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BANKRUPTCY COURT MORTGAGE LOAN CHALLENGE
Though the following presentation is proper in bankruptcy court, our judicial system is not receptive of these challenges and if you don't make payments to the bank during the challenge process, you may lose your challenge. When you have read the below material, come back and read these four documents in the order in which they are presented:
DelaSalle Opening Brief;
U.S. Bank Response to DelaSalle Opening Brief;
DelaSalle Reply to U.S. Bank Brief;
Opinion of the Ninth Circuit Bankruptcy Appellate Panel.
There are three ways to challenge a mortgage loan in bankruptcy court: 1) you can respond to the creditors motion for relief from stay; 2) you can object to the creditors proof of claim; and 3) you can file an adversary petition (complaint).
A. HOW IT WORKS
You are going to need to understand how it works if you are going to use an objection to a proof of claim as a basis to challenge the mortgage loan. It may seem daunting at first, but it actually is quite simple and only rests on a few laws. Here goes:
11 USC 101(10) defines a creditor as one who holds a "claim". That federal law states:
The term “creditor” means—
(A) entity that has a claim against the debtor that arose at the time of or before the order for relief
concerning the debtor;
(B) entity that has a claim against the estate of a kind specified in section 348 (d), 502 (f), 502 (g), 502
(h) or 502 (i) of this title; or
(C) entity that has a community claim.
11 USC 501 provides that a creditor "may" file a claim - which means, the creditor does not have to file a claim if it doesn't want to. (We are only talking about secured creditors here - the mortgagee of your mortgage loan.) A secured creditor who doesn't file a claim can "ride-through" the bankruptcy and just wait until the bankruptcy plan terminates before he tries to enforce his lien. 11 USC 501 states in part:
Filing of proofs of claims or interests
(a) A creditor or an indenture trustee may file a proof of claim....
(c) If a creditor does not timely file a proof of such creditor’s claim, the debtor or the trustee may file
a proof of such claim....
The "ride-through" is provided by 11 USC 506(d)(2) which protects the secured creditor who doesn't file a claim. That federal law states:
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such
lien is void, unless—
(1) such claim was disallowed only under section 502 (b)(5) or 502 (e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of
such claim under section 501 of this title. (I highlighted the relevant part)
Federal Rules of Bankruptcy Procedure section 3001 provides that if a creditors proof of claim is properly supported by evidence, then the claim becomes prima facie evidence of the claims validity and amount. Section 3001 states in part:
Proof of Claim
(a) Form and content.
A proof of claim is a written statement setting forth a creditor's claim. A proof of claim shall conform
substantially to the appropriate Official Form.
(b) Who may execute.
A proof of claim shall be executed by the creditor or the creditor's authorized agent except as provided
in Rules 3004 and 3005.
(c) Claim based on a writing.
When a claim, or an interest in property of the debtor securing the claim, is based on a writing, the
original or a duplicate shall be filed with the proof of claim. If the writing has been lost or destroyed, a
statement of the circumstances of the loss or destruction shall be filed with the claim.
(d) Evidence of perfection of security interest.
If a security interest in property of the debtor is claimed, the proof of claim shall be accompanied by
evidence that the security interest has been perfected....
(f) Evidentiary effect.
A proof of claim executed and filed in accordance with these rules shall constitute prima facie
evidence of the validity and amount of the claim....
If the creditor's initial proof of claim contains the evidentiary support required by Federal Rules of Bankruptcy Procedure section 3001, then pursuant to 11 USC 502(a), that claim becomes an "allowed claim". 11 USC 502(a) states:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless
a party in interest, including a creditor of a general partner in a partnership that is a debtor in a case
under chapter 7 of this title, objects. (Again, I highlighted only the relevant part of the statute that I am
talking about)
When you are in a chapter 11 or chapter 13, you have to make a "plan" that describes how you are going to repay the creditors. You will make payments to a trustee, and the trustee will pay the creditors. 11 USC 1326(c) states: "Except as otherwise provided in the plan or in the order confirming the plan, the trustee shall make payments to creditors under the plan."
So the trustee is going to make the payments to the creditors. But who is a creditor who will be paid by the trustee? Well, only those creditors who have not chosen to "ride-through" the bankruptcy. That would be the creditors with an "allowed claim". Federal Rules of Bankruptcy Procedure section 3021 states:
Distribution Under Plan
Except as provided in Rule 3020(e), after a plan is confirmed, distribution shall be made to creditors
whose claims have been allowed, to interest holders whose interests have not been disallowed, and to
indenture trustees who have filed claims pursuant to Rule 3003(c)(5) that have been allowed. For
purposes of this rule, creditors include holders of bonds, debentures, notes, and other debt securities,
and interest holders include the holders of stock and other equity securities, of record at the time of
commencement of distribution unless a different time is fixed by the plan or the order confirming the
plan.
Now, here is the kicker to the whole thing - remember 11 USC 502, above? It is a law that sets forth "steps" as to what comes first, then second, then third and fourth - and it specifies very clearly how an allowed claim can lose its status as an allowed claim. Let's read it carefully here, with my comments in red in the statute:
11 USC 502. Allowance of claims or interests
(a) (step 1 - a claim supported with evidence is deemed allowed) A claim or interest, proof of which is
filed under section 501 of this title, is deemed allowed, (step 2 - the allowed claim loses its status as an
allowed claim if you object) unless a party in interest, including a creditor of a general partner in a
partnership that is a debtor in a case under chapter 7 of this title, objects. (What's good for the goose is
good for the gander - your objection can't be a bold assertion, it too must be supported by evidence or
argument that the claim isn't supported by evidence)
(Ok, so you objected and supported your objection with evidence or demonstrated the claim was
without evidence, so the claim has lost its status as an "allowed claim")
(b) Except as provided in subsections (e)(2), (f), (g), (h) and (i) of this section, if such objection to a
claim is made, the court, after notice (Step 3 - "NOTICE" means the court can't just summarily rule on
your objection, but must give you some time - but time for what?) and a hearing, (Step 4 - AHA! A
hearing! You get due process - a day in court to argue your position that the claim is not valid.) shall
determine the amount of such claim in lawful currency of the United States as of the date of the filing
of the petition, and shall allow such claim in such amount, (Allow the claim? But why would the court
allow the claim? Oh wait, there are nine exceptions coming up in this law where a claim won't be
allowed - read on.) except to the extent that—
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or
applicable law for a reason other than because such claim is contingent or unmatured; (This exception
is most likely your exception. Here is where the rubber meets the road - where you show the court the
fraud that occurred, or that the note was never transferred to the bank [the pooling and servicing
agreement comes in here - don't forget to argue that the UCC provides that parties may contract around
the UCC and that you are in fact the penultimate party to the pooling and servicing agreement as it's
your note in there.])
(2) such claim is for unmatured interest;
(3) if such claim is for a tax assessed against property of the estate, such claim exceeds the value of the
interest of the estate in such property;
(4) if such claim is for services of an insider or attorney of the debtor, such claim exceeds the
reasonable value of such services;
(5) such claim is for a debt that is unmatured on the date of the filing of the petition and that is
excepted from discharge under section 523 (a)(5) of this title;
(6) if such claim is the claim of a lessor for damages resulting from the termination of a lease of real
property, such claim exceeds—
(A) the rent reserved by such lease, without acceleration, for the greater of one year, or 15 percent,
not to exceed three years, of the remaining term of such lease, following the earlier of—
(i) the date of the filing of the petition; and
(ii) the date on which such lessor repossessed, or the lessee surrendered, the leased property; plus
(B) any unpaid rent due under such lease, without acceleration, on the earlier of such dates;
(7) if such claim is the claim of an employee for damages resulting from the termination of an
employment contract, such claim exceeds—
(A) the compensation provided by such contract, without acceleration, for one year following the
earlier of—
(i) the date of the filing of the petition; or
(ii) the date on which the employer directed the employee to terminate, or such employee
terminated, performance under such contract; plus
(B) any unpaid compensation due under such contract, without acceleration, on the earlier of such
dates;
(8) such claim results from a reduction, due to late payment, in the amount of an otherwise applicable
credit available to the debtor in connection with an employment tax on wages, salaries, or
commissions earned from the debtor; or
(9) proof of such claim is not timely filed, except to the extent tardily filed as permitted under
paragraph (1), (2), or (3) of section 726 (a) of this title or under the Federal Rules of Bankruptcy
Procedure, except that a claim of a governmental unit shall be timely filed if it is filed before 180 days
after the date of the order for relief or such later time as the Federal Rules of Bankruptcy Procedure
may provide, and except that in a case under chapter 13, a claim of a governmental unit for a tax with
respect to a return filed under section 1308 shall be timely if the claim is filed on or before the date
that is 60 days after the date on which such return was filed as required.
If you judge has a hard time with this concept, she may say that 11 USC 502(c) says she can impose a sum that you pay into a blocked account pending the courts approval of a plan. But that misreads the law, which states:
11 USC 502(c):
There shall be estimated for purpose of allowance under this section— (allowance refers to claims
allowed - not claims that are not allowed!)
(1) any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would
unduly delay the administration of the case; or (you indicated the debt was unsecured and disputed
when you put the mortgage loan on schedule F and marked it as disputed - it is not contingent or
unliquidated.)
(2) any right to payment arising from a right to an equitable remedy for breach of performance.
In order to read the above law as allowing the judge to require payments into a blocked account for sums that the creditor says it ought to be paid for the mortgage loan, the judge would have to be saying that the nine exceptions aren't really exceptions - or that the nine exceptions have exceptions.
So if you do your objection right, you will have an argument that the bank lacks both standing (constitutional and prudential standing) and that its claims lost their "allowed" status when you filed your objection. So, if the claim is not allowed, you can't pay it in the plan - so why would you even create a plan with a payment to a creditor that you are not allowed to pay by law? You can't. So that debt comes out of the plan - you get a hearing and if you win, two things happen. The decision is res judicata and you can use it against that bank anytime later in any other court to stop them dead cold (think quiet title), and
remember 11 USC 506(d)(2)? Well, let me state it again:
11 USC 506(d)(2)
To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such
lien is void, unless—
(1) such claim was disallowed only under section 502 (b)(5) or 502 (e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of
such claim under section 501 of this title. (I highlighted the relevant part)
And, that, you can take to the bank! George Gingo
B. TECHNICALITIES OF CHALLENGE TO PROOF OF CLAIM
Here is how to initially challenge a bank's claimed right
to enforce a mortgage loan in the bankruptcy court:
Step 1:
Create a list of all parties that were involved in the collection of
your mortgage since the date you signed the note and Deed of Trust. This
includes the lender (originator) of your loan, all servicers that have
contacted you, the trustee(s) that have contacted you - everyone. Get
their addresses and phone numbers and put those on your list too. If
they had special account numbers for you, put that on the list.
Step 2: You will file a chapter 11 or chapter 13 bankruptcy (most people will do a chapter 13). {Note: Normally you can't challenge a mortgage loan in a chapter 7 case. But, if you were to cut a deal with the trustee where you did the work, you may be able to do it through the trustee. Also, there are several cases on appeal at this time in different jurisdictions regarding whether you can take action in a chapter 7 to challenge a note.)
Step
3: When you fill out the schedules on your bankruptcy petition, you
will list everyone on Step 1 on Schedule F, and mark the box
"disputed". "Schedule F" says its an unsecured debt. A lot of
bankruptcy lawyers have problems with this because they think the debt
is secured. Well, it may be secured to the State of California as an
escheated mortgage loan, but it sure isn't secured to the wrong bank -
and that's what you are saying - everyone listed is the wrong bank to be
enforcing the mortgage loan. The "wrong bank" is nothing more than a
thief. If you don't have enough evidence to support your position, serve a Qualified Written Request and Debt Verification Demand on the Servicer. Samples are available on the HOME page.
Step 4: Once the bankruptcy is filed, wait a week or ten
days. If an entity on the list in Step 1 has filed a proof of claim,
you will now file an "Objection" to that proof of claim along with a
"Memorandum of Law" in support of it.
Step 5: After 10 days, if
any entity on your list in Step 1 didn't file a proof of claim, well
you now need to file a proof of claim for that entity. Your bankruptcy
court has a form - sometimes it's an internet form - for filing a proof
of claim. Once you file that proof of claim, you then need to file an
"Objection" to that proof of claim, along with a "Memorandum of Law" in
support of it.
Step 6: The Court will rule on the objection. If you win, that ruling is res judicata for all purposes.
SAMPLE OBJECTIONS TO PROOF OF CLAIM:
1) Rickie Walker Objection to Proof of Claim.
2) Rickie Walker Memorandum of Law in Support of Objection to Proof of Claim.
3) Tentative Order of Judge Sargis.
4) Rickie Walker Objection to Claim #5 of Citibank; (Read this - its different from above!)
a) Declaration of George Gingo in Support of Objection to Claim #5;
b) Affidavit of Lynn Szymoniak in Support of Objection to Claim #5.
SAMPLE U.S. TRUSTEE COMPLAINT AND MOTIONS TO CHALLENGE NOTE:
1) Trustee Objection - version 1;
2) Trustee Objection - version 2;
3) Trustee Response to Debtor's Objection - version 1;
4) Trustee Complaint - version 1;
5) Trustee Notice of Taking Deposition - version 1;
6) Trustee Motion for 2004 Examination - version 1;
CASES:
Ibanez;
Kemp;
Weisband;
Zitta;
There are other aspects of a note challenge, such as stripping a wholly unsecured security interest (mortgage) from the note in a bankruptcy as an unperfected lien (MERS related). Here is an Arkansas case where it worked when there was a defective notarial affidavit - In re Mary Stewart. Until our bankruptcy book is written, you probably ought to have a lawyer help you with this.
B. BANKRUPTCY PRIMER INFORMATION
Bankruptcy
is a powerful option. Bankruptcy is provided for by the United States
Constitution - Article 1, Section 8, Clause 4. Corporate capitalists
make decisions that financially benefit their shareholders. When a
situation arises where it becomes more profitable to breach a contract
than to perform under the contract, the corporation owes its
stockholders the duty to make the better economic decision and breach
the contract. When that happens, no one blinks - it is expected and
encouraged as a model of efficiency in the marketplace. This is
something good for the particular business and society in general as the
fittest corporations survive and grow, spreading wealth through
commerce. Capitalism sees bankruptcy as a better economic decision.
When a person contemplates bankruptcy, he or
she often goes through the mental anguish associated with the misplaced
concept that it is morally wrong to do so. Most likely, corporations
are at the root of fostering that concept as a capitalist method of
protecting their financial interests from borrower default. Somehow,
religions sometimes wrongly intrude into that belief as well. Having
handled hundreds of family law cases, I have seen that overwhelming debt
is destructive to family cohesiveness. It leads to depression,
interpersonal disputes between hubands, wives and children, often
results in divorce and sometimes suicide. No marriage - or life -
should be sacrificed for the sake of the corporate shareholders wealth.
If bankruptcy could save marriages, then churches and pastors should
encourage its' use when financial burdens are overwhelming. To not do
so is derelict of the duties Jesus gave to those leaders. So what is
one to do when faced with unrelenting debt - take your lead from
corporations and make a better economic decision and file a bankruptcy!
Generally, the average person should consider three different chapters
of bankruptcy - chapter 7, chapter 11 and chapter 13. Chapter 7 is a
"liquidation" bankruptcy where you liquidate your unexempt property and
wipe out your debts. Chapter 13 is a restructuring of your debt where
you pay off your debt over 5 years on a very limited budget. Chapter 11
is a powerful bankruptcy usually thought of as a business bankruptcy,
but it is available to you too. It can restructure debt also. You are
probably aware that our corporate controlled government has been slowly
eliminating our rights. Corporations rights are increasing as ours
decrease. It used to be that anyone could file a chapter 7, but in
2005 the bankruptcy code was changed at the behest of the credit card
lobby so that rich people could not file a chapter 7. "Rich" is defined
by the United States Trustee through a "means test".
The U.S. Trustee periodically reports income limitations on a
state-by-state basis. If you live in a particular state where your
income is above the median income for that state, you're rich and you
can't file a chapter 7 bankruptcy. As of February 1, 2010, the test
says that $41,226 per year is the limit in Florida for a single person.
The test says that $48,140 per year is the limit in California. A
"year" of income is calculated this way - take what you made in the
prior six months and multiply it by 2.
The filing fee for a
chapter 7 is $299. There are two classes you need to take that can be
done online or over the phone that cost about $80 total. (Google
"bankruptcy classes") Your credit report needs to be run also - you can
get a free credit report at www.annualcreditreport.com. You run that report to make sure you list everyone
on your bankruptcy. There are people who are non-lawyers who may be
qualified to prepare your bankruptcy petition for you at a very low fee,
typically around $113.00. They are called "bankruptcy petition
preparers". When I file a chapter 7 for someone, I charge $1,500 for a
single person and $2,000 for a married person. That is the total costs
with no other costs to them. If an attorney is charging a total cost
more than that, you may be paying too much. You may want to file the
bankruptcy yourself. If so, you can get the forms from the USCourts website here. Your bankruptcy court has materials to assist you that are on-line.
In Florida, homestead has a constitutional meaning with protection. But for bankruptcy
purposes, currently the equity in your homestead is protected for the
first 40 months after ownership up to $137,000, after that, the entire
equity is protected. California doesn't protect homesteads to the
extent that Florida protects it - that's why rich people move to
Florida, buy a multimillion dollar property, wait 40 months and file
bankruptcy. How do they get under the income limits? They just don't
make any money "personally". Their corporations withhold dividends for
awhile. California only protects $50,000 of equity for a single person
and $75,000 for a married couple. If you think you know why the
government treats married people more harshly than single people, please
email me and let me know.
A chapter 13 bankruptcy has some debt ceilings listed in 11 USC 109(e) - currently,
you cannot have more than $336,900 in unsecured debts or $1,010,650
in secured debts or you don't qualify for a chapter 13. (That statute
isn't updated yet.) If you are "rich" or have too much debt, you can't
file a chapter 7 or chapter 13 bankruptcy - but you can use a chapter
11. It used to be that you could do a "cramdown" on a mortgage - which
is to say that you could have the bankruptcy court reduce your mortgage
principal to market value. That seemed reasonable because when you file
bankruptcy and if you lose the home, the creditor then sells it and
doesn't get any more than market value for it anyhow. The cramdown was
forced out by the corporations who control the government - they didn't
want you to be able to reduce their mortgage principal. But, the
corporations kept it for themselves - in a chapter 11. So if you use a
chapter 11, you too may be able to cramdown your mortgage. It is
complicated and way more involved than this website will get. But if
you can do it, it may be worthwhile. Chapter 13's typically run about
$3,500 by most lawyers and chapter 11's start at about $8,000 and go up.
Good luck on your better economic decision.
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