Bankruptcy Lawyers: it starts in the schedules — admission of secured debt is deadly

Bankruptcy Lawyers: it starts in the schedules — admission of secured debt is deadly by Neil Garfield

I was traveling and re listening to an older lecture given by 2 Bankruptcy judges generally held in high esteem. The largest point was that naming a party as the creditor and checking the right boxes showing they are secured basically ends the discussion on the motion to lift stay and restricts your options to either filing an adversary lawsuit attached to the administrative bankruptcy petition or filing an action in state court which is where you will be if you don't follow this same simple direction. If you file schedules attached to your petition for bankruptcy relief, as you are required to do, these are basically the same as sworn affidavits. They will be used against you in any contested hearing.

So the judge lifts the stay and then often mistakenly enters additional language in the order ending the issue of whom is the real lender. After all, that is who you were making the payments to, right, so they must be a creditor. And this is all about a mortgage foreclosure so they must, in addition to being a creditor, they must be a secured creditor. And if the collateral is worth less than the claim, there is not much else to talk about it is simple to these Judges because nobody has shown them differently and one of the Judges is retired now. By definition when the Bankruptcy Judge says in the order who is the creditor, he or she has gone beyond their jurisdiction and due process because there was no evidentiary hearing.

This all results from a combination of technology (garbage in, garbage out), inexperience with securitized mortgages, laziness and failure to do the research to determine what is the truth and what is not. If you are a bankruptcy practitioner who uses one of the desktop bankruptcy programs, then the questions, boxes, and fill-ins are intuitively placed in the schedule that your client swears to. No problem unless the schedules are wrong. And they are wrong where the debt runs from the Petitioner to the REMIC trust beneficiaries and is unsecured by any mortgage that the homeowner borrower petitioner ever signed or meant to sign.

The first point is that the amount if the debt is unknown and we now this for a fact because there are multiple offsets for Third party payment (like Servicer advances) that must be examined one by one. It could be zero, it could be there is money due to the borrower, it could be more or less what is being demanded by the Servicer or trustee. Another thing we know is that neither the Servicer or trustee is likely to know the amount of their claim. So send out a QWR to all addresses for the Servicer and the REMIC trustee.

If you get several different payment histories it is a fair bet they came off of different records, different systems and require the records custodian to authenticate each Servicer' rendition, of beginning balance, ending balance and every transaction in between. The creditor who filed a proof of claim has the burden of showing a color able right to enforce the mortgage. That can only come from the pooling and servicing agreement. The parties to the PSA are the REMIC Trust, the REMIC Trust beneficiaries and the broker dealer who sold the bonds issued by the REMIC trust.

But if there is no trust or the REMIC trust never actually acquired the subject loan, then the appointed Servicer in the PSA draws no power from a PSA for a nonexistent or empty trust (at least empty of the subject loan.) it is not the Servicer by right, it has become the Servicer by its intervention into the contractual right between the borrower homeowner and the lender (the REMIC trust beneficiaries). The "apparent authority" of the Servicer will only take it so far.

And every transactions means that as a Servicer they were paying or passing on the borrower's payments . Where are those records --- missing. Does the corporate representative know about those payments? Who was the creditor paid. When did the payments from Servicer start and when did they stop --- or are they still on-going right up to and including trial, foreclosure sale auction and final disposition of proceeds from an REO sale.

So from the perspective of the Petitioner he might have made payments to an entity that claimed to be the Servicer and those payments are due back not the bankruptcy estate. OOPS but that is what happens when a company arrogated unto itself the powers of a Servicer for loans that are claimed to be in a trust --- where the trust doesn't own the loan, note or mortgage (deed of trust). Thus the Servicer would be owed zero but you would show them in the unsecured column, unliquidated and disputed. This could have a substantial income on the amount of the claim, whether part or all of it is secured.

But no matter, if you fail to take a history from the client, get the closing documents, title and securitization report together with loan level analysis, you are going to do a disservice to your client. We provide litigation support and analysis to give you the data to make an informed decision, fight the POC, MLS, turnover of rents, etc. Then you might avoid the dreaded call of calling your insurance carrier who will probably tell you neither paid for nor received a tail on your claims made policy.

US Bank.. well I called this one awhile back :(

US Bank is popping up all over the place as the Plaintiff in judicial actions and the initiator of foreclosures in non- judicial states. It is one of the leading parties in the shell game that is mistaken for securitization of loans. But on its own website it admits against the interests that it has advanced in courts across the country, that it has NO POWER TO FORECLOSE or to pursue any other remedies.

US Bank pops up as the foreclosing party as trustee for some supposedly securitized asset pool masquerading as a REMIC trust ( which we all know now was breached in virtually every way, which is why the IRS granted a one year amnesty for the trusts to get their acts together --- an action of dubious legality).

Both US Bank and the the Pooling and Servicing Agreement will usually state flat out that the servicer makes all decisions and takes all actions relating to the borrower and the borrower's payments. There are several reasons for this one of which is the obvious conflict that could occur if the the servicer and the trustee were both bringing foreclosure actions.

But the other reason, the hidden one, is that the banks want to keep the court's attention on the borrower's contract and keep it away from the lender's contract which is quite different than the borrower's contract. And THAT will invite inquiry as to how or even if the two contracts are related or connected such that the mortgage encumbrance gives rights to the trust beneficiaries such that the collection and foreclosure efforts will inure to the benefit of the trust beneficiaries in the REMIC trust.

So why is US Bank violating both the content and intent of the PSA and its own website? In my own law firm I have two entirely different foreclosure cases --- one in which US Bank is the foreclosing party and the other where the servicer started the foreclosure action. Both loans are claimed to be in the same trust although one is in California and the other is in Florida. Why would Chase bank as servicer started an action? Even worse, why did Chase bank start the action as though it was the creditor and claim that there was no securitization?

I am not sure about the answers to these questions but I have some conjectures.

In the Florida case, US Bank is bringing the case because the servicer can't --- it knows and its records show non-stop servicer advances to the trust beneficiaries of the REMIC trust that supposedly was funded and who purchased or originated the loans in the trust. In the California case, even though the servicer advances are still present it is non-judicial so it is easier for Chase to slip by without even pausing because unless the homeowner brings a legal action to stop the foreclosure sale it just happens. And then it is over. But Chase is treading on thin ice here which is why it is now transferring the servicing rights ---- and therefore the rights to litigate --- to SPS who did not make the servicer advances.

Both Chase and US Bank are going into bankruptcy courts in Chapter 11 proceedings and demanding adequate protection payments while the bankruptcy is proceeding, knowing and withholding the fact that the creditor is being paid every month and there is no default from the creditor's point of view. This would be important information for the debtor in possession and the his attorney and the Judge to know. But it is withheld in the hope that the borrower/debtor will never discover the truth --- and in most cases they don't, unless they get a loan level account report based upon a solid securitization report which is based upon a good title report.

Both US Bank and Chase are wiling to endure awards of sanctions for misleading the court as a cost of doing business because the volume of complaints about their illegal and fraudulent activities is nearly zero when compared with the total of all state court, federal court and bankruptcy actions. But now they are treading on even thinner ice --- they are seeking to get turnover of rents with people who own multiple properties. Their arrogance apparently overcame their judgment. The owners of multiple properties frequently have substantial resources to litigate against the US Bank and Chase and now SPS. The truth is coming out in those cases.

Other Banks who say they are trustees simply direct the borrower or other inquirers to the servicer. But where US Bank is involved it is seeking profit at the expense of the trust beneficiaries and the owners of the real property involved. It seems to me that US Bank has gotten too cute by half and is now exposed to multiple actions for fraud. And I question whether the current revelations about US Bank BUYING the position of trustee has any legal support. I don't think it does --- not in the PSA, not in the statutes nor under common law.