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Noonan and Lieberman keeps you current on litigation news with its regular Case Law Update focusing on important and emerging trends in federal and state case law. Case Law Update is edited by attorney James V. Noonan.

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August 2008

Rights afforded to mortgagee under RESPA to recover escrow “cushion” through required shortage contribution could not be modified via Chapter 13 plan.

The debtors contended in In re Rodriguez, 07-24687 (Bkrtcy.D.N.J., July 22, 2008) that Countrywide’s post-petition escrow analysis of the mortgage account constituted an unlawful post-petition collection of a pre-petition obligation resulting in “repetitive and excessive payments by the Debtor of significantly more than what would have been paid but for the bankruptcy, or what Countrywide would be entitled to through the Debtor’s Bankruptcy (sic) Chapter 13 Plan.” Judge Kaplan disagreed. He found that the rights afforded lenders under RESPA cannot be abrogated in the context of a Chapter 13 bankruptcy proceeding. Debtors’ required shortage contribution is a charge authorized by and calculated in accordance with RESPA, as well as the underlying loan agreement; as such, any modification of such rights would contravene the prohibition against modifying the rights of a holder of a claim secured by a security interests in a debtor’s principal residence. He expressly denied the debtors claim that Countrywide must include in its pre-petition arrearage, to be paid over the life of the Chapter 13 plan, not only sums actually disbursed by Countrywide for items such as taxes and insurance, but also such additional sums the Debtors should have paid into the escrow account prior to filing. In doing so he rejected the recent analysis made by Judge Manger in In re Fitch, 2008 WL 1791197 (Bankr.E.D.La.2008) where she concluded that debtors are afforded the benefit of a hypothetical positive balance in their escrow account for purposes of calculating their post-petition escrow obligations. To quote Judge Kaplan: “This Court is troubled by such a result and is not prepared to leap into the “Alice in Wonderland” approach to mortgage servicing, in which lenders are required to credit an escrow account for payments not made, while coming out of pocket to advance additional payments of taxes and insurance on behalf of Chapter 13 debtors. Indeed, as argued by Countrywide, this is the very result RESPA seeks to avoid in allowing the collection of the shortage component”.

New servicer does not have to provide consumer with second validation notice under the FDCPA if it was already provided by prior servicer.

In Oppong v. First Union Mortg. Corp., 02-2149 (E.D. Pa., July 24, 2008), debtor sued Wells Fargo, the new servicer, for failing to provide her with a fresh validation notice before taking actions to collect debt. The court concluded that even assuming that Wells Fargo was acting as a debt collector in this case, it was not obligated to provide debtor with what would be a second validation notice (beyond that already provided by prior servicer’s counsel) with the requisite information. The district court cited Nichols v. Byrd, 435 F.Supp.2d 1101, 1106 (D.Nev.2006) which held that if Congress had intended to obligate every subsequent debt collector beyond the first to provide validation notice it would have explicitly called for it in § 1692g), Senftle v. Landau, 390 F.Supp.2d 463, 473 (D.Md.2005) (holding that there is only one “initial communication” with a debtor on a given debt under § 1692g(a), even though subsequent debt collectors “may enter the picture.”) and Ditty v. Checkrite, 973 F.Supp. 1320, 1329 (D.Ut.1997) (holding that after a validation notice has been timely sent, a subsequent collector does not need to provide additional notice and another thirty-date validation period). It explicitly rejected contrary authority such as Griswold v. J & R Anderson Bus. Serv., 1983 U.S. Dist LEXIS 20365 (D.Or. Aug. 11, 2005) (holding that each collector must provide information required by § 1692g) and Turner v. Shenandoah Legal Group, P.C., 2006 U.S. Dist. LEXIS 39341 (E.D. Va. June 12, 2006) (stating that every debtor is owed the same duty from each and every debt collector, lest an “end-run around the validation notice requirement” be created) as unpersuasive. “It would serve no purpose to require that the same information be given again and again, each time the servicing function was passed from one creditor to another”.

Court concludes that MERS is not "identical" to holder for Rooker-Feldman purposes.

In Fritz v. GMAC Mortgage Corp., 07-C-1019 (E.D.Wis., July 17, 2008) the mortgagee, GMAC, obtained a judgment of foreclosure in an earlier state court proceeding brought in the name of MERS. In response to a subsequent federal TILA suit, GMAC argued that the Rooker-Feldman doctrine precluded federal jurisdiction. A Wisconsin district court held that even if the non-party to the earlier state court judgment is in privity with the party to the judgment the Rooker-Feldman doctrine is inapplicable. It noted that GMAC was not a party to the state court foreclosure judgment, MERS was. While MERS listed GMAC in the caption as the servicer, and while it appears that MERS was acting on behalf of GMAC as a nominee, MERS initiated the action as the plaintiff, not GMAC. There was also no indication that MERS and GMAC are identical entities. Nevertheless, the court dismissed the claims on res judicata grounds.

Debtor can treat a junior mortgage as an unsecured claim without filing an adversary proceeding if the value of the collateral is less than the amount of the junior lien.

In this Chapter 13 case, In re Kemp, No. 08-18700 (Bkrtcy.D.N.J., July 17, 2008), the court concluded the debtor could reclassify his secured claim arising from a second mortgage on his residence as an unsecured claim, by stripping creditor’s lien based on residence’s value, without filing an adversary proceeding. The court in held that lien stripping did not challenge either the validity or the extent of lien. It distinguished the recent Third Circuit decision in In re Mansaray-Ruffin, No. 05-4790, —- F.3d ——, (3d. Cir. June 24, 2008) where the court held that a Chapter 13 debtor could not invalidate a lien through a Chapter 13 plan provision, but must file an adversary proceeding instead. Because the Mansaray-Ruffin decision drew a distinction between challenging the validity of a lien and valuing the collateral to which that lien attached to determine the amount of the secured claim, the court concluded that the filing of an adversary proceeding was not required.