Client Alert
June 18, 2019

Bankruptcy Case Law Update: Court Approves Cramdown Provision on Personal Residence

On May 24, 2019, the Fourth Circuit Court of Appeals, reviewing in an en banc rehearing, overruled a twenty-two-year-old decision of the court. In Hurlburt v. Black, No. 17-2449, 2019 WL 2237966 (4th Cir. May 24, 2019), the Court found that the Bankruptcy Code allows a debtor to modify select home mortgage claims. This decision overturned long-standing precedent that prohibited Chapter 13 debtors from modifying a claim secured by a principal residence.

The Fourth Circuit, now aligning with the other courts that have considered the issue, found that a debtor may modify a secured claim even if the property is the debtor’s principal residence, if the last payment on the secured claim is due before the final plan payment.

Facts Presented

In Hurlburt, the debtor owed approximately $131,000 on a claim secured by his principal residence. The note had a 10-year term with a final balloon payment due in May 2014. After the loan matured, the debtor filed a Chapter 13 bankruptcy case and proposed to satisfy the secured claim in full by paying the appraised valued of the home in the approximate amount of $47,000. The Chapter 13 plan proposed to treat the balance of the claim as an unsecured claim. After failing to successfully challenge the long-standing precedent in the Circuit, the debtor requested a review by all of the judges in the Fourth Circuit. Upon reviewing, the judges reversed the earlier decisions in an 11-3 decision.

Analysis

Typically, a debtor is prohibited from modifying the terms of a claim secured by a principal residence pursuant to 11 U.S.C. 1322(b)(2). However, the dispute presented here hinged on a specific exception to the anti-modification provision found in Section 1322(c)(2). Section 1322(c)(2) states that, “notwithstanding subsection (b)(2),” if the last payment on a mortgage claim is due before the final plan payment is due, “the plan may provide for the payment of the claim as modified pursuant to Section 1325(a)(5).” Previously, the Court found that 1322(c)(2) only allowed debtors to modify the rights of short-term mortgage claims by repaying the full secured claim over the duration of the plan. However, in this decision, the Court reversed the prior holding, finding that the statute allows modification of the entire claim and not just the payment schedule.

More specifically, the Court found that 1322(c)(2) provides a statutory exception to the anti-modification provision and permits Chapter 13 debtors to bifurcate under-secured, short-term home mortgages that matured prior to completion of the plan, essentially allowing the debtor to “cramdown” the loan in the Chapter 13 plan. This means that any loan that is set to mature while the debtor is in an active Chapter 13 plan, is subject to cram down provisions.

The dissenting opinion discusses the larger impact stating that the decision essentially overrules the Supreme Court’s holding in Nobelman v. American Savings Bank and will “lead to mischief in bankruptcy courts.” Since the debtors have some measure of control over whether their mortgage will qualify as a short-term one, the ruling could lead to calculated filings to cram down loans to avoid paying the full amount owed. Since this decision reinforces a trend within the circuits, secured lenders should risk assess current loans and consider this when reviewing their underwriting and approval processes.

Impact

The silver lining is the ramification of the Hurlburt decision is not likely to be far reaching to most loans. Servicers, investors, and lenders should consider the tenants of Hurlburt when originating or modifying loans that could fall victim to a cram down. While the facts in Hurlburt are the proverbial “perfect storm” of conditions, it is possible that if the economy falters and property values deflate that there could be an increase in these types of filings. Depressed home values coupled with aging loans that that contain balloon or end of term lump sum payment, could fall victim to a cram down similar to Hurlburt. Additionally, loan modifications that do not seek to alter the maturity date of an aged loan could be problematic as well.

Erin M. McCartney, Managing Bankruptcy Attorney
Joseph J. Tirello, Jr., Bankruptcy Attorney

Firm Announcement
June 13, 2019

We are excited to announce that Kathy Shakibi has joined our team! Kathy joins with over ten years of litigation experience and four years of in-house experience as house counsel with a default services law firm. Ms. Shakibi graduated cum laude from Whittier Law School. There, she was on the Dean’s honor list and received four CALI awards. Since 2005, Kathy has exclusively represented financial institutions and their vendors in mortgage banking and default services. We are thrilled that Kathy has joined our team!

Welcome to the ZBS Law family, Kathy!

Firm Announcement
June 4, 2019

We are thrilled to announce that Charles E. Katz has joined the ZBS team.

Mr. Katz is the Managing Litigation Attorney in our Irvine, California office. He is licensed to practice law in both California and Washington. He has over 14 years of experience in representing financial institutions, mortgage servicers as well as trustees. Prior to joining the firm, Mr. Katz spent over 2 years as in-house counsel for HomeStreet Bank supporting its mortgage loan servicing group. His practice currently specializes in all aspects of litigation related to the default servicing industry. He obtained his Bachelor of Science degree from University of Houston. Mr. Katz then moved on to study law and graduated with honors from Concord Law School. He is a member of the Purdue University Global Adjunct Faculty where he teaches Property Law for Concord Law School.

Welcome to the firm, Chuck!

Client Alert
April 28, 2017

New Ramifications for Secured Creditor’s Failure to Comply with Required Bankruptcy Notices Under Bankruptcy Rule 3002.1

On April 25, 2017, the Office of the Comptroller of the Currency (the “OCC”) published a decision that orders U.S. Bank National Association to pay a civil penalty of $15 million for bankruptcy filing violations. According to the OCC, the Bank committed various errors related to the requirements under Bankruptcy Rule 3002.1 including: untimely, not filed, or inaccurately filed Proofs of Claim; (b) payment application inaccuracies resulting in overpayments by debtors or trustees; (c) untimely and/or inaccurate Payment Change Notices; (d) untimely, and/or inaccurate Post-Petition Mortgage Fees, Expenses, and Charges; (e) inaccurate Notices of Final Cure; (f) exposure of confidential customer information in court-filed documents; and (g) inconsistent application of the Bank’s fee waiver practices.

Rule 3002.1 requires secured lenders in Chapter 13 bankruptcy proceedings to comply with several time sensitive notices reporting changes in payments, post-petition fees and responses to the Chapter 13 Trustee’s notice of final cure. Failure to comply with Rule 3002.1 may result in severe penalty, damages, and fines.

This decision represents a trend in decisions revolving around Rule 3002.1 violations. In November 2015, a settlement agreement was entered into in the District of Maryland between the United States Trustee Program and Wells Fargo after the United States Trustee identified over 84,000 accounts for which a notice of mortgage was either missed or untimely.

More recently, in September 2016, a decision was released out of the Bankruptcy District Court of Vermont which opened the door to Rule 3002.1 sanctions. In this case, the Rule 3002.1 violations resulted in a $375,000 sanction. More importantly, this case represents the first instance of punitive sanctions under Rule 3002.1.

We recommend that secured lenders reach out to legal counsel to evaluate current processes and determine best practices to avoid or mitigate liability. If you have questions regarding the impact of these decisions or complying with the requirement under Bankruptcy Rule 3002.1, please contact Zieve, Brodnax & Steele, LLP.

Erin M. McCartney, Managing Bankruptcy Attorney

In re Gravel, 556 B.R. 561 (Bankr. D. Vt. 2016).