May - Bankruptcy

Bankruptcy

            The final major topic of the past program year was the law and practice of bankruptcy. Richard F. Ruby, my Of Counsel colleague and fellow member of the Indiana, Michigan, and Illinois bars, was the expert guest, having had decades of professional experience in personal bankruptcies in all three states. 

                        The main points of our discussion concerned personal bankruptcies. However, even those listeners who heard the live broadcast will doubtless be interested to read the attached information about such bankruptcies from the Indiana Bankruptcy Law & Information site at LegalConsumer.com,    
http://www.legalconsumer.com/bankruptcy/bankruptcy-law.com; also at

http://www.facebook.com/notes/sawyier-williams-llp/bankruptcy-helps/232258476799458.

            On the more complex subject of business bankruptcies, which Richard and I merely touched on, listeners may  also be interested to read the attached article, written by two eminent business bankruptcy practitioners, Jonathan Friedland, James H.M. Sprayregen, and published by the Illinois Institute of Continuing legal Education. (concerning Chapter 11 bankruptcy proceedings.) See links below:

http://www.facebook.com/notes/sawyier-williams-llp/via-iicle-part-1-of-3-chapter-10-on-business-bankruptcies/232286686796637;

http://www.facebook.com/notes/sawyier-williams-llp/via-iicle-part-2-of-business-bankruptcy/232287233463249; and

http://www.facebook.com/notes/sawyier-williams-llp/via-iicle-part-3-of-business-bankruptcy/232287496796556.

            In closing, I would like to call the audience’s attention to something that Richard and I emphasized throughout the May show: the fact that the right of honest individual debtors to discharge in bankruptcy of all except a few specified kinds of debts has long been the law of this country. They are only required to pay what they have or reasonably can over a period of a few years (in the case of a Chapter 13 plan), and only after allowing for various major exemption such as the unlimited exemption for qualified retirement plans and the exemption of up to $1 MM for IRAs. There is no longer any debtor’s prison in this country. Rather, the “free start” provided by a bankruptcy discharge, like the limitations of personal liability for businesses conducted in limited liability form enables and encourages risk-taking in a dynamic capitalist society. There are many millionaires who were formerly bankrupts.

            I would also like to call the audience’s attention to the two additional attached articles about the United States Government’s extremely controversial role in recently organizing and financing the purchase of the Chrysler Company’s assets from its bankruptcy estate by a new entity primarily owned by the United Auto Workers (an unsecured creditor). This astonishing transaction, in apparent violation of the long-established “absolute priority rule” of bankruptcy law favoring secured creditors over unsecured creditors, may have done more indirect harm to the market for secured lending everywhere in this country than the good that it did for Chrysler’s workers and their families. In the end, in this author’s opinion, good financial and estate planning involves not only an adequate knowledge of the law but also a respect for the law.

The Real Cost of the Auto Bailouts:

http://www.facebook.com/notes/sawyier-williams-llp/the-real-cost-of-the-auto-bailouts/232263433465629;

The Wall Street Journal

Hoosiers vs. Crony Capitalism

How my state took on the Obama bailout machine and restored the rule of law.

By MITCH DANIELS

http://www.facebook.com/notes/sawyier-williams-llp/wall-street-journal-article/232270063464966.

April - Reverse Mortgages

Reverse Mortgages

            The April program dealt with another legal topic of widespread interest these days, reverse mortgages. The guest speaker was Florian Steciuch, a reverse mortgage consultant. 

            Because of all the common misconceptions about reverse mortgages, I have taken the liberty of including in this blog two excellent recent summaries of this now-standardized financial product by the U.S. Department of Housing and Urban Development, “Frequently Asked Questions about HUD’s Reverse Mortgages,” and “FHA Reverse Mortgages (HECMs) for Consumers.(See links below.)

            I can only add to those discussions the fact that recently the two largest reverse mortgage lenders, Bank of America and Wells Fargo, announced their withdrawal from this product market. Also, the FHA recently announced new lower regional valuation limits for any residential properties (no matter how individually valuable) for purposes of applying the three-part test of (a) allowable fraction  of the applicable valuation limit, (b) borrower’s age at loan initiation, and (c) prevailing interest rate at loan initiation in order to determine the maximum permissible amount of a reverse mortgage loan. 

http://www.makinghomeaffordable.gov/programs/Documents/MHA%20Brochure.pdf

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/hecm/hecmabou

March - Mortgage Foreclosures

Mortgage Foreclosures, Mortgage Modification, and Short Sales

            The March program concerned mortgage foreclosures and mortgage modifications, short sales, and deeds in lieu of foreclosure, as possible means of avoiding them. 

            In Indiana, mortgage foreclosures are initiated by court proceedings; there are no nonjudicial “Power of Sale” foreclosures as there are in many other states. Thus, the mortgagor debtors have a variety of important procedural rights. However, if no defense is offered, these proceedings can move very quickly, with a decree of sale being issued only three months after the filing of the complaint, and all rights of redemption and possession expiring at the time of the resulting sheriff’s sale. 

            As noted in previous programs in this series, the pervasive sloppy procedures involved in the origination, “bundling”, and securitizing of millions of single-family residential mortgages during the recently collapsed housing boom may well have created meritorious potential defenses to mortgage foreclosures in a huge number of cases. But few distressed homeowners have the knowledge or wherewithal to raise such defenses. 

            Instead, many Indiana homeowners now benefit from the recently enacted statute governing “Foreclosure Prevention Agreements for Residential Mortgages.” This statute requires among other things presuit notice by mortgage servicers of mortgagors’ eligibility for (free) counseling by foreclosure prevention counselors who are part of or have been trained or certified by the Indiana Foreclosure Prevention Network. The statute also requires the mortgage servicers to participate in settlement conferences if requested by the mortgagors. 

            With the array of mortgage modification possibilities now available to properly advised homeowners and the availability of short sales and deeds in lieu of foreclosure from lenders whose mortgages are FNMA-guaranteed (so that purchases from those lenders can be made whole by the federal government) in cases where mortgage modifications do not provide sufficient relief, there is no longer any reason for financially distressed Indiana homeowners to regard bankruptcy as the only alternative to foreclosure. Substantial help is definitely now available through the Indiana Foreclosure Prevention Network. 

            I should also emphasize that the short sales and deeds in lieu here referred to are ordinarily “nonrecourse,” i.e., without continued personal liability of the mortgagors for possible deficiency judgments. 

            In addition, under federal legislation enacted in October 2008, homeowners whose mortgage debt is thus partially or entirely forgiven may claim an exemption from the ordinary requirement that they recognize the forgiven amount as “forgiveness of indebtedness income,” simply by filing I.R.S. Form 982.

February - Statute of Frauds

“Get It In Writing”: The Statute of Frauds

            The February program dealt generally with the importance of putting important legal agreements into writing. In addition to thus ensuring or at least assisting their enforceability, committing them to written form helps to avoid unnecessary later disputes and encourages the parties at the time of the agreements to think through their key terms. Indeed, putting agreements (and other important statements of intention) into writing is an essential part of planning one’s business affairs - - a recurrent theme of all these programs.

            As everyone knows, the Statute of Frauds requires that certain kinds of agreements be made in writing or at least confirmed in writing by a separate memorandum, and signed by the party to be charged, in order to be legally enforceable. In Indiana, any lease of real estate for a term of more than three years (one year in most other states) is subject to this requirement. So are any contracts for the sale of real estate (including brokerage commissions), guaranties, and, in general, any agreements not capable of being entirely performed within a year from the date that they were made. 

            Under Indiana’s version of the Uniform Commercial Code, most contracts for the sale of goods for the price of $500 or more or for the lease of goods for total payments of $1,000 or more (excluding options to renew or purchase) must also be in writing to be enforceable. 

            There are important exceptions to these requirements. For example, almost all contracts for services are not covered and so do not have to be in writing in order to be enforceable. Real estate leases of less than three years are also not covered, and likewise sales of securities. Fraud and “equitable estoppel,” if proven, can prevent the application of the statutory bar (except in the case of business credit agreements), as can full performance of an agreement by one party or even partial performance (in limited circumstances).

            However, to repeat, it would be extremely unwise to rely upon these exceptions unless strictly necessary. Oral agreements are inherently less definite than written agreements and often so indefinite as to be unenforceable for that reason alone.  They are never to be favored as part of proper business or estate planning. 

            Equally importantly, when a written agreement is involved, both parties to it should understand and pay close attention to its terms. Under the Parol Evidence Rule and the closely related “four corners of the document” rule, oral statements not set forth in an agreement may only be allowed as evidence to alter its terms if the agreement itself is ambiguous. Thus, parties to written agreements should never rely on the courts or various consumer protection agencies to provide relief from those agreements because they are “unfair” in some general sense though not illegal. 

            One of the basic principles of our contract-based society is that most written contracts will be enforced according to their terms, so even members of the general public should try to pay close attention to them. And, in regard to contracts that must be preformed on time, members of the public should be sure to include a “Time Is Of The Essence” and, in many cases, an adequate “Liquidated Damages” provision. 

            Again, please feel free to send any questions that you may have to my email address at thelakeshorelawyer@lakeshoreptv.com, and I’ll endeavor to answer them on a no-names basis (but not as your attorney unless subsequently agreed) on my blog, thelakeshorelawyer.blogspot.com.

January - Limited Liability Entities

Limited Liability Entities

            The first program of the new year dealt with limited liability entities.  

            I first emphasized that, contrary to common belief, these entities - - including corporations, limited liability companies, limited partnership, and limited liability partnerships, among others - - do not confer complete immunity from personal liability for their owners, officers, directors, or other principals. One obvious exception to such immunity is the long-established principle of personal liability for one’s own acts of negligence or other tortious conduct. Thus, in Indiana, even the ordinary nonboard members of a nonprofit corporation may become personally liable for their actions on behalf of such a corporation, and this is also true for the members, employees, or other agents of a limited liability company. (In Illinois, by contrast, ordinary members of not-for-profit corporations are immune for the liabilities of such corporations, and board members or officers who serve without compensation may only be liable for their acts or omissions involving “willful or wanton conduct” if the corporations are tax-exempt under I.R.C. Section 501 (c). However, the potential personal liability of the owners, officers, directors, or other principals of for-profit Illinois business entities are the same as for those formed in Indiana.)

            Other less obvious exceptions to immunity include, especially when they occur together, the inadequate capitalization of the entity in question, the failure to follow the proper forms of actions by the entity as opposed to the persons owning or running it, and the commingling of entity and personal funds. In general, if the owners or operators of a limited liability entity do not bother to treat it as separate from themselves before a liability of that entity arises, then its liability may well attach to them even apart from their unavoidable liability for their own wrongful actions.

            With this said, limited liability entities are invaluably protective against general business debts unless they are personally guaranteed and against almost all sorts of liability for the actions or omissions of others (so-called “vicarious” liability). They are so relatively easy and inexpensive to form and operate in Indiana that it is sad to think of all the people who do not take advantage of them but, instead, engage in business ventures individually as “sole proprietors” or, far worse, general partners.

            After touching on certain technical reasons why Indiana limited partnerships are inferior to Indiana limited liability companies (and limited liability partnerships) for estate planning and asset protection purposes, I next pointed out that certain other states’ limited liability entities such as those formed in Nevada  are superior on both counts to any of those formed in Indiana. And, Indiana law makes it relatively easy and inexpensive for such “foreign” entities to qualify to do business in Indiana. Thus, for example, whereas the creditor of a member of an Indiana limited liability company may foreclose upon that members’ interest and acquire it by forced sale, the Nevada statute specifies that the “exclusive remedy” of any creditor of a member of a Nevada limited liability company is a “charging order” upon that member’s share of any future distributions by that entity: nothing more. 

            As I had noted in a previous program, Nevada law also allows for the creation of irrevocable asset protection trusts under which the persons establishing those trusts may receive or at least potentially be one the beneficiary of discretionary distributions from those trusts without exposing the trust assets themselves to the claims of creditors of such beneficiaries. Indiana law, which follows the traditional “self-settled trust” doctrine, does not now provide for such trusts although there are pending proposals to authorize them.

            The January program concluded with my usual invitation to the listeners to submit any legal questions that they might have about limited liability entities or any of the previous months’ topics of discussion, to my email address, which is thelakeshorelawyer@lakeshoreptv.com. Of course, neither those questions nor my answers to them establish a client-attorney relationship.