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In re Nosek:

An important bankruptcy opinion just down from the 1st Circuit in In re Nosek. The issue in the case was the practice of the lender (Ameriquest), of crediting the debtor's payments under a chapter 13 plan to missed payments first before crediting them to currently due payments. This is Ameriquest's practice outside bankruptcy and it continued to do the same inside bankruptcy.

The debtor complained, arguing that this payment allocation system violated the bankruptcy code. The practical effect (simplified) of the allocation system was that it meant that the debtor's account never appeared to be current in Ameriquest's system. Nosek claimed that she was going to try to refinance her mortgage but was, or would have been unable to do so, because of Ameriquest's payment allocation system. She never actually submitted an application (in light of the fact that this was 2004 at the heyday of subprime refinance lending, she should probably be happy that she was unable to refinance!).

The bankruptcy court initially awarded Nosek $250,000 for pain and suffering from the experience under section 1322(b) of the bankruptcy code. On appeal the district court reversed, saying that for damages to be awarded the court would have to proceed under section 105. On remand, the banrkuptcy court again entered judgment for $250,000 for pain and suffering but then added $500,000 punitive damages against Ameriquest. The court relied on the holding that Ameriquest violated section 1322(b) as the predicate basis for the award of damages under section 105. The district court affirmed.

The 1st Circuit has now entered judgment reversing liability and thus the award of damages. This is a hugely important case, because as bankruptcies rise--especially for homeowners--the underlying practice in Nosek is likely to recur. Affirmance would have required lenders to change their payment posting policies in bankruptcy, either requiring them to adopt new rules that would apply equally both inside and outside bankruptcy or to have two different systems depending on whether a debtor is in bankruptcy. Obviously, affirmance of such huge damages would also have spawned a race to the courthouse to challenge Ameriquest's practices across the country and probably many other lenders that post payments differently from how the bankruptcy court wanted payments posted here. When I spoke at the Tidewater Bankruptcy Conference last January, we dedicated a good portion of our panel to a discussion of the bankruptcy court's holding in the case.

The court wrote:

Analyzing § 1322(b) with these background principles in mind, the bankruptcy court found that Ameriquest had violated the Bankruptcy Code by failing to adequately distinguish between Nosek's pre-petition arrearages and her ordinary post-petition mortgage payments. The court stated:

The system [Ameriquest] was using has design flaws that inevitably lead to a showing that [Nosek is] behind in her payments. It did not distinguish between pre- and post-petition obligations which contradicts with [sic] 11 U.S.C. § 1322(b) which provides for the curing of any default over the course of the plan, a plan which is binding on [Ameriquest]. . . .

With this language, the court implied that Ameriquest's accounting threatened Nosek's opportunity to cure her pre-petition default pursuant to § 1322(b) and the Plan. Ameriquest contests the bankruptcy court's conclusion that the company defied the text of § 1322(b). It argues that the language of § 1322(b) does not impose obligations on any party, let alone a lender. We agree. The plain language of § 1322(b), relied upon by the bankruptcy court to find a violation of the Code, does not impose any specific duties on a lender. It merely lists elements that a Chapter 13 debtor may include in her plan. Accordingly, there is no basis for concluding that Ameriquest violated the text of § 1322(b).

The court held that for there to be a violation of section 1322(b), the lender has to violate an express provision of the debtor's chapter 13 plan. That didn't happen here because neither the code nor Nosek's plan speaks to the issue of how payments should be posted to the debtor's account. So there was no violation of section 1322:

The Plan language says nothing about how Ameriquest must account for pre- and post-petition payments during the course of the repayment period if payments are short, late, or not made at all. Simply put, the terms of the Plan itself do not provide the specificity required to invoke the enforcement authority of § 105(a).

As the plaintiff alleging a violation of the Bankruptcy Code or a related court order, Nosek had the burden of establishing that her cure rights pursuant to § 1322(b) and the Plan were violated or at risk of being violated by Ameriquest's accounting practices. Yet the bankruptcy court concluded that Nosek had not shown any economic harm resulting from Ameriquest's accounting, whether in the form of late fees, finance charges, or an improper notice of default. In addition, the court also rejected Nosek's claim that the Payment History she received prevented her from refinancing her loan. Addressing this issue in the context of Nosek's various state law claims, the bankruptcy court found that any damages based on Nosek's inability to refinance her loan on more favorable terms "would be mere speculation." The court found that Nosek "did not provide a basis to award actual damages. No documents were offered as evidence of the proposed refinancing. No testimony was proffered refinancing was even offered; there was no evidence of the terms of a refinancing which [Nosek] could expect to receive."

Notwithstanding Nosek's failure to prove actual damages sufficient to sustain a Chapter 93A claim, the bankruptcy court concluded that Ameriquest's accounting practices violated Nosek's cure rights pursuant to § 1322(b) and her Chapter 13 Plan, providing a predicate for a damage award under § 105(a). In essence, the court found that Ameriquest's slowness in crediting Nosek's payments to the proper account and its failure to distinguish between pre- and post-petition payments constituted violations of the Bankruptcy Code and her Plan. This conclusion was erroneous. Although a debtor need not show proof of economic damages to establish that her cure rights have been violated, she must at least establish that her right to cure the pre-petition default provided by the Chapter 13 plan has been impaired or threatened by the creditor's actions. Nosek's subjective fear of such impairment, based on a document prepared by Ameriquest for internal purposes only, and in the absence of any evidence that the company regarded her as in default on the basis of its accounting practices, does not suffice. Indeed, Ameriquest stated that its internal records showed that Nosek was considered current in her payment history. The Payment History document, provided only to Nosek on her request and admittedly difficult to decipher, did not show to the contrary. Nosek offered no other documentation indicating that her cure rights were at risk.

The court concludes:

Notwithstanding these legal conclusions, we are not unsympathetic to Nosek's predicament as a debtor seeking to satisfy the terms of her Chapter 13 Plan and stave off foreclosure of her home. Her circumstances are all too common today.15 Given their prevalence, it is troubling that Ameriquest had not established a more efficient and accurate way of handling the accounting issues revealed by this case at the time of trial. We fully understand the bankruptcy court's concerns about the practices that it described.

Nevertheless, the bankruptcy court's legitimate concerns did not justify the remedy that it invoked. Nosek did not demonstrate here that Ameriquest's accounting practices caused her any economic harm or threatened her right to cure her pre-petition default. Morever, even if such a threat had been demonstrated by those practices, there was no language in Nosek's Plan, as it was confirmed, or in § 1322(b), that addressed how Ameriquest was to apply the payments it received from Nosek or from the trustee. Under such circumstances, the Plan would have to be amended to prescribe the accounting practices necessary to protect Nosek's right to cure before Ameriquest could be sanctioned for a violation of an order of the bankruptcy court. In the absence of such specificity, there was no violation of § 1322(b) or the Plan and therefore no basis upon which to award Nosek damages under § 105(a). Because the bankruptcy court's judgment in the adversary proceeding is vacated, the order confirming Nosek's Third Amended Plan, which was based on the erroneous damages award, also must be vacated.

Update:

I had an error in the facts when I originally typed this. I meant to say that Nosek claimed that she was unable to refinance as a result of Ameriquest's actions, rather than that she was unable. So she was not rejected for a refi; in fact, she never actually applied. I've corrected the text.

Suzy (mail):
What follows are the questions of a fairly ignorant lay person, as will become obvious, but here goes:
I understand why the court would not find in Nosek's favor, given that, "Nosek did not demonstrate here that Ameriquest's accounting practices caused her any economic harm or threatened her right to cure her pre-petition default."

If she had provided such evidence, it seems to me that things should have gone differently. However, the court says that even if she had it would not matter, due to the absence of language in the Plan or 1322(b) that specified how to apply payments. I'll just grant that this is true, not knowing otherwise. My question is why the law in these cases, or the bankruptcy Plans that are devised, does not make it clear that a person who is current on payments should no longer be considered "late" in the way that resulted from Ameriquest's applying her payments to earlier debts and never to current ones? Shouldn't it specify that as long as the person is fulfilling the terms of the Plan, she should be considered as making current payments in good standing? Otherwise, why bother to go through the bankruptcy proceeding at all? She could have just continued making payments on the late balance, and her status wouldn't have changed (at least with respect to Ameriquest), right?

I hope someone can help clue me in here, because with the current significant of this issue I'd like to better understand how it works.
10.8.2008 12:57pm
ejo:
so, will ameriquest's "victory" simply compel more Ch. 7 liquidations?
10.8.2008 1:20pm
Dilan Esper (mail) (www):
I am not going to question Professor Zywicki's motives here, though I have my doubts.

But basically, you have a clearly unconscionable term of a credit agreement here. There is no reason in the world why a lender should get to allocate payments in such a way to ensure that the debtor remains in default despite making scheduled, agreed-upon payments.

And as for the big policy argument-- that lenders might have to change their terms for borrowers in bankruptcy-- this is facetious. Lenders change their terms all the time. They change interest rates from month to month. They put reservations of rights in agreements and then change terms through mailers. They know how to change the terms in THEIR favor.
10.8.2008 1:22pm
Oren:

The court held that for there to be a violation of section 1322(b), the lender has to violate an express provision of the debtor's chapter 13 plan. That didn't happen here because neither the code nor Nosek's plan speaks to the issue of how payments should be posted to the debtor's account.

So from now on, debtors seeking CH13 are advised to explicitly include a provision in their plan specifying that payments made after bankruptcy may only be applied to current balances.

Am I missing something very important here?
10.8.2008 1:23pm
CDU (mail) (www):
Affirmance would have required lenders to change their payment posting policies in bankruptcy, either requiring them to adopt new rules that would apply equally both inside and outside bankruptcy or to have two different systems depending on whether a debtor is in bankruptcy.


It seems to me that overturning the judgement will lead to the exact same outcome for future cases. The opinion says:
The plain language of § 1322(b), relied upon by the bankruptcy court to find a violation of the Code, does not impose any specific duties on a lender. It merely lists elements that a Chapter 13 debtor may include in her plan. Accordingly, there is no basis for concluding that Ameriquest violated the text of § 1322(b).


As I read it, the court is basically saying "If the debtor had explicitly included this in the plan we would have ruled for her, but since she didn't, tough luck". Given this ruling, isn't any bankruptcy attorney worth his salt going to include something saying how the lender should handle payments made under the plan?

It could even end up making things worse for the lender if different debtors use different plans. Rather than setting up payment systems for debtors inside and outside of bankruptcy, lenders may have to set up many different payment systems for debtors in bankruptcy.
10.8.2008 1:24pm
OrinKerr:
I am not going to question Professor Zywicki's motives here, though I have my doubts.

I'm not going to mention Dilan's questioning of Professor Zywicki's motives, either.
10.8.2008 1:35pm
DiverDan (mail):
After a quick review of the Opinion, my view is that Ameriquest was a fool to allow the Bankruptcy Court to keep this case - especially after the Bankruptcy Court first ordered sanctions against Ameriquest, and "ordered the Debtor to file an adversary against Ameriquest." That should have been a pretty good clue that the Bankruptcy Court already was predisposed to hammer Ameriquest, and letting that same Court try the Adversary was foolhardy. It has long been my opinion that the 1984 amendments to Bankruptcy Jurisdiction, 28 USC Sections 157-158, did not really fix the constitutional problems identified in Marathon v. Northern Pipeline, 458 U.S. 50 (1982), and that a creditor in this position ought to assert early and often that he objects to the Bankruptcy Court's jurisdiction and demands an Article III tribunal. This is not a question of whether Congress granted the Bankruptcy Court jurisdiction over the case -- clearly, it did in 28 USC 157; rather, it's a question of whether such a grant of jurisdiction, over the objection of a party (compare CFTC vs. Shor, 478 U.S. 833 (1986)), violates Article III of the Constitution. Can Congress require the litigation of a purely private dispute in a non-Article III tribunal over the objection of a party? Not unless "all of the essential attributes of the judicial power" are retained by an Article III tribunal.

Yes, Ameriquest ultimately won this case, but really only because the Bankruptcy Court decided liability on summary judgment, so the District Court reviewed it de novo. If Ameriquest had gone to trial in the Bankruptcy Court, the Bankruptcy Judge could have thoroughly hosed it with factual finding reviewable only on a "clearly erroneous" standard under Bankruptcy Rule 8005 (I have a REAL problem with Bankruptcy Rule 8005 - and so did Rehnquist in Marathon, see 458 U.S. at 90, Rehnquist, J., concurring).
10.8.2008 1:47pm
Dilan Esper (mail) (www):
I'm not going to mention Dilan's questioning of Professor Zywicki's motives, either.

Professor Kerr, your fellow conspirator is quite smart and scholarly, and is clearly an expert on the bankruptcy laws. He is also quite pro-creditor. And he's making a pretty bad policy argument here. When you see a really smart ideologue making a bad argument, draw your own conclusions.
10.8.2008 1:49pm
Happyshooter:
I have been the lawyer for a creditor a lot, which is often a nasty business. Usually the debtor is a decent sort who got shafted by fate--like a working man who's wife gets cancer the same month his lifetime employer decides to change the health plan to pay only half those expenses so that there is more money for officer bonuses--or a small businessman who poured his whole life into a business only to get caught in a downturn and who gets nailed by his customers not paying.

Other time it is not so nasty, a serial filer or a Trump type who is trying to jam his debts into sub entities and ride into his next phase of life with a Florida mansion and lots of goods in his kids' names.

When it is nasty, I remember that the congress sets limits on how bad it can be, in a highly structured and supervised system. Then I see the court giving a big business a free pass in flat out violating and law and screwing a debtor to squeeze a few mone pennies out of them, and I get upset. Mad at the business? Sure. A lot more mad at the judges who swung the meaning of the law to help the CEO's bonus at Ameriquest instead of enforcing the law as written.
10.8.2008 2:00pm
Calderon:
What's striking to me about the bankruptcy and district court opinion is that she suffered no economic harm, yet she received $750,000 in damages.

I've had a $200 debt on my credit report that's clearly an error that I've never bothered to sue to get rid of because the filing fees would be more than the amount and it's had no apparent effect on my credit (never brought up when I bought my car, my home, or applied for creidt cards). After reading Nosek, I now know that the pain and distress of this lottery tick -- I mean egregious credit error should be worth at least a cool million.
10.8.2008 2:01pm
dlisted:
There are obvious reasons why lenders of all sorts (home, auto, credit cards, etc.) should not be required to alter their internal methodologies for crediting payments in a manner different from the underlying application of payment provisions contained in the underlying contract, or applicable state law. Ameriquest's brief to the First Circuit best summarized these reasons:

The District Court Should Have Reversed Because Ameriquest’s Conduct Did Not Violate Section 1322(b) of the Bankruptcy Code.

The Bankruptcy court held Ameriquest in contempt because one of Ameriquest’s internal accounting methods supposedly violated Nosek’s plan. One of the unstated premises in the bankruptcy court’s order is that all Chapter 13 bankruptcies are administered in a uniform manner. They aren’t. A national mortgage servicer like Ameriquest therefore must work with differing procedures that often times make little or no distinction between payments for “pre-petition” or “post-petition” debts. Moreover, the accounting method giving rise to contempt here was purely internal and never would have been communicated to the outside world had Nosek not asked for it. Ameriquest’s conduct did not violate Bankruptcy Code section 1322(b).

A. Suspense Accounts Are Necessary in Order for Loan Servicers to Track Pre-Petition and Post-Petitions Payments in Chapter 13 Bankruptcies.

There are no statutes or uniform national rules governing the manner in which Chapter 13 debtors must pay their mortgage obligations. Some courts and Chapter 13 trustees require debtors to pay post-petition, “ongoing” mortgage payments through the trustee (“through the plan”) in cases where the trustee is also curing the accumulated pre-petition mortgage arrears. These are known as “pay-all” jurisdictions. Other judges and trustees allow the debtor to make such “ongoing” payments directly to the secured creditor; still others allow the debtor to make all payments directly to the creditor. See, e.g., In re Clay, 339 B.R. 784, 785 (Bankr. D. Utah 2006) (describing the different payments practices in Chapter 13 cases throughout the country).

On a daily basis, mortgage lenders and their servicers receive and process payments for thousands of borrowers in Chapter 13 bankruptcy cases. Because of the wide disparity of payment practices, these payments come from different sources, often without any indication of what the payment is for or who the payment is from. In the present case, for example, Ameriquest received a cashier’s check dated August 7, 2003 in the amount of $700.11. Handwritten on that check was the notation: “Loan #421-9515 Ch 13 Case No. 02-46025 JBR.” These was no indication as to whether this check was to be applied to Nosek’s “ongoing” mortgage payments or to her pre-petition arrearages.

Faced with ambiguous payments like this, mortgage servicers such as Ameriquest can either: (1) reject ambiguous, insufficient or partial payments; or (2) accept such payments and determine the proper application of payments at a later date. If the payment is accepted, most servicers (including Ameriquest) place it into a temporary internal account called a “suspense account.” These type of suspense accounts are internal bookkeeping entries; they are not communicated to the outside world, including the borrowers.

Most of the national mortgage servicers use a loan servicing program called Mortgage Servicing Platform (“MSP”). Based on the data entered into the program (i.e., the original amount borrowed, the applicable interest rate(s) and payments received), MSP indicates contractual amounts owed. Under MSP, loan payments are applied according to the standardized provisions in nationwide loan documents.

Chapter 13 bankruptcies involuntarily thrust lenders and their servicers into a setting in which they must alter their normal accounting methodologies and loan servicing protocols. Accounting for Chapter 13 borrowers is a manual process. The MSP system is not designed for the numerous variances associated with Chapter 13 cases throughout this country. At present, no computer program exists that is capable of accounting for payments by Chapter 13 borrowers under the bifurcation scheme that is usually used in most Chapter 13 cases. The unique aspects of each individual Chapter 13 case and the wide disparity of payments practices throughout this country deprive lenders and loan servicers of the full benefits of MSP.

When payments are received for borrowers in Chapter 13, mortgage companies input the payments into MSP. For internal purposes only, they sometimes place these payments into a suspense account until the proper bankruptcy allocations can be made (if they can be made). Once that determination is made, the monies are moved from suspense and applied effective as of the date the payment is originally received. Thus, no penalties or additional interest accrue as a result of payments first being placed into suspense. Because this is a manual process, there can be delays in making the internal credits and debits between the suspense account and a borrower's main account.

The use of a suspense account allows a Chapter 13 debtor to receive credit immediately for her payment, while allowing the lender and its loan servicer time to allocate the employee resources necessary to process and correctly apply payments for bankrupt borrowers under both regimes-the methodology for applying payments under the applicable loan documents and the borrower’s Chapter 13 plan (assuming a plan has been confirmed). If, at the end of the Chapter 13 plan a debtor has fully performed her obligations, both under the Chapter 13 plan and the loan documents, that debtor’s loan balance will be the same regardless of whether payments are applied according to the loan documents or applied according to the methodology for curing past defaults under the Chapter 13 plan.


B. Under § 1322(b)(2), the “Application of Payment” Provision in a Home Mortgage Cannot be Modified.

As discussed above, Chapter 13 debtor is permitted to propose a plan that cures pre-petition defaults under its home mortgage loan over the life of its plan. 11 U.S.C. § 1322(b)(5). Except for this one permissive right, no other provision of the underlying loan documents can be modified, including provisions governing how payments must be applied.

This precise issue was decided in In re Good, 207 B.R. 686 (Bankr. D. Idaho 1997). In Good, a Chapter 13 debtor proposed a plan that required the lender to apply payments in a manner consistent with the plan, but contrary to the terms of the underlying loan documents. That Good court rejected this provision:

“Debtor observes that Chapter 13 does not compel her to apply payments on the mortgage default in any particular fashion. She is right. However, the Code also does not allow her to modify Creditor’s rights under its note and deed of trust. Therefore, the Court concludes that the parties are bound by their contracts concerning how default payments must be applied.”

Id. at 689.

Other than Good, there are no other reported decisions (of which Ameriquest is aware) addressing the issue of whether a Chapter 13 debtor is permitted to modify the application of payment provisions in her loan documents. Nor is there any decision addressing whether confirmation of a Chapter 13 plan that includes a home mortgage “cure” consistent with § 1322(b)(5) results in the automatic modification of the application of payment provisions within the loan documents for a home mortgage. Certainly, there are no controlling cases within this Circuit on these issues. In the absence of controlling law or statutes on what the Good court described as “an interesting issue of bankruptcy law” (207 B.R. at 688), imposing $750,000 of contempt sanctions cannot be justified.

Interestingly, the First Circuit ignore the Good decision. Yet, it appears to have rejected the argument that the provisions of a home mortgage loan governing the application of payments cannot be modified.

This remains an open issue--and most bankruptcy judges will be loathe to tell creditors how they must internally account for payments.

This is particularly true in light of the fact that most Chapter 13 cases never result in a confirmed plan, let alone a fully consummated plan.
10.8.2008 2:19pm
Dilan Esper (mail) (www):
The Bankruptcy court held Ameriquest in contempt because one of Ameriquest’s internal accounting methods supposedly violated Nosek’s plan.

Well, that's one lie right off the bat. This isn't an "internal" accounting method. This is an accounting method that affects people who contract with the firm.

An INTERNAL accounting method is something that only affects the enterprise and its shareholders, e.g., expensing stock options.

Faced with ambiguous payments like this, mortgage servicers such as Ameriquest can either: (1) reject ambiguous, insufficient or partial payments; or (2) accept such payments and determine the proper application of payments at a later date.

Or, it can credit the payment in the manner most favorable to the customer. Which is what it should be doing anyway.
10.8.2008 2:31pm
c.gray (mail):

But basically, you have a clearly unconscionable term of a credit agreement here. There is no reason in the world why a lender should get to allocate payments in such a way to ensure that the debtor remains in default despite making scheduled, agreed-upon payments.


The lender didn't consider the debtor in default. It considered her "current" on her post-petition payment schedule, and referred to her as such in their internal documents.

What the lender refused to do was offer the debtor refinancing on her home. The debtor apparently claimed this was entirely the result of the lender's internal policies regarding the crediting of her payments, and that those internal policies violated the Bankruptcy Code. Basically, she was claiming the lender ought to ignore her pre-petition arrears when deciding whether to refinance her mortgage.

The practical effect of letting the Bankruptcy court's ruling stand would have been to force home mortgage lenders to offer refinancing on their most favorable terms to debtors in bankruptcy, and to put at risk the balance of arrears each debtor currently owes at the time of petition.

While this might be great for debtors who manage to accumulate large arrears before filing for bankruptcy, it would also have the effect of generating enormous uncertainties for lenders that choose to exercise such forbearance. This would make early foreclosure a much more attractive option.
10.8.2008 2:42pm
Tatil:

What the lender refused to do was offer the debtor refinancing on her home.

I don't see anything in the post that says she wants to get financing from Ameriquest. If your account looks past due, it gets reported to credit report agencies as such, so you cannot refinance from anybody, not just Ameriquest. This ensures that the customer is stuck with her mortgage with Ameriquest and cannot get a lower rate in the future from any other company, which means Ameriquest will have no incentive to get her a lower rate, either.
10.8.2008 3:13pm
Chem_geek:
Dilan:

Or, it can credit the payment in the manner most favorable to the customer. Which is what it should be doing anyway.


You're joking, right? A creditor doing anything in a manner favorable to the customer without being forced to?

Bwahahahaha. When pigs fly!
10.8.2008 3:59pm
Calderon:
Tatil -- you're right that the debtor was trying to get financing from someone other than Ameriquest, but neither Prof. Zywicki's post nor the opinion says anything about her status being reported to credit agencies. From the opinion, what it looks like was happening is that Ameriquest's computer system put all her payments into a "suspense account," and then a bankruptcy specialist would check that sum and manually update that she had made the right payments. Moreover, the bankruptcy court, which was obviously sympathetic to her claims, found that she had not suffered any economic harm.
10.8.2008 4:11pm
Zywicki (mail):
No, no, all I said was that the case was important because it could be expensive--I didn't say that it was right or wrong. Yeesh.
10.8.2008 4:37pm
Andy Rozell (mail):
I'm one of those nasty creditor's lawyers.

Concerning CDU's question about what debtor's lawyers worth their salt should do - in the district where I practice (Southern District of Texas) there is a uniform Chapter 13 plan that contains provisions about how the ongoing mortgage payments are to be treated.

I thought that was the case everywhere.

So I'm guessing that Ameriquest would lose that case if it happened here.
10.8.2008 4:45pm
Jmaie (mail):
Or, it can credit the payment in the manner most favorable to the customer. Which is what it should be doing anyway.

Ok, I'll bite. Why?

That you see it as the morally correct choice does not count as an answer.

I'm not saying you're wrong. Just curious what your reasoning is.
10.8.2008 4:54pm
Houston Lawyer:
It seems to me that since Ameriquest had a secured loan that she was still in arrears to them even though she was current post-plan. I don't think that those past-due payments just go away. It would seem to me that the bank could correctly report to credit agencies that the debtor never made those payments. Does the Bankruptcy Act require the suppression of factually correct information?
10.8.2008 4:54pm
Dilan Esper (mail) (www):
No, no, all I said was that the case was important because it could be expensive--I didn't say that it was right or wrong. Yeesh.

Well, this is what you said:

Affirmance would have required lenders to change their payment posting policies in bankruptcy, either requiring them to adopt new rules that would apply equally both inside and outside bankruptcy or to have two different systems depending on whether a debtor is in bankruptcy. Obviously, affirmance of such huge damages would also have spawned a race to the courthouse to challenge Ameriquest's practices across the country and probably many other lenders that post payments differently from how the bankruptcy court wanted payments posted here.

Sure looks like you are making a policy argument in favor of the case's holding, not simply saying it is important.

As for Jmaie's question as to why the creditor should credit a payment in the manner most favorable to the consumer, there's at least 2 reasons: (1) this is actually standard commercial practice-- it's the default rule under contract law and you actually need to have a contract provision even in situations of equal bargaining power to get around it; and (2) when you are dealing with consumer credit, the reasonable expectations of consumers should be enforced against terms that were not bargained for between the parties (this is standard unconscionability law).
10.8.2008 5:39pm
Dilan Esper (mail) (www):
Houston:

The debtor's contention is that if you credit the payments correctly, the debtor would not still be in default. And the Court's holding seems to be that even if that is true, it wasn't in the plan and therefore the District Court has no power to alter the accounting of the payments.

In other words, if you are correct, you may have a strong argument for resolving the case in favor of the creditor, but not on the grounds that were relied upon by the District Court.
10.8.2008 5:41pm
Calderon:
The debtor's contention is that if you credit the payments correctly, the debtor would not still be in default. And the Court's holding seems to be that even if that is true, it wasn't in the plan and therefore the District Court has no power to alter the accounting of the payments.

There's nothing in the opinion that I see where Ameriquest ever claimed that the debtor was in default. Indeed, the opinion says the opposite: "Yet the bankruptcy court concluded that Nosek had not shown any economic harm resulting from Ameriquest's accounting, whether in the form of late fees, finance charges, or an improper notice of default." (And in another section: "Nosek's subjective fear of such impairment, based on a document prepared by Ameriquest for internal purposes only, and in the absence of any evidence that the company regarded her as in default on the basis of its accounting practices, does not suffice.") And again, for Houston Lawyer, there's nothing in the opinion saying that Ameriquest ever reported her as delinquent to a credit agency, or told the other potential lender that she wasn't current on her loan.

The issue addressed by the court was purely internal to Ameriquest's accounting systems, except when she was trying to refinance her loan. Then Ameriquest sent the other lender a "Payment History [that] contained the total amount that Ameriquest determined was due on the Note, the contractual due date of each payment, the amount Ameriquest had received, the date on which a payment was recorded, and a column stating that each payment had been placed in an escrow account called a 'suspense account.'" The "suspense account" category was in there because Ameriquest's computers apparently couldn't handle receiving payments that didn't match up with the loan amounts and so had to be manually adjusted by a person. Another lender should be able match up the payments and the required dates to see that she was current. At bottom, the debtor saw an entry on the payment history she didn't understand, and convinced a bankruptcy judge this so freaked her out that she was entitled to $750,000.
10.8.2008 6:53pm
dlisted:
Calderon:

You have the facts slightly wrong. Ameriquest never sent the 12 month payment history to anyone other than Nosek's attorney, at his written request. That was done in May of 2004.

Nosek's attorney theen gave the payment history to his client. She then said she suffered emotional distress as result of her reading of the 12 month payment history.

In fact, the record (according the Bankruptcy Court in its decision) indicates that Nosek attempted to refinance the loan in December 2003--5 months before she received the payment history! Nosek never shared that payment history with anyone else.
10.8.2008 7:36pm
Calderon:
Dlisted -- thanks and fair enough. So the Payment History with the "suspense accounts" never went to the other potential lender or anyone else? That makes it even worse ... I really wonder what the Bankruptcy Court was thinking when it made its award.
10.8.2008 7:49pm
Andy Rozell (mail):
The bankruptcy court was probably thinking this was about the umpteenth time a debtor had been in court complaining about the way Ameriquest had applied what were supposed to be post-petition ongoing mortgage payments.
10.8.2008 11:28pm
dlisted:
Andy:

Therein lies the problem. The bankruptcy court started with an erroneous belief, i.e., that the Bankruptcy Code somehow requires lenders to change the contractual methodology for crediting payments, and instead credit payments in the same manner in which the Bankruptcy Code permits repayment in Chapter 13 cases.

As the First Circuit decided, the Bankruptcy Code does not impose that obligation. Nor should it.

Most Chapter 13 cases never result in a fully performed plan. Rather, as happened twice with this debtor, her bankruptcy cases were dismissed because the debtor failed to make the required payments to the Chapter 13 trustee.

When the plan was confirmed in this debtor's third Chapter 13 case, it was 14 months after the filing date. This situation is not atypical.

What is a lender supposed to do with respect to any post-petition payments that have actually been received while it awaits a ruling on the confirmability of the debtor's Chapter 13 plan.

A lender should be entitled to continue to credit payments in accordance with the terms in the loan documents. Bear in mind that we are dealing with uniform provisions in Fannie Mae/Freddie Mac mortgage/deed of trust documents.

BUT, if a lender improperly charges late fees, or seeks a lift stay order, or takes other steps to enforce its rights and remedies while a debtor is post-petition current in all of its payments, then that lender deserves to be punished.

In the Nosek case, the lender never took any of those steps AND Nosek never suffered any economic harm by this accounting methodology. Yet, the Bankruptcy Court awarded her $750,000 in contempt sanctions on account of her $90,000 loan.
10.9.2008 7:00am
Andy Rozell (mail):
That may be an erroneous belief. Nonetheless, it's an erroneous belief that seems to be shared by most Bankruptcy Judges I've run into. They seem to think that payments provided for in the plan ought to be applied the way the plan states. And I've noticed an increasing frustration with the situation where a debtor performs a plan, gets a discharge, and then finds out the mortgage company has been charging late charges the entire time and claims that the debtor is many months in arrears.


As I said, in the district where I practice, the Uniform Plan specifically mandates application of the ongoing mortgage payments. I was surprised that the plan in Nosek seems not to have contained similar provisions. I assume that if the plan specifically ordered application of the payments in a specific way, then 105 would support some kind of sanctions against the creditor, although what the court did in Nosek was certainly extreme.
10.9.2008 1:52pm