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WELTMAN, WEINBERG & REIS CO., L.P.A.

Recoverer
The
Volume 3, Number 3

Cincinnati (513) 723-2200 • Cleveland (216) 685-1000 • Columbus (614) 228-7272 • Detroit (248) 362-6100 • Mount Holly, NJ (609) 914-0437 • Philadelphia (215) 599-1500 • Pittsburgh (412) 434-7955

The Advantages and Disadvantages FA L L 2 0 0 3

of Deeds in Lieu of Foreclosure for INSIDE THIS ISSUE

Mortgage Lenders
1-2,
8 The Advantages
By: Heather Estes Bell, Esquire and Disadvantages
of Deeds in Lieu of
Foreclosure for
Advantages of Accepting Mortgage Lenders
Deeds in Lieu of Foreclosure
Speed of DLF process 3 The Nuts &
A DLF typically results in a quicker disposition of the property Bolts of the
than by the process of foreclosure. A foreclosure can be time- Estate Process
consuming due to delays resulting from perfecting service of
process, obtaining a judgment and order of sale, and obtaining
a sale date. Also, in the context of a bankruptcy, a DLF can be 4 An Update on
accepted during the pendency of the bankruptcy once an the Customer
order of abandonment has been obtained from the trustee. Identification
Program:
Protection from work stoppages in construction loans Final Rules
Governing the
A DLF can help to evade the risk of work stoppages for
USA Patriot Act
construction loans where construction is ongoing.
Heather Estes Bell is an attorney in the Less expensive process
Cincinnati office in the foreclosure/evictions 5-6 The Soldiers' and
A DLF is generally less expensive than foreclosure if you
department. She can be reached at Sailors' Civil Relief
consider the respective legal fees involved. Additionally, a DLF
(513) 723-2203 or hbell@weltman.com. Act Explained
can be less costly than a receivership should a receivership
become necessary.
Most mortgage lenders know that a deed in lieu of
Preventing risk of asset deterioration 7 The Importance
foreclosure (DLF) is a method of gaining possession
of real estate by the recordation of a deed from the of Good Credit
A DLF minimizes the risk of a deteriorating asset and prevents Education
property owners to the mortgage holder, making a waste of the asset, especially when the borrower could be
foreclosure suit unnecessary. Most mortgage lenders redirecting property rents and/or mismanaging the property.
also realize that the consideration of the transaction
is often that the lender will forego a deficiency balance Faster sale of property
against the borrowers and/or their co-signors in By gaining quicker control of the property, the lender can
return for the execution of the deed. However, a more expeditiously enter the market to effect a sale of
myriad of issues should be considered before deciding the property.
whether the DLF is the most advantageous course
of action available. In order to make this decision, it Less disruptive process
is essential to examine the advantages and A DLF is less disruptive to tenants and other third parties
disadvantages of accepting a DLF from the perspective that would be named in a foreclosure action.
of the mortgage lender.
Continued on page 2

w e l t m a n . c o m Recoverer 1
The
The Advantages and Disadvantages of Deeds
in Lieu of Foreclosure for Mortgage Lenders Continued from page 1

...the deed in lieu of foreclosure can be a sharp arrow


in the lender's quiver of available remedies...

Disadvantages of Accepting
Deeds in Lieu of Foreclosure
Lack of liability for deficiency claims
The borrower or guarantors may be released from liability for any deficiency
claim.
Potential delays in foreclosure process
Debtors often try to use DLF negotiations as a means of delaying foreclosure.
In order to prevent delays, the lender and borrowers can enter into a pre-
workout agreement that includes a solid date for the conclusion of the
Greater borrower cooperation DLF. It is often advantageous to consider commencing a foreclosure action
The borrower is generally more cooperative, because a while negotiating the DLF to gain leverage.
DLF is an agreed-upon resolution. No judicial action is Paying subordinate liens
taken, and a DLF is not reported on the borrower’s credit
report. With the borrower's cooperation, the lender is The borrower may not have the authority to transfer the property. In a
able to undertake a more thorough due diligence DLF transfer, subordinate liens survive the transaction, whereas they would
investigation of the property. be terminated in a foreclosure. Therefore, the lender must decide whether
to pay the subordinate liens, if any exist, before entering into a DLF
More accurate accounting for personal property transaction.
The lender is better able to account for personal property Common law mergers
in the consensual atmosphere.
The mortgage interest can be extinguished by a theory known as common
Prevention of delays in the foreclosure process law merger. As applied to DLF transactions, a common law merger would
The lender can avoid the hazards of a borrower delaying operate to extinguish the lender's mortgage interest when it accepts a
the foreclosure process by filing a bankruptcy petition or DLF. This can become problematic if the debtor or a bankruptcy trustee
asserting lender liability claims and other defenses. later tries to set aside the conveyance of the deed. Many states have
abolished or at least limited the theory of common law merger, but the
Improving loan documentation issue should always be considered before deciding whether to enter into
A DLF provides a helpful vehicle to implement covenants a DLF. Often, to avoid common law merger, one only needs to preserve
and warranties that may be lacking in existing loan the mortgage by declaring that the intent for merger is not to occur within
documentation. the documentation.

Lack of right of redemption Equitable mortgages/equity right of redemption

The borrower does not have a right of redemption of Savvy debtors' attorneys may later try to argue that a DLF is an equitable
the property in a DLF transaction. mortgage. Additionally, they may argue that there exists a clogging of the
equity right of redemption unless you can show that the transfer was
Release from lender liability actions voluntary and not the product of coercion or fraud. It is essential to make
sure all documentation reflects that the transaction is voluntary and that
As a condition to the DLF workout, the debtor will have
the transaction is not actually an equitable mortgage. To avoid clogging
to release the lender from any lender liability actions.
the equity of redemption, do not require a deed unless the deed is
Favorable nature of other agreements voluntarily given for adequate consideration. Generally, lenders should
avoid provisions in the workout agreement or deed that provide for
Other workout agreements, such as forbearance
reconveyance, sharing in the proceeds of a subsequent sale, or rights of
agreements, sale-lease backs, short sales, loan modifications,
first refusal. Such provisions might suggest a continuing security device or
or rights to cure arrearages in bankruptcy may be more
equitable mortgage exists. However, if a retained possessory interest is
favorable to the debtor. The debtor may be allowed to
desirable for both the lender and the borrower, it can be achieved by
retain the real property and not provide the lender with
carefully structuring the transaction.
the full value of its collateral up front.
Continued on page 8

w e l t m a n . c o m Recoverer 2
The
The Nuts & Bolts of the Estate Process
By: Scott S. Weltman, Esquire

General Estate Process


Scott S.Weltman is a partner in the Cleveland
When an individual passes away with assets, a probate office and manages the probate (deceased
court estate proceeding is often necessary for those collections) department. Mr. Weltman also
assets to become the property of another individual. focuses on collection litigation and
While some forms of property ownership can pass commercial collections. He can be
to another without a formal estate proceeding, the reached at (216) 685-1032 or
concerns of creditors with respect to a deceased sweltman@weltman.com.
customer focus on the estate procedure.
Generally, an estate entails the gathering of all assets Secured Debts
and the distribution of them in accordance with the If a particular debt is fully secured with ample collateral, a creditor may question the need
law. The estate procedure, as far as creditors are to file an estate claim. However, it is always advisable for a creditor to protect their debt
concerned, is the same whether there is a will (a by advising the estate and the probate court of their claim. The good news for secured
testate estate) or no will (intestate). For assets that creditors is that, to the extent of this collateral, there is no requirement that a claim be
are subject to probate, creditors will always get paid filed. When that collateral is sold either voluntarily or through a creditor’s actions, the
prior to heirs receiving an inheritance from the secured creditor will receive the proceeds. However, this does not apply to any unsecured
estate. portion of the debt. Unless the collateral is cash, is there really any guaranty of the value
Creditor’s Claims of collateral until it is liquidated? What if insurance on real estate lapses after death and
it is destroyed by fire before new insurance is purchased? The same concern applies for
The procedure for a creditor to collect on a debt a vehicle. Filing a claim into the estate provides a creditor with assurance that to the
occurs through the filing of a claim into the estate. extent of assets in the estate, other than their collateral, they will have the opportunity
A claim must: to be paid.
Recite the nature of the debt Current Accounts
State the amount of the debt A second dilemma facing creditors occurs when they have a debt where a borrower (or
guarantor) passes away at the time that the debt is current, and the debt remains current
Be filed within statutorily prescribed time
after death. While many loan agreements specify death as an event of default, allowing an
periods that vary from state to state
acceleration of that debt, a creditor may want to keep that debt as current and not
Once all of the claims have been filed, it is the accelerate it.
fiduciary of the estate’s job to ensure that the claims
A procedure exists for the filing of a conditional claim into an estate. This type of claim
are paid. The assets of the estate are liquidated and
informs the estate that while that particular debt is not then due (or past due), in the
the creditors are then paid in the order required
event it does become due at some unknown time in the future, then the creditors should
by the laws of that particular state. The priorities of
share in the estate assets.
creditors’ claims vary in each state, but generally
include estate administration expenses, attorney’s Failure to file such a claim in a timely manner could produce disastrous results. If no such
fees, taxes, funeral expenses and the expenses of claim is filed and the debt becomes delinquent two years later, a creditor would have no
the last illness. After that, unsecured creditors are recourse against the estate or its assets.
paid prior to heirs receiving an inheritance from
the estate.
Consequences of Not Filing a Claim In conclusion, in the case of probate court estate proceedings, time is of the essence. As
a creditor, in order to ensure proper collection of a debt occurs, it is essential to closely
A creditor who fails to file an estate claim in a timely follow the rules and regulations governing the filing of a claim into an estate.
manner will most likely never get paid on the debt.
This will be the case even if: A creditor who fails to file an estate claim in a timely
manner will most likely never get paid on the debt.
The estate has unlimited assets and no
other debts
The claim is filed, but after the statutorily
prescribed time for filing a claim
All creditors should file claims upon a customer’s
death, even in those instances where a debt is
secured or a loan is current.

Recoverer 3
The
An Update on the Customer
Identification Program:
Final Rules Governing the USA Patriot Act

By: Robert Rutkowski, Esquire

The final rules governing the USA Patriot Act (USAPA) have been published, and the compliance
deadline has been set as October 1, 2003. Section 326 of the USAPA requires the secretary
of the treasury to prescribe regulations setting forth the minimum standards for financial Robert Rutkowski is a partner in
institutions that relate to the identification and verification of any person who applies to the Brooklyn Heights operations
open an account. These standards are referred to as the customer identification program center. His practice areas include
(CIP). regulatory compliance and
contract law. He can be
Fortunately, the final rules governing Section 326 do not contain any dramatic changes and reached at (216) 739-5004
they have largely positive implications. Some of the changes include: or rrutkowski@weltman.com.
Definitions: Several definitions have changed, including “account” and “customer.”
The information required in the CIP is
• Account: Infrequent transactions such as money order purchases or wire transfers are essentially the same as detailed under the
not included in this definition. initial statute. The CIP must include risk-
based procedures for verifying the identity
• Customer: The term refers to someone opening an account but not someone merely
of each customer as is reasonable and
asking about an account. The term does not contemplate cosigners; it only considers
practicable. Procedures need to enable the
account holders.
financial institution to form a reasonable belief
The final rules are not retroactive. As long as the financial institution can show that that it knows the true identity of each
it has a reasonable belief that it knows the true identity of the existing account holder, the customer. As a risk-based procedure, the CIP
existing account holder need not go through the CIP process. This is a very welcome change! needs to contemplate the:
All USAPA programs must be part of the financial institution's Bank Secrecy Act Program. Types of accounts maintained at the
The bank has flexibility in choosing what types of identification it will accept. While a driver’s financial institution
license is a typical choice, the bank is not limited to accepting that form of identification. It
Methods of opening accounts
must merely be able to verify the legitimacy of the identification requested. For example, if
you allow a Nigerian passport to be used as identification, the bank needs to know how to Types of identifying information
identify a legitimate Nigerian passport. available
In the final rules, there is no longer a requirement that a photocopy of the identification Financial institution's size, location
needs to be kept as part of the CIP. Additionally, notice of the CIP can be given to customers and customer base
by posting a note in the lobby, giving notice with the account opening documents, or posting
it on Internet applications. Any form of written or oral notice will suffice. In short, if your management team has already
developed a CIP, the program probably will
Ironically, the USAPA requirement of checking customer names against a government list only need minor tweaking to be in compliance
is currently a moot point, because presently, there is no list. However, this may change at with the final rules governing the USAPA.
any time and it is highly recommended that financial institutions periodically check the U.S.
Department of Treasury Web site for updates (www.treasury.gov).
The USAPA will no doubt affect day-to-day practices in ways that are unpredictable. For
example, financial institutions conducting indirect lending programs will need to look at their
programs to see who, if anyone, needs to conduct a customer identification check. If an
indirect lending program involves a car dealer originating the loan on its own paper and then
assigning it to the financial institution, then the car dealer, if anyone, would need to run the
borrower through its CIP. However, if the financial institution uses its own paper in the
transaction and the car dealer is merely steering the potential borrower to the financial
institution, then the financial institution would have to run the borrower through its CIP.

... the final rules... do not contain any dramatic


changes and they have largely positive implications.

WELTMAN, WEINBERG & REIS CO., L.P.A. Recoverer 4


The
The Soldiers' and
Sailors' Civil Relief
Act Explained
By: Donald S. Burak, Esquire

With the advent of further military intervention by American forces


abroad, it is a good time to review the protections offered to service
members under the Soldiers' and Sailors' Civil Relief Act of 1940 (SSCRA).
The SSCRA is intended to help protect the rights and benefits of persons
entering or called to active duty in the U.S. Armed Forces, including
reservists and National Guard when on active federal service. The
SSCRA allows for the postponement or suspension of certain civil
obligations to enable service members to devote their full attention
to duty. The act, however, does not apply to criminal matters. Under
the SSCRA, protections are offered in the areas of:

Leases and rental contracts


Donald S. Burak is an attorney based
Installment contracts
in the Mount Holly (NJ) office in the collection
Interest rates and insurance
services and litigation & defense
Taxation
departments. He can be reached at
Judicial proceedings
(609) 914-0437 or dburak@weltman.com.
Default judgments

Continued on page 6

Announcing -NEWS FLASH-


Announcing
Weltman, Weinberg, & Reis Co., L.P.A.
is pleased to announce the scholarship Weltman, Weinberg & Reis Co., L.P.A. (WWR)
winners of our essay contest in honor
recently opened a new branch in Philadelphia,
of National Credit Education Week
(April 14-19, 2003). Megan Ashley Graves Pennsylvania (PA). This is WWR’s ninth office
of Hebron, KY and Devin T. McKenzie and its opening will allow our firm to better serve
of Detroit, MI both won $500
our clients by expanding our collections
scholarships for their outstanding essays
on the importance of credit education representation to eastern Pennsylvania. This office
for high school students.This fall, Megan is located at 325 Chestnut St., Suite 1120,
is attending New York University, while
Devin is attending Western Michigan Philadelphia, PA, 19106-2611. John S. Pucin,
University. We wish them the best of Esquire, is managing partner of the Philadelphia
luck. See Megan’s winning essay on page
office and can be reached at (215) 599-1501.
seven. Devin’s essay will be featured in
the next issue.

Recoverer 5
The
The Soldiers' and Sailors' Civil Relief Act Explained
Continued from page 5

The protections generally begin on the date of entering


active duty and terminate within 30 to 90 days after the
date of discharge from active duty. For example, a service The SSCRA allows for
member who enters into an installment contract prior
to entering active duty is protected if the member's the postponement
ability to make payments is materially affected by military
service. The creditor is also prohibited from exercising of certain civil
any right or option under the contract, such as rescinding
or terminating the contract or repossessing the property, obligations to enable
unless authorized by a court order. Although a service
member can prevent repossession, the obligation for service members to
the debt is still valid even after entry on active duty. The
creditor may take other action, such as garnishing earnings, devote their full
in order to enforce their creditors’ rights.
attention to duty.
The SSCRA can also force a creditor to reduce interest
rates. If, prior to entering active duty service, a service
member incurs a loan or obligation with an interest rate
in excess of 6%, the service member will, upon application
to the lender, only be obligated to pay an interest of 6%
per year. This relief will apply during the period of active
duty service unless the creditor can prove in court that
the service member’s ability to pay is not materially
affected by military service. The rate cap is applied to
the outstanding balance of the obligation as of the date
of entry onto active duty. Additionally, the amount of
the contractual interest charge above the statutory
ceiling must be forgiven entirely, not accrued.

Courts also have the discretion to delay a civil court


proceeding when the requirements of military service
prevent the member from either asserting or protecting
a legal right. A soldier involved in civil (not criminal)
judicial proceedings as either a plaintiff or defendant is
entitled, upon request, to a stay of these proceedings.
This protection is offered if the soldier's ability to
participate is materially affected by the soldier's active
duty service.

Every credit grantor should have in place a series of


procedures to implement when an active duty service
member requests relief under the SSCRA. It is essential
for your financial institution to ensure proper compliance
with the SSCRA.

w e l t m a n . c o m Recoverer 6
The
The Importance
of Good Credit
Education
By: Megan Ashley Graves

Megan Ashley Graves is a recipient of a WWR


scholarship for her winning essay in honor of National
Credit Education Week 2003. She is a student
at New York University.
Habits. Though easily formed, they are certainly not easily broken, whether they are good or bad. The Greek philosopher
Aristotle once said, “Good habits formed at youth make all the difference.” This statement is applicable to all areas of life;
however, when speaking about credit education it becomes even more pertinent. Smart money management and maintaining
good credit is something that everyone must learn how to do. Unfortunately, many do not have these skills or have already
acquired bad money habits. This is why it is important to begin credit education at a young age, and to have a thorough
understanding of it before graduating from high school.

A person’s credit history is the same as their financial reputation; it stays with them forever. Any company who has legitimate
reasons can review credit history. It can be used to determine eligibility for employment, an apartment rental, insurance,
and many other things! Therefore, it is imperative for a person to maintain good credit. Though many people view teenagers
as young and irresponsible, they can be taught good money management skills. High school is the time when teenagers
begin to have financial responsibilities; part-time jobs, credit cards, and checking accounts begin to become available as
graduation draws closer. Without a thorough understanding of budgeting and the credit system, many fall into debt or
financial trouble. Teenagers must learn how to handle their money and maintain good credit before the time comes when
they will really need those skills.

Good money habits must be formed when children are young. Even something as simple as an allowance can be a powerful
teaching tool in understanding how to budget and plan. Teens must know where their money is going and learn how to
spend wisely. Teenagers must also learn how to handle credit cards correctly, so that they do not overspend and fall into
debt. A person’s credit reputation is something easy to tarnish, but much harder to repair.

By receiving credit education while they are still young, teenagers will have the ability to develop good habits in dealing
with their money. And good habits formed at youth, as Aristotle said, make all the difference- especially when dealing with
financial planning.

Recoverer 7
The
WELTMAN, WEINBERG & REIS CO., L.P.A.

Recoverer
The

323 W LAKESIDE AVE ~ SUITE 200 CLEVELAND OH 44113-1099

FORWARDING SERVICE REQUESTED

The Advantages and Disadvantages of Deeds


in Lieu of Foreclosure for Mortgage Lenders Continued from page 2

Responsibility for environmental hazards Federal income tax issues


Under various federal and state laws, lenders can be held liable for There may be serious federal income tax issues for the lender
environmental cleanup on property that has been conveyed to them in with respect to the transaction. These taxes must be
DLF transactions. If a lender suspects that an environmental hazard may contemplated before a DLF is considered.
exist, it should obtain an inspection of the property and determine
Ensuring title insurance protection
whether taking possession and ownership of the property is warranted.
This is especially important when the collateral is a commercial building, The lender must make certain the title insurance protection
working farm, or a residential property upon which the owners operated is adequate for the transaction. Unless care is taken and the
a home-based business that used chemical products. lender understands the title policy, a gap in coverage can exist
in a DLF situation. The coverage may be inadequate to defend
Accusation of a preferential or fraudulent transfer
the lender against a subsequent action brought by the debtor
If the lender's attorney does not carefully structure the transfer, a or a bankruptcy trustee. It is generally a sound investment to
bankruptcy court might view the DLF as a preferential or fraudulent purchase an owner's policy and request gap coverage and
transfer. It is very important to make certain that you keep your mortgage creditor rights’ coverage when accepting a DLF.
in place unless you have title insurance that includes creditor rights’
coverage and the title company requests that the mortgage be released.
In conclusion, there are many issues that lenders should
Transfer tax issues
consider when deciding whether to accept a deed in lieu of
Transfer taxes may be so high as to make the DLF undesirable for the foreclosure. With a thorough understanding of the issues that
lender. The amount and applicability of these taxes vary from state to are involved, the deed in lieu of foreclosure can be a sharp
state and can be prohibitively expensive under certain circumstances. arrow in the lender's quiver of available remedies for troubled
real estate loans.

The Recoverer is provided as a free service by Weltman, Weinberg & Reis Co., L.P.A., representing clients on creditors’ rights issues. The data contained
in this newsletter is a summary of legal information and is not intended to constitute legal advice on specific matters. Direct editorial comments to
Recoverer 8
The

Tanya Tybur at 323 W. Lakeside Avenue, Suite 200, Cleveland, Ohio 44113. Phone 216 685-1098. Fax 216 363-4121. E-mail ttybur@weltman.com. Web site weltman.com.