Creditors: Fear Not?

Just as public ire at the mortgage industry reaches a pinnacle, courts have offered the mortgage companies refuge from their mistreatment of consumers in some recent rulings. While these decisions may be aberrations, they have powerful lessons for consumer debtors and their attorneys that bear some discussion.

A bankruptcy court ruled last week that the United States Trustee (UST) lacked the authority to bring a complaint against Countrywide for abusive mortgage servicing practices. (Hat tip to Amir Efrati at the Wall Street Journal for bringing the ruling to my attention.)The In re Sanchez court concludes that the UST failed to state a claim for sanctions because the UST is not authorized to pursue sanctions. I disagree.

I think 11 USC 307, which says the UST may "raise . . . and be heard on any issue in case or proceeding" under the Bankruptcy Code, is intentionally broad and permits the UST to file a lawsuit against alleged wrongdoers, including one asking the court to use its section 105 equitable powers to sanction. While the court suggests that instead the United States Attorney is the appropriate party to punish violations of the bankruptcy laws (yes, for bankruptcy crimes but I'm not sure about civil redress?), the real lesson of the case is that debtors' attorneys need to bring complaints against the mortgage companies. Waiting for the court to identify problems sua sponte as in In re Parsley  or hoping the US Trustee (or even less plausibly the US Attorney) will bring actions is risky at best and negligent at worst. Homeowners in bankruptcy need to know they aren't overpaying their mortgage company, and their attorneys need to shoulder this burden--at least until Congress or the rules committee or voluntary compliance does something to systemically improve the practices of servicers in bankruptcy cases.

The other victory of note for mortgage servicers was the Third Circuit First Circuit decision in In re Nosek. The court vacated the judgment against Ameriquest awarding the consumer $250,000 in emotional distress damages and $500,000 in punitive damages because it determined that there was no violation of either the Bankruptcy Code or the debtor's chapter 13 plan. The court said that 1322(b), which permits a debtor to cure a default over the course of a plan (such as by paying the mortgage arrears), did not impose any specific duties on a lender. Thus, although Ameriquest did not distinguish between the ongoing current mortgage obligations and the payments on the pre-petition debt in applying the debtor's payments, the court said that the failure of the debtor's plan to specifically obligate the creditor to apply the payments in accordance with 1322(b) to cure the arrears eliminated the debtor's ability to invoke section 105's enforcement authority. The lesson for debtor's attorneys here is that the chapter 13 plan itself apparently needs to specify how the mortgage company should apply the pre- and post-petition payments. While section 524(i), added as part of BAPCPA and not at issue in this case, may have given a different result, I think the Nosek decision strongly suggests that bankruptcy courts should permit debtors to include 524(i) language in their plans and debtors' attorneys who fail to do so--or at least fail to argue to a court that they can do so--are putting the rights of their clients at risk.

Consumer bankruptcy attorneys have a heavy burden to shoulder after BAPCPA, which imposed additional advertising restrictions, paperwork requirements, and potential liability on them. I think these two decisions add to the duties of debtor's attorneys, exacerbating concerns about the need for and the reality of increasing attorneys' fees for bankruptcy relief.

Comments

[O. Max Gardner III]

I agree with your objeservations about Sanchez. Section 307 of the Code clearly gives the US Trustee or the Bankruptcy Administrator Standing to raise any issue in any case releated to the misconduct of a debtor or a creditor. On the other hand, the Nosek decision should be Exhibit 1 for any debtor's attorney who is seeking to include a 524(i) provision in the plan.

[Patches]

Following the same thinking in Nosek, Campbell V. Countrywide, the 5th Cir. ruled about the same. Undoing the sanction award but affirmed that pre-petition Mortgage arrearage and escrow shortage is a claim that can be addressed by a Chapter 13. Because the servicing company filed a POC that instructed that the regular monthly payment was X amount and the X amount would have in essence double charged the debtors, paying for future escrow items as well as what was already claimed as an arrearage, was NOT a violation that the court could sanction. I think in Nosek the court also found that the debtor didn’t prove any damages. Her damages were something like she could not refinance her home without paying the extra fees tacked on by the servicing company. Messed up, I know but I kind of see the logic. Even though the accounting was severely messed up, they went thru the bankruptcy court process to collect the illegal fees. Ya, and I don’t think the USAs would be too keen on having to litigate Servicing errors in Bankruptcy Court. Locally they are too busy with immigration and federal drug actions. NOT CONSUMER PROTECTION! We can’t turn to our states Attorney General, its federal court. So it has to be the UST.

How all of that plays out in real life:

It stands to reason that a debtor’s attorney will almost have to form out on every Chapter 13 bankruptcy that has a Mortgage arrearage, an objection to the Proof of Claim. Now because of local rules all the Servicing Company has to do is notice the 13 Trustee that the regular monthly mortgage payment is going up because we pass the regular mortgage payment thru the 13 Trustee. We get notice of course but if the payment throws the case deficient, we have to hop back on the ball, even after confirmation to re-audit the POC, the Trustees disbursements and the plan everything!

Just yesterday alone, I spent over 4 hours with servicing companies on two separate “DISCHARGED” 13s. One was a complete payout in that the Mortgage note matured in the 5 years following the filing of the 13 and the other was a “right to cure”, the debtor had cured the mortgage arrearage thru the plan. Well come 2-3 months post-discharge the debtors receive “Notices of Default” and “Intent to Accelerate”. That is 4 hours that we cannot recoup without a severe hassle. It is the type of hassle that would take up some serious attorney time. We are having all of these problems because of bad accounting by the servicers. I think Nosek contemplating that a “Motion to determine the Mortgage Arrearage” should be initiated right before discharge. Who pays for that? The debtors pay for it and of course we just can’t leave them hanging in the wind so…. I spend 4 hours on hold getting a hold of servicers, their managers and attorneys. Most law firms would charge out the nose for that kind of work. Although discharged the debtors are not always going to be able to drop $500 -$1500 as a retainer to handle post-DISCHARGE work when if the servicer just did their job properly (account for funds paid) none of this would be necessary. ARRRRGGGG!!!!!!!

[AMC]

If the debtor made conduit mortgage payments, most Chapter 13 Trustees would file a 'motion to deem the mortgage current' or a 'motion to determine mortgage arrearage, if any'.

[Peter C. Fessenden]

Nosek was a First Circuit decision.

[Patches]

First Cir. it is I thought it was 3d.

Yes, your right AMC they do file that motion now but in the cases above, one was a payout with no conduit payments and the other was started before they initiated conduit payments by the Trustee here in Texas. Where does that leave us? If they don't come clean, its a "Motion to Reopen" and "Adversary". (A ton of work with little or no money on the front end and a big fat ? on the back end) thanks to Nosek and Campbell.

I do think that in the system we have set up now that servicers are less likely to get away with stuff like that. Although I think Campbel was a "pass thru" as we call them here.

Another problem that I have been seeing is that for debtors who are not behind on mortgage payments at the time of filing (here anyway) do not "Pass thru" the mortgage payments, and what is going on is that the debtors are receiving a charge on their mortgage statement for..... well they don't even give it a class but when the debtors call to see what the extra $2-4 hundred dollars was for the servicer tells them it was so they could file a POC or review the bankruptcy. Take in mind that the particular BK did not treat the Mortgage in any way in their "plan". So they are going right around the BK court and collecting attorneys’ fees straight from the debtors w/no lodestar accounting on hours spent. I mean we do volume but what we see is a very small piece of the pie. It has to on some larger scale out there.

I can see how an attorney would need to review that stuff for the servicer but if they do they should at least be made to prove up their fees. WE DO! We can't hardly sneeze without the courts permission in Bankruptcy. Is should not take an experienced BK attorney or legal assistant more that 15-30 min. to see whats up in any one case and thats including filing a POC. Filing a POC and the request for notice is so easy!

[Judge Roy Bean]

Patches, you're on the right track but you may not realize servicers actually get a kickback "management fee" from their attorneys.

What the borrowers are actually paying is attorney's fees plus the kickback to the servicer or the national law firm that is supervising the local firm.

[Patches]

Man, that’s messed up!

AMC had suggested in an earlier post that we could file a motion to declare the mortgage current even if the 13 does not treat the mortgage or the arrearage. Just some way to bring the servicers and their fees into the "fold" when they are not. (If they have filed a POC, we can bring them in at any time) It seems to me that the UST should be into that kind of stuff. It is like a legal form of "equity stripping”. Less and less of the debtors monthly mortgage payments will be credited towards principal. That kind of screws up the whole amortization of the loan! Fees on top of late fees, on top of the regular monthly payment. Technically they could thro them into foreclosure while they are in Bankruptcy. That’s why when they file their Motions for Relief from Stay they claim that the debtors have not made a payment in the last few months, when in fact they have.

[Mike Dillon]

Hmm.... That sound at all familiar, Patches?

Thanks for that refresher, Judge. I had forgotten about that aspect of the game... I need to go take a closer look at that angle with a case I'm currently working on....

[Patches]

Yes it does Mike! ur right.

[Patches]

NOT SO FAST: “The tide is changing, not just in the Southern District of Texas, but in courts across the country”. In re: Prevo 08-30815.

I love the decision in re: Prevo 08-30815 SD Texas 8/7/2008 Judge Jeff Bohm of "Parsley" fame issued an order denying the POC of Citi for failing to file supporting docs with their POC. In his Memorandum of Opinion he opened the door for debtors to recover attorneys’ fees for the sustained objection to the arrearage Proof of Claim. He does this by way of a Show Cause but unfortunately doesn’t hint on how we could recover the fees as an “ordinary” course of business in prosecuting the Objection. Usually when we are successful in an Objection to Claim we charge the bankruptcy estate or in other words apply for the fees and in essence we “steal” it away from the unsecured creditors. Why should the unsecured creditors suffer for the servicer trying to “game the system” by not filing supporting documents? Not that I am al of a sudden concerned with the plight of poor ole’ unsecured creditors but it’s really not fair.

I love this: “The Court would also note that amending proofs of claim, only after the debtor files an objection, to withdraw frees that should not have been included in the first instance is unsatisfactory because it does not address the larger problem with the way mortgage companies are filing proofs of claim. Based upon hearing in this and other cases, the Court believes that certain members of the mortgage industry are intentionally attempting to game the system by requesting undocumented and potentially excessive fees and then reducing those fees in amended proofs of claim only after being exposed by debtor’s counsel”. WOW! If a debtor did that in their own bankruptcy they would be denied a discharge and maybe even prosecuted for fraud by the UST. Isn’t that what the creditors lobby was saying to congress when contemplating Bankruptcy Reform? Debtors were “gaming the system”.

[me]

> Usually when we are successful in an Objection to Claim we
> charge the bankruptcy estate or in other words apply for the
> fees and in essence we “steal” it away from the unsecured creditors.
> Why should the unsecured creditors suffer for the servicer trying
> to “game the system”

So if they succeed, they make money, and if they fail, they don't lose money, because someone else pays.

I doubt you can make a law against that. Isn't it taught in business school as a tactic?

[Patches]

Well "Me", I guess the problem I have is that if the debtors did things like, not provide proper docs, misrepresent the amount they made or hid assets, they could get in very big trouble. But it seems that there is very little risk on a mortgage creditor to claim the correct amounts and provide the proper docs because there is no fear of "penalty of perjury", until now. Not all 13s would have the room for debtors’ attorneys to recover from the estate, for the time expended on making sure the amounts are right thru Objections to Claims. Your right it is a "tactic", one that I believe to be fraudulent in nature. I do believe we have laws on the books that make fraud a crime and now Judges are hinting on how to recover. I think what “Prevo” stood for, at least to me anyway is the possibility of hitting the Mortgage creditor where it hurts...... In the Pocketbook. I doubt seriously that they teach you in business school to lie on federal documents in federal court. “Gaming the Bankruptcy System for Secured Creditors 101”. I could be wrong as I don’t know what business school you’re referring to. Maybe “Kenneth Ley College of Business” or something like that....????