Houses: Key Issues and Case Law Developments in Bankruptcy

Houses: Key Issues and Case Law Developments in Bankruptcy

By

Brendetta ScottHeather Heath McIntyre

Simon MayerWilbur Suggs

2008 Consumer Bankruptcy ConferenceJune 19 - 20, 2008

Moody Gardens Hotel - Galveston, TX

BRENDETT A A. SCOTT

Brendetta Anthony Scott, born in Greenwood, Mississippi, graduated magna cum laudefrom Mississippi Delta Community College in 1994 and received her Associate of Arts. In 1996she graduated magna cum laude from Jackson State University, W.E.B. DuBois Honors Collegeand received her Bachelor of Arts degree. Brendetta obtained her Juris Doctorate, with honors,from Texas Southern University, Thurgood Marshall School of Law in 1999.

While in law school, Brendetta was a dean's list scholar and a member of the ChristianLegal Society - Secretar, Board of Advocates - Client Counseling/egotiation Coordinator andthe Black Law Students Association - Mentor. During Brendetta's final year of law school, sheinterned for the Honorable Manuel Leal of the United States Banptcy Cour of the SouthernDistrict of Texas. Brendetta was admitted to the Texas Bar in November 1999 and is licensed inthe Southern, Northern, Eastern and Western District Federal Cours of Texas.

A certified mediator, Brendetta practiced family law, tax law, and banptcy law beforejoining Hughes, Watters & Askanase, L.L.P. in 2003. Curently, her practice focuses onbanptcy, creditors' rights and default servicing representing a varety of mortgage companiesand credit unions. She has spoken on these topics at various professional development seminarsand webinars. She was named a Rising Star in the April 2007 and 2008 editions of Texas SuperLawyers Magazine. Brendetta is a member of the Law Week Committee (2006 - 2007 Co-Chair) and the Professionalism Committee (2008-2009 Co-Chair) of the Houston Bar

Association. She is also a member of the Arthur Moller/David Foltz Bankptcy Inn of Court,College of the State Bar of Texas and the Houston Young Lawyers Association. Brendetta hasalso handled pro bono cases for the Houston Volunteer Lawyers Association and volunteeredlegal services at the Shape Community Center.

HEA THER HEATH McINTYRE

Heather Heath McIntyre is an associate with Hughes WattersAskanase. Her practicefocuses mainly on reorganizations and workouts for corporations and individuals, representationof secured creditors in and out of bankptcy, and representation of banptcy trustees. She is amember of the Houston Young Lawyers Association and Houston Young Bankptcy LawyersAssociation. She graduated from the University of Houston Law Center in 2003 and obtained abachelor's degree with honors from the University of Texas at Austin.

Ms. McIntyre has co-authored dozens of articles concerning the 2005 banptcy reformsand consumer credit compliance, including

~ "The Courts and the New Bankruptcy Law: Holding Their Noses and Swallowing"; Co-

Author; Debt Collection, Loan Servicing, and Consumer Seminar; Dallas, TX (October 6,2006).

~ "How Are Courts Interpreting the New Banptcy Code?"; Co-Author; The Review ofBanking & Financial Services Review (November 2006).

1231366-1~ 2008, HughesWattersAskanase, Houston, Texas

~ "Limits on Payday Lending and Arbitration for Militar Personnel - Protection orCurse?"; Co-Author; CFL Law Report (February 7, 2007)

SIMON R. MAYER

Simon R. Mayer is an associate with Hughes WattersAskanase. His practice focusesmainly on reorganizations and workouts for corporations and individuals, and the representationof secured creditors in and out of banptcy. He also routinely represents Chapter 7 and

Chapter 11 trustees. He is a member of the Houston Bar Association, Houston Young LawyersAssociation, American Bar Association, and State Bar of Texas. He graduated from South Texas

College of Law in 2007 and obtained a bachelor's degree from the Trinity University at SanAntonio.

WILBUR E. SUGGS

Wilbur E. Suggs is a summer associate with HughesWattersAskanase. He is an activemember of the Black Law Students Association and a research assistant for the Fran EvansCenter for Conflict Resolution. He is a third-year law student at South Texas College of Lawand obtained his bachelor's degree with honors from Morehouse College in Atlanta, GA.

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TABLE OF CONTENTS

Page No.

I. HOT ISSUES IN BANKRUPTCY .............................................................................1A. Fees and expenses in bankruptcy meet high scrutiny. .................................1B. Tax advances for pre-petition taxes violate the automatic stay. .................6C. Mortgagee's proofs of claims in bankruptcy meet high scrutiny................ 8

D. Failure to properly account for payments made through a Chapter

13 plan of reorganization may violate the discharge injunction. ..............11E. Fraudulent exemption planning reduces homestead exemption. ..............15

II. HOT ISSUES IN FORECLOSURE......................................................................... 1 7

A. Failure to adequately provide notice may defeat foreclosure.................... 17

B. Documenting ownership of the loan is crucial. ...........................................19C. Orders lifting the stay are not final for ten days.........................................23D. Courts give res judicata effect to chapter 13 plans.....................................23E. Notify the insurer of foreclosure proceedings to avoid denial of a

claim. ............................................................................................................... 24F. Foreclosure judgments have a shelf life. ......................................................25G. Other Foreclosure Issues. .... ........ ............. ......... ......... ................. ..... ....... ..... .26H. The individual signing the affidavit must have personal

knowledge. ...................................................................................................... 27i. Borrower may have DTP A claims for "escrow services." .........................28J. TILA violations are not a special defense to foreclosure. ..........................29

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I. HOT ISSUES IN BANKRUPTCY

A. Fees and expenses in bankruptcv meet high scrutinv.

Servicers often find themselves in banptcy court when the foreclosure target fies

bankuptcy in an attempt to save the home. Banptcy courts are scrutinizing servicers

regarding their proofs of claims and application for legal fees incurred in the banuptcy. Much

of what the litigation servicers are facing today regarding the handling of a partial or a late

payment, or how it assesses fees, occur because the servicers are often acting on incorrect,

incomplete and/or inconsistent documents and data. Simply stated, many times the data the

servicer utilizes is simply wrong. These inaccuracies result from either improperly entered data

or inaccurate information provided by the seller. I

Another problem associated with imposing fees concerns whether the fees or penalties

are allowed under either the governing loan documents or under state law. Oftentimes, for the

fees to be allowed, the infraction and the resulting fees must be explicitly stated in the loan

documents. Further, what is permitted under law varies from state to state. If certain fees are not

authorized in the loan documents or are not permitted under state law, then charging those fees

exposes the loan servicer to liability and potentially expensive litigation. By communicating

with local counsel and performing due diligence through audits, the servicer can often avoid

charging fees and penalties which may result in litigation.

As empirical evidence sheds light on inaccurate servicer data, courts have taken a harder

look at fees in general? Additionally, attorney's fees have not been immune from scrutiny. For

example, in In re Ezzell, a banptcy court in the Southern District of Texas reiterated that a

i Jerr DeMuth, Employing Practical Tips to Avoid Class Action Litigation, SERVICING MANAGEMENT, Dec. 2006,

at i i.2 Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, at 3 (November 6, 2007) (U of

Iowa Legal Studies Research Paper No. 07-29). Available at SSRN: htt://ssm.com/abstract=i02796i.

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court has a duty to evaluate an application for an award offees.3 In In re Ezzell, the Court denied

an application for $200 in post-petition fees fied by the creditor's attorneys for fees incurred in

filing a proof of claim.

Initially, the cour noted that the attorneys did not qualify as direct applicants because

they did not fall under the categories in Section 503(b)(4). Section 503(b)(4) provides:

After notice and a hearing, there shall be allowed administrative expenses, otherthan claims allowed under section 502(£) of this title, including-

(4) reasonable compensation for professional services rendered byan attorney or an accountant of an entity whose expense is

allowable under subparagraph (A), (B), (C), (D), or (E) of

paragraph (3) of this subsection, based on the time, the nature, theextent, and the value of such services, and the cost of comparableservices other than in a case under this title, and reimbursement foractual, necessary expenses incurred by such attorney oraccountant.4

Section 503(b )(3)(A)-(E) allow compensation for creditors that (i) fie an involuntar

petition; (ii) recover propert of the benefit of the estate; (iii) prosecute criminal offenses; (iv)

represent a committee; or (v) act as a custodian. Second, assuming the application was in

substance an application from the creditor for fees pursuant to the promissory note and security

agreement, the application did not allege that either the promissory note or the deed of trust

permitted the recovery of such fees.5 Third, the application did not allege that the fees were

actually paid, which was a precondition to recovery in the note and deed of trust. Finally, the

court noted that the application did not comply with the procedural requirements of Rule

2016(a): service on the United States Trustee and "(a) statement as to what payments have

In re Ezzell, No. 07-34780, slip op. at 1-2 (Bank. S.D. Tex. Jan. 14,2008).4 11 U.S.c. § 503(b)(4).

5 In re Ezzell, No. 07-34780, slip op. at 3.

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theretofore been made or promised to the applicant for services rendered or to be rendered in any

capacity whatsoever in connection with the case. ,,6

This development, that fee applications and Rule 20 16(b) disclosures are now required

for fees the paries agree to pre-petition and are described in loan documents essentially requires

servicers and lenders to forfeit their rights because the cost of complying exceeds the fees

themselves in many, if not most, cases.

In In re Padila, the bankptcy cour was asked whether mortgage lenders must seek

cour approval before charging or collecting post-petition reimbursable expenses-legal fees,

inspection costs, and other expenses to protect a security interest in the debtor's home.? The

Padilas' chapter 13 plan stated that the debtors would pay arearage payments separately from

principal and interest payments, and the debtors would pay interest payments due post-

confirmation directly to Wells Fargo according to the Padillas' pre-petition mortgage contract.8

The Padilas were charged numerous Reimbursable Expenses9 during the Padilas' banptcy

case, including monthly inspection fees as well as attorneys' fees and costs, much of which was

assessed without cour approvaL. i 0

The Padilas contended that BANKRUPTCY RULE 2016(a)1l requires a person seeking to

collect reimbursable expenses to apply to the Court for reimbursement.

12 The Padilas further

6 Id. at 5.7 Padila v. Wells Fargo Home Mortgage, Inc. (In re Padila), 379 B.R. 643, 651 (Bankr. S.D. Tex. 2007).8 Id.9 "Reimbursable Expenses" was defined as legal fees, inspection costs, and other expenses routinely incurred by a

mortgage lender when protecting its interest in a debtor's home. Such reimbursable expenses are generally

authorized by the mortgage contract. Id. at 649.lO Jd11 BANKR. R. 2016(a), in its entirety, states:

An entity seeking interim or final compensation for services, or reimbursement of necessary

expenses, from the estate shall fie an application setting forth a detailed statement of (l) theservices rendered, time expended and expenses incurred, and (2) the amounts requested. Anapplication for compensation shall include a statement as to what payments have theretofore beenmade or promised to the applicant for services rendered or to be rendered in any capacitywhatsoever in connection with the case, the source of the compensation so paid or promised,


contended that Bankuptcy Code § 506(b)13 allows creditors to obtain attorney's fees and costs

only ifthe creditor is oversecured.14

The banptcy court held that Rule 2016(a) does govern collection of reimbursable

expenses by mortgage lenders in chapter 13 cases.15 The court reasoned that Rule 2016(a)'s

plain language and Congressional intent make it applicable both before and after confirmation.

16

The cour fuher held that reimbursable expenses that go beyond that which is allowed

under non-banptcy law do not violate the automatic stay, but do violate the order confirming

the debtors' Chapter 13 Plan, thus entitling the debtors to relief against the lender.1?

Also in the Southern District of Texas, Judge Jeff Bohm held in In re Sanchez that a

creditor holding a lien on a debtor's homestead may not assess post-petition charges, even if

those charges are specifically allowed under the pre-petition loan documents, unless the creditor

(i) provides notice to the debtor, and (ii) attains approval from the court.18 Further, the court

determined that a creditor may not advance taxes to protect its lien without notifying the court or

modifying a confirmed plan. 19

whether any compensation previously received has been shared and whether an agreement orunderstanding exists between the applicant and any other entity for the sharing of compensationreceived or to be received for services rendered in or in connection with the case, and the

particulars of any sharing of compensation or agreement or understanding therefore, except thatdetails of any agreement by the applicant for the sharing of compensation as a member or regularassociate of a firm of lawyers or accountants shall not be required. The requirements of this

subdivision shall apply to an application for compensation for services rendered by an attorney oraccountant even though the application is fied by a creditor or other entity. Unless the case is achapter 9 municipality case, the applicant shall transmit to the United States trstee a copy of theapplication.

12 Id.13 Section 506(b) states: To the extent that an allowed secured claim is secured by propert the value of which,

after any recovery under subsection ( c) of this section, is greater than the amount of such claim, there shall beallowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided forunder the agreement or State statute under which such claim arose.14 Id.15 Id.16 Jd at 657.17 Id. at 65 i.18 Sanchez v. Ameriquest Mortgage Co. (In re Sanchez), 372 B.R. 289, 321 (Bank. S.D. Tex. 2007).19 Id.


In Sanchez, Ameriquest held a security interest in the chapter 13 debtors' homestead.2o

Prior to confirmation of the debtors' chapter 13 plan, Ameriquest charged the debtors legal fees,

legal costs and property inspection fees.21 None of these fees were disclosed to the debtors or the

court. The debtors' chapter 13 plan was subsequently approved. The debtors made late

payments and Ameriquest fied a certificate of default alleging that the debtors had not made

their monthly payments pursuant to a previously entered agreed order.22

Following the certificate of default, Ameriquest sent the debtors a Forbearance

Agreement Plan to prevent foreclosure?3 Ameriquest did not send a copy of the plan to debtors'

counselor the court. The debtors agreed to the forbearance terms and paid Ameriquest monies

as detailed in the forbearance agreement. Ameriquest applied that money to banptcy costs,

property inspections and accrued interest. Shortly thereafter, Ameriquest paid the local taxing

authorities approximately $20,000.00 in unpaid taxes on the property.24

In its memorandum opinion, the court determined that neither Ameriquests post-petition

pre-confirmation charges nor its post-petition post-confirmation charges were allowable. In

denying Ameriquest's post-petition, pre-confirmation charges, the court held that for those

charges to be allowed under 11 U.S.C. § 506(b), the creditor must provide documentation to the

court so the court may review and analyze the application to determine reasonableness of the

charges?5 Because Ameriquest did not inform the bankptcy court, nor provide it with any

documentation of these charges, the banptcy court found the post-petition, pre-confirmation

charges unreasonable per se.26

20 Id. at 297.21 Id. at 299.22 Id. at 299-300.23 Id. at 300.24 Id.25 Id. at 303-04.26 Id. at 305.


In ruling on Ameriquests post-petition, post-confirmation charges, the court found 11

U.S.C. § 506(b) inapplicable.27 Instead, for post-confirmation charges, state law is the

determining factor as to whether a paricular charge is reasonable. However, because those

charges were not disclosed to the court, the court was unable to determine whether they would be

permitted under state law?8 By failing to disclose the charges to either the debtors or the court,

the court found that the Ameriquest made it impossible to determine the charges' reasonableness.

The lack of notice by Ameriquest made the post-confirmation charges per se unreasonable?9

Thus, it appears that a lender or servicer should submit an application under § 506(b) for

post-petition, pre-confirmation expenses and an application pursuant to state law for post-

confirmation expenses.

B. Tax advances for pre-petition taxes violate the automatic stay.

In In re Campbell, the Bankuptcy Court found that Countrywide willfully violated the

stay by requiring debtors' post-petition monthly mortgage escrow payment to include payment of

pre-petition property taxes.30 Plaintiff filed for chapter 13 banptcy and Countrywide fied a

proof of claim that included arearages for pre-petition debts as well as post-petition attorneys'

fees. The proof of claim listed the post-petition loan payments at $1,047.35, but stated that the

payments would increase to $1,124.97.31

The debtors brought an action for violation of the automatic stay, asserting that

Countrywide was attempting to collect pre-petition property taxes by increasing post-petition

mortgage payments. The court stated that the determining factor separating pre-petition debts

from post-petitioned debts is the period when the debt accrues. Tax obligations in Texas accrue

27 Id. at 306.28 Id. at 307.29 Id.30 Campbell v. Countryide Home Loans, Inc. (In re Campbell), 361 B.R. 831, 836 (Bankr. S.D. Tex. 2007).31 Id.


on January 1 of each year.32 "(A) claim for property taxes for the year in which a debtor's

petition is fied arises on January 1 of that year and is therefore a pre-petition claim even if the

assessment of such taxes occurs post-petition or payment ofthe taxes is not yet due.,,33

In Campbell, the debtors fied their bankptcy petition on April 3, 2006. Although the

2006 property taxes had not yet been assessed, the debtors' liability for such taxes accrued on

Januar 1,2006. Thus, the debtors' liability for their 2006 property taxes was a pre-petition debt.

Although the taxes arose prior to the debtor fiing for chapter 13 banptcy,

Countrywide contended that because it paid the taxes post-petition, the debt between

Countryide and the debtor arose post-petition.34 The court disagreed because: (1)

Countrywide's rights to repayment arise from its payment of debtors' debt to a third pary (the

taxing authorities), and Countryide can have no greater rights than that third party; and (2)

Countrywide's contractual right against the Debtors "arose pre-petition in accordance with the

terms of the Security Instrument, not post-petition when the taxes became due.,,35

By increasing the escrow payments post-petition to recover advances for pre-petition

taxes, the court determined that Countrywide violated the automatic stay. However, the court

determined a trial was necessar to determine actual damages and whether punitive damages

were warranted.36

Had Countrywide been in front of Judge Bohm in the same district, it might not have

been entitled to taxes advanced post-petition. The court took the position in Sanchez that

advancing taxes, as permitted by loan agreements, is purchasing the taxing authority's claim,

thus requiring compliance with the Bankptcy Rule 3001(e). Under that rule, a creditor wishing

32 Id. at 837-39.33 ¡d. at 839.34 Id. at 838.35 Id. at 84 i.36 Id. at 853.


to purchase another creditor's claim must fie notice of the transfer with the court.3? Ameriquest

argued that pursuant to § 1322(b )(2), the loan documents provided it the right to advance taxes to

protect its interest in the propert?8 Notwithstanding § 1322(b)(2), the court found that

advancing taxes was the same as purchasing a claim and held that Rule 3001(e) requires a

creditor to fie notice of such a transfer with the court. 39

C. Mortgagee's proofs of claims in bankruptcy meet high scrutiny.

How servicers charge and account for post-petition fees and advances is especially

important when submitting proofs of claims. Commentators have pointed to widespread

mortgagee noncompliance with banptcy law, including: fiing proofs of claim lacking the

documentation necessary to establish a valid debt, and unreasonable or poorly identified fees and

charges on banruptcy claims.4o It appears that the vast majority of these claims "pass

undisturbed through the banuptcy system.,,41

A recent study showed that over half of the proofs of claim fied are missing some piece

of documentation42 and as many as forty-three percent of itemizations contain vague or

impermissible fees.43 "If done without cause and in an unreasonable manner, the imposition of

these fees can constitute servicing abuse that may be an unfair or deceptive practice. ,,44

One type of fee that cours may not allow is a "property preservation fee," unless the

lender can show that it actually conducted a property inspection or appraisal.45 Another type of

fee that causes concern is the generic term "bankptcy fee," used to pay for the creditors'

37 Id.at318.38 Id.39 Id.at319.40 Katherine M. Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims 3 (November 6, 2007) (U of

Iowa Legal Studies Research Paper No. 07-29). Available at SSRN: http://ssrn.com/abstract=102796L.41 Id. at 18.42 Jd at 20.43 Id. at 25.44 Id. at 27.45 Id.


attorneys' fees. The permissibility of this practice appears to vary by jurisdiction.46 A larger

problem is that "the system appears to permit mortgagees to effectively make their own

determinations of what constitutes reasonable attorneys' fees. . . .,,47

A proof of claim is defined as "a written statement setting forth a creditor's claim" and it

must "conform substantially to the appropriate Official Form.,,48 A proper proof of claim must

include: (1) name and address of the creditor, (2) basis for the claim, (3) date that debt was

incurred, (4) classification of the claim, (5) amount of the claim, and (6) copies of any

documents supporting the claim.

49

Mortgagees' proofs of claim are also under fire for not including documentation, such as

proof of who owns the loan. A recent and well publicized district court decision dismissed

fourteen foreclosure cases, ruling that mortgage investors failed to prove that they owned the

properties that they were trying to seize.

50 The foreclosure cases were brought by Deutsche

Bank National Trust Company, a trustee for securitization pools that claimed to hold mortgages

underlying the foreclosed properties.51 Judge Boyko in the Northern District of Ohio ordered the

lenders to file copies of loan assignments showing that the lenders were indeed the owners of the

note and mortgage on each property when the foreclosure was filed.

52 Deutsche Ban could only

supply documents showing an intent to convey.

53

46 Id. at 29-30.47 Id. at 30.48 FED. R. BANKR. P. 3001(a).49 UNITED STATES BANKRUPTCY, PROOF OF CLAIM FORM B 10, OFFICIAL FORM 10 (04/07).50 In re Foreclosure Cases, 2007 WL 3232430 (N .0. Ohio Oct. 31, 2007); Gretchen Morgenson, Foreclosures Hit

a Snag for Lenders, N.Y. TIMES, Nov. 15, 2007,http://www.nytimes.com/2007/11/15/business/15Iend.html?ref=business (last visited Jan. 28, 2008).51 In re Foreclosure Cases, 2007 WL 3232430 at *1 (N.D. Ohio 2007).52 Id.53 Id. at *2.


The notes and mortgages identified the original lending institution, while the assignments

merely expressed a present intent to convey the interests sued on.

54 Therefore, the lenders could

not show that they were the owners of the notes and mortgages sued on. Accordingly, the

plaintiff-lenders could not show the constitutional requirements of standing. Describing as

"priceless" the jurisdictional integrity ofthe United States District Court, Judge Boyko dismissed

the lender's foreclosure complaints for failure to satisfy the burden of standing. 55

In another recent case, Washington Mutual's attorney failed to include attorneys' fees in

the proof of claim; however, those fees were later included as a line item on the debtor's payoff

statement.56 Washington Mutual then refused to provide the debtor with an abstract of title so

debtor could sell the home, unless the attorneys' fees were paid.57 The debtors paid the fees and

then brought suit to claim that the fees and the refusal to provide an abstract violated the

. 58automatic stay.

By not including the attorney fees in the proof of claim, but seeking it later through the

payoff statement, the court determined that Washington Mutual's counsel sought to hide the fee.

Furher, during testimony of Washington Mutual's counsel, the payoff statement was

characterized not as an invoice but as "informational" in nature. However, the debtor was unable

to sell his home until the fee was paid. The court found that the refusal to allow the closing of a

chapter 13 debtor's real estate sale for a lack of payment of undisclosed and unapproved pre-

confirmation attorney fees was a clear violation of the automatic stay.

In determining to award damages for emotional distress, the court took into consideration

the fact that the mortgagee had consistently paid his mortgage payment on time for twenty-eight

54 Id.55 Jd at *3.56 In re Sullvan, 367 B.R. 54,57 (Bankr. N.D.N.Y. 2007).57 Id. at 58.58 ¡d.


(28) years, including throughout his chapter 13 case. The court found that by preventing the

home sale until the fees were collected created a level of aggravation and frustration above "run-

of-the-mill" anxiety and, therefore awarded damages of $1 ,000 for emotional distress.

D. Failure to properly account for payments made through a Chapter 13 plan of

reorganization may violate the discharge injunction.

The Banptcy Abuse Prevention and Consumer Protection Act of 2005 added a

provision defining the wilful failure to credit chapter 13 payments as a violation of the discharge

injunction:

The wilful failure of a creditor to credit payments received under aplan confirmed under this title, unless the order confirming theplan is revoked, the plan is in default, or the creditor has notreceived payments required to be made under the plan in the

manner required by the plan (including crediting the amountsrequired under the plan), shall constitute a violation of aninjunction under subsection (a)(2) if the act of the creditor to

collect and failure to credit payments in the manner required by theplan caused material injury to the debtor. 59

As a result, motions to lift stay filed without thorough analysis of application of payments

made through a confirmed plan may trigger judicial scrutiny. For example, in In re Parsley,

Southern District of Texas Bankuptcy Court issued an "Order Requiring Countrywide Home

Loans, Inc. to Appear and Show Cause Why It Should Not Be Sanctioned for Filing a Motion for

Relief from Stay Containing Inaccurate Debt Figures and Inaccurate Allegations Concerning

Payments Received From the Debtor" ("Order to Show Cause") in February 2007.60

In his Order to Show Cause, the judge referenced (i) the inaccurate application of the first

post-petition mortgage payment to pre-petition arears rather than the payment then due, and (ii)

a payment not indicated on the payment history but appearing on Countrywide's own transaction

history. The court indicated concern that the debtor incurred unnecessary legal fees and

59 11 U.S.c. § 524(i).60 In re Parsley, 384 B.R. 138, 146 (Bankr. S.D. Tex. 2008).

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expenses because of the motion to lift stay that was withdrawn "at the eleventh hour because it

contained factual inaccuracies that Countrywide and its counsel should have discovered prior to

the filing of the Motion if proper attention (had) been given to the Debtor's mortgage payment

history and appropriate procedures.,,61

In its brief following the hearing, Countrywide indicated that upon discovery of the

inaccurate payment history, it withdrew the motion. Furher, Countrywide compensated the

debtor $250 for attorneys fees incured in responding to the motion to lift stay. Because no order

existed which Countrywide could violate, Countywide asserted it could not be sanctioned.

Because the debtor had not moved for relief against Countrywide, there was no issue of

compensating debtor. Thus, according to Countrywide, the Order to Show Cause appears as an

attempt to punish Countryide and vindicate the court's authority which is in the nature of a

criminal contempt proceeding and outside the bankrptcy court's jurisdiction.62

Countrywide detailed the factual background regarding recording payments and indicated

that a payment on its transaction history was not recorded on the manually kept bankptcy

ledger which resulted in the error. In addition, a payment was received after the analysis of

whether payments were made timely.63

The Order to Show Cause prompted extensive discovery propounded by the United States

Trustee covering a wide range of topics not identified in the original Order to Show Cause

resulting in over $200,000 in attorneys fees borne by Countrywide over approximately one

year. 64 In a 47 page opinion, the court ultimately found that although the servicer's conduct was

not appropriate, it was not, except for the conduct of its attorney, in bad faith. No sanctions were

61 ld at 145.

62 Id. at 178.63 Id. at 166.64 ¡d. at 142.


issued; however, the court held the U.S. Trustee was well within its authority to investigate the

loan servicer and its local and national counseL. 65

This case demonstrates the need to check pay histories for accuracy before fiing with the

court. Servicers must make sure all payments are properly applied and included on the pay

history. Otherwise, not accounting for payments received during banptcy may lead to cour

sanctions at the worst and expensive discovery or public reprimand at the least for servicers.

Further, this matter ilustrates the judicial scrutiny directed towards servicers in the

current "subprime crisis" environment. More importantly, it underscores the need for servicers

to seriously consider their procedures involving accounting in banptcy. As discussed below,

accounting in banptcy may lend itself to class actions.

Plaintiffs in Reyna v. GMAC Mortgage, LLC, brought a class action alleging that GMAC

Mortgage, LLC ("GMACM") abused the entire bankptcy process as a matter of practice by

failing to correctly account for payments, collecting pre-petition debts and charging improper

fees.66 In Reyna, the plaintiffs alleged that GMACM violated the automatic stay, discharge

injunction and chapter 13 procedures.67 Specifically, plaintiffs alleged that GMACM did not

bifurcate claims between normal monthly payments and deficiency payments, but instead sent

debtors demands for payment of pre-petition debts in incomprehensible and false amounts or

fied motions to lift stay using clearly false allegations.68 The result was that debtors would

either have their counsel spend countless hours defending their payment history or else face

foreclosure.69 Plaintiffs further alleged that GMACM added unapproved attorneys' fees and

65 Id. at 147, 8 i.66 Reyna v. GMAC Mortgage, LLC, Case No. 07-07007, Original Complaint, ~ 2 (Docket No. 1) (Bank. S.D. Tex.

2007).67 Jd at ~~ 1 -2.68 Jd at ~ 1 i.69 ¡d. at ~ 12.


other costs to the loan balance70 and failed to cause its computer systems to properly modify

bankptcy debts-resulting in demands for pre-petition debts in violation of the automatic

stay. 7 i

GMACM asserted several grounds for dismissal: lack of jurisdiction, absence of a private

cause of action, no violation of the automatic stay provision, debtors' inability to alter

GMACM's application of payments under the relevant loan documents, and statute of

limitations.72

In response to the class action, GMACM contended that the bankptcy court lacked

subject matter jurisdiction over unnamed plaintiffs whose banptcy cases were outside the

federal district,73 or that the court should at least abstain from exercising any such jurisdiction in

the interests of comity and judicial administration.74

GMACM further claimed that plaintiffs failed to state a claim on which relief could be

granted because no private causes of action exist under §§ 105,506,524, 1322(a)(1), 1322(b)(5),

1326(c), 1327(a) or 1328.75 Moreover, § 1322 of the Banptcy Code would not permit debtors

to modify the way in which GMACM, a lender secured solely by an interest in the debtors'

primary residence, applies payments to the loan account.76 Finally, GMAC asserted that it had

not violated the automatic stay provision because the payments were made outside the Chapter

13 Plan.77

Although the case is stil pending, the potential for a class action, underscores the

importance of chapter 13 accounting for servicers.

70 Id. at ~ 16.71 Id. at ~ 19.72 Reyna v. GMAC Mortgage, LLC, Case No. 07-07007, Motion to Dismiss, at 6.73 ¡d.

74 ¡d. at 7.75 ¡d. at 8.76 ¡d.

77 ¡d. at 37.


E. Fraudulent exemption planning reduces homestead exemption.

Section 522(0) provides that to the extent that a portion of the debtor's interest in the

homestead is attributable to fraud, the debtor's homestead exemption is reduced by that amount.

Fraud occurs if the debtor disposes of property in the ten-year period before the petition fiing

date with the intent to hinder, delay, or defraud a creditor.78

The passage of the Banptcy Abuse Prevention and Consumer Protection Act

(BAPCP A) in 2005 reflected a change in Congressional attitude towardexemption planning. As one cour has noted: "Congress began to put the brakeson the freedom with which states could protect their state residents by providinggenerous homestead protection laws." In re Maronde, 332 B.R. 593, 598

(Bankr.D.Minn. 2005). Specifically, BAPCPA added § 522(0). This sub§reduces the value of the debtor's exempt interest in a homestead to the extentattributable to any nonexempt property that the debtor disposed of for the purposeof increasing the debtor's equity in the homestead. The look -back period for thissubsection is ten years, and the objecting pary has to show that the debtordisposed of the nonexempt property with the intent to hinder, delay, or defraudone or more creditors.79

To prevail under § 522(0), the movant must show:

(1) the debtor disposed of property within 10 years preceding the banuptcyfiling; (2) the property that the debtor disposed of was nonexempt; (3) some of theproceeds from the sale of the nonexempt property were used to buy a newhomestead, improve an existing homestead, or reduce the debt associated with anexisting homestead, or, alternatively, to buy a new principal residence used bydependents of the debtor, improve an existing principal residence used bydependents of the debtor, or reduce the debt associated with a principal residenceused by dependents of the debtor; and (4) the debtor disposed of the nonexemptproperty with the intent to hinder, delay, or defraud a creditor.8o

In Sissom, the court found the first three elements easily met - shortly before bankuptcy,

the debtor sold non-exempt stock and used some of the proceeds to buy a new house. In

determining whether the debtor had the intent to hinder, delay or defraud a creditor, the court

considered 13 indicia of fraud:

78 11 U.S.c. § 522(0).79 In re Sissom, 366 B.R. 677, 678 (Bank. S.D. Tex. 2007) (footnote omitted).80 Id. at 688.


a. Whether the transfer or obligation was to an insider;b. Whether the debtor retained possession or control of the property after the

transfer;c. Whether the transfer or obligation was concealed;

d. Whether before the transfer was made or obligation incurred, the debtorhad been sued or threatened with suit;

e. Whether the transfer was of substantially all the debtor's assets;f. Whether the debtor absconded - i.e., avoided service of process and/or

concealed himself;g. Whether the debtor removed or concealed assets;

h. Whether the value of the consideration received by the debtor was

reasonably equivalent to the value of the asset transferred or the amount ofthe obligation incured;

1. Whether the debtor was insolvent or became insolvent shortly after the

transfer was made or the obligation was incurred;J. Whether the transfer occured shortly before or shortly after a substantial

debt vvas incured;k. Whether the transfer was done just prior to the filing of the debtor's

banptcy petition;1. Whether the debtor is unable to explain the disappearance of assets; andm. Whether the debtor has engaged in a pattern of "sharp dealing" prior to

banptcy. 8 1

In Sissom, eleven of the thirteen badges of fraud were met and the debtor's homestead

exemption denied.

Similarly, the Eighth Circuit recently affirmed a banptcy court's decision to sustain

the trustee's objection to a debtor's homestead exemption because the debtor paid down his

mortgage with non-exempt cash in an effort to thwar creditors.82 In Addison, the debtor's

business stared failing and the ban began efforts to collect the debtor's personal guarantee of

$1.3 millon. The bankuptcy cour found that the payment on the residential mortgage was used

81 Id. at 692-93 (citing Tex. Bus. & Com.Code Ann. § 24.005(b); In re Maronde, 332 B.R. 593 (Bank. D. Minn.

2005); In re Agnew, 355 B.R. 276, 285 (Ban.D.Kan. 2006); In re Lacounte, 342 B.R. 809, 816 (Bank.D.Mont.2005)).82 In re Addison, 368 B.R. 791 (8th Cir. BAP 2007). See also In re Keck, 363 B.R. 193,209 (Bankr. D. Kan. 2007)

("This is not a case where a debtor simply converted non-exempt property he already owned to exempt propert inanticipation of fiing for bankruptcy, as par of legitimate bankuptcy estate planning clearly allowed in this Circuit.Instead, this Debtor purposely incurred substantial debt on his unsecured credit cards in order to obtain the non-exempt propert, which he then converted to his homestead--in other words, this Debtor borrowed unsecured cash to"create" equity, not to preserve assets he already owned. The Court finds that the Trustee has met her burden ofshowing that Debtor's homestead exemption should be reduced, pursuant to § 522(0).").


to reduce the principal balance, not to protect the home from foreclosure by making payments

then due and that the steps the debtor took to convert nonexempt assets to exempt assets were

taken with the intent to hinder, delay, and defraud his creditors.

II. HOT ISSUES IN FORECLOSURE

A. Failure to adequately provide notice may defeat foreclosure.

The United States Supreme Cour has also weighed in on foreclosure proceedings, ruling

on the sufficiency of notice in a judicial tax foreclosure proceeding.83 Gar Jones's mortgage

company paid his property taxes for thirty years, but after Jones paid off his mortgage, he failed

to pay his property taxes.84 The commissioner of state lands attempted to notify Jones of his tax

delinquency by mailing a certified letter to Jones's address, but no one was home to sign for the

letter and no one retrieved it from the post office. The commissioner later sent Jones another

letter, this time notifying Jones that his house would be sold if Jones failed to pay his taxes. But

the second letter also went unclaimed. Another party purchased the property after the

foreclosure sale and sent Jones an unlawfl detainer notice.

Jones fied suit against the taxing authority and the tax foreclosure purchaser, alleging

that failure to provide notice of the tax sale and of his right of redemption resulted in the taking

of his property without due process. The Arkansas Supreme Cour noted that due process does

not require actual notice and that notice by certified mail satisfied due process under the

circumstances. The Supreme Cour granted certiorari to resolve whether the due process clause

requires the governent to take additional steps to notify a property owner when notice of a tax

sale is returned undelivered or unclaimed.

83 Jones v. Flowers, 547 U.S. 220 (2006); Ronald S. Deutsch, u.s. Supreme Court Decision Addresses the

Adequacy of Notice, at 43 SERVICING MANAGEMENT, Oct. 2006.84 Jones, 547 U.S. at 223.


Before a state may take property and sell it for unpaid taxes, the Due Process Clause of

the Fourteenth Amendment requires the government to provide the owner with "notice and

opportunity for hearing appropriate to the nature of the case.,,85 To determine whether notice in

a particular case is constitutionally suffcient, the court must balance the interests of the state

against the individual's interests.86

The Supreme Cour ruled that where the government has actual knowledge that the initial

notice did not reach the intended pary, additional steps must be taken. The adequacy of a

paricular form of notice is assessed by balancing interests. Where, as here, the sender had actual

knowledge that the notice was returned and never received, due process requires that additional

reasonable steps be taken to contact the owner. Moreover, Jones's failure to comply with the

statutory obligation to keep his address updated did not cause the forfeiture of his constitutional

rights.

In 2008, the Dallas Court of Appeals addressed what constitutes adequate notice of

acceleration in foreclosure proceedings.87 Joy Burney executed a home equity note secured by a

deed of trust dated March 15, 1999 payable to Long Beach Mortgage Company in the principal

amount of $42,250. The deed of trust contained an acceleration clause that provided upon

borrower's failure to cure a default within thirty days of notice, the entire balance of the loan

would be due.88 On March 24, 1999, Long Beach assigned the note to Northwest Ban

Minnesota, N.A. Burney subsequently defaulted on the loan and Northwest sent her a notice of

default on October 18, 1999. Burney did not cure the default within the thirty day timeframe as

required by the letter. On April 5, 2000, Northwest fied an application for expedited

85 Jones, 547 U.S. at 223 (citing Mullane v. Cent. Hanover Bank & Trust Co., 339 U.S. 306, 313 (1950)); Deutsch,

supra note 83, at 46.86 Deutsch, supra note 83, at 46.87 Burney v. Cžtigroup Global Markets Realty Corp., 244 S.W.3d 900 (Tex.App.-Dallas 2008).88 ¡d. at 901.


foreclosure, which was subsequently dismissed for want of prosecution. On October 21, 2004,

Citigroup, a subsequent assignee, sent notice to Burney that it had accelerated the maturity of the

debt. On November 15, 2004, Citigroup filed a home equity foreclosure application to sell the

property. During the appeal, Burney argued the trial court erred in allowing Citigroup to proceed

with the foreclosure because Citigroup was barred by the statute of limitations.

The court found that the October 1999 letter sent by Northwest constituted notice of

intent to accelerate and the April 2000 application for expedited foreclosure constituted notice of

acceleration.89 Because the loan balance was accelerated in April 2000, triggering the running of

the four year statute of limitations, the November 15, 2004 application for expedited foreclosure

was barred. The Dallas Cour of Appeals ruled that under the facts and circumstances of this

case, notice of filing an expedited application for foreclosure after the requisite notice of intent to

accelerate is sufficient to constitute notice of acceleration.

This case demonstrates the importance of servicers having a mechanism or system in

place to keep up with the dates of default and more specifically acceleration triggers on each fie

because the statute of limitations could run and cut off their liens.

B. Documenting ownership of the loan is crucial.

Ownership of the note and mortgage and a complete chain of assignments are crucial in

attaining standing in foreclosure proceedings. Recently, assignment and ownership have come

under judicial scrutiny and the complexities of securitizations make identifying the owner of a

mortgage difficult. This complexity has already begun to lead to complications for lenders and

servicers in foreclosure proceedings.

89 Jd at 904.


In In re Brooks, a chapter 13 debtor, prior to bankptcy, executed three different loans

and used the same real property as collateral on each loan.9o The third loan was assigned from

Gelt Financial Corp to Altegra Credit Company. Although debtor appealed, Altegra won a final

foreclosure judgment against debtor in state cour regarding the real property. The court

acknowledged that the state order was a final judgment on the merits which precluded debtor

from attacking that judgment. The current issue faced by the court was what became of the

mortgage after it was assigned to Altegra.91

Litton Loan Servicing, LP, alleging it represented Residential Funding Company as

owner of the mortgage, fied a proof of claim and a motion for relief attaching the loan

documents regarding the Gelt loan, which was assigned to Altegra. In order for Litton to

maintain standing, the court requested proof of assignment. Litton's attorney filed an amended

pleading in the name of Residential Funding Company, assignee of Altegra, assignee of Gelt.

However, Residential did not make any motions or claims in the case and there was no mention

of Litton in this pleading. Debtor objected to the amended pleading because it was untimely and

there was no proof of ownership/assignment.

The cour stated that due to an impossible paper trail and because the claim is facially

flawed, it did not have a clear picture of who currently owned the mortgage and did not want to

grant relief where it was not deserved.92 Therefore, the court denied the amended motion for

relief without prejudice to refillng as to the mortgagee with proof of ownership/assignment and

noted that debtor stil remained liable for the foreclosure judgment. It should be mentioned that

if the owners of the mortgage had their assignments in order initially, they would not have faced

this problem.

90 In re Brooks, 2008 WL 416268 (Bankr. E.D. Pa. Feb. 3,2008).91 Id. at *2.92 Jd. at *3.

1231366- I 20~ 2008, HughesWattersAskanase, Houston, Texas

Mortgage Electronic Registration Systems Inc. (MERS), is an electronic loan record-

keeping service.93 MERS is now the subject of a class action suit in Minnesota, where a group of

homeowners accuse MERS of failing to list the entire chain of owners of loans in foreclosure as

required by state law. Accusing MERS of facilitating anonymity in the securitization process,

the situation is described as one where "we don't know who made these loans, who funded them,

who traded them, (or) who owns them now, because MERS is the record mortgagee.,,94 Many of

the lawsuits against MERS center on whether it has legal standing to foreclose on the homes.

In a wry opinion denying standing to mortgage lenders in consolidated foreclosure cases,

Judge Boyko in the U.S. District Court of the Northern District of Ohio was clear in his lack of

concern for the need to protect the lenders.95 Describing as "priceless" the jurisdictional

integrity of the United States District Cour, Judge Boyko dismissed the lender's foreclosure

complaints for failure to satisfy the burden of standing. Specifically, the lender could not show

that it was the owner of the notes and mortgages on which it sought foreclosure. The notes and

mortgages identified the original lending institution, while the assignments merely expressed a

present intent to convey the interests sued on. Accordingly, the plaintiff-lender could not show

the constitutional requirements of standing.

One of the difficulties facing the plaintiff-lender is the convoluted path of a mortgage into

a securitization pool. In a recent New York case, the language in the assignment stated

"(a)ssignment shall be effective as of August 1, 2006.,,96 The court ruled that attempting to

retroactively assign would be insufficient to establish the plaintiffs ownership interest at the

93 Jennifer Bjorhus, Suit Targets Loan Registry: Industry Service Holds Mortgages, TRADINGMARKETS.COM,

Jan. 26, 2008), available at http://www.tradingmarkets.com/.site/news/Stock%20News/1 03 1 328 (last visited

Jan. 30, 2008).94 Id.95 In re Foreclosure Cases, 2007 WL 3232430 (N.D. Ohio Oct. 31,2007).96 Countryide Home Loans, Inc. v. Taylor, 843 N.Y.S.2d 495, 497 (N.Y. Sup. Ct. 2007).


time the action was commenced. Further, because foreclosure of a mortgage can not be brought

by an entity that has no title to the property, the plaintiff lacked standing to bring the action. As

a result, the assignment had to be fully executed prior to the commencement of the foreclosure

action.

Likewise, In Aurora Loan Services, LLC v. Sattar, the judge conducted his own

investigation and determined that the assignment to the plaintiff was not of record.97 More than

five months elapsed from the time the debtor declared banptcy until the court hearing. Yet

during that time, no evidence could be produced demonstrating an effective assignment from the

previous servicer to Aurora. Without an assignment, the court found that Aurora was not and

never had been a mortgagee in the foreclosure proceeding. The court denied the application for

notice of foreclosure, dismissed the complaint and the notice of pendency was cancelled.

Further, the judge wared of possible future sanctions against the servicer's attorneys and the

servicer for wasting judicial resources by commencing an action in which the alleged plaintiff

lacked the most basic of standing requirements.

A recent case where such lack of standing resulted in sanctions was In re Nosek.98 The

court issued a show cause order to determine why numerous paries representing Ameriquest had

failed to advise the court that Ameriquest was in fact only servicer, not holder of the note at

issue. The court did not buy Ameriquests defense that confusion as to a party's role is

understandable against the current commercial climate. The court admonished lenders and

servicers that the rules of the court apply to them and "their private agreements and the frenzied

trading market for mortgages do not excuse compliance with bankptcy rules." In an exercise

97 Aurora Loan Services, LLC v. Sattar, 2007 WL 2917245 (N.Y. Sup. Ct. Oct. 9,2007).98 In re Nosek, 2008 WL 1899845 (Bankr. D. Mass. Apr. 25,2008).


of its Rule 105 powers, the court sanctioned the mortgage holder (Wells Fargo) and Ameriquest

$250,000 each. The court also sanctioned the law firms and individual attorneys involved.

C. Orders lifting the stay are not final for ten days.

It is important to note that orders granting relief from the automatic stay are automatically

stayed for a period often days unless the court orders otherwise.99 In In re Derringer, the debtor

fied for Chapter 13 banptcy two days before a scheduled foreclosure sale.100 The banptcy

court terminated the automatic stay as it applied to the judgment creditors, and the creditors fied

a foreclosure notice with the state court before the ten days lapsed.

The creditors contended that this foreclosure sale did not violate the ten-day stay because

it was merely a continuation or postponement of a previously scheduled foreclosure sale. The

court remained unconvinced, ruling that the creditors had begun the sale process anew rather

than merely continuing a postponed sale. The court found that the automatic stay was stil in

effect when the creditors mailed the foreclosure notice and caused it to be filed in the state cour,

and that the notice served to initiate an entirely new sale. The bankruptcy court assessed $903 in

actual and punitive damages. The appellate court considered the finding that a violation

occurred and confirmed the banptcy court's finding that the judgment creditors willfully

violated the automatic stay.

D. Courts give res judicata effect to chapter 13 plans.

Creditors must properly and timely analyze chapter 13 banptcy plans and object to

them in order to avoid the res judicata effect. For example, debtors may attempt to bind creditors

to unfortunate treatment in these plans. In In re Colon, the Tenth Circuit Bankptcy Appellate

Panel ruled that a chapter 13 plan is res judicata as to the matters necessarily determined by the

99 FED. R. BANKR. P. 400 1 (a)(3).

100 In re Derringer, 375 B.R. 903, 905 (B.A.P. 10th Cir. 2007).


confirmation order. 101 In this case, the mortgage's legal description incorrectly identified the lot

number of the property. The creditor failed to file an objection against the plan. The chapter 13

plan was confirmed with a notation stating that the mortgage was improperly perfected and

avoidable by the trustee. The creditor argued that the plan violated 11 D.S.C. § 1322 of the

Bankuptcy Code and could not be res judicata as to the creditor's rights to payment under the

mortgage. Citing the Tenth Circuit, the court found that an:

order confirming a chapter 13 plan represents a binding

determination of the rights and liabilities of the paries as ordainedby the plan. Absent timely appeal, the confirmed plan is res

judicata and its terms are not subject to collateral attack, andcreditors 'may not take actions to collect debts that are inconsistentwith the method of payment provided for in the plan.' 102

Thus, the chapter 13 plan was considered res judicata as to the avoidability of the mortgage and

the creditor was bound by the terms of that plan.

E. Notify the insurer of foreclosure proceedings to avoid denial of a claim.

Lenders/servicers must notify the company insuring the home before initiating

foreclosure proceedings. A Tennessee appeals court recently ruled that the commencement of

foreclosure proceedings constitutes an "increase in hazard" under a standard mortgage clause in

an insurance policy.103 Tennessee Farmers Mutual Insurance Company ("Insurer") issued a fire

insurance policy, which contained a standard mortgage clause requiring US Bank to notify

Insurer of any "increase in hazard." The homeowner fell behind on her mortgage payments, and

US Ban initiated foreclosure proceedings which were stayed after the debtor filed for

banptcy. At no time did the bank notify Insurer of the foreclosure proceedings. The house

\0\ Hamilton v. Wash. Mut. Bank FA (In re Colon), 376 B.R. 33, 37 (B.A.P. 10th Cir. 2007).102 Id. at 37 (quoting In re Talbot, 124 F.3d 1201, 1209 (10th Cir. 1997)); see also In re Brooks, 2008 WL 416268

at *1.103 u.s. Bank v. Tenn. Farmers Mut. Ins. Co., No. W2006-02536-COA-R3-CV, 2007 WL 4463959, at *1 (Tenn.

Ct. App. Dec. 21, 2007).


was destroyed by fire, allegedly caused during the manufacture of methamphetamines, before

foreclosure. Insurer refused to pay for the home asserting the ban failed to notify it of the

foreclosure proceedings, which qualified as an increase in hazard, and the court agreed.

104

The Court defined hazard as an increased risk of loss. The hazard in this case was that an

insured may be tempted to destroy the property and obtain the funds to payoff the mortgage to

avoid foreclosure. As such, it was the initiation of foreclosure proceedings that triggered the

increase in hazard, rather than the conclusion of foreclosure proceedings.

The cour's concern appears to be well founded in the wake of a rise in suspected arson in

the areas hard hit by the "subprime crisis." The FBI reported that arson grew 4% in suburbs

from 2005 to 2006, and in California, insurance company reports of suspected arson almost

doubled. 10S Arests for arson in Detroit rose by 89% between 2005 and 2007. 106

F. Foreclosure iud2:ments have a shelf life.

Courts have also begun to scrutinize the period between foreclosure and sale to determine

if the foreclosure was done in a reasonably prompt manner. In one extreme example,

approximately 10 years passed between the time the foreclosure judgment was entered and the

sale occurred. 107 During that period, there had been four auction sales, but each had failed for

undisclosed reasons. Over the period, additional costs were incurred, yet the original judgment

capped the amount allowed for such fees and expenses.

The court determined that the referee's accounting is an important measure of ensuring

that the foreclosure process is performed reliably and in a fair way. An accurate, imparial and

104 ¡d. at *5.105 Marilyn Lewis, Broke Homeowners Linked to Arson, MSNhtt://articles.moneycentral . msn. com/lnsurance/I nsure Y ourH ome/BrokeHomeownersTum T oArson.aspxvisited Feb. 4, 2008).106 ¡d.

107 Bardi v. Morgan, 847 N.Y.S.2d 43 i (N.Y. Sup Ct. 2007).

Money,(last


transparent accounting becomes even more important when the buyer is not an independent

third-party, but is the foreclosing mortgage holder, as was the situation in this case.

By not conducting the sale within a reasonable time, the referee's accounting originally

performed prior to the foreclosure judgment, had grown stale. Considering the importance of the

referee's accounting to the court, the court found that any auction sale scheduled to occur more

than one year from the entry of the judgment of foreclosure and sale is invalid, unless an

amended judgment with an updated reference is provided.

G. Other Foreclosure Issues.

In Wiliams v. Countrywide, Deutsche Bank, as trustee, foreclosed on Wiliams' home

and Wiliams filed suit on the grounds that Deutsche violated consumer protection statutes.10S

The court granted summary judgment in Deutsche Bank's favor. On appeal, Wiliams argued

that Deutsche lacked authority to authorize the foreclosure sale because of inconsistencies in the

summar judgment documents that showed Deutsche as trustee for Vendee Mortgage Trust

1994-2, rather than 1995-3.

The court found that Wiliams provided no evidence that the incorrect numbers were

other than typographical errors, or that they caused any harm or affected the foreclosure process

in any way. 109

In a memorandum opinion, the Southern District of Texas addressed the issue of whether

a foreclosure sale conducted pre-petition passed title to a purchaser when the bankptcy case

was fied before the deed to the purchaser was delivered. i 10 Because the court found no deed

was delivered and the buyer's receipt of purchase provided that the sale was contingent on future

events, the sale was not complete. Therefore, the court held that at the moment when the

\08 Willams v. Countryide, No. 07-20672,2008 WL 687295 (5th Cir. Mar. 13,2008) (per curium).109 This case is a nice relief to know that not every mistake is grounds for invalidating foreclosure.110 In re Gomez, Case No. 07-7018 (Bankr. S.D. Tex. April 4, 2008).


bankuptcy petition was fied, the purchaser lacked both legal and equitable title and the

homestead remained property of the bankruptcy estate.

H. The individual signing the affdavit must have personal knowledge.

Lender's counsel's actions have not escaped the court's scrutiny either. In In re Osborne,

the court sanctioned the lender's counsel for misconduct and imposed debtor's attorney's fees on

the lender and its counsel in connection with a motion for relief from the automatic stay.

1 II

Under the facts of Osborne, the creditor's counsel filed an affidavit, with the motion for relief

from stay, stating that the debtor had breached a previous consent order. The affidavit recited

that the attorney had personal knowledge of the facts it set forth. However, during testimony the

attorney admitted she had no personal knowledge concerning the facts and all of her knowledge

of the case had come from the creditor's fie. Further, it was determined that the debtor was in

fact current on her mortgage payments.

The court found that it had authority under 28 D.S.C. § 1927 to sanction lawyers who

"unreasonably and vexatiously multiply court proceedings and assess the lawyers with the excess

costs, expenses and attorneys' fees reasonably incurred because of such conduct."

1 12 The cour

found that the attorney's conduct was reckless and such conduct was vexatious within 28 U.S.C.

§ 1927. Thus, the court found it had the authority to sanction lender's counsel for activity that

she reasonably should have known had no factual support. Based on the findings the attorney

wilfully abused the bankruptcy process by fiing a motion with incorrect figures. The lender and

its attorney were jointly sanctioned for $5,000 in emotional damages and over $40,000 in

attorney's fees.

iii In re Osborne, 375 B.R. 216 (Bankr. M.D. La. 2007).

112 Id. at 224.


I. Borrower may have DTP A claims for "escrow services."

A Texas court of appeals overturned a dismissal of the Texas Deceptive Trade Practices

Act C"DTP A") claims related to a home equity loan because the plaintiff showed more than a

scintila of evidence that his primary objective when obtaining the loan was to obtain services-

the services being that the lender would payoff the tax claims causing him to seek the loan. In

Allen v. American General Finance, Inc., the plaintiff had failed to pay taxes for several years.

1 13

He learned of a tax suit alleging more than $6,000 in delinquent taxes. Because he did not have

the money to pay the debt, the plaintiff sought a home equity loan from American General

Finance ("AGF"). When he requested the loan, he told the AGF representative that he needed to

pay the tax suits and AGF assured him that they would pay the taxes. AGF paid less than the

amount due to the taxing authority and the taxing authority eventually foreclosed on the house.

The plaintiff asserted, among other things, a DTP A claim. AGF moved on summar

judgment that the plaintiff was not a consumer and the court granted the motion for summary

judgment in favor of AGF without explanation. On appeal, the cour recognized that "a person

who seeks "only the extension of credit. . . and nothing more' is not a consumer under the DTPA

because the lending of money is not a good or service.,,1l4 "However, when a borrower's

objective is to obtain goods or services and the loan provides the means for obtaining the goods

or services, the borrower qualifies as a consumer. . . . The determining factor is whether the

borrower's "objective' is solely to obtain a loan or to obtain a good or service.,,115

The Texas Court of Appeals found that the plaintiff presented sufficient summary

judgment evidence that he sought "escrow services" to accomplish his objective of "taking care

11 Allen v. Am. Gen. Fin., Inc., No. 04-06-00273-CV, 2007 WL 4180145 (Tex. App.-San Antonio Nov. 28,

2007).114 Id. at *14.115 Id.


of the tax suits.'" 16 Therefore, the lower court erred in dismissing the DTP A claim because AGF

failed to establish as a matter of law that the plaintiff was not a consumer. Thus, the DTP A

claim was permitted to go forward on the basis that the plaintiff sought escrow services from

AGF making him a consumer entitled to a DTPA claim.

This development, that escrow services elevate borrowers to "consumer" status under the

DTP A, gives plaintiffs another cause of action to consider when lodging complaints concerning

loan transactions.

J. TILA violations are not a special defense to foreclosure.

On November 7, 2007, the Superior Court of Connecticut ruled that alleged TILA

violations do not constitute a legally suffcient special defense in foreclosures. 1 17 The cour also

ruled that, while a violation of TILA may constitute a violation of the Connecticut Unfair Trade

Practices Act (CUTP A), the theory behind the defendant's claim-that failure to disclose certain

fees violated TILA-was invalid as a matter of law.

In Countrywide Home Loans, Inc. v. Needham, the plaintiff Countrywide sued defendant

Needham to foreclose on a mortgage. The defendant claimed (among other things) that

Countrywide failed to disclose courier, recording, and copy fees in violation of TILA and,

consequently, in violation of CUTPA. The court first held that a violation of TILA, even if

proven true, does not constitute a special defense to foreclosure because TILA violations do not

address the enforceability of a note or mortgage. Furher, the cour held that failing to disclose

courier, recording, and copy fees does not violate TILA or Regulation Z, and thus Countrywide

did not violate the CUTP A.

116 Id.117 Countryide Home Loans, Inc. v. Needham, No. LLICV076000242S, 2007 WL 4211261 (Conn. Super. Ct.

Nov. 7,2007) (unpublished).


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