Divided Fifth Circuit Panel Suggests Bankruptcy Strong-Arm

[co-author: Frank DeBorde]

On April 14, 2022, in an unpublished, divided feeling affirming decrease-court orders disallowing a creditor’s assert and declaring the creditor’s home finance loan invalid and unenforceable, the U.S. Courtroom of Appeals for the Fifth Circuit advised (but did not definitively rule) that a bankruptcy courtroom can’t reform a property finance loan to deal with clerical glitches in these kinds of home finance loan after the bankruptcy petition day. Michael Worley was the sole owner and managing member of W Sources, which filed for bankruptcy in July 2018. In advance of bankruptcy, the proprietor secured a particular $8 million loan from NCC Economic and executed a promissory observe in his name only. That exact day, the proprietor (in his capacity as taking care of member) executed a property finance loan in favor of NCC, which purported to encumber W Resource’s assets and safe any credit card debt the corporation (as mortgagor) owed NCC. Notably, NCC by no means created any financial loans to W Means, only to the owner individually. W Resources later filed for Chapter 11 personal bankruptcy and in a problem to NCC’s proof of claim in extra of $8 million supported by the promissory notice and house loan, the individual bankruptcy court granted summary judgment in favor of Investar Bank, a competing creditor, with regard to the mortgaged attributes, invalidating NCC’s house loan as unenforceable and disallowing NCC’s assert. On immediate enchantment, the district court docket affirmed the personal bankruptcy court. Equally courts agreed with the competing creditor that the property finance loan (i) was crystal clear and unambiguous, thus barring extrinsic proof to interpret the property finance loan, and (ii) only secured the financial debt of W Sources, not Worley’s personalized debt (which include the take note), rendering the house loan unenforceable below Louisiana regulation mainly because there was there was no underlying financial debt obligation (i.e., no W Means personal debt owed to NCC).

On appeal, the divided Fifth Circuit panel turned down NCC’s arguments to clarify the mortgage loan to deal with an “obvious scrivener’s error” as disregarding “the iron rule of personal bankruptcy: creditor claims are set for allowance purposes as of the day of filing of the debtor’s petition.” Further, the panel pointed out there were being no remotely identical scenarios where “a secured creditor was authorized to cleanse up its documentation and fantastic an usually unenforceable assert submit-individual bankruptcy.” Simply because the Individual bankruptcy Code Portion 544 “strong-arm clause will take effect” to invalidate any liens or agreements that were being unperfected or unenforceable as of the petition day (including NCC’s faulty mortgage), the the vast majority held that the exception permitting extrinsic evidence to show the incompleteness of the property finance loan exterior of personal bankruptcy does not use in the personal bankruptcy context.

In a dissent, Decide Higginson found the home finance loan files ended up ambiguous as to the definition of mortgagor, noting that it would be “absurd for a document purporting to be a home loan not to protected any fundamental debt.” The dissent asserted that the panel erred by declining to take into consideration parol evidence as to regardless of whether the home loan gave 3rd parties, these types of as Investar, adequate notice of the encumbrance under Louisiana law simply because the dispute was between two non-debtor competing lenders (i.e., Investar and NCC), a single of which was not a social gathering to the mortgage in dispute.

The case is In re W Assets, L.L.C., No. 21-30291 (5th Cir. 2022). INCC is represented Chaffe McCall, L.L.P. Investar is represented by Akerman, LLP. W. Assets is represented by Stewart, Robbins, Brown & Altazan, L.L.C. The get is obtainable below.

About the author: AKDSEO

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