mortgage creditor proofs of claim and objections: a … creditor proofs of claim and objections: a...

Mortgage Creditor Proofs of Claim and

Objections: A Practical Primer for Practice

Under the Revised Rules

June A. MannMann Law Firm PLLC

David Aaron DeSotoMann Law Firm PLLC

22nd Annual DFW Consumer Bankruptcy Conference

Arlington, TexasOctober 2012

No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database orretrieval system, without prior written permission of the authors. No part of this publication is intended to constitute legaladvice, and the contents herein are provided solely as a starting point for persons seeking to research bankruptcy relatedissues. Persons in need of legal advice should consult with a licensed attorney, preferably one that regularly practicesin the field of bankruptcy. The contents of this publication are not to be employed for any purposes which run counterto any existing laws governing the use or application of federal or state laws. The views expressed herein are solely thoseof the authors and not necessarily those of the mortgage industry, Wall Street, or DFW Area Chapter Seminars, Inc. Thispaper was previously presented in China at the 8th Annual International Bankruptcy Seminar sponsored by the State Barof Texas Bankruptcy Law Section. The paper was thereafter copied and imported and looks just like the original butis only half the price and gets better mileage. Portions of this paper previously appeared in Mortgage Creditor Proofs

of Claim and Objections: A Primer for Paralegals which was presented by David Aaron DeSoto at the 2nd AnnualBankruptcy Paralegal Seminar sponsored by Houston Association of Bankruptcy Paralegals in Houston, Texas.

June Ann MannMann Law Firm PLLC

2180 North Loop 610 West, Suite 250Houston, Texas 77018(713) 893-8961 direct

[email protected]

June A. Mann is a Partner in the Houston, Texas office of the Mann Law Firm, PLLC. Priorto establishing the Mann Law Firm, June was the bankruptcy partner at Mann & Stevens, P.C. andprimarily represented mortgage lenders and other secured creditors in Texas in bankruptcies, realestate foreclosures, evictions, litigation, and all matters relating to the servicing of mortgage loansand the mortgage banking industry.

June received a B.S. from the University of Texas and her J.D. from the University ofHouston Law Center. She clerked for the Honorable Edward J. Ryan, United States BankruptcyJudge, a bankruptcy judge from New York who was recalled to serve as a visiting judge in theSouthern District of Texas. In 1996 she changed the focus of her primarily Chapter 11 practicewhen she began representing secured creditors in the mortgage banking sector in consumer cases.June has authored several articles on the bankruptcy issues relating to the mortgage banking industryand has conducted in-house seminars for mortgage banking clients.

June is admitted to practice in the Bankruptcy Courts for the Southern, Western, Northernand Eastern Districts of Texas, as well as the Fifth Circuit. She is a member of the American BarAssociation, the Houston Bar Association, the American Bankruptcy Institute, the College of theState Bar of Texas, Moller/Foltz Bankruptcy Inns of Court, Houston Association of ConsumerBankruptcy Attorneys, and the Bankruptcy Section of the State Bar of Texas. She has served onseveral committees in the Southern, Northern and Western Districts of Texas relating to bankruptcyissues.

Mortgage Creditor Proofs of Claim and Objections DFW Consumer Bankruptcy Conference October 2012

Introduction

The amendments to Rule 3001 of the Federal Rules of Bankruptcy Procedure, effective

December 1, 2011, combined with the promulgation of a revised Official Proof of Claim form, the

Supreme Court’s recent decisions in Stern v. Marshall, 131 S. Ct. 2594 (2011) and United Student

Aid Funds, Inc., v. Espinosa, 130 U.S. 1367 (2010), will have a tremendous impact on how mortgage

claim objections are handled. Under the revised Rules, mortgage claimants must meet what is

perceived to be a much higher standard in the preparation of their claims and may be barred from

introducing evidence that was absent from their filed claim, essentially closing the door to any

defense from defeat. This will, without question, speed up the objection process. This should, as

well, have the intended effect of making creditors more vigilant in the preparation of their claims.

While these new requirements may appear burdensome, careful attention and compliance may reduce

the amount of litigation regarding amounts set forth in claims and the attached documentation.

Noncompliance with the new Rules can result in the exclusion of evidence necessary to support a

claim, in addition to the imposition of sanctions.

Solely examining the objections process is like signing up for swimming lessons after the

lifeboats have left a sinking ship. This article is intended to assist attorneys on both the creditor and

debtor side of the aisle and will provide a cursory review of things to consider in the process of

preparing both the proof of claim and the objection.

I. The Claim

A. A Factory Demands Quantity, but a Profession Demands Quality

The proof of claim is the genesis of the objection process. A well drafted and thoroughly

reviewed claim can minimize or abrogate the need for an objection. A sloppy, rushed and

incomplete proof of claim, on the other hand, is certain to draw fire or spontaneously combust.

Preparation of a proof of claim can be viewed in two distinctly different manners; the

mechanical completion of a recently revised Official Form B10 or the careful assembly of a legal

document. The forms are relatively easy to read and fill out, which in turn makes the process appear


deceptively simple. Beneath the surface of simplicity, however, there are several things to consider

when completing a claim. Given the current amount of litigation over poorly filed claims and

defective documents, preparation should be approached with the mindset that the claim will be

objected to immediately after filing and that it must therefore be free of holes and dead weight before

it is cast into the rough seas.

A. The First C: Clarity

A properly prepared claim should serve as a communicative document that provides the

debtors, their counsel and the trustee with a complete picture. If you cannot understand the claim

or explain its contents, neither can the recipient. Similar to other types of legal pleadings, the

document should be drafted with audience and purpose at the fore. The Committee comments to

revised Rule 3001 state that the claim must “include sufficient specificity to make clear the basis for

the claimed amount.”

There are, essentially, four questions that a claim needs to answer: 1) to whom is the money

owed, 2) why the money is owed, 3) how much is owed, and 4) whether the claim is secured,

unsecured, priority or administrative. A well prepared claim will adequately convey the answers to

these questions. While this sounds rather simple, you would never guess so from reviewing a

sampling of claims filed in Texas just prior to the Rules changes on December 1, 2011.

Practical Practice Tips:

* Do not use abbreviations or anything that resembles a text message.

* Do not scribble handwritten notations on the claim form or documents.

* Refrain from lumping charges together into vague categories. “Corporate Advances” is

a good example of failed categorization. Yes, we know the mortgage lender advanced some funds.

But why and to whom and for how much? Are copies of the receipts attached?

* If it cannot be explained or described without using a payment history code that makes

the charge appear to be for a vitamin supplement, provide a copy of the code or explain in plain

English what the code means.

* Find a font and typeset and stick with it. Claims do not need to look like ransom notes just


1 RESPA is the Real Estate Settlement Procedures Act. It is not a Mexican snowcone.

to receive payment.

* If it cannot be explained or described in the claim, it cannot be explained in court. If it

cannot be explained in court, it should most likely not be included in the claim and may need to be

waived by the secured creditor.

B. The Second C: Completeness

Fastidious people look in the mirror before they head out the door, and you should do the

same with claims. Your claim should not look like it is dressed in Uggs and a green shower cap at

3:00 a.m. in the snack aisle at your local convenience store. You do not want your claim to end up

being a cause of embarrassment through means of the judicial equivalent of walmart-people.com:

a published opinion that parades you in your less than finest hour. Dress it smartly, make certain its

accessories are matching, and remember to remove the price tags.

Completeness counts. Rule 3001 provides that, once an objection to claim is filed, a creditor

may be precluded from introducing information omitted from the claim unless the court determines

that the failure to provide the information as part of the original claim was harmless or substantially

justified. Fed. R. Bankr. P. 3001(c)(2)(D). Attorneys’ fees may also be assessed against a creditor

who fails to provide the required information. Id.

Rule 3001 as amended and the new proof of clam require that pre-petition interest, fees and

other charges must be itemized. If the loan is escrowed, a RESPA1 analysis must be included with

the claim. This is a new, and very mandatory, provision that will unquestionably engender the most

heartburn to claimants who have not previously been keen on reviewing the figures and documents

at the level of detail that is required in these matters.

In addition to the itemization required in Part 2 of Attachment A of the new Proof of Claim

form, the comments to both the Official Form and the revised Rule indicate that the documents must

be attached to support the itemization. The Cumulative Committee Note to Official Form B10 (the

Proof of Claim form) states that “the form is revised to clarify that, consistent with Rule 3001(c),

writings supporting a claim or evidencing perfection of a security interest must be attached to the


2 Rule 1006 of the Federal Rules of Evidence (as recently amended and effective December 12, 2011)

provides as follows:“Rule 1006: Summaries to Prove ContentThe proponent may use a summary, chart, or calculation to prove the content of voluminous writings, recordings,or photographs that cannot be conveniently examined in court. The proponent must make the originals or duplicatesavailable for examination or copying, or both, by other parties at a reasonable time and place. And the court mayorder the proponent to produce them in court.”(Pub. L. 93–595, §1, Jan. 2, 1975, 88 Stat. 1946; Apr. 26, 2011, eff.Dec. 1, 2011.)

proof of claim. If the documents are not available, the claimant must provide an explanation for their

absence.

Instruction 7 contained in Form B10 requires that the claimant “Attach redacted copies of

any documents that show the debt exists and a lien secures the debt. You must also attach documents

that evidence perfection of any security interest.” The instructions for this section of the form

explain that summaries of supporting documents may be attached only in addition to the documents

themselves. “You may also attach a summary in addition to the documents themselves.” (Emphasis

added) It should be carefully noted that the phrase “in addition to” appears both within the

Committee Comments in addition to the form with regard to documents supporting summaries.

Particular attention should also be given to the verbiage “any documents that show the debt exists,”

since “debt” is defined within the Bankruptcy Code as “liability on a claim.” 11 U.S.C. §101(12).

A summary, in and of itself, is not sufficient to meet the requirements of the revised Rule.

Summaries are to be used as an aid and not as a replacement for the actual supporting documents.

Reliance cannot be placed upon Rule 1006 of the Federal Rules of Evidence, which provides

that voluminous writings that cannot be conveniently examined in court may be presented in the

form of a chart, summary or calculation.2 In order for a summary to be admissible into evidence, it

must meet the three-prong test set forth in United States v. Brady, 139 F.3d 1104 (6th Cir. 1998).

First, the summary must relate to documents that are so numerous as to make “comprehension

difficult and . . . inconvenient.” Brady at 1112. Second, the documents must have been made

“available for examination or copying, or both, by other parties at a reasonable time and place”

consistent with Rule 1006. Third, the underlying documents must be admissible into evidence.

Brady at 1109.


3 Here’s a fun cocktail party topic if you want to alienate your friends and watch members of the opposite

sex flee the room. With witty charm usually reserved for self-medicating game show hosts, casually educate them onthe difference between endorsement and indorsement. “Endorse” is a term in the English language that is used toindicate your support or approval of a person, place or thing. “Indorse” is a legal term under the UniformCommercial Code that indicates the transfer of a negotiable instrument. “Indorse” comes the Latin in dorso which isderived from the Latin word dorsum. In dorso was shortened to indorsare in Medieval Latin and remains an activeword in the Italian vocabulary.

Even if the documents were made available to the debtors, debtors’ counsel, the Chapter 13

trustee and the United States Trustee consistent with Rule 1006, the first and third prongs of the

Brady test cannot be satisfied. Inclusion of the actual single page property inspection reports and

BPOs will not, in most events, render “comprehension difficult and . . . inconvenient.” The third

prong, asserting admissibility of the underlying documents, is problematic in light of the new Rule

governing disallowance of information omitted from the claim once an objection is filed. Under the

revised Rule 3001, the proponent of a summary would be unable to prove that the documents are

admissible into evidence since the failure to attach documents to a claim can lead to their exclusion

from evidence as addressed further below. In addition, the proponent would not be able to establish

that the underlying documents were made available to the debtor, debtors’ counsel, the Chapter 13

trustee and the United States Trustee for inspection.


* The claim should include all assignments of the mortgage and all allonges and

indorsements evidencing that the claimant is the noteholder, along with all signed and consummated

loan modification agreements.3

* If the loan is escrowed, Rule 3001 requires that a RESPA analysis must be included with

the claim.

* Payment history in the format required by the jurisdiction wherein the claim is filed.

* Complete all required portions of the official claim form.

* Include all relevant supporting documents such as invoices for property inspections,

appraisals, foreclosure fees, escrow advances and attorneys’ fees. Review the documents thoroughly

to ensure that the loan numbers and any tax identification numbers and other personal or sensitive


4 The date that the services were performed versus the date the invoices were paid has a new and elevated

importance under the new Rule 3002.1 since the deadline within which to file a Notice Relating to Claim Secured bySecurity Interest in the Debtor’s Principal Residence is “180 days after the date when the fees, expenses or chargeswere incurred.” (emphasis added) The date that a charge was incurred is different than the date that the creditoradvanced funds to pay the incurred charge.

information have been redacted from the documents. This should not be limited to invoices only,

but should instead include the actual BPO or property inspection data since the invoice, in and of

itself, does not evidence that the work was performed. Also, particular attention should be paid to

these summaries to ensure that they reflect the date that the charges were incurred, not just the date

when the charges were paid.4 If challenged, a representative from the vendor who performed the

service would need to appear and testify. Given the minimal sums at issue, live testimony is not a

prudent or cost-effective replacement for supporting documents.

* If an original document has been destroyed, a statement setting forth the circumstances of

the loss or destruction should be filed with the claim. Fed. R. Bankr. P. 3001(c). If a document

cannot be produced, and its absence cannot be explained through loss or destruction, the claimant

should consider exclusion of the associated charges from the claim. The potential cost for inclusion

of the charge without supporting documentation is sanctions and attorneys’ fees. Thus, sheer

economics should be employed in calculating the worth of including unsupported charges. See In

re Shank, 315 B.R. 799, 814 (Bankr. N.D. Ga. 2004)(Claimants filing false or “overstated claims in

the expectation that their claims will not be scrutinized . . . do so at their own peril.”)

* Remember, what is included in a mortgage claim can be as important as what may be

missing.

C. The Third C: Correctness

There are, admittedly, no statutes governing Clarity, the first of the two previous “Cs.” The

second “C”, Completeness, will soon be governed by the amendments to Rule 3001 of the Federal

Rules of Bankruptcy Procedure. The third C - Correctness - is in a class by itself since it has been the

subject of many published opinions and the cause of much woeful sweat for claimants who filed

poorly prepared or wholly inaccurate claims.

Proofs of claim are legal pleadings and should be given the same meticulous review as any


other legal document. This is not just a matter of making sure that the B10 is completed and all of

the documents are attached. Correctness requires an examination of the totality of the contents of the

claim package.


* Check all documents and legal descriptions. Make sure that the documents belong to the

correct account and debtor and that any exhibits to the deed which reference the legal description of

the property are included.

* Check maturity dates and limitations. If the note has matured pre-petition, the entire

remaining amount owed on the note may be due and the entire debt must be addressed within any

proposed plan. If the statute of limitations for collection has expired, filing of the claim may be met

with an action for violations of the federal and/or state Debt Collection Practices Act.

* Verify whether or not there has been a loan modification and whether one is being

processed. If there has been a loan modification, include an executed copy as part of the documents

attached to the claim and double check that the figures accord with the terms of the modification. If

a loan modification is being processed, determine how close it is to completion and how it might

impact the amount owed to the creditor.

* Review for recoverability. If there are fees or costs that cannot be assessed against the

borrower but which still appear on the account, the claim stage is the last opportunity to take

corrective action. See Padilla v. Wells Fargo Home Mortgage, Inc. (In re Padilla), 379 B.R. 643

(Bankr. S.D. Tex. 2007); In re Sanchez, 372 B.R. 289 (Bankr. S.D. Tex. 2007).

* Candor belongs to the family of Correctness - disclose, disclose, disclose! It is always wise

to bring special circumstances to the attention of the court and interested parties as an attachment or

a footnote within the proof of claim.

D. The Fourth and Final C: Consequences

Executing a proof of claim is a significant responsibility that carries with it severe

consequences in the event that the claim is incorrect. Form B10 is rather straightforward about the

penalties for filing a fraudulent claim: a fine of up to $500,000.00 or imprisonment for up to five


5 The resulting consequence for the claimant is the potential loss of the property and a malpractice action

against its counsel if counsel signed the claim. It will be interesting to see what effect this has on malpracticeinsurance premiums for attorneys who continue to sign off on mortgage lender claims after the effective date of thenew rules.

6 This also arguably reflects the increased level of intimate familiarity with the contents that the person

signing the claim must possess.

years, or both. The practical practice tip? Don’t file a fraudulent claim. See In re Shank, 315 B.R.

799, 814 (Bankr. N.D. Ga. 2004)(Claimants filing false or “overstated claims in the expectation that

their claims will not be scrutinized . . . do so at their own peril.”)

Under the new Rule 3001, there are also consequences for filing a “bad” claim. Sloppiness

is not a crime but now carries a stiff penalty. As set forth above, poorly prepared claims may result

in the claimant being barred from producing additional information to defend against a claim

objection. While a $500,000.00 fine for filing a fraudulent claim may appear steep, imagine the

consequences of filing an incomplete claim for a million dollar property and then not being able to

defend against a claim objection.5

The new B10 includes a declaration which, according to the Committee Notes, “is intended

to impress upon the filer the duty of care that must be exercised in filing a proof of claim.” Persons

signing the form do so under penalty of perjury and must attest that the information is true and correct

to the best of their information, belief and knowledge. Similar verbiage appears in the bankruptcy

schedules and documents filed by the debtors. This places the seriousness of attestation on an equal

footing for both debtors and creditors alike.6


* Take your time while preparing the claim and make sure that it is reviewed by no less than

two persons who understand that it will be scrutinized by many more sets of eyes.

* Develop checklists of all items and attachments that must be included in the claim.

* Rigidly control the filing of the claim. Review the documents in PACER immediately after

the claim is filed to ensure that all of the documents on the checklist are filed.


7 Robosigning occurs when an individual executes documents without actually reviewing them on what

amounts to an assembly line process. Moreover, some of the persons executing the documents did not have authorityto do so and, in some instances, were not the person whose name appeared on the signature line. All of foregoinghave received a tremendous amount of media attention and have resulted in more intense scrutiny of documents filedby mortgage lenders in bankruptcy cases.

8 Imagine the reaction of debtor’s counsel if they were to receive the following telephone call: “Prove to

my client that the debtor will be one of the 30% of debtors who will successfully complete his plan. While we are atit, hand over the last year of the debtor’s billing statements, paychecks, and grocery receipts, I just don’t believe he ismagically living within the artificial guidelines that for all but the most disciplined would be an existence akin toasceticism.”

9 Preferably with a realistic amount of time for the creditor to amend its claim.

II. The Objection

A. Basis

The first question that must be asked regarding objections is “do you have one?” Is it

premised on a hunch by the borrower debtor or upon an educated review of the claim? Is it merely

a matter of your client believing that something is afoul or an article that you read about robosigning7,

or is it a Monday morning when just about everything after the alarm clock goes off is objectionable?

All too often, claim objections are filed without the level of analysis warranted prior to the

filing of a legal action. It is not enough that the mortgage industry is in upheaval and that there have

been a number of reported instances where documents have been robosigned, the original note is lost

or so forth. The filing of such an objection, based upon mere suspicion and statistics, would be akin

to the creditor objecting to plan confirmation in a Chapter 13 case based upon the reported success

rate of plans nationwide.8

There will likely be a flurry of objections filed under the new Rule 3001 where debtor’s

counsel has reviewed the claim and determined that a key document or item is missing such that the

claim will be rendered indefensible unless the creditor is able to obtain court approval to supplement

the claim. Some jurisdictions require creditor counsel to confer with debtor’s counsel prior to filing

a motion for relief from the automatic stay. The Federal Rules of Bankruptcy Procedure do not

contain any such provisions regarding claim objections. Given what amounts to a “death penalty”

sanction in Rule 3001, it will be interesting to see which jurisdictions adopt rules requiring

pre-objection conference calls and which do not.9


10 The Davis opinion also contains a rather stern dressing-down of debtor’s counsel for his conduct in

filing the claim objections. In light of the “death penalty” sanction under the new Rule 3001, it is certain that JudgeRhoades’ excellent analysis in Davis will be revisited and reviewed since the new procedural rule will greatly impactthe substantive rights of claimants.

Before proceeding with a claim objection based upon “lack of documentation,” careful

attention should be paid to the recent opinion of In re Davis, 2011 WL 1302222 (Bankr. E.D. Texas

March 31, 2011). In the Davis case, the debtor objected to all twelve of the unsecured claims filed

in her bankruptcy case on the basis that there were no records attached to the claim and that she could

not verify whether the claim was enforceable against her due to the lack of documentation. The

debtor’s objections were premised on the fact that the creditors had failed to full comply with Rule

3001 by failing to attach documentation. Judge Brenda T. Rhoades held that “the Bankruptcy Rules

do not and cannot contravene the substantive rights contained in the Bankruptcy Code.” Davis at *8,

citing In re Waindel, 65 F.3d 1307, 1309 (5th Cir. 2009). Stated simply, the court held that 11 U.S.C.

§502 sets forth the exclusive grounds for disallowance of a claim. Lack of documentation in and of

itself is not grounds for disallowance but instead goes to the sufficiency of the prima facie validity

of the clam.10

The Davis case is one of a growing number of opinions addressing the doctrines of exclusivity

and non-exclusivity. Adherents of the non-exclusivity doctrine maintain that Rule 3001, and not just

11 U.S.C. §502, provides a mechanism whereby claims may be disallowed. Followers of the

exclusivity approach maintain that disallowance of claims is solely governed by 11 U.S.C. §502.


* Though not all jurisdictions require it, it is wise to include an affidavit executed by the

debtor setting forth the basis of the objection. Preparation of the affidavit will often assist in better

formulation of the objection. Reviewing the affidavit with your clients may also help in weeding out

unfounded or bizarre objections in instances where the debtor is reluctant to attest to information that

he or she has provided to you.

* Keep a record of all correspondence, written or telephonic, between your office and the

debtor as well as creditor counsel. This is important not just for billing purposes, but also to assist


11 The relevant provisions of Rule 9011 are as follows:

“Rule 9011. Signing of Papers; Representations to the Court; Sanctions; Verification and Copies of Papers(a) Signing of papers.Every petition, pleading, written motion, and other paper, except a list, schedule, or statement, or

amendments thereto, shall be signed by at least one attorney of record in the attorney's individual name. A party whois not represented by an attorney shall sign all papers. Each paper shall state the signer's address and telephonenumber, if any. An unsigned paper shall be stricken unless omission of the signature is corrected promptly afterbeing called to the attention of the attorney or party.

(b) Representations to the court. By presenting to the court (whether by signing, filing, submitting, or lateradvocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying thatto the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under thecircumstances,—

(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessarydelay or needless increase in the cost of litigation;

(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by anonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;

(3) the allegations and other factual contentions have evidentiary support or, if specifically soidentified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery;and

(4) the denials of factual contentions are warranted on the evidence or, if specifically so identified,are reasonably based on a lack of information or belief.

(c) Sanctions. If, after notice and a reasonable opportunity to respond, the court determines that subdivision

(b) has been violated, the court may, subject to the conditions stated below, impose an appropriate sanction upon the

in establishing the level of diligence with which the objection was handled.

* It is common in some jurisdictions for counsel to file last minute objections to claims just

to get the case confirmed without any obstacles. Absent a sufficient basis for objection to the claim,

this is neither a wise nor ethical practice and may give rise to a counterclaim by the creditor.

* Debtors filing claims on behalf of creditors should carefully review Fed. R. Bankr. P. 3004

which allows a debtor or trustee to file a claim for the creditor if the creditor failed to file a claim and

thirty (30) days have passed since the bar date. Creditors should be wary of other parties filing claims

on their behalf prior to confirmation, not only because doing so is most likely in derogation of Fed.

R. Bankr. P. 3004, but also because of the binding effect of 11 U.S.C. §1327 as expressed in

Espinosa, infra.

B. Ethical Considerations

Prior to filing an objection to claim, one should bear in mind the mandates of Fed. R. Bankr.

P. 9011. Rule 9011 requires that parties not make representations (which include pleadings) to the

court for an improper purpose, without proper support or without adequate investigation.11


attorneys, law firms, or parties that have violated subdivision (b) or are responsible for the violation.

Failure to abide by the mandates of Rule 9011 can result in sanctions being issued against the

offending party. For example, filing a claim objection with the sole intention of coercing a loan

modification out of the mortgage creditor is not a good idea.

Are you under an obligation to confer with claim counsel prior to filing an objection?

Absolutely not. There are likewise not any rules which state that you must hold doors open for the

elderly, that you should not chew with your mouth open whilst waving your cutlery, or that you

should not stare obsessively at the stranger standing next to you in the elevator. Nope, those are

known as “social conventions” and, while they are not laws, they dictate what society expects of its

civilized inhabitants. If you are still drawing pictures of animals on your office walls and your letter

opener is made of flint tied to a stick, by all means skip making a conference call.

There are also ethical considerations regarding the counseling of clients. Attorneys are

required to render candid advice to their clients, and such advice “often involves unpleasant facts and

alternatives that a client may be disinclined to confront.” Rule 2.01, Texas Disciplinary Rules of

Professional Conduct.

Lastly, what is the true purpose of your objection? If it is solely intended to maim and destroy,

you may wish to reconsider your area of practice and try family law instead. If it is a legitimate

objection, by all means press forward.


* Discuss the objection in detail with your client prior to filing the objection.

* Maintain a list of telephone numbers and email addresses of every mortgage creditor

attorney and paralegal that you meet. Contacting a mortgage creditor’s counsel is often more

beneficial and less time consuming than trying to contact the appropriate department at the mortgage

company. Do not allow your paralegal to contact the mortgage lender if you are debtor’s counsel and

the mortgage lender has representation in the case.

* Do not stare at people in elevators.


12 Texas House Bill 274 went into effect on September 1, 2011 and provides that unsuccessful litigants

may in some instances be required to pay the legal costs incurred by the successful party. The legislation was metwith critical backlash as its opponents assert that it is making it more difficult for the average citizen to have theirday in court. The effectiveness of the new legislation has generated mixed results though it is still in its infancy.

C. Choice of Law

Prior to filing your claim, it is very important that a determination be made regarding whether

you are pleading causes of action that arise under state common law. The recent Supreme Court

opinion in Stern v. Mashall, infra, may or may not limit the ability of the bankruptcy judge to hear

all or portions of the objection depending on how it is plead. Be mindful of the fact that if the suit

is removed to state court, it may be subject to the new “loser pays” Texas statute.12 Consideration

should also be given to the fact that, if the objection is removed to federal district court, the cost of

prosecuting or of losing the objection may be increased.


* The real-world effect of Stern v. Mashall has not yet been determined. If the predominate

causes of action are breach of contract and infliction of emotional distress, you may end up in a battle

over jurisdictional issues depending on the judge and opposing counsel.

D. Clarity and Precision

The objection should be as clear and as concise as possible. Do not attack a poorly drafted

claim with a poorly drafted objection. This will cause a double-dip decline in everyone’s IQ points

and may result in the production of at least three new reality shows or a very embarrassing bankruptcy

court opinion.

Objections should state with specificity the nature of the complaint and the remedy requested.

If there is a controlling statute or case authority, cite it. If you do not know the controlling statute or

case authority, find it.


* Be succinct. Objections should not contain sweeping generalizations and vague allegations.


Get to the point and stay there until the point is made.

* Be realistic. Do not request $10,000.00 in attorneys’ fees and a free house for your client

because the creditor left off an invoice for a single property inspection.

* Be educated. Expand your skill set with a meaningful familiarity of how escrow accounts

work, what the requirements are for a valid home equity loan, how credit reporting works, and how

to read mortgage payment histories and loan history screen shots.

E. Evidence? That’s for the Other Side!

If you have evidence that will support your position and that will assist in expedient resolution

of the issue, consider providing it to opposing counsel at the outset of the case. Yes, you can wait

until scheduling orders have been issued and discovery is exchanged, but why retard the possibility

of resolution? If, on the other hand, you have zero evidence and are solely operating on speculation,

carefully review your objection or response to ensure that you are not running afoul of Rule 9011.


* If you are objecting on the basis that the debtor paid property taxes or insurance, include

copies of the payments in your objection.

* If you are claiming that the debtor made payments that were not credited, include copies.

* If you are objecting on the basis that the loan was modified, include a copy of the loan

modification documents (and not just the unsigned application).


13 Rule 15 of the Federal Rules of Civil Procedure is made applicable through Rule 7015 of the Federal

Rules of Bankruptcy Procedure. The Rule did not apply just to proofs of claim, but all pleadings.

F. Cashing Reality Checks, Part 1

Debtors often need to be reminded of one of two things: 1) they will most likely not end up

with a free house and a settlement to boot which will allow them to dismiss their case and live

worry-free, or; 2) they will not lose the house and end up dying penniless and forty pounds overweight

just because they prosecuted an objection to the mortgage lender’s claim. Likewise, creditors need

to be reminded that: 1) “too big to fail” is only a good thing at Carls, Jr., and; 2) not every claim

objection will end up as the lead story of the Wall Street Journal, later to be decoupaged by their

grandmother upon a tiny music box that plays “Send in the Clowns” as a recurring holiday gift.

Clients need to be provided with realistic expectations of the potential effects and costs,

benefits and detriments, at the outset. Some debtors do not want to be class action heroes and take

Wall Street to the woodshed; they just want to pay what they owe and do not want to incur more in

legal fees than the amount of the original problem. Other debtors do not want to pay a dime, want

their home and car free and clear, and will blame their counsel if they end up paying two cents

whether to their attorney or their creditors.


* Take the time to discuss the non-legal aspects of your client’s case.

* Remember that, while your law firm may be the champion of your client’s cause, it is your

client’s name that may be splashed around the news if things do not turn out well.

III. Pretrial Considerations

A. Amendments

Rule 7015 of the Federal Rules of Bankruptcy Procedure presently governs when and under

what circumstances a party may amend pleadings.13 Rule 7015 provides for a 21 day window within

which litigants may amend their pleadings. The time limitation set forth in Rule 7015 is intended to


14 Why? Because creditors are sophisticated business people. But aren’t accounts and lawyers and

business people often debtors as well? Show me a perfect business, and I will show you a world with many lesslawyers. Show me a perfect person, and I can assure you that they are not a lawyer. Bankruptcy exists because oferrors and the unexpected, lapses and accidents, misfortune and circumstance. The revised Rule 3001 requires awilling suspension of disbelief that none of those forces exist. Debtors are often compelled to amend their plans andschedules several times over the course of a bankruptcy case. The distinction between creditors and debtors in thisregard is that the debtors are moving forward in a very fluid state and their plan and schedules must accommodatethese changes. A proof of claim, on the other hand, reflects a very solid point in time as of the date of the filing ofthe case.

15 The common law doctrine of “just because” is a variant of the doctrine of “just cause,” but without all of

that fancy thinking and logic stuff. The jurisprudential history of “just because” has been traced back to a boy namedSkippy who first asserted the doctrine in his defense after being caught playing “popcorn”with Skittles in themicrowave.

prevent last minute amendments that result in trial by ambush or increase the costs of litigation.

Rule 3001 as amended does not contain the same 21 day leniency for amendments.14 While

one could argue that Rule 7015 and Rule 3001 are at odds with one another, Rule 3001 was enacted

specifically to deal with proofs of claim and not pleadings in general, so expectations of a 21 day

amendment period should be placed in line with the Easter Bunny, Santa and a balanced federal

budget.


* Be specific in responses and replies in instances where offending pleadings are ripe for

amendment.

* Do not wait until the eve of trial to seek leave to amend your claim or pleadings.

* If you find an error on the mortgage claim and the bar date has not yet passed and there is

no pending objection, immediately amend the claim.

B. Dealing with Objectionable Objections

There appears to be a growing trend whereby debtors, both pro se and represented, are filing

(or threatening to file) objections to claims under the legal doctrine of “just because.”15 While these

“nuh uh” objections do not have a legal corollary of “do too” aside from an actual hearing, the Federal

Rules of Bankruptcy Procedure do have a mechanism for time out.


Rule 12 of the Federal Rules of Civil Procedure is an important resource for dealing with “just

because” objections. Under Rule 12, a party can move to dismiss an objection for failure to state a

claim upon which relief can be granted. Rule 12 also allows a party to request that the objecting party

redraft his pleadings so that the basis for the objection and relief requested are asserted with greater

clarity.

Motions to dismiss and for more definite statement will often help narrow the focus of what

is at issue in the claim. They can also have the undesired effect of exponentially increasing the sense

of manifest unjustness perceived by the objecting party, who may now be convinced that there is a

conspiracy afoot and that is why the claimant is seeking dismissal of the objection.


* Be wary of resolving unintelligible pleadings with an opposing party over the telephone.

Remember, the pleadings need to be clear for the trier of fact as well and also in the event that the

matter is appealed. If a pleading can be interpreted in multiple ways, pin down the moving party on

an explanation early in the matter to avoid them changing their own interpretation at a later date.

(Example: Debtor pleads that the creditor has overcharged him, but does not specifically state how.

When creditor inquires over the phone, debtor’s counsel states that the debtor was overcharged for

escrow. After creditor has provided a full escrow accounting, debtor claims at the hearing that he was

overcharged for late fees, inspection fees, attorneys’ fees and that the pens at the bank were not really

free since they were purchased by the bank from interest they collected on his account.)

C. Affiant, Affi-can’t or Affi-ain’t?

The wording of affidavits should be intensely scrutinized to ensure that the contents are

accurate and unassailable. Oftentimes, however, insufficient attention is paid to who will be chosen

to execute the affidavit or testify at an evidentiary hearing. Careful deliberation should be given to

choice of messenger. This is true for both the debtor and the creditor.

How can one determine who will be the best witness? It depends on the basis for the

objection. If, for example, the objection is premised on faulty escrow accounting, the best witness

for the creditor will be one that works in the escrow department.


Sometimes you will need more than one witness. Creditors are often reluctant to provide

more than one witness at an evidentiary due to cost, travel and staffing concerns. By the same token,

debtors will often be loath to call upon an employer, a spouse, or a counselor to appear and be heard.


* Talk to the potential affiant or witness on the telephone or in person. Email correspondence

is convenient, and may provide an insightful summary, but it does not provide any aural indications

whether the party will make a good witness at the hearing. Ask some tough questions, but also

attentively listen to the responses received. If they cannot enunciate, they cannot educate.

* Impress upon the potential affiant that they should be prepared to appear and testify in court.

* Instruct your affiant to keep copies of all of the notes, screenshots, correspondence and

other data that they relied upon to make their statement.

D. Discovery and Document Requests

If the basis for the objection is that the debtor had insurance during a period when the creditor

assessed fees for lender-placed insurance, you should ask for every document from origination of the

note through the present, right? Every objection should require that the mortgage claimant produce

the original note, right?

Bear in mind that production of the blue-ink original note costs money, and it may be money

that the objecting party ends up owing. Original notes, especially if they are indorsed in blank, are

commonly retained in vaults. A creditor will not send one through the mail any more willingly than

they would an equivalent amount of cash. Instead, the notes are often subject to a chain of custody

which requires that a creditor representative personally transport and deliver the note. This is

expensive. If you think this should be free, try ordering a certified copy of your law school transcript

and see what “free” gets you.

It is worth bearing in mind that overbroad requests for documents will most likely result in

a discovery dispute and additional fees being incurred on both sides.



* Before requesting loan origination documents, talk to your client and verify that they were

honest as Eagle Scouts on their loan applications. Creditor counsel will review the documents before

handing them over, and you do not want a fight over escrow to suddenly turn into a criminal matter

based upon a fraudulent loan application.

E. Alternative Dispute Resolution

Some consideration should be given to alternative dispute resolution methods, such as

mediation, in instances where it will be more cost-effective to try and resolve the dispute without the

cost or trauma of an evidentiary hearing. It is worth noting that most bankruptcy courts do not have

the time to sort through what could amount to a day’s worth of objection morass and testimony

without having to break the matter down into multiple settings. Depending on the nature of the

dispute, this can become a very expensive proposition for all parties involved. Most debtors cannot

afford to miss work, much less incur repeated instances of absences. It must also be remembered that,

while legal practitioners are accustomed to the stresses and drama of the courtroom, most debtors and

creditor representatives would rather skip the excitement and save a few follicles. Mediation provides

a forum wherein the parties can meet, discuss and (hopefully) resolve the issues at a greatly reduced

cost in terms of fees, time and trauma. It is very rare that a bankruptcy judge will not support the

parties’ request for mediation.


* When choosing a mediator, it is preferable to find one that understands the nuances of

bankruptcy and is familiar with the recent Rules changes. If it is a mortgage dispute, ensure that the

mediator is familiar with the mechanics of mortgage loans.

* Creditors should bring a representative with authority to settle the matter. Telephonic

participation is not encouraged as it tends to give the impression that the mortgage lender is not

participating in the mediation wholeheartedly.

* Explain to the parties what the role of mediator is and what the mediation is intended to

accomplish.

* Be prepared for the mediation and have realistic expectations.


F. Mapping the Shifting Sands

Who has the responsibility for what and why at trial? The Code and the Rules are clear on

this point. Well, maybe. A properly executed and filed proof of claim constitutes prima facie

evidence of the validity and amount of the claim. Fed. R. Bankr. P. 3001(f). The burden of proof to

establish the validity of the claim shifts to the claimant once the objecting party introduces sufficient

evidence to overcome the prima facie validity of the claim. The question thus becomes how much

evidence is enough evidence to overcome the prima facie validity. The answer depends on the nature

of the objection and the evidence presented.

In the event that the claim lacks the necessary documentation to establish prima facie validity,

the claimant bears the burden at the outset. In re Moreno, 341 B.R. 813, 819 (Bankr. S.D. Fla. 2006).

This is where the revised rules regarding completeness will have a tremendous impact. If the lack

of documentation is such that the claimant has to bear the initial evidentiary burden, but is unable to

supplement the claim under Fed. R. Bankr. P. 3001, the defense of claim is a non-starter and everyone

can clear the courtroom in time for lunch. Returning to the analysis of Judge Rhoades in the Davis

opinion, it appears that the new procedural rule has in effect eclipsed a substantive right. While this

does not mean that the non-exclusivity doctrine triumphed, the new rules regarding claim

amendments could have the effect of severely diluting a claimant’s substantive rights. It will be

interesting to see how the case law develops on this point.


* If you plead it, be prepared to prove it.


G. Cashing Reality Checks, Part 2

What is often viewed as “compromise” on the eve of trial is often little more than a return to

a realistic outlook. No, the debtor should not get a free house because the lender overcharged $3.50

on a property inspection. No, the creditor cannot recover every dime it expends on servicing the

account.

Many would assert that particular attention should be paid to the monetary cost of proceeding.

However, debtor’s counsel needs to bear in mind the emotional cost to the client. Creditor’s counsel,

likewise, needs to give due consideration to the toll that may be exacted upon the client’s reputation

and the actual cost to try the issues before the bankruptcy court.

It is common for parties to become even less enamored with one another once the litigation

has commenced. The anger, cost and hours spent listening to the opposing party’s pig-headed lawyer

dribble is often enough to make your client deviate from the goal originally sought. Revisit and

remind your client of the original goal when necessary. If the outcome that your client desires has

changed, take the time to listen and discuss.


* Be compassionate but stick to the facts and supporting case law. Save the drama for your

mama. Or the courtroom.

IV. The Trial, The Appeal, The Movie

If the matter cannot be resolved, do your best not to end up with the proverbial short end of

the stick. This requires attentive planning at the outset of the matter. Carefully construct a map of

where the testimony and evidence needs to lead to, and prepare your witnesses and documents

accordingly.

Once the claim objection has arrived at its thrilling conclusion, make sure you keep your file

in order. There may be a sequel, and it is often hard to remember how the first objection played out

if you have to glue your notes back together from the wastebasket under the shredder.

Reconsideration of an order allowing or disallowing a claim may be brought at any time. Fed. R.


Bankr. P. 3008. Reconsideration may be granted after cause has been shown. 11 U.S.C. §502(j).

If the claim objection was litigated by the parties, relief from the judgment can be sought based upon

“mistake, newly discovered evidence, fraud, a void or satisfied judgment or any other similar

reasoning justifying relief.” In re Gomez, 250 B.R. 397, 401 (Bankr. M.D. Fla. 1999). If the

objection was not litigated, cause for reconsideration will take into account the following factors: 1)

extent and reasonableness of the delay, 2) prejudice to any party in interest, 3) effect on the efficient

administration of the court, and; 4) the good faith of the moving party. Id. It should be noted that any

claimant asserting “mistake” or “newly discovered evidence” will have difficulty requesting

reconsideration of a disallowed claim unless the claimant has complied with Fed. R. Bankr. P.

3001(c). The claimant should include an attached statement setting forth the relevant circumstances.

Upon conclusion of the objection process (and any appeals and reconsiderations), follow up

and make sure that any adjustments to the claim and account are expeditiously effectuated by the

secured creditor. If no adjustments to the claim and account were necessary, make certain that the

final order indicates such to prevent revisiting the same matter outside of bankruptcy.


* Manage exhibits. The often forgotten rule is that “exhibits are effective advocates.” They

should tell the story in the sequence in which the attorney intends to tell the story. This may not

always result in the most organized numbering in an exhibit notebook, but the story, rather than the

notebook, is what should garner the most attention. Always ensure that you timely provide copies

of the exhibits to opposing counsel prior to the scheduled trial.

* Maintain a time line of events. The voyage from loan origination through the rough seas

of service transfers can easily leave one disoriented. Similarly, the trek from objection to hearing may

be short, but from objection through appeal may be a marathon. Create a map early on, so that you

will know not just where you are but where you have been.

* Inform your client that a judgment may be appealed. And appealed and appealed. This can

be good or bad, depending on which side you are on, the budget involved, and whether you liked

Groundhog Day.

* Maintain a good calendaring system and always have a double-check in place.


* Continue attending seminars such as this one. There is no excuse for lack of an excellent

education in the iWorld.

* Keep track of your time and expenses. This is not just a matter of billing; this also allows

some parties to know when the end is near which is right here and now.

Mortgage Creditor Proofs of Claim andObjections: A Practical Primer for Practice

Under the Revised Rules

October 2012 Update and Addendum

June A. MannMann Law Firm PLLC

David Aaron DeSotoMann Law Firm PLLC

22nd Annual DFW Consumer Bankruptcy Conference

Arlington, TexasOctober 2012

No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database orretrieval system, without prior written permission of the authors. No part of this publication is intended to constitutelegal advice, and the contents herein are provided solely as a starting point for persons seeking to research bankruptcyrelated issues. Persons in need of legal advice should consult with a licensed attorney, preferably one that regularlypractices in the field of bankruptcy.


1. Northern District: Trustee has Commenced Filing Motions to DisallowPost-Petition Mortgage Fees, Expenses and Charges and Payment of AmountsClaimed Therein Under Rule 3002.1(e).

At least one of the Northern District of Texas Chapter 13 bankruptcy trustees is filingobjections to requests by mortgage lenders for additional fees pursuant to Rule 3002.1(e)(supplemental proofs of claim) by asserting that:

(a) The preparation of a Proof of Claim “is a ministerial task that does not require theassistance of legal counsel and is routinely performed by non-legal assistants through thebankruptcy industry. Said Proof of Claim does not claim any attorney fees for thepreparation of said document.”;

(b) The mortgage lender has “asserted a claim of $50.00 attorney fees associated withthe ‘Attorney Fees for Preparation and Filing of ARM/Escrow Change Letter.’ The Chapter13 Trustee contends that irrespective of the filing of the bankruptcy case, the debtor isentitled to and does routinely receive notices of ARM escrow changes without a cost or theconsultation of any attorney. Preparing and filing the ARM escrow change letter form is aministerial task that does not require the assistance of legal counsel and is routinelyperformed by non-legal assistants throughout the bankruptcy industry.”; and

(c) The mortgage creditor has “assessed attorney fees which have not been approved.”

As of October 15, 2012, the Court has not yet ruled on any of the pending Trustee objections.

2. Southern District: Debtor’s Objection to Payment Change Letters SustainedUnder Rule 3002.1.

Ruling: In a recent decision in the Southern District of Texas, the Court sustained theDebtors’ objection to the mortgage lender’s payment change notices because the creditorsought recovery of past due uncollected amounts from previous years through a paymentchange letter under Rule 3002.1(e). In re: Greg Garza and Elvera Garza, Case08-60088-V-13 (S.D. Tex. October 1, 2012). The issues were submitted to the Court solelyon stipulated facts.

Background: The mortgage lender filed two Notices of Payment Change under BankruptcyRule 3002.1 and the Debtors filed objections to both of the notices and requested theirattorneys’ fees as well as other relief. The mortgage lender filed its first Notice of PaymentChange but later withdrew it after the Debtors filed an objection. The mortgage lender thenfiled a second Notice of Mortgage Payment Change under Rule 3002.1(b) and the Debtorsagain objected because the creditor was seeking to increase the mortgage payment due toescrow shortages which had accrued since the bankruptcy filing.


Because the Chapter 13 Trustee was paying both the pre-petition arrears as well as theon-going mortgage payments, the Debtors filed an emergency motion to stay the effectuationof the increase to their mortgage payments and the stay was granted by the Court.

In its five page decision, the Court determined that:

(1) The mortgage lender failed to comply with Rule 3002.(1)(c) which requires theholder of a claim secured by a lien in a debtor’s principal resident to file and servea notice itemizing all fees, expenses and other post-petition charges within 180 daysafter charges are incurred.

(2) Because Rule 3002.1 did not become effective until December 1, 2011, which is aftersome of the amounts were incurred, the Court had to look to other applicable law.

(3) The mortgage lender had failed to respond to the Chapter 13 Trustee’s “Notice ofBar Date for Asserting Claim for Post-Petition Charges Accruing on ResidentialMortgage Claims” within the 60 days after the Trustee’s notice was issued.

(4) The Debtors had “dutifully made their required plan payments since late 2008.”(5) Because the mortgage lender could not produce any evidence that it had complied

with the requirements of RESPA and sent the annual escrow statements, the Courtconcluded that RESPA statements had not been sent to the Debtors. The Courtdeemed the escrow shortages waived due to the mortgage lender’s failure to providethe annual statements.

(6) All deficiencies on the loan accruing for the years 2008 through 2011 were orderedwaived by the Court and the Court ordered the mortgage lender to place the RESPAbuffer (1/6 of the annual escrow disbursements) into the Debtors’ escrow account.

(7) The court awarded Debtors’ counsel reduced attorneys’ fees.

Issues Not Decided: Will attorneys’ fees be awarded to debtor’s counsel when a Rule3002.1 notice is filed and it includes amounts which were incurred prior to the effective dateof Rule 3002.1? Does it make any difference whether they were previously disclosed?

mortgage creditor proofs of claim and objections: a … creditor proofs of claim and objections: a...

Documents