ALI-ABA Audio Seminar. Lender Misconduct in Foreclosures and Bankruptcy October 15, 2008 Telephone Seminar/Audio Webcast

Transcription

1 53 ALI-ABA Audio Seminar Lender Misconduct in Foreclosures and Bankruptcy October 15, 2008 Telephone Seminar/Audio Webcast IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS BROWNSVILLE DIVISION In Re:YDALIA RODRIGUEZ; aka IDALIA RODRIGUEZ; aka YDALIA PARDO Debtor(s) CHAPTER 13 CASE NO: YDALIA RODRIGUEZ, et al Plaintiff(s) v. COUNTRYWIDE HOME LOANS, INC. Defendant ADVERSARY NO

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3 55 IN THE UNITED STATES BANKRUPTCY COURT FOR THE SOUTHERN DISTRICT OF TEXAS BROWNSVILLE DIVISION IN RE: YDALIA RODRIGUEZ; aka IDALIA CASE NO: RODRIGUEZ; aka YDALIA PARDO Debtor(s) CHAPTER 13 YDALIA RODRIGUEZ, et al Plaintiff(s) VS. ADVERSARY NO COUNTRYWIDE HOME LOANS, INC. Defendant(s) ENTERED 09/18/2008 Memorandum Opinion For nearly a century, the Supreme Court has recognized that individual debtors who successfully emerge from bankruptcy should receive a fresh start. Williams v. U.S. Fidelity & Guar., Co., 236 U.S. 549, 554, 555, 35 S.Ct. 289, 290 (1915). The fresh start gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns at the time of bankruptcy, a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt. The various provisions of the Bankruptcy Act were adopted in the light of that view and are to be construed when reasonably possible in harmony with it so as to effectuate the general purpose and policy of the act. Local Loan Co., 292 U.S. 234, , 54 S.Ct. 695, 699 (1934). The Bankruptcy Code has seen many amendments over the years, but the fundamental fresh start purpose remains. The Supreme Court has certainly acknowledged that a central purpose of the Code is to provide a procedure by which certain insolvent debtors can reorder their affairs, make peace with their creditors, and enjoy a new opportunity in life with a clear 1

4 56 field for future effort, unhampered by the pressure and discouragement of preexisting debt. Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654 (1991) (quoting Local Loan Co., 292 U.S. at 244). Just last year, the Supreme Court reiterated that the fundamental purpose of the Bankruptcy Code is to grant the honest but unfortunate debtor a fresh start. Marrama v. Citizens Bank of Mass., 127 S.Ct. 1105, 1106 (2007). This adversary proceeding raises allegations that, if proven, corrupt the promised fresh start. Summary of Allegations Plaintiffs are former chapter 13 debtors who have mortgage contracts with Countrywide Home Loans, Inc. ( Countrywide ). Plaintiffs allege that they diligently completed their chapter 13 plans and received a discharge. Plaintiffs plans provided for the cure of all arrears on their home mortgages. Accordingly, when Plaintiffs completed their final plan payment, they should have faced a new opportunity in life with a clear field for future effort, unfettered by alleged arrearages on their home mortgages. Local Loan Co., 292 U.S. at Plaintiffs allege that they entered their first day of post-discharge life in default. Essentially, Plaintiffs allege that Countrywide managed their mortgage accounts in a manner that violated Plaintiffs chapter 13 plans. Plaintiffs allege that Countrywide allocated chapter 13 plan payments among arrearages, pre-petition debts, and current principal and interest in contravention of Plaintiffs plans. Plaintiffs also allege that defendant Countrywide charged or accumulated undisclosed attorneys fees and related expenses during their chapter 13 bankruptcy cases without notice to Plaintiffs or the Court. Plaintiffs allege that only now, after Plaintiffs received their discharge and the bankruptcy court s eyes have turned to other cases, Countrywide is seeking to collect the accrued fees and expenses. Plaintiffs allege that Countrywide is 2

5 57 threatening to, and in fact, will foreclose on their homes if they do not pay the thousands of dollars in accumulated fees and expenses. Countrywide disputes Plaintiffs rendition of the facts. If Countrywide is correct and has not charged any unapproved fees and expenses, then they should certainly prevail in this litigation. That is a matter for trial. Countrywide also contends that, even if Plaintiffs allegations are true, their mortgage contracts and Bankruptcy Code provisions allow them to delay collection of fees and expenses incurred during a pending chapter 13 case until after the debtor has received a discharge. Through this contention, Countrywide seeks a pre-emptive determination by the Court that absolves Countrywide of liability even if it did impose unapproved fees and expenses. Because Countrywide s theoretical argument is antithetical to chapter 13 s fresh start, the Court denies Countrywide s motion to dismiss this lawsuit. Mortgages in a Chapter 13 Case 1 Plaintiffs claims cannot be understood without an explanation of the mechanics of handling chapter 13 mortgages. 2 Chapter 13 includes several provisions drafted specifically to deal with mortgages. The provisions grant mortgage lenders special rights no other creditors share. Combined, the provisions have the effect of precluding the modification of a mortgage lender s right to payments pursuant to the lender s pre-petition mortgage contract. A chapter 13 plan may not reduce the lender s claim to the value of the collateral under 506 nor may the plan alter the contractual interest rate. The plan may not per se preclude the collection of fees 1 Pursuant to the Court s July 8, 2008 Order, the Court does not rule in this Memorandum Opinion on Countrywide s arguments that Plaintiffs have failed to state a claim for violation of the Bankruptcy Code or Rules. However, an explanation of the legal basis for Plaintiffs claims is necessary to place in context Countrywide s arguments with respect to subject matter jurisdiction and a private right of action. 2 The Court s use of the term mortgages is for convenience and encompasses deeds of trust, as well. However, this Memorandum Opinion is limited to mortgages or deeds of trust that are secured only by a security interest in real property that is the debtor s principal residence as set forth in 1322(b)(2). 3