A NATIONAL BANKRUPTCY SERVICES PUBLICATION
Right to
enforce the note
Will the real
party in interest
please stand up
A WINNING
STRATEGY
VOL. 1, ISSUE 2
PREPARING FOR TOMORROW’S RULES
SO CHOOSE THE COMPANY WITH ONE OF THE MOST ADVANCED
MANAGEMENT SYSTEMS TO KEEP ALL THE PIECES IN PLACE.
RESIDENTIAL MORTGAGE LENDERS  AUTOMOBILE FINANCE COMPANIES  BANKS, CREDIT UNIONS, & FINANCIAL INSTITUTIONS 
CONSUMER LENDING ORGANIZATIONS  PORTFOLIO SERVICERS, OWNERS & INVESTORS
Close monitoring of all your case developments via one of the most
technologically advanced Bankruptcy Loss Mitigation and Servicing
systems in the nation allows up-to-the-minute information on the status
of a specific case or your entire portfolio. Valuable time is saved and
losses associated with delays in case resolution are avoided. It’s one
more way we’re staying ahead of the game. Call today to find out more.
NATIONAL BANKRUPTCY SERVICES
9441 LBJ Freeway, Suite 250
Dallas, TX 75243
1-800-766-7751
NBSdefaultservices.com
FOCUS
ISSUES
DATA
A NATIONAL BANKRUPTCY SERVICES PUBLICATION
ISSUES
DATA
FOCUS
A discussion of current trends
and issues in the world
of bankruptcy and
bankruptcy servicing.
Information aggregated from
authoritative data sources
detailing bankruptcy filing
statistics around the nation.
Interviews with industry
professionals offering
insight into servicing and
legal developments.
2
16
20
NBS. HANDLING BANKRUPTCY CASES SINCE 1987.
IN THIS ISSUE
TABLE OF CONTENTS
PROOF » Right to enforce the note
2
POWER SPORTS, BOATS & AUTOMOBILES » Driving higher reaffirmation agreement rates
6
A WINNING STRATEGY » Prepare today for the rules of tomorrow
8
PIGS GET FAT, HOGS GET SLAUGHTERED » A debtor’s motto practiced with creditors
14
BY THE NUMBERS » Taking a look at the state of bankruptcy
16
CASE STUDY
» Will the real party in interest please stand up
HOT SEAT: BETSY HANSON » The client’s view of effective default servicing
20
22
Lance Vander Linden, Chairman
[email protected]
The Ledger is a National Bankruptcy Services publication.
© 2010 National Bankruptcy Services • All Rights Reserved
Paul Bourke, CEO
[email protected]
9441 LBJ FREEWAY, SUITE 250 • DALLAS, TX 75243
Contributing Writers
Sharmila Bharwani, Paul Bourke, Larry Buckley,
Paul Cervenka, Sammy Hooda, Luke Madole
Brad Cloud, COO
[email protected]
Magazine Design
The LTV Group, www.theLTVgroup.com
PAGE 1
Larry Buckley, EVP of Business Development
[email protected]
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
PROOF
RIGHT TO ENFORCE THE NOTE
BY LUKE MADOLE
PAGE 2
THE
servicer of a home mortgage acts, in the most simple arrangement, as an independent contractor engaged by the current creditor. The current creditor is almost never
the note’s payee. It is, rather, a note’s “holder,” owner or transferee
with the rights of a holder. That last category of creditor – a transferee with the rights of a holder – will hereafter be abbreviated “TRH.”
As securitized home loans have made their way into bankruptcy and other courts, some judges have pressed servicers for
confirmation of servicer/current creditor alignment. They have
asked servicers to produce the contracts, contract assignments
and other papers by which the servicer is acting and to align those
papers to a creditor demonstrated to be the debtor’s current creditor. On occasion and in response, servicers (through an honest
misunderstanding which somehow the court misapprehended as
intentional deception) have sometimes become the object of the
court’s ire. The sticking point has been that what the servicer calls
the “holder” of the note was not what the court calls the “holder.”
When the court used the term “holder” of the note as identifying
the current creditor, the court meant the technical and legal term
“holder” as defined by the Uniform Commercial Code (“UCC”).
When the servicer heard the term “holder,” the servicer registered
the colloquial term “holder” as the current physical possessor of
the note, e.g., the company for whom the document custodian of
the securitized pool physically safeguards the originally signed
notes in “collateral” files.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
But the colloquial “holder” may not be a technical “holder” under the law of negotiable instruments. The colloquial holder may
be, rather, a TRH. And, on occasion, some courts have viewed calling a “TRH” a “holder” as misleading. To help avoid those kinds of
misunderstandings, the following is offered.
If a court demotes a colloquial holder to a TRH, it is usually because of a gap in the chain of endorsements. Using the law of Texas
(which adopted the UCC effective July 1, 1966) to illustrate, start
with First Nat. Bank in Dallas v. Lampman, 442 S.W.2d 858 (Tex.
Civ. App.—Eastland 1969, writ ref’d n.r.e.) which dealt with the effect of an endorsement gap under the UCC. The issue was whether
Dozier Productions, Inc. was the holder or owner of a check payable to the order of Joy C. Dozier but endorsed to First National
Bank only by Dozier Productions, Inc. The check was deposited in
Dozier Productions, Inc.’s account at First National Bank in Dallas after Lampman, a creditor of Dozier Productions, Inc., had garnished the bank. Banker’s Trust, the bank on which the check was
drawn, dishonored the check because it lacked the endorsement
of Joy C. Dozier and consequently First National Bank returned
the check to Joy C. Dozier rather than paying the proceeds of the
check over to Lampman. First National Bank was correct in doing
so if the money was Joy Dozier’s but erred in so doing if the money
belonged to Dozier Productions, Inc..
There was, of course, the evidence stamped on the back of the
check that Dozier Productions, Inc. transferred its rights, if any,
extended period of litigation practice, he has represented debtors, creditors, mortgage insurers, lawyers and
Where a check is payable to order the endorsement of the payee, in
addition to delivery, is necessary to pass title sufficient to support
an action thereon, unless the party in possession otherwise shows
ownership of the check.
— 442 S.W.2d at 861
Note that the issue was not whether the signature of Dozier Productions, Inc. on the check was authorized by Dozier Productions,
Inc. First National had the power to supply the signature of its customer even had Dozier Productions, Inc. not rubber-stamped the
back of the check. § 4.205(a), Texas Business and Commerce Code
(TBCC). The point was that Dozier Productions, Inc. had no abil-
ity to pass title to an order instrument not endorsed by the original payee without showing the title of the original payee, Joy C.
Dozier, had been transferred to Dozier Productions, Inc. This is the
point servicers do well to understand. Endorsement gaps can usually be accounted for by transfers made not on the face of the note
but by separate papers. Had Lampman produced an assignment of
the check from Joy Dozier to Dozier Production, Inc., Lampman
would have won his case.
In Behring International, Inc. v. Greater Houston Bank, 662
S.W.2d 642 (Tex. App.—Houston [1st Dist] 1983, writ dism’d by
agreement), Behring International, Inc. drew a check to the order
of Norwegian American Lines, c/o Norton Lilly. “Somehow, the
check ended up in the possession of Nordship [Nordship Agencies,
Inc.] in New Orleans.” 662 S.W.2d at 645. Nordship deposited the
check in the Nordship’s account at Greater Houston Bank as follows: “For Deposit Only by Nordship Agencies, Inc. as agents.” 662
S.W.2d at 646. When the drawee of the check returned the check
to Greater Houston Bank (for lack of the payee’s endorsement),
Greater Houston Bank offset the account of Behring International, Inc. at Greater Houston Bank on the theory Greater Houston
Bank was the holder and owner of Behring’s check to Norwegian
American Lines and could enforce Behring’s promise to pay. Behring defeated the bank’s offset. Why? Because the bank never explained the endorsement gap. There were transfers written on the
check but they were not “endorsements.” A true “endorsement”
[ turn the page ]
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
FOCUS
PAGE 3
in the check to First National but there was no evidence Dozier
Productions, Inc. had any rights to transfer. The check was payable to the order of Joy C. Dozier and she testified that the “rubber
stamp” endorsement on the back of the check was not made by her
or at her direction but, rather, got there by inadvertence and mistake. In short, it was undisputed the endorsement of the original
payee, Joy C. Dozier, was missing. Dozier Productions, Inc. could
not, by placing its “rubber stamp” on the back of the check, appoint itself owner of the check absent any evidence of transfer
from Joy C. Dozier to Dozier Productions, Inc. Consequently, the
creditor’s garnishment failed because title to the check did not
pass to Dozier Productions, Inc. from Joy C. Dozier by negotiation
or otherwise. The court said:
PROOF — RIGHT TO ENFORCE THE NOTE » BY LUKE MADOLE
ISSUES
insureds in commercial and consumer real estate disputes.
DATA
LUKE MADOLE is a partner in the Dallas law firm of Carrington, Coleman. Sloman & Blumenthal, L.L.P. Over an
CLEARING THE PILEUP OF AUTO
BANKRUPTCY.
Call today to see how NBS can accelerate recovery through
precision auto loan bankruptcy management services.
NATIONAL BANKRUPTCY SERVICES
9441 LBJ Freeway, Suite 250
Dallas, TX 75243
1-800-766-7751
NBSdefaultservices.com
has several ingredients. Not only is an endorsement (a) a group of
words (b) written on the instrument itself, but (c) the words must
be put on the instrument by a holder!
The endorsee side of the endorsement of an order instrument is
addressed by § 1.201(21) TBCC, which defines a holder of an order
instrument as one who possesses an instrument endorsed to him.
The endorsor side of the endorsement of an order instrument is
addressed by § 3.201(b) TBCC which requires that an endorsement
be written by or on behalf of the holder.
The court, in Behring International. Inc. v. Greater Houston
Bank, held that the words looking like an “endorsement” which
Nordship put on the check did not constitute the “endorsement”
needed by Greater Houston Bank to obtain holder status because
Nordship was not the payee of the check, i.e., Nordship was not
itself a holder of the check.
On the face of the check, Norwegian American Lines was the payee. The endorsement of Norwegian American Lines was missing
and unexplained “There was no evidence adduced showing how
the check in question came into Nordship’s possession.”
— 662 S.W.2d at 651
Under the UCC, an endorsement gap precludes any subsequent
possessor of the instrument from being a “holder” as that term is
used in the UCC. In the mortgage servicing context, the possessor
of the note in those circumstances is usually a TRH but it will
take papers in addition to the note itself to show that. As a graphic
Texas case illustrates, even where all the original payee does is
change its name and sues in its new name, it is not a “holder,” in
the UCC sense, of notes payable to it under its former name:
Contrary to its contention, the Appellee, even though in possession,
was not a holder of the instruments. Tex. Bus. & Comm. Code
Ann. §1.201(20); 9 Tex. Jur 2d, § 150 at 159. It could not enforce
payment in its own name under § 3.301 without proving its right
to the instruments and accounting for the absence of the necessary
endorsements. See Note 2 to § 3.307.
The necessary proof was not furnished by any constructive admission resulting from any failure to comply with Rule 93. None of
the subdivisions apply to the allegations that the present plaintiff
[Finance America Private Brands, Inc.] was formerly GAC Private Brands, Inc. It is proof as a holder of the instruments that is
involved and not the capacity or defect of the party to bring this
suit. Lawson v. Finance America Private Brands, Inc., 537 S.W.2d
483, 485.
FOCUS
DATA
— Tex. Civ. App.–El Paso 1976, no writ
It should be noted here that in the case quoted above, Cleta
Lawson won the battle over “holder” status but lost the war over
note liability. She was unable to escape note liability because she,
herself, supplied the missing evidence during her case-in-chief
which established that Finance America Private Brands, Inc. was
a non-holder owner of the note. So the court noted:
However, reversible error is not presented. After the plaintiff had
rested, the defendant, upon direct examination by attorney, testified that GAC Private Brands, Inc. [the payee named in the note]
was the former name of the present plaintiff. This admission established the missing proof.
As the Lawson case also illustrates, endorsement gaps are usually much ado about nothing once the endorsement status is accounted for. Upon demonstration of how the current creditor
became the current creditor, it is usually easy for the servicer to
accumulate the papers needed to satisfy the court’s inquiry into
servicer/current creditor alignment.
PAGE 5
Prior to the adoption of the Uniform Commercial Code, the mere
possession by a plaintiff of notes payable to the order of a different
payee, and which were not endorsed by the payee, was not sufficient to establish the prima facie title to the instruments. Texas
State Bank & Trust Co. v. St. John, 103 S.W.2d 1104 (Tex. Civ.
App.—El Paso 1937, err. dism’d); 12 Am. Jur. 2d, Bills and Notes,
§ 1194 at 218. The last authority points out that this is clearly the
rule under the Uniform Commercial Code. Negotiation of commercial paper not payable to bearer takes effect only when the
endorsement is made, and until that time there is no presumption
that the transferee is the owner. The transferee, without endorsement of an order instrument, is not a holder and so is not aided by
any presumption that he is entitled to recover on the instrument.
He must account for his possession by proving the transaction
through which he acquired the note...
PROOF — RIGHT TO ENFORCE THE NOTE » BY LUKE MADOLE
ISSUES
Endorsement gaps can usually be accounted for by transfers
made not on the face of the note but by separate papers.
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
power sports, boats
& automobiles
BY LARRY BUCKLEY
PAGE 6
ONE
of my favorite all-time
film comedies is “Planes,
Trains & Automobiles” starring Steve Martin and the late, great John Candy. It also
serves as the inspiration for the title of
this article. More importantly, it puts the
focus on one of NBS’ most important and
successful lines of business — Consumer
Secured Bankruptcy Servicing. Consumer
lenders come in all shapes and sizes (like
Martin & Candy) and they utilize a variety
of collateral types to secure their loans.
While we have not seen any trains and
only a handful of planes in our review of
security instruments, our clients offer up
the whole gamut of collateral, from automobiles to motorcycles, to tractors, to motor homes, to jet skis, to ATVs and so on.
While consumer lenders may specialize in one or more forms of secured lending, one thing they have in common when
their loans are affected by a bankruptcy
filing is simply this: They either want to
get paid, or quickly obtain the legal right to
enforce their security interest and recover
their collateral.
The traditional approach to achieving
one of these two goals has been to follow a
path based on formal legal processes in the
bankruptcy courts. Objecting to confirmation of Chapter 13 plans and filing motions
for relief from stay certainly are important
and necessary functions. Fortunately, secured creditors have other options in the
post-bankruptcy reform world in which
we have lived since October 2005.
Bankruptcy reform provided personal
property secured lenders with some additional tools for servicing bankruptcy loans
that, when properly implemented and executed upon, can provide tangible benefits
for secured creditors.
What are some of the potential benefits? How about improved reaffirmation
and lease assumption agreement rates; reduced charge-offs; reduced loss severities
and improved recovery rates; and one of
the major benefits — lower legal expense
for attorneys’ fees!
Those are benefits that put consumer
lenders and servicers in the mood for a
good laugh — like watching Martin and
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
Candy in feigned terror as the doors to
their car come flying off!
So how does a secured lender make
all this happen? One way is to look for an
outsourcing vendor whose founding and
guiding principle is very simple — make
the best efforts to get loans in bankruptcy
to either perform financially or get them
out of bankruptcy as quickly as possible.
As Lance Vander Linder, chairman of the
board and one of the founding members
of NBS, is fond of saying, “bankruptcy is
congressionally-mandated loss mitigation.
Creditors should take full advantage of
what the law allows.”
There is no trick or “secret sauce” that
makes a bankruptcy portfolio perform in a
way that significantly improves a lender’s
performance.
It takes lots of hard work, a dedicated
team of subject matter experts including
bankruptcy administrators, managers, executives and attorneys all working in sync
to achieve defined goals and performance
metrics. And what are some of those goals?
How about obtaining every possible reaf-
FOCUS
DATA
ISSUES
» BY LARRY BUCKLEY
Reaffirmation and loan assumption agreement performance is obtained by having
a well-defined solicitation strategy that
focuses on a pre-determined eligible population of loans. Providing experienced
administrators with clearly defined client
performance expectations is a key driver
in this process. Our approach at NBS has
pushed reaffirmation agreement rates
north of 55% across our entire portfolio
of cases referred by captive auto finance
companies, indirect lenders, national and
regional banks and credit unions.
The NBS approach to driving higher reaffirmation agreement rates is coupled with
utilization of another benefit of bankruptcy
reform, stay lift by operation of law. Bankruptcy code amendments in 2005 required
debtors to state their intent with regard to
personal property secured loans. Debtors
must either affirmatively state whether they
intend to reaffirm their debt, redeem the
amount owed, or surrender the collateral.
Failure to act on one of these “intents”
starts the clock ticking, so that the automatic stay is lifted by operation of law
when debtors do not timely perform their
stated intent, rather than through the filing of a motion for relief from stay.
Jennifer Brown, senior bankruptcy counsel at NBS, says, “Stay lift by operation of law
has dramatically changed the approach
creditors may take to obtain the right to obtain possession of their collateral.”
NBS monitors debtors’ intents and measures the time frames upon which stay lift
by operation of law can take effect. This approach has significantly lowered legal fees
and costs for our clients. It also expedites the
process of collateral recovery without the necessity of filing motions for relief from stay.
NBS utilizes a similar approach in
Chapter 13 cases to ensure its clients’ are
receiving the proper treatment in Chapter
13 plans, from both delinquency and valuation perspectives.
Wes Wiley, NBS director of client man-
agement, says “a vast majority of objectionable Chapter 13 plans proposed by debtors
are resolved at NBS via negotiation with
debtors’ counsel. Our proactive approach is
designed to obtain proper creditor treatment
without the unnecessary expenditure of
legal fees. We utilize the formal legal process
when it is necessary based on the servicing
strategy defined by a given client.”
As executive vice president of business
development at NBS, my views on bankruptcy outsourcing are colored by my passion for what we have done at NBS during
the five plus years of my employment.
More importantly, my observations are
factually based on empirical performance
metrics, reduced internal costs, losses and
legal expenses, coupled with improved recoveries.
There is no singular way to service
bankruptcy loans. Outsourcing this complex, costly and risk-intensive process is
one very viable alternative for consumer
lenders of all stripes. We like to think that
in the end the NBS approach winds up like
a lot of movies do — with a happy ending!
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
POWER SPORTS, BOATS AND AUTOMOBILES
firmation agreement in your Chapter 7
portfolio? How do you make that happen?
Jeff Dowdle, vice president of consumer
bankruptcy operations at NBS, says it
works like this:
PAGE 7
LARRY BUCKLEY has served as the executive vice president of business development for National
Bankruptcy Services and managing attorney for Brice, Vander Linden & Wernick since 2005. Mr. Buckley
previously served as president of First American Title Insurance Company’s National Default Title Insurance
division from 2003–2005. Mr. Buckley was also the founding shareholder of The Buckley Firm, P.C. and
president of Buckley & Associates, Inc. and served in that capacity for over 20 years. Mr. Buckley is an AV
rated attorney licensed to practice law in the states of California, Arizona, Texas & Colorado.
PAGE 8
COVER STORY
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
FOCUS
TRENDS IN BANKRUPTCY BECOME LAW:
PREPARE TODAY FOR THE RULES OF TOMORROW
BY PAUL CERVENKA
the ever increasing
number of bankruptcy
cases filling the courts’ dockets, there has
been a consistent amount of time and energy placed toward elaborating and expanding upon the Federal Rules of Bankruptcy
Procedure. Amendments to the rules are
often needed to address repeating problems or concerns within the bankruptcy
process. Any changes to these rules are not
taken lightly and the process can be quite
lengthy. This article will examine two specific proposed rules as they relate directly
to the proof of claim and specifically to
Chapter 13 bankruptcy requirements.
These newly proposed rules will follow
the same path as any other amendment.
They began in the Advisory Committee
where they were created and will soon be
reviewed by the Standing Committee. If
approved, they will then move on to the
Judicial Conference, followed by the U.S.
Supreme Court. Assuming all groups approve, the rules will be sent to the U.S.
Congress for final review. If no changes are
made by Congress, these rules take effect
on December 1, 2011.
Even though these proposed rules
will not take effect until 2011, it is important that all lenders and servicers in the
mortgage industry are aware of where the
bankruptcy process is headed. While these
federal rules may not yet be in effect, they
are an excellent indicator of bankruptcy
trends across the nation. Typically, changes in the federal rules have already been
addressed by many jurisdictions through
their individual local rules. Thus, by familiarizing oneself with the latest trends,
a lender/servicer can always stay ahead
of the curve and better avoid the dreaded
objection to claim. The prudent lender/
servicer should take these new trends and
adopt them as part of their internal procedures to ensure compliance across the
nation. Additionally, acting now will save
time and money later spent in defending
claims through litigation.
[ turn the page ]
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
PAGE 9
WITH
A WINNING STRATEGY » BY PAUL CERVENKA
ISSUES
DATA
A WINNING
STRATEGY
PAUL W. CERVENKA is an associate attorney at Brice, Vander Linden, & Wernick, P.C. with a primary focus
on the Real Property bankruptcy portfolio. He is a graduate of The University of Texas at Dallas and Southern
Methodist University Dedman School of Law who is licensed to practice in Texas.
PAGE 10
RULE 3001
PROOF OF CLAIM AND
SUPPORTING DOCUMENTATION
The proposed rule change to Rule 3001
involves a few amendments regarding the
filing of a proof of claim, with a special
emphasis on supporting documentation.
As we look at where we are now with proof
of claims, we remember the all too familiar Rule 3001(c) requiring that any claim
based on a written agreement must have
the writing filed with the proof of claim.
This is followed by Rule 3001(d) which
requires proof of perfection of a secured
claim.
When read in conjunction with one
another, a secured claim for real property
must have the Note (written agreement)
and Recorded Deed of Trust (proof of perfections) attached as supporting documentation to every filed proof of claim.
This federal standard is the minimum
requirement.
However, many local rules across the
nation have expanded upon this to require
an increasing amount of additional documentation. Additionally, many trustees
have interpreted these rules to require assignments or endorsed notes to prove the
lender/servicer is the correct successor
in interest to file the claim. It was only a
matter of time before the Federal Rules of
Bankruptcy would follow suit and expand
upon these minimum national standards.
That time is now.
Revolving or Open-end Loans
The first proposed amendment to Rule
3001 involves an open-end or revolving
loan (typically a credit card type of agreement). This new amendment requires an
attachment to the proof of claim which
is: “the last account statement sent to the
debtor prior to the filing of the petition.”
(Proposed Rule 3001(c)(1)). A requirement
such as this is not an entirely new or unheard of practice, as there are some jurisdictions that have already adopted this as
part of their local rules (Maryland Local
Rule 3001-1(a)).
What distinguishes this type of rule is
that this statement is required, even if the
last statement was sent out by a prior lender/servicer. Thus, it is the responsibility of
the current lender/servicer to provide this
prior statement with the proof of claim filing, even if the current lender was not responsible for sending it out. The prudent
lender/servicer who deals with these types
of loans should develop a business prac-
tice to accommodate this rule. Whether
this means having an immediate contact
with the prior lender, or obtaining this
documentation when the loan is acquired,
the lender/service should assume this will
be required for all open-end or revolving
loans. As a best practice, every lender/
service dealing with these types of loans
should be able to produce this account
statement in a reasonable amount of time.
Supporting Documentation —
Itemization and Escrow Analysis
The second amendment to Rule 3001
lays out a detailed list of supporting documentation specifically required when the
debtor is an individual. This section of proposed Rule 3001(c)(2) requires an “itemized
statement” of all “interest, fees, expenses,
or other charges” included in the proof of
claim. It also puts special requirements
on secured claims by requiring a “statement of the amount necessary to cure any
default as of petition date”. Additionally, if
the secured claim is regarding the debtor’s
principal residence, an escrow statement
must be provided for all escrowing loans.
This escrow statement must be prepared as
of the petition date and must be filed with
the proof of claim.
IT WAS ONLY A MATTER OF TIME.
THAT TIME IS NOW.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
FOCUS
DATA
ISSUES
Loan History for the Southern
District of Texas
One cannot discuss supporting documentation and proof of claims without
at least some mention of the Southern
District of Texas. When it comes to supporting documentation requirements,
this district leads the way. Judge Marvin
Isgur advocates a loan history form for
Chapter 13 arrears claims to help ensure
compliance with Fifth Circuit case-law
requiring all pre-petition escrow amounts
be captured within the proof of claim arrears (see Campbell v. Countrywide Home
Loans, Inc., 545 F.3d 348 (2008)).
This idea has been mentioned to the
advisory committee as a possible future
amendment and the loan history requirement has already been adopted as part of
the local rules for the Southern District
of Texas (Southern District of Texas Local
Rule 3001-1).
To comply with this local rule, the lender/servicer must provide a complete history of all transactions on the loan relating
to the current delinquency. The more delinquent the debtor, the more months (and
in some cases years) the lender/servicer
will have to go back.
Every transaction must be accurately
described using “court-friendly” terms so
that the history can be easily understood
by the court, debtor, and trustee. The
amount of detail required by such a form
may seem quite burdensome from the
lender/servicer’s perspective.
However, the goal of the court is the
same as all the other federal courts around
the nation: paint an accurate picture of
the total debt owed by the debtor at petition. While the Southern District of Texas
requires a more precise and specific snapshot of the delinquency, the motive remains the same.
As seen with some of the examples
above, the trend of one jurisdiction soon
becomes the trend of the nation. Don’t be
surprised when this Texas loan history
requirement becomes the norm — in fact
expect it!
[ turn the page ]
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
A WINNING STRATEGY » BY PAUL CERVENKA
Requiring an escrow statement at petition helps to better explain the escrow
amounts included in the claim. If this new
rules takes effect, it may require an actual
escrow analysis at petition for every escrowing mortgage. This ensures an accurate snapshot is taken of each escrowing
loan at the start of the bankruptcy. Ideally,
this would help to ensure all pre-petition
escrow amounts are included in the proof
of claim, while also reducing the likelihood that a pre-petition shortage is being collected in the ongoing post-petition
monthly payment.
Once again, this is not a new requirement (To name a few: Delaware Local Rule
3023-1(b)(ii)(C); Florida Local Rule 30011(B)(3); Maryland Local Rule 3001-1(b)(3);
New Jersey General Order 3904). However,
this new rule makes this a minimum requirement across all jurisdictions, not just
a select few.
Thus, lenders/servicers will be forced
to conduct an escrow analysis on every
escrowing loan at the time of petition. As
a lender/servicer, if you have not yet developed an escrow analysis process as it
relates to bankruptcy, now is the time to
get to work!
PAGE 11
Again, these requirements are not news
to the bankruptcy world. Many trustees
have followed the guidelines established
by the National Association of Chapter
13 Trustees (NACTT), which suggest a detailed itemization of any amounts listed
in the proof of claim. The goal of detailed
itemization is to clearly show all parties
(debtor, trustee, and court) exactly what
dollar amounts are being collected and
what each dollar is being collected for. For
the lender/servicer this means you must
be able to clearly label every amount you
wish to collect in the claim.
A clear label must be a “court friendly”
description, meaning anyone outside of
the mortgage industry (for example the
debtor, trustee, or judge) can ascertain
exactly what each fee is for. Words such
as “Prior Servicer Fees”, “Other Corporate
Advances”, “Fee Assessed” or any other
vague language will not be considered a
detailed itemization under this proposed
rule. From a practical standpoint, vague
descriptions such as those mentioned
above have already proven to be accidents
waiting to happen.
Diligent trustees and debtor’s attorneys
are constantly on the lookout for these
unclear words. The best case scenario for
the lender/servicer is a phone call seeking clarification. The worst case scenario
is an adversary or show cause, resulting
in more money spent than the lender/servicer bargained for. Once again, the goal
is to put forth the extra effort to accomplish this task early on (when the proof of
claim is filed). This effort will pay for itself
through reduced objections and litigation
costs for all parties.
Sanctions
One of the most concerning amendments to this section governs sanctions.
Proposed Rule 3001(c)(2)(D) states that if
a lender fails to provide any of the above
supporting documentation with the proof
of claim, the lender is prohibited from presenting the documentation at any later
time. This means the missing information
cannot be presented as evidence at any
subsequent proceeding for the bankruptcy
case, such as an adversary hearing or any
other contested matter.
The ONLY exception is if the court can
be convinced that failure to provide the documentation earlier was “substantially justified or is harmless.” Additionally, the court
may award “other appropriate relief” which
could include reasonable attorney fees and
other expenses caused by the failure.
While it remains to be seen exactly how
the courts will use this “substantially justified” standard, suffice it to say they will
require a genuine and legitimate reason
for failure to follow the federal rules. It is
also difficult to imagine a scenario where
the courts will deem such a failure to be
“harmless,” especially from the perspective from the debtor.
The bottom-line is that these rules must
be followed if the lender/servicer wishes to
collect any amount of debt. The best way
for the lender/servicer to protect itself is to
be proactive and tackle these new compliance issues before they come with a penalty attached for failure to comply.
RULE 3002.1
NOTICE MUST BE GIVEN
Proposed Rule 3002.1 would be a completely new rule added to the Federal Rules
of Bankruptcy Procedure. This new rule
applies to Chapter 13 cases where the debtor’s principal residence is the secured collateral. It is being added to help in the implementation of § 1322(b)(5) of the United
States Bankruptcy Code (which allows the
debtor in a Chapter 13 case to cure a default
and maintain home mortgage payments
throughout the course of the debtor’s plan).
This goal is accomplished by requiring notice in several situations.
Payment Change Notice
First, a Notice of Payment Change is
required at least 30 days before any new
payment amount is due. This has been
a common trend among many districts
across the nation, and again this is another
requirement that falls in line with recom-
mendations of the NACTT. Under this new
rule, payment change notices are required
across the nation. While the advisory
committee has recommended the notice
requirement be reduced to at least 21 days
notice, it remains to be seen exactly how
the final version will play out.
The format of this payment change notice must be substantially similar to the
format used outside of bankruptcy and
must be sent to the debtor, debtor’s attorney, trustee, and the court.
As stated in the Advisory Committee
notes, “Timely notice of these changes
will permit the debtor or trustee to challenge the validity of any such charges,
if necessary, and to adjust post-petition
mortgage payments to cover any properly claimed adjustment.” The committee
goes on to state that these rules will also
eliminate any concern the lender/servicer
might have that giving notice of a postpetition payment change might violate
automatic stay.
Once again, many local rules already
require a payment change notice during
bankruptcy. The truly prepared lender/servicer will have a process in place for its national portfolio before this rule even takes
effect.
DON’T BE CAUGHT OFF GUARD.
PAGE 12
DEVELOP BEST BUSINESS PRACTICES TODAY.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
FOCUS
DATA
Sanctions
Again there are penalties for not complying with these rules. If proper notice
is not given for any of the three situations
mentioned above (payment change, postpetition charge, or delinquency after final
cure) then the lender/servicer is prohibited
from presenting this information at any
later date.
The only exception is convincing the
court the failure was “substantially justified” or harmless, which as discussed
above, could prove quite difficult.
Again, the court also has discretion to
award other relief, such as attorney fees
and other reasonable expenses resulting from the failure. One very important
note from the advisory committee cautions that if the lender/servicer tries to
recover an amount that should have been
disclosed under this rule, “the debtor may
move to have the [bankruptcy] case reopened in order to seek sanctions against
the holder of the claim…” In other words,
speak up about the debtor’s delinquency
when you are supposed to…or forever hold
your peace.
What Can You Do?
While these new Federal Rules of
Bankruptcy Procedure may seem to impose a great burden on lenders/servicers,
one must remember the purpose of these
rules are to promote consistency across
the nation while also addressing concerns
within the bankruptcy process. The idea is
that one standardized federal rule is better
than several variations of local rules for
each bankruptcy district.
The bottom-line is that change is coming. New requirements for one district
spread to another, and before you know it a
new trend has developed in the bankruptcy world. By the time the federal rules are
approved and take full effect, there is often already a new trend that has emerged
across the nation (with local rules to back
it up). Don’t be caught off guard. Develop
best business practices today to follow the
most recent trends.
It’s better to put forth the extra effort at
the front end of the bankruptcy case and
cover all of your bases, than to have to litigate the discrepancies later at an increased
cost. By working on building these best
practices now, you can avoid the headache
of an objection later.
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
A WINNING STRATEGY » BY PAUL CERVENKA
ISSUES
Notice of Final Cure Payment
Under this part of the proposed new
rule, the trustee is required to give notice
to all parties within 30 days after the entire pre-petition default has been paid in
full. This issuance of notice starts a 21 day
clock for the lender/servicer to respond.
The lender/servicer must respond in agreement or disagreement with the trustee’s
notice and lender/servicer must also state
whether or not the debtor is current on all
post-petition mortgage payments.
Any remaining pre-petition or postpetition delinquency must be itemized
as part of this response. This itemization
must follow the same detailed requirements listed under Rule 3001 above. If
this response is disputed by the trustee or
debtor within the next 21 days, the court
will conduct a hearing to make a determination on whether the loan is deemed
current.
This puts into rule a practice that occurs on a regular basis in many jurisdictions. Motions to Deem Current are often
filed by debtors at or near the end of bankruptcy. Failure to adequately respond to
such a motion can leave the lender/servicer with an order forcing them to make
the loan current (and writing off any
amounts not allowed by the courts).
When reading this rule in conjunction
with the notice regarding post-petition
fees, expenses, and charges the message is
clear. Lenders/servicers should promptly
give notice of any post-petition charges
to the debtor to ensure these can be recovered during the bankruptcy case. If notice
is not given, the risk is never being able to
collect this amount from the debtor.
PAGE 13
Notice of Post-Petition Fees,
Expenses, and Charges
As it relates to the secured property
mentioned above, any post-petition fees,
expenses, and charges that a lender deems
recoverable against the debtor must be
itemized and notice must be sent to the
debtor, debtor’s attorney, trustee, and the
court. This notice must be filed within
180 days of when the charge occurred.
The debtor or trustee then has one year to
file a motion with the court to determine
whether these fees and charges are allowed under the agreement.
For lenders/servicers this means there
is no time to drag your feet. If an expense
is incurred that should be passed onto the
debtor, get notice to all parties involved in
the bankruptcy and be sure this is filed
with the court (typically via amended or
supplemental claim). The faster the better.
Pigs get fat
Hogs get slaughtered
A DEBTOR’S MOTTO
PRACTICED WITH CREDITORS
THREE COMMON STRATEGIES
PRACTICED BY DEBTOR ATTORNEY’S
THAT HARM CREDITORS
BY SHARMILA BHARWANI
DURING THE BANKRUPTCY
process, the creditor and debtor debate
numerous topics, including notice requirements, accurate arrearage amounts and
standing issues. When debtor attorneys
file a bankruptcy, there are a few strategies
they employ in dealing with creditors.
These strategies are based on the behavior of creditors and allow debtor attorneys
to design an efficient practice in the eyes
of the Debtor and Court; however, these
practices can be harmful to over-burdened
creditors. It is a system that relies on the
weaknesses of creditors.
Debtor attorneys try to use certain
methods to create an ideal situation for the
debtor. These systems often impair creditors with unfair, burdensome, and sometimes illegal plan treatment. This article
discusses three major strategies debtor attorneys exploit, which cause major harm
to the unaware creditor.
PAGE 14
THE SHEER SIZE OF
CREDITORS
The large size of financial service companies with numerous locations servicing hundreds of thousands of loans is a
trait debtor attorneys rely on when filing a
bankruptcy case.
Being aware of the size of creditors,
debtor attorneys file a case knowing the
creditor may not even become aware of
the case before plans are confirmed. For
example, the majority of Chapter 13 bankruptcies are filed immediately before foreclosure.
Due to the stringent timeline of foreclosure, some debtor attorneys file the case
first and ask the debtor questions later.
Debtor attorneys utilize the bankruptcy
notice requirements to their benefit.
Knowing that notice of a bankruptcy
to creditors is mandatory, they provide
notice, but often timing and delivery of
notice to creditors is incorrect. A prime example is in the Bankruptcy Code §362, that
provides for the automatic stay.
The automatic stay is in effect for any
debtor who files within a 12-month period. However, when a debtor has two active bankruptcy cases within one calendar
year, a motion is brought extending the
automatic stay.
Each creditor is required to be notified
of this motion and hearing in order to object or allow the stay to continue.
A creditor’s response time is limited,
and if no response is received, the stay
is extended at the hearing without their
knowledge.
Many debtor attorneys send the notice
to a mailing address that may not be the
appropriate address for the creditor, such
as a billing or payment address. Therefore,
when the creditor becomes aware of the
case, the stay has already been imposed.
If proper notice is given, it is given with
limited advance time, and creditors have
insufficient time to properly object. Debtor
attorneys are aware creditors are large entities that have numerous layers of departmental approval and attorneys use that
fact to benefit the debtor.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
THE BANKRUPTCY MILL
The more bankruptcies a debtor attorney files, the more money he makes. The
more clients they have and the more cases
they can file, the bigger the trustee check.
This cycle requires extraordinary salesmanship for their cause.
A debtor may have an initial consultation with what to them is a unique and
dire situation; however most times debtors
are simply categorized and placed in a pile.
Sometimes, debtors are promised more
than the bankruptcy code allows. Even
more surprising, due to time restraints,
debtors may have received incorrect statements on the benefits of a bankruptcy filing.
For example, the majority of debtors enter into a bankruptcy to save their
home, with high hopes of modifying their
mortgage. The bankruptcy code does not
require a loan modification on a first lien
mortgage; nonetheless, many bankruptcy
attorneys regularly suggest that a loan
modification is probable.
Other methods commonly utilized
by bankruptcy attorneys are filing a plan
without verifying the arrears on the mortgage or the payoff on a vehicle. If the jurisdiction is one in which the trustee pays
pursuant to the amounts in the Plan, as
opposed to the proof of claim, the creditor
may not have adequate notice to object to
the amount listed in the plan.
Another common practice is impairing
secured debt or cramming down the value
and waiting for the creditor objection be-
THE CURRENT
POLITICAL SITUATION
Since the burst of the mortgage bubble and the Obama administration’s announcement of the home-rescue plan in
2009, the mortgage industry has received
widespread negative publicity. This shift
in perception of mortgage companies has
manifested itself in the courtroom. A bankruptcy attorney’s primary responsibility is
to protect the interests of the debtor in the
case and to provide him the best treatment
the bankruptcy code allows.
However, debtor attorneys now see
themselves as saviors against corrupt creditors. New contingents of debtor attorneys
question the standing of mortgage companies; the documents and actions of creditors in a case.
Recently, adversary proceedings as well
as objections to claims have risen to argue
such items as standing, proper title, proper
assignments, issues with MERS and other
such adversaries.
In fact, numerous programs now teach
debtor attorneys how to strip a lien, invalidate a sale or argue an assignment. Regardless of the Debtor’s intent as to the property, creditors are at a disadvantage if for
no other reason than the current political
environment.
This self-righteous behavior is seen
in evidentiary hearings in Bankruptcy
Courts around the nation. Debtor attorneys take advantage of the Bankruptcy
Courts sometimes inconsistent adherence
to evidentiary standards.
In certain instances where the burden
of proof is on debtor attorneys, it turns
again to creditors to prove the validity of
the debt. This exemplified in Real Estate
Settlement Procedures Act (RESPA) requests made by debtor attorneys. RESPA
was originally created with the buying
and selling of real estate because different
parties in sale transactions were inflating
costs; however, now Debtor’s Attorneys are
now using RESPA as an informal vehicle to
avoid formal discovery requests.
Debtor attorneys take broad liberties
with such requests because of the negative
publicity and the prevailing political atmosphere regarding mortgage companies.
The practices of many debtor attorneys may not strictly violate the Bankruptcy Code but they do stretch the
spirit of what the code is actually intended to provide in the way of debt relief.
Creditors must be aware of the political climate and the common practices utilized by debtor attorneys. Having strong
internal management controls and procedures, along with utilizing third party
providers and outside counsel, is critical
to reducing losses and managing risk.
FOCUS
REFERENCES
•
•
•
•
•
•
maxbankruptcybootcamp.com
The Honorable Joe Lee, Chapter 12. Bankruptcy Code §§101-112, Code §105. Power of the Court Part
Two. Digests of Decisions IV. Enforcement of Orders and Authority of Court C. Acts Warranting
Sanctions Other than Contempt, Bankruptcy Service, Lawyers Edition. July 2010, 2.
Bankruptcy Code §362(c)(4)(a).
National Conference of Bankruptcy Judges: Judges, Insolvency Professionals Discuss ‘Gag Rule,’
Creditor Claims, Counsel’s Duties, Bankruptcy Law Daily, October 23, 2007 at 4.
Bankruptcy Law Daily Highlights The Bureau of National Affairs, Inc
Katherine Porter, Consumer Debtor Class Actions: One More Windmill, or the Ultimate Remedy for the
Subprime Mess? American Bankruptcy Institute, April 3, 2008 at 3.
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
PAGE 15
fore confirmation. Debtor attorneys may
also reverse engineer bankruptcy schedules, specifically exemptions (Schedule C),
income and expenses (Schedule I and J) to
match the payment plan.
This can cause major issues in court if
the debtor attorney is found to be embellishing the debtor’s income and or exemptions.
In fact, some courts have issued “necessary and appropriate” orders to debtors that
have had numerous misstatements and
falsehoods in the sworn bankruptcy petition and schedules in a deliberate effort to
mislead creditors.
The United States Trustee is litigating
more cases where debtor attorneys embellish the debtor’s assets, exemptions and
amounts to defraud creditors. Knowing
the creditors’ resources are strained by the
sheer volume of activity, debtor attorneys
are in a better position to take advantage in
preparation of the petition.
PIGS GET FAT, HOGS GET SLAUGHTERED » BY SHARMILA BHARWANI
ISSUES
cases a month. She is well versed in Bankruptcy Chapters 7, 11, 12 and 13.
DATA
SHARMILA BHARWANI is an associate attorney at Brice, Vander Linden & Wernick, P.C. She has been practicing
consumer bankruptcy since 2008. Previously as a debtor attorney, her caseload included over 150 bankruptcy
DATA
STATE-BY-STATE FILINGS PER CAPITA
D.C.
> 7.5
6 – 7.5
4.5 – 6
3 – 4.5
5.16% NATIONAL PER CAPITAL FILINGS
FILINGS PER CAPITA: TOP 10
PAGE 16
State
Filings Per
Capita
<3
FILINGS PER CAPITA: BOTTOM 10
Percent
Change1
Nevada
Tennessee
Georgia
Indiana
11.44
0.21
8.01
-0.62
7.95
0.35
7.49
0.21
Alabama
California
Michigan
Colorado
Utah
7.30
-0.14
7.01
1.40
6.97
0.20
6.67
1.00
6.49
1.20
Arizona
6.41
1.18
State
Filings Per
Capita
Percent
Change1
Alaska
South Carolina
District of Columbia
Texas
South Dakota
North Dakota
Vermont
1.61
0.17
2.07
-0.11
2.17
0.21
2.32
0.07
2.52
0.23
2.53
0.14
2.74
0.25
North Carolina
Wyoming
New York
2.84
-0.13
2.87
0.40
2.93
0.01
PER CAPITA FILINGS BASED ON ESTIMATED JULY 1, 2009 CENSUS; 1. PERCERNT CHANGE VS PREVIOUS YEAR
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
District of Columbia
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Total States and DC
Ratio of Chapter 7
Filings
Ratio of Chapter 13
Filings
25,764
844
31,701
12,389
194,279
25,129
8,764
3,191
976
84,503
58,590
3,028
6,305
61,967
36,082
7,639
8,587
18,932
14,254
3,160
22,559
17,763
52,127
17,120
10,564
25,044
2,387
5,857
22,670
4,276
30,535
5,005
44%
82%
83%
56%
77%
84%
90%
74%
68%
76%
54%
80%
88%
76%
75%
92%
71%
75%
39%
87%
73%
77%
85%
87%
57%
73%
86%
74%
76%
81%
78%
92%
56%
18%
17%
44%
23%
16%
10%
26%
32%
24%
46%
20%
12%
24%
25%
8%
29%
25%
61%
13%
27%
23%
15%
13%
43%
27%
14%
26%
24%
19%
22%
42,988
19,950
1,228
54,073
11,278
15,378
29,666
4,140
7,065
1,538
37,821
43,082
13,563
1,276
28,447
25,644
4,739
23,394
1,173
1,188,434
81%
55%
89%
77%
83%
79%
72%
87%
51%
91%
51%
50%
67%
80%
68%
79%
90%
82%
87%
73%
FOCUS
DATA
Cumulative 2010
Filings
8%
19%
45%
11%
23%
17%
21%
28%
13%
49%
9%
49%
50%
33%
20%
32%
21%
10%
18%
13%
27%
PAGE 17
State
ISSUES
STATE-BY-STATE TOTAL 2010 BANKRUPTCY FILINGS
AND PERCENTAGES OF CHAPTER 7 VS. CHAPTER 13
Please turn the page for a visual representation of this data.
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
STACKED UP
PAGE 18
STATE-BY-STATE COMPARISON OF 2010 CUMULATIVE FILINGS
(HEIGHT OF LETTERS REPRESENT FILING TOTALS)
BOTTOM TEN
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
FOCUS
DATA
ISSUES
PAGE 19
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
CASE STUDY
WILL THE REAL
PARTY IN INTEREST PLEASE STAND UP
IN RE HWANG’S AFFECT ON THE MORTGAGE SERVICING WORLD
BY SAMMY HOODA
IN 2008
a bankruptcy judge in the Central District of California shocked the mortgage
servicing world by denying a motion for relief from the automatic
stay filed by a servicer.
In Hwang, the court concluded that even though IndyMac (the
servicer) held the note with the power to enforce it under California law, it failed to satisfy the procedural requirements of federal
law in seeking relief from the automatic stay.
The court concluded that IndyMac must join the note’s owner
on two separate grounds; first, the note’s owner is the real party in
interest under Federal Rules of Civil Procedure 17 (“Rule 17”), and
second the note’s owner is a required party under Federal Rules
of Civil Procedure 19 (“Rule 19”). In re Hwang, 396 B.R. 757, 772
(Bankr. C.D. Cal. 2008).
PAGE 20
CASE OVERVIEW
In Hwang, the debtor executed a note in favor of MortgageIT
Inc., secured by a first lien on his primary residence. The loan was
transferred to IndyMac before the debtor filed for bankruptcy. IndyMac then sold the note to unidentified investors through Freddie Mac, and the court assumed the note was ultimately sold to a
securitization trust.
When the debtor filed for bankruptcy, the loan was owned by
unidentified investors, but the original note was still in the possession of IndyMac. IndyMac filed a motion for relief from the automatic stay.
The evidence established that IndyMac physically possessed
the note; the deed of trust had been assigned to it and recorded. IndyMac remained the note-holder even though it had sold the loan
to Freddie Mac and serviced it on Freddie Mac’s behalf.
Based on the assumption that the loan was securitized, the
court concluded that IndyMac was not the real party of interest.
In the court’s view, the real party in interest was the securitized
trust. Thus, the court required that the trustee of the securitized
trust must be involved with IndyMac to prosecute the note.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
The Hwang case has significant implications for the mortgage
servicing world, dealing with motions for relief from the automatic stay and foreclosure actions. However, on July 21, 2010, the
United States District Judge for the Central District of California
reversed on appeal In re Hwang and returned the mortgage servicing world’s bankruptcy and foreclosure processes back to status
quo. The district court held that a note-holder is the real party in
interest and the note’s owner does not need to join as a necessary
party. In re Kang Jin Hwang, Case No. CV-08-7871-PSG (C.D. Cal.
July 21, 2010).
FUTURE OF THE “REAL PARTY IN
INTEREST” REQUIREMENT
Even though the district court’s decision reversed the bankruptcy court’s determination that IndyMac was not the real party
in interest under Rule 17 and its determination that Rule 19 required the owner of the note to join the motion, the mortgage
servicing world should be extremely cautious of the reasoning
behind the reversal.
The district court held the bankruptcy court’s conclusion that
IndyMac failed to join the real party in interest was an abuse of discretion, which is defined as a decision based on an erroneous conclusion of law or when the record contains no evidence on which
the court could have rationally based that decision. Simply put, the
bankruptcy court’s decision was not supported by any evidence in
the record therefore the conclusion of law was erroneous.
Hence, if a record contains sufficient evidence that the note
was securitized, then a bankruptcy court’s determination that the
servicer failed to join the real party in interest would not be an erroneous conclusion of law. It is plausible that a bankruptcy court
could determine that a note is securitized, based on the evidence
in the record (e.g., an endorsed note to a securitization trust), requiring a servicer to join the real party in interest (i.e. the trustee
of the securitization trust).
In Hwang, both the courts expressly recognized that under
his graduating law school class, served as the Editor-in-Chief of the Law Review and was a Judicial Intern to
FUTURE OF THE “REQUIRED JOINDER
OF THE NOTE’S OWNER”
The district court reversed and held that the bankruptcy court
abused its discretion in concluding that Rule 19 requires the note’s
owner to join IndyMac’s motion for relief from the automatic stay.
The court reasoned that the bankruptcy court failed to recognize
that, to qualify as a necessary party under Rule 19, the impair-
ment of the party’s ability to protect its interest must be caused by
the party’s absence from the litigation. The district court was not
persuaded by the bankruptcy court’s argument. Thus, one interpretation of the district court’s holding is that joinder of a note’s
owner is not required when the note holder is a party to a motion
for relief from the automatic stay.
The likelihood of this issue being relitigated under substantially similar sets of facts is less than the real party in interest issue. This conclusion rests on the district court’s explanation that
“necessary parties under Rule 19 are only those parties whose
ability to protect their interest would be impaired because of that
party’s absence from the litigation.” In re Hwang, Case No. CV-087871-PSG (C.D. Cal. July 21, 2010).
In Hwang, the district court observed that “only IndyMac, as
the note-holder had the right to enforce the note; neither Freddie
Mac nor any subsequent owner of the note had that right.” In re
Hwang, Case No. CV-08-7871-PSG (C.D. Cal. July 21, 2010). Thus,
the court concluded that “the difficulties perceived by the bankruptcy court in protecting the note owner’s interests on this motion did not result from the owner’s absence from the motion, but
from the owner not having the right under California law to enforce the note.” In re Hwang, Case No. CV-08-7871-PSG (C.D. Cal.
July 21, 2010).
Thus, the mortgage servicing world can breathe a sigh of relief on this particular issue. The district court did an analysis of
the bankruptcy court’s holding and expressly stated the reasons
for reversing, rather than simply stating that the evidence in the
record did not support the holding, as it did for the real party in
interest issue.
However, the mortgage servicing world should be cognizant of
cases where “the note’s owner is a person who claims an interest
relating to the subject matter of the action, and is so situated that
disposing of the action in the person’s absence may, as a practical
matter, impair or impede the person’s ability to protect their interest.” Fed. R. Civ. P. 19(a)(1)(B).
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
FOCUS
PAGE 21
California law, the holder of a note has the right to enforce the note,
regardless of whether or not the holder is the owner of the note.
The district court went a step further, stating that IndyMac, as
the party with the right to enforce a claim on the note, is the real
party in interest on a motion for relief from the automatic stay.
However, the district court did not reverse the bankruptcy court’s
decision on that ground.
The district court merely concluded that, “the record simply
does not support the bankruptcy court’s supposition that the
note was likely securitized.” In re Hwang, Case No. CV-08-7871PSG (C.D. Cal. July 21, 2010). This leaves the bigger question unanswered: whether it is necessary to join the trustee of a securitization trust as a real party in interest if the evidence shows the note
was securitized.
It is likely that this will be the central issue in future cases, but
it is uncertain in which party’s favor the gavel will fall. Therefore,
it would behoove the mortgage servicing world to reevaluate current practices and procedures regarding motions for relief from
the automatic stay and foreclosure actions.
One best practice suggestion is to bring actions in both parties
names and clearly identify the relationship (e.g., ABC Servicing
Company, as servicing agent for XYZ Trust). Regardless of whether
debtors or servicers win the battle in bankruptcy court, ultimately the issue is likely to be decided by the highest court, especially
because there seems to be a split of authority among the circuits
on who is the real party in interest under Rule 17. In re Hwang, 396
B.R. at 770 (Bankr. C.D. Cal. 2008).
WILL THE REAL PARTY IN INTEREST PLEASE STAND UP
» BY SAMMY HOODA
ISSUES
the Honorable Jeff Bohm, U.S. Bankruptcy Judge for the Southern District of Texas.
DATA
SAMMY HOODA is a bankruptcy attorney at Brice, Vander Linden & Wernick. Sammy was the Valedictorian of
HOT SEAT
BY PAUL BOURKE
HANSON
Up Close with Betsy Hanson
Betsy Hanson is a seasoned
servicing executive with a broad
range of experience in the
mortgage and consumer lending
spaces. Her decisive management
style might best be described
as “challenging, innovative and
inspirational.” Betsy combines an
“old school” approach of leading
by example with a more modern
approach driven by metrics,
reporting transparency and
process improvement.
PAGE 22
Having assumed leadership over
a business segment that has been
effectively operating for more
than 20 years, Betsy has taken a
measured but aggressive approach
to assessing the status quo and
determining where changes are
required. She has brought a fresh
perspective to foreclosure and
related state court processes that
incorporate technology, people
and compliance. Betsy’s extensive
servicing experience has provided
clear insight into the client’s view
of effective default servicing.
THE LEDGER: Tell us a little bit about
your career in servicing?
BETSY HANSON: I have been in the
industry more than 25 years. I started my
career on the origination side and transitioned over to servicing, working in
bankruptcy, foreclosure, loss mitigation,
escrow and DIL, REO and recovery units.
The ability to adapt to change and look
for process improvements has afforded me
the opportunity to be exposed to all parts
of the mortgage industry.
I believe in laying out a process, testing it and continually refining it until you
have the best in class. Learn to use resources and systems that are around you and listen to people who may have a better way of
doing something.
I have been fortunate to work with
good role models who have been in the
industry far longer than myself and who
continually challenged me to get better.
L: How did you become familiar with NBS
prior to coming on board and what drove
your decision to make the move to “vendor
world”?
BH: NBS is well known within the industry and was already a vendor of mine,
so I knew the management at NBS from
firsthand experience. I have long felt that
servicers didn’t use their vendors to their
full capacity.
There are lots of opportunities in this
industry for vendors and servicers to
bridge the gaps and help each other be
more successful in their partnerships.
Part of that can be done through reporting and sharing data, identifying the root
cause of delays in a process and providing
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
ongoing training for the servicers to equip
their staff and vendors with what is needed to be successful.
L: Having managed REO as a servicer,
what were your general views on outsourcing key pieces of this internal function?
BH: Very good question. When you have
the volume servicers have today, it’s important to know where you have the most
exposure for curtailments and reputational risk, and if the vendors can meet the
demands and adjust to an ever changing
regulatory environment.
It is also difficult for vendors to take on
the financial responsibilities surrounding
code violations and HOA fines. You must
determine a capacity plan for every vendor and monitor their performance. As a
servicer, you must have confidence in your
vendors.
Due to the various platforms that we
work on, there is not always transparency
and often times a vendor or servicer may
miss critical information. It is important
when reviewing a new file, to identify all
pertinent documents that are necessary to
begin and complete the transaction.
L: Default management processes have
largely been measured by timeline assessments over the last 10+ years. What other
aspects of managing the foreclosure process have you discovered as critical in addition to timelines?
BH: Servicers today more than ever are
having to react to the ever changing laws
regarding foreclosure, eviction and loss
mitigation, and thus, rely strongly on their
vendors to help facilitate all actions.
Along with the high unemployment
FOCUS
DATA
ISSUES
BH: Surprisingly enough, it’s quite similar. Throughout my career, I have been
called upon to build start-up operations or
develop process improvement from existing operations.
The basic fundamentals of learning
one’s job and ensuring the employee understands one’s decisions on a file can
mitigate risk, improve bottom-line profit,
increase customer satisfaction or can have
the opposite effect.
The more time a manager has to invest
in an employee by teaching them the business from all aspects makes them well
rounded. It also makes the employee feel
more valuable and empowered in making
their daily decisions.
What I hope to bring to the table at NBS
is teaching the perspective of what a servicer is wanting from their vendor.
L: The Texas foreclosure process is widely
noted for its expedited timeline and singular monthly sale date on “First Tuesday.”
What benefits and challenges do you see
arising from this expedited process?
I believe in
laying out a
process, testing
it and continually
refining it until
you have the
BEST IN CLASS.
Learn to use
resources and
systems that
are around you
and LISTEN to
people who
may have a
better way of
doing something.
Many cities around the nation are looking for a “fast track” foreclosure process
on homes that have been abandoned. The
servicer’s challenge is identifying if the
home is abandoned, tenant, or mortgagor
occupied.
There are neighborhood stabilization
programs in many cities which have funds
allocated to assist in purchasing property
from banks in order to allow tenants to
stay in the property, and in some cases,
even work with a former mortgagor.
This is an opportunity for the servicer,
city and attorney to help facilitate the foreclosure process and assist with the closing
in a timely manner.
The challenge with the short process is
managing your volume to the peak timelines. The servicer has to learn to manage
around the short sale and loss mitigation
opportunities and make every reasonable
effort to keep someone in their home.
Our goal here is to ensure that, as their
vendor, we are passing along every communication that we receive from a mortgagor to the servicer, and the servicer is
working to do the same thing.
We have learned to staff around the
peak call times as well as ensure our
posting deadlines are met month in and
month out.
UP CLOSE WITH BETSY HANSON » BY PAUL BOURKE
L: How do you compare managing from
the vendor side of the equation as opposed
to working for a major loan servicer?
BH: An obvious benefit for the servicer is
once they gain possession, especially on
abandoned homes, they can quickly begin
property preservation to prevent blight on
neighborhoods and get the property listed.
Code violations are escalating nationwide
and can be very expensive to cure.
L: Loss mitigation has been dominating
the headlines for some time now. How effective do you believe are the various programs offered to borrowers in default, and
what are some of the roadblocks to success
loan workouts?
BH: The ultimate goal for any servicer it to
try and prevent a home from going to sale.
That being said, the servicer, mortgagor
WWW.NBSDEFAULTSERVICES.COM « VOL. 1, ISSUE 2
PAGE 23
rates and increasing fines surrounding
code violations, it is a challenge to reach the
massive population needing assistance and
to satisfy the investors whom they serve.
Servicers must rely on the vendors they
use to provide factual information regarding loss mitigation activity, condition of
the property, code violations and past due
taxes to be able to make the best possible
decision to move forward with a foreclosure. Failure to do so can be costly.
FOCUS
DATA
ISSUES
UP CLOSE WITH BETSY HANSON » BY PAUL BOURKE
and vendor must work together to make
this happen.
One of the challenges for all parties
experiencing today’s volumes is making
contact with the individual who can affect change.
Most mortgagors want to stay in their
home but have limited knowledge on what
programs are available or if they may qualify for a program.
The good news is that more and more
servicers are providing information on
their websites, along with enlisting vendors to help facilitate transactions.
Another obstacle in large institutions
is that certain departments and associates
may only handle DIL, short sale or foreclosure, and therefore are unfamiliar with
other remedies to recommend.
Other issues can come from departments using different software applications that do not share current information with other departments.
L: You also have responsibility for managing the REO eviction process at NBS. What
are some of the strategies you have found
most effective for getting REO properties
back in the hands of servicers for liquidation and sale?
L: What advice would you give to aspiring
managers and executives in the default
management space?
BH: Take a step back and review your metrics against best practices in the industry.
If your timelines are deficient, identify
what process is causing the most signifi-
PAGE 24
BH: The first thing the vendor needs to
know is whether you have a mortgagor,
personal property, or a tenant in the property — this drives the timelines under the
PTAF Act. The tenant occupancy can create the longest timeline.
To prevent delays in the process, it’s
critical to have a solid working relationship with your broker, property manage-
ment and servicer, and to keep everyone
informed as the process moves forward.
It is not uncommon to see more and
more mortgagors filing wrongful foreclosures or issuing a TRO to halt the eviction.
It is important to quickly understand what
the issues surrounding the claims are and
to engage the servicer and broker to provide all the facts in order to be prepared for
hearings.
One of the common themes I heard at
a Legal League conference when I was on
the servicing side was that firms would appear at a hearing, but be unaware of facts
that the mortgagor or tenant would bring
forward. This creates delays in the process.
Other issues that you have to mine for
post foreclosure are HOAs, code violations
and other types of liens that may be working behind the scenes but the investor has
not yet provided the servicer with the information.
Code violations are on the radar in
every city, and it is imperative that if we
find those issues, we report them and
have the servicer start curing the issue
sooner than later.
Finally, you have to invest in creating
reporting to identify and report to the servicer if and when these types of impediments occur.
THE LEDGER » WWW.NBSDEFAULTSERVICES.COM
cant problem. Identify what defects there
are in the current process.
For example, you determine your closing dates are all pushed back 10 days consistently because there are title impediments, you should create a process to start
curing the issue upon file entry into REO,
not at the closing.
Evaluate your staffing: Do you have the
right people in place to drive performance?
What is the skill set of those around you?
Do they understand the daily objectives
and how to recognize issues?
Over communicate, don’t under communicate, and make sure you stay engaged
in the business at hand.
Develop leaders within your organization; you cannot do it all by yourself. You
need to rely on others around you to assist
and carry part of the load. Give praise and
recognition; that goes a long way with everyone!
L: What motivates you to continue to take
on the unique challenges in the default
servicing environment?
BH: I started in customer service many
years ago. What I’ve discovered is that I
like working with people. An employee
and a customer both want the same thing
— to understand all that is available to
them and weigh all of their options.
You have to learn to approach situations and people on their level. Never assume the person you are speaking with
understands everything you are trying
to communicate; ask questions, follow up
and make sure they are informed every
step of the way.
LATEST NEWS
NBS WINS DIAMOND AWARD
NBS is proud to announce that Dallas-based bankruptcy and foreclosure law firm, Brice, Vander Linden &
Wernick, P.C., has, for the tenth consecutive year, been
named a recipient of USFN’s Award of Excellence.
Since 1993, the annual Award of Excellence has
been given to USFN member firms that meet rigorous standards evaluating the professional activities,
industry volunteerism and community and charitable
involvement of the firm.
The prestigious 2010 DIAMOND AWARD was
presented on November 6th at USFN’s Annual Member Education Retreat in Paradise Island, Bahamas. Please join us in congratulating Brice, Vander Linden & Wernick, P.C. for achieving these high standards of excellence in service to industry clients and
their communities.
ABOUT NBS
OUR MISSION IS SIMPLE. We strive to improve the
bottom line performance of our clients’ bankruptcy
portfolios through careful, efficient and client-specific
management of each individual case.
NBS provides nationwide bankruptcy management
services to the following types of organizations:
* Residential Mortgage Lenders
* Automobile Finance Companies
* Banks and Financial Institutions
* Consumer Lending Organizations
* Portfolio Servicers, Owners and Investors
Learn more about how our services, our technology
and our people can help your organization today.
Contact us and let us have the opportunity to discuss
how we can work together.
NBS is a leader in bankruptcy servicing for the consumer finance industry. NBS is a subsidiary of Advent
International.
NATIONAL BANKRUPTCY SERVICES COMPANY NEWS
NBS NEWS DESK
W W W. N B S D E FAU LT S E R V I C E S .C O M
THE LEDGER
VOL. 1, ISSUE 2