LENDER LIABILITY LITIGATION

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1 LENDER LIABILITY LITIGATION 21 ST ANNUAL DFW AREA CHAPTER 13 CONSUMER BANKRUPTCY CONFERENCE Irving, Texas November 14, 2011 Gary A. Armstrong ARMSTRONG KELLETT BARTHOLOW P.C N. Central Expy Ste 301 Dallas, Texas (214) (214) (fax) Gary A. Armstrong practices in the areas of consumer bankruptcy and consumer credit litigation. He spent the first 10 years of his practice representing consumer creditors, focusing on compliance with state and federal lending laws such as the Truth-in-Lending Act, the Real Estate Settlement Procedures Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and state consumer lending, retail installment sales laws, disclosure and collection laws, and usury laws in Texas and throughout the United States. In 2001 he established Armstrong Law Firm and began representing consumer clients in Chapter 7 and Chapter 13 bankruptcy cases and in litigation involving state and federal consumer credit laws. In 2009, he formed Armstrong Kellett Bartholow P.C., continuing the practice of representing individual debtors in bankruptcy and consumer credit litigation. Gary is a 1991 graduate, magna cum laude, of Tulane Law School and holds a Master of Business Administration from Tulane University. He has received further training at Max Gardner s Bankruptcy Boot Camp, Peter Barry s FDCPA Boot Camp, and through his membership and participation in the National Association of Consumer Bankruptcy Attorneys and the National Association of Consumer Advocates.

2 Pre Bankruptcy Claims Loan Origination/Servicing Claims Truth in Lending Act 3 day rescission right Equal Credit Opportunity Act Credit denial letter Real Estate Settlement Practices Settlement disclosures Fee splitting Pre Bankruptcy Claims Loan Origination/Servicing Claims State Lending Laws Finance Code applies to retail installment and motor vehicle installment sales, finance company loans Servicing issues Application of payments Fees and charges assessed against loan Escrow accounting Scheduling the Debt Best practices Request from Debtor all documents the client has regarding their debts, including the loan documents, billing statements, and other correspondence For secured debts, verify perfection/recording Obtain payoff quote Send QWR on mortgage loans Evaluate whether debt should be listed as disputed, contingent, or unliquidated 1

3 Identifying Debtor s Causes of Action With documentation in hand and reviewed: Review documentation for violations of loan origination laws Review evidence of perfection of security interest Interview Debtor regarding any disputes that he or she is aware of and follow up to investigate Schedule any potential causes of action on Schedule B FDCPA Debt Collection Practices Consumers are protected under federal and state law against unfair, deceptive, or harassing collection efforts. Interview client for details Schedule any claims on Schedule B 9 Top Debt Collection Violations Debt collector calls friends, family, neighbors, or co workers about debt Debt Collector threatens wage garnishment Calling debtor at work if the debt collector knows that employer does not allow personal calls Calling the debtor after the debt collector knows the debtor is represented by counsel Attempting to collect amounts that are now owed Debt collector threatens arrest Debt collector uses offensive or demeaning language Calling and talking to debtor repeatedly to the point of harassment Threatening to place a lien on the debtor s home, car or other exempt property. Reporting false information to credit reporting agency 10 2

4 Top Mortgage Loan Servicing Violations Payments not timely credited to loan account resulting in late fees or other charges Improperly force placing insurance when insurance has not lapsed Failing to provide reinstatement quotes timely Charging fees not authorized by law or contract Applying payments other than as authorized under the Note and Deed of Trust Failing to properly credit payments after servicing transfer 11 DURING BANKRUPTCY Stay Violations False Motions for Relief from Stay Proof of Claim Litigation Incorrect Accounting Undisclosed and Unapproved Fees Standing Issues 12 STAY VIOLATIONS Many courts hold that assessment of undisclosed fees and improper accounting are stay violations. Tacking vs. Tracking Lender Upping Debtor s Mortgage Payment After Bankruptcy to Cover Pre petition Escrow Deficiency TIP: Send pre bankruptcy Qualified Written Request to mortgage servicers 13 3

5 False Motions to Lift Stay 14 In re Gorshtein, 285 B.R. 118 (Bankr. S.D.N.Y. 2002) Rejected dog ate my homework defense. In each of three separate cases at issue, the servicer s actions had created a danger that a family would lose its home without just cause andin violation of the bankruptcy code. In re Osborne, 375 B.R. 216 (Bankr. M.D. La. 2007) Judge Doug Dodd awarded sanctions against creditor's counsel for a baseless stay relief motion of $5,000 (emotional distress damages) and reasonable attorney's fees. 15 In re Fagan 376 B.R. 81 (Bankr. S.D.N.Y. 2007) Motions to lift the stay may be routine and inconsequential to secured creditors and their counsel. But to a debtor and his or her family, such a motion and the consequent loss of the family home may be devastating. Most creditors and counsel are conscientious. But some are callous by design or inadvertence, as exemplified by this motion and two others presented to the Court the same week. 16 4

6 The danger here is that a debtor who does not have an attorney or the resources of intellect or spirit to defend against a baseless motion may lose his/her home despite being current on post petition mortgage and plan payments. 17 In re Willard, 2004 Bankr. LEXIS 958 (Bankr. Ne. February 13, 2004) Court sanctions law firm and lender ($25,000) for false motion for relief from stay. In re Parsley, 384 B.R. 138 (Bankr. S. D. Tex. 2008) citing numerous cases on a variety of abuses 18 Tips Don t agree to the lender s Agreed Order verbiage in a stay relief motion. Watch out for lender trying to get a blessing of non MFRS feesin theirmotion for relief. Lender is entitled to fees for bringing this motion and for taking other actions in this bankruptcy proceeding. 19 5

7 Challenge lender s affidavits on evidentiary grounds. 20 Problems with POCs Claimant lacks standing Insufficient Documentation or False Claims For payment deficiencies For fees, expenses and escrow amounts claimed li Refusal to provide documentation when asked Attempt to increase or settle monthly payment amount on attachment to POC 21 The Supreme Court has characterized the claim determination process as one of basic importance in the administration of a bankruptcy estate, without which unmeritorious or excessive claims might dilute the participation of the legitimate claimants. Gardner v. New Jersey, 329 U.S. 565, 573, 67 S.Ct. 467, , 91 L.Ed. 504 (1947) 22 6

8 In re Coates, 292 B.R. 894, 899 (Bankr. C.D. Ill. 2003)(explaining the underlying importance of the claims process with respect to mortgage loans in Chapter 13) In re Gilbreath, 395 B.R. 356 (Bankr. S.D. Tex. 2008)(explaining parties' burdens with respect to proofs of claim.) 23 Failure to Account for Payments Properly 24 In re Jones, 2007 Bankr. LEXIS 2984 (Bankr. E.D. La. August 29, 2007) Wells Fargo avers that it was Debtor s burden to discover that it had clandestinely assessed and paid itself for undisclosed fees and charges otherwise not due. Incredibly, Wells Fargo also argues that it was Debtor s burden to verify that its accounting was correct, even though Wells Fargo failed to disclose the details of that accounting until it was sued. 25 7

9 The final assault on the Bankruptcy Code is Wells Fargo s position that not only can it secretly assess a debtor s account postpetition, but it can collect payment on these charges without seeking Court permission Depending on how much and how often the lender siphoned off funds, payable under a confirmed plan for other purposes, a debtor might or might not satisfy the obligations contemplated by his or her plan. To allow such a practice is to eviscerate the provisions of the automatic stay and this court s power to protect the Debtor and property of the estate. 26 Undisclosed Fees 27 In re Tate, 253 B.R. 653 (Bankr. W.D. N.C. 2000)(granting summary judgment to debtor class because undisclosed fees are per se unreasonable) In re Sheffield, 281 B.R. 24, 33 (Bankr. S.D. Al. 2000) ( Fees which are not disclosed at all, fees which are not properly claimed with specificity, or are not included in the arrearage claim to be paid through the plan if the plan so provides, are per se unreasonable because they are improperly charged. ) 28 8

10 In re Harris, 280 B.R. 876, 885 (Bankr. S.D. Al. 2001)( A fee which is charged, but not fully disclosed to the debtor is not owed. ) In re Slick, 2002 Bankr. LEXIS 772 (Bankr. SD S.D. Ala. May 10, 2002). In certified nationwide class action, Judge Mahoney sanctioned Norwest (now Wells Fargo) $2,000,000 for failure to disclose post petition fees: 29 Padilla v. Wells Fargo Home Mortgage, Inc. (In re Padilla), 379 B.R. 643, 661 (Bankr. S.D. Tex. 2007)( Debtors cannot realistically obtain a fresh start if mortgage lenders can charge a debtor s account without disclosure. ) Sanchez v. Ameriquest Mortgage Co. (In re Sanchez), 372 B.R. 289, (Bankr. S.D. Tex. 2007)(holding that the entity seeking reimbursement for expenses from the estate must comply with Section 506(b) and Rule 2016) 30 Standing/Ownership Issues Hot area of litigation Issue arises any time that a note or debt is payable to an original creditor and is now being collected by a different creditor/loan servicer Mortgage loan securitization The claimant must have standing to file a claim or motion to lift stay 31 9

11 Securitization A legal vehicle to provide financing for lenders Transfers loan assets to a trust for benefit of investors Allegations are that transfers were not done, or were not done legally, such that the trust and its servicer lack sufficient rights to enforce loan and security interest against debtors. BCC Article 3, Article 9, trust law 32 POST DISCHARGE Collecting discharged debts Reporting debts to credit reporting agencies as still owing Collecting fees and charges not disclosed or approved in bankruptcy court and/or failure to properly service loan during bankruptcy After discharge, lenders asserting that the debtor is in default, beginning foreclosure proceedings, and actually foreclosing. 33 Types of Relief Sought Restitution of overpayments Sanctions for creditor s violation of Code and Rule sections (NOTE NEW RULES) Actual damages (including emotional distress) Statutory damages Punitive damages Attorneys fees Injunctive Relief Reduction or denial of lender s proof of claim 34 10

12 Declaratory relief that debtors are current Other injunctive relief Damages against lenders law firms 35 11

IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF TENNESSEE

Dated: 10/01/09 IN THE UNITED STATES BANKRUPTCY COURT FOR THE MIDDLE DISTRICT OF TENNESSEE In Re: ) ELLIOT and DEBORAH RAMSEY ) CASE NO. 309-06086 Debtors. ) Chapter 13 ) Judge Marian F. Harrison ) MEMORANDUM