CA Court Site Info on Foreclosure

Wednesday, July 8, 2015

Prior Bankruptcy May Bite Your Butt Down the Road in Lawsuit? HURRY and READ!

HBOR Collaborative is closing down (maybe temporary, depends on funding) but their last newsletter is out.



With increasing frequency, advocates find themselves considering litigation on behalf of clients who come to their offices with some bankruptcy history. The fallout from a past bankruptcy can present real problems in litigation against a lender or servicer. Attorneys who represent these creditors routinely try to use homeowners’ past bankruptcies against them. Fortunately, there are ways to prepare for these challenges and minimize their impact. This article will address the most common bankruptcy fallout issues in foreclosure litigation and suggest how best to deal with them.
Three Recent California Examples
Three recent California appellate decisions addressed the most common bankruptcy fallout scenarios. In the first case the homeowner filed a lawsuit in state court raising contract and tort causes of action against his mortgage servicer. He asserted strong claims that his servicer had acted improperly in failing to convert his trial loan modification to a permanent modification. However, shortly after he filed the case, the homeowner learned that he did not “own” his own lawsuit. 
Instead, the lawsuit belonged to the trustee in an old chapter 7 bankruptcy case that he had filed years earlier. The bankruptcy case had been closed long ago, after the homeowner received his discharge of debts. The bankruptcy trustee, who the court now considered to be the owner of the lawsuit, had only one interest: to settle the case for as much money as possible and use those funds to pay off the creditors in the old bankruptcy case. 
The homeowner would receive no relief under the trustee’s proposed settlement. The bankruptcy court approved the settlement, and the Ninth Circuit Bankruptcy Appellate Panel affirmed that this was as a proper outcome.[2]
In the second case, a borrower filed a lawsuit alleging that his servicer had engaged in dual tracking when it foreclosed while he was being reviewed for a loan modification. This borrower had never received a discharge in a prior bankruptcy case. However, he had filed chapter 13 cases twice while pursuing the modification. Both bankruptcy cases had been dismissed. Although the borrower listed the deed of trust debt in his bankruptcy schedules, he had not included any legal claim against his servicer in the list of his personal property filed with the bankruptcy court. According to the trial court deciding the post-bankruptcy lawsuit, this borrower had taken an inconsistent position in not listing the legal claim against his servicer as an asset in his bankruptcy schedules. Now, he could not file a lawsuit later in which he asserted that he had such a claim. 
The U.S. district court held that taking these “inconsistent” positions called for the application of judicial estoppel. The court dismissed the borrower’s lawsuit with prejudice.[3]
In the third case, the borrower sued a lender and servicer after a foreclosure sale. The borrower alleged that these defendants conducted the sale without authority because they relied on faulty loan document transfers. In a prior bankruptcy case the borrower had challenged the rights of the same parties to file a bankruptcy proof of claim. The bankruptcy court allowed the proof of claim. 
The state court dismissed the borrower’s post-bankruptcy lawsuit. According to the state court, the dispute over the creditors’ proof of claim in bankruptcy court was a proceeding entitled to res judicata treatment. 
This borrower could not proceed with a lawsuit challenging the same parties’ authority to foreclose after the bankruptcy court had allowed the parties’ proof of claim. The California Court of Appeal upheld the trial court’s dismissal of the complaint on claim and issue preclusion grounds.[4]
These cases illustrate three common bankruptcy fallout problems: 
(1)  lack of standing 
(2) judicial estoppel 
(3) .... and res judicata 
Defense counsel in a wide range of cases are becoming more aggressive about bringing these challenges. 
They often succeed in having otherwise meritorious lawsuits dismissed over what appear to be trivial mistakes in old and forgotten bankruptcy schedules. 
Given that over a million individuals file for consumer bankruptcy relief yearly, these defense tactics can have a wide and pernicious impact. The effect is particularly harsh for borrowers involved in foreclosures. Many borrowers could not afford to pay an attorney to pursue legal claims extensively in bankruptcy. 
The economics of consumer bankruptcy practices often do not lead to thorough review of all the debtor’s potential legal claims. When a homeowner’s advocate is pursuing litigation years later, the harm from the past bankruptcy activity has already occurred. Nevertheless, there are ways for advocates to minimize the impact of these harsh creditor remedies.


Did the borrower actually disclose the claim? This will be evident from looking at Schedule B and the Schedule of Financial Affairs filed in the bankruptcy case, as well as any amendments to the initial schedules. In some cases counsel may be able to argue successfully that less than complete scheduling satisfied the basic disclosure requirement.[21] If the adequacy of a disclosure is doubtful, it is probably the best practice to treat this as a non-disclosure and amend the schedules, as discussed below.
Did the borrower’s claims really accrue pre-petition? It must be kept in mind that the bankruptcy standing problem does not exist, at least for chapter 7 cases, if the borrower’s claims arose after the filing of the initial petition for relief. Subject to exceptions inapplicable to mortgage issues, a legal claim acquired after the date of filing the chapter 7 petition does not belong to the bankruptcy estate. Occasionally a pattern of servicer misconduct straddles the pre- and post-petition time periods.[22] In these instances it will be to the borrower’s advantage to characterize the critical events as occurring post-petition. Where there are multiple causes of action, certain claims may be post-petition, while others are pre-petition.
Was the prior bankruptcy case dismissed? While the Ninth Circuit has not addressed this issue, the Second Circuit recently held that the Code provision under which the bankruptcy estate retains unscheduled estate property does not apply to dismissed bankruptcy cases.[23] The closing of a bankruptcy without a discharge occurs frequently in chapter 13 cases. However, chapter 7 cases are occasionally dismissed without a discharge as well. This happens, for example, if the debtor failed to file paperwork necessary to proceed to discharge and to the formal closing of a fully administered bankruptcy case.

No comments:

Post a Comment