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Although my blog primarily is devoted to issues surrounding Indiana state court foreclosure and lien enforcement actions, some discussion of bankruptcy matters will be warranted.  This is because, not infrequently, a real estate foreclosure or UCC lien enforcement proceeding that starts in state court will end up in bankruptcy court.  So, I would be remiss if, from time to time, I did not address legal opinions arising out of Indiana bankruptcy courts.  One such case is In The Matter Of:  David Burr Fink, 2007 Bankr. LEXIS 1149 (N.D. Ind. 2007), a March 15, 2007 decision by Judge Robert E. Grant that tackles questions regarding whether a late-filed proof of claim should be allowed.  (Fink Opinion.pdf)

1. General bankruptcy rule.  An unsecured creditor that has notice or knowledge of a bankruptcy case but fails to timely file a proof of claim may have its claim disallowed or, in a Chapter 7 liquidation case, subordinated (see #3). 11 U.S.C. 502(b)(9); Fink at 2.

2. “Excusable neglect” exception.  In a chapter 11 proceeding only, a court can, but is not required to, allow late filed claims if the failure is due to excusable neglect.  Bankr. Rule 3003(c) and 9006(b)(1); Fink at 2, n.1. Proving “excusable neglect” can  be difficult, particularly where a creditor is sophisticated and/or represented by counsel.

3. Chapter 7 late claims.  In Chapter 7 cases, theoretically the failure to file a timely proof of claim is not fatal.  11 U.S.C. 726(a)(3); Fink at 2.  The result is the subordination of the claim to the full payment of all other timely filed unsecured claims. Thus the tardy creditor is at the back of the line for any distribution.  11 U.S.C. 726(a)(3); Fink  at 14. But chapter 7 plans that pay unsecured creditors in full are extremely rare.  For all practical purposes, a late-filed claim in a Chapter 7 case ultimately will mean no distribution to an unsecured creditor.

4. “No asset” cases.  In most Chapter 7 cases, courts will issue an order indicating that there is no need to file a proof of claim until further notice. The reason for this is that, absent a finding that there are assets, there may well be no distribution to unsecured creditors.

5. Secured creditors and deficiency claims.  As a general rule, only unsecured creditors need to file proofs of claim in order to be placed “in the distributional queue.” But if a secured creditor desires to retain a deficiency claim, it too should file.  Fink at 14.  In other words, secured creditors should file in order to preserve possible distribution on account of any unsecured deficiency.  Significantly, the failure to file a claim will not destroy or eliminate a secured creditor’s lien or interest in the property of the estate.  Fink at 14-15.  A lien remains unaffected by bankruptcy unless it specifically is altered by the court.   

6. Informal proof of claim.  Bankruptcy courts have developed an equitable doctrine known as an “informal proof of claim” that can sometimes permit a claim to be asserted via something other than a formal proof of claim.  The Fink opinion provides a thorough analysis of this doctrine.  Judge Grant found that the situations in which “informal claims” should be allowed are extremely narrow.  In Fink, the Court found that a creditor had not, via a motion for relief from stay, asserted an informal claim.  The creditor was unable to avoid strict enforcement of the claims bar date.
Turning to this blog’s true purpose, which is to provide a resource for secured lenders facing loans in default, Judge Grant’s opinion provides a nice refresher on the rules for filing proofs of claims.  The message is to determine quickly whether you need a proof of claim and, if so, to ensure you timely file it, even if you have or will be seeking other relief in the bankruptcy proceeding such as an order modifying the automatic stay.  Actually, the filing of a proof of claim is fairly painless, and there really is no downside to filing one.  When in doubt - file.


When it comes to asset based lending, the types of loan collateral, particularly the tangible assets that may become subject to a security interest, can be quite interesting.  For example, today's Louisville Courier-Journal has an article about a lien dispute between Fifth Third Bank and the owner of a Kentucky Derby contender.  Allegedly, several thoroughbred interests, including the race horse Great Hunter, were a part of the collateral for about $3 million in loans that went into default.  The case, which was pending in California, has settled.  One wonders what would have happened to Great Hunter had Fifth Third become the owner of the horse.  Depending upon the timing, it's certainly conceivable if not likely that the thoroughbred would have missed the May 5th race.


The Star's John Ketzenberger has a column today about how Irwin Union Bank, 107 other creditors and the government may or may not be able to collect from Carmel Concrete, one of the five local concrete companies targeted in a price-fixing case last year.  The litigation now is in bankruptcy court, and the goal appears to be much like any other commercial foreclosure case - sell the loan collateral (and other assets) in order to pay the lenders (and other creditors).


The mortgage fraud/subprime lender story is off topic for this blog because the problems do not directly involve or affect most commercial lenders.  But the issues are important and likely are of some general interest to the commercial lending industry.  The Indianapolis Star's Sunday Edition has five articles dealing with the issues - probably due in part to the fact that the Indy metro area ranks number three in the nation in foreclosures.  Here are the pieces: (1) case study, (2) more about the prosecution, (3) possible state legislation, (4) potential Congressional action and (5) civil sheriffs affected.  Our firm has handled some of the civil litigation (fraud recovery) that has arisen out of these types of cases.  One of the many challenges with such matters is being able to collect from the responsible persons or entities, many of whom are judgment proof. 

DEEDS IN LIEU OF FORECLOSURE: Who, What, When, Where, Why and How

In the event a loan becomes non-performing, commercial lending institutions that hold mortgages in Indiana need to be familiar with deeds in lieu of foreclosure.

Who.  The parties to a deed in lieu are the mortgagor (generally, the borrower) and the mortgagee (usually, the lender).  Both sides must consent.  Most lawyers will say that it isn't advisable to accept a deed in lieu if there are multiple lien holders.  Lenders will have to negotiate releases of those liens in order to secure clear title.  The better approach may be to proceed with foreclosure, which will wipe out such liens.   

What.  A deed in lieu of foreclosure is a document that conveys title to real estate.  What is unique about this particular deed is that the mortgagor surrenders its interests in the real estate to the mortgagee in consideration for a complete release from liabilities under the loan documents.  The release, among other things, usually is articulated in a separate settlement agreement.

When.  Lenders normally pursue deeds in lieu when there is no chance of collecting a deficiency judgment - the mortgagor is judgment proof.  For example, this option makes sense with non-recourse loans.  Another consideration is when the value of the property unquestionably exceeds the amount of the debt.  If the lender thinks it may be able to liquidate the real estate for more than the borrower owes, pursuing a money judgment may be superfluous.

The parties typically will explore a deed in lieu of foreclosure early on in the dispute - once a determination is made by the lender to foreclose.  Although this is the point in which deeds in lieu are best utilized, in Indiana it's possible to execute the deed right up until the time the property is sold at a sheriff's sale.

Where.  Deeds in lieu are the product of out-of-court settlements.  The process of the securing of a deed in lieu is non-judicial. 

Why.  The fundamental reasons why a lender may want to take a deed in lieu of foreclosure involve time and money.  A deed in lieu grants to the lender immediate possession of the real estate.  Several months, conceivably years, can be saved.  Just as importantly, spending thousands of dollars, primarily in attorney's fees, could be avoided by cutting to the chase with a deed in lieu.  Expediency and expense are the primary factors that motivate lenders to accept a deed in lieu of foreclosure. 

How.  Other than the obvious - executing a deed - there are certain steps a lender should consider taking before it enters into a deed in lieu.  The lender should know whether it is acquiring clear title.  A title insurance policy commitment should be ordered to examine the status of any liens, taxes and other potential clouds on title.  Work also may need to be done to get a handle on the value of the property.  This may include an appraisal, an inspection or an environmental assessment.  These things generally are recommended when evaluating how to proceed with any distressed loan.

One potential land mine must be specifically highlighted here.  Without getting too technical, in Indiana there needs to be language in the deed protecting against a merger of the mortgagor's fee simple title and the mortgagee's lien interest, which merger could extinguish the mortgagee's rights under the mortgage.  Without the appropriate language expressing the intent of the parties in the deed, the lender's interest in the property could become subject to junior liens without the right to foreclose.  So, be sure that you or your lawyer inserts an anti-merger clause into the deed.  Please contact me if you want to see an anti-merger clause our firm has used.