California recently enacted the first phase of the “California Homeowner Bill of Rights”

The new law will do the following: (i) it stops lenders from filing notices of default, notices of sale, or conducting foreclosure sales while also actively engaging in the consideration of alternatives to foreclosure, including loan modifications, short sales, and deeds in lieu of foreclosure; (ii) it requires lenders to provide a single point of contact for borrowers and it requires that the assigned contact have knowledge of the borrower’s loan and direct access to decision makers; (iii) it imposes civil penalties of up to $7,500 for repeated filing of foreclosure documents without properly reviewing the foreclosure documents and verifying their accuracy; and (iv) it provides homeowners with the right to access state courts to protect themselves from violations of the law.

The new law will go into effect on January 1, 2013 but it will apply solely to first mortgages and only to homeowners still living in their houses.

This week, in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11‐166 (U.S. May 29, 2012) the United States Supreme Court unanimously ruled that a secured lender must be given the right to credit bid up to the full amount of its claim where the debtor pursues a Chapter 11 plan that proposes to sell assets free and clear of liens. This decision resolves a split of authority in several circuits and is a significant win for secured creditors facing a debtor’s Chapter 11 bankruptcy plan.

As explained in the opinion, a bankruptcy plan confirmed over the objection of a secured creditor had to meet one of three requirements to be deemed “fair and equitable.” Under Bankruptcy Code Section 1129(b)(2)(A)(i), a secured creditor’s lien remains on the property and it receives deferred cash payments. Under Section (ii), the property is sold free and clear of the creditor’s lien, and the creditor receives a lien on the sale proceeds. The sale, however, must be conducted pursuant to Section 363(k) of the Bankruptcy Code which provides that the creditor may credit bid at the sale, up to the amount of its claim.  Under Section (iii), the plan has to provide the creditor with the “indubitable equivalent” of its claim.

In the case before the Supreme Court, the debtors sought to confirm their plan under Section (iii) without providing the lender the right to credit bid. Instead, the debtors proposed a plan to sell the property free and clear of the lender’s liens and repay the lender using the sale proceeds.

The Court reasoned that Section (ii) is a detailed provision that sets forth the requirements for confirming a plan that seeks to sell property free and clear of liens. Section (iii), however, is a more broadly worded provision and says nothing about a sale. The Court, relying on a well established principal of statutory interpretation that “the specific governs the general.” held that the general language of clause (iii), “although broad enough to include it, will not be held to apply to a matter specifically dealt with” in clause (ii).  Thus, if the plan includes a sale of the property, then the secured lender has a right to credit bid.  That right, the Court noted, helps protect the creditor against the risk that the property is sold for a depressed price and it allows the secured lender to purchase the property for what it considers a fair market price without committing additional cash.

This is a victory for secured lenders.