The Blogstein- Capsule Articles to Understand the Law

NB&A CAPSULE ARTICLES TO CLARIFY AND SIMPLIFY COMPLEX AREAS OF THE LAW.

At the Blogstein, the law firm of Nate Bernstein & Associates presents an informative capsule Article about a legal topic of interest to clients and to the viewing public. The law firm uploads a new article every month. This month the article is about the issue of litigation by Second Mortgage Holders.

Blogstein Capsule Article- Second Mortgage Holders Get Aggressive and File Superior Court Actions Even During a Pending Short Sale.

Bankers change their policy.

Even during this "loan modification" cycle, where, per the directives of the Obama administration, mortgage holders are supposed to help borrowers stay in their homes and reduce debt load, certain major banks are getting aggressive with debtors who took out second mortgages, and did not pay them in full, or who have tried to complete short sales at substantial discounts. Second mortgage holders are in the business of lending money to home owners, and secure the loan by second deeds of trust recorded on title to the homestead. Property values have dropped, and frequently these lenders become in effect "unsecured credotors."

Recently, NB & A has been retained to represent borrowers who got "clipped" by lawsuits filed by second mortgage holders.-one such lawsuit was filed during the escrow of a pending short sale !! Completing a short sale does not always mean a full release of liability on the underlying note- realtors should be aware of this and notify their clients accordingly. The trend of litigation by second mortgage holders filing garden variety collection lawsuits is a change in the economic and legal policy of banks- in the past, holders of second mortgages were more passive, and more often than not, would not pursue lawsuits against borrowers. Banks may pursue non-judicial foreclosure, or just "charge off" the debt, if the borrower is not collectible. However, there is a recent trend to treat the second mortgage debt, as akin to a credit card debt- a lender will sue for breach of contract and common counts. The lawsuit can be defended, and may settle if the lender and borrower come to settlement terms.

If your clients got served with a summons and lawsuit on a lawsuit filed by the second mortgage holder, and you are having trouble negotiating a settlement and need assistance to respond to the lawsuit, please contact Nate Bernstein & Associates for assistance and representation in defending the lawsuit.

Defending the case will buy you time and peace of mind so you can reorganize your financial affairs, and will prevent the mortgage holder from filing a judgment lien in the County without your knowledge. You may be able to avoid bankruptcy.

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Blogstein Capsule Article- Protecting the Homestead with a Quiet Title Action.

     When you have a dispute as to the state of the title for a residential real property or commercial real estate, or an unfriendly person or entity is making a legal or equitable claim against your title, you can file a "quiet title" lawsuit in the Superior Court where the property is located to resolve the claim.

      The claim can also be brought in conjunction with other claims, such as fraud, a claim for cancellation of an instrument, or declaratory relief.    In a declaratory relief action, for example, the court has the power to determine the contractual rights of the parties as of a certain date.

       In a quiet title lawsuit, you can also litigate a claim relating to a fraudulently executed or recorded deed of trust mortgage document.

       In the quiet title lawsuit, the Court will determine the state of the title as of a particular date, and has the power to clear title.    Title disputes can be adjudicated in an orderly manner without infighting or shouting matches.

When this lawsuit is filed, the plaintiff records a lis pendens at the County recorder's office. The term "lis pendens" is a latin term for "action pending." The lis pendens lets the world know that a lawsuit is pending, and that any subsequent grantee, subsequent purchaser, or lender, takes title subject to the claim. Generally, a lender will not make a loan secured by a title that is subject to a lis pendens.

The quiet title action is important, if an owner wants to determine that he or she has superior rights to the title of a particular parcel of real property in comparison to other claimants. Establishing a clear and marketable title is also crucial for receiving future financing, or for making a marketable future transfer by trust or will. It is also important to have clear title if you start an eviction lawsuit- also known as an unlawful detainer action.

In reality, many quiet title lawsuits are settled after the case is filed prior to trial. Cases often settle in mediation, and sometimes, when the defendant fails to defend the action , and a default is taken. Because of the intricacies of the court process, you should retain experienced counsel to represent you in the quiet title action.

If you have a question pertaining to your quiet title action, please contact Nate Bernstein & Associates at (818) 995-9475 for a professional consultation.

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Blogstein Capsule Article- Should a person file bankruptcy prior to proceeding with a mortgage loan modification or attempt a loan modification first and then file bankruptcy?

One of the greatest challenges facing consumers and families with financial difficulties is whether to negotiate a mortgage loan modification prior to filing a bankruptcy, or to file a bankruptcy first, and then attempt a mortgage loan modification either during the bankruptcy or after the filing is completed. While it is possible to complete both procedures concurrently, but there are legal obstacles and challenges. Obviously, first, if a loan modification would avert the need for a bankruptcy, then the modification makes sense and should be pursued and completed. Another consideration is what are the goals and other immediate debt problems of the borrower. If the consumer has substantial debts other than mortgage debts, is facing lawsuits and collection remedies from unsecured creditors, a Chapter 7 may be the best course of action, and perhaps the only effective initial course of action.

If the goal of the consumer is to pay back mortgage arrears, and the debtor has regular income, then filing Chapter 13 may be the best course to stop a foreclosure if a pre-filing loan modification is unsuccessful. Chapter 13 is a form of bankruptcy, whereby the petitioner proposes a repayment plan to pay creditors over time, and makes one monthly payment to a trustee. Mortgage arrears are paid through the plan, and post filing mortgage payments are paid directly to the mortgage creditor. A loan modification of terms such as interest rate or payment amount could be achieved after the case is filed, but a post filing modification or refinance while the bankruptcy is pending will probably need bankruptcy trustee review and Court approval.

Another important question, is what terms the lender and borrower can workout in the modification ? Is the modification a meaningful step in the right direction for the borrower, or is the borrower just adding interest to the debt burden ? Is a forbearance agreement part of the modification package ? If the goal of a bankruptcy filing is to discharge credit card debt and to stop lawsuits and there is little or no equity in the homestead property, then filing Chapter 7 may be the best first course of action in order to give the debtor some relief.

If a bankruptcy is filed, usually a lender holding a first mortgage will not negotiate a formal modification-or continue to negotiate a modification right away- the lender may take an initial "hands off approach" as a result of the bankruptcy filing and the automatic stay that is in effect. The borrower can buy some time. The lender is prohibited by the bankruptcy laws from continuing with a foreclosure without permission from the bankruptcy court. The lender may transfer the file from its "modification department" to its "bankruptcy department" or to outside bankruptcy counsel. If the debtor is not current in post petition payments, the lender may file a Motion for Relief from the Automatic Stay, which is a motion that seeks court permission to start or continue the foreclosure process. However, at the end of the day, most lending institutions don't want to own real estate. Lenders want to loan money and make profits through interest and other fees. It may in the lender's best financial interest to negotiate a post filing loan modification so that payments can continue and both creditor and debtor can achieve their financial objectives.

          At our law firm, Nate Bernstein & Associates, we take a step back and analyze whether debtor clients

need to file bankruptcy at all in the first place- in fact we determine whether we can help a client avoid filing for

bankruptcy- bankruptcy is a last resort.

   If a client needs a loan modification and a bankruptcy, one approach in certain

circumstances is to file the bankruptcy first to eliminate dischargeable unsecured credit card debt and to stop

any pending lawsuits. There is more certainty in this approach than waiting for months for a lender to

consider a loan modification while other creditors are taking aggressive action. Filing a Chapter 7 first, may

free up more monthly income for payment of the mortgage, and allow the borrower to focus on the important

obligations that protect his or her family.

After the bankruptcy is completed, then the mortgage may still be modified if the lender is willing to modify

it, the borrower can meet the lender's modification criteria, and the lender has not made a firm decision about

the foreclosure remedy. The post filing modification may include negotiation of such terms as to whether an

adjustable rate loan can be transformed into a fixed rate obligation that is more affordable, and whether

arrears can be deferred.

     Another approach is to try to modify a second mortgage (mortgage recorded in second position) with a

reaffirmation agreement that is part of the bankruptcy process. The creditor usually sends a letter and

proposed reaffirmation agreement to the debtor's attorney.   The proposed agreements are voluntary.

There are advantages and disadvantages to the reaffirmation approach. United States Bankruptcy Code

Section 524 governs reaffirmation agreements, and allows for a rescission and cancellation period at any

time before the bankruptcy court enters a discharge order, or before the expiration of the 60 day period that

begins on the date the reaffirmation is filed with the court, which ever occurs later.    Reaffirmation agreements

have the legal effect of making a debt survive bankruptcy- the debt is not discharged in bankruptcy, and the

debtor is personally liable for the obligation after the bankruptcy is completed. For this reason, Bankruptcy

Code Section 524 mandates that debtor's attorneys and the Courts "police" these agreements. Usually a

creditor may offer a reaffirmation agreement as a way to minimize losses and to keep the debtor paying some

portion of the obligation. Sometimes this is offered as a way for the debtor to rebuild credit in the post

bankruptcy period if the creditor is willing to offer a small credit line.    In some situations a mortgage creditor

with a second mortgage may offer a reaffirmation agreement as a way to lower the payments.    The terms of

the reaffirmation agreement should be reviewed carefully by bankruptcy counsel prior to execution.

In summary, there is no absolute, clear cut answer to the question of whether a person or a

married couple should file bankruptcy first, and attempt the mortgage modification second, or vice

versa. Borrowers may have little control over whether a loan modification will be approved- the lender

can take their sweet time and not approve an application even after extensive delay. Filing

bankruptcy, on the other hand, is a form of immediate and powerful relief. Each situation must be

looked at on a case by case basis, and the borrower should keep the creditor's representative informed

if a bankruptcy filing is imminent.

NATE BERNSTEIN & ASSOCIATES ATTORNEYS AND COUNSELORS AT LAW N B & A
Professional Receivers and Fiduciaries Serving State and Federal Courts

Design

The Blogstein- Capsule Articles to Understand the Law

  
  A.          UNDERSTANDING LIABILITY UNDER THE "ALTER EGO DOCTRINE."

     Under normal circumstances, the liability of shareholders is limited to their investment in the corporation.  

Using a corporation or LLC is a way to limit the legal liability of shareholders from claims of the corporation 

or LLC’s creditors.    This protection from personal liability may be lost, however, if the courts find a basis 

for invoking the ALTER EGO DOCTRINE.   The term is called “alter ego,” because the Court has the power

 to hold an individual shareholder, director, and officer liable for a corporate debt if the corporate entity is an

 undercapitalized or is legal and financial sham.

      Under this doctrine, if it would be inequitable not to do so, the courts may disregard the legal fiction of a 

corporation’s separate existence distinct from that of its shareholders, and “pierce the corporate veil,” thus 

exposing the shareholders to personal liability for corporate debts and obligations.”

B.  PUBLIC POLICY REASONS FOR IMPLEMENTING  THE ALTER EGO  DOCTRINE.

     The law of alter ego is derived from legal precedents that have been decided by our state and federal 

appellate courts.  A common reason for invoking the alter ego doctrine is that in certain situations the failure

 to do so would work an injustice on the corporation’s creditors or other third parties.  In other words, the 

 shareholders are attempting to use the corporation as a shield against liabilities that would otherwise inure to them 

personally.  See case law including Minton v. Caveney   (1961) 56 C.2d 576, 15 CR 641 (applying to tort causes 

of action); Minifie v. Rowley   (1921) 187 C. 481, 202 P. 673 (applying to breach of contract causes of action); 

People v. Clauson   (1964) 231 CA2d 374, 41 CR 691 (tax liabilities).

C.    THE CALIFORNIA SUPREME COURT SETS FORTH A “TWO PART TEST,”

     As stated by the California Supreme Court, “the two requirements for application of this doctrine are (1) that 

there be such unity of interest and ownership that the separate personalities of the corporation and the individual 

no long exist and (2) that, if the acts are treated as those of the corporation alone, an inequitable result will follow.” 

 Automotriz del Golfo de California v. Resnick (1957) 47 C2d 792, 796, 306 P.2d 1, 3.  See also


Nilsson v. Louisiana Hydrolec  (9th Cir. 1988) 854 F2d 1538, 1544.

     Because the alter ego doctrine is “equitable,” (meaning that a Court sits as a court of equity and decides the issue

 based on weighing many factors”)  the courts have applied it to many different fact situations to arrive at a result 

that the court believes to be fair, and its application varies according to the circumstances in each case.   See 

Automotriz del  Golfo de California v. Resnick.

     While the doctrine does not depend on the presence of actual fraud, bad faith is an underlying consideration 

and is found in some form or another whenever the trial court has been justified in disregarding the corporate entity.  Associated Vendors, Inc. v. Oakland Meat Co.  (1962) 210 CA2d 825, 838, 26 CR 806.    The legal analysis in the The Associated Vendors, Inc. case is frequently cited by attorneys and used by Courts to analyze alter ego liability.

     In Associated Vendors, Inc. v. Oakland Meat Co.   (1962) 210 CA2d 825, 838, 26 CR 806, the court reviewed 

and analyzed a number of cases in which the trial court had been upheld on appeal in disregarding the corporate 

entity, and produced the following list of fact patterns, which could serve the attorney and his or her client as a 

checklist in determining whether the alter ego doctrine might be applicable:

1.  Commingling of funds and other assets, failure to segregate funds of the separate entities, and the unauthorized 

diversion of corporate funds or assets to other than corporate use;

2.  The treatment by an individual of the assets of the corporation as his or her own;

3.  The failure to obtain authority to issue stock or to subscribe to or issue the same;

4.  The holding out by an individual that he or she is personally liable for the debts of the corporation;

5.  The failure to maintain minutes or adequate corporate records, and the confusion of the records of the separate 

      entities;

6.  The identical equitable ownership in the two entities; the identification of the equitable owners with the 

domination and control of the two entities; identification of the directors and officers of the two entities in 

the responsible supervision and management; sole ownership of all of the stock in a corporation by one

 individual or the members of a family;

7.  The use of the same office or business location; the employment of the same employees and or attorney;

8.  The failure to adequately capitalize a corporation; the total absence of corporate assets, and undercapitalization;

9.  The use of a corporation as a mere shell, instrumentality, or conduit for a single venture or the business of an 

individual or another corporation;

10.  The concealment and misrepresentation of the identity of the responsible ownership, management, and 

financial interests, or concealment of personal business activities;

11.  The disregard of legal formalities and the failure to maintain arm’s length relationships among related entities;

12.  Bad faith conduct by corporate insiders that has harmed or defrauded corporate creditors;

13.  The diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment 

of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one 

and the liabilities in another;

14.  The contracting with another with intent to avoid performance by use of a corporate entity as a shield 

against personal liability or the use of a corporation as a subterfuge of illegal transactions; and

15.  The formation and use of a corporation to transfer to it the existing liability of another person or entity.

     In evaluating an “alter ego” claim, the court may use some or all of the factors in deciding whether to pierce

the corporate veil. See Cal. Continuing Education of the Bar, “Counseling California Corporations,”

Sections 3.71-3.74, et. seq..

                          D.   OTHER CONSIDERATIONS ON THE SUBJECT OF "ALTER EGO" LIABILITY.


          The issue of alter ego liability is usually raised in civil litigation by the creditor making an allegation that

 for example that a corporate insider of Corporation A is liable for the debt of Corporation A.  

The alter ego claim is raised in the body of the lawsuit allegations, and sometimes it is raised as a separate cause of

 action under the heading of “Declaratory Relief.”        Remember that the underlying public policy of the doctrine

 is to prevent injustice on creditors by debtors who would abuse the corporate model to obtain corporate assets for

 personal benefit, and to, albeit at the same time, not pay corporate creditors.    The doctrine is equitable in nature,

 and will be decided by a judge and not a jury.  The Court balances the factors, and weighs the evidence.        

The burden of proving the two prong test, and the factors considered by the Court is on the creditor who is the

 plaintiff in the case.  The evidence of the factors will have to be obtained by the creditor through discovery.  

For example, the creditor will have to subpoena corporate records, and take the deposition of the debtor.  

This may be time consuming and expensive.  The debtor may also object to the discovery of personal and 

corporate information being produced based on the right to privacy.  A Court will have to balance the rights 

of the creditor versus the privacy rights of the corporate insider, and may give the debtor some privacy 

protection from a broad discovery request.        

     In short, if you are a creditor who is lending to a small corporation or LLC, you should have a well drafted

 personal guaranty that makes the insiders liable if the corporation should go insolvent and not pay the debt. 

 If you are a debtor, you should observe corporate formalities to protect your personal and family assets 

from the claims of corporate creditors, and the risk of a finding of alter ego liability.

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Second Mortgage Holders Get Aggressive in State Court

     Even during this "home loan modification" cycle in our economy, where, per the directives of the Obama

administration, institutional mortgage holders are supposed to help borrowers stay in their homes and reduce

loan debt service obligations, certain major banks are getting aggressive with debtors who took out second

mortgages secured by their home equity, and who are not paying the debts. These borrowers may be trying to

complete short sales at substantial discounts off the amount of the mortgage debt.    Many banks are in the

business of providing home equity loans to homeowners secured by a second mortgage on the borrower's

homestead. When home values drop, these lenders are now "unsecured" or "undersecured" creditors.

Unpaid second mortgages are a frequent cause of personal bankruptcy among homeowners as the debtors

cannot afford to pay the loans.   Recently, our law firm has been retained to represent borrowers who got

"clipped" by such lawsuits filed by second mortgage holders- one such lawsuit was filed during the escrow of

a pending short sale that was seeking to payoff a portion of the same second mortgage ! ! The completion of

a short sale does not always mean a full release of liability for the borrower on the underlying promissory note

- realtors and attorneys should be aware of this reality and notify their clients accordingly. The bank may still

sue the borrower based on a breach of the underlying promissory note.    The trend toward legal action by the

institutional holders of second mortgages is a change in the economic and in-house legal policy and

collection strategy of banks. In the past, holders of underwater second mortgages were more passive, and

more often than not, would not, pursue direct lawsuits against borrowers. Banks may pursue non-judicial

foreclosure of a first mortgage, and a second mortgage holder would just wait on the sidelines, "charge off"

the debt if the secured obligation is wiped out and the note is not collectible.    However, there is a recent trend

of institutional mortgage holders to treat second mortgage debt as similar to delinquent credit card debt- a

lender will sue for breach of contract and common counts. This is a different type of lawsuit than a

judicial foreclosure action. In the judicial foreclosure action, the bank sues to foreclose on the real property,

and to seek a deficiency judgment.      If ignored, the legal consequences can still be devastating.

If you got served with a summons and lawsuit filed by the second mortgage holder, and you are having trouble negotiating a settlement and need assistance to respond to the lawsuit, please contact Nate Bernstein & Associates for assistance and representation in defending the lawsuit. The collection lawsuit can be defended, and settled if both sides agree to terms. Mortgage companies have aggressive attorneys- you should retain counsel to even the playing field and protect your rights. Defending the case will buy you time and peace of mind so you can reorganize your financial affairs, and will prevent the mortgage holder from recording a judgment lien in the County without your knowledge. You may also avoid bankruptcy.

_________________________________________________________________________

Blogstein Capsule Article- Protecting the Homestead with a Quiet Title Action.

If you have a question pertaining to your quiet title action, please contact Nate Bernstein & Associates at (818) 995-9475 for a professional consultation.

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Blogstein Capsule Article- Should a person file bankruptcy prior to proceeding with a mortgage loan modification or attempt a loan modification first and then file bankruptcy?

Any statement or image contained on any page of this website is not intended as a promise, representation, express warranty, implied warranty, guaranty, prediction about the outcome of a particular legal matter, and shall not be construed as being formal legal advice. All statements, information, articles, and images are strictly promotional. Case situations are fact specific, and laws and rules change on a daily basis, and courts interpret laws differently. No express or implied attorney client relationship is created by viewing any page, image, statement, or language on this website. No attorney client relationship is formed until the client signs a written retainer agreement with Nate Bernstein & Associates. Content copyright Nate Bernstein & Associates 2009. All rights reserved.