Articles Posted in Bankruptcy Caselaw

California residents who reside in the Sacramento metropolitan area may be interested to know an update in case-law that could potentially impact any home loan modification. The ongoing trend regarding litigation surrounding the Home Affordable Modification Program (HAMP) has been re-affirmed by a Washington D.C. Judge in Doreen Edwards et al v. Aurora Loan Servicers LLC. In Edwards, the Plaintiff argued that an individual borrower should have the right to sue because they were impacted by the HAMP agreement between Aurora , a private loan servicer and Fannie Mae.

All Plaintiffs in the case were eligible under HAMP for a home loan modification but were nonetheless denied by Aurora even though they were qualified under the program. The plaintiff’s cited “endless bureaucratic incompetence coupled with a lack of effective recourse for wrongful denials” as a basis for their against Aurora after having been denied a modified loan. The lawsuit alleged a violation by Aurora of its independent agreement with Fannie Mae: (1) that Aurora failed to act in good faith and fair dealing and (2) Aurora violated their right to Due Process. Aurora responded that the plaintiffs were not eligible to sue since they were not parties to the agreement with Fannie Mae and Aurora.

Judge Rothstein agreed with Aurora and held that the individual borrowers had no right to sue because they had no vested interest under the HAMP agreement. Judge Rothstein joined numerous other court decisions making similar findings. Judges in all District Courts of California have held this same decision including the Eastern District of California, which hears all cases brought in the Sacramento area. These courts have held in order for a person to have standing, the homeowner plaintiffs had to show that Fannie Mae and Aurora intended to include the borrowers, individually, to their HAMP agreement.

The 9th U.S. Circuit Court of Appeals, which has jurisdiction over all Sacramento area residents who file Chapter 7 or Chapter 13 bankruptcy, ruled yesterday that a Chapter 7 bankruptcy trustee may be able to sell a debtor’s house if its value increases during the bankruptcy, even though the debtor’s equity was fully exempt at the time of filing. The 9th Circuit consolidated two bankruptcy appeals within their jurisdiction in the case, In re Gebhart, No. 07-16769.

Debtors from Arizona and Washington each argued that the Chapter 7 trustee’s failure to object to a homestead exemption claim within the prescribed time frame permitted to contest the property’s value results in the property being withdrawn from the bankruptcy estate.

Gebhart focuses on a debtor who filed for Chapter 7 in Arizona in 2003 and claimed the full value of his home as exempt. The trustee assigned to the case did not object to the exemption when the debtor claimed it. However, the debtor’s case remained open and in 2006 the trustee attempted to sell the house as property values increased in order to reclaim the appreciated value for the debtor’s creditors. The debtor lost in the district court when he objected to the sale arguing the homestead exemption covered the full value of his home when he filed for Chapter 7. Oddly, a court in Washington with facts almost identical to the case filed in Arizona held that the original exemption did in fact cover the inceased value of the debtor’s home.

Sacramento area debtors who have filed Chapter 7 or Chapter 13 bankruptcy are frequently concerned with the implications of the FDCPA (affecting a creditor’s ability to collect on a debt) while his or her case is pending in the local bankruptcy court.

The Seventh U.S. Circuit Court of Appeals, which covers the Midwestern U.S., recently decided that some communications sent to borrowers by a loan servicer may fall under the provisions of the FDCPA. In Gburek v. Litton Loan Servicing LP, a borrower appealed after the trial court dismissed her case when she sued her mortgage servicer for violating her rights under the Act when the mortgage servicer hired a third party company to communicate with her about the debt. In her original complaint, Gburek claimed that Litton violated the FDCPA by contacting her despite knowledge that she had a lawyer, using deceptive means to obtain her personal information, and for disclosing her personal information to a third party.

According to the case, Litton contacted Gburek to discuss Gburek’s default on her mortgage. Litton sent Gburek a letter that asked her for a variety of financial information which also discussed Gburek’s possible alternatives to foreclosure on the property in an attempt to settle her mortgage-loan debt. The letter contained a disclosure that Litton was a debt collector and that the letter was sent as an attempt to collect a debt. Sometime thereafter Litton contracted with Titanium Solutions to contact Gburek. Gburek received a letter from Titanium that also asked for Gburek’s financial information but stated that it was not a debt collector and could not accept payments even though they had been hired by Litton to contact Gburek in order to facilitate a settlement between them.