Senate kills proposed Bankruptcy change to allow judges to rewrite loan terms

Jason S. Buckingham — Tue, 08 Apr 2008 05:37:32 GMT

Well, you can't blame them for trying...

As noted in this New York Times article last Friday (April 4, 2008), the Senate has killed a controversial proposal that would have allowed Bankruptcy judges to modify real estate loan documents. This practice, which is common in a variety of other contexts, is known under common law principles as the court's power to "do equity."

By examining and balancing the interests and hardships of parties to a transaction, courts have done a great service for the common good in the United States by requiring parties to contracts to act reasonably and in good faith. In short, doing equity is of the essence of why we have a judiciary in the first place. If a person or company abuses its position or economic influence and imposes terms and conditions on others that the court finds to be too harsh to have been fairly and reasonably negotiated, then the court can do equity by reforming those terms and conditions. On the other hand, if the court finds that the party complaining of harsh terms or conditions has done something underhanded related to the transaction, then the court can refuse to do equity based on the party's bad act.

Bankruptcy judges, whose positions were created by the Bankruptcy Code, can only do equity to the extent that Congress gives them such powers under the Code. In the author's opinion, it is a shame that the Senate has tabled what could have been a very powerful tool in persuading lenders and borrowers to work together. After all, as noted above, doing equity cuts both ways, and the risk of leaving it up to the judge is usually enough to get the parties talking about a workout.

Real Estate Legal Issues

Senate kills proposed Bankruptcy change to allow judges to rewrite loan terms