Mortgage Current Despite PNC’s Claim for Escrow Advances

Posted by NCBRC - August 24, 2016

Where the court previously precluded evidence of unpaid escrow advances due to the creditor’s failure to comply with the evidentiary requirements of Bankruptcy Rule 3002.1(g), and the debtor made all plan payments as well as continuing mortgage payments outside the plan, the debtor was entitled to an order deeming the mortgage current under Rule 3002.1(h). In re Howard, No. 10-52527 (Bankr. N.D. Cal. Aug.15, 2016).

After the trustee file the notice of final cure payment under Rule 3002.1(f), the senior mortgagee, PNC, responded that Ms. Howard still owed over $60,000 in escrow advances for taxes and insurance. PNC did not, however, submit any itemization in support of the claim as required by Rule 3002.1(g). As a result of PNC’s failure to comply with Rule 3002.1(g), the court held that: “PNC is precluded from presenting evidence, in any form, of the $62,623.90 in escrow charges in any contested matter or adversary proceeding in this case” (Preclusion Order). The court also denied, without prejudice, Ms. Howard’s request to deem the mortgage current, subject to filing the motion under Rule 3002.1(h).

Ms. Howard filed the motion to deem the mortgage current and for attorney’s fees associated with it. PNC opposed the motion on the bases that: 1) Rule 3002.1 does not apply to taxes and insurance, 2) Ms. Howard failed to sustain the burden of proof that she did not owe the escrow advances, 3) deeming the mortgage current would result in a windfall to Ms. Howard, 4) the underlying note was executed by Ms. Howard’s non-debtor husband and deeming the mortgage current would infringe on PNC’s right to collect from him, and 5) Rule 3002.1(h) does not permit an award of attorney’s fees.

The court began with PNC’s contention that Rule 3002.1 does not apply to taxes and insurance finding that the Preclusion Order was based on application of the Rule and the doctrine of “rule of the case,” therefore, precluded the argument that the Rule was inapplicable. The court went on to find that even if the prior ruling had not addressed the issue, Rule 3002.1, which includes various provisions relating to the creditor’s obligation to notify of and/or itemize changes in payment amounts including “escrow account adjustments,”  is broad enough to encompass taxes and insurance. In the absence of an exclusion of those escrow advances in the ambit of the Rule, PNC’s argument of non-applicability failed.

As to the burden of proof, the court found that “the mortgage holder has the burden to establish the prepetition cure amounts and outstanding postpetition obligations on the mortgage.” The fact that the plan provided for Ms. Howard rather than the trustee to make the payments on the mortgage did not alter the burden of proof. In fact, the court noted that the Advisory Committee Notes to the rule state that “[Rule 3002.1] applies regardless of whether the trustee or the debtor is the disbursing agent for postpetition mortgage payments.”

As to PNC’s contention that the mortgage should not be deemed current because that would result in a “windfall” to Ms. Howard, the court found that it would be illogical to require a debtor to pay charges for which inadequate notice and itemization were provided and which PNC was unable to prove. Freeing a debtor from an unsubstantiated debt was not a “windfall.” The court was unpersuaded by PNC’s allegation at trial that Ms. Howard knew of the escrow advances and therefore had notice of her shortfall. In fact, evidence supported Ms. Howard’s position that she had reason to believe she was current on all payments.

The court turned to PNC’s argument that it had recourse against Mr. Howard and that it was entitled to present evidence of the escrow advances notwithstanding the Preclusion Order. In support of this argument, PNC cited In re Felipe, 549 B.R. 252 (Bankr. D. Haw. 2016), which held that a Preclusive Order by a bankruptcy court was inapplicable outside bankruptcy. The court distinguished Felipe, finding that the order relevant to any potential case against Mr. Howard would not be the Preclusive Order but the order deeming the mortgage current. That latter order would be applicable in other courts.

Finally, the court found that subpart (h) of Rule 3002.1 does not contemplate an award of attorney’s fees and that it could not import subpart (i)(2) of that Rule to allow such fee award.

Congratulations to NACBA member Cathy Moran on this win for her client.

Howard Bankr ND Cal preclusion order July 2016

Howard Bankr. ND Cal opinion Aug 2016


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