A federal bankruptcy judge has ordered Wells Fargo to pay $250,000 in sanctions for its role as a trustee for a pooled subprime mortgage trust. In re: Nosek, Case No. 02-46025-JBR (Bankr. D. Mass.).

In Geygan v. World Savings Bank, FSB, 2008 FED App. 0005P (6th Cir. B.A.P. Mar. 12, 2008), the Sixth Circuit BAP affirmed the bankruptcy court, holding that the mortgage’s certificate of acknowledgment, which included the phrase “witness my hand” next to the notary’s signature, did not comply with Ohio law, and that the Trustee was a bona fide purchaser pursuant to the U.S. Bankruptcy Code. 

In a May 23, 2008 decision, the United States Bankruptcy Court for the District of Delaware ruled that BBB-rated mortgage-backed notes are eligible for the Bankruptcy Code's repurchase agreement safe harbor as “interests in mortgage loans”. The court also held that a repurchase agreement constituted a sale, as opposed to a financing governed by UCC Article 9 -- the first decision on this topic since the financial contract safe harbors were expanded under the 2005 amendments to the Bankruptcy Code.

On May 20, 2008 the Tenth Appellate District Court of Appeals issued an opinion in Guernsey Bank v. Milano Sports Enterprises, LLC holding on several issues of priority between mortgages and mechanics’ liens as well as the application of prejudgment interest on mechanics’ liens.

Courts faced with the task of unraveling the results of the recent credit crisis are being called upon to scrutinize lending agreements—many of which are complex and often previously uninterpreted. The review of these agreements is a reminder to signatory parties of the importance of fully understanding their obligations upfront.

Adjustable rate mortgages began to reset just as the economic outlook for subprime borrowers soured. Defaults on subprime debt inevitably followed. The onslaught of litigation against all players in the subprime lending arena followed just as inevitably.

Boards of directors of troubled companies must balance their fiduciary obligations to shareholders and creditors. Insolvent companies owe duties to creditors and not solely to shareholders and, under evolving case law, companies acting in the "zone of insolvency" owe a duty to creditors as well as to shareholders.

On May 23, 2008, in American Home Mortgage Investment Corp. v. Lehman Bros. Inc.(In re American Home Mortgage Corp.),1 the United States Bankruptcy Court for the District of Delaware ruled that BBB-rated mortgagebacked notes are eligible for the Bankruptcy Code’s repurchase agreement safe harbor as “interests in mortgage loans”.

Many of the cases we have reported on continue to be hotly debated among the parties and are subject to appeals or motions for reconsideration. In an effort to keep you updated, we have highlighted some of these developments below.

Musicland

In a decision issued on June 26, 2008, the Sixth Circuit Court of Appeals held that the earmarking doctrine does not provide a refuge for late-perfecting secured creditors and thus does not shield the creditor from preference exposure in a subsequently filed bankruptcy case.Lee v. Shapiro.