Second Lien on House

A second lien on the house

A junior lien bankrupt can maintain the compartmentalization of a junior lien. However, the second security right of first priority maintained by a security right owner is a right of ownership sufficiently effective to give rise to the right of residence. To the extent that the enforcement procedure of an older lien owner would lead to the extinction of the second lien of the obligor, a judicial tribunal may only revoke the deferment and allow enforcement if the older lien owner proves appropriate relief.

This means that the insolvency of a subordinated lien has the potential to thwart or impede the attempt of a subordinated lien to exclude its interest, even if the registered proprietor of the immovable is in arrears with its lending obligation. At Three Strokes, the landlord took out a USD 28,600,000 US dollar promissory notes from the borrower, which is backed by a grade and a first rate mortgages on the area.

A customary secondary ranking arrangement was concluded by the creditors of the pledge with a Junior pledgee who had a $1,992,643 landowner's notice backed by a secondary mortgaging on the real estate. An expert then verified that the stabilised value of the real estate was only $27,700,000.

Thereafter, the landlord was in default with his first prior ranking mortgages liabilities, which led to enforcement; the junior lien possessor (a unit associated with the landlord) filed for insolvency on the evening before enforcement. On the other hand, the older pledgee reasoned that the automated deferment under 362 was not applicable to out-of-court enforcement procedures initiated prior to the submission of the claim or, in so far as this was the case, that there was a reason to overturn the deferment under 362(d) and allow enforcement.

However, the courts held that although the land was not owned by the bankrupt's assets of the obligor or lien owner, the second lien was in fact a right of ownership which caused the automated deferment. According to the Tribunal, if the enforcement of the second lien had expired, the lien would have been "controlled" by the lien owner over a part of the debtor's or the lien owner's assets, and according to 362, all companies - not only believers - are prevented from having "control" over a debtor's assets in liquidation.

Then, the courts found that the older lien owner must apply to the courts for the suspension to be revoked, whereupon the courts would examine whether the second lien has a value (i.e. whether, on the basis of actual proof, such as the estimate, capital remains with the debtor) and whether the second lien was necessary for an efficient and reasonable reorganisation of the debtor's inheritance.

Three Strokes' participation followed previous participations in several other jurisdictions confirming the predominant understanding of Section 362 regarding the application of automated deferral to enforcement measures of holders of senior liens in the course of insolvency of junior liens, an understanding that was finally dispersed from the wide range of "estate assets" under insolvency law.

In one case, for example, under the previous Bankruptcy Act, the Tribunal ruled that first and second liens represented interest on mortgages "property" of the inheritance and that a levy of execution of the WBT lien could not extinguish either the first ranking mortgages or the second ranking mortgages without the approval of the Tribunal.

A different judge found that the automated residence in insolvency of the obligor or the pledgee was infringed when an older pledgee received a document in place of enforcement from the fiduciaries under the terms of the trustee agreement, which, in the judgement of the judge, impaired the debtor's right to repayment, including ownership of the inheritance.

At re Capital Mortgage & Loan, Inc. Indeed, in a case where a believer was inadmissibly excluded on land which was deemed to be exclusively in the possession of the debtor's non-debtor partner but which was in fact joint ownership of both the defendant and his non-debtor partner, the Tribunal found that the automated residence rules even attained title with insecure title or title (i.e. "questionable" property).

The three Stokes report endorses the dominant view that "ownership" of the debtor's inheritance is wide in nature and even includes interests in immovable assets that do not belong to the borrower. Concerning the insolvency of a subordinated lien possessor, the attempt of a subordinated lien possessor to exclude his participation in the immovable object may be rendered frustrating or impossible - even if the lien possessor's recordholder is in arrears but has not applied for the insolvency court's right of defence.

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