Bankruptcy Department Vol. 1, Issue 2 March, 2006 Newsletter

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1 Table of Contents Why this Newsletter?... Page 1 of 6 The Finkel Firm Teaches BAPCPA... Page 1 of 6 Right to Cure Letters... Page 2 of 6 Recovering for Construction Defects... Page 3 of 6 EIFS - What is it?... Page 3 of 6 What Does EIFS Look Like?... Page 4 of 6 History of EIFS... Page 4 of 6 Representing Successors in EIFS Litigation... Page 5 of 6 Why Should the Successors Care About EIFS?... Page 6 of 6 The Finkel Firm... Page 6 of 6 Why this Newsletter? After sending out our first Newsletter, we had several questions from our clients and suggestions that we continue to present this Newsletter to respond to questions that are common to our clients. This second edition of the Newsletter will address three such questions. If you missed the first newsletter and would like a copy, us at newsletter@finkellaw.com. Also, if you would like this newsletter sent to you via e- mail, please us, and we will put you on the e- mail list for future editions. You will need to have the ability to get attachments in pdf format. The first question relates to the seminar that Finkel & Altman, L.L.C. (the Finkel Firm ) will be teaching on the Bankruptcy Abuse Prevent and Consumer Protection Act (the BAPCPA ). The second question relates to right to cure letters in consumer transactions. In this second section, Janet B. Haigler, Esquire will discuss when right to cure letters should be sent under South Carolina law. The third question relates to when it might be possible to recover from third parties when a home taken back through a foreclosure action and the real estate owned ( REO ) discovers defective construction. Charles A. Krawczyk, Esquire will discuss recoveries for successor purchasers in construction defects cases with specific attention to the use of exterior insulation finish systems ( EIFS ) as an exterior cladding in the South East. The Finkel Firm Teaches BAPCPA As mentioned in the first newsletter, Lorman Education Services has asked the Finkel Firm to present a Seminar on April 26, 2006 in Columbia, South Carolina on the BAPCPA. The Finkel Firm has arranged for additional registration materials to be sent to the Finkel Firm so that we will mail to all of the people on this mailing list the registration materials. So, you should be receiving these materials in the next few weeks. If you believe that others in your organization would benefit from this Newsletter and/or from these materials, please feel free to contact Shelly Walters, the Finkel Firm s Business Manager and she will make sure that those names get included in all future mailings. Page 1 of 6

2 In addition, if you find it inconvenient or not viable for you to send the needed members of your organization to this seminar, please let Shelly know the interests of your organization, the number of people that would be involved in the seminar and the Finkel Firm may be able to take the show on the road and do a presentation on the BAPCPA or on creditor representations in Bankruptcy in the conference room of your office. Right to Cure Letters. Janet tells us that right to cure letters are provided for in the Uniform Consumer Protection Code. While a Uniform Code has been adopted in most jurisdictions, it is possible that a particular state may have varied or changed the terms of its particular adoption of the Uniform Code. Thus, Janet warns that the provisions relating to right to cure letters may vary depending upon the location of the consumer receiving the letter. Practicing in South Carolina, Janet is familiar with South Carolina s adoption of the Uniform Consumer Protection Code as found in Chapter 37 of the South Carolina Code of Laws. Janet tells us that South Carolina adopted the Uniform Consumer Protection Code s provision on right to cure letters without making any changes. In South Carolina, right to cure letters are provided for in Section This section relates to consumer credit transactions payable in two or more installments. Once a consumer has defaulted, the creditor must provide the consumer with a right to cure letter. The mandatory provisions in the right to cure letter are found in Section and the consumer must be given twenty (20) days to cure the default. If the consumer tenders the amount of all unpaid sums due at the time of the tender, without acceleration, plus any unpaid delinquency and deferral charges, the consumer has cured the default. Janet says that the tricky part is how often does a creditor have to send a right to cure letter to a defaulting debtor. Basically, the sending of a right to cure letter fulfill s the creditors obligations for a period of twelve months. If the debtor defaults again during that twelve months, the creditor does not need to send another right to cure letter. However, if the debtor defaults after performing for twelve months, then another right to cure letter is required and the consumer is given another opportunity to cure and perform under his loan obligations. Janet provides a word of caution. If collection actions are brought without a right to cure letter, sanctions could be obtained against the offending creditor. In fact, actions have been dismissed and creditors have been sanctioned both attorney fees, actual damages and even punitive damages in certain cases. Janet also mentions that if you are ever involved in a foreclosure or transaction where the debtor alleges the failure to provide a right to cure letter, you should discuss the situation with counsel. Janet suggests that depending upon the situation, there are defenses against these claims. For example, Janet mentions that these right to cure provisions relate to consumer credit transactions. This term has a specific definition within South Carolina s Uniform Consumer Code and that definition excludes, in some instances, transactions involving the first mortgage on real property. Janet tells us that the legal analysis of this exclusion involves a reading of Sections (11), 2-104, and and is not for the faint of heart. At the same time, Janet Page 2 of 6

3 tells us that this defense may not be available depending upon the note and mortgage which could make the transaction subject to the right to cure provisions of Sections and So, as practical advice, Janet suggests that when in doubt, send the right to cure letter. As legal advice, when questioned, make sure your attorney is familiar with the loan, loan documents and provisions relating to right to cure letters. Recovering for Construction Defects One area of practice at the Finkel Firm is its team of partners, associates and paralegals that handle construction related cases. From representing homeowner s associations in multi-million dollar condominium cases to individual homeowners with problems with their residences. From representing contractors, architects, and sub-contractors in construction disputes to representing homeowners relating to problems with the developers of their communities, the Finkel Firm has developed a construction litigation practice that has been involved in cases in Alabama, Georgia, North Carolina, Indiana, and South Carolina. As part of this practice the Finkel Firm represents successors when a home is foreclosed upon, or part of a bankruptcy estate and that home has construction defects that need to be repaired. The Finkel Firm has represented the bank in its claim against the contractor for its negligence in the construction of the residence. Charles A. Krawczyk, Esquire is one of the partners of the Finkel Firm that has represented trustees and banks as successors to the original homeowner in their claims. Charley tells us that one of the areas of construction litigation that is prevalent throughout the Southeast relates to the installation of Exterior Insulation Finish Systems ( EIFS ) on homes. EIFS - What is it? EIFS or synthetic stucco originates from post World War II Europe. The East Germans, short on money and trying to adapt to its new communist reign, had two major problems: (1) they had a torn infrastructure; and (2) they were short on natural resources. Their immediate problem was that noninsulated buildings were extremely vulnerable to the cold winter months, and they did not have enough petroleum to run furnaces 24 hours a day, 7 days a week. Combining two different technologies, they were able to solve their immediate concerns. Essentially, the East Germans took advantage of the developing technology of synthetic polymer chemistry. They produced an architectural coating (a crack-free topical paint) and foam plastic insulation. By combining the two materials, the East Germans could give their buildings a new look and solve their energy crisis. Therefore, EIFS, also called synthetic stucco, was originally designed to be a topical finish on an already intact building. As developed, EIFS has five components which fit over a pre-existing substrate. They are: (1) Expanded polystyrene (foam plastic insulation)(called EPS board ); (2) Attachment systems-- the foam needs to be securely attached to the substrate the two choices for attachment systems are: (a) mechanically fasten, or (b) glue which could be: (i) synthetic glue (no cement); or (ii) cement based glue (comprised of polymers and portland cement); (3) Reinforcing mesh -- reinforcing mesh is made of woven fiberglass, Page 3 of 6

4 covered by a plastic coating and the plastic coating is required because the cement in the base coating adhesive will degrade the fiberglass; (4) Base coat adhesive; and (5) Finish coat -- generally an acrylic resin (i.e., a high grade paint), the texture is created by aggregates of specified size, found or added to the paint. Thus, EIFS is a system designed to achieve a nice aesthetic look and incredible insulation properties. The East Germans believed they had found the answer to their reconstruction efforts as well as their energy crisis. What Does EIFS Look Like? From its appearance, EIFS looks just like traditional stucco. The following picture is of a section of a three year old EIFS clad home: The above picture is of the same section, once the EIFS has been removed. The substrate was so significantly deteriorated, it too had to be removed and you can see in the picture the damage to the framing members of the home. This damage occurred within three (3) years of the home s construction. Specifically, once moisture enters into the wall cavity of some EIFS, it is trapped. Moisture within the wall cavity causes damage. Sometimes that damage is isolated to the substrate but sometimes, the damage can be so severe as to impact the structural integrity of the home. As you can see from the pictures, an EIFS house can look beautiful but these looks are deceiving and hide what may lurk behind the EIFS, damages that can be quite significant both to the structure and to the pocketbook. The typical EIFS home is priced between $150,000 and $450,000 but Charley tells us that he has represented homeowners with homes valued in the many millions of dollars. The problem is not with the outward appearance. The problem is that sometimes that beautiful outward appearance covers up the potential problems inside. History of EIFS Unlike almost every other building envelope used in modern construction, EIFS has no secondary Page 4 of 6

5 moisture barrier. That means, if incidental water penetrates into the system, there is no built-in mechanism for getting the water back out. EIFS is theoretically designed to be a complete barrier system. No water is ever intended to penetrate past the face of the system. Historically, in the late 1960 s, the manufacturers of EIFS brought EIFS to America. Fascinated by the insulating properties, the construction industry decided to adapt it to original construction. Adhesively applied EIFS was now being used on wood-framed, wood-sheathed buildings and homes. This was a substantial leap in application from the European idea of cladding already existing buildings. America began using EIFS as the only exterior in the building envelope. In the 1990 s, Wilmington, North Carolina became a hot bed of litigation. As a result of the studies done there, Stephen S. Ruggiero, an expert engineer, performed a study and found: Surface sealed EIFS is inherently flawed as an exterior cladding system, and it is particularly unsuited to residential house construction in its current form and method of application. The waterproofing integrity of the system depends entirely on constructing and maintaining a perfect, surface sealed barrier to the weather. Giving inevitable formation of defects in the surface seals, which must be anticipated in the course of normal construction practice and weathering of materials, this cladding concept is not reliable or durable. Therefore, when faced with the inevitable failure of the EIFS, the homeowner or the homeowner s successor, including bankruptcy trustee s, purchasers in foreclosure sales or lending institutions receiving the property through deeds or trust or foreclosure sales, become Plaintiffs in litigation. When representing these Plaintiffs, the Finkel Firm takes the position that the EIFS problems as described herein are exacerbated by (a) negligent and poor training of the builder and applicator by the manufacturer, (b) poor and negligent application by the builder and the applicator, and (c) sheer negligence by the builder. On behalf of these clients, the Finkel Firm has been successful in recovering against those involved in the original construction. Representing Successors in EIFS Litigation Charley tells us that representing a successor is a little different than representing the original owner or homeowner that had the home built for them. Charley says, that usually, we have to engage in more investigation, finding out who the builder was by pulling building permits or speaking to the original owners, finding out who the manufacturer of the EIFS was and who the applicator of the EIFS was through interrogatories to the builder. Nevertheless, Charley says that the Finkel Firm has been quite successful in recovering some of the repair costs on behalf of our bankruptcy trustee, successive purchasers and bank clients. Charley says that the owner that has a stucco looking home, needs to do the following things: (1) find out if the stucco is a facial barrier EIFS, (2) find out if moisture has entered into the wall cavity and begun to damage the substrate and structural members of the home, (3) find out if a previous homeowner sued because of the construction problems with the home, and (4) investigate who the parties were in the original construction. Depending on the outcome of that investigation, the owner may have the ability to recover money from sources other than the sale of the home. Why Should the Successors Care About EIFS? Page 5 of 6

6 EIFS problems and associated litigation has been an ongoing issue in the southeast United States for many years. Because of the widespread failures of EIFS, many stucco homes (traditional stucco and EIFS) have suffered from a loss of value due to the stigma associated with EIFS. This loss can amount to hundreds of thousands of dollars in the resale value of the home. Banks, trustees and other successive purchasers can find themselves with the proverbial white elephant which they are unable to sell or sell only through a substantial loss. The Finkel Firm has been successful in recovering substantial amounts of money on behalf of successive purchasers in situations such as these. Thus allowing the homes to be resold faster and with greater return. EIFS litigation is just one of many potential construction deficiencies that can arise in the resale of a foreclosed property making it difficult to market and sell. With his experience in the construction business Charley has been able to help clients through many difficult matters regardless of the type and size. The Finkel Firm The Finkel Firm has been serving people and businesses of South Carolina for over thirty years. Founded in 1970, the Firm made a conscious commitment to provide sophisticated legal services and to develop practices areas in the corporate and commercial litigation fields. The firm is a full service firm handling litigation, real estate issues, corporate issues, finance, bankruptcy, foreclosure and tax matters. With offices in Columbia, Charleston, and Georgetown, the Firm seeks to service all of its clients in the most cost-effective manner possible. Please feel free to contact us at: Finkel & Altman, L.L.C Main Street, Suite 1800 Post Office Box 1799 Columbia, South Carolina (803) Page 6 of 6