Home Mortgages in Chapter 13 Cases. Andrea E. Celli Chapter 13 Standing Trustee 7 Southwoods Boulevard Albany, New York (518)

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1 Home Mortgages in Chapter 13 Cases Andrea E. Celli Chapter 13 Standing Trustee 7 Southwoods Boulevard Albany, New York (518) Special thanks to the NACTT Academy for Consumer Bankruptcy Education for contributions to these materials 1

2 TABLE OF CONTENTS 1. Undisclosed Fees and Post-Confirmation Charges 3 2. Proper Application of Payments 8 3. Allowable Fees and Costs and Proper Procedure for Compliance Effect of Changes in Payment Amounts Curing Mortgage Arrearage and Reinstatement at Conclusion of Case Remedies Ensuring Compliance With Plan Best Practices for Trustees and Mortgage Servicers in Chapter Undisclosed Fees and Post-Confirmation Charges 2

3 The purpose of a bankruptcy case is to provide the debtor with a fresh start. Vital to this fresh start is a clear understanding of which debts are being brought into the case and the status of those debts and claims once the discharge is granted and the case is closed. Communication between debtors, creditors, the Trustee and the Court is imperative for this goal to be achieved. There are instances where a creditor has not provided a debtor with notices of fees or charges during the pendency of the bankruptcy case. Most often these fees are associated with late charges, inspection fees, and escrow fees. In re Placidi, 2008 WL , 2008 Bankr. Lexis 629 (Bankr. M.D.Pa. 2008) Summary: Oversecured mortgagee holding mortgage on debtor s residence objected to confirmation of Debtor s plan as impermissibly including a cure of postpetition arrears and impermissibly requiring an application under Fed. R. Bankr. P before the mortgagee may assess postpetition fees and costs. Holding: Applying the analysis from the 11 th Circuit s decision in In re Hoggle, 12 F.3d 1008 (11 th Cir. 1994), the Court held that permitting postconfirmation defaults best accords with Congressional intent to permit homeowners to utilize [Chapter 13 s] flexible provisions for debt relief without sacrificing their homes. The Court permitted the postconfirmation modification. The Court sustained the mortgagee s objection to the proposed requirement that the creditor file a 2016 statement prior to the assessment of postpetition fees and costs and, agreeing with the 9 th Circuit B.A.P. in In re Atwood, 293 B.R. 227 (9 th Cir. B.A.P. 2003), held that a fee application is not necessarily required and, to confirm the debtor s plan with this language would impermissibly limit the procedural mechanisms available to the mortgagee, such as filing the 2016 statement, filing an amended proof of claim or filing a motion for relief from the automatic stay as an oversecured creditor and request fees as a part of the motion. What this case means to debtors: There is room for creativity in plans, however proper notice must be provided to all parties and the provisions must not limit procedural mechanisms otherwise available to the parties in a case. 3

4 What this case means to creditors: Review plan language carefully! Increasingly creative provisions are being added to plans that affect parties rights. Each plan must be reviewed thoroughly for additional provisions that may alter your client s rights. What this case means to Trustees: Trustees should verify that the proposed plan provisions are compliant with the Bankruptcy Code and do not interfere with case administration. In re Dominique, 368 B.R. 913, 20 Fla. L. Weekly Fed. B 423 (S.D. Fla. 2007) Summary: At the time of Debtors bankruptcy filing in 2002 Debtors had a mortgage and promissory note with Countrywide. Pursuant to Debtors plan, Countrywide was paid a monthly scheduled payment amount for ongoing debt service together with a separate monthly amount necessary to cure prepetition arrearages. Prior to the scheduled plan completion date of August, 2007, on November 20, 2006 Countrywide for the first time provided Debtors with an escrow account review which reflected an escrow shortage of $6, The escrow shortage accrued post-petition over a period of several years. Debtors filed a modified plan seeking to modify payments to Countrywide to pay the increased escrow payments and adjustments for the current escrow year and further filed a motion seeking a discharge upon plan completion of the existing escrow shortage based on an estoppel theory since Countrywide did not object to the original plan and since Countrywide accepted monthly payments consistent with the original plan amounts. Countrywide asserted that it was not estopped from seeking payment of the arrearage and that the escrow shortage would continue to be secured by the home and would not be discharged upon plan completion. Holding: The Court held that Countrywide failed to comply with the Real Estate Settlement and Procedures Act (RESPA) and Florida law by failing to complete an annual escrow analysis and provide at least annual notice to Debtors. The mortgagee s failure to do so resulted in a waiver of its right to recover any escrow shortage except that for the current year. In addition, the Court noted that providing notice of an escrow deficiency is not a violation of the automatic stay. What this case means to debtors: Ensure that, at a minimum, on an annual basis a review of the escrow analysis is completed. Discrepancies should be noted and reviewed immediately with the lender to ensure that escrow shortages are addressed. What this case means to creditors: Compliance with applicable federal and state law is critical when seeking to enforce your rights. Where providing a notice that is required 4

5 by law or is otherwise informational to a debtor, send the notice and communicate. The effect of a failure to comply may constitute a waiver of rights. What this case means to Trustees: Proper and full case administration is dependent upon full and ongoing disclosure. Failure to have same will only result in prompt refilings after completion of 60 month plans to address accrued, undisclosed fees and charges. In re Padilla, 379 B.R. 643 (Bankr. S.D.Tex. 2007) Summary: Chapter 13 Debtors in separate cases brought challenges to the manner in which mortgagees had applied their mortgage payments. The debtors alleged that the mortgagees had violated the Rule 2016 for failure to submit reimbursement applications for fees and costs and that the mortgagees had violated the terms of the confirmed plans. The mortgagees argued that 1322(b)(2) preserved their contractual rights through the case and that charging for costs and fees without court authorization was appropriate. The debtors argued that the contract rights, although preserved under 1322(b)(2), are governed by specific Code provisions and the Bankruptcy Rules, in particular, 506(b) [oversecured creditor may obtain attorney fees and costs] and Rule 2016 [application for reimbursement]. Holding: A court has authority under 105(a) to order disgorgement of postconfirmation fees charged where there is not a proper 2016 application or where the creditor has violated the plan. What this case means to debtors: Civil contempt is not the appropriate remedy for alleged violation of the discharge injunction. Civil contempt is available where there is a violation of a court order requiring, in specific and definite language, that a party do or refrain from doing something. The Court may however, exercise its equitable powers under 105 where appropriate. What this case means to creditors: Case law is evolving regarding whether a creditor is required to submit a 2016 statement in relation to recovery of postpetition fees and costs. Several procedural mechanisms, including amended proofs of claim and 5

6 motions for relief from stay, exist to provide a vehicle for creditors to make all parties aware of an assertion of a contractual right to reimbursement. What this case means to Trustees: Increasingly courts are addressing in a more proactive manner issues arising in the arena of mortgage lending and mortgage servicing, particularly in relation to fees and undisclosed charges. This is certain to continue as mortgage foreclosure rates continue to rise. See e.g. In re Scheussler, 386 B.R. 458 (Bankr. S.D.N.Y. 2008)(Rule 9011 sanctions were warranted where mortgagee filed motion for relief from stay without regard to past payment history and equity in the property); In re Stewart, Slip Copy, 2008 WL (Bankr. E.D. La. 2008)(Court ordered audits of all proofs of claim in the District pursuant to 105(a) where it was determined that payments had been misapplied); In re Parsley, 384 B.R. 138 (Bankr. E.D. Tex. 2008)(U.S. Trustee was within its authority to investigate activities of a loan servicer and its local and national counsel where flawed motion for relief from stay gave rise to questionable conduct associated with same). In re Johnson, 384 B.R. 763 (Bankr. E.D. Mich. 2008) Summary: Mortgagee filed a proof of claim in Debtor s Chapter 13 case listing an arrearage claim of $20, on the attached worksheet. The arrearage claim was included in the larger claim of $111, Also attached to the proof of claim was the mortgage and fixed/adjustable rate rider. Debtor objected to the proof of claim and alleged that the arrearage was overstated and the monthly payment too high. The arrearage was based on advances made by the mortgagee for taxes and insurance. The debtor alleged that the bank was not entitled to recover the advances because the bank allegedly failed to send proper RESPA notifications. The bank argued that the mortgage was a non-escrowed loan and accordingly, the RESPA notification requirements were not applicable. Debtor further argued that, because debtor confirmed a plan in his prior dismissed bankruptcy case, the bank is precluded from recovering advances it made during the pendency of the prior case because the bank did not provide a statement of the increase in the mortgage payments caused by the advances as required by the local bankruptcy rule. The Court held an evidentiary hearing and determined that, even where the bank was entitled to an exemption from sending an annual escrow statement, 6

7 the bank was still obligated to provide notice of any escrow account shortage or discrepancy. Debtor was the only witness and the lender failed to testify or present any evidence demonstrating notification to the debtor of any escrow shortage or deficiency. Holding: The Court overruled Debtor s argument regarding the local bankruptcy rule since the debtor s first case was dismissed. Any alleged failure by the bank to comply with the local rule did not by itself constitute grounds to disallow the arrearage claim in the second case. In addition, the court noted that the local bankruptcy rule did not provide that the remedy for non-compliance was waiver of a mortgagee s right to recover advances made on behalf of the debtor. Lender waived its right to assert a claim for the disputed arrearages based on the facts and circumstances of the case. When the proof of claim was filed it was learned that, for the period from 2002 to September, 2007 no notice had been provided to debtor. During that period, lender was under an obligation by virtue of the local rule to have provided notice. Lender s claim for the advances was disallowed as waiver had been demonstrated. What this case means to creditors: Where, over a five year period, lender took no action to give notice of escrow shortages or deficiencies, the lender, under Michigan law, intentionally or neglectfully relinquished a known right to payment. The facts and circumstances will bear on whether a waiver has occurred. Waiver may induce a belief in the debtor that the creditor does not intend to request payment for amounts advanced. In re Craig-Likely, 2007 WL , (E.D. Mich. 2007) Summary: Bankruptcy Court confirmed Debtor s 48 month plan which provided for the cure of a mortgage arrearage of $4,000 in the first 36 months of the plan. The same day that the mortgage arrears were paid in full through the plan the mortgagee sent a notice indicating that the monthly mortgage payment had increased during the 36 month period from $ to $1, for a period of approximately three years due to escrow shortages. The result was an alleged escrow shortage of $13,000. Lender contended that it had complied with notices required by the local bankruptcy rule, however the Court, following an evidentiary hearing, determined that not only did the mortgagee not comply with the local rule, it also had not complied with RESPA. Holding: Failure to comply with the local bankruptcy rule and RESPA resulted in a waiver of the right to assert a claim for escrow arrearages. What this case means to creditors: A lender has an ongoing obligation to provide notice of a shortage in escrow account funds, even where an exemption may exist under applicable law. 7

8 Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001) Summary: Debtors plan provided for a cure of mortgage arrears over a 48 month term. During the 48 months the debtors proposed and the court approved four postconfirmation plan amendments. Debtors proposed a fifth modification and, for the first time, lender notified debtors that additional monies were owed due to increases in insurance premiums and property taxes. The Bankruptcy Court held that the mortgagee waived the right to recover past advances based on the failure to provide notice to debtors. The mortgagee appealed to the District Court. Holding: The District Court held that a lender is permitted to make advances without prior notice, however the mortgagee was still required to notify debtors of the escrow shortages resulting from the tax and insurance increases. The District Court affirmed the Bankruptcy Court s holding that the mortgagee failed to comply with state and federal law and accordingly, waived its right to recover the advances. What this case means to creditors: A servicer s failure to notify debtors during the plan term of an escrow shortage in accordance with RESPA constitutes a waiver of the servicer s right to collect that amount. Involvement throughout the case and awareness of postconfirmation amendments and the responsibility to respond to same where there has been a change in payment amount is vital. Proper Application of Payments Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348 (5th Cir. 2008) 1 Summary: The debtors filed a Chapter 13 petition in April of 2006 seeking to cure a default on their mortgage they owed to Countrywide. Under the loan agreement, Countrywide was entitled to collect both principal and interest on the underlying obligation and was also allowed to collect any amounts Countrywide expended to cover escrow expenses such as insurance and taxes. Pursuant to RESPA, a loan servicer can estimate property taxes and insurance that would be due on property for the ensuing twelve months and adjust the regular monthly payments on the mortgage by one-twelfth of the total calculations and also one-sixth of the monthly escrow amount to provide a cushion to cover shortfalls. 1 Reprinted with permission, NACTT Academy for Consumer Bankruptcy Education, Inc. 8

9 Countrywide had three types of claims in the case. First, there were fifteen delinquent, pre-petition, monthly principal and interest payments. Second, there were amounts that Countrywide had expended to cover escrow advances made in years prior to the petition year. Finally, Countrywide was owed additional costs and fees. Countrywide s Proof of Claim did not include unpaid escrow payments that accrued between January of 2006 and the date of the debtors bankruptcy petition in April of Instead, Countrywide increased the ongoing post-petition payments to recoup the escrow shortfall resulting from the monthly payments that were unpaid between January and April of Holding: The Court held that the escrow amounts which the debtors failed to pay between January and April 2006 constituted a claim, cognizable under the Bankruptcy Code. Accordingly, Countrywide s claim included pre-petition principal and interest, funds advanced, and the unpaid escrow portion which was contractually due prior to the filing of the petition the Court rejected. Countrywide s argument that was it was entitled to disregard the January through April escrow defaults as part of its claim and increase the monthly payments post-petition to recover the escrow deficiency. Despite the error by Countrywide in listing on its claim the increased monthly postpetition payments, its conducts was not a violation of the automatic stay. No section of the Bankruptcy Code bars a creditors filing a Proof of Claim pursuant to 501 of the Bankruptcy Code. We find no precedents in which a court has held that asserting a right to payment is a Proof of Claim constitutes a violation of the automatic stay. The court did recognize, however, that other procedural safeguards are available to the bankruptcy court for parties who attempt to abuse procedural mechanisms and assert improper claims in bankruptcy cases. What This Case Means To Debtors: When a Chapter 13 plan attempts to cure a mortgage default, careful analysis must be made of the claim filed by the mortgage servicer to make certain that pre-petition obligations owed to the creditor are included in the pre-petition arrearage, an obligation which must be paid within a reasonable time ( 1322(b)(5)), (which, in many jurisdictions would be several years), rather than included in the post-petition monthly payments which must be paid during the pendency of the case. By enforcing the Campbell holding, a debtor obtains a longer period of time to satisfy any unpaid escrow payments for the year in which the bankruptcy petition is filed. Since RESPA permits a servicer to collect this obligation more aggressively within a year by increasing the post-petition payments, debtors plans can be made feasible. 9

10 What This Case Means to Creditors: Mortgage servicers face a heavy burden when a borrower files a Chapter 13 case and seeks to cure a mortgage default. Under both the requirements of RESPA and the Bankruptcy Code, a servicer must carefully allocate obligations which accrue prior to the filing of the petition and are thus part of the arrearage claim, and disclose the ongoing payments commencing with the filing of the petition which should not include any pre-petition obligations, such as unpaid escrow payments for the year in which the petition is filed. Bankruptcy bookkeeping is different than the bookkeeping regularly applied under RESPA. The Fifth Circuit is very clear, however, that the Bankruptcy Code requires a creditor to differentiate between prepetition obligations and the post-petition obligations they are allowed to collect under 1322(b)(5). What The Case Means To Trustees: The current mortgage crisis and potential legislative cures may result in an increased use of Chapter 13 in which to cure mortgage defaults. More trustees will be called upon to maintain payments to mortgage servicers ( conduit ) as the plan cures the pre-petition default. As such, trustees should verify that the pre-petition obligation is facially correct and there is not an effort by a creditor to collect a pre-petition claim in a more aggressive manner than required by the Bankruptcy Code itself. In re Collins, 2007 WL , 2007 Bankr. Lexis 2487 (Bankr. E.D.Tenn. 2007) Summary: Debtors had a mortgage on their primary residence with Beneficial Tennessee, Inc. The terms of the note and mortgage required monthly installment payments plus an escrow payment representing one-twelfth of Debtors annual homeowners insurance premium and property taxes. Debtors proposed a plan with weekly payments of $450 to the Trustee plus all tax returns exceeding $1,000 with a projected dividend of 20-70% to unsecured creditors. A provision was included in the 10

11 plan which prohibited the Trustee from paying future mortgage increases or decreases due to escrow and interest rate changes absent a plan modification. The Trustee would be responsible for remitting both the monthly maintenance fee and a payment toward the prepetition arrearage. Payments were to commence following payment of attorney fees to debtors counsel. The plan also provided for certain affirmative duties and legal obligations on the holders and/or servicers of the mortgage. The issue presented to the Court as a result of an Objection to Confirmation by Beneficial was whether 524(i) as amended by BAPCPA allows a debtor to propose plan language that outlines the procedure for crediting payments received by a mortgage lender or servicer under a plan to the claims for both the ongoing monthly mortgage payment and mortgage arrears without modifying the rights of the holders of secured claims secured only by a security interest in real property that is the Debtors principal residence in violation of 11 U.S.C. 1322(b)(2). The Court considered sections 1322(b)(2) (permitting debtors to modify the right of holders of secured and unsecured claims excepting the claims of creditors secured by a debtor s homestead) and 1322(b)(5)(allowing a debtor to manage long term secured and unsecured debt by curing a prepetition default and maintaining payments during the plan term) in evaluating whether the proposed Plan language violated antimodification provisions of 1322(b)(2). In essence, Beneficial objected to the additional duties, over those included in the Loan Repayment and Security Agreement and Deed to Trust, that the Plan sought to impose on the mortgagee and argued that such duties were not provided for in the Bankruptcy Code. Holding: Referencing the Supreme Court in Nobleman v. Am. Sav. Bank, 113 S.Ct (1993)(citations omitted), the Court held that Beneficial s prepetition arrearage claim arose under 1322(b)(5) and accordingly, was not subject to the anti-modification provisions of 1322(b)(2). The Court considered the balance of the claim, as to which debtors might have some flexibility within their plan. In so doing, the court looked to model plans utilized by other courts and the debtors proposed plan language section by section and determined that several of the debtors proposals constituted impermissible modifications of Beneficial s rights. The Court set forth in its decision standardized language that would not be inconsistent with the antimodification provisions of 1322(b)(2) for use within the district. What this case means to debtors: Consider section 524(i), which, under BAPCPA, provides a specific cause of action to remedy problems associated with payment application. 11 U.S.C. 524(i) provides: (i) The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) [discharge injunction] if the act of the creditor to collect 11

12 and failure to credit payments in the manner required by the plan caused material injury to the debtor. This new cause of action is contingent upon the plan providing specific language regarding how plan payments are to be applied. What this case means to creditors: Updating of accounting procedures to ensure that payments are properly allocated between prepetition arrearage amounts and ongoing postpetition payments is viewed by courts as procedural in nature and not an impermissible modification of a mortgagee s rights. Such a view has widely been adopted by courts as the appropriate procedure to ensure that debtors accounts are not subjected to additional fees and charges associated with prepetition defaults. What this case means to Trustees: Consider the manner in which specific plan language from the plan is incorporated into the confirmation order. In jurisdictions in which plans are not served in accordance with Rule 7004 the question arises as to whether all parties received notice of the specific plan language providing the potential post-discharge remedy. If only the confirmation order is served, did the parties receive actual notice of the language which will potential bind them? The use of form plans and implementation of local rules or standing orders in some jurisdictions has attempted to address this concern. In re Boday, 397 B.R. 846 (Bankr. N.D.Ohio 2008). Summary: Debtors filed Chapter 13 plan with an existing mortgage arrearage of approximately $17,000. The mortgagee filed a proof of claim reflecting the arrearage amount. The claim was transferred and thereafter Debtors confirmed a plan which provided for repayment of the prepetition arrearage claim filed by the original claimholder. The plan terms provided that all defaults were to be fully cured, creditors holding mortgages were required to adjust their records to show that the arrearages had been paid, the mortgage balance had to be adjusted to reflect the balance due in the original amortization schedule and any amounts owed in excess of that reflected on the original amortization schedule were deemed to be discharged. Debtors completed their 12

13 plan and received a discharge. They thereafter requested an amortization for the period of September, 2004 through February, Throughout this period, the principal amount on their loan remained constant at $154, Debtors filed a complaint alleging a violation of the discharge order, confirmation order and automatic stay and requested that the court determine the amount due under the mortgage and that the court award damages, including attorney fees and punitive damages for the mortgagee s failure to properly account for the payments made during the bankruptcy. Holding: A secured creditor's failure to properly account for the payments made by the Chapter 13 debtors to cure their mortgage arrearage and to service the remaining mortgage debt, such that the debtors' account was never brought current, violated both the cure statute and the confirmed plan. The creditor was required to adjust its records so as to indicate that all arrearages had been paid and to ensure that the amount due on the underlying debt corresponds to the parties' original amortization schedule. The court determined that an order was warranted requiring the mortgagee to adjust its records so as to reflect the amount owed by the debtors under the original amortization schedule and to void any postpetition fees, legal or otherwise, assessed based upon the debtors' account being in arrears. What this case means to debtors: It is good practice to review on a periodic basis the application of payments to the mortgage debt made by the trustee or the debtor directly. In particular, ensure that payments are made in accordance with the confirmed plan to guarantee that the mortgage will be current at the time of emergence from bankruptcy. What this case means to creditors: The confirmed plan binds the debtor and the creditor to its terms and, despite contractual language regarding the manner in which payments are to be applied, the creditor must adjust its accounting to split the secured claim into two claims representing prepetition arrears and the postpetition ongoing obligation. 1322(b)(5) s splitting of the claim overrides the creditor s ability to apply payments in accordance with its contract and requires that the prepetition claim be paid in accordance with the debtor s confirmed plan. The allocation of payments therefore is changed. 13

14 Allowable Fees and Costs and Proper Procedure for Compliance AmeriQuest Mortgage Company v. Nosek (In re Nosek), 544 F.3d 34 (1 st Cir. October 3, 2008) 2 Summary: In the continuing saga of Jacalyn Nosek s dispute with AmeriQuest Mortgage Company, the First Circuit considered whether substantial damages for emotional distress, awarded by the bankruptcy court, were appropriate when AmeriQuest provided a poor accounting of payments and advances of Ms. Nosek s mortgage. Starting with a $90,000 adjustable rate mortgage with AmeriQuest, Ms. Nosek s troubles began when she fell behind on payments. Ms. Nosek then filed a Chapter 13 case. AmeriQuest and Ms. Nosek entered into an agreement following a motion for relief from stay where she agreed to make additional post-petition payments to cure a post-petition default. She did not make all of these payments. She amended her Chapter 13 plan proposing to make regular monthly payments in accordance with the contract with AmeriQuest and AmeriQuest would be paid its prepetition arrearage over 60 months at a specified amount. Accordingly, Ms. Nosek was to pay her pre-petition arrearage through the plan and her first mortgage, ongoing payments directly to AmeriQuest. When Ms. Nosek sought to refinance her mortgage AmeriQuest faxed her a payment history revealing that AmeriQuest had placed funds into a suspense account rather than applying them to payments. Following extensive court proceedings, the bankruptcy court concluded that AmeriQuest had violated 1322(b) by failing to account for or properly distinguish between pre-petition and post-petition payments and its ongoing failure to account for payments to and from the suspense account. AmeriQuest was assessed both punitive and compensatory damages (resulting from Ms. Nosek s emotional distress). The award was made pursuant to 105(a). The Court reasoned that, by its terms 1322(b) authorizes debtors to cure defaults on a long-term debt, such as a mortgage, and to maintain payments on that debt during the life of the plan. The effect of the provision is to essentially split each of [the debtor] s secured claims into two separate claims the underlying debt and the arrearages.... If the debtor is successful in curing the default, the debt is reinstated to its pre-default position, thereby returning the debtor and creditor to their respective positions before the default. The plain language of 1322(b), however does not impose any specific duties on a lender; it merely lists elements that a Chapter 13 debtor may include in her plan. Because 1322(b) merely provides optional elements that a debtor may incorporate into her Chapter 13 plan, the provision has no meaning separate and apart from the choices the debtor makes and incorporates into her Chapter 13 plan. In other words, to determine 2 Reprinted with permission, NACTT Academy for Consumer Bankruptcy Education, Inc. 14

15 whether and how Nosek took advantage of the cure opportunity provided by 1322(b)(5), and whether her exercise of her cure rights were threatened by AmeriQuest s accounting practices, we must look to the terms of the Nosek s Plan itself. The terms of Ms. Nosek s plan did not place any specific obligations on AmeriQuest, as to its accounting or other matter. The plan language said nothing about how AmeriQuest must account for pre and post-petition payments during the course of the repayment period, if, for example, the payments were late, inadequate, or not made at all. Holding: Section 105 cannot be utilized to impose obligations or create a remedy where there is not an underlying basis for the remedy in the Bankruptcy Code itself, or in the debtor s plan. [T]he proper response of the bankruptcy court would have been an amendment to the Plan specifying the accounting practices necessary to eliminate that threat. The sanctions were, accordingly, overturned. What This Case Means To Debtors: The First Circuit s opinion makes very clear that Chapter 13 plans must include provisions dealing with appropriate accounting and reporting or application of payments if protection or enforcement is to be expected. The court cited with approval the cases In re Watson, 384 B.R. 697 (Bankr. D. Del. 2008) (which held that Chapter 13 plans may contain procedures for requiring notice of fees and charges, allocation of payments and requiring the bankruptcy court to adjudicate disputes over fees, costs, and charged under a mortgage) and In re Collins, 2007 WL , 2007 Bankr. Lexis 2487 (Bankr. E.D. Tenn. July 19, 2007) (which held that language in a Chapter 13 plan which imposed procedural obligations over the life of the plan on mortgagees does not violate the antimodification provisions of 1322(b)(2) and is permissible and even desirable ). Debtors have come to rely upon Local Rules, best practices, and the justifiable concern of the bankruptcy court to correct sloppy mortgage service practices. They must, however, anticipate this problem and place their concerns in specific provisions, clearly spelled out, in their Chapter 13 plans. Without specific provisions, such as used in Collins, the ability to enforce openness and requiring accurate accounting is doubtful. What This Case Means to Creditors: Mortgage servicers can 15

16 take some comfort in the most recent Nosek decision. Unless there is a specific statutory or plan directive to them, they should not face the risk of monetary sanctions because their accounting practices offend a bankruptcy judge. Creditors must be wary, however, of the provisions of debtors Chapter 13 plans. These plans, which clearly will be more detailed, will govern the steps a mortgage servicer must take in dealing with escrow analysis, advanced costs, application of payments, and other provisions during the pendency of a Chapter 13 case. By requiring specific plan provisions that deal with mortgage servicer conduct, the very real possibility exists that mortgage servicers will face different obligations and requirements in each case. This will result in a lack of uniformity, growing inconsistency, and an accounting nightmare. What The Case Means To Trustees: Once again the appellate courts are placing accounting and monitoring obligations on the bankruptcy system, albeit through a plan rather than through some nebulous good faith requirement. Debtors that truly seek to protect themselves from the vagaries of servicer accounting would be well served to make such mortgage payments through the Chapter 13 trustee. Doing so at the start of a Chapter 13 case will provide them with an accurate record and a strong ally in court if and when a servicer fails to comply with the clear terms of a confirmed plan. In re Madison, 337 B.R. 99, 55 Collier Bankr.Cas.2d 846 (Bankr. N.D. Miss. 2006) Summary: In four cases the Chapter 13 Trustee objected to certain postpetition and preconfirmation charges included in proofs of claim filed by a law firm on behalf of certain creditors. The Trustee objected to the description of certain postpetition services performed as well as to language in three of the cases that indicated that, if legal fees are incurred after the filing of the proof of claim, the account will be assessed those fees if the lender deemed such fees legally permissible. The provision of the claim also advised that, if the fees were not part of the case, such fees may be collected in the future pursuant to the terms of the security agreement, Bankruptcy Code and applicable law. The Trustee argued that charges assessed for attorney fees for preparation and filing of 16

17 proofs of claim were unnecessary and the amounts charged unreasonable. The Court distinguished those fees permitted under 1322(e) (amounts necessary to cure a default) from fees permitted to be recovered by an oversecured lender under 506(b) and required the lenders to establish that they were oversecured prior to considering whether the charges could be permitted. The Court also addressed how a creditor should procedurally request fees and/or expenses which may be applicable to an oversecured claim. Finally, the Court addressed the language in three cases regarding potential prospective, postpetition collection of legal fees. Holding: Lenders must establish that they are oversecured prior to consideration of fees sought pursuant to 506(b). Disclosure of fees sought may be accomplished through a proof of claim, however that disclosure must be specific to afford any interested party reasonable opportunity to object. Nominal fees, such as the fees sought in these cases, would not require the filing and noticing of a 2016 fee application. Regarding potential prospective, postpetition collection of legal fees, the Court held, in this jurisdiction, the property of the Chapter 13 bankruptcy estates does not vest at confirmation in the debtors. This is specifically set forth in the order confirming the debtors Chapter 13 plans. Consequently, while the bankruptcy cases are still pending, no additional fees should be changed to or collected from the debtors without the specific approval of the court [this] prevents unsuspecting debtors from being blind sided by the addition of undisclosed charges. Despite indicating that the preparation of a proof of claim is ministerial in nature, not warranting an attorney fee, the Court allowed a fee of $150 in each of the four cases for the work completed in relation to the preparation and filing of the claims because of the testimony presented to the court demonstrating that the services performed were necessary and not simply ministerial. This determination was made contingent upon a demonstration that the creditors are oversecured. What this case means to creditors: Know when property vests in the debtors. Although nominal fees may not require a 2016 notice, they nonetheless must be disclosed. What this case means to Trustees: Certain postpetition fees, if disclosed and if appropriate given the status of the creditor (oversecured) and the nature of the work performed, may be permitted over the Trustee s objection. 17

18 Effect of Changes in Payment Amounts In re Armstrong, 394 B.R. 794 (Bankr. W.D.Pa. 2008) Summary: Debtor-mortgagor filed a proposed Chapter 13 plan which provided for payments of $637 per month for 36 months. The plan provided for a cure and reinstatement of Debtor s mortgage with Ocwen Federal Bank FSB (the servicer for LaSalle Bank National Association). Ocwen was to receive $400 per month with a cure of the prepetition arrearage of $2,400. Ocwen filed a claim with arrears of $3, included in the total amount of $57, The proof of claim indicated the postpetition payment amount of $ and that the amount was [s]ubject to change according to terms of your note and mortgage. A copy of the adjustable rate note, mortgage and adjustable rate rider were attached to the proof of claim. Also attached to the proof of claim was an amortization schedule reflecting a monthly payment of $ in April, 2005 with an interest rate of 7.88% and a payment amount of $ plus 8% interest beginning May, LaSalle objected to confirmation alleging that the plan was insufficient to pay the stated arrearage on the claim. The plan confirmed in January, 2006 with an increased plan payment of $717 per month and provided that the proof of claim would control as to amount, classification and rate of interest. Debtor defaulted in making plan payments and, in response to the Trustee s motion to dismiss, filed an amended plan seeking to cure arrears by increasing the plan payment to $721 and extending the plan to 46 months. The Amended plan provided for an increase in the payments to LaSalle to $ begin[ning] 9-05 per claim and for a payment of the arrearage claim in the amount of $3, through 8-05 per claim. The amended plan was confirmed with the following new language that did not appear in the first plan: Any creditor whose payment changes due to variable interest rates, change in escrow, or change in monthly payments, shall notify the Trustee, Debtor(s) counsel and Debtor(s) at least twenty (20) days prior to the change taking effect. A local procedural rule was in place which required that notice of any postpetition changes in the debtor s monthly plan payments must be noticed to the debtor, counsel and the trustee. In January, 2008 LaSalle filed and served a Notice of Post Petition Payment Change recounting the multiple payment changes for the period of December, 2005 through June, Debtor objected to the notice by LaSalle as late filed and served and sought that the court strike the notice and limit LaSalle to the $ payment amount reflected in the Amended Plan. LaSalle asserted that it was in compliance with the order confirming the amended plan since the language in the amended plan requiring notice was not confirmed until December, 2007 and the noticing requirements for payment changes from November, 2007 which pre-dated the confirmation order could not be retroactively enforced. Holding: The Court held that the failure of the lender to provide prompt notice of changes in the monthly payment amount to the debtor, counsel and the trustee in contravention of the local procedural rule resulted in a waiver of the lender s right to the higher payments. The Court noted that multiple measures were in place, including the requirement that current and arrearage payments on a mortgage be made through the Trustee, to ensure that completion of a Chapter 13 plan would result in a fresh start with a 18

19 current mortgage. Failure of a creditor to provide notice would derail the opportunity to reach the goal of a fresh start. The Court further held that the local procedural rule did not affect a mortgagee s rights in violation of the anti-modification provisions of 1322(b)(2). What this case means to debtors: Failure to provide notice may result in a waiver of a lender s right to the change in payment amount. What this case means to creditors: Be aware of and follow local procedure and rules. Often there is a lack of familiarity with local procedure and practice, particularly where a national creditor or servicer is involved. Curing Mortgage Arrearage and Reinstatement at Conclusion of Case In re Jones, 366 B.R. 584, 57 Collier Bankr. Cas.2d 1622 (Bankr. E.D. La. 2007) Summary: Prior to the petition date Wells Fargo commenced a foreclosure action on debtor s residence. After the petition was filed, Wells Fargo stayed prosecution of its foreclosure action but did not dismiss the suit. Wells filed a proof of claim listing the amounts owed by Debtor at the time of filing and attached to the proof of claim its adjustable rate note. Debtor s confirmed Chapter 13 plan provided for payments of $2, per month for thirty-six months plus one final payment of $ Wells was to receive payments on its prepetition arrearage claim and was to be paid directly on its ongoing postpetition installment payments. Within one week of plan confirmation the debtor suffered a heart attack and, as a result, missed three plan payments and four postpetition mortgage payments. The Court ordered the plan extended by three months and excused the debtor from immediately making the three missed payments to the trustee. Debtor entered into a Consent Order with Wells to make direct payments to cure the postpetition default and to pay attorney fees and costs. Approximately two and onehalf years later debtor sought court authority to refinance the Wells debt, representing to the Court that Option One had provided debtor with a commitment in the amount of $275,000. The $275,000 was intended to satisfy the costs of the refinance, the outstanding claims of Wells, and all remaining plan obligations. Wells provided an itemized payoff the day prior to closing in the amount of $231,463.97, however the payoff did not provide an explanation or substantiation for the amounts listed. Debtor questioned the figures, but testified that he was unable to obtain an accounting. Rather than lose the loan commitment from Option One, Debtor closed, but after payment of the refinancing costs and the Wells Fargo debt, no funds remained to satisfy the outstanding plan obligations. Post-closing Debtor requested an accounting and Wells provided correspondence that confirmed that it had collected more than necessary to satisfy its loan. No further explanation was provided and debtor was advised that he would receive a check for the reimbursement in approximately fifteen days. Approximately two months 19

20 after the reimbursement was to have been received but was not, Debtor commenced an adversary proceeding. Approximately three weeks later a reimbursement check in the amount of $7, was forwarded by Wells and the funds were placed in escrow with the court pending the outcome of the adversary proceeding. Debtor disputed the accounting presented into evidence by Wells and argued that none of the disputed charges, including the accrual and payment of postpetition inspection fees, attorney fees, statutory expenses and Sheriff s commissions, were previously disclosed to Debtor, the Court or the Trustee and that the foreclosure fees in the accounting were significantly higher than those disclosed in the proof of claim. Wells responded that the amounts asserted were correctly calculated and were permitted under the terms of the parties agreement. Wells also asserted that the debtor was estopped from recovering amounts improperly charged because debtor voluntarily paid those amounts. Wells accounting demonstrated that Wells had applied Debtor s postpetition installment payments to prepetition amounts owed, contrary to the plan s language. In addition, the terms of the Consent Order were not incorporated into the accounting and the prepetition arrearage amounts to be paid by the trustee without interest were not addressed. The result of these errors was an increase of the amount of interest charged over what was actually due. Holding: The Court held that Wells was not entitled to recover legal fees it allegedly incurred postpetition and prior to confirmation and following confirmation and that the lender willfully violated the automatic stay by assessing and paying for undisclosed charges from estate property following confirmation. The Court noted, Creditors should not be able to assess fees to the account of a person in bankruptcy without the person s knowledge. A bankruptcy case s purpose is to allow a debtor to get out of financial trouble. At discharge, a debtor ought to be able to expect he or she has brought his or her secured debts current and wiped out all unsecured debts not paid through a plan. Undisclosed fees prevent a debtor from paying the fees in his or her plan an option that should not be lost simply because a creditor chooses to not list the fee and expects to collect it later. What this case means to debtors: Debtors must be in communication with the creditor regarding their account and must ensure that they are receiving notifications and account information on a regular basis. Reviewing monthly statements, and requesting and reviewing an accounting or escrow analysis on a regular basis is imperative to ensure that all charges are dealt with during the pendency of the bankruptcy so the debtor does not emerge from bankruptcy facing foreclosure or uncertainty. What this case means to creditors: Creditors should be proactive in communicating with debtors counsel, the court and the Trustee regarding ongoing fees, costs and escrow 20

21 charges during the pendency of the bankruptcy. If necessary, a 2016 statement could be filed to disclose the fees or an amended proof of claim could be filed. What this case means to Trustees: As with pre-petition defaults being cured through plans, trustees should verify that any postpetition obligation sought to be paid through the plan is facially correct. Communication with counsel for debtor regarding the impact on the plan is also recommended. In re Andrews, 2007 WL , 2007 Bankr. Lexis 3290 (Bankr. D.Kan. 2007) Summary: Debtor filed plan proposing to pay zero percent interest on prepetition arrearages owed to first position mortgagee. Wells Fargo objected. Holding: The Court overruled the objection to the extent that the prepetition arrearages constituted interest. For those portions of the prepetition arrearage that did not constitute interest, the court sustained the objection and required payment of interest through the plan. The Court further held that post-confirmation fees and expenses charged by mortgagees are subject to bankruptcy court review as to reasonableness and are limited pursuant to 362(a)(3) and subject to review under debtor s plan, state law and Fed. R. Bankr. P. 2016(a) and 105(a). What this case means to debtors and creditors: Postconfirmation fees and costs remain subject to bankruptcy court review for reasonableness. Remedies Ensuring Compliance With Plan In re Perez, 339 B.R. 385 (Bankr. S.D.Tex. 2006) Summary: Debtors initiated a challenge to a local rule which required that all debts be paid by the Trustee and sought leave to make payments directly on their home mortgage. The Court considered whether debtors should be permitted to pay the lenders directly instead of remitting funds to the trustee for distribution. Recognizing that the Code permits debtors to make direct payments to creditors, the Court noted that to do so is a 21

22 privilege and not an unqualified right. The Court reflected that the change in practice in three divisions within the Southern District of Texas to utilizing the Trustee as disbursing agent and removing the debtor from that role resulted in more efficient administration of Chapter 13 cases. Accordingly, the judges sought uniformity and a decrease in disputes regarding issuance and receipt of payments. In reaction to the Debtors argument that payments being made inside the plan subject the debtors to payment of the trustee s fee over and above the mortgage payment, the Court found that the local rules and practice were put in place to protect the debtors and the trustee s fee was hardly of consequence because the amount was deducted from monies that would otherwise be disbursed to unsecured creditors. Holding: Home mortgage payment procedures and uniform plan approved in district which limited assessment of postpetition late fees was not impermissible modification of mortgagee s rights. What this case means to debtors: Exceptions to a local requirement or administrative procedure to pay residential mortgage payments through the plan are not unknown, but are subject to review in the context of confirmation. Factors to be considered include: (1) the degree of responsibility of the debtor, considering past dealings with creditors; (2) the reasons contributing to the need for the Chapter 13 filing; (3) delays that might occur as a result of the Trustee s acts; (4) whether the proposed plan modifies the debt; (5) sophistication of the creditor; (6) ability and incentive of the creditor to monitor payments; (7) consumer or commercial nature of the debtor; (8) ability of the debtor to reorganize absent direct payments; (9) whether the payment can be delayed; (10) the number of payments proposed to pay the specific claim; (11) whether direct payments will impair the trustee s ability to perform his duties; (12) unique or special circumstances of a particular case; (13) the business acumen of the debtor; (14) the debtor s post-petition compliance with statutory or court-imposed duties; (15) the good faith of the debtor; (16) the plan treatment of each creditor to which a direct payment is proposed to be made; (17) the consent, or lack thereof, by the affected creditor to the proposed plan treatment; (18) the ability of the trustee and the court to monitor future 22