FYI: 6th Cir Says Chpt 13 Debtor Has Standing to Avoid Mobile Home Lien Converted to Real Property by Court Order

The U.S. Court of Appeals for the Sixth Circuit recently ruled that a
Chapter 13 debtor whose mobile home was involuntarily converted to real
property by court order had standing to seek avoidance of a perfected lien
on the real property under Section 522(h)(1) of the bankruptcy code. A
copy of the opinion is attached.

The borrower in this matter gave Countrywide Home Loans ("Countrywide") a
note and mortgage on an unimproved lot in consideration for a loan. She
then used the loan proceeds to purchase a manufactured home, and placed
that home on the mortgaged real property. Under the terms of the
mortgage, Countrywide was granted a lien against the real property and
"all improvements now or hereafter erected on the property, and all
easements, appurtenances, and fixtures now or hereafter a part of that
property." Several years later, the borrower filed for bankruptcy under
Chapter 7 and was granted a discharge; she did not reaffirm the debt.
After a subsequent default, Countrywide initiated foreclosure proceedings.

In its foreclosure complaint, Countrywide asserted that while the parties
had intended the mortgage to secure a valid, first lien on the
manufactured home, the borrower had failed to surrender the title to the
manufactured home, thus preventing the Countrywide from noting its lien on
the title to the manufactured home. Countrywide obtained a judgment from
the state court that it had a valid first priority lien on the real
property, that the real property be sold to satisfy Countrywide's lien,
and that the manufactured home be "deemed converted to real estate."

Shortly thereafter, the borrower filed a Chapter 13 petition. Countrywide
sought relief from the stay, but the borrower responded by filing an
adversarial complaint, asserting that Countrywide had failed to properly
perfect its lien on the manufactured home. Countrywide moved for summary
judgment on the bases that the borrower lacked standing to bring the
adversary proceeding because the mortgage lien was consensual, that the
borrower's claim was barred by res judicata as a result of the prior
Chapter 7 case, and that the prior state court judgment prevented
avoidance of Countrywide's lien. The borrower filed a similar cross
motion for summary judgment, disputing each of Countrywide's assertions.

The bankruptcy court denied both parties' motions, and ruled that the
borrower did have standing because the lien at issue was created by a
non-consensual judgment lien. After renewed cross motions from both
parties, the bankruptcy court eventually again ruled in favor of the
borrower, concluding that "the only manner in which to perfect a lien on a
manufactured home under Kentucky law is by noting the lien on the
certificate of title, that Countrywide had failed to perfect its lien, and
that even if Countrywide had perfected its lien, such lien was avoidable
as a preference." On appeal, the Bankruptcy Appellate Panel upheld the
bankruptcy court's judgment and order in favor of the borrower, and
Countrywide appealed to the Sixth Circuit.

The Sixth Circuit noted that, under Kentucky law, "a manufactured home is
personal property for which a certificate of title is required" and that
"[i]n order to perfect a lien on personal property, the lien must be noted
on the certificate of title." However, the Court also noted that "a
manufactured home may also be converted from personal property to an
improvement to real estate.thereby allowing perfection through first
recording without notice."

The Court further noted that "the plain language of the mortgage contract
did not grant Countrywide a lien on [the borrower's] manufactured home as
personal property." Accordingly, "unless converted to an improvement to
real estate, Countrywide did not obtain a security interest in the
manufactured home through the mortgage contract."

The Court also considered various state-law decisions in ruling that "even
if Countrywide obtained a lien against the manufactured home by way of the
mortgage contract, it is undisputed that Countrywide did not note this
security interest on the certificate of title, and the filing of a lis
pendens cannot serve to perfect a security interest in a manufactured
home" and thus, "before the state-court foreclosure judgment, Countrywide
did not have a perfected lien on the borrower's manufactured home."

The Court then examined the state court order of sale converting the
borrower's manufactured home to an improvement to real property, and
concluded that the state court judgment created a perfected security
interest in the manufactured home. The Court also noted that, because the
borrower did not appeal the state court judgment, the conversion was
binding under the doctrine of res judicata.

In addition, the conversion also placed the manufactured home "clearly
within the terms of the mortgage contract," which then "granted a security
interest in favor of Countrywide on the listed real estate, together with
'all the improvements now or hereafter erected on the property.'"
Accordingly, the Court ruled, "upon the entry of the state-court judgment.
Countrywide possessed a perfected lien on the borrower's manufactured
home."

The Court then considered whether the borrower had standing to seek
avoidance of Countrywide's perfected lien. Considering the language of
Section 522(h) of the Bankruptcy Code, the Court ruled that "a Chapter 13
debtor has standing to avoid a transfer under Section 522(h) if five
conditions are met: (1) the transfer was not voluntary; (2) the transfer
was not concealed; (3) the trustee did not attempt to avoid the transfer;
(4) the debtor seeks the avoidance pursuant to Sections 544, 545, 547,
548, 549, or 724(a) of the Bankruptcy Code; and (5) the transferred
property is of a kind that the debtor would have been able to exempt from
the estate if the trustee had avoided the transfer under one of the
provisions in Section 522(g)."

The Court ruled that Countrywide did not obtain a perfected security
interest in the manufactured home until it "was converted to an
improvement to real estate, thereby bringing the home within the
boundaries of the mortgage contract," and thus, "while a transfer in real
property did occur through the mortgage contract, the mortgage was not the
triggering transfer."

Rather, the Court ruled, the "conversion of [the borrower's] manufactured
home to an improvement to real property was involuntary because it was
accomplished by operation of law without consent." Countrywide did not
dispute that the borrower met requirements 2 through 4 of Section 522(h),
and therefore, the Court ruled, the borrower "possesses direct standing"
to avoid Countrywide's lien pursuant to Section 522(h).

Finally, the Court also considered whether the lien was properly avoided
pursuant to Section 547, which as you may recall allows for the avoidance
transfers within the 90 days period before the filing of a bankruptcy
petition. The Court first examined a prior decision holding that under
Section 547, "a transfer is deemed to have been made at the time the
transfer is perfected, if perfection takes place more than 30 days after
its creation."

However, the Court ruled, "the creation and perfection of Countrywide's
interest in the manufactured home occurred at the time of the state-court
judgment. [which was] well-within the 90-day preference period" and
therefore, the Court ruled "Countrywide's lien on the manufactured home
was properly avoided pursuant to Section 547.5."

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

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FYI: New Jersey Sup Ct Applies Consumer Fraud Act to Post-Foreclosure Forbearance Agreements as "Extensions of Credit"

The Supreme Court of New Jersey recently held that certain
post-foreclosure forbearance agreements were "extensions of credit"
covered by the New Jersey Consumer Fraud Act, and that unconscionable
practices in negotiating or collecting on such loan agreements would
constitute violations of that statute.

A copy of the opinion is available at:
http://www.judiciary.state.nj.us/opinions/supreme/A9909GonzalezvWilshireCr
editCorp.pdf

The borrower on the loan at issue passed away. The surviving mortgagor
continued to make payments on the loan in order to avoid foreclosure. The
surviving mortgagor eventually defaulted on the loan, and the loan owner
filed a foreclosure action.

Before the scheduled sheriff's sale of the property took place, the
mortgage servicer and surviving mortgagor entered into a written agreement
("First Agreement") whereby the servicer agreed not to pursue the
foreclosure sale if the surviving mortgagor paid a specified lump sum and
monthly payments, consisting of the original loan's monthly payments plus
certain fees through a specified future date. The servicer also agreed to
dismiss the foreclosure action when the account became current. After
entering the First Agreement, the surviving mortgagor paid the majority of
amounts due, but missed a number of monthly payments. The trial court
then calculated the amount of arrears, and a sheriff's sale was again
scheduled.

Soon thereafter, the servicer contacted the surviving mortgagor directly
to negotiate a second agreement to avoid foreclosure of her home ("Second
Agreement"). According to the allegations, neither the servicer nor the
loan owner notified the mortgagor's attorney, and the surviving mortgagor
allegedly could neither read nor speak English.

The Second Agreement, entirely in English, set the arrearages at roughly
68% higher than the amount calculated by the trial court a short time
earlier and required the mortgagor to purchase force-placed insurance
despite an active homeowner's insurance policy on the property. As in the
First Agreement, the servicer agreed to dismiss the foreclosure action
once the mortgage payments became current. Both agreements included
language stating that the agreements were an attempt to collect a debt.

The surviving mortgagor made all payments required by the Second
Agreement. However, instead of dismissing the foreclosure action as it
had agreed, the servicer allegedly contacted the mortgagor when the Second
Agreement was about to expire to notify her that another agreement was
needed in order to avoid foreclosure. The mortgagor then notified her
attorney, who, among other things, requested that the servicer explain how
it calculated the amount of arrearages in the Second Agreement and why the
loan was not considered current. The servicer allegedly was unable to
provide an explanation as to the arrearages or the status of the loan.

The surviving mortgagor filed a complaint alleging that the servicer and
loan owner had engaged in deceptive and unconscionable practices in
violation of the New Jersey Consumer Fraud Act, N.J.S.A. 56:8-1 - 195
("NJCFA"). The complaint alleged that the servicer and loan owner,
supposedly knowing that the surviving mortgagor did not read or speak
English and that she was represented by an attorney, contacted her
directly to negotiate the Second Agreement. The complaint further alleged
that the servicer included in the Second Agreement improper costs and fees
in calculating her arrearages and demanded amounts that were not yet due
and owing.

The trial court granted summary judgment in favor of the servicer and loan
owner, holding that the NJCFA did not apply to "post-judgment settlement
agreements entered into to stave off a foreclosure sale." The court
reasoned that the NJCFA was not intended to apply to settlement agreements
entered into by parties to a lawsuit, and that the surviving mortgagor's
only option for relief was to file a motion to vacate, modify, or enforce
the settlement.

The appellate court reversed the trial court judgment, holding that the
agreements were contracts covered by the NJCFA and that the surviving
mortgagor had standing under the NJCFA because she was a signatory to the
post-judgment agreements. The appellate court also concluded, among other
things, that, if proven, the surviving mortgagor's monetary damages from
the servicer's alleged unconscionable practices satisfied the NJCFA's
"ascertainable loss" requirement. The New Jersey Supreme Court affirmed
the appellate court's ruling, and reinstated the surviving mortgagor's
alleged cause of action.

The Supreme Court of New Jersey held that the NJCFA provides relief if a
consumer can prove: (1) an unlawful practice prohibited by the CFA; (2) an
"ascertainable loss"; and (3) a causal relationship between the misconduct
and the loss. Citing Lemelledo v. Beneficial Mgmt. Corp., 150 N.J. 255
(1997), the Supreme Court noted that the broad language of the NJCFA
applies to lending activities and to the sale of insurance related to a
loan, and that an unlawful practice under the CFA includes a person's use
of "any unconscionable commercial practice . . . in connection with the
sale or advertisement of any merchandise or real estate, or with the
subsequent performance of such person." The Court further observed that
an "ascertainable loss" includes one incurred through improper "loan
packing," such as forcing the borrower to purchase unnecessary insurance.

The Court rejected the defendants' assertion that the alleged collection
activities of a servicer do not constitute "subsequent performance" in
connection with a loan. Without deciding whether the forbearance
agreements and the servicer's alleged collection activities were the
"subsequent performance" with respect to the original loan, the Court
concluded that "the post-judgment agreements, standing alone, constitute
the extension of credit, or a new loan, and that [the servicer's]
collection activities may be characterized as 'subsequent performance' in
connection with [that] extension of credit."

The Court remarked that the servicer's alleged dealings with the surviving
mortgagor "placed her on a credit merry-go-round" that "would keep her in
a constant state of arrearages." The Court also further pointed out that
these were not ordinary settlement agreements, as the mortgagor was not
only required to pay the original monthly payments, but also additional
charges such as foreclosure, attorney, and lender-placed insurance fees.

The Court enumerated certain factors regarding the servicer's alleged
conduct with respect to the forbearance agreements that appeared
questionable, including: (1) what this court described as the servicer's
"inexplicably" contacting the surviving mortgagor and negotiating with her
directly even though she was represented by an attorney and did not speak
or read English; (2) the servicer's threat to foreclose even though the
mortgagor allegedly had made every payment under the Second Agreement; (3)
the servicer's alleged inability to explain how it arrived at the
arrearages figure in the Second Agreement or why the loan was not
considered current; and (4) the Second Agreement's requirement to purchase
supposedly unnecessary lender-placed insurance.

The Court further rejected the servicer's and loan owner's argument that
the NJCFA is not an available remedy and that the only options available
to the mortgagor were either to seek relief from the post-judgment
agreements or to pursue common law claims based on breach of contract
and/or fraud. The Court observed that the relief available under the
NJCFA is in addition to any other relief provided by state or federal law.

In addition, the Court stated that there was no need to address whether a
direct relationship existed with the non-borrower mortgagor and the
originating lender. Rather, the assignment of the note and mortgage to
the loan owner and the appointment of the servicer substituted them for
the originating lender with regard to the mortgagor. The Court also
stated that, [a]s a practical matter . . . the agreements were nothing
more than a recasting of the original loan," and concluded that the
forbearance agreements established privity" between the parties.

In remanding to determine whether the defendants' conduct fell below the
NJCFA's permissible standard, the Court stressed that its decision did not
extend to settlement agreements generally. The Court limited its holding
to the narrow issue of the applicability of the NJCFA to the creation of
and collection on a post-foreclosure judgment agreement involving a
stand-alone extension of credit.

Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com

NOTICE: We do not send unsolicited emails. If you received this email in
error, or if you wish to be removed from our update distribution list,
please simply reply to this email and state your intention. Thank you.

Our updates are available on the internet, in searchable format, at:
http://updates.kw-llp.com
CONFIDENTIALITY NOTICE: This communication (including any related attachments) is intended only for the person/s to whom it is addressed, and may contain confidential and/or privileged material. Any unauthorized disclosure or use is prohibited. If you received this communication in error, please contact the sender immediately, and permanently delete the communication (including any related attachments) and permanently destroy any copies.

IRS CIRCULAR 230 NOTICE: To the extent that this message or any attachment concerns tax matters, it is not intended to be used and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed by law.