Indiana mortgage lenders should be aware of a 2016 bankruptcy ruling (the first of its kind in the nation – and likely not the last), in which a bankruptcy court sanctioned a mortgage lender $375,000 for failing to comply with Rule 3002.1 of the Federal Rules of Bankruptcy Procedure concerning $716 in postpetition fees.1 Sanctions were entered following the Court’s finding that the mortgage lender issued statements that contained postpetition fees and costs were not appropriately disclosed in court filings, as required under Rule 3002.1.

Exacerbating matters, the statements containing the undisclosed fees were sent to the debtor after the entry of “final cure” orders. A final cure order essentially is an order that is obtained by the trustee, following appropriate notice and opportunity to object, that the debtor has completed all mortgage payments, arrears, fees, etc. during the term of the chapter 13 plan and is fully current.

Rule 3002.1 was adopted to ensure a “brightline” point of demarcation for debtor’s “fresh start.” In other words, too many chapter 13 debtors would complete payments during chapter 13 plans – only to instantaneously face default and foreclosure postdischarge as a result of undisclosed fees and expenses. Rule 3002.1 requires mortgage lenders (with mortgages on a debtor’s principal residence) to file a notice “itemizing all fees, expenses or charges (1) that were incurred in connection with the claim after the bankruptcy was filed, and (2) that the holder asserts are recoverable against the debtor or against the debtor’s principal residence” within 180 days of the assessment of the fees. The idea is that the trustee can gradually adjust the plan payments over time to address postpetition fees so that the debtor can truly obtain a fresh start upon discharge. Rule 3002.1 also addresses deadlines for filing notices of postpetition late payment fees and interest rate changes.

Decided by the U.S. Bankruptcy Court for the District of Vermont, In re Gravel consolidated three separate cases where a chapter 13 trustee sought both sanctions and disallowance of the undisclosed postpetition fees. Notably, the chapter 13 trustee was aware of other instances of similar conduct by the mortgage lender in other jurisdictions. The Court determined that sanctions were necessary and invited both the trustee and the mortgage lender to provide input as to the appropriate level of sanctions. Neither did.

In assessing sanctions, the Court considered a number of issues:

• Whether the mortgage lender had notice of the need to comply with 3002.1;
• Whether the mortgage lender had failed to comply before;
• Whether the mortgage lender was given an opportunity to address and to fix its processes (and, if so, did it do so); and
• Whether final cure orders were entered.

The Court concluded that the mortgage lender had notice and should have known about the bankruptcy rules. In addition, the Court found that the mortgage lender was large and sophisticated, and a pattern of conduct existed. As a result, the Court ordered sanctions in the amount of $375,000 although the amount of the undisclosed, postpetition fees at issue only totaled $716 for all three cases. It seems that the Court was primarily interested in deterring creditor conduct, rather than merely disallowance of the fees.

In sum, mortgage lenders should take care in reviewing their internal processes, as well as their computergenerated statements. Bankruptcy decisions of this nature tend to stoke new case law in other jurisdictions, including potentially here in Indiana. The time is now to ensure that your systems and processes appropriately address 3002.1 in order to achieve both maximum, legal recovery of postpetition fees and expenses, as well as to avoid costly sanctions and litigation.

This article was published in Hoosier Banker, March/April 2017. View the publication: http://www.ourdigitalmags.com/publication/?m=33031&i=387778&p=50

Bankruptcy Math - When $716 = $375,000 in Sanctions