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ALTA® Letter to Orrin Hatch: RE Bankruptcy Reform Act(03/31/00)

March 31, 2000

March 31, 2000

The Honorable Orrin Hatch
Chair, Committee on the Judiciary
U.S. Senate
Washington, DC 20510

Dear Chairman Hatch:

I hope you will preserve in the conference report for S. 651/H.R. 833, the "Bankruptcy Reform Act," the sections from last Congress? H.R. 3150 conference report that fixed the 1996 McConville court case that exposed lenders and title companies to liability for undisclosed bankruptcies. The McConville amendment has been in the technical corrections section of each bankruptcy bill since 1997 and is currently in the House-passed version of this legislation.

In the McConville court case* the 9th Circuit judge failed to apply section 549(c) of the federal bankruptcy code in a case where a lender advanced funds to a borrower without knowledge of an undisclosed bankruptcy. Although the judge later withdrew his initial ruling and a subsequent second ruling, cert was denied by the Supreme Court. Therefore, the McConville case remains a precedent and a threat to the real estate industry that should be addressed in Bankruptcy Reform.

Limiting section 549(c) to transfers of fee interests only puts at risk every real property lessee, easement grantee, and lender who provides consideration or extends credit in return for its interest in real property in reliance upon the state real property recording acts. Because it is a practicable impossibility for the title insurance industry to search contemporaneously bankruptcy filings in every bankruptcy court in all 50 states at the time of closing, were the decision in McConville allowed to stand, the existence of an undisclosed bankruptcy case places the risk of loss on the lending, leasing and development industries, potentially chilling the availability of credit.

McConville is easily solved by simple amendments to clarify the law as enacted in 1978 and does not represent a change in the law under the Bankruptcy Code. First, with respect to the Automatic Stay, section 362(b) of the Bankruptcy Code should be amended to clarify that postpetition transfers required to be perfected under section 549(c) and which are otherwise immune from attack would not be void or violable as made in violation of the automatic stay. Second, with respect to postpetition transactions, section 549(c) should be clarified to apply to "transfers of interests in real property, including a security interest in real property" where the purchaser has given fair equivalent value without notice of the pendency of the bankruptcy case and has perfected that interest timely. To clarify that section 549(c) of the Bankruptcy Code applies to encumbrancers, the definition of "transfer" in section 101(54) should be amended by inserting "the creation of a lien." The House-passed version of H.R. 833 effects these changes as did last Congress? H.R. 3150 Conference Report.

I hope you will preserve in the conference report for Bankruptcy Reform the House-passed version of H.R. 833 where it impacts the McConville case. Should you wish to discuss this further, please don?t hesitate to contact me or Ann vom Eigen, ALTA Legislative Counsel, at 202-296-3671, x214, or ann_vomeigen@alta.org.

Sincerely,



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