Articles Posted in Creditor’s Rights

Q. My father’s home was in his Trust and the home was sold. The money from the sale was deposited into the Trust account. In cleaning out my father’ home, we found a monthly statement for a home loan but did not know the status of the loan. We learned that there was no Deed of Trust recorded on the home Related imagewhich is why nothing showed up on the title search when the home was sold. We have tried to contact the bank to inquire as to the status of this loan and pay any remaining balance. We left messages for numerous managers at the bank but no one returns our calls.  My father died almost a year ago and we want to settle and close the Trust. What should we do?

A. As the Trustee, you are obligated to plan for payment of your father’s debts and obligations, such as income taxes, gift taxes, credit card debts, and mortgage payments. If an estate tax is due, these debts can be deducted for estate tax purposes. But, as Trustee, you are not legally required to notify your father’s creditors of his death.

Conversely, you are required to notify various state agencies that may have claims such as the State Board of Equalization, Franchise Tax Board, Department of Human Resources Development, Department of Mental Health, Department of Health Care Services and Medi-Cal.

California enacted its own version of the Uniform Voidable Transactions Act (UVTA) deviating slightly from the uniform version. Some archaic terminology that applied the label of “fraud” to certain perfectly innocent transactions will now fall under the less pejorative “voidable” category. The new state law also altered the burden of proof in making and defending a claim for relief under the act, as well as the choice of law governing a determination under the UVTA. The new law goes into effect on January 1, 2016.

Federal Counterpart

There is a Uniform Voidable Transactions Act (UVTA), formerly named the Uniform Fraudulent Transfer Act (UFTA), which is a federal law that strengthens creditor protections by providing remedies for certain transactions by a debtor that are unfair to the debtor’s creditors. With the passage of the state version, California lawyers will need to analyse fraudulent transfers under both statutory schemes, but will likely rely mainly on the state-based law.

Governor Brown signed the new Uniform Voidable Transactions Act into law on July 2, 2015. The bill received unanimous support in both the Senate and the Assembly and was recommended by the Commercial Transactions Committee. This law renames and amends the pre-existing Uniform Fraudulent Transfer Act. This new law will impact both debtors and creditors.

What is the Uniform Voidable Transfer Act?

California’s pre-existing Uniform Fraudulent Transfer Act is based in part on the model Uniform Fraudulent Transfer Act, which has been adopted at least in part by various states including Georgia, Idaho, Kentucky, Minnesota, New Mexico, North Carolina, and North Dakota. It establishes the conditions under which a transfer made or obligation incurred by a debtor is fraudulent as to the creditor. It also sets remedies a creditor can obtain with respect to a fraudulent transfer or obligation. One potential remedy is the voiding of the transfer. This new law renames the law the Uniform Voidable Transaction Act. It also adopts certain changes promulgated by the Uniform Law Commission. It specifies a burden of proof in making and defending a claim for relief under this law. It specifies the basis for determining the governing law for a claim for relief under the act. It modifies definitions applicable to the act. It removes a definition of insolvency and adds new definitions including definitions for “record” and “sign.” It replaces the term “fraudulent” with the term “voidable.” These modifications are only applicable if the right of action accrued, the transfer was made, or the obligation was incurred on or after the effective date of the bill. That date is January 1, 2016.

Real estate and commercial disputes across the country are often settled by a forbearance agreement. In these agreements, the creditor agrees to settle its claim for a discounted amount, usually payable in installments. In exchange, the debtor is required to admit that he or she owes the full amount of the debt and agree that if he or she fails to timely make the agreed upon payments that a judgment for the full amount of the debt may be entered against him or her. Historically, creditors have been hesitant to enter into these agreements in California, but because of a new court decision that may change.

History of Forbearance Agreements in California

Historically, California has taken the minority view on these forbearance agreements in that it has not enforced them. As recently as 2014, in Purcell v. Schweitzer, a California court opted not to enforce such an agreement. It determined that, on the facts before it, forcing the debtor to pay the entire original debt would violate California law because such a judgment would not bear a rational relationship to the damages the creditor would suffer due to the breach of the forbearance agreement. In other words, since the forbearance agreement was in place, the creditor was not really out the full amount of the original debt due to the debtor’s failure to pay. Had the debtor made the payments the creditor never would have seen the repayment of the full original debt. This decision relied heavily on a similar earlier decision in Greentree Financial Group, Inc., v. Execute Sports.

There are many small businesses in the Sacramento area that offer consumer financing for larger purchases or installment contracts so that the consumer does not have to pay in one large lump sum. One major benefit of financing is that the small businesses can collect interest on the payments in exchange for the convenience of smaller payments on the part of the consumer. Similarly, small businesses benefit from installment contracts in that the business does not have to deliver a finished product or service before receiving partial payment. debt-collection.jpg

In some cases though, consumers break their promises to pay the remaining balances. When this happens, businesses and their agents are free to engage in actions to collect the debt. However, there is one major caveat: the debt collection practices must comply with a federal law called the Fair Debt Collection Practices Act (FDCPA). This is where an experienced Sacramento small business attorney can be a valuable asset to the small business, acting as a consultant on FDCPA compliance.

In general, the Act is designed to protect debtors from fraud and harassment in the collections process. For example, before the Act, it was commonplace for debt collectors to insinuate that the debtor was committing a crime and that the debtor could go to jail if the debt was not paid by a certain date. Debt collectors would call the debtor’s residence up to dozens of times a day, or find the debtor’s place of business and call there as well. In extreme cases, intimidation and threats of violence were used to induce prompt payment of debts. It is not surprising that these types of debt collection practices do not fly in the modern business world.

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Q: I have 3 judgements valued at a total of 7K against an experienced BK Attorney. He has 3 personal BK filings in CA in the last 20 years. Will a collection company levying against his operating account get me paid? He has no RE property so see no advantage to Abstract. One attorney suggested a claim against his future client fees. Thank you,

Asked about 2 hours ago in Debt Collection

In today’s climate, California judgment creditors are finding that debts of business entities are uncollectable and that the debtor is nothing more than a shell business entity. Facing the frustration of collecting against a company with marginal assets, creditors have been abandoning their judgments. Recently, the appellate courts cracked open the corporate shield giving judgment creditors a better chance of collection. Cracked Window.jpgTwo recent Court of Appeal cases opined on the tactics for collecting against business owners evading financial responsibility through the use of shell companies.

In Misik v. D’Arco, 197 Cal. App. 4th 1065, as modified by 2011 Cal. App. LEXIS 1028 (Cal. App. 2d Dist., Aug. 9, 2011), the appellate court cracked the corporate shield, increasing a judgment creditor’s chance of collection. The appellate court held that a trial court, using its general powers under Code of Civil Procedure Section 187, can amend a judgment to add a judgment debtor who is found to be an alter ego of the business defendant. In Misik, the plaintiff filed a motion to amend the judgment to add a corporate officer, D’Arco, as a judgment debtor. Unbeknownst to Misik, he made a loan of money to a shell company owned by D’Arco. After D’Arco’s company defaulted on the loan, Misik sued D’Arco and his company for breach of contract and fraud. Misik did not prevail on the fraud claim against D’Arco and ended up with a judgment against D’Arco’s company only.

Unable to collect against D’Arco’s worthless company, Misik filed a motion to add D’Arco to the judgment based on the alter ego doctrine. Whether the business is an alter ego of an individual is a factual question. First, there must be sufficient unity of interest and ownership between the individual and the business such that their separate personalities no longer exist. Secondly, treating the business as separate will sanction a fraud, promote injustice, or cause an inequitable result. The Misik court found D’Arco to be an alter ego of his company. The Court relied on the facts that D’Arco was the only officer and employee of his business, that he made all decisions for the business, and that he even paid some business debts with personal checks. The Misik court futher noted that D’Arco participated in and controlled the litigation filed against his company by Misik.

The court in Phillips Spallas & Angstadt LLP v. Fotouhi (197 Cal. App. 4th 1132) approved of the use of charging orders to grab corporate assets to satisfy a judgment against an individual shareholder. There, the court approved a charging order, finding that a new corporation was merely a continuation of a partnership. Phillips Spallas & Angstadt, a law firm, obtained a judgment against Fotouhi, a departing partner, for breach of the partnership agreement. Fotouhi left the firm with its major clients and formed a new partnership with several associates of the firm. The firm won an arbitration award against Fotouhi. Fotouhi attempted to discharge the award in bankruptcy, but was unsuccessful when his bankruptcy was discharged for fraud. He then swore that the firm would never collect a dime. He formed a law corporation which “bought” the assets of his new law partnership.
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It is a basic premise in the world of foreclosures in California, that to stop a non-judicial foreclosure, the borrower must tender, or pay, the full amount owed. Well, many borrowers have successfully argued that a tender is not necessary if the company that foreclosed on the property is not the holder of the original promissory note and, thus, not entitled to be paid. But, a recent California appellate court opinion, Ferguson v. Avelo Mortgage, LLC (Cal.App. 2 Dist. Jun. 1, 2011) — Cal.Rptr.3d —, 2011 WL 2139143, held that if the Deed of Trust assigns the right to foreclose to another company and its successor or assigns, that assignment is valid and any company that has been assigned the right to foreclose may do so. Essentially, the original holder of the promissory note may grant the right to foreclose to another company who in turn can pass on their right to foreclose.

In Ferguson, the plaintiffs attempted to avoid the tender rule by arguing it did not apply because neither the company that foreclosed, Avelo Mortgage, nor its predecessor, Mortgage Electronic Registration Systems (MERS), owned the original note for the property. This argument fell flat. The original note specifically stated that the mortgage holder assigned its right to foreclose to MERS, its successors or assigns. So, when MERS assigned its right to foreclose to Avelo, Avelo was acting with full authority to foreclose.

Pay Money.jpgBut, what about the tender – if the foreclosing company does not hold the original promissory note, do you still have to pay? The court noted that “it does not follow that a beneficiary may initiate non-judicial foreclosure proceedings under a deed of trust without the original promissory note, but cannot seek tender from a defaulting borrower attempting to set aside the foreclosure.” In essence, the plaintiffs still had to tender to Avelo full payment of the amount due to stop the foreclosure proceedings.

A few years ago, when the value of commercial real estate was much higher, Sacramento landlords signed many favorable leases. Now, with the change in the market, many Sacramento tenants are looking for rent concessions, a full blown lease modification, or an outright walk-away. Failing to obtain the relief demanded, tenants can file for bankruptcy protection to jettison unwanted leases or force demanded modifications on desperate landlords.

That is exactly the scheme used by one of Arizona’s most prominent real-estate firms, Realty Executives, Inc. Realty Executives filed for bankruptcy reorganization as a legal strategy to circumvent a handful of what this company termed as “uncooperative landlords.”

Realty Executives was unable to negotiate better terms for a handful of its 15 office leases. So, Realty Executives filed its Chapter 11 bankruptcy petition along with a request for immediate court approval to “reject,” or walk away from, four of its 15 lease agreements. In exchange for breaking the leases, Realty Executives proposed adding the amount still owed on each lease, not to exceed 12 months’ worth of payments, to the company’s list of unsecured debts to be settled in the bankruptcy. Faced with rental losses, several of Realty Executives’ landlords are renegotiating their lease deals. If the negotiations fail, Realty Executives still has time to add other leases to its list of rejects.