Friday, December 19, 2008

Why It Will Not Get Better Soon - Take A Huge Bite of The Reality Sandwich

Subprimes: just the tip of the credit default iceberg

When the rest of the credit markets melt down too, what a tsunami, it'll be

"The truth? You can't handle the truth!"

Speaking of the truth, how about this truth? The National Debt

The Gross National Debt

Sunday, December 14, 2008

Greed, Madness and Ruination on Wall Street

They will become poster boys in the Rogues Gallery of Wall Street'08

Bernie Madoff and Marc Drier

Madoff's self described 50 billion dollar Ponzi scheme is the Granddaddy of All Ponzis while Drier, though not nearly in the same league of dollar devastation, nevertheless makes legal history by conducting a 380 million dollar swindle through the auspices of a law firm.

And the devastation will be enormous. Think Louis Winthorp III in the first part of "Trading Places" in his Santa Clause outfit, jamming salmon fillet down his tunic from the buffet, and staggering drunk and homeless outside of his former securities firm. Except here, there's no secret orange juice crop report to save the day by insider trading. Or is there?

More likely, non-dischargeability in bankruptcy will be playing in a courthouse in Manhattan.

Bernie's victims Marc's Maelstrom

Come to know, understand and love the Uniform Fraudulent Transfer Act. Those hapless souls who recently managed to obtain some return on their original investments in these schemes will become transported to an alternate universe (or Purgatory, for traditionalists among you) when the bankruptcy trustee or receiver wields UFTA and preference avoidance powers to undo and recover those payments from the victims, now twice looted, as fraudulent conveyances.

The Madoff secret recipe for running a multi-billion dollar securities Ponzi scam

Stay tuned.

Saturday, December 13, 2008

The Big Ka-Boom: Credit Default Swaps (CDS and AIG)

Obama Treasury Secretary nominee Geithner called out for the AIG Bailout, the 50 Trillion Dollar Credit Default Swap Holocaust

President-elect Obama and the American people have a choice: embrace financial sanity and safety and soundness by deflating the last, biggest speculative bubble using the time-tested mechanism of insolvency. Or we can muddle along for the next decade or more, using the Paulson/Geithner model of financial rescue for the AIG CDS Ponzi scheme and embrace the Japanese model of economic stagnation.

And, yes, we can put AIG and the other providers of protection through a bankruptcy and force the CDS market into a quick and final extinction. Remember, when AIG goes bankrupt the insurance units are taken over by NY, WI and put into statutory receiverships. Only the rancid CDS positions and financial engineering unit of AIG end up in bankruptcy. And fortunately we have a fine example of just how to do it in the bankruptcy of Lehman Brothers.

Our friends at Katten Muchin Rosenman in Chicago wrote last week in their excellent Client Advisory: "On November 13, 2008, Lehman Brothers Holdings Inc. and its U.S. affiliates in bankruptcy, including Lehman Brothers Special Financing and Lehman Brothers Commercial Paper (collectively, "Lehman") filed a motion asking that certain expedited procedures be put in place to allow Lehman to assume, assign or terminate the thousands of executory derivative contracts to which they are a party. If Lehman's motion is granted, counterparties to transactions that have not been terminated will have very little time to react and will likely find themselves with new counterparties and no further recourse to Lehman because, by assigning contracts to third parties, Lehman will effectively receive, by normal operation of the Bankruptcy Code, a novation."
At some point, Washington is going to be forced to accept that bankruptcy and liquidation, the harsh medicine used with other financial insolvencies, are the best ways to deal with the last, greatest bubble, namely the CDS market. When the end comes, it will effect some of the largest financial institutions in the world, chief among them Citigroup (NYSE:C), JPMorganChase (NYSE:JPM), GS and MS, as well as some large Euroland banks.

The impending blowback from a CDS unwind at less than face amount is one of the reasons that the financial markets have been pummeling the equity values of the larger banks last week. Any bank with a large derivatives trading book is likely to be mortally wounded as the CDS markets finally collapse. We don't see problems with interest rate or currency contracts, by the way, only the great CDS Ponzi scheme is at issue - hopefully, if authorities around the world act with purpose on rendering extinct CDS contracts as they exist today. Call it a Christmas present to the entire world.

Who's On First? (Stop that Foreclosure Now!)

Bankruptcy Court Decision Pronounces Holder of Note and Real Party in Interest Requirements For Foreclosure

In both Chapter 13 and Chapter 7, real estate lenders can not continue foreclosure proceedings against real estate without first getting permission from the Bankruptcy Court. This permission is most commonly pursued by filing a motion for “relief of stay.” In other words, the lender requests the court to grant permission to continue their foreclosure proceedings against the real estate and relieve the lender from the restraining order as instituted under 11 USC 362. This bankruptcy Code provision prohibits any collection efforts against the debtor or property of the debtor once a bankruptcy case is filed.

Typically, a relief of stay motion is an expedient proceeding requiring little evidence before the bankruptcy court. In chapter 7, they are typically unopposed. In chapter 13, they are ether granted or resolved by an adequate protection order(stipulation between the debtor and lender to hold off relief of stay provided the debtor complies with getting current on the loan by a date certain).

Nevertheless, the requirement to move for relief of stay just got a little tougher, at least in one bankruptcy court in the Central District of California. On October 29, 2008, Judge Samuel Bufford rendered his decision in the Hwang Case.

In that case, Judge Bufford ruled that lenders need to meet both the substantive and procedural requirements in moving for relief of stay. More specifically, lenders must satisfy both 11 USC 362(d) of the Bankruptcy Code and Rule 17a of the Federal Rules of Civil Procedure.

Ironically, even though the Court found that only Indymac (who moved for relief of stay in the first place) could move forward on a foreclosure sale (since it could enforce the note by being in possession of the note with its endorsement, thus satisfying the holder requirements of CCC 3301(a)), it still was not entitled to relief of stay. Instead, Indymac’s ability to foreclose only satisfied the substantive requirements of 362(d) as being the “party in interest.”

Indymac failed, however, to satisfy the “real party in interest” requirement to move for relief of stay as required by FRCP 17a. This was because no one knew who the owner of the note was. Indymac never transferred the note upon sale, and admitted at trial that it sold the note and was no longer the owner. Instead, Indymac was servicing the note for some entity, but could not say for who. Accordingly, since the owner was not joined via FRCP 19 or did not ratify or move for relief as the original party in the action under 17a, the real party in interest requirement was not met, and the motion for relief of stay was denied.

This was a very ironic twist, since the Court agreed that Indymac was the proper party under California Law that could foreclose since it possessed the note with its endorsement. “Thus, the court holds that, notwithstanding the sale of the note, IndyMac remains the holder of the note and is entitled to enforce it.”

Yet, despite Indymac having the ability to foreclose under California Law, relief of stay could not be granted to Indymac because they admitted that they did not OWN the note. ”The court concludes that the real party in interest has not joined in the motion before the court. Indeed, neither the court nor IndyMac even knows who the real party in interest is. Pursuant to Rule 17(a)(3), the court must give IndyMac a reasonable amount of time to accomplish this joinder. Despite two continuances (totaling more than two months) to accomplish this joinder, IndyMac has refused to join the owner of the note in this motion. Thus, the motion must be denied on these grounds……….. IndyMac gives no explanation for its failure to join the owner of the note in this motion. The likely reason is that IndyMac does not know who the owner is, and thus cannot have any authority to join the owner voluntarily.”

So what can one take from this decision? If a lender attempts to move for relief of stay, be sure to make them prove that they meet the substantive and procedural requirements for a relief of stay action:

1) SUBSTANTIVE: They must prove they have the ability to foreclose (under California, that means they must possess the physical note and have it endorsed to them or their principal), and

2) PROCEDURAL: They must also actually own the note. If the note was securitized (sold in a pool of notes on wall street) that means the real party in interest is the Trustee of the securitization trust, not the servicing agent. See LaSalle Bank N.A. v. Nomura Asset Capital Corp., 180 F. Supp. 2d 465, 469-71 (S.D.N.Y 2001) (”LaSalle-Nomura”); accord, LaSalle Bank N.A. v. Lehman Bros. Holdings, Inc., 237 F. Supp. 2d 618, 631-34 (D. Md. 2002) (”LaSalle-Lehman”).

Since most relief of stay actions typically only meet one of these requirements, relief of stay should not be granted. The next hurdle, of course, is then attempting to convince your local Bankruptcy Judge to agree.Judge Bufford’s analysis.

Written by Michael G. Doan in Bankruptcy Law Network

In re Hwang is the 600 lb Gorilla in the Room - The MERS Debacle

The Mortgage Backed Securities ("MBS")industry (remember, "lenderless loans")created an electronic registration system for tracking purchase, sale and transfers of home ad other mortgages (promissory notes and their related security, mortgages or deeds of trust) and called it MERS.

The problem with MERS legally speaking is that while this facilitated the trading of mortgages as securitized intruments in vast numbers, this Wall Street driven device did not necessarily meet state by state requirements for the physical possession of documents by a real party in interest to foreclose on a defaulted mortgage This gives rise to a defense of "lack of standing to sue"

Foreclosure Defense and Loan Modification Significance

In addition to Reg Z, RESPA, HOEPA, "tortious making of loan" and servicing fraud legal analyses to determine the enforceability of any mortgage loan, an investigation into the actual "ownership" of the servicer or putative "lender" trying to foreclose must be done.

How to:

California Foreclosure Law

California Commercial Code

If you are considering a "loan service" company for your loan modification instead of representation by an attorney, it should be able to discuss these issues and defenses with you. If they don't, or don't give you a clear understanding of these issues, ask them why.

Being evicted after foreclosure? Tenant eviction law. State law in California gives you 60 days from foreclosure. Cities have additional laws that may assist you in staying longer, depending on your circumtances. Generally, it is just a matter of time if the new owner after foreclosure wont reach agreement to let you stay on.

California Court Forms

California Codes
(including Civil Procedure and Evidence)

California Rules of Court

Los Angeles County Superior Court Case Information

Federal Rules

(c) copyright New Dawn Law all rights reserved

Dont Just Stand By And Watch Your Business Fail

Most businesses that fail do so because the owners fail to get to the emergency room on time! Like a staph infection or sepsis, it's treatable if you get treatment in time. The trick is getting pass the denial, anxiety, and panic/paralysis stage, recognizing that you can't do it alone, and getting the expertise to help and guide you through a turnaround of your business.

Turnaround consultants - CPAs, MBAs, bankruptcy and financial attorneys make up a team of skill sets needed to assess the viability and survivability of a business in a particular industry or economic sector, that is, to determine that the business has adequate potential to survive the economic and financial crisis that threatens its existence.

Common root causes of business crisis

Reduced revenues resulting from economic downturn

Overly optimistic sales projections

Poor execution of a good business plan or model

High operating costs

High fixed costs that decrease management flexibility

Insufficient resources

Poor management of vendor and supply relationships

Unsuccessful R&D projects

Industry or market paradigm shifts for which management was unprepared

More efficent, better marketed competition

Excessive debt leverage and service

Inadquate financial controls

Typically, the turnaround process involves the following stages:

Management change
- draw in turnaround management expertise

Situational analysis

Survivability under changed market conditions

Change of management better equipped to manage under crisis conditions

Divestment of poorly performing assets

Reformulation of business strategy

Optimization of revenues with less resources

Cost reductions

Vendor and supplier concessions

Human resource concessions

Strategic acquisitions

Emergency Action Plan

Quick tactical action in order to implement the strategies above

Business Restructuring

Achieve positive cash flow

Improve efficiencies of delivering services and goods

Optimize, and where necessary, reposition marketing strategies

Strategic planning to return to long term profitability

Secure additional capital or financial resources

Develop reorganization strategies to employ the powerful weapons
available under Chapter 11 of Title 11, United States Code
("the Bankruptcy Code")

Liquidation Strategy

Where the business illness is irreversible and fatal, develop a
liquidation strategy and road map in order to minimize damage to employees,
suppliers, vendors, other third parties, and potentially, salvage
some equity for stockholders and investors, including white knight takeovers, and mergers with financially stronger companies.

Decisions, decisions:
Your Small Business: When Do You Call It Quits?By Däna Wilkinson, Attorney at Law on Nov 30, 2009 in Chapter 11 BankruptcyFeaturedGeneral Bankruptcy InformationOne of the hardest decisions a small business owner will ever face is whether to shut down a business that is losing money.  It is an emotional decision because of the blood, sweat and tears that it takes to go into business for yourself.  But it is also a financial decision, fraught with uncertainties and unknowns.  Whether you have invested your life savings, or just your life, in a business, it is not easy to decide whether, and when, it is time to quit.There are some businesses that are clearly not viable without a significant change in product or service.  Let’s say, for example, you operate a photo developing and printing business.  With the advent of digital cameras, cheap photo printers, and online printing services, it may be obvious that such a business cannot survive without either diversifying or offering some unique service or product.  But for most businesses, it’s a much closer call.  In the present economy, when so many businesses are failing, there is an added risk/reward analysis–with so many businesses failing, if you can outlast your competitors, you may be well-positioned to take advantage of reduced competition when things improve.

Cathy Moran’s five questions for business owners are  a very good start toward identifying your options and deciding whether you should continue to try to operate your business, reorganize your business, open a new business, or call it quits.  Those questions are:
  1. Do you have the time, energy, and desire to continue the business?
  2. Could the business prosper if it wasn’t servicing old debt?
  3. Could the business prosper if it shed equipment or premises leases?
  4. Could you start a like business if you walked away from this one?
  5. Could you sell this business as a going concern?
 I often tell clients that the first thing you should do when you find yourself in a hole is quit digging.  If your business is in a hole, bleeding cash and building debt, I would add one more bit of advice.  Set yourself a limit, whether it is a dollar amount that you will invest in the business, or a length of time that you will operate at a loss, or some other measure.  Decide on your tolerance for risk, and don’t go beyond it.  I can’t tell you what that ought to be because it is a very personal limit.  But set it, and live with it.  Don’t just keep digging the hole deeper out of simple inertia.

Sunday, December 7, 2008

Chapter 11 and Chapter 13 - corporate, business, and individual reorganizations

Corporate Bankruptcy

What happens when a public company files for protection under the federal bankruptcy laws? Who protects the interests of investors? Do the old securities have any value when, and if, the company is reorganized? We hope this information answers these and other frequently asked questions about the lengthy and sometimes uncertain bankruptcy process.

What Happens to the Company?

How Are Assets Divided in Bankruptcy?

Secured Creditors - often a bank, is paid first.
Unsecured Creditors - such as banks, suppliers, and bondholders, have the next claim.
Stockholders - owners of the company, have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors' claims are not fully repaid.
Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company, the "debtor," might use Chapter 11 of the Bankruptcy Code to "reorganize" its business and try to become profitable again. Management continues to run the day-to-day business operations but all significant business decisions must be approved by a bankruptcy court.

Under Chapter 7, the company stops all operations and goes completely out of business. A trustee is appointed to "liquidate" (sell) the company's assets and the money is used to pay off the debt, which may include debts to creditors and investors.

The investors who take the least risk are paid first. For example, secured creditors take less risk because the credit that they extend is usually backed by collateral, such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

Bondholders have a greater potential for recovering their losses than stockholders, because bonds represent the debt of the company and the company has agreed to pay bondholders interest and to return their principal. Stockholders own the company, and take greater risk. They could make more money if the company does well, but they could lose money if the company does poorly. The owners are last in line to be repaid if the company fails. Bankruptcy laws determine the order of payment.

What Will Happen to My Stock or Bond?

A company's securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange. However, even when a company is delisted from one of these major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets. There is no federal law that prohibits trading of securities of companies in bankruptcy.

Note: Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss. Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company's plan of reorganization will cancel the existing equity shares. This happens in bankruptcy cases because secured and unsecured creditors are paid from the company's assets before common stockholders. And in situations where shareholders do participate in the plan, their shares are usually subject to substantial dilution.

If the company does come out of bankruptcy, there may be two different types of common stock, with different ticker symbols, trading for the same company. One is the old common stock (the stock that was on the market when the company went into bankruptcy), and the second is the new common stock that the company issued as part of its reorganization plan. If the old common stock is traded on the OTCBB or on the Pink Sheets, it will have a five-letter ticker symbol that ends in "Q," indicating that the stock was involved with bankruptcy proceedings. The ticker symbol for the new common stock will not end in "Q". Sometimes the new stock may not have been issued by the company, although it has been authorized. In that situation, the stock is said to be trading "when issued," which is shorthand for "when, as, and if issued." The ticker symbol of stock that is trading "when issued" will end with a "V". Once the company actually issues the newly authorized stock, the "V" will no longer appear at the end of the ticker symbol. Be sure you know which shares you are purchasing, because the old shares that were issued before the company filed for bankruptcy may be worthless if the company has emerged from bankruptcy and has issued new common stock.

During bankruptcy, bondholders will stop receiving interest and principal payments, and stockholders will stop receiving dividends. If you are a bondholder, you may receive new stock in exchange for your bonds, new bonds, or a combination of stock and bonds. If you are a stockholder, the trustee may ask you to send back your old stock in exchange for new shares in the reorganized company. The new shares may be fewer in number and may be worth less than your old shares. The reorganization plan will spell out your rights as an investor, and what you can expect to receive, if anything, from the company.

The bankruptcy court may determine that stockholders don't get anything because the debtor is insolvent. (A debtor's solvency is determined by the difference between the value of its assets and its liabilities.) If the company's liabilities are greater than its assets, your stock may be worthless. Contact your local Internal Revenue Service (IRS) office or call 1-800-829-1040 for information about how to report worthless securities as a loss on your income tax return. If you don't know whether your stock has value, and you can't find a stock or bond price in the newspaper, ask your broker or the company for information.

Why Would a Company Choose Chapter 11?

"Prepackaged Bankruptcy Plans"

Sometimes companies prepare a reorganization plan that is negotiated and voted on by creditors and stockholders before they actually file for bankruptcy. This shortens and simplifies the process, saving the company money. For example, Resorts International and TWA used this method.

If prepackaged plans involve an offer to sell a security, they may have to be registered with the SEC. You will get a prospectus and a ballot, and it's important to vote if you want to have any impact on the process. Under the Bankruptcy Code, two-thirds of the stockholders who vote must accept the plan before it can be implemented, and dissenters will have to go along with the majority.

Most publicly-held companies will file under Chapter 11 rather than Chapter 7 because they can still run their business and control the bankruptcy process. Chapter 11 provides a process for rehabilitating the company's faltering business. Sometimes the company successfully works out a plan to return to profitability; sometimes, in the end, it liquidates. Under a Chapter 11 reorganization, a company usually keeps doing business and its stock and bonds may continue to trade in our securities markets. Since they still trade, the company must continue to file SEC reports with information about significant developments. For example, when a company declares bankruptcy, or has other significant corporate changes, they must report it within 15 days on the SEC's Form 8-K.

How Does Chapter 11 Work?

The U.S. Trustee, the bankruptcy arm of the Justice Department, will appoint one or more committees to represent the interests of creditors and stockholders in working with the company to develop a plan of reorganization to get out of debt. The plan must be accepted by the creditors, bondholders, and stockholders, and confirmed by the court. However, even if creditors or stockholders vote to reject the plan, the court can disregard the vote and still confirm the plan if it finds that the plan treats creditors and stockholders fairly. Once the plan is confirmed, another more detailed report must be filed with the SEC on Form 8-K. This report must contain a summary of the plan, but sometimes a copy of the complete plan is attached.

Who Develops the Reorganization Plan for the Company?

Committees of creditors and stockholders negotiate a plan with the company to relieve the company from repaying part of its debt so that the company can try to get back on its feet.

One committee that must be formed is called the "official committee of unsecured creditors." They represent all unsecured creditors, including bondholders. The "indenture trustee," often a bank hired by the company when it originally issued a bond, may sit on the committee.
An additional official committee may sometimes be appointed to represent stockholders.
The U.S. Trustee may appoint another committee to represent a distinct class of creditors, such as secured creditors, employees or subordinated bondholders.
After the committees work with the company to develop a plan, the bankruptcy court must find that it legally complies with the Bankruptcy Code before the plan can be implemented. This process is known as plan confirmation and is usually completed in a few months.

Steps in Development of the Plan:

The debtor company develops a plan with committees.
Company prepares a disclosure statement and reorganization plan and files it with the court.
SEC reviews the disclosure statement to be sure it's complete.
Creditors (and sometimes the stockholders) vote on the plan.
Court confirms the plan, and
Company carries out the plan by distributing the securities or payments called for by the plan.
What is the Role of the U.S. Securities & Exchange Commission in Chapter 11 Bankruptcies?

Generally, the SEC's role is limited.
The SEC will:

review the disclosure document to determine if the company is telling investors and creditors the important information they need to know; and
ensure that stockholders are represented by an official committee, if appropriate.
Although the SEC does not negotiate the economic terms of reorganization plans, we may take a position on important legal issues that will affect the rights of public investors in other bankruptcy cases as well. For example, the SEC may step in if we believe that the company's officers and directors are using the bankruptcy laws to shield themselves from lawsuits for securities fraud.

How Will I Know What's Going On?

Sometimes, you may first learn about a bankruptcy in the news. If you hold stock or bonds in street name with a broker, your broker should forward information from the company to you. If you hold a stock or bond in your own name, you should receive information directly from the company.

You may be asked to vote on the plan of reorganization, although you may not get the full value of your investment back. In fact, sometimes stockholders don't get anything back, and they don't get to vote on the plan.

Before you vote, you should receive from the company:

a copy of the reorganization plan or a summary;
a court approved disclosure statement which includes information to help you make an informed judgment about the plan;
a ballot to vote on the plan; and
notice of the date, if any, for a hearing on the court's confirmation of the plan, including the deadline for filing objections.
Even when stockholders do not vote, they should get a summary of the disclosure statement, and a notice on how to file an objection to the plan.

Stockholders may also receive other notices unrelated to the plan of reorganization, such as a notice of a hearing on the proposed sale of the debtor's assets, or notice of a hearing if the company converts to a Chapter 7 bankruptcy.

What is Chapter 7 Bankruptcy?

Some companies are so far in debt or have other problems so serious that they can't continue their business operations. They are likely to "liquidate" and file under Chapter 7. Their assets are sold for cash by a court appointed trustee. Administrative and legal expenses are paid first, and the remainder goes to creditors. Secured creditors will have their collateral returned to them. If the value of the collateral is not sufficient to repay them in full, they will be grouped with other unsecured creditors for the rest of their claim. Bondholders, and other unsecured creditors, will be notified of the Chapter 7, and should file a claim in case there's money left for them to receive a payment.

Stockholders do not have to be notified of the Chapter 7 case because they generally don't receive anything in return for their investment. But, in the unlikely event that creditors are paid in full, stockholders will be notified and given an opportunity to file claims.

Does My Stock or Bond Have Any Value?

Usually, the stock of a Chapter 7 company is worthless and you have lost the money you invested.

If you hold a bond, you might only receive a fraction of its face value. It will depend on the amount of assets available for distribution and where your debt ranks in the priority list on the first page. If your bond is secured by collateral, your payment will depend in large part on the value of the collateral.

Where Can I Find More Information?

The Company. - Contact the investor relations department in the company's home office. They can give you more information on the bankruptcy proceeding, including the name, address, and phone number of the court handling the bankruptcy.

Your Broker. - If you can't find information in the newspaper or the library, or you haven't received any correspondence from the company, call the person who sold you the investment.

The SEC. - Companies file regular reports with the SEC in a computer database known as EDGAR. For example, a company declaring bankruptcy will file a form 8-K that tells where the case is pending and which chapter of bankruptcy was filed. You can access EDGAR through your computer at: If you don't have access to a computer, your public library may have a computer you can use. You can also request a copy of Form 8-K, or any other reports that the company files with the SEC, see "How to Request Public Documents". Or, you can visit the SEC's Public Reference Room, 100 F Street NE, Washington, DC 20549. You might also be able to get copies of SEC filings from your full-service stockbroker, or the company itself.

Bankruptcy Court. - If the company is in Chapter 7, and has not filed reports with the SEC, or you need more information, the bankruptcy court itself is another source. This court is usually located where the company has its main place of business or where the company is incorporated. (There is at least one bankruptcy court in each state and the District of Columbia.) Once you know a company's main place of business or state of incorporation, you can obtain the address and phone number of the bankruptcy court for that region by visiting the website of the Administrative Office of the United States Courts or by calling (202) 502-1900. Court addresses and phone numbers are also listed in the publication, The American Bench, which you can find at your local library. In addition, you'll find links to U.S. Bankruptcy Court websites at

U.S. Trustee at the Department of Justice. - The U.S. Trustee has broad administrative responsibilities in bankruptcy cases. Check the U.S. Trustee's website, your local telephone book, or the public library for the field office closest to you, and contact them for information on the status of the bankruptcy.

A Securities or Bankruptcy Attorney. - You may want to talk to an attorney, especially if you believe that the debtor defrauded you and you want to know your legal options. If you suspect fraud, you should also report it to the SEC or your state securities regulator.

For a more detailed discussion of different types of bankruptcy, please read Bankruptcy Basics, which the Bankruptcy Division of the Administrative Office of the United States Courts produced to assist the public in understanding bankruptcy.

The Small Business Chapter 11 (< $2,000,000)

Fast Tracking for Small Businesses (Debt less than $2,000,000).

A small business (Debt less than $2,000,000) can elect to be treated as a "small business". The case is then put on a fast track and is treated differently than a regular Chapter 11 case:

A separate hearing to approve the disclosure statement is not mandatory. It may be combined with the confirmation hearing;

The appointment of a creditors' committee is not mandatory:

The debtor has a shortened period of time (100 days from the date of the order for relief), within which only the debtor may file a plan;

After the 100 day period expires any party in interest may file a plan however, all plans must be filed within 160 days from the date of the order for relief.

Official Bankruptcy Form 25A Small Business Plan of Reorganization

The "new value" Chapter 11 plan requirement for ownership retention

Chapter 11 for individuals

Chapter 11 bankruptcy is also a reorganization bankruptcy for businesses or individuals similar to Chapter 13 bankruptcy. While chapter 13 reorganizes individuals' unsecured debt of less than $336,900.00 and secured debts of less than $1,010,650.00 -- as of April, 1 2007 -- Chapter 11 is available to any business or individuals with at least these unsecured and secured debts. Individuals doing business under a fictitious business name may file for Chapter 13 as a business reorganizations. Corporations and partnerships may not.

If a business is unable to pay its creditors, the business can file for bankruptcy under either Chapter 7 or Chapter 11. In chapter 7 a trustee liquidates the business's assets and uses the proceeds to pay off its creditors. When filing Chapter 11 however, the company may still continue to operate its business once its plan to reorganize and repay the debts has been approved.

How Chapter 11 Bankruptcy Works

Under the Chapter 11, the court may grant a bankruptcy filer a court-approved plan of reorganization after the owner has presented his or her business reorganization plan within 120 days of filing the bankruptcy case. The filer should include a written disclosure statement about their assets, liabilities, and business affairs so their creditors may be able to evaluate the feasibility of the plan.

The final court-confirmed draft of the reorganization may include reduction only a portion of its debts or completely discharge the debts altogether.

Under the Chapter 11, the filer may also eliminate their problematic contracts and leases, recover their assets, and rescale their operations to its normal productivity. However, if the debts are more than their assets chances are the creditors whose debts were canceled will become the owner of the newly reorganized entity.

What to Expect when You File for Chapter 11

Upon the accomplishment of this bankruptcy petition, the business owner assumes the identity of 'debtor in possession' who keeps possession and control of all his commercial assets without the backing of an appointed case trustee while still undergoing the reorganization payment plan for 3-5 years.

In most cases, a US court trustee will not take control over the business and all its property unless the judge decides it's necessary. The bankrupt company will remain a 'debtor in possession' until its reorganization payment plan is finally court-confirmed.

If the plan cannot be confirmed the court converts the case to a Chapter 7 bankruptcy, or remains a Chapter 11 bankruptcy case with an appointed trustee -- if either of these actions is in the best interest of all creditors.

So the Chapter 11 bankruptcy mostly answers the debt issues of businesses. You may also file Chapter eleven, but individual debtors who are eligible for Chapter 7 or Chapter 13 bankruptcy rarely chose this option for the complexity and expense of the proceeding reasons.

FAQs - Chapter 11   Bankruptcy Basics - Chapter 11

Chapter 13 – where Chapter 7 is not for you or you need a repayment plan

Because of the Means Test, many people cannot file a Chapter 7 to liquidate their debts. They must file a Chapter 13, or in some cases, a Chapter 13. Others need Chapter 13 because they want to catch up payments in order to keep their home, cars or other property that is on an installment payment plan.

Chapter 13 bankruptcy is a repayment plan that protects the debtor from collection action during the plan and discharges any unpaid balance of dischargeable debts at the end of the plan.
The discharge in Chapter 13 covers some debts that cannot be discharged in Chapter 7. It is a powerful tool for debtors to regain control of their financial lives and to get a meaningful fresh start.
Debtors choose to file a repayment plan under Chapter 13 when
• they owe debts not dischargeable in Chapter 7 (such as taxes, child support, marital property settlements)
• they have liens that are larger than the value of the assets securing the debt
• they are behind on car or house payments
• their assets are worth more than the available exemptions
• they are repaying retirement fund loans not permitted in Chapter 7
Contrast: What's dischargeable in Chapter 7.
The Chapter 13 plan does not have to pay debts in full; it can provide for only fractional payment. How much the plan has to pay to creditors is a function of the confirmation tests.
The Bankruptcy Code does require that priority claims be paid in full. The most frequently found priority claims are recent taxes and family support. More on creative use of Chapter 13 for tax troubles.
The Chapter 13 discharge eliminates some debts that cannot be discharged in Chapter 7, like recent tax penalties and non support debts incurred in the course of a divorce.
It permits the debtor time to pay debts that can't be discharged in either chapter, like recent taxes or back child support; to cure defaults on home mortgages; and to eliminate liens to the extent the lien is greater than the value of the asset.

Who is eligible for Chapter 13?

To file Chapter 13, you must be
• an individual (no corporations or partnerships);
• have a regular income greater than your reasonable living expenses; and
• have liquidated, unsecured debts not exceeding $336,900 and secured debts not exceeding $1,010,650.

A liquidated debt is one where the amount the debtor owes is known, or capable of easy calculation. For example, a loan is a liquidated debt; the damages owing in an auto accident are usually unliquidated until judgment is entered.
Effect of prior bankruptcies
While you can only file Chapter 7 every 8 years, you can file a Chapter 13 bankruptcy even if you got a Chapter 7 discharge less than 8 years ago.
A strategy frequently used is to file Chapter 7 to discharge those debts that are dischargeable, and file a subsequent Chapter 13 to repay those debts that were not discharged in Chapter 7. This sequence is sometimes called a "Chapter 20", a 7 plus 13. In fact there is no Chapter 20 of the Bankruptcy Code. This approach is limited by the provisions of the 2005 amendments which allow a discharge in a subsequent 13 only when specified time has passed (four years).


Chapter 13 Plans and the Ninth Circuit tests


Wednesday, December 3, 2008

Beat the Reaper (IRS)

The general rule is that you will realize taxable income from debt forgiveness. That's right, that money you got from a loan you no longer are legally obligated to pay, the IRS will consider as income to you, and tax you on it.

The Bad Mortgage Mercy Exception - an IRS Special (for 2007 - 2009)

Wall Street gets trillions (no, no typo) for screwing the pooch.

You on the other hand get, uh, nothing. Well, you get not to have to pay taxes on income you didn't really earn (you borrowed the money, yes, and spent it on something, but it wasn't like it was really free, right? Mortgages, foreclosure, short sales, debt collection etc. ad nauseum). The IRS will give you a break if you ducked out on your mortgage obligations by foreclosure, short sale, or loan modification but only if you did your ducking between 2007 and 2009

How To Beat The Reaper

Let's say you don't qualify for a free ducking by the IRS.

Ah - Bankruptcy is a friend of yours.

Debt forgiveness as the result of bankruptcy discharge generally is not taxable. Lucky you.

(c) copyright 2008 New Dawn Law all rights reserved

Tuesday, December 2, 2008

Predatory Lending Practices

Predatory Lending Practices

Loan “flipping” – frequent refinancings that result in little or no economic benefit to the borrower and are undertaken with the primary or sole objective of generating additional loan fees, prepayment penalties, and fees from the financing of credit-related products;


Refinancings of special subsidized mortgages that result in the loss of beneficial loan terms;

“Packing” of excessive and sometimes “hidden” fees in the amount financed;
Using loan terms or structures – such as negative amortization – to make it more difficult or impossible for borrowers to reduce or repay their indebtedness;

Using balloon payments to conceal the true burden of the financing and to force borrowers into costly refinancing transactions or foreclosures;

Targeting inappropriate or excessively expensive credit products to older borrowers, to persons who are not financially sophisticated or who may be otherwise vulnerable to abusive practices, and to persons who could qualify for mainstream credit products and terms;

Inadequate disclosure of the true costs, risks and, where necessary, appropriateness to the borrower of loan transactions;

The offering of single premium credit life insurance; and

The use of mandatory arbitration clauses.

Common law fraudulent loan schemes:

Bait and switch

Forged signatures and documents

appraisal fraud

Loan to own ("you can't possibly repay the loan I'm about to make you; I'll own it by foreclosing on you")

What to look at

The five most crucial documents in the analysis of any loan fraud file are: (1) the HUD-1 (or HUD-1A); (2) the loan application (1003); (3) the loan submission form (1008); (4) the escrow instructions; and (5) the preliminary title report. These few documents often serve as a blueprint of the fraud, showing the trail of money and the identity of the people who stood to gain. (by C. Robert Simpson, Esq.)

Properly analyzing and highlighting these documents will assist your attorney in more effectively representing you, and in developing a plan of attack. The effectiveness of your attorney increases exponentially if he or she can litigate your case, i.e., examine witnesses, conduct depositions, etc., having a complete knowledge of the motivations and involvement of each of the parties.

Do not pay for a stop foreclosure or loan modification that does not include these analyses. Make sure you are given a Truth in Lending (TILA) RESPA (Real Estate Settlement Procedures Act), and HOEPA (Homeowners Equity Protection Act) analysis

Deceptive and Unfair Mortgages

By L. Jed Berliner, Massachusetts Foreclosure Defense Attorney on Dec 9, 2008

Mortgages are “presumptively” deceptive and unfair if they have these four characteristics, says the Massachusetts Supreme Judicial Court.

First, the mortgage must be adjustable, with the first adjustment taking place within the first three years. (Well, okay, this is two requirements which the court combined into one.)

Second, the introductory interest rate is at least 3% lower than the fully indexed rate (the base index rate plus the adjustment factor). The rest of us call this a “teaser” rate, since it teases the borrower into thinking that the early affordable payments will always be affordable. It also teases the borrower into thinking that the loan can be refinanced if the payments became too expensive, since home prices would always go up - right?

Third, the borrower’s debt-to-income ratio is at least 50% if the fully indexed rate is used, and not the teaser rate. This means that, half the borrower’s income or more would go to mortgage payments if there is no change to the interest rate calculation factors and there were no teaser rate.

Last, 100% of the home’s value is being borrowed.

In this case, “presumptively unfair” means that the Massachusetts Attorney General must be notified before any foreclosure can take place by the lender, Fremont, allowing time for a court to stop the foreclosure unless the lender can show it took reasonable steps to work with the borrower to avoid foreclosure.

The court rejected Fremont’s argument that its earlier loans should not be held to current standards of unfairness, noting that many government agencies warned against these loans as far back as the late 1990s. Fremont knew, or should have known, that loans with these characteristics would guarantee default by the borrower unless home prices rose indefinitely, which was an unreasonable assumption. But a default would not hurt Fremont, since it sold most of its mortgage loans.

The Attorney General filed the case to stop unfair foreclosures, but it did not seek damages. This issue is left open for another suit by a private borrower, but the decision throws open the door to recovery.

Commonwealth v. Fremont Investment & Loan, and another, 2008 WL:5122699 (Mass.).

(c) copyright New Dawn Law all rights reserved

Reg Z - It May Be The Key To Rescinding Your Bad Loan, But Do You Really Want To Know How It Works??

The concept is simple: federal law requires an accurate written disclosure of the annual percentage rate ("APR") and finance charges in home and consumer loans. Good luck understanding what the Reg Z rules are on your own.

Regulation Z of the Truth and Lending Act

Related to Reg Z and also important in compelling a modification of your home mortgage is the Real Estate Settlement Procedures Act, or RESPA (HUD-1 good faith estimate of closing charges, reasonableness of charges, anti-kickback).

Go see an experienced Truth in Lending attorney - you likely only have 3 years from the making of the loan to take legal action

(c) copyright 2008 New Dawn Law all rights reserved

Mortgage Modification Poker - "Call,and Raise You $10,000"

California Foreclosures: Must Your Lender Accept Your Loan Modification Offer?

By Michael Doan on Sep 8, 2008 in Mortgage Law Network

A new law enacted on July 8, 2008, now requires Lenders of residential loans in the State of California to accept loan modifications in most foreclosure situations. California Civil Code 2923.6 went into effect on July, 2008, and applies to all residential loans made from January 1, 2003, to December 31, 2007, inclusive, that are secured by residential real property and are for owner-occupied residences.

Practically all residential mortgages have Pooling and Servicing Agreements ("PSA") since they were transferred to various Mortgage Backed Security Trusts after origination. These vehicles likewise almost always contain a duty to maximize net present value to its investors and related parties. Under the new laws, California Civil Code 2823.6 broadens and extends this PSA duty by requiring servicers to accept loan modifications with borrowers.

Essentially, California Civil Code 2823.6(a) states that "a servicer acts in the best interest of all parties if it agrees to or implements a loan modification where the (1)loan is in payment default, and (2) anticipated recovery under the loan modification or workout plan exceeds the anticipated recovery through foreclosure on a net present value basis."

Likewise, California Civil Code 2823.6(b) now provides "that the mortgagee, beneficiary, or authorized agent offer the borrower a loan modification or workout plan if such a modification or plan is consistent with its contractual or other authority."

So what does all this mean? Well, lets take an example:

John Martin's loan is presently in default, or reasonably foreseeable of near default. The house he previously bought 2 years ago for $800,000 with a $640,000 first and $140,000 second, has now plummeted to $375,000. While Mr. Martin can no longer afford the $9,000 per month mortgage payment, he is willing, able, and ready to execute a modification of his loan on the following terms:

a) New Loan Amount: $330,000.00

b) New Interest Rate: 6% fixed

c) New Loan Length: 30 years

d) New Payment: $1978.52

While this new loan amount of $330,000 is less than the current fair market value, the costs of foreclosure need to be taken into account. Foreclosures typically cost the lender $50,000 per foreclosure. For example, the Joint Economic Committee of Congress estimated in June, 2007, that the average foreclosure results in $77.935.00 in costs to the homeowner, lender, local government, and neighbors. Of the $77,935.00 in foreclosure costs, the Joint Economic Committee of Congress estimates that the lender will suffer $50,000.00 in costs in conducting a non-judicial foreclosure on the property, maintaining, rehabilitating, insuring, and reselling the property to a third party. Freddie Mac places this loss higher at $58,759.00.

Accordingly, the anticipated recovery through foreclosure on a net present value basis is $325,000.00 or less and the recovery under the proposed loan modification at $330,000.00 exceeds the net present recovery through foreclosure of $325,000.00 by over $5,000.00. Thus California Civil Code 2823.6 would mandate a loan modification to the new terms.

The homeowner just got a new arrow to add to his foreclosure defense quiver. Pursuant to California Civil Code 2823.6, the lender is now
contractually bound to accept the loan modification as provided above.
Failure to do so should allow the borrower to sue for specific performance or wrongful foreclosure in State Court.

California Senate Bill 1137, enacted and effective on July 8, 2008 was a variety of new laws that directly addressed California's foreclosure crisis, among the highest in the nation. Civil Code 2823.6 was among the new laws, and clearly establishes a legal standard of conduct for servicers of pooled or securitized mortgages in meeting their legal duties owed to mortgage investors where a proposed loan modification "maximizes net present value." But the law appears to direct that lenders and their agents make loan modification offers to borrowers "if such a modification or plan is consistent with its contractual or other authority" - that is, results in a "maximized net present value" if indeed their servicing contracts so provide.

Does this compel lenders to offer or accept offers for a "maximized net present value" loan modification or does it merely protect servicers if in fact they do so?

This bill

9. Would codify a legislative finding that any duty servicers
may have to maximize the net present value under their
pooling and servicing agreements is owed to all parties in a
loan pool, not to any particular parties, and that a
servicer acts in the best interest of all parties if it
agrees to or implements a loan modification or workout plan,
as specified;

10. Would codify the intent of the Legislature that the
mortgagee, trustee, beneficiary, or authorized agent offer
the borrower a loan modification or workout plan, if such a
modification or plan is consistent with its contractual or
other authority;

Creative litigation lawyers, and California's appellate courts will determine this soon, predictably.

See how this might work for you.

Present value calculator

Without legal leverage (see above, Reg Z) "loan modifications" may simply be a shell game.

A content rich source on mortgages in crisis: the mortgage lender implode=o=meter

(c) copyright 2008 New Dawn Law all rights reserved

Feeling Guilty About Needing Bankruptcy Relief? Don't.

There's no government bailout waiting there for you, is there.