ERIC L. FRANK, CHIEF U.S. BANKRUPTCY JUDGE.
Presently before the court is the objection ("the Objection") of Debtor Carolyn Whitfield ("the Debtor") to the proof of claim filed by Wilmington Savings Fund Society ("WSFS") for prepetition arrears on a mortgage loan secured by her residence.
WSFS's prepetition arrears claim is for $29,972.28. The Debtor objects to the claim, primarily on the ground that $3,217.17 for certain escrow advances and $5,762.47 for pre-petition legal expenses are unreasonable, not due under applicable law, or not actually expended by WSFS. The Debtor requests that WSFS's allowed claim for prepetition arrears be reduced to $20,992.64.
The Objection will be sustained in part, and denied in part. The escrow advances component of the claim will be disallowed in large part. The legal expenses component of the claim will be disallowed in its entirety. As a result, WSFS's allowed claim for mortgage arrears will be reduced by $8,126.13 from $29,972.28 to $21,846.15.
The Debtor filed a chapter 13 bankruptcy petition on February 2, 2016. WSFS filed a secured proof of claim for $108,396.58, with arrears of $29,972.28 on June 30, 2016. (Claim No. 9-1). The Debtor filed the Objection on August 9, 2016. (Doc. # 48).
Following the hearing, the parties submitted post-trial memoranda, the last of which was filed on August 23, 2017. (Doc. #'s 149, 151, 154).
The facts in this contested matter are largely undisputed.
The Debtor resides at 1627 W. Nedro Ave. Philadelphia, PA. On December 6, 1999, she entered into a thirty (30) year adjustable interest rate mortgage loan transaction with WSFS's predecessor in interest, with an initial principal balance of $55,593.00, an initial interest rate of 10.45%, a maximum interest rate of 15.95% and an initial monthly payment for principal and interest of $506.45. (
The mortgage authorizes the lender to purchase and pay for property insurance if the Debtor fails to do so. The mortgage also authorizes the lender to assess a reasonable attorney's fee plus court costs if the Debtor defaults in paying any obligation secured by the mortgage:
(Ex. 1) (emphasis added).
By agreement effective May 9, 2007, the Debtor and EMC Mortgage Corporation entered into a loan modification agreement ("the LMA").
On June 30, 2011, the Debtor received a mortgage assistance loan of $12,500.00
Thereafter, the Debtor defaulted on the mortgage loan presently held by WSFS. In its proof of claim, WSFS identifies February 2013 as the date of the Debtor's default.
As stated earlier, WSFS' proof of claim lists the prepetition arrears as $29,972.28, including:
Prior to the commencement of the bankruptcy case, WSFS initiated an action in mortgage foreclosure against the Debtor in the Court of Common Pleas, Philadelphia County. (Ex. 6) (foreclosure complaint filed December 24, 2013). Before doing so, on July 8, 2013, WSFS sent the Debtor a pre-foreclosure notice of intent to foreclose. (Ex. 5). WSFS did not provide the Debtor with a notice advising her of her right to apply for mortgage assistance under the HEMAP program.
In the foreclosure action, the Debtor participated in the state court's mortgage diversion process. As a result, the Debtor applied for another loan modification. That application was denied. Then, in 2014, she applied for another HEMAP loan, despite the fact that she did not receive a notice of her right to apply for HEMAP benefits. That application also was denied. (A.T. at 1:59-2:04). The record does not reveal the precise reason for PHFA's denial of the Debtor's 2014 HEMAP application.
Having exhausted her other options for saving her home, the Debtor filed this chapter 13 bankruptcy case on February 2, 2016.
A proof of claim filed in compliance with the Federal Rules of Bankruptcy Procedure is deemed allowed unless a party in interest objects. 11 U.S.C. § 502(a). If a party in interest objects, the court shall disallow any portion of a claim which is "unenforceable against the debtor and property of the debtor's estate under any agreement or applicable law...." 11 U.S.C. § 502(b)(1).
Bankruptcy courts resolve objections to proofs of claim by employing a "burden shifting" analysis.
A claim filed in accordance with Bankruptcy Rule 3001 establishes a
To puncture that
The evidence needed to challenge the validity or amount of a proof of claim
The Objection before me has two (2) components, requests for: (1) disallowance of $3,217.17 of the $7,837.11 in escrow advances that are attributable to forced placed insurance ("FPI") and (2) disallowance of the entire $5,762.47 claimed for legal expenses.
I will address each component separately.
The Debtor asserts that WSFS has not satisfied its burden of proving that $3,217.17 in FPI premiums were actually expended. As explained below, I agree and therefore will disallow that component of WSFS' proof of claim in large part.
To meet her initial burden of production to overcome the
First, the Debtor points to the loan history attached to the proof of claim
The first advance for FPI in the loan history was on January 31, 2013 in the amount of $274.45.
The purported initial advance seems ordinary and regular, but what follows is not. After January 31, 2013, there were no disbursements for FPI for fourteen (14) months. WSFS next paid a FPI premium on March 5, 2014 in the amount of $54.89. What confounds things, however, is the refund to WSFS on March 28, 2014 of $20.74 followed by another FPI payment in the amount of $2,283.56 on March 31, 2014 (which would represent more thirty-six (36) monthly premiums at the rate of $55.00 per month). Then, WSFS inexplicably received another FPI refund of $867.67 one (1) month later on April 30, 2014 (which would represent about sixteen (16) monthly premiums, still leaving the March 31, 2014 advance as the payment of roughly twenty (20) months of coverage).
There could be satisfactory explanations for this erratic history in the payment of FPI premiums. But the point here is that the payment pattern in the loan history, viewed alone, is sufficiently odd to raise at least some question regarding the accuracy of the WSFS's account records. Whether the peculiarity of the FPI payment pattern described above, by itself, is sufficient to burst WSFS's
The Debtor established that she made a specific, formal discovery request, asking WSFS to produce anything — including invoices from the insurers or checks cut to the insurers for the appropriate amounts — to substantiate that the FPI charges were incurred and paid. (Ex. 13). Further, the Debtor showed that WSFS produced no documents responsive to her request (even though it produced documents verifying the amounts and actual disbursements made for other escrow charges, such as property taxes and attorney fees). The Debtor asks that I draw a negative evidentiary inference from WSFS's nonproduction.
In evaluating whether WSFS's
The issue is a close one, but I find that the irregularities in the loan payment history and WSFS's failure to provide discovery that would explain the nature of the FPI charges and corroborate that the payments were made succeed in satisfying the Debtor's initial burden of production, thereby overcoming the
Although the Debtor's objection will be sustained, the amount deducted from the WSFS arrears claim will be less than that asserted by the Debtor.
WSFS's proof of claim includes two (2) rebates in favor of the Debtor totaling $888.41 which are attributed to "Insurance Refund." (POC 9-1 Payment History at 3/28/14 and 4/30/14). WSFS is only seeking to collect the net amount it claims it paid for FPI; it has already deducted the rebates against the claimed advances.
Therefore, I will disallow FPI charges in the net amount of $2,328.76, rather than $3,217.17. This disallowance will prevent the Debtor from obtaining a double-recovery on the insurance refunds.
The second component of the Objection is the Debtor's challenge to WSFS's claim for $5,762.47 in prepetition legal expenses.
The Debtor does not dispute the occurrence of a contractual default that would permit the assessment of legal expenses. However, she asserts that the legal expense component of WSFS' claim must be disallowed because WSFS failed to satisfy a contractual condition precedent to the institution of legal proceedings and the assessment of legal expenses.
The Debtor's argument is based on the mortgage provision that requires WSFS to deliver pre-foreclosure notices "required under law applicable to the Mortgage." The subject mortgage provides:
(Ex. 1) (emphasis added).
This provision of the mortgage expressly permits fee shifting in the event that WSFS institutes foreclosure proceedings following a default, but is subject to a condition precedent. Acceleration of principal and the commencement of legal proceedings must be preceded by the delivery of notice to the Debtor. The Debtor reasons
In making this argument, the Debtor invokes 35 P.S. § 1680.401c
Act 91 also adds a procedural requirement to actions in mortgage foreclosure in Pennsylvania — the pre-foreclosure delivery of what is commonly called an "Act 91 Notice." That notice provides a delinquent homeowner with notice of and the opportunity to apply for HEMAP benefits, along with contact information for an agency qualified in assisting the homeowner in the application process.
Although the Debtor received a pre-foreclosure notice, the notice she received (Ex. 5), was designed to comply with a separate "law applicable to the Mortgage," Act 6 of 1974, 41 P.S. § 403 ("Act 6 Notice"), not Act 91. The Act 6 Notice did not provide the Debtor with certain material information required by Act 91. It did not inform the Debtor of HEMAP; it did not mention the 30-day time period to engage with the program; and it did not provide contact information for a housing counselor.
According to the Debtor, this failure to comply with Act 91, i.e., the "law applicable to this Mortgage," establishes the merits of her objection to the allowance of the legal expenses.
On its face, the Debtor's contention that WSFS's failure to send the Act 91 pre-foreclosure notice violated the contractual precondition to the initiation of foreclosure proceedings is meritorious. However, WSFS responds with two (2) arguments.
First, WSFS asserts that the Debtor was categorically ineligible under the HEMAP
Section 1680.401c(a)(7) states that the provisions of the statute governing HEMAP are not applicable if:
Second, WSFS argues that even if its notice was deficient under Act 91, the Debtor has no legal remedy unless that deficiency caused her prejudice and that the Debtor presented no evidence that she was prejudiced. The source of WSFS' "prejudice" argument is Act 70 of 2012, 35 P.S. § 1681.5 ("Act 70"), which provides:
The analysis is nuanced; but as explained below, I conclude that both of WSFS' arguments are without merit. WSFS was obliged to send the Debtor an Act 91 notice prior to commencing foreclosure proceedings and the Debtor has met her burden of demonstrating that this violation of WSFS' contractual and statutory obligation was prejudicial.
More specifically, while the Debtor was not a prime candidate for a HEMAP loan, the record does not establish that, as a matter of law, she was categorically ineligible for the program under 35 P.S. § 1680.401c(a)(7), and that the mortgagee was relieved of its obligation to provide her with an Act 91 notice before commencing foreclosure proceedings. The Debtor was entitled to an Act 91 notice and awareness of her opportunity to present her situation to the Pennsylvania Housing Finance Authority ("PHFA"), the agency which administers HEMAP.
As for the prejudice requirement of Act 70, 35 P.S. § 1681.5, PHFA's own policy statement suggests that WSFS' very failure to send the Debtor an Act 91 notice rendered her ineligible for HEMAP benefits.
(emphasis added).
The undisputed facts that the Debtor received no notice resembling an
WSFS initially defends its noncompliance with Act 91 by arguing that it was under no obligation to send the Debtor an Act 91 notice because she was ineligible for the program pursuant to 35 P.S. § 1680.401c(a)(7).
Section 1680.401c(a)(7) provides that the HEMAP statutory provisions are inapplicable in certain situations based on the existence of other mortgages and liens on the homeowner's property. WSFS asserts that the Debtor fell into this categorical exclusion and, thus, that she was outside the reach of HEMAP and unable to save her house via the program. Therefore, WSFS argues that it was not necessary to provide the Debtor with an Act 91 notice.
PHFA's policy statement lends some support to WSFS' argument. 12 Pa. Code § 31.202(e) states that an Act 91 "notice need not be sent to homeowners who do not qualify under [12 Pa. Code § 202](a), (b), (c) or (d)." Section 202(d)(3) parrots 35 P.S. § 1680.401c(a)(7). Thus, on its face, PHFA's regulations appear to authorize a mortgagee to make the threshold determination under § 1680.401c(a)(7) that the provisions of Article IV-C of the Pennsylvania Housing Agency Law, governing Homeowner's Mortgage Assistance, are "not applicable," 35 P.S. § 1680.401c(a), thereby relieving the mortgagee from the obligation to send an Act 91 notice.
In the end, however, as explained below, the record does not support WSFS' position that the Debtor was categorically ineligible under § 1680.401c(a)(7). Consequently, she was entitled to an Act 91 notice and a chance to present her situation to PHFA.
35 P.S. § 1680.401c(a)(7) is a provision that identifies an exclusion from statutory benefits. The exclusion applies when
Consideration of the specific content of the exclusion is critical to the outcome of the parties' dispute.
The provision consists of two (2) clauses that create separate disqualifying factors, one of which is objective and nondiscretionary, while the other is based on the exercise of agency discretion.
The objective first clause focuses on whether a property is encumbered by more than two (2) mortgages, not counting PHFA mortgages granted through the HEMAP program. The meaning of this clause is clear, easy to apply and its purpose is sensible: if a property is encumbered by more than two (2) non-HEMAP mortgages, Act 91 does not apply to that property and, in the event that such a property comes in front of PHFA for evaluation, PHFA may not grant a HEMAP loan. In such a case, no purpose would be served by sending a homeowner a pre-foreclosure Act 91 notice.
The second clause is not objective; it is largely discretionary. This part of the statutory provision prohibits PHFA from extending a HEMAP loan for a property encumbered by liens or encumbrances "which would unreasonably impair the security of the agency's mortgage." This clause makes sense in guiding PHFA's second-step discretionary decision whether to grant a HEMAP loan. It directs PHFA to grant loans only when they are sufficiently collateralized, in order to ensure the program remains solvent in the long term.
The critical point here is the discretionary nature of the second clause of § 1680.401c(a)(7). It is difficult to envision how the second clause can be applied by a mortgagee as a threshold, categorical screener, when it requires PHFA to evaluate whether its lien position would be unreasonably impaired if it granted a junior priority, secured loan. In other words, how can a homeowner be categorically ineligible for benefits based on PHFA's discretionary determination that its potential lien position is too precarious, if the homeowner is not advised of the right to apply for HEMAP benefits and is deprived of the opportunity to present the facts to PHFA?
Thus, I have serious doubts whether the second clause can ever justify a mortgagee decision not to send an Act 91 notice to a borrower who is delinquent on a mortgage otherwise subject to Act 91.
To reiterate, WSFS was relieved of its obligation to send a pre-foreclosure Act 91 notice only if either:
The record before me establishes that just prior to the initiation of the foreclosure action, the Debtor's home was encumbered by one (1) mortgage held by WSFS and one (1) mortgage held by PHFA, and no other mortgages. (Exs.1, 9; A.T. at 0:52). The first clause of § 1680.401c(a)(7) requires the existence of two (2) non-HEMAP mortgages for the exclusion to apply. That was not the case here.
WSFS fares no better under the second clause of § 1680.401c(a)(7). Even based on the debatable assumption discussed above,
In terms of the shifting burdens in bankruptcy claims litigation, the consequence of the foregoing analysis is that the Debtor satisfied her burden of producing evidence proving that she was entitled to receive an Act 91 notice and that the failure to do so would preclude the shifting of subsequent legal fees to her. In response, WSFS points to § 1680.401c(a)(7), but has not come forward with sufficient evidence to establish that the Debtor falls under that exclusion from the HEMAP program. Therefore, WSFS has not satisfied its burden of proof with respect to its entitlement to shift legal expenses to the Debtor.
WSFS's last line of defense is Act 70, 35 P.S. § 1681.5, which requires that a party establish prejudice before a court may grant a remedy based upon the violation of Act 91's notice requirements.
At the outset, WSFS is on solid ground insofar as it suggests that the prejudice requirement of Act 70 applies in this claims objection contested matter. This principle is supported by the statutory text. Act 70 refers to a party raising an asserted violation of Act 91's notice requirement "in a
Based on the Act 70 prejudice requirement, for the Debtor to overcome the
On the record presented, I am satisfied that the Debtor met this burden.
The Debtor testified that, notwithstanding the absence of an Act 91 notice, she applied for HEMAP benefits in 2014 after her loan modification request was denied as part of the state court mortgage foreclosure diversion process and that PHFA denied her 2014 HEMAP application.
At first blush, it might appear that the Debtor was not prejudiced. Despite the fact that she did not receive an Act 91 notice, she managed to apply for HEMAP benefits.
In light of PHFA's policy requirement that an applicant must receive an Act 91 notice,
That said, I acknowledge the possibility that PHFA denied the Debtor's HEMAP application on one (1) or more other, substantive
In short, WSFS has failed to counter the Debtor's evidence with regard to legal expenses. Because WSFS bears the ultimate burden of proof, the Debtor's objection to the allowance of expenses must be sustained.
For the reasons set forth above, WSFS' claim for prepetition mortgage arrears will be allowed, subject to the reductions set out below:
$29,972.28 amount claimed ($ 2,328.76) partial disallowance of escrow component of claim ($ 5,762.47) disallowance of legal expenses ($ 34.90) inspection fees ____________$21,846.15 allowed claim for prepetition mortgage arrears
An appropriate order follows.
It is hereby
1. The Objection is
2. Wilmington Savings Fund Society's proof of claim (Claim No. 9-1) is
Under the loan documents, the Debtor is obliged to maintain insurance on the property and WSFS may advance premiums for insurance only if the Debtor fails to perform that obligation. The Debtor testified that her self-procured insurance lapsed in 2014. (A.T. at 0:46). This testimony was designed to suggest that an irregularity exists in the payment records,
In finding that the Debtor has met her initial burden of production on the Objection, I have not relied on this evidence. Based on my observations during the hearing, I do not question the Debtor's honesty. However, neither do I find her to be a reliable historian with respect to the specific dates and the precise sequence in which various events occurred in her relationship with the mortgagee. Specifically, I am not convinced that the Debtor could pinpoint the lapse date of the property insurance that she purchased.
At first blush, the idea that the foreclosing party's failure to provide the required Act 91 notice to a delinquent homeowner should result in the denial of the homeowner's HEMAP application seems perverse. However, I surmise that this policy is in place because HEMAP funds are limited and must be directed to homes imminently in danger of foreclosure.
First, as discussed in the text, 35 P.S. § 1680.401c provides a broad statement of categorical eligibility. It states that Act 91 applies to all mortgages except those falling into seven (7) categories. In addition, 35 P.S. § 1680.404c(a), speaks more specifically to eligibility for HEMAP benefits. Section 1680.404c(a) sets out thirteen (13) eligibility factors a homeowner must satisfy to receive benefits.
Oddly, five (5) of the seven (7) categorical eligibility factors in § 1608.401c are repeated in § 1680.404c(a) as factors for PHFA to consider in the actual loan eligibility determination, including § 1680.401c(a)(7), the provision relied upon by WSFS. Due to the placement of the same text in these two (2) separate places in the statute, the provision is both a categorical exclusion to Act 91 coverage generally and a specific factor for PHFA to evaluate in deciding whether to grant a loan.
WSFS points to an online "FAQ" posted by PHFA stating that to obtain a HEMAP loan, the resulting PHFA mortgage must have at least third lien position. See HEMAP Frequently Asked Questions, http://www.phfa.org/counseling/hemap.aspx (last visited 11/3/17). WSFS contends that a second PHFA mortgage would have had fourth position — or worse — because of the various mortgages and liens on her property, a factual contention that appears accurate. WSFS therefore posits PHFA would not have granted a HEMAP application, making the pre-foreclosure Act 91 notice unnecessary.
Again, the factual record does not support WSFS's position.
Further, PHFA's published policy statement, 12 Pa. Code, § 31.202, includes no requirement that PHFA hold a third lien position; rather, there is only the discretionary requirement that PHFA's lien position not be impaired. Thus, it is hardly clear that the Debtor was categorically ineligible for HEMAP benefits due to the putative "third lien" requirement. The failure to send the Debtor a pre-foreclosure Act 91 notice cannot be justified on this basis.
