Tuesday, June 7, 2011

Hamilton v Greenich Investors 2DCA 6/1/11

The Court of Appeal of the State of California, Second District, recently confirmed that if a borrower fails to "schedule" or disclose claims against a creditor in the borrower's bankruptcy proceedings, the borrower is barred from litigating the undisclosed claims against the creditor in subsequent proceedings.

The plaintiff-borrower defaulted on his home loan. He entered into a forbearance agreement with the servicer of the loan, Select Portfolio Servicing, Inc. ("SPS"), but then re-defaulted. SPS notified the borrower that his loan had been transferred to Greenwich Investors ("Greenwich").

The borrower then filed for bankruptcy, making no mention of a possible claim against Greenwich. The borrower's bankruptcy workout plan called for borrower to make regular payments to Greenwich. The borrower again defaulted, and Greenwich initiated nonjudicial foreclosure proceedings.

The borrower then filed suit against Greenwich, alleging breach of contract, fraudulent and negligent misrepresentation, and violation of foreclosure statutes. These claims arose from Greenwich's alleged failure to acknowledge the forbearance agreement, as well as Greenwich's alleged failure to abide by the notice provisions of the relevant foreclosure statute, among other alleged statutory violations.

Greenwich demurred to the borrower's complaint, on the grounds that the borrower was barred from raising his claims by the doctrines of res judicata and estoppel. The trial court sustained the demurrer, and the foreclosure sale took place. The borrower appealed, but the appellate court upheld the trial court's decision.

The appellate court's decision to sustain the lower court hinged on the application of the rule established in Oneida Motor Freight, Inc., v.
United Jersey Bank, 848 F.2d 214 (3d Cir. 1988). As you may recall, the court in Oneida Motor Freight stated that a party's failure to disclose litigation claims likely to arise in a nonbankruptcy context "triggers application of the doctrine of equitable estoppel, operating against a subsequent attempt to prosecute the action." Id. at 417.

The borrower argued that cases decided subsequent to Oneida Motor Freight provided that the rule applied only where the nondisclosure was accompanied by bad faith. The court disagreed because, among other reasons, the cases cited by borrower did not involve a subsequent lawsuit against an entity that had been a creditor in the bankruptcy proceedings.

As such, in the other cases, the debtor did not benefit from the nondisclosure. As the cases the borrower relied upon by the borrower were all distinguishable from the matter at hand, the court concluded that the Oneida Motor Freight rule should apply. Therefore, the borrower was barred from litigating the claims he failed to disclose in his bankruptcy proceedings.

However, the borrower's statutory claims (lack of notice, failure to provide a loan modification) arose after the bankruptcy proceedings, and thus were not barred by the Oneida Motor Freight rule. However, the court found no merit in either claim.