Chapter 13 Bankruptcy

Written by Craig D. Robins, Esq.

A review of United States bankruptcy litigation during the past year shows an incredible increase in the number of proceedings brought against mortgagees and their attorneys who initiated frivolous proceedings, filed incorrect documents, or sought unreasonable attorneys fees. In my April 2008 column in the Suffolk Lawyer, I discussed efforts of the United States Trustee to pursue mortgage companies and their counsel who engaged in such improper conduct.

Since then, there have been even more highly publicized cases, especially involving the poster-child of bad-boy bankruptcy practices, Countrywide Mortgage Company. Not only has the U.S. Trustee brought suit against Countrywide in a host of cases around the country, but a number of State Attorneys General have sued them as well for deceptive practices.

Why Mortgagee Litigation is on the Rise. I previously wrote that in the past, if a mortgage company violated the rules — by bringing a frivolous motion to lift the stay or filing an incorrect proof of claim – then invariably the worst punishment it would receive would be little more than a slap on the wrist – a token sanction in a nominal amount.

In the past year, with increased attention towards mortgage companies engaging in sloppy bankruptcy practices, the Office of the U.S. Trustee said, “enough is enough.” In doing so, the U.S. Trustee developed a new policy to police and punish those mortgage companies and their attorneys who flout their obligations to follow the rules.

In addition, since such conduct can be considered “bankruptcy abuse,” the Courts have been more open-minded towards sanctioning abuse, especially considering that the official name of the 2005 Bankruptcy Amendment Act is “the Bankruptcy Abuse Prevention and Consumer Protection Act” (often referred to as “BAPCPA”).

In the Past, Mortgagees Were Not Deterred by Sanctions. In prior years, if a mortgagee engaged in frivolous litigation or filed an erroneous proof of claim, debtors’ bankruptcy counsel, including myself, would be hesitant to litigate for several reasons.

First, the debtor rarely had sufficient funds to cover the cost of doing so. Second, the Courts seemed reluctant to sanction the mortgagee sufficiently to cover the attorney’s billable time. Finally, on the rare occasions when mortgagees were sanctioned, the amounts were often so low, that the mortgagees chalked up the sanctions as a small cost of doing business, and were not deterred at all from improper future practices. For these reasons, the most common approach was to work out a non-litigious disposition that did not necessarily result in the fairest outcome to the debtor.

A Perfect Example of Mortgagee Abuse Falls in My Lap. In 2004, I filed a routine Chapter 13 proceeding for my client, Walter C. Schmidt (04-87110-dem). His Chapter 13 plan was confirmed, and for years, the debtor made regular and timely payments to the trustee and mortgagee. Schmidt was a great client – always personable, responsible and cooperative. He is also a paraplegic and confined to a wheelchair, having been catastrophically disabled with multiple sclerosis from Agent Orange exposure after serving our country in Vietnam.

In December 2007, more than three years after the petition was filed, the debtor’s mortgagee, Bayview Financial, brought a typical motion to lift the stay. They argued that the debtor neglected to pay his real estate taxes which had come due two months earlier, and for this reason, the stay should be vacated. This was quite a surprise because it was the mortgagee, not the debtor, who was obligated to pay the real estate taxes.

The debtor had the same mortgage for over twenty years and every single payment to the mortgagee included an escrow component for the purpose of the mortgagee paying the real estate taxes. Since it was the mortgagee’s obligation to pay the real estate taxes, their position in the motion to lift the stay was totally erroneous and therefore frivolous and abusive. For some reason, the mortgagee made an unbelievably sloppy mistake.

It thus seemed that not only did the debtor have a perfect defense to the motion to lift the stay, but he also had a great case for bringing a cross-motion seeking sanctions for bringing a frivolous motion. Whereas in the past I would have been hesitant to vigorously pursue sanctions, I thought the time was now ripe to do so.

The Mortgagee was Guilty of Violating Other Statutes. Upon reviewing the situation further with the debtor, I learned that the mortgagee often paid the real estate taxes late, resulting in penalties, and that there was one period that the mortgagee neglected to pay the real estate tax altogether. I then spent even more time pouring through the debtor’s documents and inquiring about the debtor’s history with the mortgagee.

I learned that the mortgagee had failed to provide debtor with post-petition annual escrow disclosure statements. Apparently, the last time the debtor received an annual escrow disclosure statement was in November 2004. This violated federal law.

The Real Estate Settlement and Procedures Act of 1974 (“RESPA”) is a federal consumer protection statute that, among other things, requires mortgage servicers who collect escrow to conduct an escrow account analysis each year to determine the borrower’s monthly escrow account payments for the next year. Upon completing an escrow account analysis, the servicer must provide an annual escrow account disclosure statement to the borrower.

For each and every year from 2005 to the present, the lender failed to adhere to its federally-mandated obligation to provide the debtor with the annual escrow account disclosure statement. There is no exception that gives mortgage servicers a vacation from this requirement while the borrower is in a Chapter 13 bankruptcy proceeding.

RESPA provides that a servicer’s failure to provide the borrower with the annual escrow account disclosure statement is a violation of the statute. RESPA also gives individuals a private right of action against mortgagees who violate such provisions.

I Sought Sanctions Against the Mortgagee. I spent a significant amount of time researching and drafting a reply to the motion, which incorporated a cross-motion for sanctions.

I argued that the mortgagee engaged in egregious conduct which was abusive under BAPCPA, filed a frivolous motion, sometimes failed to pay the debtor’s real estate taxes, often paid the taxes late which resulted in penalties and late fees, and violated RESPA statutes for failing to provide the debtor with annual escrow account disclosure statements. As with any application for sanctions, I also sought costs and attorney’s fees as well.

The Mortgagee Quickly Withdraws Motion to Lift Stay. Shortly after serving the cross-motion for sanctions, counsel for the mortgagee conceded that the mortgagee had made an egregious mistake, and blamed it on the mortgagee’s prior bankruptcy counsel. Soon, the motion to lift the stay was deemed withdrawn, just leaving my cross-motion for sanctions.

Settlement Discussions Ensue. We discussed settling the matter, but I insisted that the mortgage first provide me with a full accounting. We also bantered about the sum of $10,000 as a possible settlement that the mortgagee would pay to the debtor.

The Mortgagee Makes Its Situation Worse. After weeks turned into months, the mortgagee still had not provided me with the promised accounting. I admonished the mortgagee’s attorneys that my pending motion did not excuse the mortgagee’s pre-existing obligation to provide the accounting.

The mortgagee was compounding the severity of its malfeasance by not providing the accounting. This was incomprehensible as the mortgagee was a multi-national finance company that had $12 billion in assets and employed more than 2,000 people.

I argued with counsel that the mortgagee’s failure to provide the accounting over a period of many weeks could only lead a reasonable individual to conclude that there were serious problems with the mortgagee’s finances and accounts. I advised counsel that any possible prior understanding concerning a settlement amount was withdrawn.

It took several more weeks to obtain the accounting, which the mortgagee apparently had to do by hand. The accounting revealed that the debtor’s real estate taxes increased each year during the post-petition period, but since the mortgagee never bothered to conduct an annual escrow accounting, it never bothered to advise the debtor that his escrow account had become extremely overdrawn – to the tune of $9,000. Imagine a debtor coming out of a Chapter 13 proceeding, only to learn that he owes the mortgagee $9,000 to bring the escrow account current!

The Mortgagee Agrees to Pay Debtor $32,000 in Sanctions – A Record. The mortgagee was now faced with a most-embarrassing situation where, if we went forward with my cross-motion, it would certainly be sanctioned, the only issue being how much. In addition, as sloppy mortgagee bankruptcy practices had become somewhat newsworthy as a result of Countrywide’s problems, this mortgagee now faced potential negative publicity on a national level.

We then hammered out a settlement which resulted in a $32,000+ package for the debtor. This included giving the debtor a $10,000 cash payment, reducing the proof of claim by about $12,000, waiving escrow arrears in the approximate sum of $9,000, and accepting slightly-reduced mortgage payments for a period of time, worth a minimum of $1,700. The settlement was so-ordered by the Court in July.

I was very pleased with the resolution and felt that I had truly achieved justice for my client. I believe that this was the highest award or settlement ever for mortgagee abuse in a consumer case in the Central Islip Bankruptcy Court.

Practice Tip. The purpose of BAPCPA is to protect the integrity of the bankruptcy system and that requires taking action against creditors and mortgage servicing companies who carelessly and sloppily file incorrect documents or frivolous proceedings.

Under BAPCPA, all parties, including creditors, are held to a higher standard to provide accurate information to the Court. As bankruptcy courts are now recognizing this, you should consider being much more aggressive in pursuing abusive creditors.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the September 2008 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

For the very first time in the 15 years that I have been writing articles on bankruptcy law, I found it necessary to pull the article that I had just submitted because of some major late-breaking news that will immediately affect all consumer bankruptcy practitioners.

The New Exemption is $50,000. On September 6, 2005, Governor George Pataki signed into law an amendment to the existing New York homestead exemption statute boosting the homestead exemption from $10,000 to $50,000. This new law came as a total surprise to the bankruptcy bar with virtually no warning of any kind. This change will have a far-reaching impact on local bankruptcy practice, especially over the next five weeks, at which time the federal bankruptcy laws will drastically change on October 17, 2005. The new exemption will be an incredible boon for many home owners who previously could not consider Chapter 7 because of the built-up equity in their homes.

The amended statute is identical to the prior statute with the exception that the amount of the exemption has changed. Accordingly, it is reasonable to assume that just as now, a husband and wife filing jointly can double their exemption for a total of $100,000.

History of the Prior $10,000 Exemption. The prior $10,000 exemption statute contained in C.P.L.R. section 5206 was enacted some 28 years ago in 1977 at a time when the typical Long Island home was worth about $40,000 to $50,000. Despite several real estate booms and the effects of years of inflation, the 1977 exemption was never increased.

Senator Vincent Leibell who sponsored the bill, stated in his memo in support of the amendment, that the $50,000 amount was a much more realistic figure and that the previous amount of $10,000 was so low that it was tantamount to having no exemption at all.

Apparently, the New York State legislature has for years regularly proposed legislation seeking to increase the homestead exemption. However, such legislation was routinely rejected or ignored in the Republican-run Senate, according to information in a New York Law Journal article. Since such legislation never made any progress over the course of a decade, the bankruptcy bar stopped paying attention many years ago.

Practical Tips. Consumer bankruptcy practitioners will have to immediately review all pending cases. The following are some practical tips to consider:

Immediately Re-Evaluate All Open Files. In all pending cases involving debtors with real estate where you have not yet filed the petition, you will need to re-analyze the effects of the new exemption to determine whether Chapter 7 will now be a feasible alternative to Chapter 13. In addition, you may have previously turned away some clients because the small $10,000 exemption was insufficient at the time to make a bankruptcy filing workable. You should quickly contact these clients and have them come in again.

Re-Examine All Chapter 13 Cases That Have Not Been Discharged. Even if you filed a Chapter 13 case several years ago, it may be possible to convert the case to one under Chapter 7, thereby enabling the debtor to stop having to make any further plan payments. However, you would need to be mindful of the good faith issues involved with Code section 707(b). In other words, if elimination of the monthly plan payment from the budget results in a significant increase in disposable income, then the United States Trustee can theoretically argue that the debtor should instead remain in Chapter 13. However, many debtors supplemented their income in Chapter 13 with either second jobs or contributions from family members in order to have sufficient funds to pay into the plan. These situations would probably call for conversion to Chapter 7, assuming that equity was within the new exemption amount.

Consider Amending the Schedule of Exemption in Certain Recently-Filed Cases. If you recently filed a Chapter 7 real estate case in which the trustee has taken the position that there may be non-exempt equity in a home, or if you filed a Chapter 13 case in which the amount of plan payments are based on the amount of equity in the home, consider amending the schedule of exemptions to provide for the new amount. The ability of debtors to do this will most certainly be tested with litigation. The issue is whether a debtor can amend the exemptions post-petition to take advantage of the new exemption. Theoretically, a debtor can amend the schedules at any time while the case is pending. However, trustees will certainly litigate this issue. The answer as to whether amending the exemption schedules would be successful is up in the air, but would probably be worth the effort considering the amounts involved.

Rush, Rush, Rush to File Those Petitions! The “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” also known as S. 256, is the new federal law that will go into effect on October 17, 2005, making filing for bankruptcy relief much more difficult. The new law imposes a strict means test and has many other onorus and burdensome requirements. You will certainly want to file before the new law becomes effective. After that date, many potential debtors who could have taken advantage of the new homestead exemption by filing for Chapter 7 may instead be required to file Chapter 13 because of the means test.

About the Author.  Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a regular columnist for the Suffolk Lawyer, the official publication of the Suffolk County Bar Association in New York. This article appeared in the September 2005 issue of the Suffolk Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.

Written by Craig D. Robins, Esq.

Motions to lift the stay must comply with the various rules.     The most common type of motion in consumer bankruptcy practice is a motion to lift the stay. Such motions are typically brought by a secured creditor, such as a mortgagee or auto lender, because the debtor has fallen behind with his or her payment obligations.

Almost all creditors’ attorneys now bring “lift-stay” motions by filing and serving a “notice of presentment of a proposed order lifting the stay,” as this type of application alleviates the need to make a court appearance unless opposition is filed. However, the judges in this district have strict chamber’s rules pertaining to how such applications can be brought, which are in addition to Bankruptcy Code and local rule requirements. The various court rules seek to protect a debtor by requiring that various due process requirements be satisfactorily addressed.

Lift-stay motions often contain fatal mistakes.    Most lift-stay motions are prepared by secretaries and paralegals. A large percentage of these applications are not sufficiently reviewed by supervising attorneys and do not meet all of the court’s requirements. Consequently, it is often possible to spot a fatal procedural flaw, which, if brought to the attention of the court, could end up buying your client more time in their home. A former law clerk estimated that as many as one-fourth of all lift-stay motions are initially defective.

Reviewing a lift-stay motion for errors can help your client.    Even in situations where there is a low likelihood of the debtor ultimately saving the subject premises, you may be able to extend the debtor’s time in the house by bringing these fatal flaws to the attention of the court. No matter how solid a creditor’s position is, the creditor still has an absolute obligation to make sure that its motion papers are properly prepared and conform to the Bankruptcy Code as well as local rules and chamber’s rules. I have focused the following discussion primarily on lift-stay motions brought by mortgagees (as opposed to other secured creditors like car loan lenders), as efforts undertaken by a foreclosing mortgagee will probably affect your client the most. However, the same principals apply to all lift-stay motions.

Were the motion papers properly served?     Make sure that service of the motion was proper. The moving party must file with the court an affidavit of service or certificate of mailing indicating that all proper parties were served. This includes the debtor, debtor’s counsel, and the bankruptcy trustee, all of whom are indispensable parties who must be joined. In addition, notices of presentment must have a time period of at least 20 days from the date of service to the date of presentment.

Did the motion include the necessary supporting documents?   A motion to lift the stay must include a copy of the mortgage note and mortgage, and these documents must show the date of recording. In addition, the debtor must be a party to the note or mortgage. All exhibits must be legible. This is important as exhibits are often generated from microfiche where the legibility may be poor.

Did the moving party establish standing?   Mortgages are frequently assigned. If the moving creditor is not the same entity as the creditor set forth in the mortgage and note, then there must be a recital in the motion papers explaining that either the mortgage was assigned or that the movant is a servicing agent. If the mortgage was assigned, a copy of the recorded instrument of assignment must be attached to the motion papers. If the movant is the servicing agent, then the motion papers must contain a copy of the servicing agreement or power of attorney authorizing the servicing agent to take legal action to enforce the mortgage.

Is there a supporting affidavit from the loan representative?   It is elementary law that all motions must be supported by an affidavit from someone who has actual knowledge of the relevant facts. Accordingly, there must be a notarized and executed affidavit from a loan representative. This affidavit must set forth the post-petition payment defaults and the total amount of the mortgage indebtedness. In addition, the affidavit must either indicate that the stay should be lifted for cause, in which event the specific cause should be set-forth, or the stay should be lifted because the mortgage indebtedness exceeds the value of the property. Finally, the affidavit must correctly identify the address of the subject property.

Has the mortgagee properly demonstrated the value of the property?    When the mortgagee asserts that the ground for lifting the stay is that the mortgage indebtedness exceeds the value of the property, then the mortgagee must include a valuation report such as an appraisal or broker’s price opinion letter as an exhibit to the motion. The valuation report must be current, which generally means that it must have been made within the preceding 90 days, or within 90 days of the petition date. Anything older than that can be considered obsolete. The valuation report must be signed and must also contain language in the form of an affidavit that the person who prepared the report attests that he or she is disinterested and is not a broker or selling agent under a listing agreement and does not anticipate acting as the broker or listing agent for any party in interest. The person who signs the valuation report must include a statement of his or her professional qualifications. The report must contain a suitable description of comparable values of properties that have been recently sold. If the moving party is taking the position that the mortgagee lacks adequate protection, then the moving papers cannot contain any inconsistent statements which indicate that the mortgagee is fully secured. In lieu of providing a valuation report, the mortgagee can rely on the debtor’s admission of the value of the property as indicated in the debtor’s bankruptcy schedules. In such an event, the creditor must include a legible copy of the debtor’s schedule “A” or “D” as an exhibit.

Is the motion seeking proper relief?   Generally, a motion to lift the stay, when brought by notice of presentment, may not seek any type of equitable relief other than an unadorned vacating or modifying of the stay to permit the mortgagee to enforce its state law remedies. Accordingly, a proposed order cannot seek payment of costs and attorney’s fees as this creates an inconsistency between section 362 (a)(d)(2) and section 506 (b).

What happens if you demonstrate a fatal error?   The mortgagee must usually start the entire motion process all over again. This means that the mortgagee must take the necessary time to correct and amend its motion. The mortgagee must then re-serve all necessary parties, and begin the twenty-day time period all over again. This can get your client an extra four to six weeks or more in their home. Keep in mind that this article focused on utilizing procedural errors as a defense. There are numerous substantive issues that you can raise as well.

Long Island Bankruptcy Attorney Craig D. Robins, Esq., is a frequent columnist for the Nassau Lawyer, the official publication of the Nassau County Bar Association in New York. This article appeared in the November 2004 issue of the Nassau Lawyer. Mr. Robins is a bankruptcy lawyer who has represented thousands of consumer and business clients during the past twenty years. He has offices in Medford, Commack, Woodbury, Patchogue, Mastic, Coram and Valley Stream. (516) 496-0800. For information about filing bankruptcy on Long Island, please visit his Bankruptcy web site: http://www.BankruptcyCanHelp.com.