Leveraging Meritorious Arguments Against Prevailing Law To Reach Settlement

At Jacobs PC, our focus is on achieving the best results for our clients in the most efficient way possible. Settlement with the adversary is generally the best way of reaching that goal.

Having leverage against the adversary is critical to reaching a proper settlement.  An adversary believing it can achieve its goals through the courts is one of the greatest obstacles to reaching a balanced settlement.

However, after a deep dive into the law and its application to the facts, the black letter law often disintegrates and the playfield between the client and its adversary is leveled.  Commonly, the prevailing assumption of what the law is can be overturned based on meritorious arguments applying binding and persuasive authority which support the opposite conclusion. 

An adversary will be faced with uncertainty in its ability to use the strong arm of the court when the black letter law stops appearing so black and white.  Even if the lower court renders a verdict in the adversary’s favor, that verdict can be appealed two times, or even three times in the bankruptcy context.  Popping the bubble of an adversary’s counsel’s assumptions can create the leverage necessary to settle the dispute and move on.

Nowhere does this dynamic play out more often than in the bankruptcy context, where courts and attorneys must grapple with the interplay between state and bankruptcy law.  Jacobs PC’s focus on both commercial and bankruptcy litigation puts the firm’s attorneys in a unique position to capitalize on that interplay.

Jacobs PC demonstrated this prowess in a recent bankruptcy matter.  The prevailing assumption of bankruptcy courts is that a mortgage lender is generally entitled to bid the amount owed to it on the mortgage in the event of a bankruptcy sale.[1]  Therefore, even if the property is worth less than the money owed on it, the mortgage lender is still entitled to bid up until the amount owed to it on the property, much to the dismay of debtors who would like to hold onto the property.

However, this assumption in the non-recourse loan context is arguably predicated on a misunderstanding of state law lien theory and the Bankruptcy Code.

For example, under New York law, a mortgage is merely a lien against property which entitles the lien holder to an equitable remedy of foreclosure.[2]  The mortgage does not constitute a charge against the property which the proceeds of the foreclosure sale are designed to satisfy, rather the money owed on the mortgage loan sets the bar for the maximum amount the mortgage lender is permitted to recover through a foreclosure sale.[3]

Under Second Circuit precedent, a non-recourse mortgage lender’s claim against the debtor is allowed only up to the amount that such claim is enforceable against the property.[4]  Because a non-recourse mortgage lender’s only right against the debtor is the equitable remedy of foreclosure, the mortgage lender’s claim should only be allowed up to the amount the mortgage lender could fetch for the property at a foreclosure sale, not the full amount owed to the mortgage lender.[5]

Furthermore, the mortgage lender should need to establish the amount the property would sell for at a foreclosure sale before the lender be allowed to bid at all because a mortgage lender can only credit bid the value to which it is entitled under the Bankruptcy Code, which in this case is the value of its foreclosure right.  

Whether these arguments will ultimately be adopted by the courts is not the main point.  The point is that the adversary will not want to risk this argument being adopted by the court, or risk the issue going up on appeal and remaining unresolved for years.

When it comes to legal strategy, Jacobs PC understands that our clients may not always have the winning argument on their side, but with insight and ingenuity we craft strong arguments that are likely to convince our opponents that settlement is the most reasonable solution to the dispute.

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[1] See generally Michael E. Rubinger & Gary W. Marsh, "Sale of Collateral" Plans Which Deny A Nonrecourse Undersecured Creditor the Right to Credit Bid: Pine Gate Revisited, 10 Bankr. Devs. J. 265 (1994).

[2] See, e.g., Wyoming County Bank & Trust Co. v Kiley, 430 N.Y.S.2d 900, 903 (Ap. Div. 1980).

[3] See id. (holding mortgage foreclosure is not associated with a money judgment).

[4] See In re PCH Associates, 949 F.2d 585, 604 (2d Cir. 1991) (holding 11 U.S.C. § 502(b)(1) disallows the deficiency claim of a secured creditor who does not have recourse against the debtor); Cavaliere v. Sapir, 208 B.R. 784, 786 (D. Conn. 1997); see also In re 680 Fifth Ave. Associates, 29 F.3d 95, 97 (2d Cir. 1994) (noting that without the 11 U.S.C. § 1111(b) exception, “under 11 U.S.C. § 502(b)(1), the nonrecourse nature of the loan would otherwise bar a deficiency claim for the unsecured portion of the loan”); H.R. REP. 95-595, 549, 1978 U.S.C.C.A.N. 5963, 6516 (11 U.S.C. § 502(a)(1) “is intended to result in the disallowance of any claim for deficiency by an undersecured creditor or a nonrecourse loan”).

[5] See Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (holding that a creditor’s “right to foreclose on the mortgage can be viewed as a right to an equitable remedy” for a default on the underlying obligation under 11 U.S.C. § 101(5)(B)) (internal quotation omitted).