A mortgage lender filed a proof of claim in a chapter 13 bankruptcy claiming total secured debt of $132,945.08, including $14,327.60 in prepetition expenses that were identified as $2,231.93 in late charges and $12,095.67 in attorney fees. The debtors objected, claiming that (1) the lender failed to properly itemize prepetition expenses, and (2) the attorney fees were unreasonable.
Under Bankruptcy Rule 3001(f) a proof of claim filed in accordance with the rules is prima facie evidence of the validity and amount of the claim. Rule 3001 was amended in 2011 to add special requirements for a proof of claim filed in an individual debtor case (such as a chapter 13 case). Among other things, under Rule 3001(c)(2)(A):
If, in addition to its principal amount, a claim includes interest, fees, expenses or other charges incurred before the petition was filed, an itemized statement of the interest, fees, expenses, or charges shall be filed with the proof of claim.
Further, Rule 3001(c)(2)(C) provides: “If a security interest is claimed in property that is the debtor’s principal residence, the attachment prescribed by the appropriate Official Form shall be filed with the proof of claim.” The relevant official form is the “Mortgage Proof of Claim Attachment.” It includes a section for itemization of prepetition fees, expenses, and charges that lists more than a dozen specific categories of items.
Although the lender used the standard form attachment and properly identified late charges as a separate line item, its claim included only $7,868.90 in attorney fees, but it lumped over $4,000 in appraisal costs, title fees, public trustee fees, and filing fees with these fees. As a result, it listed $12,095.67 on the line for attorney fees – notwithstanding that there were separate lines for expenses such as appraisal fees, title costs and recording fees. Consequently, the court concluded that the lender failed to comply with the requirement that the proof of claim include an itemized statement of pre-petition expenses.
With respect to the reasonableness of the attorney fees, the fees were incurred by the lender in connection with initiating foreclosure proceedings on three separate occasions prior to the bankruptcy. (In each case, the foreclosure was dismissed after the debtors cured the delinquency.) The fees were collectible under the deed of trust and other loan documents.
The debtors presented testimony by a partner in a law firm specializing in foreclosures to support their contention that the fees were unreasonable. The court commented that this testimony was not helpful because the witness’ experience was solely in high-volume foreclosure firms that tend to use flat rate fees, while the lender chose to use a full-service law firm that primarily uses hourly billing.
The fact that a high-volume foreclosure firm provides services at a “dramatically lower” cost than a full-service firm, did not demonstrate to the court that the higher fees were unreasonable. Instead, it concluded that the fees were within the reasonable range of what it saw in other case, and it did not “fault the bank for choosing a full-service firm to do its legal work.”
Becasue the proof of claim did not comply with the rules, it did not constitute prima facie evidence of the claim. In addition, Rule 3001(c)(2)(D) authorizes sanctions: a court may preclude a claim holder from presenting additional information regarding its claim or may award other appropriate relief, including reasonable expenses and attorney fees.
Since debtors are entitled to have correct information in order to properly assess the claim, the court concluded that a substantial penalty was appropriate, but that it would be unnecessarily harsh to exclude all of the information regarding the lender’s claim since there was no indication of intentional noncompliance.
So, the court allowed the properly itemized late charges and the attorney fees of $7,868.90 claimed by the lender, but disallowed the appraisal costs and other expenses. The court also directed that the lender pay the debtors’ fees and costs incurred in objecting to the claim, and prohibited the lender from adding its own attorney fees and costs in defending the objection to its claim.
This case highlights the importance of paying attention to and complying with the Bankruptcy Rules – which also includes any local court rules. The results could have been worse for the lender, but there would not have been an issue in the first place if it had been more careful in completing the form.
Vicki R. Harding, Esq.