North Carolina Bankruptcy Court Takes Borrowers Side in Debate with Lender Over Loan Modification

510 Glenwood in Raleigh involve in recent Chapter 11 bankruptcy

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A new North Carolina bankruptcy ruling in the Eastern District dealt a hand slap to a creditor and may change how debtors are treated by those they owe during the bankruptcy process. Today we'll take a look at the Burcam Capital II case and explain in layman's terms what it means for borrowers in future cases.

Background Information

Burcam Capital owns commercial real estate that rents out retail and office space. That real estate is collateral on two loans serviced by CW Capital Asset Management. These are commercial loans, not individual loans. Back in 2011, Burcam could no longer afford to make payments on their loans because of a lull in the market. CW Capital began foreclosure proceedings and Burcam filed Chapter 11 business bankruptcy to stall the foreclosure and give it time to reorganize its debts.

This is where it gets tricky. The loans were not made by CW Capital, but they serviced them. This is much like with a federal student loan where you borrow from the government but another company interacts with you, collects payments and pursues collections if you default, but does so on behalf of the government and is paid for this service. This was the relationship of CW Capital with Burcam – not a lender but a loan servicer.

Accusations Against the Loan Servicer

Burcam filed a complaint (called an adversary proceeding) with the bankruptcy court alleging that the loan servicer, CW Capital, was stepping outside of the boundaries of their relationship with both Burcam and the company that actually issued the loans (Bank of America) to try and take advantage to profit off of Burcam's financial hardship. Burcam's accusations were that CW Capital was scheming to buy the real estate at the foreclosure sale far below the market price which would damage both Burcam and the lender.

Burcam said CW Capital had obtained a drastically low appraisal of the commercial property to influence the lender into letting them pick up the property for a song by basically convincing them the loan was largely worthless. The complaint against CW Capital also said that every effort Burcam made to modify the loan or work out a financial solution was rebuffed because they were scheming to profit rather than acting in good faith.

CW Capital purchased some of the claims of Burcam's unsecured creditors so that they could try and block approval of Burcam's Chapter 11 bankruptcy plan. Burcam told the court that this move by CW Capital hurt not only Burcam but all of the other creditors in the case because if forced into foreclosure rather than getting a chance to pay their debts, everyone except for CW Capital would lose out. In short, CW Capital did everything they could to block reasonable efforts by Burcam to pay their debt and retain their property.

Tenant protest at CW Capital over shady activities

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What the Court Did

CW Capital was using the claims it purchased, in essence, to tank Burcam's reorganization plan. Burcam's attorneys proposed a change to how creditors were classified to put CW Capital's purchased claims in a category of their own so that they couldn't unduly influence the whole Chapter 11 plan. The court said this was equitable because it allowed Burcam to pay those creditors first that they needed to keep their business running and CW Capital's claims last since they were purchased dubiously.

Burcam was also seeking a cram down on interest rates to get the rates on the two loans secure by the property in line with market rates. They brought in an expert that said 3.75%-4.25% was reasonable while the creditor's expert said the rate should be double that at 8.5%. The court established a cram down rate of 5% based on the debtor's appraisal of the property value and did not rely on the intentionally low appraisal CW Capital had obtained.

The Complaint Against CW Capital

The court approved Burcam's Chapter 11 plan despite CW Capital's efforts to the contrary and then went a step further and ruled that Burcam's complaint against CW could proceed. The court found that the allegations could be proof of breach of the covenant of fair dealing which does not have to be spelled out in a loan agreement as it is implied as a condition of the transaction.

The court also said that, if true, CW Capital could be guilty of deceptive trade practices for stepping outside the boundaries of the relationship. Not only that, but the court said the actual lender – Bank of America – wasn't off the hook either because CW Capital was acting as its designated representative while it engaged in the questionable activities. CW Capital's motion to dismiss the complaint was rejected.

What This Means

Once the official ruling in the complaint is argued and a judgment issued, we'll revisit this, but for now, what it means is that loan servicers can be called on the carpet in North Carolina bankruptcy court for shady tactics. If you are deep in debt and are looking to modify financial agreements, you should keep careful notes about how your creditors treat you during this process.

In North Carolina, it's legal to record a phone call that you are party to, so it may be a good idea to record negotiations. If the lender or loan servicer is in another state, double check their state laws to make sure it's legal. Keep notes of who you talk to, the date you spoke, what was discussed and any follow up. If you feel you are being negotiated with in bad faith, this is something to mention to your bankruptcy attorney when you come in for your initial bankruptcy consultation.

If you're deep in debt and need a hand, contact the law offices of John T Orcutt to find out more about filing Chapter 7, Chapter 13 or Chapter 11 in North Carolina.