Foreclosure Defense

Written by Craig D. Robins, Esq.

        This past September, Gov. Patterson and state legislators agreed to slow down the foreclosure process by imposing a new law that required mortgage lenders and banks to provide delinquent homeowners with a 90 day notice of their intent to commence foreclosure. Now, Albany lawmakers, fearing the recession will produce more home evictions, plan to examine the effectiveness of this 90 day warning period and whether additional time is needed.

        The purpose of the 90 day notice is to give homeowners the opportunity to try to reach a settlement with their lender before the foreclosure proceeding is commenced.

        Judging from my own experience with Long Island consumers who have fallen behind, communicating with a mortgagee can be very time consuming and frustrating. Ninety days is often an insufficient period of time to work out debts with a lender. Many mortgagees are also unreceptive and indifferent to modifying their customers’ mortgages.

        Long Island State Senator Brian X. Foley (D - Blue Point), who just became the new chairman of the Senate Banks Committee, will be holding hearings on this issue. Last year, when he was campaigning, he actually backed a one-year moratorium on foreclosures.

        Suffolk County and Nassau County have among the highest mortgage default rates in New York. Many homeowners are able to stop foreclosure and cure their mortgage arrears by filing Chapter 13 bankruptcy.

Written by Craig D. Robins, Esq.

The new bankruptcy laws that went into effect in October 2005 were officially dubbed “The Bankruptcy Abuse Prevention and Consumer Protection Act” by Congress. Up until recently, “abuse” was almost solely linked to the debtor, as in the situation where a debtor, who presumably had the ability to make some payments to creditors, instead sought to not pay creditors by filing for Chapter 7 relief. Now, the Court is also punishing creditors who it believes are abusing the system in different ways.

When the 2005 Act went into effect, the Office of the United States Trustee, a branch of the Department of Justice which is the federal regulatory agency that oversees the integrity of all bankruptcy proceedings, adopted an aggressive approach to enforcing the new law by seeking to strictly construe all aspects of the law as it applied to debtors. The U.S. Trustee focused most of its attention on investigating and pursuing debtors, but devoted very little time, if any, investigating any other party involved in bankruptcy proceedings.

Mortgagees are learning that they can by guilty of abuse also. For the longest time, there appeared to be widely disparate treatment of debtors who misrepresented facts, and creditors who brought frivolous proceedings or filed incorrect documents. 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 get would be little more than a slap on the wrist. However, if the trustee discovered that a debtor grossly misrepresented his financial information, that would be considered a heinous malfeasance subjecting the debtor to litigation challenging dischargeability.

Let’s be clear here. Presenting any false information to the Court, whether intentionally or negligently, is a serious offense that should be punished. But the Court should treat all parties the same way – whether debtor or creditor.

The U.S. Trustee is stepping in to police abusive mortgagee practices. In the past half-year, with increased attention towards mortgage companies engaging in sloppy bankruptcy practices, the Office of the United States Trustee said enough is enough. In doing so, the U.S. Trustee has developed a new policy to police and punish those mortgage companies and their attorneys who flout their obligations to provide accurate information to the Court.

One particular lender, Countrywide Home Loans, has become the poster child for bad-boy bankruptcy practices committed by a mortgagee. In the past two months, several U.S. Trustees across the country have brought charges against Countrywide for abusing the bankruptcy process.

In cases in Georgia and Florida, the U.S. Trustee alleged that Countrywide made inaccurate allegations in motions to lift the stay, asserted liens that they were not entitled to, and collected money from a Chapter 13 trustee after the mortgage claim was satisfied. These actions were so newsworthy that The New York Times, the Wall Street Journal, and the Los Angeles Times prominently covered the story. The U.S. Trustee’s complaint alleged that Countrywide’s conduct and practices created unnecessary delay and expense, abused the bankruptcy process, and were sanctionable.

Although the U.S. Trustee has previously intervened in bankruptcy cases involving Countrywide in Florida, Ohio, Pennsylvania and Texas, this recent Georgia case was especially noteworthy because the U.S. Trustee initiated the suit on its own. In November, the U.S. Trustee subpoenaed Countrywide in at least a dozen cases regarding questionable claims for fees. Many of these cases are continuing.

Study shows mortgage proofs of claim contain significant errors. A recently published study revealed that mortgage companies are guilty of making tremendous mistakes with the proofs of claim they file. Katherine Porter, Associate Professor of Law at the University of Iowa, concluded that mortgage companies frequently do not comply with bankruptcy statutes regarding the filing of claims. She found that a majority of claims are missing one or more of the required pieces of documentation. She also found that fees are often poorly identified, making it impossible to verify if such charges are legally permissible or accurate. Hopefully the U.S. Trustee will also devote some attention to reviewing the accuracy of mortgagee’s proofs of claim.

Creditor’s firm severely sanctioned for sloppy mortgage bankruptcy practices. A very large and prominent Texas law firm that primarily is engaged in representing mortgagees in bankruptcy cases was severely sanctioned by the Bankruptcy Court for improperly calculating the legal fees. The firm, Barrett Burke Wilson Castle Daffin & Frappier, operates a high volume foreclosure and bankruptcy practice and frequently brings motions for relief from the stay. In each application, as is the usual practice everywhere, they asked for legal fees. In one case, In re Porcheddu, 338 B.R. 729 (Bankr.S.D.Tex. 2006), the judge felt the legal fees were not appropriate and demanded the mortgagee’s attorney to account for them.

The Judge discovered that in numerous instances, the mortgagee’s attorneys lied to the Court as to how the fees were calculated and also lied about keeping contemporaneous time sheets, when in fact they did not. After several hearings, the judge, incensed by this conduct, sanctioned the firm $125,000, although this amount was later reduced to $65,000.

Bankruptcy Reform involving creditors is needed. The 2005 Bankruptcy Act primarily reformed the law as it applied to consumers and made the entire bankruptcy procedure stricter for them. What we still need are laws that protect consumers from creditors and mortgagees who engage in poor and sloppy bankruptcy practices. Many mortgagees file incomplete claims with vaguely identified fees. Mortgagee’s attorneys often seek to lift the stay with information that is incorrect and unverified.

Professor Porter concluded that the existing system is insufficient to ensure the integrity of the bankruptcy system and its home-saving purpose. Systematic reform of mortgage servicing is needed to protect all homeowners – inside and outside of bankruptcy – from overreaching or illegal behavior. Hopefully the recent efforts of the U.S. Trustee will be the first step in this direction

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 April 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.

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.