SVL Quarterly – December 2023

Dec 20, 2023 | SourcExpo 2022, SourcExpo 2023, SVL Newsletter

Successors in Interest and Bankruptcy

A recent bankruptcy decision out of Virginia highlights the breadth of rights a successor in interest has in a residential mortgage loan. The court opinion is from In re: Stevenson, a Chapter 13 bankruptcy, pending before the United States Bankruptcy Court for the Eastern District of Virginia. The decision was entered on November 8, 2023. The Debtor filed a Chapter 13 bankruptcy with the intent to cure the arrearage on a mortgage loan owed to Wesbanco Bank.

The Debtor, Mr. Stevenson, was not obligated on the mortgage loan (he had not signed the note or the mortgage), and the property in question was not his residence. Mr. Stevenson had inherited the property after the previous owner died. Under Federal law, that makes the Debtor a successor in interest and subject to the rights of a successor in interest under the Federal Mortgage Servicing Rules.

The Bank objected to the Debtor’s plan on the grounds that the Debtor was not obligated on the note and mortgage and was seeking to force an assumption for the mortgage loan without its consent. The Court overruled the Bank’s objection, confirming the Chapter 13 plan. The Court noted that bankruptcy courts do not agree on whether a Chapter 13 plan may cure a defaulted secured claim when no privity of contract exists (meaning the Debtor is not personally liable on the note and mortgage). The Court sided with the majority of courts that found that the bankruptcy code allows a debtor to propose a plan to repay a debt on the property that the Debtor owns, even if the Debtor is not personally liable for the debt.

While the court did not cite the mortgage servicing rules, the rights of a successor in interest would have justified the same result for the court. Mr. Stevenson inherited the property, making him a successor in interest. The CFPB’s rule on successors in interest took effect on April 19, 2018. The Rule applies to all servicers, including small servicers. The law entitles a successor in interest to make loan payments and apply for loss mitigation assistance.

When dealing with a person who has inherited a mortgaged property, lenders must understand that this person is a successor in interest and has certain rights under Federal law. Furthermore, a successor in interest has certain rights whether or not they assume the loan. If the successor in interest chooses to file bankruptcy, most courts will find that the bankruptcy code allows them to cure any arrearage on the loan and resume payments under the note and mortgage.

If you have questions or concerns regarding successors in interest or bankruptcy-related issues, please get in touch with a lawyer at Sorenson Van Leuven.

New Ruling Has Effect on Till Rate in “Cram Downs

In a Chapter 13 bankruptcy, a debtor has the chance to reorganize their finances and repay debts over a specified period, typically three to five years. For secured creditors, this process introduces a crucial concept known as “cram down,” which carries significant implications. A cram down occurs when a bankruptcy court approves a repayment plan proposed by the debtor that reduces the outstanding balance of a secured debt to the collateral’s value, rather than the total amount owed. However, the Supreme Court ruled in its Till decision that, when this occurs, the secured creditor is entitled to an interest rate of the current prime interest rate plus a 1-3% risk adjustment. Creditors are entitled to this even if the contract rate is less than Till rate.

A recent case in the 8th Circuit discusses the issue of whether Till requires the Court to start at the prime interest rate or if the treasury rate is also applicable.

The Case

The case at issue, Farm Credit Services of America v. Topp, 22-2577 (8th Cir. Aug. 2, 2023), deals with a Chapter 12 (family farmer or fisherman bankruptcy) debtor who proposed a cram down plan to compensate a secured lender who held a $595,000 mortgage on property worth $1.45 million. The parties could not agree on the interest rate to be paid on debt. The creditor argued that they are entitled to the prime (3.25% plus a 2% risk-adjustment for a rate of 5.25%), while the debtor argued that they start with the 20-year treasury rate (1.87% plus 2% for a rate of 4%).

The Court sided with the debtor and ruled that “Till did not explicitly analyze the merits of starting with the prime rate versus the treasury rate.” The Court discussed the prime rate simply because that was the formula-approach proponents used. As for the appropriate risk adjustment on top of the prime rate, the plurality did not decide; it merely observed that courts had generally approved adjustments of 1% to 3%.

The Effect

In today’s wild financial climate, interest rates are ever changing. As of the date this article was drafted, the prime interest rate is 8.5% and the treasury rate 4.503%; the difference is substantial and can add up quickly on larger debts. While I have not seen a Court use the treasury rate yet in a Chapter 13, it is only a matter of time until a debtor’s attorney tries something like this.

As always, when a member files bankruptcy the name of the game is to try and limit your losses. To do that you need to pay close attention to all the filings and make sure you don’t miss any deadlines. When a plan is filed, always remember to review it and look out for the VIP: Valuation, Interest, and Payments. These are the common reasons for an objection to a plan. If you have any questions about a Chapter 13 Plan, you should immediately contact your attorney to see what steps should be taken.

Should you have any questions about this issue or any other matter, please feel free to contact a lawyer at our firm for further instruction and guidance.

Staff Spotlight on Cassidy James

Cassidy was born in New Brunswick, New Jersey, and made the move to Tallahassee to attend Florida A&M University. She will be graduating from Florida A&M this month with her bachelor’s degree in political science. Cassidy joined our team in August of this year to gain more experience within the legal field. Her goal is to become a lawyer! She is one of our legal assistants in the post-judgment area and is such an amazing addition to our firm.

Away from the office, Cassidy loves to photograph landscapes and scenery. She has recently taken up this hobby and loves to take photos of sunsets and buildings lit up at night. A fun tidbit about Cassidy is that once a month she tries something “new” that she has never done before. Just a few examples of what Cassidy has done: horseback riding, skiing and snowboarding in the Poconos, trying Mangosteen and squid, going to an electronic dance festival, seeing a new singer in concert, going to an adult gymnastics class and, finally, participating in a local dog contest with her dog, Milo! What a great idea!

Cassidy, thank you for all that you do. We appreciate you!

SVL Launches New Podcast

We have launched a new Podcast focusing on all things Credit Unions and the law. The name of the Podcast is “Banking on Credit Unions” and can be found on iTunes, Spotify, and other popular platforms. You can also find episodes at www.svllaw.com/podcast/ Come give us a listen. We are confident that this podcast will be informative and helpful.

Holiday Party

On Saturday, December 9, 2023, the SVL team gathered at Steve & Virginia Orsillo’s beautiful home to celebrate the holiday season. Staff, spouses, and friends had a great time spreading Christmas cheer. We are thankful that we have such a great work family to spend these special times with.