of the legislation: "We are supportive of carefully designed changes” to bankruptcy law, Geithner said. “It’s a difficult balance to get right, as you know,” he continued. “But the president is supportive of this.” He was responding to a question from Elizabeth Warren, chairwoman of the congressional oversight panel on the financial bailout, a friendly audience since she has been a long-time supporter of the bankruptcy mortgage cramdown option.

Please return to this website for developments throughout this upcoming week as the anticipated Senate floor vote approaches.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.


by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

A Busy Senate Easter Break for the Bankruptcy Mortgage Cramdown Legislation

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

After a few days of quiet early in the Congressional two-week Easter break which ended this last weekend, reliable details are now emerging about the intense negotiations on the bankruptcy mortgage cramdown legislation among Senators and their staff during the break. After the Senate leadership decided in mid-March not to bring a bill to the floor for a vote before the break (see my earlier Bulletin on this), rumors arose that the legislation was in serious trouble. Indeed there is more doubt now that a bill will pass Congress than at any time since the beginning of the session. All indications are that at the least the bill that passed the House of Representatives on March 5 will not pass the Senate without significant changes. However, the vigorous horse-trading of the last week or two which has now come to light--occurring even while Congress was not in session--shows that the legislation is very much alive. But whether any bill will pass in the Senate, and then survive in a conference committee to resolve the almost certain differences from the House bill, is still impossible to predict.

If a bill does emerge into law, some of its most important provisions will be shaped by how Congress resolves the issues which were the subject of the last few days of negotiation, as follows:

1) Potential Restriction to Subprime Mortgages

On April 16, a spokesperson for Senator Richard Durbin, sponsor of the Senate bill and the Senate Majority Whip, said that one of the main points of contention is whether to limit bankruptcy cramdowns to certain kinds of mortgages, at the extreme end only to subprime mortgages. Indications are that such a severe restriction is unacceptable to Sen. Durbin. In contrast, the bill passed by the House has no such restriction, in that it is applicable to any mortgage "secured by a security interest in the debtor’s principal residence that is the subject of a notice that a foreclosure may be commenced with respect to such loan." (See my prior Bulletin on the key terms of the bill passed by the House.)

2) Potential Restriction to Mortgages of Limited Time Periods, Limited in Amount

Bankruptcy mortgage modifications are limited in one compromised version to loans originated before 2009, and with a balance of less than $729,750. The modification provisions would expire in 2014. In contrast the House-passed version would include loans "originated before the effective date" of the law, thus including those entered into so far this year. And importantly there is no explicit maximum loan balance in the House bill, and no sunset clause.

3) Restrictions Related to Non-Bankruptcy Mortgage Modifications

Before its early March passage, the House bill had been delayed by and then amended at the behest of a group of self-styled "moderate" Democratic Representatives. This amendment required bankruptcy judges in certain circumstances to consider whether a non-bankruptcy loan modification consistent with President Obama’s Homeowner Affordability & Stability Plan had been offered to the homeowners before their Chapter 13 case was filed. For more details on this provision, see my earlier Bulletin titled The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself. A potential Senate compromise would convert this limited and at least somewhat discretionary standard and turn it into a explicit restriction: if a lender offered a modification through the Obama plan or last year's Hope for Homeowners Act program called the Hope for Homeowners Act, the homeowner would be ineligible to modify their loan through bankruptcy.

Another related potential compromise: if a homeowner ended up paying a quarter of income or less for the mortgage under a non-bankruptcy modification under the Obama plan, he or she would not be eligible for a bankruptcy modification.

4) Limits on Principal Reduction

Mortgage holders have been highly resistant to lowering principal balances, in large part because they do not want to lose any more discretion on how to value such assets. This issue is one that is near the heart of the mortgage crisis. A potential compromise in discussion among Senate negotiators would not allow mortgage principal reductions for certain low-income borrowers who pay less than 31 percent of their income for their mortgage payments. Instead they could only have their interest rates reduced or their loans amortized over a longer time.

5) 50-50% Split of Residential Sale Proceeds

In mortgages where the principal is reduced by a bankruptcy judge and the residence is then sold during the Chapter 13 case for more than the court-determined value, one possible Senate compromise would have the mortgage holder and homeowner evenly split any such profit. This is actually less generous to mortgage holders in some respects than the House bill. The House version's annually graduated schedule pays to the mortgage holder 90% of such potential profit during the 1st year of the Chapter 13 plan, 70% the 2nd year, 50% the 3rd year, 30% the 4th year, and 10% the 5th year.

Current Prospects in the Senate

Max Gleischman, Senator Durbin's spokesperson, said on April 8 that the bill in the form that passed the House bill in March “doesn’t have the votes to pass the Senate.” So the pressing question is what compromises will be struck in the next few days to come up with a bill which the leadership believes will pass. According to an April 16 CongressDaily / NationalJournal.com article, "Democrats hope to move the measure this month with a deal in place."

Congress is scheduled to reconvene on Monday, April 20. Prospects are that the negotiations will only intensify.

Addendum: Potentially Influential Report for the Senate Debate

Mr. Gleischman says that Senator Durbin sought independent analysis of the controversial issues behind his mortgage cramdown proposal from, among other sources, a Credit Suisse/Fixed Income Research report of late January 2009. It is titled "Bankruptcy Law Reform – A new tool for foreclosure avoidance." Given how extensively this respected research organization's earlier study on the projected number of upcoming foreclosures was cited by the press and by many governmental decision makers, I anticipated this new report's similar impact. See my prior Bulletin titled New Report by Influential Credit Suisse Cautiously Supportive of Chapter 13 Mortgage Cramdown Legislation. This study goes to the heart of the issue: the potential effectiveness of Chapter 13 residential mortgage cramdowns and their potential effect on future mortgage credit markets. It is highly worthwhile reading.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Mortgage Cramdown Legislation Stalled in the Senate, Not Likely Seeing Action Until Late-April, After Easter Break

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Although there had been some indications that the Senate would quickly take up the Chapter 13 mortgage cramdown legislation after the House of Representatives passed its bill on March 5, because of political distractions and fierce negotiations this will not happen until late April or even later.

Hurry Up and Wait
When the House passed HR 1106, the "Helping Families Save Their Homes Act of 2009" on March 5, the Democratic Senate leadership signaled that it would attempt to bring the matter to a vote within the following week or two. That same day Bloomberg.com reported that the senior communication advisor to Senate Majority Leader Harry Reid, Jim Manley, one of the most powerful Senate staffers, said the Senate could vote on its bill as early as the following week.

But with more than two weeks having passed and the start of the two week Easter recess a little more than a week away--it starts Friday, April 3--it appears highly unlikely that the Senate will take any action on its bill, S. 61, until after this recess. Indeed, according to a recent Associated Press story, the bill did not make it onto Senator Reid's list of priorities to accomplish before the Easter recess.

The Behind-the-Scenes Negotiations
The Senate situation echos what occurred in the House. There the House Judiciary Committee passed H.R. 200 with amendments on January 27, and the full House was scheduled to vote on it on February 26, but was delayed a week while additional amendments were hammered out and the necessary votes rounded up. (See my earlier Bulletin on this delay in the House.)

The wrangling in the Senate continues the House battles on how much to narrow the types of mortgage eligible for Chapter 13 cramdown. The horsetrading is closely tied to the need to attract virtually every one of the 58 Democratic votes (with the potentially 59th Minnesota vote still tied up in litigation) and a few Republican votes to reach the 60 needed to break filibuster. Republican Arlen Spector of Pennsylvania has long been a potential supporter, but apparently only a narrower version, so Democratic Sen. Evan Bayh of Indiana and he are working on a proposal limiting cramdown only to subprime mortgages. There are also discussions among the Democratic leadership and various creditor organizations, such as the Credit Union National Association, to include provisions favorable to them, in an effort to win their support and that of on-the-fence Senators.

The Personal Politics
While Sen. Dick Durbin of Michigan is the sponsor of S. 61, the "Helping Families Save Their Homes in Bankruptcy Act of 2009," Sen. Christopher Dodd of Connecticut has been an influential and vocal supporter. He is the Chair of the Senate Banking, Housing, and Urban Affairs Committee to which the House bill was referred after it passed. He spoke at the press conference along with Sen. Durbin in early January when the "deal" with Citigroup was announced. (See my Bulletin about that.) In his speech on March 12 to the Consumer Federation of America, he emphasized the importance of and his support for the bankruptcy legislation.

But Sen. Dodd has been buffeted by a number of controversies involving personal financial matters--he is under Senate ethics investigation for a couple of Countrywide mortgages he received, and in the last two weeks has been soundly criticized in the AIG executive bonuses brouhaha. AIG's notorious Financial Products division is based in Connecticut, and Sen. Dodd was the largest recipient of AIG executives' political contributions in the US Senate, according to the Center for Responsive Politics. He vacillated about his role in the stimulus bill which allowed those AIG bonuses, first denying involvement and then trying to pin the blame on the Treasury Department, until Secretary Geithner accepted responsibility. Dodd is up for election in 2010, and in spite of being the longest-serving Senator in his state's history, in a state that has recently tended to vote Democratic, is in a close race with his anticipated Republican challenger. It is hard to say what effect his political vulnerabilities will have on the controversial bankruptcy legislation, but these circumstances do not seem conducive to risk-taking.

The Latest on the Prospects
A month of delay, including a two week recess, is a very long time in this economic and political environment, making assessing the legislation's prospects impossible. This delay gives opportunity for Senators to be influenced by all the interest groups, especially those who can most afford to pay for that influence. But it also perhaps gives them the opportunity to see the detrimental impact of home foreclosures upon their voting constituents and neighborhoods.

The House vote earlier this month had to some degree been slowed down by the controversies of the prior few weeks surrounding the huge stimulus bill, and now Congress is digging into controversial budgetary issues with the same potential effect on the Senate side. And for the first time there are serious hints of the possibility that no version of the legislation will pass, or only a highly restrictive one, given the skepticism expressed by a number of "centrist" Democratic Senators, and by Republican Senators who had appeared more amenable earlier. The fate of the legislation will depend on the direction of the economic and political winds of the next several weeks.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

The Terms of the Bankruptcy Mortgage Cramdown Bill Passed by the House of Representatives--The Cramdown Itself

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

This Bankruptcy Bulletin presents the core cramdown provisions of the bankruptcy bill which was passed by the House of Representatives last Thursday, H.R. 1106. Each part of the bill outline below refers both to its pertinent Section number in the bill and to the Bankruptcy Code Section it proposes to amend. The full text of the engrossed bill is as passed by the House is at either of these two website: one by govtrack.us and the other by the Library of Congress' THOMAS.

(See my Bulletin of last Friday, March 6, on the passage of this bill in the House, the amendments offered on the floor, and the legislation's prospects in the Senate. An upcoming Bulletin addresses other aspects of the bill affecting Chapter 13, including a major but selective expansion in the jurisdictional debt limits, new rules governing post-petition fees of mortgage creditors, and the bill's applicability to previously filed cases.)

Mortgages eligible for Chapter 13 cramdown (H.R. 1106 Section 103; Bankruptcy Code Section 1322(b)(11)):

• All mortgages secured by "principal residence" after receiving notice of potential foreclosure.
• Not restricted to sub-prime or any other category of mortgages.
• Does NOT include mortgages entered into after the law goes into effect.

Mortgage modifications permitted (Bill Section 103; Code Section 1322(b)(11)):

• Reducing principal to the value of the residence.
• Stopping postpetition interest rate adjustments.
• Extending the term of payment to as long as a total of 40 years.
• Adjusting interest to the rate as published by the Federal Financial Institutions Examination Council, "plus a reasonable premium for risk."

Payments on modified mortgages may be paid (Bill Section 103; Code Section 1322(b)(11)):

• "[D]irectly to the holder of the claim."
• "[T]hrough the trustee during the term of the plan," "at the discretion of the court."

The court may confirm a plan with a mortgage modification that reduces the interest rate but not the principle, if (Bill Section 105; Code Section 1325(d)):

• The "total monthly mortgage payment is reduced to a percentage of the debtor's income in accordance with the guidelines of the . . . Homeowner Affordability and Stability Plan as implemented March 4, 2009."
• Allowing for expenses permitted under section 707(b)(2).
• The debtor could prevent foreclosure and pay a 30-year fully amortizing loan at the reduced interest rate without reducing principle, after allowing for "additional debts and fees that are to be paid in this chapter and thereafter."

Valuation of principal residence for cramdown (Bill Section 103; Code Section 1322(i)):
"Allowed secured claim" is the fair market value of the residence.
If there is a dispute about value, the court determines the value through the appraisal rules of the Federal Housing Administration.

Distribution of post-petition sale proceeds of principal residence (Bill Section 103; Code Section 1322(g)):

• For sales during 1st year of the Chapter 13 plan, 90% of net proceeds would go to the mortgage holder
• During the 2nd year, 70%.
• During the 3rd year, 50%.
• During the 4th year, 30%.
• During the 5th year, 10%.

Debtor's prepetition effort to modify mortgage (Bill Section 103; Code Section 1322(b)):
For Chapter 13 cases filed after 30 days after the law's effective date--

• Timing: Debtor must contact lender or servicer at least 30 before filing the case about modifying the mortgage.
• Must provide lender or servicer with information about income, expenses, and debt, in a format like the bankruptcy schedules.
• Must consider any "qualified loan modification"--a newly defined term--presented by the lender or servicer.
• These requirements are waived if a foreclosure is scheduled within 30 days after filing the Chapter 13 case.

For cases filed before 30 days after the law's effective date--

• Timing: Must attempt to contact lender or servicer about mortgage modification before filing an initial Chapter 13 plan, or a pre-confirmation or post-confirmation plan (no stated length of time).

Definition of "qualified loan modification" (Bill Section 100; Code Section 101(43A)):

• Mortgage modification agreement made under the guidelines of the Homeowner Affordability & Stability Plan.
• Debtor's aggregate housing payment does not exceed a percentage of income consistent with those guidelines.
• Scheduled payments fully amortize the outstanding loan principal without any periods of negative amortization.
• May not require debtor to pay any fees to participate.
• Can't be affected by debtor's filing of a bankruptcy.

Mortgage modification requires court's finding of debtors' good faith (Bill Section 105; Code Section 1325(a)):

• No good faith if debtor "can pay all of his or her debts. . . without difficulty for the foreseeable future."
• These debts include "any future payment increases on such debts.
• These payments include "the positive amortization of mortgage debt.
• "No good faith if court finds that debtor was "convicted of obtaining by actual fraud the extension, renewal, or refinancing of credit" at issue.

A reduction in mortgage principal requires a court determination of good faith (Bill Section 105; Code Section 1325(a)):
Court must consider whether the mortgage holder had offered an affordable "qualified loan modification" without principal reduction.

Modified mortgage holder retains lien on residence (Bill Section 105; Code Section 1325(a)):
Until the later of a) the payoff of the secured claim, or b) completion of all plan payments (or hardship discharge)

Exclusion of modified mortgage balance from discharge (Bill Section 106; Code section 1328(a)):
Discharge at end of Chapter 13 case excludes the unpaid portion of the "allowed secured claim."

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report. PLEASE EMAIL ME at Andy@BLSforAttorneys.com IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED onto this website.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Chapter 13 Mortgage Cramdown Bill Passes House of Representatives, Moves to Senate For New Battle About Amendments

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com

Yesterday evening (March 5) the House passed H.R. 1106, the Helping Families Save Their Homes Act of 2009, by a largely party-line vote of 234 to 191. Seven Republicans voted for it, 24 Democrats against. None of the Oregon and Washington Representatives broke party ranks. The vote came a week after debate on the bill began on the floor a week before, and after votes on three substantive amendments, two of which passed and one failed, all again mostly decided on party-line votes. The issue now goes to the Senate, as early as next week according to a spokesman for Senate Majority Leader Harry Reid, as reported by Bloomberg.com.

Senate Prospects
The Senate's bill, S. 61, is identical to the House's original bill, H.R. 200, when both were introduced on January 6, 2009, but has not yet seen any committee action. The consensus appears to be that passage in the Senate of a bankruptcy mortgage modification bill will be more difficult than in the House, if for no other reason than the Senate's rule requiring 60 votes to force a vote, effectively meaning that the bill must have the support of every Democratic Senator and also a couple Republicans. The additional time also gives the lobbying power of the mortgage industry opportunity to further limit the amendment's scope and to continue to try to kill it. However, the continuing downward spiral both in foreclosures and in the general economy may well encourage Senate passage. Of the House Republicans who crossed party lines to vote for H.R. 1106, most were from states with the worst foreclosure situations.

Amendments Made on the House Floor
Of the three amendments debated on the House floor yesterday, the one that was the closest vote, 211-218 (with all Republicans and 37 Democrats voting for in favor) did not pass. It sought to provide that if a residence with a mortgage modified through Chapter 13 is sold after "the effective date of the [Chapter 13 plan," at a net profit beyond the modified principal amount, the mortgage holder would recapture ALL of this profit (instead a portion as provided by another amendment).

The significant substantive amendment which did pass by 263-164, with all Democrats and 10 Republican votes, requires courts to use FHA appraisal guidelines in cases of dispute about a residence's fair market value, prevents Chapter 13 modifications for homeowners deemed to be able to pay their mortgage, extends the negotiation period before filing from 15 to 30 days, and requires the debtor to certify that he or she contacted the lender and provided it with income, expense and debt statements.

The other substantive amendment which passed, near unanimously, 423-2, provides that for debtors with their residence in foreclosure, their pre-filing credit counseling requirement can be met not just before filing but up to 30 days thereafter.

The precise language of these amendments is found in House Report 111-21 and 111-23. In an upcoming Bulletin on this website I will provide a more detailed analysis of the entire bill in its final version.

Party Unity
In the final 234-191 vote on the bill, the seven Republicans voting in favor are from Florida, Ohio, Delaware, New York and North Carolina, and the 24 Democrats voting against are from the South and Border States, and the greater Midwest.

Interestingly, the Republicans tended to vote more as a block with the exception of the key 1st amendment and the final vote. The opposition seems to be somewhat more united than the proponents. We shall see if that carries through to the Senate.

A new Bulletin on this website will provide an update of this legislation as soon as there is new information to report, certainly by the end of next week (March 13). PLEASE EMAIL ME at the address below IF YOU WOULD LIKE TO BE EMAILED A LINK TO IT AS SOON AS IT IS UPLOADED.

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

PLEASE NOTE that this Bulletin and the entire contents of this website are NOT designed for the general public but rather only for attorneys. The writer is not licensed to practice law in any state. This means that he is not legally permitted to give any legal advice or perform any legal services. Any non-attorney reading this must consult an attorney about ANYTHING contained here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.

© 2009 Bankruptcy Litigation Support for Attorneys

Annuity Bought for $10,000 by Debtor a Few Months Before Filing Chapter 7 Case is Not Exempt Either as Life Insurance or a Private Retirement Plan

By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com



Simpson v. Burkart (In re Simpson)
Ninth Circuit Court of Appeals, Case No. 07-15626
February 23, 2009

The Ninth Circuit panel agreed with both the bankruptcy court and the Bankruptcy Appellate Panel that a single-premium annuity purchased by debtor a few months before filing Chapter 7 was not exempt as either life insurance or private retirement account under California exemption statutes.

Although this opinion turns on statutory interpretation of California statutes, it is of broader interest because it addresses two important general issues:
a) what factors determine whether an annuity with life insurance components qualifies for a life insurance exemption, and
b) the role of debtor's subjective intent in determining whether an annuity qualifies for a retirement exemption.

(The BAP opinion being appealed from, Simpson v. Burkart (In re Simpson), 366 B.R. 64 (9th Cir. B.A.P. 2007) was authored by Judge Randall Dunn writing for the three-judge BAP.)

Essential Facts
The Annuity: Simpson paid $10,000 to buy an annuity "a few months" before filing a Chapter 7 bankruptcy.

• Simpson was the annuity contract owner and annuitant (the person entitled to receive benefits or payments from the annuity); his two sons were the beneficiaries.
• Non-qualified for IRS purposes, meaning that contributions to it are not tax-deductible.
• No loan value, so could not be borrowed against.
• If the annuity was surrendered before 2043 when Simpson was to begin receiving payments from it, he would have to pay a 10% early surrender penalty.
• If Simpson were to die before 2043--when he would be 95 years old, his beneficiaries could either surrender the annuity and receive the principal and interest, or could wait until that date and receive the payments as usual.
• Cute twist: Simpson bought the annuity through his bankruptcy attorney, who sold financial products as an apparent side business.
  

Judge Dunn's BAP Opinion Corrected on Methodology
The Ninth Circuit called "incorrect" the BAP opinion's statement that "[w]hether an annuity contract qualifies as exempt life insurance under California law is a factual determination that we review under the clearly erroneous standard.” Instead, the Ninth Circuit asserted:

we undertake two inquiries. The first is a question of statutory interpretation, that is, whether the claimed statutory exemption includes the asset at issue. . . .. If the statutory exemption categorically includes the questioned asset, then the inquiry is at an end. If the asset is not categorically embraced within the statutory exemption, then the question is whether, as a factual matter, the particular financial instrument qualifies for the exemption. . . . . Statutory interpretation and whether a particular policy qualifies as a life insurance policy are questions of law subject to de novo review. We do, however, review factual findings for clear error.

Life Insurance Exemption
The pertinent exemption statute states: "Unmatured life insurance policies (including endowment and annuity policies), but not the loan value of such policies, are exempt without making a claim."

As to the first inquiry, the Court determined that, notwithstanding the parenthetical reference to "annuity policies," "single-premium annuities are not included categorically within California’s statutory life insurance exemption." It based this on a prior BAP opinion's "careful statutory analysis" which concluded that the purpose of this parenthetical language was "to clarify that life insurance that includes the essential features of an annuity or endowment policy does not lose its exempt character." But that language apparently did not add annuities to this category of exemptions, which "applies only to life insurance."

On the second inquiry, in response to debtor's argument that the annuity "is actually a life insurance policy," the Ninth Circuit held that a "single-premium annuity that provides a guaranteed stream of income and has no contingencies that can divest the debtor or his beneficiaries of their right to payment is an investment, not a life insurance policy."

To make this determination, the Court looked to the following list of non-exclusive factors from the BAP opinion Turner v. Marshack (In re Turner), 186 B.R. 108, 117 (9th Cir. B.A.P. 1995):

(1) whether the annuity is truly contingent;

2) whether the debtor can accelerate the maturity date;

3) whether the debtor can borrow against the policy;

4) who owns the policy;

5) whether payment of the premium is consistent with an investment or payment;

6) whether the seller was licensed to sell life insurance in the debtor’s state;

7) what, if any, is the opinion of testifying experts;

8) what provisions of the application are also part of the policy; and

9) whether a life insurance policy in the debtor’s state must contain a death benefit.

The Ninth Circuit held that the BAP did not err in concluding that, based on the bankruptcy court's findings, the debtor's annuity was not a life insurance policy. The BAP had focused on six of the above factors, determining that the annuity is not life insurance because:

• "the payments under the . . . Annuity are not contingent upon debtor's life" (above factor 1);
• the "Annuity does not allow for the debtor to accelerate the maturity date" (factor 2);
• the "Annuity . . . does not allow the debtor to borrow against it" (factor 3);
• “[i]nstead of creating an immediate estate for the benefit of others, the annuitant [reduced his] immediate estate in favor of future contingent income." (factor 4);
• the "limited death benefits do not change the fundamental purpose of the . . . Annuity — to provide the debtor with fixed, periodic payments for life or a stated period of time, without requiring his death to trigger [the annuity obligor]’s obligation to pay" (factor 5); and
• the annuity obligor was"authorized to sell life insurance . . .[but this is] not dispositive as to whether the annuity contract qualifies as life insurance . . .." (factor 6)

The only "death benefit" of the annuity was that upon debtor's death his beneficiaries would not have to pay the 10% early-surrender penalty and received an accelerated vesting of accrued interest; "those features do not change the 'fundamental purpose' of the . . . Annuity."

"Private Retirement Plan"
The pertinent exemption statute states:
All amounts held, controlled, or in process of distribution by a private retirement plan, for the payment of benefits as an annuity, pension, retirement
allowance, disability payment, or death benefit from a private retirement plan are exempt.
To be a "private retirement plan," the asset must fit into one of the following definitions:
(1) Private retirement plans, including, but not limited to, union retirement plans.
(2) Profit-sharing plans designed and used for retirement purposes.
(3) Self-employed retirement plans and individual retirement annuities or accounts provided for in the Internal Revenue Code of 1986.

Starting again with the first inquiry, the Court asked if under this statute a single-premium annuity would "categorically" fit under the the term, "private retirement plan." It reviewed California case law, which did not directly address whether a single-premium annuity would qualify as a private retirement plan, observing that not a single one of the appellate decisions interpreting the term did so "to include independent retirement investments." From this the Court inferred that such annuities would not "qualify categorically under California law as a private retirement plan."

And on the second inquiry, whether this particular annuity qualifies for the exemption, the debtor argued that it was a private security plan under subsection (1) above "because he subjectively intended to use it as one." But the Court cited an earlier Ninth Circuit opinion, Lieberman v. Hawkins (In re Lieberman), 245 F.3d 1090, (9th Cir. 2001) to determine that "debtor's subjective intent for or use of the asset is irrelevant to this analysis." That same earlier opinion held that "private retirement plans" under subsection (1) applied "only to retirement plans set up by private employers, 'not by individuals acting on their own, outside the employment sphere.' " As such, debtor's annuity here did not qualify as a "private retirement plan"

by Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com

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