Case Law Newsletter

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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January 2011

COURT REJECTS SERVICER’S ARGUMENT THAT RESPA’S SAFE HARBOR LASTS UNTIL THE BORROWER FILES SUIT; IT IS NOT APPLICABLE IF THE SERVICER DID NOT NOTIFY THE BORROWER’S OF THE ERROR. ALSO, ALL REASONABLY STATED WRITTEN REQUESTS FOR ACCOUNT INFORMATION SHOU

In * Catalan v. GMAC Mortgage Corp. * , No. 09-2182 (7th Cir., January 10, 2011), the Seventh Circuit Court reversed a grant of summary judgment in favor of a servicer, finding that the District Court erred when it held that the servicer qualified for RESPA’s “Safe Harbor” with respect to its failure to timely and properly respond to borrower’s “Qualified Written Requests”. The problem began with the plaintiffs’ prior servicer who incorrectly set the first payment date on the account one month earlier, thus causing their loan to show a default when the first payment was actually due. The prior servicer also increased the borrowers’ monthly payment without notice, causing them to go into default even though they continued to make the original payments. Relying on the incorrect information the servicer treated the account as delinquent. In an attempt to resolve the disputed charges, the borrowers wrote five letters to the servicer. While the defendant acknowledged the receipt of the letters, it failed to follow up with responses to the inquiries. Eventually, upon HUD’s intervention, the servicer corrected the account charges, reinstated the loan account and accepted payments from the borrowers. The borrowers sued under RESPA and the District Court found that the corrective actions defendant took following HUD’s intervention constituted a “Safe Harbor” defense under 12 U.S.C. § 2605(f)(4). The Seventh Circuit held otherwise. It said that the defendant did not qualify for the “Safe Harbor” because it did not notify the borrower’s of the error. The court was not persuaded by the defendant’s argument that the safe harbor is available until suit is filed even if it did not discover and correct the error before by notified by the borrowers. The Court then evaluated the servicer’s argument that the borrowers’ letters were not “Qualified Written Requests” within the meaning of RESPA because they did not identify an error or state that the borrowers believed their account was in error. According to the defendant where the communication merely disputes the debt, as it did here, or requests information on the account it does not trigger obligations under RESPA. The court disagreed observing that “RESPA does not require any magic language before a servicer must construe a written communication from the borrower as a qualified written request and respond accordingly.” It explained that “any request for information made with sufficient detail is enough under RESPA to be a qualified written request and thus to trigger the servicer’s obligations to respond.” The “take-away” from this case: a servicer must vet all communication from a borrower to ascertain if it is a Qualified Written Request.

A MORTGAGE LOAN SERVICER IS PROHIBITED BY THE AUTOMATIC STAY FROM SEEKING ADDITIONAL AMOUNTS POST-PETITION FOR FUTURE ESCROW CUSHION NOT INCLUDED IN THE SERVICER’S PROOF OF CLAIM

At the time of filing their bankruptcy action the borrowers in * In re Rodriguez * , No. 09-2724 (3d Cir. Dec. 23, 2010) had an escrow account arrearage with the loan servicer of $5,657.60: $3,869.91 was the amount the servicer had paid for taxes and insurance and $1,787.69 was for 2 months escrow cushion as permitted under RESPA. In its proof of claim the servicer did not include the $1,787.69 escrow cushion which it sought to recoup through higher post-petition escrow payments. The borrowers contended that the payment increase violated the automatic stay. The Bankruptcy Court denied the motion and the District Court affirmed, concluding that the pre-petition “claim” was limited to the amounts the servicer already paid and had the right to retain, and not to the escrow cushion that it had the right to collect. The Third Circuit reversed holding that the language “right to payment” in 11 U.S.C. § 101(5)’s definition of “claim” meant “nothing more nor less than an enforceable obligation’” and that “Congress intended by this language to adopt the broadest available definition of claim.” The court looked to the terms of the mortgage and concluded that the servicer had an enforceable right to the payment of the escrow cushion at the time of the borrowers’ bankruptcy filing and so it had a “claim”. To the Court’s reasoning, the fact that the right to payment was contingent on the servicer actually advancing its own funds to satisfy an escrow payment that would result in a deficiency does not change the fact that the right to payment exists, even if it is remote. Accordingly, the Third Circuit held that the escrow cushion should have been treated as a pre-petition claim and included in the proof of claim. The dissenting opinion agreed with the servicer’s argument that a pre-petition claim is limited to the amounts actually disbursed. The dissent adopted the Bankruptcy Court’s reasoning that the phrase “right to payment”, as incorporated in the statutory definition of a “claim” under § 101(5), implicitly encompasses a right of retention, which is not included in the servicer’s “right to collect” escrow items. The dissent further observed that the servicer acted in accordance with RESPA which authorizes it to recalculate future escrow fund payments at various junctures to avoid shortages. The dissent submitted that the majority sets up an irreconcilable conflict between RESPA and the Bankruptcy Code’s automatic stay provision that in effect abrogates RESPA for it is difficult to foresee how a servicer’s attempt to recalculate escrows due in accordance with RESPA will not be in violation of the automatic stay.

IF A MORTGAGOR IS GOING TO CONTEST STANDING HE OR SHE SHOULD DO IT EARLY; OTHERWISE THE DEFENSE MAY BE WAIVED

Three recent opinions have confirmed the long-standing evidentiary rule (which courts routinely ignore) that if a mortgagor wishes to contest standing he or she needs to raise that defense at the pleading stage of the case; otherwise it’s waived. In * Mortgage Electronic Registration Sys., Inc. v. Barnes *, 1-09-2345, (Ill. App. Ct. Dec. 3, 2010) the mortgagor did not answer the foreclosure complaint and was subsequently defaulted. After the sale was held, but before it was approved, the mortgagor asked to set the foreclosure aside on the grounds that the Plaintiff lacked standing. The court held that the mortgagor forfeited her right to challenge standing because she was properly served with the complaint but failed to answer it, was defaulted, and thereafter participated in the action by successfully petitioning the court for a continuation of the sale but did not attempt to raise the standing issue until after the sale and only in response to mortgagee’s motion to confirm the sale. Similarly, in *JPMorgan Chase Bank v. Harp *, 2011 ME 5, 2011—-A.3d—- (Jan. 6, 2011) the mortgagor tried to challenge the bank’s standing on the ground that the bank only owned note, but not mortgage, at the time it commenced litigation to foreclose The bank did not acquire the mortgage until after the suit was filed. In response to the bank’s motion for summary, the mortgagor objected to standing but the court over-ruled the objection because the mortgagor did not raise the objection prior to the time the bank cured the standing defect. Also important was the fact that the late acquisition of the mortgage did not change the cause of action or prejudice the mortgagor. The court noted that the bank would have been vulnerable to a motion challenging its ability to foreclose at the commencement of the case but because the assignment of the mortgage was made prior to its motion for summary judgment the bank had met the criteria for summary judgment in a foreclosure action. Lastly, in * In re Glover *, 09-00744 (Bankr. D.D.C. Jan. 27, 2011) the Bankruptcy court rebuffed a challenge to the mortgagee’s effort to annul the automatic stay which was premised on the basis that the Bank never proved it had standing in the foreclosure proceeding. The Bankruptcy court was not impressed observing that any defense that the bank was not a “party in interest” with standing to pursue foreclosure or a ratification of the foreclosure sale should have been raised in the foreclosure. “Armed with an order ratifying the sale to it, the bank obviously has standing to seek annulment of the automatic stay with respect to the ratified foreclosure sale”.