No matter the legislative outcome, the U.S. Supreme Court will be asked to decide whether bankruptcy courts can "cram down" the value of a mortgage owed by a debtor in a case brought under Chapter 13 of the Bankruptcy Code.
Plaintiffs' lawyers in the first federal appellate court case won by lenders have announced their intention to petition the high court to take the case, a development that is cheered by a coalition of lenders on the opposite side of the question.
"I would rely solely on a legislative solution," said Robert E. McKew, assistant general counsel for the American Financial Services Association, the Washington-based trade association of non-bank lenders. "One thing I've learned is that the more certain you are that the Code covers something, the more likely it is that a court somewhere will add to it." McKew also is counsel to the National Consumer Bankruptcy Coalition, a group of lenders seeking reform of bankruptcy laws.
Dean S. Cooper, associate general counsel for the Federal Home Loan Mortgage Corporation, said he strongly favored a review by the Supreme Court. Freddie Mac had hoped to bring a case it had lost in the 2d Circuit Court of Appeals to the Supreme Court but, Cooper said, the debtors couldn't meet the reorganization plan and the case is now moot.
Last month, the 5th Circuit Court of Appeals in New Orleans became the first federal appellate court to rule in favor of lenders in a case, Nobleman v. American Savings Bank. In that case, the debtors sought to have their mortgage loan divided into a secured and unsecured portion and then be relieved of the burden of paying off the unsecured portion. In addition to the 2d Circuit, the 3d, 9th and 10th circuits had ruled in favor of the debtors.
Meanwhile, Congress is being asked to pass legislation granting the lenders their way on the cramdown issue.. The Senate has passed a comprehensive bankruptcy bill (S. 1985) that prohibits cramdowns. It is before the House Judiciary Committee along with a narrower bill (H.R. 5321) that would also prohibit cramdowns.
The lenders' coalition is working with committee staff to develop a package that can be acted upon prior to Congress' scheduled adjournment Oct. 2.
The legislation deals only with future cases whereas a Supreme Court decision in favor of the lenders would reverse the cases that went the other way. (See The Mortgage Marketplace, May 18.)