Sent By the ALFN Federal Legislative Subcommittee
Mortgages (BNA 02/01/11)
Bankruptcy Judge Upholds Court's Right To Set Up Foreclosure Mediation Program
The U.S. Bankruptcy Court for the District of Rhode Island, on an issue of first impression, Jan. 28 held in two cases heard together that it has the authority to require home mortgage lenders to participate in the court's loss mitigation program (In re Sosa, Bankr. D. R.I., No. 10-11702 (ANV), 1/28/11); In re Lawton, Bankr. D. R.I., No. 10-11302 (ANV), 1/28/11).
Judge Arthur N. Votolato overruled secured creditor PHH Mortgage Corporation d/b/a PHH Mortgage Service Center's (PHH) objection to debtor Alberto G. Sosa's request for loss mitigation.
Sen. Whitehouse Sees National Model
Sen. Sheldon Whitehouse (D-R.I.) applauded Votolato's decision in a Jan. 28 news release, saying that it "is a win for Rhode Island homeowners. The Rhode Island bankruptcy court's foreclosure mediation program helps distressed families to cut through the red tape of our broken mortgage modification process and has already saved at least 100 homes in our state." Whitehouse said he hopes the decision "will encourage other bankruptcy districts to follow Rhode Island's lead and adopt similar programs."
Whitehouse Jan. 27 introduced the "Limiting Investor and Homeowner Loss in Foreclosure Act" (S. 222) to support these successful programs, and plans to chair a Senate Judiciary Committee hearing Feb. 1 on " Foreclosure Mediation Programs: Can Bankruptcy Courts Limit Homeowner and Investor Losses?" The hearing will examine whether the Rhode Island Program can serve as a model for the rest of the nation.
Case Management Tool
Votolato explained that Rhode Island's Loss Mitigation Program and Procedures Program (LMP), which became effective Nov. 1, 2009, was conceived as a case management tool "designed to encourage the resolution of differences between residential mortgage lenders and their borrowers, and to provide a way for them to access the various federal housing programs available outside of bankruptcy, such as the Home Affordable Modification Program (HAMP)." The program is intended to "start a dialogue, giving the parties nothing more than the opportunity to discuss their respective positions," Votolato said.
The "alleged dire consequences of the implementation of such a Program, as predicted by PHH have not materialized," the court said, and "if any do emerge, they will be judicially addressed forthwith."
Resolve 'Information Exchange Deficit.'
The bankruptcy court explained that the LMP is now operating under the Third Amended Loss Mitigation Program, effective Aug. 23, 2010. The amendments have increased the efficiency and user friendliness of the program, the court said, and simplified the use of recommended forms. Because the debtor's request for loss mitigation was filed April 27, 2010, the court noted that this proceeding is governed by the terms of the Second Amended LMP.
According to the court, the LMP "was implemented in response to the home mortgage and foreclosure crisis generally..." and to address a communication issue. "With communication between parties and a consensual resolution as the objectives, but too often without enough information to assess the likelihood of an agreement, the Court repeatedly had to postpone hearings, order the parties to confer, and report their progress at yet another hearing," the court said. The court called this an "information exchange deficit" that needed to be resolved.
The court explained that under the LMP process, (1) either the debtor or a creditor can initiate the process; (2) if objections are filed, loss mitigation may not begin unless and until such opposition is resolved; (3) after entry of a loss mitigation order, a "Party ... may request that the loss mitigation period be terminated for cause," and (4) if cause for early termination is shown, the loss mitigation process is ended.
PHH's Objections
PHH argued that the LMP (1) enlarged the substantive rights of debtors by creating or granting a previously unauthorized retention option under Bankruptcy Code Section 521(a)(2)(A); (2) violated the relief from stay time constraints under Section 362(d); (3) exceeded bankruptcy court authority under Section 105; and (4) the procedures exceeded the scope of the court's Section 105(a)'s powers.
Amicus Argument
The debtor and amicus counsel, John Rao of the National Consumer Law Center Inc. (NCLC), appointed by the court July 12, 2010, contended that even without a formal loss mitigation program in place, there is "ample authority and precedent for the Court to regulate the administration of cases pending before it." They cited Bankruptcy Code Section 105(d), Fed. R. Bankr. P. 7016, which incorporates Fed. R. Civ. P. 16, and 9014.
Court's Interest in Loss Mitigation
The court noted that it is interested in loss mitigation "to encourage and facilitate home mortgage modifications, and thereby reduce foreclosures" and to "alleviate Court congestion and delay." Noting that the LMP is but one of the court's many case management tools available to manage its caseload, the court said that "[i]f the mediation process is successful, the parties go forward in their new relationship, and the resolved matter is removed from the Court's calendar. If mediation fails, the issues are adjudicated in accordance with applicable law."
The court also noted that the Rhode Island LMP "sets specific time frames and guidelines within which parties may negotiate mortgage modification(s) or any other agreement they deem to be mutually beneficial." Further, it "does not permit the mediation process to just drift, without direction," the court said.
The LMP also requires parties to negotiate within specific deadlines, the court pointed out, and "gives secured creditors the right to speedy hearings, and termination for cause if it is shown that further negotiations would be futile."
Codify 'Ride-Through' Option
The NCLC also noted that the addition of Section 524(j) to the Bankruptcy Abuse Prevention and Consumer Protection Act renders PHH's allegations of conflict regarding Section 521(a)(2) problematic. Section 524(j), the NCLC explained, exempts secured creditors from being in violation of the discharge injunction if they seek or obtain "periodic payments associated with a valid security interest ... [in the real property that is the debtor's principal residence] ..." According to the NCLC, this insertion was to codify the "ride-through" option for distressed debtors who, with creditor assent, continue, post-discharge, to pay their mortgages.
The court noted that several courts have held that the BAPCPA amendments to Section 524(j) and 521(a)(6), with additional changes to Section 362(h) show Congress's intent to eliminate the ride-through option only as to personal property and to permit debtors to take advantage of it with respect to relevant real property without affirming the underlying debt, citing In re Carabello, 386 B.R. 398 (Bankr. D. Conn. 2008). However, the court concluded that it was governed by In re Burr, 160 F.3d 843 (1st Cir. 1998), which holds that the "ride through option is not available with respect to personal property."
The court declined to address whether debtors can force a permanent ride through on their homes without reaffirming the underlying debt. According to the court, the loss mitigation process "in no way authorizes debtors to retain such property without the creditor's consent. Rather, it merely permits the Court to extend the time necessary to perform the stated intention until the parties know whether:
1) a new mortgage contract is being entered into (loan modification), or
2) the mortgage is to be reaffirmed, or
3) the property is being surrendered." Under Rhode Island's LMP, "no new substantive rights are created, nor are any existing Code provisions infringed upon," the court concluded.
'Compelling Circumstances' Exist
PHH also argued that the LMP conflicted with the relief from stay provisions of Section 362. The court disagreed, concluding that Section 362 is not so constraining that such a conflict should result in the nullification of the entire program. Section 362(e), the court explained, authorizes the court to extend the automatic stay for a specific time in "compelling circumstances." The court found that in light of the federal housing programs designed to assist distressed borrowers and their lenders, "compelling circumstances clearly exist to extend the stay for the 60 to 90 days required by the negotiating parties to complete the loss mitigation process."
The court, however, noted that the program is relatively new and it will, as a result, continue to "examine, refine, and amend the LMP as necessary to maintain its utility, integrity, and operation as long as necessary."
Allow Motions for Relief From Stay
To keep the program "as neutral and user friendly as possible," the court said that upon filing of this decision, the LMP would be amended, prospectively, to "allow motions for relief from stay to be filed during the loss mitigation period." The court noted, however, that "if it appears that such motions are being filed prematurely, and/or primarily to drive up costs to debtors, particularly when a consensual loan modification is in progress, the Court will consider, on a case by case basis, whether such fees and costs are appropriate."
Michael W. Favicchio of Warwick, R.I., represents the debtor. Lynn Bovier Kapiskas of Law Offices of Mark L. Smith, North Smithfield, R.I., represents PHH Mortgage Corporation d/b/a PHH Mortgage Service Center. Susan W. Cody and John McNicholas of Korde & Associates, Chelmsford, Mass., represents PHH Mortgage Service Center. John Rao of National Consumer Law Center Inc., Boston, Mass., is amicus counsel.
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