Consumer Foreclosure: Lawyers May Need to Tread Lightly

Jackson v ING Bank, FSB (In re Jackson), 545 B.R. 62 (Bankr. D. Mass 1916)

A chapter 13 debtor sued a mortgagee’s law firm asserting various claims based on the firm’s attempts to exercise remedies in connection with a defaulted mortgage loan, including wrongful foreclosure, breach of contract, deceit and misrepresentation, and violation of a bankruptcy discharge injunction and the Fair Debt Collection Practices Act (FDCPA). The debtor also objected to the mortgagee’s proof of claim.

In 2008 the debtor defaulted on a 2004 mortgage loan secured by a condominium unit that she owned. The mortgage was foreclosed and one of the Countrywide entities apparently became the owner pursuant to a foreclosure deed. The debtor executed a Move Out Agreement and vacated the property in 2009.

When the debtor filed a chapter 7 bankruptcy in 2010, she did not list the condominium as an asset “presumably because she had lost it to foreclosure (or so she thought).” She received a discharge injunction in May 2010, and the bankruptcy case was closed in January 2011.

Ten months later she received a letter from ING Bank informing her of the monthly payment due on the 2004 mortgage note. Two weeks after that the bank’s counsel sent a letter demanding payment of the note. bad A couple of months later the law firm sent a second letter stating that the bank was the present holder of a mortgage on the debtor’s condo and that she was in default for failure to make payments due under the note and mortgage. This letter further stated that the entire loan was immediately due and payable, requested that the debtor obtain a current payoff amount before sending any payment, and stated that the law firm was a “debt collector.”

The debtor interpreted this as meaning that there was no foreclosure in 2009 after all and moved back into the condo in June 2012. Almost immediately she received a notice of a scheduled foreclosure sale which did not reference any amounts owed or demand payment.

The debtor once again filed bankruptcy. She filed amended schedules that included the condo as an asset and identified the mortgage debt as a disputed claim. After resolving a series of other issues in prior orders, the court turned to the debtor’s claims against the law firm in this decision.

On the question of whether there was a violation of the bankruptcy discharge injunction entered in the prior bankruptcy case, the firm contended that it did not violate the injunction because (1) the lawyer writing the letters did not know that the debtor had filed bankruptcy in received a discharge, and (2) one of the letters that was sent included the following bankruptcy disclaimer language:

Be advised that if your debt to the foreclosing lender has been discharged in bankruptcy, and said discharge has not been vacated or otherwise modified any time in the future then this notice is void and of no legal effect whatsoever, and does not serve in any way to assert or revive any claim that the lender may have had against you prior to the discharge being entered.

Under section 524 of the Bankruptcy Code a discharge order “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived.” To support a finding of contempt of the discharge order a debtor is required to show that a creditor knew the order was entered and intentionally engaged in conduct that violated the order.

[E]ven legitimate state-law rights exercised in a coercive manner might impinge upon the important federal interest served by the discharge injunction, which is to ensure that debtors receive a “fresh start” and are not unfairly coerced into repaying discharged prepetition debt.

Although the law firm asserted that the lawyer sending the letter was not aware of the discharge, the lawyer testified that she assumed she knew of the bankruptcy because she included the bankruptcy disclaimer language in one of the letters and it was her customary practice to run a bankruptcy search of borrowers.

Consequently, the court found that the law firm intentionally engaged in conduct that violated the discharge injunction when it sent a letter seeking to collect a debt from the debtor personally by including multiple demands for payment without the disclaimer that she had no personal liability due to the bankruptcy discharged. A letter that requires the debtor to pay immediately, requests the debtor to obtain a payoff amount before payment, and closes by stating that the law firm is a debt collector attempting to collect a debt will necessarily be viewed as an act to collect the debt in violation of the discharge injunction.

The court also found in favor of the debtor on her FDCPA claims. The key factor was whether the law firm engaged in an act or omission prohibited by the statute. The court found that the firm violated the statute when (1) it claimed that ING Bank held a mortgage at a time when Countrywide was the actual holder, and (2) it asserted that the debtor was required to pay the mortgage debt even though she was no longer personally liable due to the discharge.

The firm raised as a defense a section of the statute which excuses “an unintentional violation resulting from ‘a bona fide error notwithstanding the maintenance of procedures reasonably adopted to avoid such error.'” However, the firm was not able to show that it had any such procedures, so the statutory defense was not available.

The debtor was not successful on her deceit and misrepresentation claims since, at a minimum, she did not show that she relied to her detriment on any misrepresentation. She did not prevail on the wrongful foreclosure case because the court had previously ruled that there was no foreclosure, and there was an issue with the breach of contract claim in that she did not establish privity of contract with the law firm.

The court’s decision also dealt with reducing the mortgagee’s claim for charges during the period between 2009 and 2012 when the debtor vacated the property. However, the lender had already agreed to reduce its claim, and the debtor did not offer any basis for an alternative calculation.

So, the court allowed the mortgagee’s claim in the reduced amount that it proposed, and found against the law firm on violation of the bankruptcy discharge injunction and the FDCPA. Further proceedings were to be scheduled to determine damages.

As illustrated by this case, a law firm involved in foreclosing a consumer mortgage must to be careful even if the borrower is no longer in bankruptcy. The firm can be held liable for unintentional violations of the FDCPA, and if the borrower was in bankruptcy at some point in time and received a discharge, the firm must be careful to pursue only in rem remedies as opposed to attempting to collect from the debtor personally.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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