Summary:
CitiMortgage filed the original Proof of Claim in Ms. Bivens' Chapter 13 case, with the claim subsequently being transferred first to Ditech Financial and then to New Penn Financial, d/b/a Shellpoint Mortgage Servicing. Nearing the completion of her case, NewRez, L.L.C. d/b/a Shellpoint Mortgage Servicing responded to the Notice of Final Cure filed by the Chapter 13, agreeing that the prepetition arrearage had been cured and that all postpetition payments had been made. (After filing that response, NewRez filed the third and final transfer of claim in the case.) Ms. Bivens then completed her plan and received a discharge on June 1, 2020. The next day Shellpoint sent Ms. Bivens a Notice of Default and Intent to Accelerate the mortgage. Ms. Bivens reopened her bankruptcy case and commenced an Adversary Proceeding against the past and present mortgage servicers for violations of the discharge, the automatic stay and Rule 3002.1(c), alleging that CitiMortgage misapplied payments and improperly assessed fees and charges. CitiMortgage moved to dismiss the complaint for failing to state claim.
As to the alleged violations of the discharge, the bankruptcy court held that pursuant to 11 U.S.C. § 524(i) the debtor must show:
(1) a willful failure to credit payments received under a confirmed plan; and
(2) material injury to the debtor.
"Willful" does not require a showing of bad faith or specific intent to violate the Code or plan, but instead only that "the creditor intended to apply the payments received in the manner it applied them." Here Ms. Bivens adequately alleged that CitiMortgage misapplied ongoing monthly payments received from the Trustee not only to the prepetition arrearage, but also to the incorrect postpetition months. Further CitiMortgage did not accurately convey information to successor servicers. As to the material injury, the court reiterated that this requirement will “be met in virtually
every case involving a secured creditor, because the failure to properly credit payments will almost always result in a higher payoff balance for the debtor and therefore a larger lien on the debtor’s property than if the payments were credited properly.” Williams v. Citifinancial Servicing LLC (In re Williams), 612 B.R. 682, 691 (Bankr. M.D.N.C. 2020) at 692 (quoting 4 Collier on Bankruptcy ¶ 524.08 (16th ed. 2019).
Ms. Bivens alleged that the misapplication of payments by CitiMortgage received under a plan violated the automatic stay. CitiMortgage responded that, as it had never communicated misapplications to Ms. Bivens, there was no violation of the stay, as this was merely an internal bookkeeping record. The bankruptcy court disagreed, holding that the allegation that CitiMortgage had inaccurately disclosed an inflated principal balance to successor servicers lead to the reasonable inference that this was not merely an internal bookkeeping record.
Ms. Bivens lastly asserted that during the case CitiMortgage assessed fees for late charges, prepetition foreclosure attorney fees, and assorted other fees and charges, without timely disclosing such as required by Rule 3002.1(c) and then subsequently including those fees in the balance when the servicing was transferred. Taking these allegations as true for the purpose of the Motion to Dismiss, the court held that the only defense would be to show that the failure to disclose was "substantially justified or harmless", which CitiMortgage could not do.
Accordingly, the Motion to Dismiss was denied on all count.
Commentary:
Put simply, this opinion reinforces that mortgage servicers must apply payments received "Pre to Pre and Post to Post."
As CitiMortgage argued, mortgage servicers routinely keep a separate set of books from the Trustee, basically applying payments not as required by the Bankruptcy Code and the Chapter 13 plan, but in accord with its own interpretation of the applicable contracts, in the hope that the Chapter 13 case will be dismissed and then the servicer can retroactively assess all possible fees, interest and charges, putting the debtor in the worst possible position. The transfers of servicing, which occur far more often than not during Chapter 13 cases (especially when the mortgage servicers themselves file bankruptcy) compound these accounting deceit.
That CitiMortgage may not have communicated its misapplications of postpetition payments to Ms. Bivens may have been possible when it was still servicing this mortgage at the beginning of her case, as mortgage servicers were not required under the Dodd-Frank Act and CFPB regulations to provide those to debtors in Chapter 13 cases until 2018. This illegal activity by mortgage servicers can no longer be hidden from debtors.
For a copy of the opinion, please click here:
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