Sacramento Bankruptcy Lawyer Blog

Another major Sacramento-area business will be winding up their operations through bankruptcy court. Placer Fire Equipment, a Rancho Cordova company that builds fire apparatus for local and state agencies, filed for Chapter 7 bankruptcy in Sacramento on March 3.

The effect of Placer Fire Equipment's bankruptcy will be felt elsewhere in the Sacramento area. Its clients included the Sacramento Metropolitan Fire District, the governor's Office of Emergency Services, and the North Lake Tahoe Fire Protection District. The company owes nearly $1 million to Folsom-based Sierra Vista Bank, $63,000 to Sacramento County Airports, and at least eight employees will be out of their jobs and may be out of back wages as well. In bankruptcy, the court will liquidate Placer Fire Equipment's assets and distribute the proceeds among its creditors. But, with total debt of $3.8 million, it is unlikely that any creditor will receive more than pennies on the dollar.

It is hard not to at least partly blame the economy for any company's failure. Placer Fire Equipment went from $1.6 million in income in 2008 to a more than $1 million loss in 2009. While the news has been dominated by bank failures, foreclosures, and unemployment. It is stories about small companies that capture how starkly fortunes of many Americans changed because of forces beyond their control.

Unemployment figures for the Sacramento area released this week gave mixed signals about the state of the local economy. In conjunction with the depressed local real estate market, the recession has hit Sacramento's job market particularly hard. Still, the numbers indicate that the job market may be bottoming out and better times could be ahead.

The official jobless rate reached 13.1% in January, the highest rate that Sacramento has had since the current calculation method was instituted in 1990. However, the nearly 1% increase from December mostly reflects seasonal labor being let go after the holiday season. Only 4,400 permanent payroll jobs vanished, which is a low number for January. Many of these jobs were retail positions as the lackluster holiday season spelled the end to a number of jobs and even a few businesses.

The numbers, released by the Employment Development Department, showed that Sacramento lost nearly 50,000 jobs in 2009, twenty percent more than had previously been believed. That number amounts to almost 6 percent of all local jobs. Even the local health care industry shed 1 percent of its jobs, despite the general belief that health care is the most recession-proof industry.

Two other local counties, Yolo and El Dorado, had unemployment rates topping 13 percent. Placer County was just a little better at 12 percent. The statewide January unemployment rate was 12.5 percent.

As with all economic figures released these days, the unemployment figures were sobering. But, the numbers do provide some hope that a rebound is impending. With many families struggling month-to-month with their finances, hope is a powerful thing.

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is widely considered to be vague and poorly written. Courts have struggled interpreting its language, and on Monday the Supreme Court interjected some, but not total, clarity in an opinion that both burdened and unburdened bankruptcy attorneys' practices. The Court unanimously ruled that bankruptcy attorneys must identify themselves as "debt relief agencies" in advertisements. It also held that they may advise clients to take on additional debt as long as the attorneys do not inform clients to load up on debt in anticipation of filing bankruptcy. Justice Sonia Sotomayor wrote the majority opinion in Milavetz v. United States.

The BAPCPA had attempted to clamp down on attorneys who were providing clients with ways to exploit impending bankruptcy. Read broadly, the law the Act instituted seemed to prohibit bankruptcy attorneys from advising clients to take on any debt, even necessary expenses such as signing an apartment lease or acquiring a car for transportation. Many attorneys complained that such an interpretation hamstrung their ability to provide effective counsel. In the case that reached the Supreme Court, a Minnesota law firm, Milavetz, Gallop & Milavetz, argued that the rule violated the First Amendment by restricting attorney-client communication.

Sotomayor did not agree that the rule violated the First Amendment because attorneys have no right to affirmatively advise clients to commit abusive pre-filing conduct. However, her opinion indicated that the law only applies when the "impetus for the advice to incur more debt is the expectation of filing for bankruptcy and obtaining the attendant relief." In other words, attorneys can advise clients to rent an apartment or make a reasonable car purchase so long as the attorney does not expect or intend that the obligations will be excused by bankruptcy.

Sotomayor's standard does not draw a bright-line rule, so attorneys will have to carefully consider whether their advice adheres to the language in the Milavetz case.

On January 30, 2010, Kimberly Wiefling, Global Business Leadership Consultant, with offices in Redwood City, CA, gave a seminar on "Creating a Vision for Your Future". Sometimes when negative situations happen to people, such as filing for bankruptcy, they ask what they did wrong to deserve it. Other people will criticize saying a person would not be in debt if he knew how to manage money, he would not be unemployed if he worked harder, he would not have been hit by a truck walking across a street if he had not been at the wrong place at the wrong time. These people do not realize that all of life, no matter good or bad, is worth experiencing.

In bankruptcy, a person may fear surrendering property to creditors, but remember to have courage and proceed even when there is fear. Do not wait for courage, but accept the fear. What changes people are experiences, not homework, not degrees. Scratch out the word "hope", and learn what it is like to be pushed off the edge of a cliff, forced to invent water on the way down. Declare what will happen and commit to the outcome.

In bankruptcy, there are different kinds of debts and creditors. A creditor is someone owed a debt. Secured creditors loaned money in exchange for interest in the property. The property is collateral. Secured debts include mortgages, car loans, and furniture loans. With secured debts, besides returning the property to the creditor, a debtor may pay for the property in full and keep it, or reaffirm the debt and agree to continue to pay the debt as if a bankruptcy petition was not filed, knowing that if the debt is not paid, the debtor may be sued for collections. Unsecured creditors are all other creditors such as doctors' bills, credit cards, past-due utilities.

"Hoping" creates disappointment. Every situation is temporary. People can be wrong even when they are sure. For example, when people think of bankruptcy, they think of the negatives like a ruined credit. But, filing for bankruptcy may make something possible that was not possible before. People secretly like to see others taken down. They wonder why they did not do something when they see others accomplish. When other people try to kill dreams, remember that just because they seem sure does not mean they are right.

Continue reading "Creating a Vision for Your Future" »

Many businesses use derivatives like currency or interest rate swaps or forward contracts for purchase of oil, gold, natural gas, wheat or other commodities to hedge exposure to unexpected rise or fall in values, interest rates or prices. The September 2008 collapse of Lehman Brothers, Inc. and its affiliates exposed global derivative trading and the use of such transactions in structured finance deals, sold to investors as safe and given triple A ratings.

Through bankruptcy court, the Bankruptcy Code prohibits a non-debtor counterparty in litigation from exercising any rights and remedies against the debtor or its property or from continuing litigation against the debtor.

Derivatives continue to be traded on public exchanges such as the New York Mercantile Exchange (NYMEX), but the majority of transactions are "over the counter" (OTC) trades negotiated directly between private parties that are exempt from regulation by the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC) or other governmental regulatory bodies.

With Lehman, because its bankruptcy disrupts the financial markets, the Bankruptcy Code safe harbor provisions permit counterparties to:

• terminate securities, commodities, forward, repurchase, and swap agreements; exercise contractual, exchange-specific or other rights to accelerate, liquidate, terminate or set-off under the parties' securities and derivatives contracts;
• exempt pre-bankruptcy petition settlement payments, margin payments and other transfers made in connection with securities and derivative contracts from avoidance as a preference or a constructive fraudulent conveyance when such payments are made to or through certain categories of persons.

Paul Volcker, former Chairman of the Federal Reserve Board and current Chairman of the President's Economic Recovery Advisory Board, testified on February 2, 2009, before the Senate Banking, Housing, and Urban Affairs Committee. He spoke about President Barack Obama's "Volcker Rule" proposal. The Volcker Rule proposal prohibits a bank or bank holding company from owning, investing in, or sponsoring hedge funds or private equity funds, or engaging in proprietary trading operations for its own profit unrelated to serving customers.

Volcker's speech comes at the same time that the Federal Trade Commission ("FTC") issued a Notice of Proposed Rulemaking ("NPRM"), seeking comment on a proposed Rule that would regulate loan modification, foreclosure rescue, and other mortgage assistance relief ("MARS") providers.

On the issue of international consensus on the Volcker proposal, there were grounds to anticipate success. Volcker felt it would not be difficult to detail the functional definition of hedge funds and private equity funds that commercial banks would be forbidden to own, sponsor or invest in, and proprietary trading in they would be forbidden to engage. Volcker highlighted conflicts of interest in the participation of commercial banking organizations in proprietary or private investment activity, remarking "Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions."

Meanwhile, the proposed FTC Rule, issued on February 4, 2010, would ban MARS providers from collecting fees prior to delivering MARS services, prohibit misrepresentations in the marketing of MARS services, and require affirmative disclosures about the nature and terms of the services. The proposed Rule extends liability for violations to persons or companies who provide assistance or support to MARS providers that violate the proposed Rule.

The Volcker proposals were part of structural reform to deal with the problem of "too big to fail", ensuring that large institutions and their managers and creditors do not assume a public rescue will be forthcoming in times of pressure. But, for Volcker, non-"systemically significant" non-bank institutions, such as hedge funds, private equity funds, and other private institutions, should be allowed to fail in a competitive free enterprise system.

The FTC Rule comes from 2009 Omnibus Appropriations Act, as clarified by the Credit Card Accountability and Disclosure Act, giving the FTC rulemaking authority to prevent unfairness or deception in practices involving loan modification and foreclosure rescue services.

The federal government is applying pressure on banks to help borrowers burdened with second mortgages. Representative Barney Frank, chairman of the House Financial Services Committee, wrote an angry letter to major U.S. banks demanding that they write-down second mortgages. By failing to do so, Frank claims that borrowers are unable to receive loan modifications on their first mortgages, and as a result are letting their homes go into foreclosure.

Until now, the Obama Administration has focused its Home Affordable Motification Program (HAMP) on modifying first mortgages. However, many modifications fall through because an agreement fails to be reached with the holder of the second mortgage. So, the focus is now shifting to coming up with solutions for the second mortgage.

Many second mortgages these days are completely unsecured because property values have dropped below the balance of the first mortgage. Due to complicated accounting rules, banks prefer not to take losses on their second mortgages because doing so would cause a big hit to their balance sheets. Also, even if a borrower goes into foreclosure, the bank can pursue the borrower for the balance owed on the second mortgage. Those two factors are dissuading banks from writing down second mortgages. A homeowner cannot complete a short sale without agreement from the bank holding the second mortgage. And thus, many short sales have fallen through.

A short sale occurs when mortgage company holding the first mortgage agrees to allow the borrower to sell the home for less than the balance of the loan, and the borrower can walk away from the difference. In avoiding a foreclosure, the bank saves money and the borrower does not take a hard hit to his credit.

In a few weeks, borrowers who receive reduced payments on their first mortgage through HAMP will also receive a break on their second mortgages. Bank of America has signed up for this program and other large banks are likely to as well. The Obama administration will also be encouraging those who cannot qualify for a loan modification to pursue a short sale or deed-in-lieu of foreclosure. Holders of second mortgages may receive 3% of the unpaid loan balance, up to a maximum of $3,000, for writing down second motgages in the event of a short sale.

There have been some positive news stories of late about a rising stock market and unemployment figures that are no longer rising. However, the American Bankruptcy Institute released numbers that show that consumer bankruptcy filings surged 14% in February from a year earlier. In total, 111,693 cases were filed, a 9% increase from January.

The higher number of filers does not reflect a worsening economy, but reflects the duration of the down times. American families have been living with joblessness, low housing prices, and tight credit markets for years, and many are unable to continue the uphill battle. The executive director of the American Bankruptcy Institute predicts that filings will top 1.5 million this year. Last year, there were 1.47 million filings.

Filers are now more likely than before to file Chapter 7 bankruptcy. Chapter 7, if approved by the bankruptcy court, allows the debtor to discharge unsecured debt and does not leave the debtor with a monthly payment. Only those making below the median income and with insubstantial assets may have a Chapter 7 plan approved.

On the other hand, Chapter 13 bankruptcies are decreasing. When Congress imposed a stricter bankruptcy code in 2005, one of the goals was to compel higher earners to file Chapter 13 bankruptcy, which requires filers to repay a portion of their debt over several years. Chapter 13 bankruptcy was in large part designed for homeowners who wanted to stay in their homes. But, so many homeowners are underwater in their homes that they have little incentive to stay. They sensibly decide to start over elsewhere with a fresh start.

An economic recovery may be on the horizon but there will be plenty of reminders of the Great Recession until then.

Elk Grove Promenade has sat collecting weeds off Highway 99 over the last few years, a seemingly permanent reminder of the dreams of prosperity that the recession shattered a few years ago. Sacramento-area residents would never know that a couple of gigantic property firms are vying to takeover the property.

General Growth Properties Inc. developed Elk Grove Promenade intending to turn it into a destination shopping attraction for the south-of-Sacramento area. Instead, midway through development, General Growth filed bankruptcy and production stalled. A fence was built around the property and the partially-built mall was frozen in 2008.

Two large real estate firms, Brookfield from Canada and Simon Property Group from Indianapolis, have submitted multi-billion dollar bids to buy General Growth and its portfolio, including the Elk Grove Promenade. General Growth is in bankruptcy court in Manhattan, and the bankruptcy judge will have final say on which bid General Growth will accept.

A new owner could sit on the Elk Grove property until the market makes a large mall viable. Or, it could redevelop the property as a big-box center or an outlet mall. Any new work on the Promenade will likely only come with an improvement in the economy. Thus, the Promenade remains a large symbol of the Great Recession.

Chris Webber's downtown Sacramento restaurant, Center Court, received plenty of attention at its 2006 opening. Less than four years later, Webber is being sued by Promenade, Center Court's landlord, in Sacramento County Superior Court for $1.8 million after Center Court closed months ago with a lease that runs until 2026. Promenade's complaint asks for $1 million to help release the property, $134,997 in overdue rent, $50,000 in clean-up fees and $41,399.32 a month until the court renders a judgment.

Webber was no longer with the team at the time Center Court opened and has since retired, but he remains a popular figure in Sacramento. Sacramento Kings fans have fond memories of the wildly entertaining Kings teams from the early part of last decade that consistently made it deep into the playoffs. Webber and business partner Jeff Dudum of Dudum Sports and Entertainment opened Center Court hoping to leverage that popularity into a hot Sacramento restaurant. But the restaurant business has suffered just like the rest of the economy over the last few years. Center Court could not make rent payments towards the end of last year and decided to close its doors.

Webber and Dudum signed a lease with Opus West Corporation, a real estate developer. Opus West filed for bankruptcy protection last year, one of many real estate developers that were punished by the recession.

For all who are struggling to find ways out of debt, don't invest all of yourself in a relationship, a job, or one aspect of life. Always have independence and be in life to live. Touch the world and make everything possible. One inspiration is Sramana Mitra, a writer and entrepreneur in Silicon Valley, CA, who graduated from MIT. Over the last 15 months, she has coached over 75 entrepreneurs. She summarizes her observations in an article "How to check Infant Entrepreneur Mortality" She reports 25% don't validate their ideas, another 25% go straight out to raise money, leading to nowhere.

Mitra made a New Year resolution in 2010 to help a million entrepreneurs globally reach $1 million in revenue (and beyond). She believes this would be the foundation of a robust, distributed, and sustainable economic value creation that would add up to a trillion dollars in global GDP, and result in creating at least 10 million jobs around the world.

Because every moment is fleeing, don't waste words and moments without doing what is in your hearts. Everyone fails, but everyone also has the fortune to pick him/herself up. If you are thinking of doing something negative to make ends meet, do not do it before it is too late. There may be forgiveness, but there will be pain and guilt from knowing who you are and what you did. Don't steal or seek revenge. Control anger and hate. Life is immense like the ocean. For Mitra, as she started talking to her readers about her New Year resolution, many of them stepped up to help out through a program they now formalized, called 1M/1M Ambassadors.

Be brave everyday to step into the ocean and face the immensity. Get away from situations where people do not value you. Tell yourself that you are made to be where you want to be. Believe it. With Mitra, she has been writing to her connections for support in bringing the key piece of the 1M/1M initiative to a broader audience of entrepreneurs - her free online strategy weekly roundtables address positioning, financing, and other aspects of a startup venture. Up to 1,000 people can attend each session, but only the first five who register to pitch will be able to present their business ideas. All attendees are able to join in on the conversations via a live chat.

Life is about minimizing regrets. When making choices, weigh which options cause regret. Business and people break hearts. Don't cry over people or companies who won't cry over you.

With Mitra, she seeks ways of collaborating by offering guest columns to fellow writers, as in a series, Blogosphere On Bootstrapping, which writers contributed. She welcomes people joining the 1M/1M program.

In January 2010, Forbes.com reported "America's Best And Worst Banks" ranking the 100 largest banks. This article attracted numerous discussions on bank failures.

In February 2010, the California Department of Financial Institutions closed First Regional Bank, headquartered in Los Angeles, California, and the FDIC was named receiver. As of September 30, 2009, First Regional Bank had approximately $1.87 billion in total deposits and $2.18 billion in total assets. First Regional Bank is the first bank to fail in California following Imperial Capital Bank on December 18, 2009.

The FDIC, as receiver, entered into a purchase and assumption agreement with First-Citizens Bank & Trust Company, headquartered in Raleigh, North Carolina, to assume all of the deposits of First Regional Bank. First-Citizens Bank & Trust Company agreed to purchase approximately $2.17 billion of First Regional Bank's assets. First-Citizens Bank & Trust Company did not pay the FDIC any premium for the deposits of First Regional Bank.

The FDIC estimates the cost to the Deposit Insurance Fund to be $825.5 million. The FDIC has been making attempts to address bank failures. The FDIC adopted a final Statement on August 26, 2009 singling out private equity investors as affecting the ability of failing banks to attract capital, avoid taxpayer bailouts and minimize losses to the Deposit Insurance Fund.

Continue reading "Bank Failures" »

ZipRealty, Inc. reported decline in MLS-Listed Homes "On Sale" in December 2009, and foreclosures and short sales dominating the U.S. Housing Market in 2009 on its residential real estate community news and information site.

These news events affect not only primary real property mortgages, but also increase the reduction of credit limits for Home Equity Lines of Credit. With a decline in property values, and people's inability to repay loans, creditors reducing credit limits for Home Equity Lines of Credit have become litigation targets with plaintiffs asserting violation of the federal Truth in Lending Act, 15 U.S.C. 1601, et seq. ("TILA"), and state law claims for breach of contract, unjust enrichment, and violation of state unfair practices act in credit limit reductions for Home Equity Lines of Credit. The creditor must give the borrower written notice within three business days stating the reason for the reduction. 12 C.F.R. § 226.9(c)(3).

TILA and its implementing regulation Regulation Z governs the administration of Home Equity Lines of Credit. A creditor reduces a borrower's credit limit where there is a significant decline in the value of the property securing the line of credit or a material change in the borrower's financial circumstances. 15 U.S.C. §§ 1647 (c)(2)(B), (C); 12 C.F.R. §§ 226.5b(f)(3) (vi)(A), (B). TILA "does not require a creditor to obtain an appraisal before suspending credit privileges, although a significant decline must occur before suspension can occur." 12 C.F.R. Part 226, Supp. I, cmt. 5b(f)(3)(vi)-6.

A significant decline for reduction of lines of credit "will vary according to individual circumstances." 12 C.F.R. Part 226, Supp. I, cmt. 5b(f)(3)(vi)-6. Where a borrower's available equity in a property has declined by fifty percent, the decline is significant under the statute and the credit limit may be reduced. 12 C.F.R. Part 226, Supp. I, cmt. 5b(f)(3)(vi)-6. The significant decline inquiry focuses on their available equity rather than the value of the property alone.

In three opinions issued on motions to dismiss Home Equity Lines of Credit cases, courts dismissed the plaintiffs' claims under TILA because the plaintiffs failed to adequately allege that the Home Equity Lines of Credit was obtained for "personal, family, or household purposes." Walsh v. JP Morgan Chase Bank, No. 09-04387 RGK, Docket No. 26 at 3 (C.D. Cal. Dec. 8, 2009); Wilder v. JP Morgan Chase Bank, N.A., No. 09-0834 DOC, Docket No. 26 at 4 (C.D. Cal. Nov. 25, 2009); Schulken v. Washington Mutual Bank, No. 09-02708 JW, Docket No. 30 at 6-7 (N.D. Cal. Nov. 19, 2009).

Continue reading "Reducing Limits on Home Equity Lines of Credit" »

The California Attorney General warned last week about a new scam aimed at struggling homeowners. It is called a "forensic loan audit." The scammer contacts the homeowner to offer an audit of the mortgage loan. The homeowner sends his mortgage documents, and the scammer purports to evaluate the loan for compliance with state and federal laws. The scammer sells this service by claiming that he will arm the homeowner with information about the loan that will provide leverage in loan modification negotiations with the banks. Instead, the homeowner pays upfront fees and receives nothing useful in return.

The scam has been advertised on TV, radio, and in print. It caught the attention of the California Attorney General's office, which partnered with the California Department of real Estate and the State Bar to warn consumers. The Attorney General's Office provides a number of don'ts to avoid foreclosure scams:

• Don't pay up-front fees. By law, foreclosure consultants are prohibited from collecting money in advance of providing services.

• Don't ignore letters from your lender or loan servicer.

• Don't transfer title or sell your house to a "foreclosure rescuer." This scam convinces homeowners they can stay in their home as renters and repurchase the home later. It also could be part of a fraudulent bankruptcy filing. A scammer can evict you and take your home.

• Don't make mortgage payments to anyone except your lender or loan servicer. Fraudulent consultants often keep the money for themselves.

• Never sign a document without reading it. Homeowners have unknowingly signed documents that transferred their home ownership to someone intent on evicting them.

Refinances, loan modifications, and short sales receive most of the attention when alternatives to foreclosure are discussed. However, another option may begin to gain popularity. One of the nation's largest mortgage lenders, CitiMortgage, will soon start a program for borrowers to execute "deeds in lieu of foreclosure."

A deed in lieu of foreclosure is fairly straightforward. A struggling borrower and his or her lender agree that the borrower will turn over the deed to the home in exchange for the bank not foreclosing on the home. The borrower may remain in the home for a number of months and does not suffer as much damage to his or her credit rating as would occur with a foreclosure. The bank releases the borrower from all legal obligations to repay the loan. A deed in lieu involves less legal costs for a bank than foreclosure and also incentivizes borrowers to keep the homes in better condition.

CitiMortgage is planning a pilot program for deeds in lieu in a number of eastern and midwestern states. Qualified homeowners would receive six months to live in the home and $1000 in relocation assistance as long as they maintain the property in good condition. To qualify, a homeowner must be 90 days late on their mortgage and not have a second lien. Citi expects only about 1,000 borrowers to take advantage of the offer because of how many of its customers have second mortgages.

Other lenders consider deeds in lieu on an ad hoc basis. If you are interested in pursuing a deed in lieu or any alternative to foreclosure, contact a specialist who has helped many borrowers find a better option to foreclosure.