New Jersey Lawyer & Attorney : Stark & Stark Law Firm : New Jersey Law Blog

On May 18, 2009, the United States Bankruptcy Court for the District of New Jersey issued a General Order with respect to the New Jersey Judiciary Foreclosure Mediation Program.  This Order clarifies that participation in the Foreclosure Mediation Program, where the homeowners have filed for Bankruptcy, does not violate the automatic stay.  Furthermore, a mortgagee does not have to obtain relief from the automatic stay to participate in the Foreclosure Mediation Program.

In addition, this Order makes it clear that in Chapter 13 cases, the debtor is obligated to continue to make regular monthly mortgage payments as well as required payments to the Chapter 13 trustee during the time the mediation process is pending.

This Order further makes clear that if the automatic stay was in place during participation in the program, it remains in place.  If the mortgagee wishes to continue with any foreclosure proceeding, relief from stay must be granted by the Bankruptcy Court.

Finally, this Order directs that any resolution or settlement, including any modification to the mortgage, must be approved by the Bankruptcy Court.  If any settlement impacts a provision of a Chapter 13 Plan, a modified plan must be filed.

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Timothy P. Duggan, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group, was  quoted in the March 29, 2009 Asbury Park Press article, Already owed thousands, Kara Homes contractors now told to pay back what they already got.

Mr. Duggan discusses the effects the Kara Homes bankruptcy is still having on contractors throughout New Jersey over two years after the company initially filed for bankruptcy. Contractors who were paid by Kara Homes within 90-days of the bankruptcy filing are now being told they have to pay back any money they received from the builder. You can read the full article here. (PDF)

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With the downturn in the economy, many New Jersey residents are strapped for cash. A possible reprieve for some people is to file for bankruptcy protection. In the past, many unit owners with equity in their units would simply file for Chapter 13 bankruptcy protection.  Chapter 13 protection would allow the debtor to pay their secured debt in-full and their unsecured debt pro rata through a three to five year bankruptcy plan, while keeping current their monthly obligations.  For condominium, homeowners, and co-operative associations (“Associations”), a successful Chapter 13 proceeding would lead to payment in-full, overtime of their pre-petition secured condominium lien, a pro rata payment of any unsecured claim and being kept current with the Association’s monthly assessments.  

Many Debtors Now Filing for Chapter 7 Bankruptcy Protection
However, now many units are “underwater” - meaning that the value of the home is less than the mortgages and liens on the property.  Instead of filing for Chapter 13 protection and attempting to re-pay debts overtime, many debtors are beginning to file for a Chapter 7 bankruptcy liquidation.  In some cases, Chapter 7 debtors have simply ceased paying any post-petition monthly assessments.  When this happens, Associations are left asking:

• Who’s liable for the post-petition assessments?
• Will we be paid all secured pre-petition assessments?
• How does the debtor’s discharge effect the Association?
• Can we proceed with foreclosure efforts?

   
Following is a brief overview on the Associations’ rights and remedies when a unit owner files for Chapter 7 bankruptcy protection.

The Chapter 7 Discharge
When a debtor files for Chapter 7 bankruptcy protection, they are seeking a discharge of all pre-petition obligations. Generally, the Chapter 7 discharge releases a debtor from personal liability for pre-petition debts and prevents the creditors from pursuit of those debts against the individual debtor. For Associations, this means that it cannot pursue the individual debtor for the any of its pre-petition claims.  Associations can, however, pursue claims secured by collateral, such as Association lien claims. Valid Association liens pass through bankruptcy unaffected, while unsecured pre-petition Association claims are discharged and only paid pro rata if the Trustee finds assets to sell.

Unit Is Property of the Estate at Beginning of Chapter 7 Proceeding
Like a Chapter 13 bankruptcy proceeding, all of the debtor’s property, including interest in the unit, is placed into the bankruptcy estate (the “Estate”). Bankruptcy Code Section 541 defines property (“Property”) very broadly as all legal and equitable interests of the debtor. Included as Property of the Estate is the unit. Acts against the Property of the Estate are prohibited by Section 362 of the Bankruptcy Code (the “Automatic Stay”) and sanctionable.  For Associations, just like in a Chapter 13 bankruptcy proceeding, this means all actions, including collection efforts, such as filing lien claims, foreclosure, seeking judgment and/or wage executions, must cease until otherwise allowed by the court.

Chapter 7 Trustee Determines Whether to Abandon or Sell the Unit 
Overseeing this Estate, in a Chapter 7 Bankruptcy, is a Chapter 7 trustee (the “Trustee”).  It is the Trustee’s job to liquidate the non-exempt Property of the Estate for the benefit of creditors, including the Association.  However, in this economy, many units have little or no equity because either the value of the unit fell or the debtors leveraged all the equity.

To determine if equity exists, the Trustee will perform an equity analysis of the unit. Generally, the Trustee takes the value of the unit and subtracts all mortgages, liens, exemptions and costs of sale.  As a rule of thumb, if there is less than $10,000 in equity remaining after the equity analysis, then the Trustee will abandon the unit.  If there is equity in the unit, the Trustee can sell it to pay secured creditors in-full and make a pro rata distribution to unsecured creditors.

More often, the Trustee will abandon the unit because little or no equity exists. When abandonment occurs, the unit is removed from the Estate and placed back in control of the debtor.  Any mortgages or liens, such as an Association lien, that were valid prior to the bankruptcy filing remain intact.  By abandoning the unit, the protections of the Bankruptcy Code cease and the unit may be pursued by the Association.

Mere Ownership in Unit Obligates Debtor to Pay Post-Petition Assessments
A statutory exception to discharge is the debtor’s obligations to pay post-petition assessments.  So long as the debtor has a mere ownership interest in the unit, the debtor is liable for post-petition assessments. The debtor’s liability was clarified by statute in October 2005 when Congress amended Bankruptcy Code Section 523(a)(16):  

(a)     A discharge under section 727,...does not discharge an individual debt for any debt -

(16)     for a fee or assessment that becomes due and payable after the order for relief to a membership association with respect to the debtor's interest in a unit that has condominium ownership, in a share of a cooperative corporation, or in a homeowners association, for as long as the debtor or the trustee has a legal, equitable or possessory ownership interest in such unit, such corporation or lot.
 

(See 11 USC 523(a)(16), Emph added).

Prior to the 2005 amendments, post-petition assessments due to an association were non-dischargeable, so long as the debtor physically occupied the unit or rented the unit. See prior 11 USC § 523(a)(16), pursuant to the Bankruptcy Reform Act of 1994.  See also, Matter of Mattera, 203 B.R. 565, 572 (Bankr.D.N.J. 1997) (chapter 13 debtor’s non-occupancy of an association unit permitted her to discharge post-petition obligations due to the association). The 2005 amendments eliminated these two provisions entirely and added language that mere ownership creates the non-dischargeability of the post-petition assessments.
 

Association’s Rights to Enforce its Obligations
Until the unit is either sold or abandoned, it remains under the protections of the Automatic Stay.  Bankruptcy Courts in New Jersey will permit an Association relief from the Automatic Stay to pursue its interest in the unit, only (i.e lien claim and or foreclosure), if the debtor has not paid approximately three months of post-petition assessments. 

From a strategic and cost standpoint, the Association must make the decision to either expend money and file a motion for relief from the Automatic Stay or wait for the Trustee to abandon the unit.  Although the motion will provide certainty and allow the Association to pursue the unit, the costs may be prohibitive and may not be collectible within the foreclosure action.  Further, Trustees rarely abandon the unit within 90 days of the filing.  Often, the Trustee must confirm the reasonableness of the value of the unit through an appraisal.  This could take six months or more.  With all these factors, it is vital to have effective communications between the Association’s bankruptcy attorney and the Trustee.  These communications can provide the Association information that needs to make the best decision to enforce its rights. 
 

With the increase in Chapter 7 filings, Associations must not only be vigilant to protect their interests, but also strategic in how to protect themselves. Although the bankruptcy process is complex, thoughtful and sound legal advice at the beginning of a bankruptcy case can help address many thorny issues that Associations regularly face as a creditor in a bankruptcy proceeding.  

For more information on an Association’s rights in bankruptcy, please contact Thomas Onder at Stark & Stark in the Creditor’ Rights Group at (609) 219-7458 or tonder@Stark-Stark.com.

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Timothy P. Duggan, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group authored the article Stub Rent Revisited: No entitlement to immediate payment for the January 12, 2009 edition of the New Jersey Law Journal.

Mr. Duggan discusses the fact that the recent increase in retail bankruptcies has caused the bankruptcy courts and litigants to revisit a variety of legal issues, including the debtor’s obligation to pay post-bankruptcy rent while it decides which leases to assume or reject. You can read the full article online here.

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This installment of the New Jersey Legal Update is an interview with Bari Gambacorta, Shareholder in Stark & Stark's Bankruptcy & Creditor's Rights group, Allyson Cofran, member of Stark & Stark's Bankruptcy & Creditor's Rights group, and Kevin Wolfe, of the State of New Jersey's Civil Practice Division. The podcast is a discussion of the New Jersey Foreclosure Mediation Program which went into effect Monday January 5, 2009 in order to assist homeowner's throughout New Jersey who are facing foreclosure delinquencies.

The State of New Jersey has released the list of CDR (Complimentary Dispute Resolution) point persons, who will be creating mediation calendars and coordinating the foreclosure mediation program in county courthouses. You can access the list here. (PDF)

You can download the full interview here. (15.5 MB)

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Timothy P. Duggan, Shareholder of Stark & Stark's Bankruptcy & Creditor's Rights group, was interviewed for an NJN News story discussing Governor Corzine's economic stimulus bill and the recent rise of unemployment and personal bankruptcies in New Jersey. As the number of Chapter 7 bankruptcies more than doubled from 7,200 in 2006 to 16,955 in 2008, Mr. Duggan states that people are just not able to make mortgage payments in addition to their every day living expenses, and are therefore forced into bankruptcy.

You can watch the full story here.

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Deficiency actions to recover balances owed after a consumer foreclosure action are not favored in New Jersey Courts.  Although, such actions are permitted under New Jersey law, it is in very limited circumstances and may be difficult to obtain.  Under New Jersey law, a judgment for deficiency may not be brought in the same action to foreclosure the residential mortgage (a separate action must be brought); this preclusion also includes claims on any personal guarantees. Foreclosure deficiency actions can be brought only once the mortgage is foreclosed; must be brought within three (3) months from the date of the sale and can not be brought against any party who was not a party to the foreclosure action.  The deficiency balance sought must be the difference between the foreclosure judgment amount and the fair market value of the property at the time of the sale.

The public policy behind the legislation was to protect the homeowners from losing their homes and then to have a judgment against them for a deficiency which could be as much as the full amount of the mortgage plus additional costs and attorney’s fees.

The protection afforded by New Jersey’s deficiency statutes does not extend to business or commercial loans, one to four family residential dwellings owner occupied at the time the deficiency action is commenced where the mortgage is not the primary security for the debt or where there is a second mortgage lender and the mortgage is subject to a prior lien(s) not held by the same lender.  It is a common misconception that these statutes protect all residential homeowners.  For example the protection would not apply to a second mortgage held by a different lender than the one who holds the first mortgage, provided the first mortgage has already completed its sale; a single family dwelling where the owner or family does not occupy the property or a single family dwelling which secures a commercial loan.

Although, the amount of the foreclosure judgment is binding on all parties to the foreclosure action, the defendant in the deficiency action may still dispute the amount of the debt in the deficiency action. The main thrust of the statute’s protection is found in the ability of the mortgagors to dispute the amount of the fair market value of the property at the time of the foreclosure sale. 

A deficiency action can not be brought if a deed in lieu of foreclosure is accepted.  It must be remembered that an action to recover a deficiency balance will open the foreclosure and sale of the subject property and extend the homeowners right or his assignee to redeem the property for six months, by paying the full amount determined in the foreclosure action.

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It is hard to know when the proverbial “next shoe” will drop in the current economic crisis but recently credit lenders in my practice have experienced attempted policy rescissions for their mortgage insured accounts where suddenly and without any notice the private mortgage insurer  (the “Company”) has attempted to rescind its insurance policy on specific accounts. This is especially true for policies issued on mortgage accounts closed during 2005-2006, the peak years of residential real estate values. Their letter often contains language to the effect that the application’s underlying appraisal was “false, incorrect or incomplete” and was “material to the decision to insure” or something similar thereto. The reality is that private mortgage insurers now realize that they are likely to be hit with a rash of claims on loans they have underwritten since the real estate bubble has burst and home values in many geographic regions have declined precipitously. Rather than brave the tempest and honor their policies they have elected to get in front of the wave through this novel rescission approach.

Attempted private mortgage recessions such as these, need to be handled promptly by qualified counsel. The credit lender’s appraiser should be put on notice and invited to put his carrier on notice of the pending claim. The appraiser should also be requested to review the appraisal used for the original underwriting to make certain that the facts contained therein are accurate and to verify the comps used. There should simultaneously be a demand for the insurance company’s new appraisal. Payments should be made to the Company in the regular fashion even if they are returned initially. Counsel should review the Company’s Master Policy and any exclusions and give the Company any required notice pursuant thereto in anticipation of the pending litigation.

While this recommended course of action often puts credit lenders and their appraisers (often with mutual business interests and longstanding relationships) at odds, New Jersey’s Entire Controversy Doctrine makes a second lawsuit against the appraiser itself impossible. Counsel, experienced and sensitive to these relationships, can normally soften the prospects of the pending suit by a telephone call explaining the circumstances and promising full cooperation in the litigation prior to issuing his written demand.

If litigation is commenced it is imperative to ascertain if the financial institution has other insured loans with the Company and it is normally advisable to seek declaratory relief in the Complaint seeking to maintain coverage on all those other  loans where policies exist. Additionally, it may be time to take stock and ascertain the possible exposure of those other loans since the Company’s intentions to “rescind” its policies may signify well-founded concerns for its adequate capitalization. Prudence would suggest that a lender at least recognize the additional risks such mortgage insured loans may poise to a lender’s portfolio. Certain or all of these loans may well be singled out for “special handling”.

If the lender has any concern about the appraisal questioned or any other appraisals insured by the Company then it should hire an independent review appraiser to offer an independent view on the appraisal or appraisals. If there are any weaknesses in the case it is better to know up front. This may well affect the negotiation strategy with both the Company and the appraiser’s insurance company.

In these “recession” situations, it’s a simple “shoe-in” to seek guidance and move swiftly in order to preserve the credit lender’s rights. Normally the bank’s counsel will need a copy of the notifying letter, a copy of the appraisal used by the Company to determine that the underlying appraisal was “false”, a copy of the original appraisal and a copy of the Company’s Master Policy currently in effect with the credit lender.

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Timothy P. Duggan, Shareholder and member of Stark & Stark's Bankruptcy & Creditor's Rights group, will present a seminar entitled Insolvency in Franchise Businesses: Minimizing Risk and Maximizing Recovery Under the Bankruptcy Code in conjunction with the Legal Publishing Group of Strafford Publications. The 90-minute tele-seminar will be held Thursday December 4, 2008 from 1:00 PM - 2:30 PM.

The seminar will feature a discussion of the weakening economy and it's effects on many franchises, ranging from restaurants to convenience stores to staffing services who are now seeking bankruptcy protection. The Bankruptcy Code addresses how franchise agreements are treated in bankruptcy; however, the Code does not resolve all of the unique issues that arise for franchisors and franchisees. It is critical that franchise counsel develop strategies to anticipate and protect against the fallout from bankruptcy.

This teleconference will highlight key legal issues that arise during a franchisor or franchisee bankruptcy. The program will also offer best practices for creating a franchise agreement in order to protect their respective interests and maximize their recovery under the Bankruptcy Code.

You can access additional information and a registration form here.
 

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Commercial landlords need to be vigilant in protecting their interests in these uncertain economic times.  Getting and keeping paying commercial tenants is the name of the game.  However, its not always that simple.  Sometimes, landlords have to make the difficult decision of whether to evict and try to collect against a non-paying tenant. The commercial landlord could be left with the tough choice of evicting a tenant and have a "dark store" until a new tenant can be found or working with their tenant by offering more favorable terms or concessions. 

Whatever business decision a commercial landlord makes, its advisable to know what your rights are, and what steps you have to make, before you proceed with a litigation strategy.  A clear strategy for dealing with non-paying tenants can help determine the success of your commercial property with existing, new and potential tenants. 

Following is a quick primer of questions to ask your attorney about both the eviction and collection process in New Jersey before proceeding with litigation.  Asking these questions ahead of time can help you make a more informed decision on how to proceed with a non-paying tenant.

EVICTION
In New Jersey, commercial landlords have the right to have a tenant evicted through a summary dispossess action (aka "eviction") for non-payment of rent.  Before attempting to evict tenants, the landlord should confirm with their attorney a number of questions, including:

1. Has a New Jersey attorney reviewed the lease?  It is important to have an attorney licensed to practice law in the State of New Jersey review the lease to make sure that it complies with State and Federal law.
2. Do any Federal or State statutes preempt?  Your attorney should be able to advise if any Federal or State statutes specifically define rent, which would only allow a certain portion to be collected.  If so, then you may need to re-inform the tenant of the amount due and owing before commencing suit.
3. Does the lease provide for collection of attorney fees as additional rent? To collect attorney fees, generally there must be either a contractual arrangement or a statute that provides for such collection.  For eviction actions, to include attorneys fees as rent in the eviction complaint, it must be specifically defined as additional rent.  Just having a provision that allows the collection of attorneys fees, but not defined as additional rent, will not permit the landlord to call a default and institute an eviction.
4. Who will testify to the amount owed? If the matter is contested, you will need to submit proofs and testimony to show the amounts due and owing.  It's a good idea to have your attorney review the lease and accounting with whomever is to testify.  Further, its important that the person testifying have actual knowledge of the books and records, as well as authority to testify.
5. Have all notice provisions been complied with? Before your file the eviction action, make sure you've complied with all notice provisions.  Your attorney should advise of the specific notice provisions that need to be followed under the lease, as well as if the Fair Debt Collection Practices Act and New Jersey Anti- Eviction Act, may be applicable.

COLLECTION
Commencing the eviction action is only half the battle for commercial landlords.  Once a landlord has obtained an order for summary dispossession, the next step is to actually evict the tenant and then try and collect money.  Following are questions to ask your attorney about what to do after the summary dispossession order (eviction order) has been entered.

1. Is settlement possible?  At this point it may be worth attempting to speaking with the tenant one more time before the actual eviction takes place. Sometimes just getting the order for possession will bring the tenant to the bargaining table.
2. Has the warrant been posted?  It is essential to go through with the entire eviction. This means not only obtaining the order for possession, but also enforcing it through a warrant of removal and actual eviction.  Its advisable to confirm your attorney has followed-up with the Sheriff to make appropriate arrangements.
3. What to do with left over items?  When the eviction takes place, you may want to check with your attorney on what to do with items left in the premises. For instance, if a copy machine has been left in the premises, do you know who owns it?  If not, how do you find out?  Further what rights do you have in that equipment?  These issues should be thoroughly discussed with your attorney.
4. How do you get paid? After the landlord has gotten possession, the next steps is getting paid.  In New Jersey, landlords usually have to commence a separate action to collect all sums due and owing.  However, before you authorize a collection action you may want to ask your attorneys about what steps you've done or have to do to mitigate damages.  For instance, if the lease term was 10 years and you evicted the tenant after three years, how much can you collect?  Are your attorneys fees provided to be collected in the lease?  What about improvements?
5. Are there guarantors on the lease?  Besides suing the tenant, you and your attorney should thoroughly review the lease to see if there are other parties that you can try and collect for arrears and damages owed.

Prior to making that decision to evict a non-paying tenant, it is advisable that a commercial landlord reviews these and many more questions with a licensed New Jersey attorney.  Answering these questions beforehand can help you with the proper strategy to keep your commercial property(s) profitable in these cautious economic times.

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