CHAPTER 13-REORGANIZATION

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1 BANKRUPTCY AND RECEIVERSHIPS KATHLEEN NITSCHKE GIFFEN & KAMINSKI, LLC Overview BANKRUPTCY What Did The Court Decide? BANKRUPTCY-WHAT IS ITS PURPOSE? To distribute assets fairly to unsecured creditors or to reorganize debt to allow for the continuation of business BANKRUPTCY COMMENCEMENT OF BANKRUTPCY AUTOMATIC STAY Chapter 7 Liquidation Chapter 9 Municipality Chapter 11 Reorganization of Business Chapter 13 Individual Reorganization Bankruptcy commences with the filing of a petition. Upon filing of petition a new estate is created with legal rights. Pursuant to 11 U.S.C. 362 an automatic stay is put into place at the time of the filing of the petition that stays all actions against any property or interest. CHAPTER 7-LIQUIDATION CHAPTER 13-REORGANIZATION WHAT IS DISCHARGE? In a liquidation, the Trustee s duties is to collect property and pay unsecured creditors monies owed. Debtor is discharged from their debts and are no longer liable to creditors. A plan for the repayment of debts is submitted to and approved by the Court. Plan can concern both unsecured and secured debt. Debtor is relieved of its obligations; Estate is left behind but the bankruptcy case is not over; Just because debtor is discharged does not mean that the property has been abandoned by the Trustee.

2 Avoidance actions are brought pursuant to 11 USC 544. Specifically, 544(a), the Strong Arm Clause, provides that the Trustee shall have, at the commencement of a case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor...that is voidable by a bonafide purchaser of real property from the debtor. In other words, the Trustee enjoys the status of a hypothetical bona fide purchaser, without regard to any actual knowledge of the Trustee. The execution of a mortgage must comply with the statutorily required formalities to be considered valid. In Ohio, a mortgage which is not properly executed is not entitled to be recorded. If an invalid mortgage is recorded, the mortgage is treated as though it had not been recorded. Consequently, a bona fide purchaser (Trustee) can avoid an invalid mortgage whether or not it has been reocorded. Preference actions are brought pursuant to 11 USC 547. The statute lists elements that need to be satisfied by the Trustee to establish a preference. Preference actions regarding mortgages arose from the defense of lis pendens which was being asserted in avoidance actions Lis pendens provides that: When a complaint is filed, the action is pending so as to charge a third persons with notice of its pendency. While pending, no interest can be acquired by third persons in the subject action, as against the plaintiff s title. Theory being that there was no notice of mortgage until action on mortgage was filed and notice given if within 90 days before filing of petition then preference. 11 USC 548 provides that a trustee may avoid a transfer of interest of a debtor within 2 years of the filing of the petition if satisfies enumerated elements.

3 WHY DO THE TRUSTEES ATTACK MORTGAGES? However, 11 U.S.C. 548(c) provides for an exception for good faith purchases. It provides in part: (c) The trustee may not avoid under subsection (a) of this section a transfer of an interest in real property to a good faith purchaser without knowledge of the commencement of the case and for present fair equivalent value unless a copy or notice of the petition was filed where a transfer of an interest in such real property may be recorded. In order to raise money for the bankruptcy estate either through the sale of the property or by means of monetary settlements. Dallas gives power of attorney to his wife, Shirley; Shirley grants mortgage on jointly owned property; Shirley signs as herself and in capacity as power of attorney; Trustee seeks to avoid mortgage for improper execution due to notary acknowledgment clause. William Todd Drown v. National City Bank (6 th Cir. July 20, 2011), 2011 U.S. App. LEXIS Joyce grants mortgage on the property; Notary public fails to apply notary seal; Notary s name is not printed, typewritten or stamped legibly on document; Notary does not list date of expiration of term; Trustee seeks to avoid for improper execution of mortgage. Brent Stubbins v. BAC Home Loan Servicing, LP (S.D. Bk Sept. 23, 2011), 2011 Bankr. LEXIS Recently followed in Roger Luring v. Midland Mortgage Company (S.D. Bk Feb. 2012), 465 B.R. 146, 2012 Bankr. Lexis 764 Tim and Lori grant mortgage on jointly owned property; Lori appears in notary acknowledgment clause and not Tim; Trustee seeks to avoid mortgage.

4 Susan Rhiel v. Huntington National Bank (S.D. BK March 4, 2011), 445 B.R Recently followed by Thomas R. Noland, Trustee v. Annette Gail Wiggins, (S.D. BK April 10, 2012), 2012 Bankr. Lexis Richard grants mortgage on property; Richard defaults; Foreclosure filed December 9, 2008; Petition filed January 21, 2009; The notary fails to include Richard s name in the notary acknowledgment clause; Trustee wants to avoid mortgage and seeks to defeat lis pendens with preference action. Eric Goering v. Green Tree Financial Services Corp. (S.D. BK May 2, 2011), 2011 Bankr LEXIS Cited by: Mason v. Ocwen Loan Servicing, (S.D. Bk. Feb. 17, 2012), 2012 Bankr. Lexis 553 Todd and Zeta grant a mortgage on a property that they jointly own; The granting clause of the mortgage appears as follows: (B) "Borrower" is TODD S PAYNE, MARRIED Both Todd and Zeta initialed each page of the mortgage; Todd s name was pre-printed below the signature line; Zeta wrote her name below the line and signed her name; Trustee seeks to avoid half interest of Zeta.

5 TRANSFER OF RIGHTS IN THE PROPERTY : For this purpose, Borrower does hereby mortgage, grant and convey Borrower covenants that Borrower is lawfully seised of the estate hereby conveyed and has the right to mortgage, grant and convey the property. Clyde Hardesty v. Huntington National Bank (S.D. BK March 31, 2011), 450 B.R RECEIVERSHIP 101 WHAT IS RECEIVERSHIP? WHAT ARE ITS BENEFITS? WHAT IS A RECEIVER? Receivership is an alternative to bankruptcy whereby a receiver is appointed to maximize the assets of an entity and facilitate payment to its creditors. It is not bankruptcy; Usually costs less than bankruptcy; Driven by business decisions not legal ones; It moves at the speed of business; More flexible than bankruptcy. A receiver is one placed in the custodial responsibility for the property of others, including tangible and intangible assets and rights. WHO MAY BE A RECEIVER? WHO SHOULD BE A RECEIVER? HOW DOES A RECEIVER GET APPOINTED? Pursuant to Ohio Revised Code Section no party, attorney, or person interested in an action shall be appointed as a receiver unless there is consent of the parties. Skilled turn-around consultants; Inherent understanding of the law; Quick on their feet; Resourceful; Good business managers. Typically, three ways: 1.Pursuant to statute; 2.Privately-appointed receiver; 3.Court-appointed receiver.

6 STATUTORY APPOINTMENTS PRIVATELY APPOINTED RECEIVER COURT APPOINTED RECEIVER Arise from state or federal laws, which specifically provide for the appointment of a receiver. Appointed pursuant to a contractual agreement such as a security interest where the ability to appoint a receiver is specifically provided for in the security document. Anyone with a valid and quantifiable interest in a company can seek a court appointed receiver. A court must have personal jurisdiction over the parties involved or over the entity placed into receivership. WHAT DOES A RECEIVER DO? WHAT DOES A RECEIVER DO? It is not necessary that the assets at issue be withinthe jurisdiction of the court who is appointing the receiver. Ohio ex rel. Petro v. Gold, 166 Ohio App.3d 371. A receiver is responsible as a fiduciary of all of the assets of the receivership. The goal of the receiver is to maximize returns from the assets either through a going-concern sale or liquidation. The role of receiver supersedes existing management authority of the entity. He or she controls all of the assets over which he/she is appointed. Thus, only the receiver can run the business or control the assets. HOW DOES A RECEIVER MAXIMIZE RETURNS FROM ASSETS? THEN WHAT? HOW DOES THE RECEIVER GET PAID? Taking and keeping possession of property; Receiving rents; Collect, compound for and compromise demands; Make transfers of property; Anything other action permitted by the court. At the appropriate time, the receiver will disburse the proceeds (i.e. returns from assets) to valid creditors in the priority provided by law. Secured creditors receive payment prior to unsecured creditors. A receiver generally gets paid from the assets of the estate. Castlebrook v. Dayton Prop. Ltd. Partnership (1992), 78 Ohio App.3d 340. Receiver fees are priority claims; They should be paid on reasonable terms; Attorney s fees can be recovered.

7 WHAT HAPPENS WHEN THE RECEIVERSHIP IS COMPLETED? Once a receivership is concluded, a receiver should be discharged from his/her duties. Depending on the type of receivership, the discharge maybe a letter from the appointing creditor or an order of the court. Although not statutorily mandated, due process of court requires that an interested party be given notice before a receiver sells property. Galt Alloys, Inc. v. KeyBank N.A. (1999), 85 Ohio St.3d 353. What constitutes notice of the sale? Determined on a case-by case basis; Court is not required to strictly follow the notice requirements of Ohio Revised Code ; Need reasonable notice and opportunity to respond. A property can not be sold free and clear of liens without the consent of the lienholder or notice to the lienholder that the property would be sold free of the lien. Ohio Dir. Of Trans. v. Eastlake Land Development Co., 177 Ohio App.3d 379. If a parcel of real estate is sold to a bona fide purchaser who does not have knowledge of the receivership, then the purchaser has priority over the receiver and is entitled to possession. Cadle Co. No. 2 v. Rendezvous Realty (Sept. 2, 1993), 8 th App. Nos , GIFFEN & KAMINSKI, LLC Attorneys at Law 1300 East Ninth Street, Suite 1600 Cleveland, Ohio Phone: Fax: