Preference Actions - Ordinary Course of Business and New Value Defenses

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On February 10, 2010, the Bankruptcy Court for the Southern District of Florida issued its opinion in the case of Deborah C. Menotte, Trustee v. Oxyde Chemicals, Inc., __ B.R. ___, 2010 WL 554900 (Bkrtcy.S.D.Fla.). The case involved a attempt to avoid and recover an alleged preferential transfer and the creditor's alleged a defense of "ordinary course of business" or "new value." The transfer in issue was a check dated within 90 days before the filing for payment of an invoice dated a few months earlier.

Elements of Preference Avoidance

The Court noted that the U.S. Supreme Court has explained that the purpose for the trustee's power to avoid preferences is to "discourage creditors from 'racing to the courthouse to dismember the debtor during bankruptcy,' and to facilitate an equality of distribution among creditors. The Court reviewed that section 547 (b) sets forth five elements to allow an avoidance of a preference.

1. Payment was to or for the benefit of a creditor
2. On account of an antecedent debt
3. Made while the debtor was insolvent
4. Made within 90 days before the bankruptcy petition date (one year for insider)
5. Effective in allowing the creditor to receive more than it would have received in a chapter 7 distribution

Ordinary Course of Business Defense

The Court found that the five elements of a preference were met and that the payment could avoided unless one of the exceptions set forth in section 547 (c) applied. The creditor argued that the section 547 (c)(2)(A) "ordinary course of business" exception applied. The elements of this exception are that the (i) debt was incurred in the ordinary course of business or financial affairs of the debtor and creditor and (ii) the payment was made in the ordinary course of business of the debtor and creditor. The trustee argued that this exception did not apply as the payment was made later than payments made during the pre-ninety day period and was made in response to unusual collection activity.

The Court cited the 11th Circuit case of In re Globe Mfg. Corp., 567 F.3d 1291 (11th Cir. 2009) and explained that the "ordinary course inquiry is subjective" and requires the court to consider whether the transfer was ordinary in relation to other business dealings between the creditor and debtor. It further stated that courts consider the following in making this determination:

• Prior course of dealings between the parties during the pre-preference period - Transactions during the pre-preference are examined to determine the parties' ordinary course of business and then transactions occurring during the preference period are compared to the parties' pre-preference transaction to determine if they were made in a similar manner. Although courts have various mathematical tools available to make these analyses, there is no single formula the court must use and most tend to use the "range of terms that define the transaction, rather than considering only averages." The payment need not be rigidly similar to each past transaction, but need only demonstrate "some consistency with other business transaction."

• Amount of the payments

• Timing of the Payments - Untimely payments are more likely to be considered outside the ordinary course of business. The operative date is the date of delivery of the check and not the date the check is issued, but dishonored checks are considered delivered on the date the check is actually honored by the drawee bank.

• Circumstances surrounding the payments - Otherwise "normal" payments which result from "unusual debt collection or payment practices" are not protected. Marathon Oil Co. v. Flatau (In re Craig Oil Co.), 785 F.2d 1563, 1566 (11th Cir. 1986). In making this determination (as with aging of payments), courts "normally conduct a comparative analysis between the preference and pre-preference periods." The analysis in on a case by case basis and legal action or coercion is not required.

Although the Court found that the payment was within the range of the debtor's ordinary course of late payments, it found that the circumstances surrounding the payment indicated "unusual debt collection" and therefore took it outside of the ordinary course of business. In making this finding, the Court compared the emails between the parties during the preference and pre-preference periods and found that warning of imposition of prepaid credit status/request for next day payment and a placement of a "credit hold"(which triggered the payment herein) were substantively different types of collection activity.

New Value Defense

The Court also rejected the creditor's attempt to use the section 547 (c)(4) "new value" exception as the other credit that was extended was before and not after the challenged preference payment. The section 547 (c)(4) new value defense requires that (1) the creditor extend new value after receiving the challenged payments, 2. the new value must be unsecured, and 3. the new value must remain unpaid.

Prejudgment Interest

The Court found that pursuant to the 11th Circuit's decision in In re Globe Mfg. Corp., courts have the discretion to award prejudgment interest as a matter of federal common law, but that its award must be "equitable." As the Court found that the creditor's ordinary course of business defense was colorable although ultimately unpersuasive and that the creditor did not otherwise delay the proceedings, it declined to exercise its discretion to award prejudgment interest.

Mortgage Servicer Qualifies to Move for Stay Relief as Party in Interest and as Real Party in Interest

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com


The decision in In re Woodberry, ___ B.R. ___, 2008 WL 677810 (Bkrtcy.D.S.C.)(Duncan, J.) illustrated the issue whether the mortgage servicer qualified to file a motion for stay relief as a "party in interest" and "real party interest." Under the facts of this case, the court held that it was a "party in interest" and "real party in interest" and allowed it to pursue its motion for stay relief.

In this case, there was an original "Lender" and MERS as "Mortgagee". The allonge to the mortgage note contained a blank endorsement. The court explained that an "allonge" is a paper annexed to a negotiable instrument for endorsement too numerous or lengthy to be contained in the original. There was no recorded assignment of the mortgage prior to the filing of the motion. Wells Fargo Bank NA d/b/a America's Servicing Co. ("ASC") was the servicer for US Bank NA as trustee pursuant to a Securitization Sub Servicing Agreement (the "Sub Servicing Agreement"). US Bank NA was trustee for Structured Asset Investment Loan Trust Mortgage Pass-Through Certificates, Series 2005-8.

ASC filed a motion for stay relief in this chapter 7 case. The debtor objected to ASC's motion for stay relief although she did not dispute to being behind in her mortgage payments. The debtor argued that ASC is not the proper "party in interest." ASC offered testimony that it was in possession of the original note and that the Sub Servicing Agreement provides that it would be the custodian for US Bank NA and that its holds the documents in trust for US Bank NA. The Sub Servicing Agreement provides that the servicer collects payments due under the terms of the note and mortgage and will foreclose on the property in the event of a default. The Sub Servicing Agreement is filed with the SEC and is available on the SEC's website. MERS as nominee assigned the mortgage to US Bank NA as Trustee for the Structured Asset Investment Loan Trust Mortgage Pass-Through Certificates, Series 2005-8.

The Debtor argued that for the servicer ASC to be the proper "party in interest", it must hold both the note and be either the mortgagee or the assignee of the mortgage. The court found that applicable state law does not require both possession of the note and an assignment of the mortgage to prove ownership. The court found that when a negotiable note payable to order is indorsed by the payee, the note and its incidents pass in the commercial world by delivery. Dearman v. Trimmier, 26 S.C. 507, 2 S.E. 501. The law in the involved state does not require that assignment of mortgages be recorded. The court found that the allonge to the noted converted the note to a bearer instrument and as such, the ownership passes with delivery of the instrument and proof of ownership can be made by possession. The court noted that possession of a bearer instrument is prima facie evidence of ownership. The fact that the note is held in trust for another is not of significance. It is interesting to note that ASC apparently did not enter the original note into evidence, but only had a "default litigation specialist" and records custodian testify that she determined ownership of the involved note and mortgage by tracking it a computer screen of a computer based system.

The court found that the servicer ASC has standing as a "party interest" to seek relief from the stay as it had provided sufficient evidence as to ownership of the note and mortgage. The court stated that since ASC was in possession of the note and mortgage at the time it filed the motion for stay relief, it had made a prima facie case that it owned the note and mortgage albeit as custodian for the Trust.

The court noted that the Bankruptcy Code does not define "party in interest" but uses the term often. The term is not restricted to creditors and the determination of the status of a party in interest under a motion for stay relief under section 362(d) is made on a case by case basis with reference to the interest asserted and how the interest if affected by the automatic stay.

The court found that the servicer ASC had a contractual relationship with the US Bank NA and other parties as set forth in the Sub Servicing Agreement. The court noted that the transfer of the note to ASC by endorsement in blank vested it with the right of the transferor and that the owner or holder of a note has a right to payment. The court found that ASC is a "creditor" for purposes of the application of the term "party in interest."

But the court further analyzed that Fed.R.Bankr.P. 7017 applies to contested matters pursuant to Fed.R.Bankr.P. 9014(d). Fed.R.Bankr.P. adopts Fed.R.Civ.P. 17 which provides that "[e]very action shall be prosecuted in the name of the real party in interest". The term real party interest is on who under the applicable substantive law has the legal right which is sought to be enforced or is the party entitled to bring suit." In re Comcoach Corp., 698 F.2d 571, 573 (2nd Cir. 1983). The court found that the general principal of Comcoach is that "party in interest standing does not arise if a party seeks to assert some right that is purely derivative of another party's right in the bankruptcy proceeding." The court found that under the state's law, the plaintiff in a mortgage foreclosure suit should be the real, beneficial owner of the mortgage debtor." 27 S.C. Juris Mortgage Section 107. Despite this general proposition, the court noted that it appears that foreclosures and motions for relief from the stay are often brought by parties other than the beneficial owner.

The court found that other jurisdictions tend to favor the view that a loan servicer is a "party in interest" and a "real party in interest". "The general rule is that a mortgage servicer has standing by virtue of its pecuniary interest in collecting payments under the terms of the note and mortgage." See In re Tainan, 48 B.R. 205 (Bankr.E.D.PA. 1985), In re O'Dell, 268 B.R. 607, 618 (N.D.Ala.2001)(A servicer was allowed to defend a proof of claim on behalf of its principal). aff'd, 305 F.3d 1297, 1302 (11th Cir.2002)(A servicer is a party in interest in proceeding involving loans which it services"). The court noted that is seems to be the better view that a loan servicer, with a contractual duty to collect payments and foreclose a mortgage has standing to move from relief from stay in the Bankruptcy Court.

Thoughts on Saving Your Miami or Broward Home from Foreclosure

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing chapter 13 and chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com




It is reported in the media every day that many Miami and Broward homeowners are "upside down" or "underwater" with their homes. That is, they owe more on their mortgages than the value of the homes. Many homeowners financed their home on an "80-20" basis. That is, they borrowed 100% of the value of the home, structuring 80% of the borrowed sum into a first priority mortgage and 20% of the borrowed sum into a second priority mortgage. In many or most cases, the value of the home has fallen at least 20-30% at present and some experts expect a further substantial decline.

What is the Miami or Broward homeowner to do? The recently passed $700 billion bailout package did not include a proposed bankruptcy code amendment that would have given the bankruptcy courts the power to modify and reduce mortgages on principal residences and reduce them to the fair market value of the home that serves as collateral. It also appears that the various well publicized federal programs have not been widely used for a variety of reasons. Many homeowners also report that they get the "runaround" when they attempt to contact their mortgage company to arrange a modification or workout. Many homeowners find that they are unable to modify their first priority mortgage due to the last of cooperation by the second priority mortgage holder.

The distressed homeowner should be aware that Chapter 13 bankruptcy does offers various possible opportunities. First, if the value of the home has fallen so substantially that there is no equity to secure the second priority mortgage, this second mortgage may be "avoided" and deemed an unsecured claim. Unsecured claims are usually only paid a percentage on the dollar in Chapter 13, typically about 5 - 20%, and the unpaid balance discharged. This would present the homeowner the opportunity to negotiate a modification of the first mortgage without the necessity of placating the second priority mortgage holder.

Another benefit of filing for Chapter 13 bankruptcy is that it may present an opportunity to get the attention of the first priority mortgage company and negotiate a modification of the mortgage, including a reduction of the interest rate or principal balance. It may also present an opportunity to stop the foreclosure and give one enough time to review and obtain relief under any of the new federal programs being put into effect for distressed homeowners.

Unliquidated Personal Injury Claim Not Exempt in Missouri

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com


The Bankruptcy Court in the case of In re Mahony, Case No. 06-60347 (WD Missouri 2007)(Federman, J.) held that contingent and unliquidated personal injury claims are not exempt in bankruptcy in Missiouri. Property exempt must be pursuant to statute. State case law that contingent claims cannot be garnished or assigned and are exempt from attachment and execution is not sufficient. In re Benn, 491 F.3d 811 (8th Cir. 2007). Overruled In re Mitchell, 73 B.R. 93 (Bankr. E.D. Mo. 1987).

Postjudgment Interest Due on Prejudgment Interest

Quality Engineered Installation, Inc. v. Higley S., Inc., 670 So.2d 929 (Fla. 1996) resolved a conflict among the Florida District Courts of Appeal and held that an award of prejudgment interest merges into and becomes part of a single total sum adjudged to be due and owing and as such the amount awarded for prejudgment interest, like all other components of the judgment, automatically bears interest as provided by section 55.03, Florida Statutes. The Florida Third District Court of Appeals, in Westport Recovery Corp. vs. Batista, 32 Fla.L.Weekly D2173 (Fla. 3rd. DCA 2007) applied the Quality Engineered decision and held that a writ of execution on a judgment had not been fully paid as the Sheriff had not collected postjudgment interest due on the awarded prejudgment interest. The Third District Court of Appeal also held that the Quality Engineered decision applies retroactively.

Property Revested in Chapter 11 Debtor Even Though Not Schedulede

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com


The Court in the case of James P. Driscoll, Inc., et al. v. Theodore B. Gould, 32 FLW D2467 (3rd DCA 2007) dealt with a  judgment that was not listed in chapter 11 schedules. The Defendant claimed that the post-confirmation debtor did not have standing as the judgment was not listed in the bankruptcy schedules.  Parker v. Wendy's Int'l, Inc. 365 F.3d 1268, (11th Cir. 2004). There is an independent avenue under which property may revest in the debtor at conclusion of a Chapter 11 proceeding, which is the express terms and conditions of the confirmed plan of reorganization. See In re Coastline Care, Inc., 299 B.R. 373, (Bankr. EDNC 2003). Here the plan released and revested the right to pursue the judgment to the debtor upon consummation and closure of the bankruptcy case. See In re Coastline Care, Inc. 299 B.R. at 377-78.

MERS Kansas Supreme Court

Today's New York Times refers to a recent decision by the Supreme Court of Kansas in the case of Landmark National Bank v. Kesler, et al., No. 98,489 (Kansas 2009) involving the controversial organization known as "MERS" - the Mortgage Electronic Registration Systems, Inc. MERS was established by large lenders as a quasi-parallel recording recording system to facilitate electronic trading and tracking of mortgages.

The Kesler case involved a routine residential foreclosure by the holder of the first mortgagee, Landmark National Bank. Landmark included as defendant the homeowner and Millennia Mortgage Corp. who per the public records held the mortgage. Sovereign Bank and MERS as its nominee were not included as defendants and subsequently claimed to be the assignees of Millennia.

The court stated that it would base its decision on the true roles of the parties and not the mere "nomenclature" used in the mortgage document. The court found that the form of the mortgage designated MERS as the mortgagee but not the lender.  

The court found that MERS had no right to the underlying debt repayment secured by the mortgage and did not even act as the servicing agent. The court found that MERS was only the agent of the lender.

Mortgage Foreclosure and Discharge of Indebtedness Income

A mortgage foreclosure may also have federal income tax consequences. One issue is "discharge of indebtedness income." This can be understood as the IRS's attempt to tax you on money you were loaned but are not going to repay. The mortgage lender may be required to report the amount of the cancelled debt to you and the IRS on a Form 1099-C, Cancellation of Debt. Fortunately though there are various exceptions to this rule and even a recently added exception.

One of the exceptions to discharge of indebtedness income is if the mortgage debt is discharged in bankruptcy, including under chapter 7 or under chapter 13. In order to take advantage of this exception, it may be important to file for bankruptcy before the foreclosure sale.

Another exception to discharge of indebtedness income is the insolvency exception. That means if you are insolvent when the debt is cancelled, some or all of the cancelled debt may not be taxable to you. Insolvency generally means that your total debts are more than the fair market value of your total assets.

The new exception if the Mortgage Forgiveness Debt Relief Act of 2007 which generally allows people to exclude certain discharge of indebtedness from the foreclosure or mortgage restructuring on their principal residence. This new provision applies to debt forgiven in 2007, 2008 or 2009. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately).

An applicable form is Form 982, "Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment).

Florida's Third DCA Allows MERS Standing to Foreclose

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com


In an opinion filed on March 14, 2007, Florida's Third District Court of Appeals held that MERS does have standing to sue in foreclosure. MERS v. Oscar Revoredo, et al., ___ FLW ____ (3rd DCA. Case No. 3D05-2572 2007). The Court adopted the reasoning of MERS, Inc. v. Azize, 32 FLW D546 (2nd DCA 2007) which involved a very similar procedural situation and the identical question of law.

The trial court struck MERS's pleadings and ruled that it did not have standing to proceed as it acted essentially as a collection and litigation agent for the actual owner of the notes and mortgages.

The Court of Appeals noted that the involved problem "arises from the difficulty of attempting to shoehorn a modern innovative instrument of commerce into nomenclature and legal categories which stem essentially from medieval English land law." The Court held that MERS did not lack the standing to foreclose and it clarified that that in accordance with its usual practice, MERS was the holder of the note. The Court stated that it did not make a difference that MERS was not the owner of the mortgage as Fla. R. Civ. P. 1.210(a) allows an action to be prosecuted in the name of authorized persons without joining the party for whose benefit the action is brought.

The Court further held that as "no substantive rights, obligations or defenses are affected by the use of the MERS device, there is no reason why mere form should overcome the salutatory substance of permitting the use of this commercially effective means of business."

"Projected Disposable Income" of Above-Median Income Chapter 13 Debtor Based on Mechanical Test

Miami Personal Bankruptcy Lawyer Jordan E. Bublick has over 25 years of experience in filing Chapter 13 and Chapter 7 bankruptcy cases. His office is centrally located in Miami at 1221 Brickell Avenue, 9th Fl., Miami and may be reached at (305) 891-4055.  www.bublicklaw.com



The court in In re Petro, ___ B.R. ___, 2008 WL 204670 (Bkrtcy.M.D.Tenn. January 23, 2008)(Paine, J.) was faced with the issue whether the calculation of the over-median income debtors' projected disposable income is to be done by the strict mathematical formula set added by BAPCPA or whether schedule I and J can be referred to in setting disposable income. The debtors' Form 22C showed a negative amount but the debtors' schedules I and J showed a positive net monthly income of $1,386.33. One reason for the discrepancy was that the debtor wife had recently obtained employment. The chapter 13 trustee argued that projected disposable income is a forward-looking concept and that the disposable income figure determined pursuant to section 1325(b)(2) is merely the starting point in determining the debtor's projected disposable income. The debtors contended that section 1325 mandates the use of the new mathematical formula to calculate the debtors' projected disposable income.

The court held that "projected disposable income" for an over-median income chapter 13 debtor is not a forward-looking concept, but is simply the debtor's disposable income projected over the debtor's applicable commitment period. 11 U.S.C. section 1325(b)(1)(B), (b)(2). The court further held that the "projected disposable income" for an over-median income debtor is based on the "means test" calculation and not on the expenses listed in schedule J. The court noted that just as CMI may not represent a debtor's actual income, the expenses set forth in section 707(b)(2)(A) are not derived from a debtor's actual expenses but are based in large part on predetermined standards. The court agreed with the courts, including the court in In re Musselman, ___ B.R. ___, 2007 W 4357161 (Bankr.E.D.N.C., Nov. 30, 2007) and In re Kolb, 366 B.R. 802, (Bankr.S.D.Ohio 2007) and held that the term "projected disposable income" as used in section 1325(b)(1)(B) and the term "disposable income" as defined in section 1325(b)(2) have the same meaning as to above-median income debtor. The computation of "disposable income" is simply projected over the time of the applicable commitment period. The court stated that although the adoption of such a mechanical test may lead to impractical results, that is was beyond the province of the court to rescue Congress from its drafting errors.

The court also rejected the trustee's argument that the debtors' plan was not in good faith as that pursuant to the debtors' chapter 13 plan payment and the net income per the debtors' schedule I and J, the debtors were proposing to retain a substantial amount of net income during the plan. The court rejected the trustee's argument and found that if the debtor's plan met BAPCPA's "projected disposable income" requirement, he could not be required to contribute any more to pay unsecured creditors on a theory that a failure to do so would not be in "good faith."