REQUIRED READING: Working in the bankruptcy world for the first half of 2009 has been both interesting and challenging. Not only have we seen the impact of the 2008 local rule changes in the eastern district of Michigan, but we have experienced the new U.S. Trustee initiative in relation to mortgage claims. Additionally, several bankruptcy court opinions have been issued that directly affect mortgage holders.
In May 2008, several new local rules were implemented that directly affect mortgage claims. Two of the most significant were the payment change rule (LBR.3001-2) and the Chapter 13 plan completion/discharge review rule (LBR. 2015-5).
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As was previously advised, payment changes in the eastern district of Michigan must be completed in strict compliance with the local rule or they will not be effectuated. The rule requires that the notice of payment change be filed with the court, as well as served on the borrower, the borrower's attorney and the Chapter 13 trustee, 45 days prior to the effective date.
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While electronic case filing provides automatic service to the debtor's attorney and the Chapter 13 trustee, the debtor must be served via standard paper service. A certificate of service must then also be filed with the court. Deviation from the local rule will likely result in the Chapter 13 trustees' ignoring the payment change.
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One notable exception to the local rule is for home equity line of credit loans. While the payment change notice must still be filed with the court and served on the above-named parties, the 45-day notice requirement is waived on loans where the payment is subject to change more than once every six months. However, the creditor must attach a "Notice of Exception to the LBR 3001-2(a) Deadline" to the statement of proposed payment change.
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New local bankruptcy rule 2015-5 is also now being widely applied in Michigan's eastern district. This rule requires that, when the plan is ready for completion, the trustee send to all creditors a notice of plan completion.
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While there are some exceptions, failure to object to this notice within 30 days waives a creditor's right to later assert that the account is not contractually current, at least as of the date of the notice. If a creditor finds that an account – including all payments, fees, escrow accounts and other charges – is not contractually current, the creditor's objection can only be sustained if the failure to be current is not the result of the creditor's failure to comply with another local rule, such as the payment-change rule.
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As is common knowledge, the U.S. Trustee's Program has publicly revealed an initiative to curb mortgage creditor (perceived) abuses. In compliance with this initiative, the Detroit office of the U.S. Trustee's office invited local mortgage creditor attorneys to a meeting to disclose exactly what they are looking for and why. The trustee is looking for full disclosure of all charges assessed to accounts and, in some cases, is unaware of standard practice and charges. What servicers and/or their attorneys take for granted may not always be clear and common knowledge to others. Approaching trustees' inquiries as an attempt to seek common ground has had favorable results.
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Two important decisions that affect mortgage holders have also been issued in the eastern district of Michigan. While bankruptcy court decisions are not binding on other judges, they are, nonetheless, noted by judges and the debtor's bar alike.
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In the case of In re Nathaniel and Carol Ann Neal, the trustee argued that the recording of an affidavit of lost mortgage, where the original mortgage could not be located, was not a sufficient substitute for a mortgage to perfect the interest and did not meet the three requirements to be duly recorded in Michigan as set forth in Gold v. Interstate Financial Corp.
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The court concluded that the document in question did not properly convey an interest in property and, thus, could not be recorded to establish conveyance or perfect a conveyance. By this holding, the court specifically disagreed with the earlier ruling in Camacho v. HomEq Servicing Corp., 311 B.R. 186 (Bankr. E.D. Mich. 2004). The Neal decision allowed the trustee to avoid the mortgage, leaving the creditor fully unsecured. All Chapter 7 trustees will now be looking for mortgages recorded in this manner and where a case is found, an adversary case will likely be filed. Creditors should immediately file a title claim, as well as consider mounting a defense to the challenge.
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A second case of significant interest is that of In re Coryell, Case No. 09-54760. In Coryell, the Chapter 13 debtor filed the current case less than four years from the entry of a discharge order in a prior Chapter 7 bankruptcy. Thus, pursuant to the Bankruptcy Code, while the debtor could file bankruptcy and receive the protection of the automatic stay, the debtor would not be eligible for a discharge at the end of the Chapter 13 case.
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The debtor's plan provided that the junior mortgage would be stripped, as there was no equity above the senior mortgage. The dispute in this case was not as to value, but as to whether the debtor could propose the lien strip where a discharge would never be entered.
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By local rule, in the eastern district of Michigan, liens subject to being stripped are only fully eliminated upon the entry of a discharge order in the Chapter 13 case. However, seemingly in conflict to the rule, the judge in Coryell held that plan completion, not discharge, was the triggering event for finalization of the lien strip, and the plan could be confirmed as proposed. Thus, the judge widened the applicability of lien strips in the eastern district of Michigan. At this time, In re Coryell is only a bench opinion, and it is unknown whether other Michigan judges will follow this ruling.
Marcy Ford is managing partner for bankruptcy and first legal delay resolution with Farmington Hills, Mich.-based Trott & Trott PC. You can reach Ford at mford@trottlaw.com or (248) 594-5403.
