Chapter 13 Bankruptcy | Debtor Allowed to Sue Loan Servicer

Chapter 13 Bankruptcy | A bankruptcy court allowed Chapter 13 debtors to pursue an adversary claim against their loan servicer for unapproved fees. The debtors claimed that the loan servicer intentionally misapplied a lump sum payment intended to go towards their mortgage principal after the discharge. The court granted the debtors’ request for a preliminary injunction. In re Moffitt (“Moffitt I”), 390 B.R. 368 (Bankr. E.D. Ark. 2008). It dismissed the debtors’ non-Bankruptcy Code claims in two subsequent opinions, 406 B.R. 825 (Bankr. E.D. Ark. 2009) (“Moffitt II”) and 408 B.R. 249 (Bankr. E.D. Ark. 2009) (“Moffitt III”), but it allowed the remaining claims to proceed. The parties settled the dispute several months later.

The debtors filed a Chapter 13 petition in October 2004. They listed a first-lien deed of trust of $35,000 to their mortgage servicer, EverHome, which filed a proof of claim alleging a debt of over $36,000. It filed amended proofs of claim that progressively increased that number throughout 2005, claiming expenses like attorney’s fees and inspections. The debtors objected to the additional fees, but they also moved to settle and administer the case in order to use a personal injury settlement to pay off the Chapter 13 plan. Although the debtors wanted to continue to pursue the objection, the court ruled that it was moot and granted a discharge.

EverHome transferred the debt to America’s Servicing Company (ASC), which the debtors claim is an alter ego of Wells Fargo Bank, in late 2005. ASC submitted a payoff amount to the trustee of just under $10,000. In April 2006, the trustee paid that amount to ASC, and the debtors sent a personal check to ASC in the amount of $10,000, directing ASC to apply the funds to the mortgage principal. Instead, ASC applied the debtors’ payment to other fees, causing their mortgage “to go into complete disarray.” Moffitt I at 389.

The debtors filed an adversary claim against EverHome, ASC, and Wells Fargo in 2007 after ASC continued to misapply their payments. Causes of action included:

  • Reconsideration of an allowed claim, 11 U.S.C. § 502(j);
  • Improper and unauthorized fees, 11 U.S.C. § 506;
  • Unapproved fees, Fed. R. Bankr. P. 2016;
  • Willful discharge injunction violation, 11 U.S.C. § 524;
  • Automatic stay violation, 11 U.S.C. § 362(a)(3);
  • Violations of the Real Estate Settlement Procedures Act (RESPA), 12 U.S.C. § 2601 et seq., and HUD Regulation X, 24 C.F.R. Part 3500;
  • Violations of the Fair Debt Collections Practices Act (FDCPA), 15 U.S.C. § 1692 et seq.; and
  • State law claims for conversion, breach of contract, fraud, and deceptive trade practices.

The bankruptcy court granted a preliminary injunction, finding that ASC misapplied the $10,000 payment but “never attempted to understand what the problem was” until the debtors filed suit. Moffitt I at 389. It further found that the debtors continued to make “full and timely” payments despite ASC’s “bi-monthly inaccurate, incomprehensible mortgage statements.” Id. The court dismissed the state law, RESPA, and FDCPA claims, but it allowed the other claims to proceed. The parties settled, and by agreed order, the court released over $27,000 from the court registry to the debtors in late December 2009. – Los Angeles Bankruptcy Lawyer

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