Litigating Against Abusive Mortgagees
Your Columnist Scores Big Win Against Mortgagee Who Filed Frivolous Motion
Suffolk Lawyer, September 2008
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.
Editor’s Note: (revised 2008):