Northern California Bankruptcy Lawyer Blog

Student loans continue to be a drag on the economy in Northern California because it is difficult to get any form of relief from a student loan. This is true even if you are unemployed as a result of the economic recession. Lenders have no incentives to work with borrowers since the debts are generally non-dischargeable in bankruptcy and the federal government has made no effort to help students despite helping financial institutions and homeowners in the economic recovery.

The total outstanding student debt appears to have surpassed $1 trillion late last year, according to officials at the Consumer Financial Protection Bureau (CFPB), a federal agency created after the financial crisis. Student loans may be dischargeable in Chapter 7 or Chapter 13 bankruptcy if you can show that repayment would impose an undue hardship on you and your dependents. Student loans may also be dischargegable after they are no longer collectable.

The Ninth Circuit Court of Appeal recently reviewed the seven year timing of collectability of a student loan under 11 U.S.C. § 523(a)(8)(A) (1990) in Poynter v. U.S. 2012 U.S. App. Lexis 6168, Case No. 10-56751 (9th Cir. 2012). In the case, Eric Poynter (debtor) filed a chapter 7 bankruptcy and on March 1994, the debtor received a discharge. Following the bankruptcy, the Department of Education continued to attempt to collect on the student loan. On September 2008, the debtor reopened his bankruptcy case for the purpose of obtaining a declaration that his 1985 educational loans were discharged in his bankruptcy.

The Bankruptcy Court and District Court determined that the loans were not dischargeable. The Ninth Circuit Court of Appeals reviewed the case and focused on whether or not the student loans were due more than seven years before the filing of the bankruptcy petition pursuant to 11 U.S.C. § 523(a)(8)(A) (1990). Under Section 523, if the student loans were due more than seven years before the filing, they would be uncollectible. Here, the critical date was October 27, 1986. The debtor argued that two provisions of the promissory notes caused the loans to become due by October 27, 1986. The debtor argued his grace period had run by September 1986 because he was not carrying at least one-half the normal academic workload because he stopped attending most of his classes. The Ninth Circuit ruled that enrollment, not attendance, was the issue. The debtor next argued that according to the terms of the loan the note would become "immediately due and payable" upon default. The debtor argued the failure to notify the lender of a change in enrollment status constituted a default. The Ninth Circuit rejected this argument finding that although such failure could constitute default, the lender had the discretion over when to declare a default, and when to demand repayment. There was no evidence that the lender demanded repayment more than seven years before the debtor filed for bankruptcy.

If you are having a problem paying your student loans, bankruptcy may be able to help you either by discharging other debts to help you afford the student loans or by discharging the debts if repayment would impose an undue hardship or they are no longer collectable. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Many people in Northern California are burdened by the cost of student loans and it continues to create a drag on the economic recovery. While there have been efforts by the federal government to help borrowers with home loans that are upside down, there has been no help for borrowers that are drowning in student debt. According to recent estimates by U.S. officials at the Consumer Financial Protection Bureau, the amount Americans owe on student loans is far higher than earlier estimates and could lead some consumers to postpone buying homes and making other purchases, potentially slowing the economic recovery.

If you have student loans that you are unable to afford Chapter 7 bankruptcy or Chapter 13 bankruptcy may help you to discharge other debts and give you the ability to repay the student debt or to reorganize your debts. In some cases, if you can show financial hardship, you may be able to discharge the student loan debt in bankruptcy.

The total outstanding student debt appears to have surpassed $1 trillion late last year, according to officials at the Consumer Financial Protection Bureau (CFPB), a federal agency created after the financial crisis. The CFPB estimate is based on a survey of private lenders, as opposed to other estimates that rely on a sampling of consumer credit reports. According to the CFPB student debt is rising because of the surge in Americans going to college in recent years to escape the weak labor market and tuition increases causing students to take out bigger loans.

In addition, the interest costs on older loans are climbing as borrowers fall behind on payments, reflecting mounting financial strains, according to the CFPB. The New York Fed data shows that as many as one in four student borrowers who have begun repaying their education debts are behind on payments. As more people go to college and assume bigger loans for education, they may take longer than previous generations to buy a house or get married. It could take longer for heavily indebted graduates to save money for a down payment on a home, or it could be harder for them to qualify for mortgages.

Student loans are generally nondischargeable in bankruptcy unless you can show that repayment would impose an undue hardship on you and your dependents. An undue hardship determination is generally based on a three-part test developed by the Courts. A student must show that based on current income and expenses the student cannot maintain a minimal standard of living for the student and the student's dependents if forced to repay the loan. That additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period. The student has made a good faith effort to repay the student loan. The additional circumstances refer to something beyond the mere current inability to pay. The circumstances must be exceptional, but only in the sense that they demonstrate insurmountable barriers to the student's financial recovery and ability to repay the student loan now and for a substantial portion of the loan's repayment period. Examples are serious mental or physical disability of the student or student's dependents that prevents employment or advancement, the student's obligations to care for dependents, lack of, or severely limited education, poor quality of education, lack of usable or marketable job skills, underemployment, maximized income potential in the chosen educational field and no other more lucrative job skills, limited number of years remaining in work life to allow repayment of the loans, age or other factors that prevent retraining or relocation as a means for paying the loan, lack of assets that could be used to repay the loan, potentially increasing expenses that outweigh any potential appreciation in the value of the student's assets and/or likely increases in the student's income. If these conditions apply then you can discharge your student loan in bankruptcy.

If you are worried about filing for bankruptcy and what impact it could have on your ability to obtain a student loan in the future, a governmental unit that operates a student grant or loan program, and any individual, partnership, or corporation engaged in a business that includes making loans guaranteed or insured under a student loan program, may not deny a grant, loan, loan guarantee or loan insurance to a person that is or has been a debtor in a bankruptcy case.

If you are having problems paying a student loan or other debts, bankruptcy may assist you. You should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Homeowners throughout Northern California continue to suffer because of the decline of property values and loans that can not be refinanced due to the decline in property values. While some lenders have allowed borrowers to modify their loans, the modifications often do not solve the problems facing the borrower and the modifications often require the borrower to pay back arrears created by the modification process. Lenders generally will not consider a modification unless the borrower is behind in the loan. The lenders then often take months before they provide their decision on the loan. As a result, the loan cannot be modified because of the arrears that have to be paid back in the modification.

If you are having problems with a loan and the loan is not secured because the value of the property has declined, you may be able to obtain relief through bankruptcy. In some cases, a second loan that does not have security can be stripped in a Chapter 13 bankruptcy and the arrears can be paid back over five years. In the alternative, the loan arrears can be discharged if the property is surrendered in a Chapter 7 bankruptcy.

In Securities and Exchange Commission v. Wells Fargo & Co., 12-80087, U.S. District Court, Northern District of California (San Francisco) the Securities and Exchange Commission (SEC) is investigating Wells Fargo to evaluate whether or not its sale of almost $60 billion in residential mortgage-backed securities involved fraud. The SEC has been examining how many banks packaged and sold home loans to investors that resulted in the financial crisis. The SEC is looking for evidence that banks failed to disclose underlying credit weaknesses in mortgage pools and delinquencies. In other investigations, the SEC has told Goldman Sachs Group Inc. and JPMorgan Chase & Co. (JPM) that they may face civil claims.

The Securities and Exchange Commission recently asked a federal judge in San Francisco to compel Wells Fargo, the largest U.S. home lender, to deliver documents it agreed to produce under subpoenas dating from September 2011. The SEC in the Commission's San Francisco Regional Office issued several subpoenas to Wells Fargo since September 2011 seeking, among other things, materials related to due diligence and to the bank's underwriting guidelines. According to the SEC, Wells Fargo agreed to produce the documents, and set forth a timetable for doing so, but Wells Fargo has failed to produce many of the materials.

Pursuant to its Application, the Commission is seeking an order from the federal district court compelling Wells Fargo to comply with the SEC's administrative subpoenas and to produce all responsive materials to the staff. The SEC notes that it is continuing to conduct a fact-finding inquiry and has not concluded that anyone has broken the law. The SEC is examining whether Wells Fargo misrepresented or omitted facts in offerings from September 2006 to early 2008, according to the application. While the bank reviewed a sampling of loans and excluded those that failed to meet its standards, Wells Fargo may not have taken steps to address flaws in the remainder of the pool, the SEC claims
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The SEC's request, if granted, would give Wells Fargo 14 days to hand over 1,365 e-mails and attachments it has withheld from the SEC, according to the court filing. Wells Fargo said in a statement that the enforcement action is unwarranted and that it will defend itself in court.

Wells Fargo said in its annual report filed February 28, 2012 that it received a notice from the SEC warning the bank that it may face civil claims tied to the sale of mortgage- backed securities. SEC lawyers send the notices when they intend to recommend that the agency take action. Four days before, on February 24, 2012 the SEC told Wells Fargo that it was considering enforcement measures, the SEC said in its court filing. The bank has attempted to use that as an "excuse to avoid complying with the subpoenas," the SEC said in the filing. "There is no basis for Wells Fargo's refusal to comply with the subpoenas because a Wells notice, such as the staff provided, does not terminate the commission's investigative power," the SEC said in its filing. The scope of the SEC's probe "involves not just Wells Fargo's own potential violations of the securities laws, but the roles played by other persons associated with the bank's residential mortgage-backed securities offerings," according to the filing.

If you are having problems with your lender and facing foreclosure, you should seek advice from a bankruptcy attorney to determine what options are available to you. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Home values have fallen significantly in Northern California since 2008 so that many people with mortgages owe more than their properties are worth. Many of the properties are heading for foreclosure. If your property is heading for foreclosure, Chapter 7 bankruptcy, Chapter 13 bankruptcy or Chapter 11 bankruptcy may help you keep the property. Property owners have been requesting loan modifications hoping that their loans will be reduced to the value of the property. Property owners with investment properties have faced resistance from lenders to modify their loans.

The Obama administration created the Home Affordable Modification Program (HAMP) to help homeowners modify certain loans that qualify for the program. To qualify for the HAMP, mortgages must meet the following requirements. The mortgage must be a first mortgage encumbering a 1-4 unit residential property that serves as the borrower's current primary residence. The borrower must have had a change in circumstances that causes financial hardship, or be facing a recent or imminent increase in the amount of the borrower's monthly payment that is likely to create a financial hardship. The unpaid principal balance of the mortgage must be no more than $729,750 (this amount increases proportionately for multiple unit properties.) The mortgage can not have been previously modified under the HAMP. The mortgage must have been originated on or before January 1, 2009 (mortgages are eligible to be modified until December 31, 2012).

The original HAMP program did not apply to investment properties. As a result, investors that purchased properties that subsequently lost value have had difficulty refinancing or modifying their loans. The Obama administration has indicated that it will extend mortgage assistance for the first time to investors who bought multiple homes before the market crashed. The HAMP program is being enlarged after less than one million borrowers modified loans through HAMP. The administration's goal in 2009 was to help three to four million homeowners. The program initially focused on owner-occupied houses because the need was high and to help keep homeowners in their homes. In the past, banks have repeatedly rejected property owners for a modification when the properties were not primary residences. The government is now recognizing that vacant properties are a problem no matter how they became vacant and as a result it is extending the HAMP program to owners of investment properties.

Under the new HAMP program, landlords and investors can qualify for up to four federally-subsidized loan modifications starting around May 2012. The program pays banks to reduce monthly payments by cutting interest rates, stretching terms, and forgiving principal. The loans can be modified if the properties are rented or there are plans to rent them. The government has concluded that the need to help to protect neighborhoods from blight and renters from eviction by keeping the current owners in place outweighs concern that taxpayers will end up bailing out real-estate investors. Federal Reserve Chairman Ben S. Bernanke told homebuilders in Florida recently that the U.S. economic recovery has been frustratingly slow, in part because weak housing markets are holding back consumer spending. As a result, investors are central to the federal government's strategy for reviving real estate with home prices significantly down since 2008 and because foreclosures deplete the number of buyers who can qualify for a mortgage.

At the same time the new HAMP program takes effect, a new Fannie Mae program designed to reduce the number of foreclosed homes is encouraging potential buyers, including private-equity firms, to purchase properties in bulk and convert them to rentals. The government announced last month that it would triple incentives to owners of mortgages that reduce home loan debt and expand eligibility to borrowers struggling under the weight of other liabilities, like medical bills. The extension will apply to all loans, including those held by Fannie Mae and Freddie Mac, the government-sponsored mortgage financiers.

While the efforts of the federal government to assist borrowers should help to relieve the crisis, the programs do not apply to everyone and there have been problems with implementation of the programs. As a result, if you are an investor, you may want to consider a Chapter 13 or Chapter 11 bankruptcy that would allow you to strip liens that do not have security because of the reduction in value of the properties or surrender the non-productive properties in a Chapter 7 bankruptcy. You should consult a bankruptcy attorney regarding your options. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Northern California continues to suffer from the effects of the great recession. The Federal Reserve has reported on December 8, 2011 that household wealth in the U.S. fell from July through September for a second straight quarter as the European debt crisis depressed stocks and home values decreased. According to the report, Net worth for households and non-profit groups decreased by $2.45 trillion.

The decline resulted from a fourteen percent slump in the Standard & Poor's 500 Index which is the worst quarter since 2008. This combined with another decrease of real estate values in the third quarter. According to the Federal Reserve, the value of household real estate decreased by $98.3 billion in the third quarter after dropping by $37 billion in the previous three months. Owners' equity as a share of total household real-estate holdings was little changed at 38.7 percent last quarter.

People living in Northern California continue to suffer from the problems identified in the Federal Reserve report. If your income or the value of your property has decreased and you are having financial difficulties, Chapter 7 or Chapter 13 bankruptcy may assist you. A Chapter 7 bankruptcy can discharge your credit card debts. A Chapter 13 bankruptcy can help you reorganize your debts and pay back arrears on your car and house loans.

According to the Federal Reserve, the volume of outstanding home mortgages was $9.93 trillion at the end of the second quarter. According to separate Federal Reserve data, this is the lowest figure since the end of 2006. This means U.S. mortgage debt, a driver of consumer spending during the real estate boom, may be about to enter its fourth year of decline as foreclosures wipe out home loans and housing purchases fall.

The value of financial assets, including stocks and pension fund holdings, held by American households decreased by $2.78 trillion in the third quarter, according to the Federal Reserve flow of funds data. Other forms of consumer credit, including auto and student loans, increased at a 1.2 percent pace.

According to the Federal Reserve report, Americans are reducing debt and rebuilding savings to weather an unemployment rate that has averaged 9 percent this year. Payrolls climbed by 120,000 in November and the jobless rate fell to 8.6 percent, the lowest level since March 2009, the Labor Department said on Dec. 2.

Total non-financial debt last quarter rose at a 4.3 percent annual pace, led by a 14.1 percent increase by the federal government and a 3.5 percent gain among businesses. State and local government borrowing was little changed.

If you live in Northern California and you are having financial difficulty, you should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

In Northern California plummeting home values have caused countless property owners to abandon the properties to the bank. The banks have refused to cooperate with the owners to modify the loans and the properties have gone through foreclosure. The banks have forced the homeowners out of the properties and the abandoned properties have been vulnerable to looting. If you are behind in your loan and you are looking for a strategy to keep your property, bankruptcy may help you. Chapter 13 bankruptcy can help you pay off your arrears over time and remove unsecured loans from your property. Chapter 7 bankruptcy can discharge debt from a property that you need to surrender or that has gone through foreclosure.

60 Minutes is reporting that across America, recession-fueled foreclosures and plummeting home values have left countless properties abandoned and vulnerable to looting. The problem has gotten so bad in some communities that county officials have been forced to demolish homes rather than let the blight spread and render nearby homes worthless. So there are two impacts from the property owner losing the property. The first impact is the loss of the property and the money invested in the property. The second is that the owner's neighbor's property values are degraded by the foreclosure and abandonment of the property. The homeowners in the neighborhood may not have indulged in the real estate bubble, but the neighbors have been trapped with the impact of the steady decline in home values. According to 60 Minutes, home values have dropped so far, so fast, that nearly 25 percent of mortgage holders today owe more than their house is worth.

With unemployment so high, so long, many face foreclosure. The new threat from the great recession is the sudden surge in the number of abandoned houses. Vacant homes have become ruinous to neighborhoods throughout America. The owners walked away because they couldn't or wouldn't keep paying on a mortgage debt that was twice the value of the home. After the home is abandoned foreclosure scavengers remove anything of value from the home. The scavengers find out about the properties because they are listed on line. When there are a number of abandoned homes in the neighborhood the remaining houses aren't worth a percentage less, they are just worthless.

In theory there shouldn't be any abandoned houses. When homeowners walk away, the bank is supposed to take responsibility. But one little known feature of the great recession is that after refusing to work with their customers to keep them in their homes, many banks are walking away too, unwilling to maintain a house whose value has crashed. Very often a bank will take a property to the point of foreclosure, but won't go to the sheriff's sale, because in the end they don't want the property. They don't want the responsibility of maintaining the property or paying the expense that comes with tearing the house down.

According to 60 Minutes, the banks could stop the wrecking crews if they would only reduce the loan balances on underwater mortgages. "You're gonna have to write down principle balances. Because if you don't write down the principle to something that's more realistic, it just guarantees that more people will walk away and more people will default. " "Aren't you better off let's say on a $150,000 mortgage preserving $75,000 in value, as opposed to letting that house go vacant, possibly seeing the house vandalized and dropping to a value well below that? I mean, they helped to cause this mess. And it's not going to fix itself without their cooperation." Cuyahoga County Ohio is tearing down 20,000 homes in the next year at a cost of $150 million dollars.

If you are having financial problems and or problems affording your loan. You should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

In Northern California a large number of homeowners are suffering because of loans obtained before the recession with high interest rates that could not be refinanced, declining property values and loans with negative amortization. For the most part, there have been no legal consequences for the lenders or their executives that were involved in the crisis resulting from subprime loans. The SEC and the Justice Department have been facing criticism for not doing anything to hold companies and executives accountable for any wrongdoing related to the financial crisis.

Today, the SEC charged six former executives of Fannie Mae and Freddie Mac with securities fraud claiming they misled the public about the companies' exposure to subprime loans during the onset of the mortgage meltdown. Fannie and Freddie provide funding for mortgage lenders and play a central role in housing finance. The companies were taken over by the federal government in 2008 and have received billions of dollars of taxpayer money to keep operating. The SEC said that it was not prosecuting the companies because Fannie and Freddie are now part of the government.

According to SEC enforcement director Robert Khuzami, Fannie Mae and Freddie Mac executives told the world that their subprime exposure was substantially smaller than it really was. These material misstatements occurred during a time of acute investor interest in financial institutions' exposure to subprime loans, and misled the market about the amount of risk on the company's books. The SEC said it is trying to force the Fannie and Freddie executives to pay fines and give up "ill-gotten gains" and to bar them from serving as officers or directors of public companies. The SEC alleged that in 2007, when Fannie Mae began reporting its exposure for subprime loans, or loans made to borrowers with weaker credit histories, it disclosed less than one-tenth of the total loans that met that description. At the time, Fannie's executives were trying to expand the company's market share by buying up more subprime and Alt-A loans. Alt-A loans often required no documentation of the borrower's income.

At Freddie Mac, the executives claimed that Freddie's single-family business had no subprime exposure, according to the SEC. At the time, Freddie was at risk for about $141 billion in loans that were described internally as "subprime" or "subprime like," accounting for 10 percent of the portfolio. That figure grew to about $244 billion, which was 14 percent of the portfolio, by mid-2008, according to the SEC. When the government seized the companies in September 2008, it wiped out all shareholders who owed stock in the companies. The Treasury Department received a 79.9 percent ownership stake in the firms.

The executives charged in the civil suits include Daniel H. Mudd, former chairman and chief executive of Fannie Mae, Richard F. Syron, former chairman and chief executive at Freddie Mac, Enrico Dallevecchia, Fannie's former chief risk officer; Thomas A. Lund, former executive vice president of Fannie's single-family mortgage business; Patricia L. Cook, former chief business officer of Freddie Mac; and Donald J. Bisenius, former executive vice president for Freddie's single family guarantee business.

The lawsuits were filed in federal court in Manhattan, where a judge recently refused to accept a settlement between the SEC and Citigroup and challenged the SEC's standard practice of settling cases without admissions or denials of wrongdoing.

If you are having problems with a loan in Northern California, bankruptcy may help you pay off arrearages or remove an unsecured loan allowing you to keep your house. If you are in foreclosure, you should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Northern California continues to be in the midst of an unprecedented foreclosure crisis. Since housing prices began their precipitous decline in early 2007, thousands of homes have gone into foreclosure, and thousands more remain in distress. The crisis has devastated families and communities all over Northern California. Although foreclosures are increasingly driven by high and persistent unemployment, the crisis has its origins in the subprime mortgage market. While subprime loans were initially marketed as "niche" products, during the latter half of the 1990s and early 2000s, subprime lending exploded to become a major driver of the U.S. housing market.

From 1996 to 2006, the size of the subprime mortgage market grew from $97 billion to $640 billion. At the peak of the subprime market in 2006, 27 percent of all loan originations were subprime. During this time period the subprime market became increasingly dominated by "non-traditional" loans, including interest-only loans, loans with limited or no documentation of income or assets, and loans with low teaser rates that adjusted to much higher rates. These loans were often made on the basis of weak underwriting and without regard for borrowers' ability to repay them. If you have lost your job, or if your loan has adjusted to a rate that is unaffordable, or the value of your home has decreased, you may be able to solve your financial problems by filing a Chapter 7 or Chapter 13 bankruptcy. If you are unable to afford you loan and the house has lost value you can surrender your home in a Chapter 7 bankruptcy and discharge your debts. If you have fallen behind on your loan but want to keep it, Chapter 13 bankruptcy can help you catch up on the arrearages and strip off unsecured loans on the property.

A recent report from the Center for Responsible Lending, "Lost Ground, 2011," finds that at least 2.7 million mortgages loaned from 2004 through 2008, or about 6 percent, have ended in foreclosure and that nearly 4 million more home loans (roughly 8 percent) from the same period remain at serious risk. According to the report, the nation is not even halfway through the foreclosure crisis. The report analyzed 27 million mortgages made over the five years. Across the country, low- and moderate-income neighborhoods have been hit especially hard, the report found.

The report found that certain types of loans have much higher rates of completed foreclosures and serious delinquencies. They include loans originated by brokers; hybrid adjustable-rate mortgages, option ARMs, loans with prepayment penalties and loans with high interest rates (subprime). Accompanying the report is an online map showing foreclosures and delinquencies by state.

If you have a loan that falls into one of the high risks categories and you have lost your job or are unable to continue to pay your loan, you may be facing a foreclosure. You should consult with an attorney since there may be options that could help you. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

Bank of America and other banks including Chase, Citigroup and Wells Fargo have been targeted by federal and state attorneys general investigators as the biggest violators of borrower's rights in the current mortgage crisis. Many borrowers in Northern California are suffering from a reduction in the value of their property, loans that far exceed their property value, spiraling loan costs and foreclosures. While borrowers have filed for assistance with Bank of America, Wells Fargo and Chase and other banks, the banks have often been unresponsive, requesting paperwork to be sent multiple times, delaying the process and then declining the modification and foreclosing on the loan based on the arrears created by the modification process. If you are having problems with your loan bankruptcy may help you. In a Chapter 7 bankruptcy you can discharge any recourse debt from a property you intend to surrender because you can no longer afford it. In a Chapter 13 bankruptcy you can strip unsecured loans from the property and obtain a payment plan to repay any arrears on the property. You can also get assistance in paying back taxes.

Bank of America's, Wells Fargo's and Chase's practices along with other banks have been the subject of negotiations with various state and federal agencies. Attorneys general from all 50 states began investigating the practices last year. State and federal officials investigating mortgage practices have worked on settlements including proposals for banks to fund principal writedowns for homeowners. The five largest banks have previously proposed paying $5 billion to settle the probe. Massachusetts Attorney General Martha Coakley has consistently indicated that her state will not sign on to any settlement of a nationwide foreclosure probe that includes liability releases for banks.

The banks in the settlement talks with state and federal officials have been seeking broad releases to protect them from legal claims. The banks want releases that go beyond servicing to include lending and securitization of loans. Massachusetts Attorney General Martha Coakley has said that she won't support an agreement that includes releases for securitization of mortgages and conduct related to a database of mortgages known as MERS.

Massachusetts Attorney General Martha Coakley filed a lawsuit on December 1, 2011 against JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc., Wells Fargo & Co., and Ally Financial Inc., in state court in Boston. The case is Commonwealth of Massachusetts v. Bank of America N.A., 11-4363, Suffolk County Superior Court (Boston). She accused the banks of engaging in unfair and deceptive trade practices in violation of state law for allegedly conducting unlawful foreclosures and deceiving homeowners. Coakley blamed the banks for failure to reach a deal, saying they hadn't offered "meaningful and enforceable relief" to homeowners for harm they have caused. With a settlement still out of reach more than a year after all 50 states announced their investigation into bank practices, Coakley said, she decided to file her lawsuit. "They have had more than a year to show they've understood their role and the need to show their accountability for this economic mess, and they failed to do so," she said.

Coakley said at a press conference in Boston, "the stakes could not be higher at this stage of the game." "The foreclosure crisis continues to be at the root of the economic mess that we find ourselves in and our inability to turn it around." Coakley said the banks moved to seize Massachusetts homes when they had no legal authority do so because they didn't hold the mortgage on the properties. Failure to obtain valid mortgage assignments before foreclosure has affected titles to "hundreds, if not thousands, of properties" in the state, she said. The banks also deceived and misled homeowners about loan modifications, the attorney general said in a statement. The servicers "often strung along borrowers for months" in trial modifications before rejecting their attempts to modify loans, according to Coakley. Banks are also accused of engaging in "robosigning," in which foreclosure paperwork is signed without verification of the information in the documents. The practice was also used in the transfer of mortgages, Coakley said. "If we do not do this, we are stuck in this downward spiral of more foreclosures in a way that is totally counterproductive to the economy," she said at the press conference.

In September, California Attorney General Kamala Harris said she was withdrawing from the national talks, saying a proposed settlement was "inadequate" and would allow too few California homeowners to stay in their homes, but she has not taken any action since making the statement. The action taken by Massachusetts may provoke California to take similiar action.

If you are having problems with a loan, you should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

There are a number of homeowners living in Northern California that have loans with Citigroup on properties that have lost value and the homeowners are unable to pay the loans. Many of these loans were financed with no down payments and high interest. The loans were then sold to investors. If you have a loan you were unable to pay in Northern California, and you are in foreclosure, a Chapter 7 bankruptcy or Chapter 13 bankruptcy may assist you.

The U.S. Securities and Exchange Commission (SEC) has been investigating whether or not Citigroup misled investors in a $1 billion collateralized debt obligation linked to subprime residential mortgage securities. The SEC filed a complaint against Citigroup alleging the misconduct. The case is U.S. Securities and Exchange Commission v. Citigroup Global Markets Inc., 11-cv-7387, U.S. District Court, Southern District of New York (Manhattan). In its complaint against Citigroup, the SEC said the bank misled investors in a $1 billion fund that included assets the bank had projected would lose money. At the same time it was selling the fund to investors, Citigroup took a short position in many of the underlying assets, according to the SEC. Investors lost about $700 million, according to the SEC. The case is scheduled for trial on July 16, 2012.

The SEC agreed to a $285 million settlement of the case where Citigroup was relieved of any further liability or responsibility without any admission or explanation of the allegations in the complaint brought by the SEC. Citigroup has an interest in settling the case without formally admitting liability because of the bad publicity that would follow and because an admission would give a powerful tool to investors suing the bank. A trial could establish conclusions that investors could use against Citigroup, as could a settlement that includes admissions by the bank.

The $285 million settlement proposal was submitted to U.S. District Judge Jed Rakoff in Manhattan for approval. The $285 million settlement was rejected by Judge Rakoff who said he hadn't been given enough facts to approve it. Judge Rakoff criticized the SEC's practice of letting financial institutions such as Citigroup settle cases without admitting or denying liability. Judge Rakoff asked whether the public interest doesn't require determining whether Citigroup did what the SEC claimed in the complaint. In rejecting the settlement, Judge Rakoff wrote, "In any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth." The proposed settlement is "neither fair, nor reasonable, nor adequate, nor in the public interest." "If the allegations of the complaint are true, this is a very good deal for Citigroup." "Even if they are untrue, it is a mild and modest cost of doing business." Rakoff said he can't endorse the proposed settlement based only on the unproved allegations in the SEC's complaint. "The court has not been provided with any proven or admitted facts upon which to exercise even a modest degree of independent judgment," he said. He rejected the SEC argument that he should defer to the agency's determination that the settlement is fair, particularly as it asked him to issue an order requiring Citigroup not to violate the securities laws in the future. Calling Citigroup "a recidivist," Judge Rakoff said the SEC hasn't tried to enforce such an order against a financial institution in the past 10 years.

Citigroup has indicated to the press that the proposed settlement is a fair and reasonable resolution to the SEC's allegation and that the settlement fully complies with long established legal standards. In the event the case is tried, Citigroup claims it would present substantial factual and legal defenses to the charges.

According to the SEC the proposed $285 million settlement was fair, adequate, reasonable, and in the public interest, and reasonably reflects the scope of relief that would be obtained after a successful trial.

Judge Rakoff previously criticized another SEC settlement, in a case involving Vitesse Semiconductor Corp. (VTSS). In that case he stated, "[h]ere an agency of the U.S. is saying, in effect, 'although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it."

Judge Rakoff's opinion is a blow to the SEC and Citibank and the SEC's approach to these high profile cases. There may be a settlement to follow, but it will need to meet Judge Rakoff's standard of disclosure.

If you have a loan with Citibank or any other lender that you are unable to pay or that you have been unable to modify, bankruptcy may assist you. You should consult with an attorney. A Chapter 7 bankruptcy will relieve you of the debt if you decide you no longer want to keep the property and you have a recourse loan. A Chapter 13 bankruptcy can help you keep the property by stripping unsecured loans and obtaining a payment plan to pay back arrears that you may owe on the loan along with other unsecured debts. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

A number of businesses throughout Northern California have been struggling due to the effects of the recession. According to a recent article in Reuters, this may lead to a new wave of Chapter 7 and Chapter 11 bankruptcy filings. If your company is struggling with debt and decreased in come, you should consult with a bankruptcy attorney.

According to Reuters, companies in a range of businesses, including hair salons,
restaurants, renewable energy, and the paper industry, have tumbled into Chapter 11 in the past few months. The weak economy, lackluster consumer spending, a shaky junk-bond market and increasingly tight lending practices are threatening struggling companies in industries as diverse as shipping, tourism, media, energy and real estate.

Predicting a bankruptcy wave is a tricky task, according to Reuters. It could depend on several unknowns: how much money banks and other institutions are willing to lend troubled companies, whether the economy lands in a double-dip recession and what happens in the European debt crisis. The sovereign debt crisis in Europe could be the most important X factor.

Even the experts who say that a bankruptcy crisis is not coming because current low interest rates make it easy for companies to get cash to finance their way out of trouble, say that the euro zone's problems could trigger defaults here.

Chapter 11 filings are picking up, bankruptcy data show. Ten companies with at least $100 million in assets filed for bankruptcy in September, the most since 17 filed in April, which was the busiest month since 2009, according to Bankruptcydata.com.Recent failures included renewable energy companies Evergreen Solar and Solyndra. The latter collapsed in a politically-charged bankruptcy after taking a $535 million loan from the federal government.

Other recent bankruptcies include glossy magazine paper manufacturer NewPage Corp, Graceway Pharmaceuticals; Hussey Copper Corp. and the Dallas Stars of the National Hockey League. So far this month, five companies with more than $100 million in assets have filed, including the Friendly's ice cream chain - and wireless broadband company Open Range Communications Inc.

Chapter 11 bankruptcy court allows troubled companies to shed debt and also become more operationally efficient as they renegotiate labor contracts, as airlines have done, or reject pricey store leases, which retailers often do.But these changes do not always work, especially when companies find little support among suppliers or creditors for their turnaround plans. Bankrupt book chain Borders, for instance, recently closed its doors after failing to find a buyer.

In addition, confidence in the economy and easy access to debt allowed companies to complete restructurings in 2009 and 2010 with business plans and debt loads that were based on an economic pickup that has now faltered. That could create the potential for trouble at companies that have already restructured once.

Restructuring advisers agree that a dimming economic outlook will force lenders to make some tough calls about troubled companies. Those who see a broader wave of bankruptcies expect the economy to dip back into recession as the U.S. government cuts spending and Europe's debt problems worsen.

They also look beyond the equity market for less visible signs of trouble. They see a junk-bond market that has suffered its worst sell-off since the Fed cut rates to near zero in 2008 and falling loan market prices as lenders reduce their exposure to weak borrowers. The level of debt held by consumers, the federal government and the corporate sector weighs heavily on the economy and will likely spell trouble for some major companies.

If your company is having financial difficulty, contact us for legal advice. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

If you live in Northern California and you are contemplating bankruptcy, you should be aware that not all debts are dischargeable in bankruptcy. Section 523 of the bankruptcy code delineates various debts that are not dischargeable. The list includes, taxes, fraud, domestic support obligations, intentional acts, fines, penalties, death or injury while driving intoxicated, divorce orders, homeowner's association dues post bankruptcy, profit sharing plan loans, and securities violations. In order to determine whether or not your debts are dischargeable in a Chapter 7 or Chapter 13 bankruptcy you should consult with an attorney.

The Ninth Circuit Court of Appeals recently reviewed the applicability of Section 523 to an attorney involved in a securities enforcement action that was not involved in any securities related wrong-doings. The case is Sherman v. SEC (In re Sherman Case No. 09-55880 (9th Cir. September 19, 2011). Debtor-Appellant Richard Sherman is an attorney who represented some of the defendants in a securities enforcement action. As part of the enforcement action, the receiver ordered Sherman to disgorge two separate sums of money. First, he was ordered to disgorge $54,980 that he withdrew from his clients' litigation trust account in violation of a freeze order issued by the district court. Second, the receiver ordered Sherman to return money he had received and retained, but had not earned, in a separate contingency case. The district court calculated that he was responsible for disgorging $581,313.43 plus interest. The court held that Sherman lacked any interest in the money because he was obligated by the California Rules of Professional Conduct to return the amount by which his advances exceeded his ultimate fee. The SEC conceded that Sherman had not been found to have committed any securities violations on his own. The case involved a debtor who was not found to have himself violated the securities laws and had not been alleged to have committed other acts of fraud by the SEC.

Four days before the hearing on the disgorgement motion, Sherman and his wife filed a petition for Chapter 7 bankruptcy. The SEC and the receiver responded by filing a motion to dismiss the petition. The receiver independently filed a motion seeking a determination by the court that Sherman's debts arising from the disgorgement order should be held nondischargeable under § 523(a)(4) and (6)3 of the Bankruptcy Code. The bankruptcy court denied the motion, and the SEC appealed to the district court, which reversed. While the appeal was pending, the bankruptcy court granted Sherman a discharge under 11 U.S.C. § 727. In a prior case the Court held that Sherman's conduct did not constitute "cause" sufficient to warrant dismissal under § 707(a) of the Code, which allows a bankruptcy court to dismiss petitions filed in bad faith. We then mentioned that "the SEC could have filed--and still could file--a complaint under § 523(a)(7) or (19)," though we did not explicitly conclude whether the SEC would prevail under either provision.

In a subsequent adversary proceeding, the Shermans sought declaratory relief to establish that their debt to the SEC had been discharged under § 727 notwithstanding § 523(a)(19)'s discharge exception. The bankruptcy court granted summary judgment for the Shermans. It concluded, as a matter of law, that the SEC's disgorgement order did not arise from a violation of securities laws. It further ruled that "[s]ection 523(a)(19) was intended to apply to 'wrongdoers' and not to persons who are simply found to owe a debt which the SEC is authorized to enforce."

The SEC appealed to the district court, which reversed the bankruptcy court. The district court adopted a broad interpretation of § 523(a)(19), treating as paramount the Sarbanes-Oxley Act's goal of "protect[ing] investors by improving accuracy and reliability of corporate disclosures made pursuant to the securities laws." It expressed particular concern that "[r]eading a limitation into the SEC's ability to enforce its powers to obtain disgorgement of ill-gotten funds in an appropriate case . . . would frustrate the ability of the SEC to enforce the federal securities laws." Sherman appealed the district court decision.

The Ninth Circuit agreed with the bankruptcy court and held that 11 U.S.C. § 523(a)(19) prevents the discharge of debts for securities-related wrongdoings only in cases where the debtor is responsible for that wrongdoing. Debtors who may have received funds derived from a securities violation remain entitled to a complete discharge of any resulting disgorgement order.

If you are considering filing for bankruptcy, you should consult with an attorney to determine whether or not you qualify and what debts are dischargeable. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

If you live in Northern California and you have fallen behind on a car loan, you may be faced with a repossession of the vehicle. If the vehicle is repossessed, the lender will generally pursue the borrower for the difference between the loan amount and the amount recovered by the lender in an auction. If you are facing a potential repossession or your car has been repossessed you may benefit from a Chapter 7 bankruptcy or a Chapter 13 bankruptcy. In a recent case, the Ninth Circuit interpreted U.S. Banks disclosure procedures to determine whether a legal action was viable for failure to give proper disclosures. The case is Aguayo v. U.S. Bank Case No. 09-56679 (9th Cir. August 1, 2011).

The case involves the Appeal of the district court's grant of U.S. Bank's motion to dismiss Aguayo's complaint that U.S. Bank violated California's Rees-Levering Act by failing to provide Aguayo with required post-repossession notices prior to selling the repossessed vehicle.

In 2003, Aguayo purchased and financed a Ford Expedition. Aguayo fell behind on payments. In August 2007, after U.S. Bank repossessed the vehicle, U.S. Bank sent Aguayo several documents. The first document was titled "Notice of Our Plan to Sell Property," which stated that the vehicle would be sold after a date certain. The second document was titled a "Request for Extension," by which Aguayo could request a ten-day extension of the deadline to redeem the vehicle. The final document was titled "California Redemption Letter with an Extension Agreement Accompanied," which provided Aguayo with an accounting necessary to either redeem or reinstate the contract. The Letter contained a conspicuous notice in bold, all capital letters, advising that Aguayo may be subject to suit and liability if U.S. Bank's sale of the vehicle was insufficient to satisfy the balance of the contract. The language in the Letter tracked the language required under the Rees-Levering Act, but did not contain all the required information. U.S. Bank sold the vehicle after Aguayo did not redeem, and sought to recover the deficiency from Aguayo. In response, Aguayo filed suit against U.S. Bank in California state court.

U.S. Bank timely removed the action to the district court and moved for dismissal, arguing that the NBA and OCC regulations preempt the Rees-Levering Act, a state law. The district court dismissed the case, holding that the Rees-Levering Act repossession notice requirements were expressly preempted by the federally-enacted NBA and OCC regulations. In so holding, the district court examined the NBA, which exempts national banks from state laws concerning "[d]isclosures and advertising, including laws requiring specific statements, information, or other content to be included in credit application forms, credit solicitations, billing statements, credit contracts, or other credit related documents." The district court held that the Rees-Levering notice requirements are "disclosures" under the NBA, and found that the post-repossession notice qualified as an "other credit-related document" because it was issued during a continuing credit relationship with Aguayo.

The Court found that the district court erred in not analyzing the savings clause of the OCC, which explicitly saves state laws regarding "rights to collect debts" from preemption. Noting that debt collection, and the right to repossess property that is the subject of a secured transaction, traditionally has deep roots in state law, the Court found that the OCC's use of a vague "credit-related document" term was not sufficient for express preemption. Reviewing the legislative history, the Court determined that the OCC was intended to preserve "undiscriminating" state laws "that form the legal infrastructure for conducting banking or other business." Finding that the Rees-Levering Act does not discriminate because it applies to any defaulted car loan repossession irrespective of the original lender, the Court held that the challenged sections of the Rees-Levering Act fell under U.S. Bank's "right to collect debts."

In light of this, the Court held that the district court erred by holding that the Rees-Levering Act post-repossession notices were expressly preempted. The Court examined whether the documents sent to Aguayo constituted "disclosures" under the NBA, and determined that they were nothing more than notices or demand letters. The Court then looked to whether the documents sent to Aguayo constituted "credit related documents" under the NBA. In examining the language in the OCC, the Court noted that the Rees-Levering notification was sent after the lending relationship ended, and if the OCC intended to expand the term "other credit-related document" to debt collection notices, it could have done so expressly.

The Court reversed the district court's order granting Defendant U.S. Bank, N.A.'s ("U.S. Bank") motion to dismiss Plaintiff Jose Aguayo's ("Aguayo") complaint under California's Rees-Levering Act and remanded for further proceedings, holding that the federal National Bank Act ("NBA") and regulations issued by the Office of the Comptroller of Currency ("OCC") did not preempt the Rees-Levering Act's provisions governing certain post-repossession notices required under the Act prior to selling repossessed property

If you are having a problem with a car loan in Northern California you should consult with an attorney. We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.

There are many people in Northern California that have been unable to pay their tax debt because of the economy. The tax debt may be dischargeable in a Chapter 7 or Chapter 13 bankruptcy. The Ninth Circuit recently ruled that the three year look back period prevented the California Franchise Tax Board from collecting income tax debt. The case is California Franchise Tax Board v. Kendall (In re Jones)-- F.3d ---- (9th Cir. 2011); Case No. 10-60000 (July 12, 2011)

In the case, Brenda Marie Jones and her husband filed a joint voluntary Ch. 13 bankruptcy petition in July 2002. The bankruptcy court confirmed the Joneses' plan in September 2002. Thirteen months later in October 2003 and pursuant to an extension, the Joneses filed their joint income tax return for the year 2002. The Joneses owed approximately $6,000 in reported taxes to the California Franchise Tax Board which the Joneses did not pay. The bankruptcy court dismissed the Joneses' Ch. 13 case in September 2006. In October 2007, Brenda Marie Jones (individually) filed a voluntary Ch. 7 bankruptcy petition. She received a discharge of her existing debts in January 2008 and the Franchise Tax Board (after successfully reopening the case) requested a determination that the tax debt was excepted from discharge.

The Ninth Circuit Court of Appeals affirmed the Ninth Circuit Bankruptcy Appellate Panel's ruling that a tax debt owed by Brenda Marie Jones and her husband to the California Franchise Tax Board was not excepted from the Debtor's Ch. 7 discharge where the Franchise Tax Board was not precluded by the Debtor's previous Ch. 13 filing from collecting on the debt and the three-year look back period under section 507(a)(8)(A) was not suspended. The tax debt arose after the Debtor's Ch. 13 plan confirmation, so property had revested in the Debtor, the applicable stay provisions of section 362(a) were lifted, and the Franchise Tax Board was able to collect on the debt up until the Debtor's Ch. 7 filing approximately four years later. The Circuit Court declined to apply the principles of equitable tolling to extend the look back provision of section 507(a)(8)(A). Accordingly, the three-year look-back period was October 2004 through October 2007. As the tax debt came due in 2003, the debt would be discharged unless the "statutory suspension or equitable tolling appl[ied] to extend the look back period to encompass the 2003 due date."

The suspension provision of section 507(a)(8) "contemplates three scenarios in which the [three-year] look back period is suspended," the second of which is relevant to the Debtor's case: "any time during which the stay of proceedings was in effect in a prior [bankruptcy] case." (citing 11 U.S.C. § 507(a)(8)). The Circuit Court consulted the legislative history of the relevant portion of section 507(a)(8), which "Congress intended to codify the rule established in Young v. United States, 535 U.S. 43 (2002)," and concluded that "the suspension provision applies here only if the Franchise Tax Board was precluded from collecting the debt by a stay of proceedings" during the Debtor's prior Ch. 13 case.

The Circuit Court then analyzed whether the Debtor "had property outside of the bankruptcy estate from which the Franchise Tax Board could collect the tax debt" during the Ch. 13 bankruptcy proceeding. Noting the need to harmonize sections 1306(a) (defining property of the Ch. 13 estate) and 1327(b) (vesting all property of the Ch. 13 estate in the debtor upon confirmation of a plan, unless otherwise provided in the plan or confirmation order), the Circuit Court held that the Debtor "did not elect otherwise, [so] she once again became the owner of her property at confirmation, except as to those sums specifically dedicated to fulfillment of the plan. Accordingly, the Franchise Tax Board was not precluded from collecting the post-[Ch. 13] petition tax debt from property that revested in [the Debtor] upon plan confirmation." (citing 11 U.S.C. § 362(c)(1)). The Circuit Court further ruled that the FTB could have collected on the tax debt between the due date of the debt (October 2003) and the Debtor's filing of the Ch. 7 petition (October 2007) and that the look back period was not statutorily suspended. Therefore, the tax debt was discharged.

Finally, the Circuit Court noted that equitable tolling was not appropriate where the FTB took no "action to protect its claim until 2009, six years after the debt arose. This inaction creates the appearance that, rather than exercising caution in light of uncertainty [of the interplay of sections 1306(a) and 1327(b)], the FTB simply did not pursue its claim until the opportunity to do so had passed."

Continue reading "Court Rules State Tax Debt is Discharged in a Chapter 7 Bankruptcy" »

Issues regarding the rights of parties in Chapter 7 bankruptcy and Chapter 13 bankruuptcy in Northern California can be very technical. Before proceeding with a bankruptcy, you should consult with a bankruptcy attorney. The bankruptcy code allows a co-debtor that pays a debt to be subrogated to the rights of the creditor. 11 U.S.C. Section 509(a). In a recent case the Ninth Circuit interpreted the applicability of the subrogation clause. The case involves an appeal from the United States District Court for the District of Nevada (Judge Jones) affirming the order of the Bankruptcy Court for the District of Nevada (Judge Markell) disallowing a claim of a creditor for subrogation pursuant to 11 U.S.C. Section 509(a) The case is Grantham v. Cory (In re Flamingo 55, Inc.) F.3d (9th Cir. 2011); Case No. 10-15755 (July 25, 2011).

The appellants, Gregory Grantham and John Saba, were investors who were charged with liquidating the failed Broadway-Acacia LLC ("BA"), which entity had been a partner or co-venturer with the Debtor, Flamingo 55, Inc. ("Flamingo"). After a series of schemes and transactions by what was characterized by the Court as unscrupulous co-members of BA, BA and Flamingo had both executed a note in favor of Datacom on account of a loan taken out to purchase real property, which note was cross-collateralized by California and Nevada property. Eventually, BA and Flamingo defaulted on the note, and Datacom foreclosed on the California real property belonging solely to BA.
An involuntary petition under Chapter 7 of the Bankruptcy Code was filed against Flamingo. BA filed a claim against the Chapter 7 estate, asserting subrogation rights on account of the value of the real property lost to Datacom in foreclosure. After an objection by the Trustee, the Bankruptcy Court disallowed BA's claim, holding that its subrogation claim was precluded by Bankrutpcy Code Section 509(b)(2) as an entity that had "received the consideration for the claim held by...[the] creditor." 11 U.S.C. Section 509(b)(2).

The Court of Appeals for the Ninth Circuit ("Ninth Circuit") affirmed the decision of the District Court and upheld the ruling by the Bankruptcy Court that had ordered the disallowance of the subrogation claim of the creditor pursuant to the provisions of Bankruptcy Code Section 509. The Ninth Circuit rejected the creditor's contention that, as a co-obligor on the debt with the Debtor, it was entitled to subrogation within the plain meaning of the provisions of Section 509(a). Instead, the Court ruled that the creditor, as a principal obligor of a loan with the debtor, was precluded from subrogation in accordance with Bankruptcy Code Section 509(b)(2). And, in so holding, the Ninth Circuit specifically clarified the Bankruptcy Court's opinion that it was the creditor's status as a "joint borrower" on the debt (and not as a guarantor, surety, or accomodation co-maker) that distinguished the situation at issue and precluded the application of Section 509(a).

The Ninth Circuit rejected and overruled the Bankruptcy Court's finding that the foreclosure of real property belonging to the creditor could not constitute a "payment" within the meaning of Bankruptcy Code Sectin 509(a). The Court determined a payment of cash is not necessarily required before subrogation rights can be asserted.

We provide free legal consultations for bankruptcy in San Francisco County, Sacramento County, Alameda County, Contra Costa County, San Mateo County, Santa Clara County, Stanislaus County, San Joaquin County, Marin County, Solano County and throughout Northern California. Contact us for a free legal consultation today.