Lang, Richert & Patch continues to maintain its reputation as “The Firm of Distinction”, with five attorneys earning the title of Super Lawyer and two others being named as Rising Stars. The Super Lawyers hailing from Lang, Richert & Patch include; personal injury and wrongful death specialist Robert L. Patch II, construction and complex litigation attorney Val W. Saldana, bankruptcy and insolvency advocate Rene Lastreto II, employment and labor law attorney Charles T. Taylor, and construction law specialist Mark L. Creede. LR&P further recognizes Rising Stars, Matthew W. Quall, construction litigation attorney, and Craig B. Fry, corporate and business transactions and bankruptcy specialist.

The selection of Super Lawyers and Rising Stars from Lang, Richert & Patch represents the broad and diverse set of skills and backgrounds the firm brings to litigation matters. The seven Super Lawyer and Rising Star honorees represent two thirds of the lawyers currently practicing with Lang, Richert, & Patch and is by far the largest contingent in the Central Valley. Attorney Val Saldana commented that the title is, “as much an honor for the entire firm, as it is for the individuals involved”. Saldana further noted, “we have always taken a collaborative team approach to our complex litigation matters.” The multiple Super Lawyer and Rising Star distinctions demonstrate Lang, Richert & Patch’s ability to provide aggressive and effective results to a wide range of client demands.

Lang, Richert & Patch has strived for more than 40 years to provide its clients with premier legal services through establishing an open and collaborative environment while maintaining a result driven mentality. The experience and expertise of the firm has earned the respect of both the local and legal communities. The firm also received the prestigious, Martindale-Hubbell AV-rating, which is the highest peer rating for ethics and ability. Looking ahead, Val Saldana notes that, “we have worked hard to achieve preeminent status in the business litigation and bankruptcy departments. And we intend to keep on building.”

February 22, 2007 – The Supreme Court ruled Wednesday that a financially troubled small-business man gave up an important right under the federal bankruptcy code because he failed to disclose all of his assets as the law requires.

In a 5-4 decision, the Court said Robert Marrama of Gloucester, Mass., could not convert his bankruptcy case from one chapter of the code to another, as the law ordinarily allows.

The reason, the Court said, stemmed from his failure to disclose a Maine vacation home placed in a trust. Marrama, who operated a flooring company, listed the value of his interest in the property as zero, according to papers in the case.

After finding out about the home, the bankruptcy trustee said he would recover the real estate for the benefit of Marrama’s creditors. Marrama had attempted to convert his case from a Chapter 7 liquidation to Chapter 13, which allows a debtor to keep property and pay debts over time.

Writing for the majority, Justice John Paul Stevens said honest debtors possess an absolute right to convert their cases to Chapter 13, but that nothing in the law limits a court’s right to take away that right for “fraudulent conduct.”

In dissent, Justice Samuel Alito said the bankruptcy code “unambiguously provides” that a debtor has a “broad right” to convert to Chapter 13. Alito said Chapter 13 contains a number of requirements that protect creditors from any bad faith by a debtor.

In Marrama’s case, a bankruptcy judge denied the conversion to Chapter 13, and a bankruptcy appellate panel agreed.

Attorney Eric Brunstad, who represented a creditor in the case, Citizens Bank of Massachusetts, said that once a bankruptcy is converted from Chapter 7, the trustee is ousted, and in many instances “there really is no one to take action against a fraudulent debtor.”

“The statutory safeguards in Chapter 13 are not always adequate to prevent abuse,” said Brunstad.

The case is Marrama v. Citizens Bank, 05-996.

by Alane Becket

With the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), fundamental changes in how distribution of a debtor’s income will be made during a bankruptcy case went into effect. Unfortunately, touted as a “creditor’s bill,” an analysis of BAPCPA has uncovered several examples of the law of unintended consequences. Indeed, credit card companies and other unsecured creditors, and those who purchase this type of account, should proceed with caution when making projections based on media hype and rumor.

When analyzing and anticipating the net result of BAPCPA for a creditor or debt buyer’s bottom line, it is one thing to make general predictions about recoveries, but another to understand why the changes will occur and what can be done by unsecured creditors to make a positive difference for recoveries. This article will focus on some of the major changes made by BAPCPA and their effects on unsecured recoveries.

First, the Means Test, which is designed to require debtors who have the ability to make at least partial repayment to their creditors to enter into a Chapter 13 Plan or face dismissal from bankruptcy, is probably the single most publicized aspect of the consumer amendments to the Bankruptcy Code. However, under scrutiny, it does not appear that this provision will result in a significant shift of debtors into Chapter 13 as intended. One of the primary reasons for this is that the Means Test is only applied to debtors with income above the median income for their state. As a majority of consumer debtors have incomes below their state median, the Means Test will be inapplicable to a large percentage of debtors. Thus, a majority of Chapter 7 filers will be permitted to remain in Chapter 7, unaffected by the Means Test.

On the other hand, the ability to pass the Means Test and file under Chapter 7 does not mean that a debtor eligible for Chapter 7 will necessarily file under that chapter. Debtors will continue to use Chapter 13, regardless of whether or not they have passed the Means Test, for traditional reasons, such as to prevent foreclosure on real property, to modify secured claims, to discharge certain taxes, to pay attorney fees and the like. Thus, it appears that, while the Means Test will require a percentage of debtors to proceed under Chapter 13, this provision alone will not translate into significantly larger recoveries for unsecured creditors. This is especially true when considered along with some of the sleeper provisions in BAPCPA.

Second, BAPCPA’s definition of income raises several issues when put into practice. Under BAPCPA, all of the debtors’ income is calculated under its new definition of Current Monthly Income (CMI). CMI is calculated as the average of the last six months’ income received by the debtor from all sources, with some exclusions, most notably, Social Security Income. Thus, unlike under the old law where a debtor’s future income determined plan payments, under BAPCPA, a debtor’s CMI is used as a starting point, and thus, by definition, is backward looking – a formula that may not accurately reflect a debtor’s current or future available income. For example, a debtor who was unemployed for part of the last six months but who is now employed will have CMI – the average of the previous 6 months’ income – that is less than his actual monthly income. When calculating the plan payment, then, the debtor begins the process by using an income amount that is less than the debtor’s actual monthly available income. As a result, creditors share in a smaller payment amount.

As with the Means Test in Chapter 7, in Chapter 13, a debtor’s CMI is again determinative and dictates important aspects of the repayment plan. Once a debtor’s CMI is determined, the debtor is permitted to deduct monthly expenses to reach the debtor’s “disposable income”, which is then used to pay unsecured creditors. For debtors whose income is below the median, monthly expenses must be “reasonable and necessary” and will be viewed under traditional standards established by previous judicial decisions on what constitutes reasonable and necessary expenses for a Chapter 13 debtor. For debtors with income above the state median, monthly expenses will be those set forth in section 707 that are used for the Means Test. Close scrutiny of these standard expenses uncovers numerous ways in which these expenses, and the official forms developed for use by debtors in determining disposable income, produce artificial results, potentially shielding significant income from creditors.

Another issue is whether a debtor is required to include all or any part of a non-filing spouse’s income as part of the debtor’s CMI. According to the precise terms of BAPCPA, CMI includes income that the debtor receives from all sources and includes “any amount paid by any entity other than the debtor … on a regular basis for the household expenses of the debtor…” There are sure to be heated debates over whether and how much of a debtor’s spouse’s income should or must be included in a debtor’s CMI, especially if a debtor claims deductions for dependents, one of whom is the spouse.

Third, all debtors are now permitted to both contribute to and repay loans from retirement plans as part of their monthly expenses. In the past, these practices were judged under the reasonable and necessary standard, with the result that in many cases, debtors were prohibited from continuing contributions or making repayments to retirement plans before paying unsecured creditors. Now that these payments are sanctioned under BAPCPA, debtors have incentive to both contribute to retirement plans and to take loans from those assets, knowing that they will be repaid while the debtor is in bankruptcy.

BAPCPA also calls for repayment, in full, of certain secured loans, which in the past had been subject to strip down, a process which required a debtor to repay only the value of the collateral, while remainder of the debt was an unsecured claim. Under BAPCPA, automobiles purchased within two and a half years of the bankruptcy and other secured personal property purchased within a year of bankruptcy must be paid for in full or surrendered. Payment in full now means that money which, under the old law, had gone to unsecured creditors will now go to secured creditors.

As these provisions demonstrate, BAPCPA is not necessarily living up to its reputation as a “creditor’s bill.” And, while secured creditors reap the most benefit from the new law, there are still ways unsecured creditors can participate in bankruptcies and take full advantage of the opportunities available to them. The details of the bankruptcy bill and a discussion of how unsecured creditors can realize the most from their accounts was discussed at the Debt Buyers Association Conference, “Racing for Debt”, held February 7-9, 2006 in Las Vegas, Nevada. For more information log onto www.debtbuyers.com.

Alane Becket is a managing partner at Malvern, Pennsylvania based Becket & Lee, LLP, a law firm specializing in the representation of consumer creditors and debt purchasers in bankruptcy matters. Information on the firm can be found at www.becket-lee.com.

A “dragnet clause” is a contract provision stating that a mortgage secures all the debts that the mortgagor may at any time owe to the mortgagee. California courts have upheld the general validity of dragnet provisions. Union Bank v. Wendland, 54 Cal.App.3d 393, 398 (1976). They also recognize the risk that such provisions may be included in a trust deed or mortgage without the debtor’s knowledge or understanding. “Clauses such as this are often termed ‘dragnet’ or ‘anaconda,’ ‘as by their broad and general terms they enwrap the unsuspecting debtor in the folds of indebtedness embraced and secured in the mortgage which he did not contemplate… ‘….” Wong v. Beneficial Savings & Loan Association, 56 Cal.App.3d 286, 292 (1976) emphasis in original.

Most modern forms of deeds of trust contain a dragnet clause. One example follows:

Trustor agrees to (1) pay the principal and interest on the note of even date herewith; (2) perform each agreement in this deed of trust; and (3) pay such further sum as the then recorded owner of the property may hereafter borrow from beneficiary [lender], evidenced by another note (or notes) reciting it is so secured. Bernhard, California Mortgage and Deed of Trust Practice (3rd. Ed.), The Regents of the University of California, 2000; page 699.

While Courts will generally uphold the validity of dragnet clauses, that is not always the case. Often when challenged by the debtor or creditors who also claim a security interest in the real property secured by the deed of trust, Courts construe the clause as not including certain debts that the creditor asserts are secured by the deed of trust. This article will state the current state of the law with regard to the validity of dragnet clauses covering pre-existing or contemporaneous debts (either in existence or entered into at the time the deed of trust was executed) or those debts incurred after the deed of trust was recorded.

Pre-existing or contemporaneous debts.

Courts in California have rejected the view that a broadly worded dragnet clause may never be applied to other existing or contemporaneous debt. However, California Courts have consistently adhered to a construction of such clauses that depends more on “the actual expectations of the parties… than the literal wording of the boilerplate clause.” Fischer v. First International Bank, 109 Cal.App.4th 1433, 1435 (2003) citing Ostayan v. Serrano Recoveyance Co., 77 Cal.App.4th, 1411, 1421 (2000). Generally a proponent of a dragnet clause bears the burden of establishing that the parties intended all existing or contemporaneous loans to be included within its scope. Wong, supra, at 294. This construction makes sense because it is easy to include specific existing obligations when that is the party’s intent. If the parties fail to include those obligations a court can likely confer that no such intent existed or that, if it did, it was a secret intent. Fischer, supra, 109 Cal.App.4th at 1447. When you add to that analysis the view in California that a trust deed containing a dragnet clause that is printed on a standard bank form is considered a contract of adhesion, Lomanto v. Bank of America, 22 Cal.App.3d 663, 668 (1972), enforcement will depend on whether the provision is within the reasonable expectation of the weaker or “adhering” party (the Bank’s customer). See Armendariz v. Foundation Health Phychcare Services, Inc., 24 Cal.4th 83, 113 (2000).

Relevant factors articulated in the case law which help

California Courts determine whether a broadly worded dragnet clause was mutually intended by the parties to cover pre-existing or contemporaneous debts include: (1) the language and specificity of the dragnet clause; (2) whether the parties were aware of the dragnet clause and appreciated its significance; (3) whether the other loans were of the same type or character as the primary loan; and (4) whether the Bank relied upon the dragnet clause as security for the other loans. Fischer, supra, 109 Cal.App.4th at 1446.

In order to make it more likely that if challenged by the debtor or another creditor, a dragnet clause would be construed to include contemporaneous or pre-existing debts, creditors should consider these options.

1. Specify in the deed of trust the specific debts that intend to be covered by the deed of trust. Since it is preferable to utilize forms, it may be appropriate to modify the form to include reference to an exhibit so that all the debts can be listed.
2. Include in the instruments that are to be secured by the deed of trust specific reference to the fact that a deed of trust of a certain date is to serve as security.
3. Have the debtor sign a separate document stating the debtor specifically recognizes that more than one debt is to be secured by the deed of trust and that the debtor recognizes the significance of that fact. For example, if the debtor defaults on one of the obligations secured by the deed of trust, the foreclosure process could begin.
4. The creditor’s internal documents should establish very clearly that the deed of trust is to serve as security for multiple obligations.
5. The loans to be secured by the deed of trust should be similar in character.

Future advances.

In contrast to debts which may be in existence when a deed of trust is signed and recorded, other issues arise when a lender lends additional monies after the deed of trust is signed and recorded and wants the obligation secured by the deed of trust expanded to include the later advances. Obviously, if a loan is in existence when a deed of trust is signed and recorded, a strong argument could be made that if the parties intended to include those loans under the umbrella of the deed of trust, they could have done so. Such an argument may not be available with respect to future advances made by a lender.

The California Civil Code contemplates that a lien may be created and take immediate effect as security for performance of obligations which do not yet exist. Civil Code Section 2884. The example of the dragnet clause at the beginning of this article limits the obligations secured by a deed of trust to those that specifically refer to the existing deed of trust.

As with contemporaneous or pre-existing obligations, the courts try to construe dragnet clauses consistent with the expectations of the parties. Strong evidence of the party’s intention to include subsequent loans is if the initial and subsequent loans are related. See Union Bank, supra, 54 Cal.App.3d 393. Where disputes arise generally is not between the debtors and creditors in this area but rather between creditors asserting priorities to the collateral. Obviously, if a deed of trust specifically describes future obligations that it secures, a competing creditor will have difficulty establishing that the advance made under that deed of trust is not entitled to priority. This is especially true if the party subsequently signs notes or other instruments specifying the debt was secured by that deed of trust. See Bernhard, supra, at page 708. However, if the creditor has to rely upon a broadly worded dragnet clause, a debtor can argue that it did not know what the clause meant and bring into question the validity of the security for the advance. Lomanto, supra, 22 Cal.App.3d 663.

Many lenders are aware of issues that arise whether an advance made by a lender secured by a deed of trust is optional or obligatory. If obligatory advances, they are generally believed to be secured by the deed of trust. However, if the advances are optional, they are not. Deeds of trust rarely state whether future advances are optional or obligatory. In many cases, deeds of trust do include covenants of the borrower that if the lender has to make certain expenditures (such as attorneys’ fees) to protect the security, it will be secured by the deed of trust. Those types of clauses, however, while technically “future advance clauses” really are more specific statements of the borrower’s obligations which are secured by the deed of trust. Some helpful guidelines for lenders with senior liens that may contemplate additional advances are:

1. Specifically state in the deed of trust the amount and timing of advances that may be required and for which the deed of trust will act as security.
2. Any subsequent instrument signed that is to be secured by the deed of trust should make specific reference to the deed of trust.
3. Provide notice to any subordinate creditor who has recorded a deed of trust or that the senior lender knows about prior to the advance.

At the same time if a lender wishes to loan funds to a debtor secured by property that is already encumbered, that lender should protect itself in a priority dispute with a senior lienholder. Here are some suggestions to do so:

1. Perform a careful title search to determine the identity of any senior lienholder.
2. Inquire of any senior lienholder of the amount due. Civil Code § 2943 requires the beneficiary of a deed of trust to provide information to certain persons including the trustor or mortgagor under that deed of trust.
3. Give notice to the senior encumbrancer of the existence of the junior lien.
4. Obtain warrantees and representations from the borrower about the balance due secured by the senior trust deed.

Conclusion

Dragnet clauses are enforced by courts to the extent they accurately reflect the parties intentions. They can accurately reflect intentions provided lenders and borrowers carefully document their positions. Both senior lienholders and junior lienholders can take steps to protect themselves in priority fights concerning the collateral by following a few reasonable steps.