Many have made comments to my blog or emailed me separately in regard to my blog about a recent bankruptcy appellate case that could potentially revolutionize loan modifications, forensic audits, short sales, deficiency judgments etc. I wanted to review the case with colleagues prior to discussing it further. Last evening, I met with prominent tax and bankruptcy attorneys. I traveled from the Giant Litter box (Las Vegas) to Palm Desert, California and another traveled from Phoenix to Palm Desert to discuss this case – it is that significant.
The case is In re Veal and it involved AHMSI and Wells Fargo. It was a Ninth Circuit Appellate panel (BAP). It is significant to note that the appellate panel consisted of judges from California (Riverside vicinage), Montana and Arizona. The case affects much more than just debtors in bankruptcy.
I will summarize the 46 page opinion and the impact that it may have.
Essentially, the first part of the decision indicated that since Wells Fargo could not prove that it had the original note; it did not have standing to enforce its right to foreclose upon the property. In bankruptcy, the creditors are prevented from any action against the person, but they can readily proceed against the property, IF they have a perfected security interest in the property. This is referred to as “relief from the automatic stay”. It is routinely granted because it is a right that a secured creditor has. In this case, since Wells could not prove that it had the original note, they did not have standing and the automatic stay remained in place and Wells could no proceed against either the debtor or the property!!
The second impact is potentially even greater!! The court appeared to rule that a lender can only proceed against the secured interest to the extent of its VALUE and not the amount owed. In other words, if a borrower owes $400,000 but the property is worth $200,000, this court is ruling that the lender can only seek to collect $200,000 under its secured interest. At this could put an end to deficiency issues.
We also discussed ways that a borrower can argue against the “forgiveness of debt” issue on a short sale. WOW, this could be huge….collective thought really stimulates great results.