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IN RE JOHNSON: BK Court, ED Arkansas “J.P. Morgan was not qualified to use Non-judicial foreclosure process when it initiated against these Debtors”

IN RE JOHNSON: BK Court, ED Arkansas “J.P. Morgan was not qualified to use Non-judicial foreclosure process when it initiated against these Debtors”


In re DANIEL L. JOHNSON and SUSAN D. JOHNSON, Chapter 13 Debtors.
In re TAMMY R. PEEKS, Chapter 13 Debtor.
In re TRACY L. ESTES, Chapter 13 Debtor.

Case Nos. 3:10-bk-19119, 3:11-bk-10602, 3:10-bk-16541

 

 

United States Bankruptcy Court, E.D. Arkansas, Jonesboro Division. 
September 28, 2011.

MEMORANDUM OPINION AND ORDER OVERRULING OBJECTIONS TO CONFIRMATION

AUDREY R. EVANS, Bankruptcy Judge

In a consolidated hearing on July 14, 2011, the Court heard the Objection to Confirmation of Plan filed by Chase Home Finance, L.L.C. (“Chase”) in the case of Daniel and Susan Johnson, Case No. 3:10-bk-19119 (the “Johnson Objection to Confirmation”); the Objection to Confirmation of Plan filed by J.P. Morgan Chase Bank, N.A. (“J.P. Morgan”) in the case of Tammy Renae Peeks, Case No. 3:11-bk-10602 (the “Peeks Objection to Confirmation”); and the Objection to Confirmation of Plan filed by Chase in the case of Tracy L. Estes, Case No. 3:10-bk-16541 (the “Estes Objection to Confirmation”) (collectively the “Objections to Confirmation”). J.P. Morgan appeared through its counsel, Kimberly Burnette of Wilson & Associates, P.L.L.C.[1] The Debtors in all three cases were represented at the hearing by Joel Hargis of Crawley & DeLoache, P.L.L.C. Kathy A. Cruz of The Cruz Law Firm, P.L.L.C., also appeared as co-counsel for the Debtor, Tracy L. Estes. At the outset of the hearing, the parties agreed that the facts of the cases were not in dispute, and that the same underlying issue of law was present in each case. For that reason, the hearings were consolidated. The Court accepted evidence and heard the arguments of counsel.[2] At the close of the hearing, the Court took the matter under advisement.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(L). This Order shall constitute findings of fact and conclusions of law pursuant to Bankruptcy Rule of Procedure 7052. To the extent that any finding of fact is construed as a conclusion of law, it is adopted as such; to the extent that any conclusion of law is construed as a finding of fact, it is adopted as such. As explained herein, the Court overrules the Objections to Confirmation.

FACTS

The parties stipulated that at the time of the foreclosure proceedings at issue in these cases, neither Chase nor J.P. Morgan was “authorized to do business” in the state of Arkansas as required by § 18-50-117 of the Arkansas Statutory Foreclosure Act of 1987, Ark. Code Ann. §§ 18-50-101, et seq. (the “Statutory Foreclosure Act”). Additionally, the Court finds the following to be the facts of each case:

The Johnson Case

Chase initiated non-judicial foreclosure proceedings, through Arkansas’ Statutory Foreclosure Act, against a property owned by Daniel and Susan Johnson. On December 20, 2010, the Johnsons filed a Chapter 13 bankruptcy bringing that non-judicial foreclosure to a halt. In their bankruptcy case, the Johnsons filed a Chapter 13 plan listing Chase as a long-term secured creditor that was owed an arrearage of $7,485. On March 2, 2011, Chase filed the Johnson Objection to Confirmation claiming that the correct arrearage amount was $14,072.81. Chase filed a proof of claim in the case (the “Johnson Proof of Claim”) claiming a secured debt of $187,468.21, which included the $14,072.81 arrearage, and explained that $1,380 of the arrearage was for foreclosure fees and costs. On July 4, 2011, Chase transferred the Johnson Proof of Claim to J.P. Morgan.

The Peeks Case

J.P. Morgan initiated a non-judicial foreclosure proceeding, through Arkansas’ Statutory Foreclosure Act, against property owned by Tammy Renae Peeks. To initiate the foreclosure process, J.P. Morgan granted Wilson & Associates, P.L.L.C. (“Wilson & Associates”) a limited power of attorney authorizing Wilson & Associates to conduct the foreclosure.[3] On January 31, 2011, Ms. Peeks filed a Chapter 13 bankruptcy bringing the non-judicial foreclosure to a halt. On February 10, 2011, Ms. Peeks filed a proposed Chapter 13 plan that listed J.P. Morgan as a long-term secured creditor that was owed an arrearage of $7,500. On March 21, 2011, J.P. Morgan filed the Peeks Objection to Confirmation asserting that the correct arrearage amount was $10,089.19. J.P. Morgan filed a proof of claim in the Peeks case on July 13, 2011 (the “Peeks Proof of Claim”) claiming a secured debt of $133,172.09, which included an arrearage of $9,516.72, and explained that $2,400.02 of the arrearage was for foreclosure fees and costs.

The Estes Case

Chase initiated non-judicial foreclosure proceedings, through Arkansas’ Statutory Foreclosure Act, against a property owned by Tracy L. Estes. On September 8, 2010, Ms. Estes filed a voluntary petition for bankruptcy under Chapter 13, bringing that non-judicial foreclosure to a halt. On September 21, 2010, Ms. Estes filed a proposed Chapter 13 plan listing Chase as a long-term secured creditor that was owed an arrearage of $8,000. Chase filed the Estes Objection to Confirmation on October 20, 2010, asserting that the correct arrearage amount was $10,537.36. Chase filed a proof of claim in the Estes case on October 28, 2010 (the “Estes Proof of Claim”), claiming a secured debt of $37,041.96, which included an arrearage of $10,509.36, and explained that $2,706.56 of the arrearage was for to foreclosure fees and costs. On May 25, 2011, Chase filed an amended proof of claim adjusting the arrearage from $10,509.36 to $10,502.22. On July 14, 2011, Chase transferred the Estes Proof of Claim to J.P. Morgan.

DISCUSSION

The question before the Court is whether the Debtors owe J.P. Morgan the foreclosure fees and costs listed on its proofs of claims. The Bankruptcy Code allows a debtor in a Chapter 13 bankruptcy case to cure a default on a debt for its home mortgage through the plan. 11 U.S.C. §§ 1322(b)(3), (5). In order for that plan to be confirmed, a debtor must pay the default arrearage amount in full. The amount owed in order to cure a default is “determined in accordance with the underlying agreement and applicable nonbankruptcy law.” 11 U.S.C. § 1322(e). This determination poses two separate inquires: first, what fees and costs are allowed by the agreement between the parties, and second, what fees and costs are allowed by the applicable law. See In re Bumgarner, 225 B.R. 327, 328 (Bankr. D.S.C. 1998).

In these cases, there is no dispute that the foreclosure fees and costs are owed under the parties’ agreements because the instrument used to create each debt gives J.P. Morgan “the right to be paid back by me for all of its costs and expenses in enforcing this Note . . . .” The only question in each of these three cases is whether the foreclosure fees and costs are allowed by the controlling law. The controlling law is Arkansas’ Statutory Foreclosure Act (i.e., Arkansas’ non-judicial foreclosure procedure), and the issue is whether J.P. Morgan was qualified to use Arkansas’ non-judicial foreclosure procedure when it initiated the foreclosure proceedings against these Debtors.

The Debtors argue that J.P. Morgan was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and that J.P. Morgan was not in compliance with that requirement.

J.P. Morgan stipulated that it was not authorized to do business as is required Ark. Code Ann. § 18-50-117. Nonetheless, it maintains that it was qualified to use Arkansas’ non-judicial foreclosure process. J.P. Morgan makes three arguments in support of its position. First, J.P. Morgan argues that its compliance with § 18-50-102 of the Statutory Foreclosure Act enabled it to legitimately employ the non-judicial foreclosure process without being authorized to do business in the state as required by Ark. Code Ann. § 18-50-117. Second, J.P. Morgan argues that the authorized-to-do-business requirement is superseded by a conflicting provision in Arkansas’ Wingo Act, Ark. Code Ann. § 4-27-1501, and finally, that it is preempted by federal law through the provisions of the National Banking Act.

For the reasons discussed below, the Court finds that J.P. Morgan was not qualified to use the Arkansas non-judicial foreclosure process when it initiated the foreclosures against these Debtors. J.P. Morgan failed to comply with the authorized-to-do-business requirement of Ark. Code Ann. § 18-50-117, and nothing in Ark. Code Ann. § 18-50-102, the Wingo Act, or the National Banking Act allowed it to conduct those proceedings without meeting that requirement. Absent compliance with Ark. Code Ann. § 18-50-117, J.P. Morgan’s avenue for foreclosing on these properties was that of judicial foreclosure through the courts, not through Arkansas’ non-judicial foreclosure process. As a result, the foreclosure fees and costs incurred by Chase and J.P. Morgan are not owed by the Debtors, and need not be included in the Debtors’ repayment plans in order for those plans to be confirmed.

Finally, both parties request their attorney fees for pursuing or defending these matters. The Court finds that an award of attorney fees to the Debtors is warranted.

The Statutory Foreclosure Act

In 1987, the Arkansas legislature enacted the Statutory Foreclosure Act, which authorized the use of non-judicial foreclosure proceedings as an alternative to judicial foreclosure proceedings. Ark. Code Ann. §§ 18-50-101, et seq. See also Union Nat’l Bank v. Nichols, 305 Ark. 274, 278, 807 S.W.2d 36, 38 (1991) (“The procedure is designed to be effectuated without resorting to the state’s court system . . . .”). These statutory provisions must be strictly construed. See Robbins v. M.E.R.S., 2006 WL 3507464, at *1 (Ark. Ct. App. 2006) (“It is also true that the Arkansas Statutory Foreclosure Act, being in derogation of common law, must be strictly construed.”).[4]

The parties’ arguments are based on two provisions of the Statutory Foreclosure Act; Ark. Code Ann. § 18-50-117 and Ark. Code Ann. § 18-50-102. Each of these two provisions places a restriction on who can use Arkansas’ non-judicial foreclosure process. The first provision, Ark. Code Ann. § 18-50-117, requires a creditor to be authorized to do business in Arkansas before employing the state’s non-judicial foreclosure process. Ark. Code Ann. § 18-50-117 (“No person, firm, company, association, fiduciary, or partnership, either domestic or foreign shall avail themselves of the procedures under this chapter unless authorized to do business in this state.”) (emphasis added).[5] The second provision, Ark. Code Ann. § 18-50-102, limits who can be a party to a non-judicial foreclosure proceeding to three categories of persons or entities: (1) trustees or attorneys-in-fact, (2) financial institutions, and (3) Arkansas state agencies. See Ark. Code Ann. § 18-50-102.[6] Further, this provision requires that in order to qualify, a “trustee or attorney-in-fact” must be a licensed member of the Arkansas bar, or a law firm who employs a licensed member of the Arkansas bar. Ark. Code Ann. § 18-50-102(a)(1).

The Debtors argued that J.P. Morgan was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and J.P. Morgan stipulated that it was not in compliance with that provision. J.P. Morgan argued that it was not required to comply with Ark. Code Ann. § 18-50-117 because it authorized Wilson & Associates to conduct the foreclosures as its attorney-in-fact, pursuant to Ark. Code Ann. § 18-50-102(a)(1). This argument extends in two directions.[7]

Specifically, one extension of J.P. Morgan’s argument is that when the attorney-in-fact category of § 18-50-102 is used, the authorized-to-do-business requirement of § 18-50-117 does not apply. The Court finds no support for this argument. The language of Ark. Code Ann. § 18-50-117 is broad, specifically stating that it is applicable to every “person, firm, company, association, fiduciary, or partnership, either domestic or foreign . . . .” An emergency clause recorded in the sessions laws of Ark. Code Ann. § 18-50-117 explains the reason that the provision was enacted:

It is found and determined by the General Assembly of the State of Arkansas that foreign entities not authorized to do business in the State of Arkansas are availing themselves to [sic] the provisions of the Statutory Foreclosure Act of 1987; that often times it is to the detriment of Arkansas citizens; and that this act is immediately necessary because these entities should be authorized to do business in the State of Arkansas before being able to use the Statutory Foreclosure Act of 1987.

2003 Ark. Acts 1303, § 3, effective Apr. 14, 2003. The broad language of this provision, and the clear concerns set out in the legislative history, indicate that Ark. Code Ann. § 18-50-117 was meant to apply without regard to which category of person or entity is conducting the foreclosure under Ark. Code Ann. § 18-50-102.

Further, the Court finds nothing in the language of Ark. Code Ann. § 18-50-102 to indicate that it eliminates the need to comply with the authorized-to-do-business requirement of Ark. Code Ann. § 18-50-117, or that the attorney-in-fact party should be treated in any way different from the other categories of persons or entities allowed to conduct a non-judicial foreclosure proceeding. Further, the most recent enactment of Ark. Code Ann. § 18-50-102, now in effect, places several additional requirements on an attorney-in-fact before he can qualify as a party to a non-judicial foreclosure proceeding. In addition to the requirement that the attorney-in-fact be licensed in Arkansas (which was the law at the time of these foreclosure proceedings), an attorney-in-fact must now also have an office located in Arkansas, be accessible during business hours, and be able to accept funds as payment on the subject mortgage. See 2011 Ark. Acts 901, § 2, effective July 27, 2011. These recent additional restrictions to the attorney-in-fact qualification provide further evidence of the Arkansas legislature’s intent to limit access to the Statutory Foreclosure Act, not to further broaden access to that process as J.P. Morgan’s argument would necessarily require.

A second extension of J.P. Morgan’s argument is that, even if Ark. Code Ann. § 18-50-117 applies, J.P. Morgan satisfied the authorized-to-do-business requirement because its attorney-in-fact, Wilson & Associates, satisfied that requirement. This argument also fails. The procedures for appointing an attorney-in-fact to conduct the foreclosure are self-contained within the § 18-50-102 of the Statutory Foreclosure Act. This appointment is accomplished through the use of a power of attorney. Ark. Code Ann. § 18-50-102(e) (“The appointment of an attorney-in-fact by a mortgagee shall be made by a duly executed, acknowledged, and recorded power of attorney . . . .”). That power of attorney provides the attorney-in-fact only with those powers held by the appointing mortgagee. Ark. Code Ann. 18-50-102(d) (“A mortgagee may delegate his or her powers and duties under this chapter to an attorney-in-fact, whose acts shall be done in the name of and on behalf of the mortgagee.”) (emphasis added).

J.P. Morgan appointed Wilson & Associates as its attorney-in-fact through a limited power of attorney. Wilson & Associates did not initiate the foreclosure proceedings on its own behalf, but initiated those proceedings “in the name of and on behalf of” J.P. Morgan. It is J.P. Morgan’s compliance with the authorized-to-do-business requirement that is relevant, not that of Wilson & Associates. Thus, the Court finds that J.P. Morgan’s compliance with Ark. Code Ann. § 18-50-102 by electing to use an attorney-in-fact did not, by substitute, afford it compliance with the authorized-to-do-business requirement in Ark. Code Ann. § 18-50-117.

Therefore, J.P. Morgan has failed to show that its compliance with § 18-50-102 of the Statutory Foreclosure Act enabled it to legitimately employ the non-judicial foreclosure process without being authorized to do business in the state.

The Wingo Act

J.P. Morgan argues that a conflict between the Wingo Act (Ark. Code Ann. §§ 4-27-1501, et seq.), and the Statutory Foreclosure Act (Ark. Code Ann. §§ 18-50-101, et. seq.), allows J.P. Morgan to conduct non-judicial foreclosures without complying with the authorized-to-do-business requirement found in § 18-50-117 of the Statutory Foreclosure Act.

The Wingo Act is a sub-provision of the Arkansas Business Corporation Act, found at Ark. Code Ann. §§ 4-27-101, et seq. The Wingo Act states that “[a] foreign corporation may not transact business in this state until it obtains a certificate of authority from the Secretary of State.” Ark. Code Ann. § 4-27-1501(a). However, the Wingo Act also contains a non-exhaustive list of actions that do not constitute transacting business. Ark. Code Ann. § 4-27-1501(b). This list includes, among other things, the acts of “[m]aintaining, defending, or settling any proceeding[,]” and “[s]ecuring or collecting debts or enforcing mortgages and security interests in property securing the debts[.]” Ark. Code Ann. §§ 4-27-1501(b)(1), (8).

J.P. Morgan asserts that a conflict exists between the Wingo Act and the Statutory Foreclosure Act because the Wingo Act does not require a creditor to be authorized to do business in order to collect on its debt; the Statutory Foreclosure Act does. J.P. Morgan argues that the Wingo Act controls this conflict, and thus, the authorized-to-do-business requirement of the Statutory Foreclosure Act does not apply.

It is a well-settled principle of construction that where two statutes conflict, the more specific statutory provision controls. See Ozark Gas Pipeline Corp. v. Arkansas Public Service Comm’n, 342 Ark. 591, 602, 29 S.W.3d 730, 736 (2000) (“The rule is well settled that a general statute must yield when there is a specific statute involving the particular matter.”). The exclusions afforded in the Wingo Act address the broad category of “[s]ecuring or collecting debts or enforcing mortgages and security interests . . . .” Ark. Code Ann. § 18-27-1501(b)(8). The Statutory Foreclosure Act, on the other hand, deals with a specific type of collection activity — foreclosure — and an even more specific type of foreclosure — non-judicial foreclosure. Given the greater specificity of Ark. Code Ann. § 18-50-117, the Court finds that the Statutory Foreclosure Act provision carves out the specific statutory procedure of non-judicial foreclosure from the broad category of collecting debts, and as a result, controls any conflict between the two provisions.

Further, J.P. Morgan’s argument ignores the other provisions of the Wingo Act . The provision immediately following the exclusionary provision states that the consequence of transacting business without a certificate of authority is: (1) the foreign corporation is prohibited from maintaining a cause of action in the state courts, and (2) the foreign corporation must pay a monetary penalty. Ark. Code Ann. §§ 4-27-1502(a), (d)(1)(A).[8] As such, the exclusions allowed by § 4-27-1501(b) of the Wingo Act enable a foreign corporation to conduct some activities (including collection activities) without being subject to the consequences found in § 4-27-1502. In other words, under the Wingo Act, a foreign corporation can bring a cause of action in the Arkansas courts in furtherance of its collection activities, without a certificate of authority and without being subject to monetary penalty. This, however, is the full effect of the Wingo Act’s exclusionary provision. While it is true that J.P. Morgan was not required to obtain a certificate of authority in order to collect on its debts in Arkansas under the Wingo Act, it was required to do so if it wanted to employ Arkansas’ non-judicial foreclosure process. J.P. Morgan’s extension of the Wingo Act exclusions to the Statutory Foreclosure Act is far too broad.

Finally, during the hearing, J.P. Morgan argued that Omni Holding and Development Corp. v. C.A.G. Investments, Inc., 370 Ark. 220, 258 S.W.3d 374 (2007), establishes authority for its position. In Omni, a creditor filed a lawsuit against Omni seeking a judgment on its promissory note and claiming that Omni had committed an unlawful detainer of its property. In response, Omni claimed the creditor lacked standing because it did not have a certificate of authority. The Arkansas Supreme Court held that the creditor did not need a certificate of authority because its actions fell within the Wingo Act exclusion for collection activities. See Omni Holding and Development Corp., 370 Ark. at 226. Consistent with the Court’s determination above, the holding in Omni only stands for the proposition that a creditor can file a lawsuit in furtherance of collection activities without a certificate of authority. Id. (“Thus, C.A.G. was not `transacting business’ in Arkansas and its failure to obtain a certificate of authority did not prevent C.A.G. from filing suit in the state.“) (emphasis added). Under the Wingo Act exclusions, J.P. Morgan was allowed to foreclose on these properties through a judicial foreclosure action in the state court, but it was prohibited from using the state’s non-judicial foreclosure process. Omni does not support J.P. Morgan’s argument.

Therefore, the Court finds that no conflict exists between the Wingo Act and the Statutory Foreclosure Act, and to the extent that any conflict is present the more precise provision of the Statutory Foreclosure Act controls.

The National Banking Act

Finally, J.P. Morgan maintains that federal legislation preempts the requirement in Arkansas’ Statutory Foreclosure Act that a bank be authorized to do business in Arkansas before it employs the state’s non-judicial foreclosure process.

The federal law presented as having preemptive authority in this case is the National Banking Act (“NBA”). A brief review of the text, history, and purpose of the NBA is essential to the task of analyzing its preemptive effect. In 1864, Congress placed into law an act that established a national banking system. An Act to Provide a National Currency Secured by a Pledge of United States Bonds, and to Provide for the Circulation and Redemption Thereof, ch. 106, 13 Stat. 99 (1864) (codified as amended at 12 U.S.C. §§ 1 et seq.). Today, that system of laws remains largely intact, and has been renamed the National Banking Act. 12 U.S.C. § 38. See also Watters v. Wachovia Bank, N.A., 550 U.S. 1, 10-11, 127 S.Ct. 1559, 1566, 167 L.Ed.2d 389 (2007). The purpose of the national banking act is to prevent the “[d]iverse and duplicative superintendence of national banks” by the differing laws of the individual states. Watters, 550 U.S. at 13-14. See also Easton v. State of Iowa, 188 U.S. 220, 229, 23 S.Ct. 288, 290, 47 L.Ed. 452 (1903) (describing the goal of the NBA as “the erection of a system extending throughout the country, and independent, so far as powers conferred are concerned, of state legislation which, if permitted to be applicable, might impose limitations and restrictions as various and as numerous as the states.”).

Preemption occurs under Article VI of the Constitution, the Supremacy Clause, which provides that the laws of the United States “shall be the supreme Law of the Land; . . . any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.” U.S. Const. art. VI, cl. 2. A determination of whether a state law is preempted by federal law “start[s] with the assumption that the historic police powers of the States were not to be superseded by the Federal Act unless that was the clear and manifest purpose of Congress.” Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230, 67 S.Ct. 1146, 1152, 91 L.Ed. 1447 (1947). A determination as to the congressional purpose of a law is the “ultimate touchstone” of any preemption analysis. Retail Clerks v. Schermerhorn, 375 U.S. 96, 103, 84 S.Ct. 219, 222, 11 L.Ed.2d 179 (1963); Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 30, 116 S.Ct. 1103, 1107 (1996) (“This question is basically one of congressional intent. Did Congress, in enacting the Federal Statute, intend to exercise its constitutionally delegated authority to set aside the laws of a State? If so, the Supremacy Clause requires courts to follow federal, not state, law.”).

Congressional intent to preempt a state law is typically derived from the language, structure, or purpose of the federal statute. See Jones v. Rath Packing Co., 430 U.S. 519, 525, 97 S.Ct. 1305, 51 L.Ed.2d 604 (1977). Accordingly, preemption is classified into three different categories: express preemption, field preemption, and conflict preemption. See Pacific Gas & Elec. Co. v. State Energy Resources Conservation and Dev. Comm’n, 461 U.S. 190, 203-04, 103 S.Ct. 1713, 1721-22, 75 L.Ed.2d 752 (1983). See also Altria Group, Inc. v. Good, 555 U.S. 70, 76, 129 S.Ct. 538, 543, 172 L.Ed.2d 398 (2008).

Express preemption exists where Congress’s intent to preempt the state law is clearly stated in the language of the federal statute. See Pacific Gas & Elec. Co., 461 U.S. at 203. However, more often than not, Congress does not make such an explicit manifestation of its intent. See Watters v. Wachovia Bank, N.A., 550 U.S. 1, 33, 127 S.Ct. 1559, 1579, 167 L.Ed.2d 389 (2007) (Stevens, J., dissenting). In the absence of such an explicit expression, the courts must determine whether the statutory provision implies a preemptive intent by evaluating the structure and purpose of the statute. See Barnett Bank of Marion County, N.A., v. Nelson, 517 U.S. 25, 32, 116 S.Ct. 1103, 1108, 134 L.Ed.2d 237 (1996). These implied forms of preemption are referred to as field preemption and conflict preemption, respectively. Id. Field preemption exists if the structure of the statute represents a “scheme of federal regulation . . . so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.” Rice v. Santa Fe Elevator Corp., 331 U.S. at 230. Alternatively, conflict preemption exists where the purpose of the federal law conflicts with the state law. See Maryland v. Louisiana, 451 U.S. 725, 746, 101 S.Ct. 2114, 2128-29, 68 L.Ed.2d 576 (1981) (“It is basic to this constitutional command that all conflicting state provisions be without effect.”). Conflict preemption arises under two different scenarios. The first scenario, referred to as physical impossibility preemption, is when it is physically impossible to comply with both the federal law and the state law at the same time. See Pacific Gas & Elec. Co., 461 U.S. at 204; In re Bate, 2011 WL 2473493, at *2-4 (Bankr. M.D. Fla. June 22, 2011). The second scenario, referred to as obstacle preemption, is when the “state law stands as an obstacle to achieving the objectives of Congress.” Id.

In these cases, there is no real question that express preemption does not apply. There is no specific provision in the NBA clearly stating a congressional intent to preempt state laws regarding non-judicial foreclosure, or moreover, state laws requiring a person or entity to be authorized to do business in the state before employing the non-judicial foreclosure process. Thus, the NBA does not expressly preempt the authorized-to-do-business requirement of the Statutory Foreclosure Act.

Field preemption is also inapplicable. The Supreme Court has specifically identified the activities of the “acquisition and transfer of property,” and the “right to collect their debts,” as areas where banks are generally subject to state law. Watters, 550 U.S. at 11; McClellan, 164 U.S. at 357. Additionally, regulations promulgated by the Office of the Comptroller of Currency (the “OCC”) save certain areas of state law from general preemption by the NBA.[9] See Monroe Retail, Inc. v. RBS Citizens, N.A., 589 F.3d 274, 282 (6th Cir. 2009). Those regulations state that state laws on the subjects of the “rights to collect debts[,]” and the “[a]cquisition and transfer of property[,]” are not inconsistent with the national bank’s real estate lending powers, provided those state laws only “incidentally affect” the bank’s exercise of its powers. 12 C.F.R. §§ 34.4, 7.4007(c), 7.4008(e). The collection of debts and transfers of property are the specific types of activities dealt with by the state law in question, the Statutory Foreclosure Act. Thus, the Court is not persuaded that the NBA’s occupation of these areas is “so pervasive as to make reasonable the inference that Congress left no room for the States to supplement it.” As a result, field preemption does not apply.

As previously mentioned, conflict preemption is found in two different forms: physical impossibility preemption and obstacle preemption. The first of these types, physical impossibility preemption, is not present in this case. It is not “physically impossible” for J.P. Morgan to comply with the requirements of both the NBA and the authorized-to-do-business requirement of the Statutory Foreclosure Act. Such a scenario might exist if, for example, a provision of the NBA prohibited national banks from being certified to transact business within a state. It might then be physically impossible for J.P. Morgan to comply with both the NBA’s requirement and the authorized-to-do-business requirement of the Statutory Foreclosure Act. However, no such provision is found in the NBA, and as a result, physical impossibility preemption does not apply.

The remaining determination is whether obstacle preemption applies. This determination turns on whether the authorized-to-do-business requirement of the Statutory Foreclosure Act “stands as an obstacle to achieving the objectives of Congress.” Pacific Gas & Elec. Co., 461 U.S. at 204. A state law stands as an obstacle to a federal law when it significantly interferes with the objectives of that federal law. Barnett, 517 U.S. at 33; Watters, 550 U.S. at 12. As previously stated, Congress’s objective in creating the NBA was to prevent the”[d]iverse and duplicative superintendence of national banks” by the differing laws of the individual states. In order to accomplish that objective, the NBA vests national banks with certain enumerated powers. 12 U.S.C. § 24.[10] Those enumerated provisions provide national banks with “all such incidental powers as shall be necessary to carry on the business of banking . . . .” 12 U.S.C. § 24 (Seventh). Additionally, Congress has given national banks the authority to “make, arrange, purchase or sell loans or extensions of credit secured by liens on interest in real estate . . . .” 12 U.S.C. § 371. See also Watters, 550 U.S. at 18 (stating that mortgage lending is one aspect of the “business of banking”).

The question is whether the burden of the requirement that a bank be authorized to do business in Arkansas before using the non-judicial foreclosure process significantly impairs the bank’s ability to conduct its business of banking, which includes its rights to hold and enforce mortgage liens. The Court finds that it does not. Obviously, the Statutory Foreclosure Act requirement places some measure of burden on a national bank holding a mortgage on property in Arkansas if it wants to foreclose on that property through the state’s non-judicial foreclosure process. However, a bank’s failure (or refusal) to comply with the Statutory Foreclosure Act requirement leaves the bank with the option of foreclosing on a property through the state’s judicial process. On that point, the Statutory Foreclosure Act specifically states that “[t]he procedures set forth in this chapter for the foreclosure of a mortgage or deed of trust shall not impair or otherwise affect the right to bring a judicial action to foreclose a mortgage or deed of trust.” Ark. Code Ann. § 18-50-116(a). While this alternative method of collection (judicial foreclosure) may not be as efficient as the non-judicial foreclosure process, the Court finds that it does not significantly impair the bank’s ability to collect on its debt.[11]

Moreover, the process of judicial foreclosure is available in all states, while only approximately 60 percent of the states allow non-judicial foreclosures. See Grant S. Nelson, Reforming Foreclosure: The Uniform Nonjudicial Foreclosure Act, 53 Duke L.J. 1399, 1403 (2004).[12] J.P. Morgan’s contention that the provisions of the NBA are significantly impaired by the authorized-to-do-business requirement is undermined by the fact that only slightly more than half of the states authorize such a procedure at all. The Court finds that the powers conferred to J.P. Morgan under the NBA are not significantly impaired by the Statutory Foreclosure Act’s requirement that J.P. Morgan be authorized to do business in Arkansas, and as a result, conflict preemption does not apply.

For the foregoing reasons, the Court finds that the Statutory Foreclosure Act’s requirement that a person or entity be authorized to do business in the state is not preempted by the NBA. As a result, the Court finds that J.P. Morgan was not in compliance with the Statutory Foreclosure Act, and that the Debtors do not owe, nor must they pay, J.P. Morgan for any fees and costs incurred through the non-judicial foreclosure proceedings conducted against these Debtors.

Attorney Fees

Both parties have asked for an award of attorney fees. As a general rule, known as the “American rule,” the parties to litigation must pay their own attorney fees. In re Hunter, 203 B.R. 150, 151 (Bankr. W.D. Ark. 1996). However, certain exceptions to this rule exist, one of which is found in Ark. Code Ann. § 16-22-308, which states,

In any civil action to recover on an open account, statement of account, account stated, promissory note, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, or for labor or services, or breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney’s fee to be assessed by the court and collected as costs.

Ark. Code Ann. § 16-22-308. Under Arkansas law, an award of prevailing party attorney fees under this statute are permissive and discretionary. In re Cameron, No. 4:10-bk-14987, 2011 WL 1979503, at *6 (Bankr. E.D. Ark. May 17, 2011).

This action was brought by the Debtors to determine whether they owed the foreclosure fees and costs incurred by J.P. Morgan in conducting non-judicial foreclosure proceedings on its promissory notes. The Debtors are the prevailing party in these matters, and as such, the Court awards the Debtors a reasonable amount for their attorney fees. Counsel for the Debtors shall submit a separate application for those fees to the Court, as further ordered below.

CONCLUSION

For the foregoing reasons, the Court concludes that J.P. Morgan was not in compliance with the authorized-to-do-business requirement of the Statutory Foreclosure Act when it conducted the foreclosures against these Debtors. Additionally, the Court has determined that J.P. Morgan’s failure to comply with Ark. Code Ann. § 18-50-117 was not cured by empowering an attorney-in-fact under Ark. Code Ann. § 18-50-102, was not superceded by the Wingo Act, and was not preempted by the National Banking Act. As a result, the foreclosure fees and costs incurred by Chase and J.P. Morgan are not owed by the Debtors, and need not be included in the Debtors’ repayment plans in order for those plans to be confirmed.

Further, the Court has determined that the Debtors should be awarded their attorney fees incurred in pursuing these actions.

Therefore, it is hereby

ORDERED that the Objections to Confirmation are OVERRULED; it is further,

ORDERED that the Defendant shall pay the reasonable attorney fees incurred by the Debtors in pursuing these actions. The Court will determine the amount of this award on further application by Debtors’ Counsel, which shall include an itemization of the attorney fees incurred in these actions. This application must be filed with the Court within 14 days of the entry of this Order, and shall be served on Counsel for J.P. Morgan. J.P. Morgan shall have 14 days from the date that fee application is filed with the Court in which to file a response, should it wish to do so.

IT IS SO ORDERED.

[1] Although the objections to confirmation were filed by two separate creditors, J.P. Morgan and Chase, as of the date of the hearing all of the claims at issue in this matter had been transferred to J.P. Morgan.

[2] The Court also takes judicial notice of all filings and records in these cases, including the proofs of claim. See Fed. R. Evid. 201; In re Henderson, 197 B.R. 147, 156 (Bankr. N.D. Ala. 1996) (“The court may take judicial notice of its own orders and of records in a case before the court, and of documents filed in another court.”) (citations omitted); see also In re Penny, 243 B.R. 720, 723 n.2 (Bankr. W.D. Ark. 2000).

[3] J.P. Morgan only presented the limited power of attorney filed in the property records for the Peeks case, but J.P. Morgan’s counsel represented to the Court that a similar limited power of attorney was granted and recorded in the property records for each of the three cases.

[4] The Court notes that counsel for the Debtors argued that a determination that the statute had been violated would make any sale under the Statutory Foreclosure Act void ab initio. No property sales actually resulted from the foreclosure proceedings in these cases. The sole dispute in these cases is whether the foreclosure fees and costs incurred through use of Arkansas’ non-judicial foreclosure process are owed.

[5] The Court notes that no explanation is provided by the statute regarding what action is required in order to be authorized to do business under Ark. Code Ann. § 18-50-117. Following a review of other provisions within the Arkansas Code, it appears that this requirement generally demands that a party obtain a certificate of authority from the secretary of state. See Ark. Code Ann. § 23-48-1003 (“A certificate of authority authorizes the out-of-state bank to which it is issued to transact business in the state . . . .”); Ark. Code Ann. § 4-27-1501 (“A foreign corporation may not transact business in this state until it obtains a certificate of authority from the Secretary of State.”). However, no such determination is necessary in these cases because J.P. Morgan stipulated that it was not so authorized.

[6] J.P. Morgan did not argue that it met the requirements of the Statutory Foreclosure Act because it was a “financial institution.” Nonetheless, the Court notes that even if J.P. Morgan qualified as a financial institution under Ark. Code Ann. § 102, it would still be required to comply with the fundamental statutory requirement of Ark. Code Ann. § 18-50-117 for the same reasons discussed herein with regard to its use of an attorney-in-fact.

[7] J.P. Morgan did not provide the Court with the analytical extensions needed to support its argument. As a result, the Court has analyzed all possible extensions of that argument, which include (1) that because J.P. Morgan authorized an attorney-in-fact to conduct the foreclosure, Ark. Code Ann. § 18-50-117 did not apply, or (2) that because J.P. Morgan authorized Wilson & Associates to conduct the foreclosure it satisfied the requirement of Ark. Code Ann. § 18-50-117.

[8] Ark. Code Ann. § 04-27-1502 is titled the “[c]onsequences of transacting business without authority,” and states that:

(a) A foreign corporation transacting business in this state without a certificate of authority may not maintain a proceeding in any court in this state until it obtains a certificate of authority.

. . .

(d)(1)(A) A foreign corporation that transacts business in this state without a certificate of authority shall pay a civil penalty to the state for each year and partial year during which it transacts business in this state without a certificate of authority.

Ark. Code Ann. § 4-27-1502.

[9] In many cases, the OCC regulatory interpretations are entitled to substantial deference, commonly known as Chevron deference. Investment Co. Institute v. Camp, 401 U.S. 617, 626-27, 91 S.Ct. 1091, 28 L.Ed.2d 367 (1971) (“It is settled that courts should give great weight to any reasonable construction of a regulatory statute adopted by the agency charged with the enforcement of that statute.”).

[10] J.P. Morgan did not direct the Court to any specific provision of the NBA to support its argument that the authorized-to-do-business requirement creates an obstacle to achieving Congress’s objectives. Nonetheless, the Court’s review of the NBA has identified several powers granted to national banks that extend to such an argument.

[11] The Court also notes that all a national bank must do in order to meet the requirements of Ark. Code Ann. § 18-50-117 is become authorized to do business in the state.

[12] A list of the types of foreclosure allowed by each state is available at http://www.realty trac.com/foreclosure-laws/foreclosure-laws-comparisons.asp (last visited Sept. 12, 2011).

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IN RE MONK | Oregon BK Court “Proof Of Claim, Failure to Respond, LSI Title, Litton, U.S. Bank, PCFS”

IN RE MONK | Oregon BK Court “Proof Of Claim, Failure to Respond, LSI Title, Litton, U.S. Bank, PCFS”


UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF OREGON

IN RE
LESTER G. MONK, and
MARY L. MONK,
Debtors.
___________________
LESTER G. MONK, and
MARY L. MONK,
Plaintiffs

v.

LSI TITLE COMPANY OF OREGON, LLC,
LITTON LOAN SERVICING, LP,
U.S. NATIONAL BANK ASSOC., as Trustee
under a pooling and servicing agreement dated as of
March 1, 2002,
MORGAN STANLEY DEAN WITTER CAPITAL
I INC. TRUST 2002-NCI, and
DOES 1 through 10,
Defendants.

EXCERPTS:

DISCUSSION

A. Litton’s Motion to Dismiss
Defendant Litton has filed a motion to dismiss on the following grounds:
1) Plaintiffs do not have a private right of action under the discharge injunction and no violation of the
discharge injunction occurred under the facts of this case.
2) Plaintiffs’ Chapter 13 Plan did not affect the lien of the Defendants, which rode through bankruptcy
unaffected unaffected by the order disallowing the claim of PCFS, Litton’s predecessor in interest.
3) Plaintiffs entered into a novation of the loan after the discharge order was entered in the Chapter 13 case.
4) The bankruptcy court lacks post-confirmation subject matter jurisdiction over the claims set forth in the
Complaint.
5) Plaintiffs have failed to state a claim for rescission based on the foregoing and the fact that they failed to
plead that they could repay moneys owed to the Defendants in order to completely unwind the transaction.
6) The claim for violation of the FDCPA should be dismissed based on the foregoing and because: a)
Defendants are not “debt collectors” within the meaning of the FDCPA; b) the FDCPA claim is based on
alleged conduct outside the statute of limitations; and c) no FDCPA claim lies for alleged violations of the
discharge injunction.

[…]

Litton also seeks dismissal of the Claim on the basis that under the facts alleged, no violation of the
discharge injunction occurred. To determine whether this is so, some analysis of the actions which occurred
in the case must be made. First, the Trustee filed an objection to the secured claim of PCFS because it had
not provided the information the Trustee had been seeking to verify the secured status and perfection of the
claim. Proper notice was made to PCFS of the objection and order and the fact that it was required to
respond within 32 days or its claim would be “disallowed in full.” When PCFS failed to respond, its claim
was “disallowed.” Litton argues in its second ground for dismissal that PCFS’s lien was unaffected by the
disallowance of its claim and “rode through” bankruptcy unscathed. It is true that a lien will survive
bankruptcy despite the failure of the holder to file a proof of claim for the related claim. See Hamlett v.
Amsouth Bank (In re Hamlett), 322 F.3d 342 (4th Cir. 2003). Here, however, a proof of claim was filed, and
subsequently disallowed on the Trustee’s objection.

Section 506(d)4 provides as follows:

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) [unmatured support obligation] or
502(e) [certain claims for reimbursement or contribution] 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 claim under section 501 of this title.

Because PCFS’s claim was “disallowed,” it was not an “allowed secured claim,” and the related lien
was void pursuant to § 506(d). Defendant’s claim was not of the type described in § 506(d)(1), and its claim
was disallowed for reasons other than its failure to file a proof of claim. Thus, when the discharge order was
entered in Debtors’ case, Defendant held a “disallowed” claim and a void lien.
Section 1328 provides in part:

(a) As soon as practicable after completion by the debtor of all payments under the
plan, unless the court approves a written waiver of discharge executed by the debtor after the
order for relief under this chapter, the court shall grant the debtor a discharge of all debts
provided for by the plan or disallowed under section 502 of this title, except any debts —
(1) provided for under section 1322(b)(5) of this title.
****

Defendant argues that Debtors did not file an amended Plan after disallowance of its claim and that
the Plan continued to provide for ongoing payments to Defendant on the long-term debt pursuant to ¶ 4, and
that the Plaintiffs did, in fact, continue to make the ongoing payments to PCFS even after the claim was
disallowed. If follows, argues Defendant, that the debt was not discharged under the exception at §
1328(a)(1).

Defendant’s argument fails for the following reason: The debt was disallowed under section 502 and, as provided by § 1328(a), it was discharged. A “debt” is defined at §101(12) as “liability on a claim.” A “claim” is defined as a “right to payment . . . .” §101(5)(A). Once the claim was disallowed, PCFS no longer had a right to payment and thus no longer had a “claim” or a “debt.” As it no longer possessed a “debt,” it follows that it did not have a “debt[] provided for under section 1322(b)(5),” and cannot use § 1328(a)(1) to except its nonexistent debt from discharge.

[…]

[ipaper docId=62063472 access_key=key-134gz14erxuyifc9odk0 height=600 width=600 /]

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Posted in STOP FORECLOSURE FRAUDComments (1)

IN RE DeSHETLER | OH BK Court GRANTS THE UNITED STATES TRUSTEE’S MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE EXAMINATION OF AND REQUIRING THE PRODUCTION OF DOCUMENTS BY WELLS FARGO HOME MORTGAGE

IN RE DeSHETLER | OH BK Court GRANTS THE UNITED STATES TRUSTEE’S MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE EXAMINATION OF AND REQUIRING THE PRODUCTION OF DOCUMENTS BY WELLS FARGO HOME MORTGAGE


In re: THOMAS L. DeSHETLER, CHERYL A. DeSHETLER, Chapter 13, Debtors.

Case No. 10-36557.

United States Bankruptcy Court, S.D. Ohio, Western Division, Dayton.

July 12, 2011.

Scott A. King, Jennifer L. Maffett, 2000 Courthouse Plaza, N.E., Dayton, Ohio, Counsel for Wells Fargo Bank, N.A.

Pamela Arndt, Office of the United States Trustee, Columbus, Ohio, Counsel for the United States Trustee.

DECISION GRANTING IN PART AND DENYING IN PART THE UNITED STATES TRUSTEE’S MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE EXAMINATION OF AND REQUIRING THE PRODUCTION OF DOCUMENTS BY WELLS FARGO HOME MORTGAGE

GUY R. HUMPHREY, Bankruptcy Judge.

I. Introduction

This contested matter is before the court on the motion filed by the United States trustee[1] seeking an order authorizing him to conduct an examination of Wells Fargo Home Mortgage, one of the nation’s largest residential mortgage lenders, pursuant to Federal Rules of Bankruptcy Procedure 2004 and 9016. Wells Fargo objects to this request.

As a backdrop to understanding this contested matter, the UST’s motion seeking to conduct a 2004 examination comes in the wake of the mortgage crisis that has gripped this nation for the last several years, highlighted by an unprecedented number of foreclosures and litigation in the bankruptcy courts concerning issues of standing and documentation.[2] The volume of foreclosure proceedings has caused strain on mortgage servicers’ ability to process the large volume of delinquent loans encountered in the last several years. Compounding the challenges arising out of the sheer volume of the foreclosure filings is that most of these loans are syndicated, having been originated at a local level, bundled with other mortgage loans, and then sold to private investors, resulting in at least one and usually multiple transfers of the loan.[3] Thus, the state and federal courts, particularly the bankruptcy courts, have been engulfed by the “perfect storm” arising out of the mass syndication of mortgage loans and the ensuing financial crisis.

The UST’s motion raises several issues. The threshold issue is whether the UST has the authority to conduct an examination and to compel the production of documents pursuant to Federal Rule of Bankruptcy Procedure 2004. If the UST possesses such authority, two additional issues must be addressed: 1) whether the UST has demonstrated “good cause” under Rule 2004 for this request; and 2) whether the scope of the requested examination is appropriate.

For the reasons to be discussed, the court finds that the UST has the authority to conduct an examination under Rule 2004, including the ability to compel the production of documents. The court further finds that the UST has established good cause. However, the court limits the scope of the examination to the documents related to Wells Fargo’s claim that it is the holder, or other person entitled to enforce, the promissory note that is the subject of this inquiry. Any oral examination, as limited by this decision, shall only proceed in the event that the UST determines that Wells Fargo has not produced sufficient documentation to establish that it is entitled to enforce the note and when that occurred.

II. Factual and Procedural Background

Thomas L. DeShetler and Cheryl A. DeShetler (the “Debtors”) filed a joint chapter 13 petition on October 11, 2010 (doc. 1). Wells Fargo Home Mortgage filed a proof of claim (claim 9-1) on November 19, 2010 on behalf of Well Fargo Bank, N.A.[4] Attached to Wells Fargo’s proof of claim are copies of a mortgage granted to Washington Mutual Bank, FA (the “Mortgage”) and a promissory note payable to Washington Mutual Bank, FA endorsed in blank (the “Note”). On December 8, 2010 the court entered an order confirming the Debtors’ plan (doc. 21).

The UST filed a motion seeking to conduct a 2004 examination on December 8, 2010 (doc. 19) (the “2004 Motion”); on January 7, 2011 Wells Fargo filed an objection to the 2004 Motion (doc. 27) on February 22, 2011 the UST filed a reply (doc. 37) and on March 15, 2011 Wells Fargo filed a supplemental brief (Doc. 43) and a Request for Hearing (doc. 44), which the court granted (doc. 45). The court heard oral argument on April 13, 2011.

III. Positions of the Parties

The UST argues that he may conduct a 2004 examination because Wells Fargo’s proof of claim fails to attach documentation that Wells Fargo had standing to file its claim. In particular, the UST asserts that the Mortgage and Note attached to the proof of claim reference only Washington Mutual Bank, FA and that it is unknown whether the Note and Mortgage were ever properly assigned to Wells Fargo. To assist in determining the validity of Wells Fargo’s claim, the UST requests that Wells Fargo produce the “transactional mortgage loan history on the Debtors’ mortgage loan, along with payments for escrow advances made by Wells Fargo.” 2004 Motion, Exhibit A. The UST also requests that Wells Fargo provide evidence of the chain of assignment of the Mortgage and endorsement of the Note. Finally, the UST seeks to examine a representative of Wells Fargo regarding those documents.

In response, Wells Fargo asserts that the statutory powers granted to the UST do not include the authority to investigate and determine validity of claims based on state law rights and unilaterally increase the documentation necessary to file a valid proof of claim under Federal Rule of Bankruptcy Procedure (“BR”) 3001.[5] Wells Fargo further argues that, assuming that the UST has the statutory powers to conduct a 2004 examination, the UST lacks good cause to request a 2004 examination because the proof of claim establishes that Wells Fargo holds the Note since a copy is attached to its proof of claim and because, under Ohio law, security follows the debt, it need not provide a copy of the assignment of the Mortgage. Finally, Wells Fargo challenges the UST’s request for a “complete loan history” as unnecessary. If the court allows the 2004 examination, Wells Fargo concludes that the scope of the document requests must be narrowed and any examination conducted at the place of employment of the individual representative who is examined.

IV. Legal Analysis

A. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 05-02 of the United States District Court for the Southern District of Ohio, which is the general order of reference referring all bankruptcy proceedings and matters to this bankruptcy court. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O).

B. The Role of the United States Trustee’s Program

Because Wells Fargo challenges the UST’s authority to conduct 2004 examinations, an examination of the role of the UST, including the relevant statutes, is in order.

The UST was created by the Bankruptcy Reform Act of 1978 (the “1978 Act”) as a pilot effort in select federal judicial districts of the United States to remedy the perceived institutional bias arising out of bankruptcy judges’ handling of both the judicial and administrative aspects of the bankruptcy system. H.R. Rep. No. 595, 95th Cong., 1st Sess. 100, reprinted in 1978 U.S.C.C.A.N. 5963, 6061. Under the program, the UST was appointed to take over the administrative functions previously assumed by bankruptcy judges. Id.

To implement the newly created program, the 1978 Act added a new chapter to Title 28 of the United States Code, chapter 39, which addresses, among other things, the appointment, role, and salaries of United States trustees. See 28 U.S.C. §§ 581-586(a). Section 586 sets forth a list of the duties of the UST and defines the United States Attorney General’s supervision to be exercised over these trustees. 28 U.S.C. § 586; In re Countrywide Home Loans, Inc., 384 B.R. 373, 380 (Bankr. W.D. Pa. 2008). It provides in relevant part that:

(a) Each United States trustee, within the region for which such United States trustee is appointed, shall—

(3) supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever the United States trustee considers it to be appropriate—

[…]

(C) monitoring plans filed under chapters 12 and 13 of title 11 and filing with the court, in connection with hearings under sections 1224, 1229, 1324, and 1329 of such title, comments with respect to such plans;

[…]

(F) notifying the appropriate United States attorney of matters which relate to the occurrence of any action which may constitute a crime under the laws of the United States and, on the request of the United States attorney, assisting the United States attorney in carrying out prosecutions based on such action;

(G) monitoring the progress of cases under title 11 and taking such actions as the United States trustee deems to be appropriate to prevent undue delay in such progress…

28 U.S.C. § 586(a). The legislative history explains:

The Trustee in each case will be responsible for the administration of the case. The bill gives him adequate powers to accomplish what must be done, and relieves him of the necessity for applying to the court and receiving court approval for every action he proposes to take. The bill introduces the concept that the trustee may take any action necessary to the administration of the case if he notifies those parties in interest to whom notice would be appropriate under the particular circumstances . . . and provide an opportunity for a party in interest to object.

H.R. Rep. No. 595, 95th Cong., 1st Sess. 107-108, reprinted in 1978 U.S.C.C.A.N. 5963, 6069. Based on the pilot program’s success, Congress expanded the program and made it permanent through the enactment of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 (the “1986 Act”), P.L. 99-554. See also U.S. Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys. Inc.), 33 F.3d 294, 296 (3rd Cir. 1994).

As part of the 1986 Act, Congress added a new provision to the Code — 11 U.S.C. § 307. That section provides that “[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title but may not file a plan pursuant to section 1121(c) of this title” (emphasis added). The House Report explains:

The U.S. Trustee is given standing to raise, appear, and be heard on any issue in any case or proceeding under Title 11, U.S. Code-except that the U.S. Trustee may not file a plan in a Chapter 11 case. In this manner, the U.S. Trustee is given the same right to be heard as a party in interest, but retains the discretion to decide when a matter of concern to the proper administration of the bankruptcy laws should be raised.

H.R. Rep. No. 764, 99th Cong., 2d Sess. 27, reprinted in 1986 U.S.C.C.A.N. 5227, 5240.

Wells Fargo advocates a view that restricts the powers granted to the UST to those specifically enumerated in § 586 and posits that § 307 is merely an enabling provision granting the UST the standing necessary to perform his duties under § 586. The UST argues that, pursuant to his congressionally mandated role as a “watchdog” of the bankruptcy system, § 586 and § 307 confer upon him broad authority to seek and conduct 2004 examinations.

C. Rule 2004 Examinations

The UST seeks to conduct an examination of Wells Fargo pursuant to BR 2004. It provides in pertinent part as follows:

(a) Examination on motion. On motion of any party in interest, the court may order the examination of any entity.

(b) Scope of examination. The examination of an entity under this rule or of the debtor under § 343 of the Code may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge. In . . . an individual’s debt adjustment case under chapter 13 . . ., the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.

(c) Compelling attendance and production of documents. The attendance of an entity for examination and for the production of documents, whether the examination is to be conducted within or without the district in which the case is pending, may be compelled as provided in Rule 9016 for the attendance of a witness at a hearing or trial. As an officer of the court, an attorney may issue and sign a subpoena on behalf of the court for the district in which the examination is to be held if the attorney is admitted to practice in that court or in the court in which the case is pending.

* * * *

(e) Mileage. An entity other than a debtor shall not be required to attend as a witness unless lawful mileage and witness fee for one day’s attendance shall be first tendered . . . .

BR 2004.

The purpose of 2004 is to provide a tool to parties to a bankruptcy, particularly trustees, to obtain information concerning “the acts, conduct, or property” of the debtor, “the liabilities and financial condition of the debtor,” “any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge,” and in a Chapter 11, 12, or 13 case, “the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.” SeeIn re GHR Energy Corp., 35 B.R. 534, 536-38 (Bankr. Mass. 1983). See also In re Express One Int’l, Inc., 217 B.R. 215, 216 (Bankr. E.D. Tex. 1998) (The general purpose of a BR 2004 examination is to review the estate’s condition for the benefit of the rights of creditors.). BR 2004(b);

Bankruptcy courts have broad discretion in determining whether to order a 2004 examination. Bank One, Columbus NA v. Hammond (In re Hammond), 140 B.R. 197, 201 (S.D. Ohio 1992); In re Drexel Burnham Lambert Group, Inc., 123 B.R. 702, 708-09 (Bankr. S.D.N.Y. 1991); and In re Fearn, 96 B.R. 135 (Bankr. S.D. Ohio 1989). As Judge Cole noted, a 2004 examination’s scope is very broad:

It is well-established that the scope of a Rule 2004 examination is very broad and great latitude of inquiry is ordinarily permitted. The scope of examination permitted pursuant to Rule 2004 is wider than that allowed under Federal Rules of Civil Procedure and can legitimately be in the nature of a “fishing expedition”. Although the primary purpose of a Rule 2004 examination is to permit a party in interest to quickly ascertain the extent and location of the estate’s assets, such examination is not limited to the debtor or his agents, but may properly extend to creditors and third parties who have had dealings with the debtor.

Id. at 137-38 (citations omitted). However, Judge Cole also noted that, while broad, the scope of Rule 2004 examinations is not “limitless.” Id. at 138. “The examination should not be so broad as to be more disruptive and costly to the party sought to be examined than beneficial to the party seeking discovery.” Id. Moreover, an examination cannot be used for purposes of abuse or harassment. Fearn, 96 B.R. at 138; In re Mittco, Inc., 44 B.R. 35, 36 (Bankr. E.D. Wisc. 1984).

The use of a 2004 examination is not permitted for matters not related to the financial condition of a debtor or a debtor’s estate. Upon a creditor objection, the examiner must establish “good cause,” taking into consideration the totality of the circumstances, including the importance of the information to the examiner and the costs and burdens on the creditor. See Countrywide Home Loans, 384 B.R. at 393. The level of good cause required to be established varies depending on the potential intrusiveness. Id., citing Fearn, 96 B.R. at 138. See also Official Cmte. Of Unsecured Creditors v. Eagle-Pitcher Indus., Inc. (In re Eagle-Pitcher Indus., Inc.), 169 B.R. 130, 134 (Bankr. S.D. Ohio 1994)Hammond, 140 B.R. at 201 (similar). (examination should not be so broad as to be more disruptive and costly to the party to be examined than beneficial to the party seeking discovery);

D. The UST Has Authority to Monitor the Bankruptcy Claims Process

Wells Fargo argues that the UST lacks the authority under § 586 to investigate the proof of claim that it filed and, therefore, no basis exists for the UST to conduct a 2004 examination. Wells Fargo argues that § 586 sets forth the specific and limited tasks which the UST may undertake and that § 307 merely provides the UST with standing to take actions related to those specific tasks. Wells Fargo asserts that investigation of proofs of claim is not one of those specific tasks.

28 U.S.C. § 586(a)(3) grants the UST broad authority to “supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever the United States trustee considers it to be appropriate . . . [.]” This authority includes “monitoring the progress of cases under title 11 and taking such actions as the United States trustee deems to be appropriate to prevent undue delay in such progress[.]” 28 U.S.C. § 586(a)(3)(G). As such, the UST is charged by statute with the duty to oversee and supervise the administration of bankruptcy cases. 28 U.S.C. § 586(a). Congress has summarized the role of the UST as protector of the public interest with the responsibility to ensure that bankruptcy cases are conducted in accordance with the law. Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990), citing H. Rep. No. 595 at 109, reprinted in 1978 U.S.C.C.A.N. at 6070; United Artists Theatre Co. v. Walton, 315 F.3d 217, 225 (3rd Cir. 2003); U.S. Trustee v. Clark (In re Clark), 927 F.2d 793, 795 (4th Cir. 1990); In re Plaza de Diego Shopping Center, 911 F.2d 820, 824 (1st Cir. 1990); Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 162 (2nd Cir. 2010).

Further, Congress has expressly given the UST standing under § 307 to raise and be heard on any issue under title 11, except that the UST may not file a chapter 11 plan. 11 U.S.C. § 307; Revco, 898 F.2d at 500; United States Trustee v. Price Waterhouse, 19 F.3d 138, 141 (3rd Cir. 1994); U.S. Trustee v. FIshback (In re Glados, Inc.), 83 F.3d 1360, 1361, n.1 (11th Cir. 1996); In re Donovan Corp., 215 F.3d 929, 930 (9th Cir. 2000); Clark, 927 F.2d at 796; Plaza de Diego Shopping Center, 911 F.2d at 824.[6] Because of his role as representative of the public interest, the UST is not required to demonstrate any concrete pecuniary injury to exercise his standing under § 307 of the Code. Revco, 898 F.2d at 500. For example, the Sixth Circuit has held that a United States trustee had standing to appeal a bankruptcy court decision not to appoint an examiner under 1104(b)(2) because the public interest is a sufficient stake to confer standing upon the UST.[7] Id.

Wells Fargo’s argument that § 586 circumscribes the UST’s authority under § 307 contradicts the express language of § 307. Section 307 specifically provides that “[t]he United States trustee may raise and appear and be heard on any issue in any case or proceeding under this title . . . .” 11 U.S.C. § 307 (emphasis added). In enacting § 307, Congress did not limit the issues which the United States trustees may raise to those specifically enumerated in § 586. Rather, Congress used very broad, all-inclusive language to authorize the United States trustees to raise any issue in any case or proceeding. In Countrywide, after an extensive review of the history of the UST, including the legislative history behind §§ 586 and 307, case law interpreting the powers granted to the United States trustees under those provisions, and a thorough application of traditional canons of statutory interpretation, the court concluded that:

Section 307 is written in extremely broad language. Indeed it is difficult to conceive of how section 307 could have been written in any broader language. The court has thus no difficulty concluding that the plain meaning of the power to “raise” and to “appear and be heard” as to any issue in any bankruptcy case or proceeding includes the ability to conduct examinations pursuant to Rule 2004 in the right circumstances.

Countrywide, 384 B.R. at 384. The court adopts the thorough analysis performed by the Countrywide court in concluding that the UST’s authority is not limited to the specific tasks expressly mentioned in § 586 and that the UST may conduct the requested 2004 examination in this case.

The claims process, including the filing and allowance of claims, constitutes a significant part of the bankruptcy process. Sections 501 through 511 of the Code directly address the claims process in bankruptcy cases. Other Code provisions cover varying issues relating to the determination, allowance, and treatment of claims.[8] In addition to these Code provisions, Rules 3001 through 3014 address the claims process and claims issues in bankruptcy cases. Additional Rules cover the diverse issues relating to the determination, allowance, and treatment of claims.[9] Section 586 is broad enough to allow the UST to monitor the claims process, including through the investigation of proofs of claim filed by creditors, to assist in his duty of monitoring the progress of cases. Issues, with proofs of claims filed by mortgage lenders, affect the administration of cases. Accordingly, monitoring the claims process falls well within the UST’s duty to monitor the progress of bankruptcy cases.

Other courts have recognized the UST’s ability to monitor the claims process in bankruptcy cases and under the broad standing accorded by § 307, to object to proofs of claim. In re Borrows, 2011 WL 721842 (Bankr. W.D. Wash. Feb. 22, 2011). In Borrows, the United States trustee filed an objection to a mortgage lender’s proof of claim. The lender, rather than responding to the substance of the objection, challenged the United States trustee’s standing to object to claims. Id. at *1. The court determined that § 307 provided standing to the United States trustee to object to a proof of claim. In so deciding, it found that § 586(3)(G) provided “specific authority for the UST to bring an objection to claim under the circumstances of this case.” Id. at *2.[10]

Similarly, in Countrywide, the court concluded that the UST had sufficient interest to conduct a 2004 examination in connection with the UST’s challenge to Countrywide’s manner of calculating proofs of claim because “she has been charged to act as a watchdog to protect the integrity of the bankruptcy system.” Countrywide, 384 B.R. at 391, citingRevco, 898 F.2d at 500 and Eagle-Pitcher Holdings, 2005 WL 4030131, at *4 (Bankr. S.D. Ohio Aug. 26, 2005). The UST filed notices of 2004 examinations to obtain information from Countrywide in various bankruptcy cases alleging that the lender had engaged in questionable actions when filing proofs of claims. The UST sought to examine a corporate representative of Countrywide regarding “[its] bankruptcy procedures as they related to the Debtors’ financial affairs, the administration of their estate and the impact of Countrywide’s bankruptcy procedures on the integrity of the bankruptcy process in the Western District of Pennsylvania.” Countrywide, 384 B.R. at 400. The subpoena part of the request asked Countrywide to produce a variety of documents. The court rejected many of the same arguments made by Wells Fargo in this case in finding that the UST had the authority to conduct 2004 examinations relating to claims filed by Countrywide.

In addition, In re Wilson is instructive because it dealt with the UST’s on-going investigation into mortgage lenders’ filings in bankruptcy cases. 413 B.R. 330 (Bankr. E.D. La. 2009). In that case, the UST did not move for a 2004 examination but merely issued subpoenas to the mortgage lender. The court, finding “no reason to differ from the vast majority of courts on this issue” specifically adopted the reasoning in Countrywide, and allowed the UST to propound discovery on a mortgage lender in connection with allegations of improper filings by the lender pursuant to 11 U.S.C. §307 and § 105(a). Id. at 335-36. Noting that even though the UST had not sought discovery pursuant to 2004, “the preferable method for the UST to obtain the information it seeks from the [m]ovants,” the court concluded that its decision would have been the same. Id. at 336.

Perhaps most apposite to this case is the decision in In re Michalski, 449 B.R. 273 (Bankr. N.D. Ohio 2011). Wells Fargo filed a motion to quash a subpoena issued by the UST and requesting the court to reconsider an order granting a 2004 examination. The UST sought to examine records and documentation pertaining to the proof of claim which Wells Fargo filed in the debtors’ Chapter 13 case. While limiting the scope of the examination and documents to be produced, the court otherwise enforced the subpoena and denied the request to reconsider the granting of the 2004 examination. The court relied in large part on the rationale provided by Countrywide and Wilson and held that the UST had the authority “under Sections 307 and/or 586” to conduct the 2004 examination and to subpoena the documents underlying Wells Fargo’s proof of claim. Id. at 280.

Finally, another bankruptcy court rejected similar arguments made by BAC Home Loans Servicing, adopting the rationale of Countrywide, Wilson, and Michalski. The court stated: “The UST is charged to serve as a watchdog to protect the integrity of the bankruptcy system. That status compels the conclusion that Congress intended the UST to have the tools, including the ability to conduct Rule 2004 examinations and issue subpoenas, to carry out that duty. Without such authority, the UST’s role as a watchdog would be circumscribed and toothless.” In re Youk-See, ___ B.R. ___, 2011 WL 2458106, at *9 (Bankr. D. Mass. June 16, 2011).

The cases upon which Wells Fargo relies to argue that the UST’s authority under § 586 is very narrow do not alter this court’s conclusions. First, Wells Fargo cites In re Washington Mfg. Co., but that decision addressed the issue of whether a UST could intervene in an adversary proceeding under BR 7014, not the power of the UST to move for a 2004 examination. Citicorp North Amer., Inc. v. Finley (In re Washington Mfg. Co.) 123 B.R. 272, 275-76 (Bankr. M.D. Tenn. 1991). Of even greater significance, Washington Mfg. was decided prior to the Sixth Circuit’s decision in Revco.[11]

Accordingly, the court concludes that the UST may be involved in the claims process by virtue of his duty to monitor the progress of bankruptcy cases in his role as the “public watchdog” of the system.

E. A 2004 Examination is a Tool Which the UST May Use in Exercising His Authority to Monitor the Progress of Bankruptcy Cases, Including the Claims Process

As noted, the UST has the authority under § 586 to monitor the progress of bankruptcy cases and to investigate conduct to determine if a crime has been conducted. Through § 307 Congress made the UST a party in interest to all bankruptcy cases and authorized the UST to appear in any case or proceeding and to raise any issue in any case or proceeding. The 2004 examination is a tool which Congress has given to parties in interest in bankruptcy cases to investigate matters relating to debtors’ financial condition, including to determine whether to proceed with litigation. A 2004 examination may be used by the UST to investigate proofs of claim filed in bankruptcy cases provided that the examination is otherwise appropriate under Rule 2004. Accordingly, the court will now address whether the UST’s requests in this case meet the requirements of Rule 2004.

F. The Requirements and Limits of Rule 2004 Examinations Applied to the UST’s Request

1. Standing: The UST Has Standing To Pursue a Rule 2004 Examination

For the reasons discussed, the UST has standing pursuant to 28 U.S.C. § 586 and § 307 to pursue a 2004 examination.

2. Good Cause: The UST Has Established Good Cause for Conducting a 2004 Examination

Wells Fargo argues that the UST does not have the necessary good cause to conduct a 2004 examination. Wells Fargo explains that “[a] UST is not vested with the power to independently investigate and determine the validity of claims based on state law rights and, in the process, unilaterally increase the required documentation necessary for the filing of a valid proof of claim under Fed. R. Bankr. 3001.” doc. 27, p. 3. Wells Fargo further argues that “the documents attached to the Wells Fargo claim already establish its standing.” doc. 27, p. 8. The court disagrees.[12]

Essentially, Wells Fargo’s argument is premised upon an erroneous conclusion — that attaching a copy of a promissory note asserted to be the Note executed by the Debtors conclusively establishes that it is the holder of the Note and, therefore, is entitled to enforce the rights under the Note and Mortgage. See Objection, pp. 8-11. The court does not disagree with, and the UST has conceded, the propositions that under Ohio law the holder of a promissory note may enforce the note and that the rights under a mortgage are incidental to the rights under the promissory note which it secures.[13] However, Wells Fargo’s argument that attachment of a copy of a promissory note to a proof of claim conclusively establishes Wells Fargo’s standing to file the proof of claim is not well taken.

A properly filed proof of claim is only prima facie evidence of the validity of a claim, and the UST is entitled to verify that eligibility by requiring that original documents or other evidence of the claimant’s entitlement to file and enforce the claim be produced. 11 U.S.C. § 502(a). Wells Fargo’s argument that the UST’s request amounts to an attempt to rewrite the rules governing the documentation of proofs of claim misses the point. In seeking to verify Wells Fargo’s standing to file a proof of claim, the UST is seeking to ensure that Wells Fargo complies with the Code and the Rules and to verify that Wells Fargo is a creditor entitled to file a proof of claim under § 501 of the Code. While the UST has not yet challenged the validly of Wells Fargo’s claim by objecting to it, he is entitled to make preliminary inquiries before determining if an objection is warranted. That inquiry is exactly the purpose of a 2004 examination. As noted, the UST seeks production of the Note based on the fact that the copy of the Note affixed to Wells Fargo’s proof of claim, which Note is endorsed in blank, fails to show Wells Fargo as the holder of the Note. Wells Fargo’s ability to provide a copy of the Note does not necessarily equate to it being in possession of the original Note, much less being in its possession at the time it filed its proof of claim. Under these circumstances, the UST may seek to verify Wells Fargo’s entitlement to file the proof of claim, including review of the original Note or such other appropriate documentation to convince the UST that Wells Fargo is in possession of the original Note or otherwise was entitled to file the proof of claim.[14] In this regard, the court notes that the Debtors’ case is an open Chapter 13 case continuing to be administered by the Chapter 13 Trustee and an objection to the claim could still be made. After conducting its 2004 examination, the UST can decide if it is appropriate to object to Wells Fargo’s proof of claim or to take other appropriate action.

Under the standards described, the UST has established good cause to conduct a 2004 examination. The Debtors’ case is open and being administered. The UST has questioned the status of Wells Fargo as the legitimate holder of the Note and Mortgage attached to Wells Fargo’s proof of claim based on the fact that neither of those documents shows Wells Fargo as the holder. Because the Note was endorsed in blank, the UST seeks production of the original Note by Wells Fargo to evidence Wells Fargo’s possession of that Note. As the recognized “watchdog” of the bankruptcy system, charged with the duties to protect its integrity and to ensure that bankruptcy cases are conducted in accordance with the law, the UST is a party in interest entitled to seek to verify the standing of claimants and their entitlement to payment. Those matters relate to the Debtors’ liabilities and financial condition and may affect the administration of their estate and the dividend paid to unsecured creditors in particular. See BR 2004(b).

Wells Fargo also suggests that a 2004 examination is inappropriate because no objection to Wells Fargo’s proof of claim has been filed, but a contested matter is not required. See Hammond, 140 B.R. at 204 (A 2004 examination is appropriate to determine whether a potential plaintiff has grounds under 11 U.S.C. § 523(d) and BR 9011 for filing an action); In re Johnson, 2007 Bankr. LEXIS 3022 (Bankr. S.D. Ohio July 23, 2007) (2004 examination is normally a pre-litigation device); In re Michalski, 449 B.R. at 281 (“[A] Rule 2004 examination is frequently used as a pre-litigation tool . . . .”); Collier on Bankruptcy, ¶ 2004.01[1]. See also In re Robinson, 2011 Bankr. LEXIS 1667 (Bankr. W.D. Tenn. April 6, 2011) (United States trustee has standing to examine the representative of the holder of an allowed secured claim when no objection has been filed with respect to the claim by the Chapter 13 Trustee or anyone else.).

Having decided that good cause exists for the UST to conduct a 2004 examination, the last issue is whether the scope of the UST’s request is appropriate.

3. The Scope of the Examination

The UST seeks to examine a Wells Fargo representative at the UST’s office in Columbus, Ohio and requests that Wells Fargo produce the following documents:

1. The actual, contemporaneously-kept transactional mortgage loan history on the Debtors’ mortgage loan, along with payments for escrow advances made by Wells Fargo Home Mortgage.

2. Evidence of the chain of assignment of the mortgage and chain of endorsement of the note which would tend to support claimant’s right to make the within claim in Debtor’s bankruptcy case.

Motion, Exhibit A, p. 9.

Wells Fargo argues that the scope of the production of documents is too broad. It explains that it should not have to produce a complete loan history as it is irrelevant to Wells Fargo’s standing to file its proof of claim, the only basis asserted by the UST for his request. In that same vein, Wells Fargo adds that an in-person examination is superfluous as the standing issue can be addressed through the production of documents.

Rule 2004(c) provides with respect to examinations that:

Compelling attendance and production of documents. The attendance of an entity for examination and for the production of documents, whether the examination is to be conducted within or without the district in which the case is pending, may be compelled as provided in Rule 9016 for the attendance of a witness at a hearing or trial. As an officer of the court, an attorney may issue and sign a subpoena on behalf of the court for the district in which the examination is to be held if the attorney is admitted to practice in that court or in the court in which the case is pending.

BR 2004(c).

In Countrywide, the court linked the good cause requirement with the scope of the examination. The court was legitimately concerned with the potential for abuse that could occur if parties were given essentially carte blanche to conduct broad, unlimited investigations resulting in unwarranted expensive burdens on private parties. The court stated:

Countrywide points out that a finding of an unchecked power in the UST to pursue examinations of creditors under Rule 2004 could lead to full-scale “investigations” by the UST that would unfairly intrude into the private business affairs of creditors and chill their participation in the bankruptcy process. That is a legitimate concern which the Court takes seriously. While the UST was undoubtedly intended to be a “watchdog” of the bankruptcy system, that cannot and should not be viewed as providing a license for the UST to engage in potentially invasive and expensive Rule 2004 discovery based on nothing more than her own curiosity. Such a license would be inimical to bedrock principles underlying the relationship between the federal government and the people (intended in the broad sense, including corporations such as Countrywide.)

Countrywide, 384 B.R. at 392 [footnote omitted]. In order to guard against over-reaching intrusions and examinations, the court applied a sliding scale approach to determine whether the United States trustee had sufficient cause to justify the scope of the examination she sought to conduct. The court continued:

The question of whether the UST has shown sufficient good cause to pursue a Rule 2004 examination and the type of discovery implicitly allowed by the Rule in a given matter is not suited to application of a mechanical test. Rather, a totality of circumstances approach is required, taking into account all relevant factors. Consistent with this approach it is appropriate to apply the “good cause” standard in what may be termed a “sliding scale” manner or balancing test. That is to say, the level of good cause required to be established by the UST before she can obtain certain documents or pursue a certain line of inquiry in a Rule 2004 examination involving a creditor will vary depending on the potential intrusiveness involved.

Id. at 393. While such factors may bear on whether good cause exists for a 2004 examination, these considerations are even more useful in determining the appropriate scope of the examination once a party establishes standing and good cause. The more compelling the cause, the greater latitude the court will allow for the 2004 examination.

In this case the UST’s cause for the examination is narrow — determining whether Wells Fargo was legally entitled to file the proof of claim. Accordingly, the scope of any examination granted should likewise be narrowly focused. In order to verify Wells Fargo’s entitlement to file a proof of claim in this case, the UST is entitled to review the original Note and any such documents that establish Wells Fargo is the holder of the Note under the Ohio Uniform Commercial Code and when Wells Fargo came into possession of the original Note. To the extent that the “contemporaneously-kept transactional mortgage loan history on the Debtors’ mortgage loan” is intended by the UST to capture documents in Wells Fargo’s possession relating to the transfer of the Note or interests in the Note from one entity to another until Wells Fargo became the holder of the Note, the request is granted and Wells Fargo shall produce such documents to the UST.[15] In addition, the request for documents pertaining to “the chain of assignment of the mortgage and chain of endorsement of the note which would tend to support claimant’s right to make the within claim in Debtor’s bankruptcy case” is granted as those documents are clearly relevant to the UST’s inquiry into Wells Fargo’s legal basis and standing for filing the proof of claim. However, to the extent that the UST is seeking a loan history relating to the payments made by the Debtors, charges made by the lender on the account, and other debits and credits relating to the loan evidenced by the Note and Mortgage, or any documents other than the original Note and other documents pertaining to the chain of ownership interests in the Note, the UST’s request is denied. The UST is not challenging the amount of the claim filed by Wells Fargo or any other issue other than the legal basis for its filing the proof of claim and, therefore, any other such documents would unnecessarily burden Wells Fargo. Any production of documentations authorized in this decision shall occur within forty-five (45) days after entry of the court’s order on this decision unless otherwise agreed by the parties.

After the documents are produced by Wells Fargo, if the UST determines that the documents produced do not establish Wells Fargo as the person entitled to enforce the Note under Ohio law and that it had that status at the time the proof of claim was filed, then at the request of the UST, Wells Fargo shall appear for an oral examination through an appropriate representative designated by Wells Fargo to be examined concerning how Wells Fargo became the holder of the Note. Any such examination shall take place at the office of the UST nearest to the principal place of business of the representative designated by Wells Fargo to be orally examined or at such other location or manner as the parties may agree.[16] To the extent such oral examination is not conducted by consent of the parties, the UST shall comply with the requirements of Rule 2004(c) and (d).

V. Conclusion

For the foregoing reasons, the court grants in part and denies in part the UST’s Motion for Entry of an Order Authorizing the Examination of and Production of Documents by Wells Fargo Home Mortgage Pursuant to Fed. R. Bankr. P. 2004 and 9016 (doc. 27). The court finds that the UST has the authority to investigate the proof of claim filed by Wells Fargo and has standing to conduct a 2004 examination for that purpose and that the UST has demonstrated good cause to conduct a 2004 examination. However, the examination shall be limited as provided by this decision, with an oral examination to occur only in the event that the documentary production is insufficient to establish Wells Fargo’s standing to file the proof of claim. In the event that the UST determines that an oral examination is necessary, the oral examination shall be conducted in accordance with BR 2004(c) and (d) and this decision, unless otherwise agreed upon by the parties.

The court is concurrently entering an order consistent with this decision.

IT IS SO ORDERED.

[1] “United States trustee” includes a designee of the United States Trustee. 11 U.S.C. § 102(9). For simplicity, the court will use the abbreviation “UST” whether referring to the movant, Daniel M. McDermott, United States Trustee for Region 9, his designee, or the United States Trustee program generally.

[2] See e.g., Harker v. Wells Fargo Bank, NA (In re Krause), 414 B.R. 243, 268, n.22 (Bankr. S.D. Ohio 2009); In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008); Nosek v. Ameriquest Mortgage Co. (In re Nosek), 386 B.R. 374 (Bankr. D. Mass 2008), aff’d in part, vacated in part 406 B.R. 434 (D. Mass. 2009), aff’d as modified 609 F.3d 6 (1st Cir. 2010); In re Foreclosure Cases, 521 F. Supp. 2d 650 (N.D. Ohio 2007).

[3] See In re Saffold, 373 B.R. 39, 42 (Bankr. N.D. Ohio 2007); Chris Markus, Ron Taylor & Blake Vogt, From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

[4] The proof of claim describes the creditor as Wells Fargo Bank, NA and the name to which notices and payments should be sent as Wells Fargo Home Mortgage. The United States Trustee, in his motion, used Wells Fargo Home Mortgage while the creditor used Wells Fargo Bank, NA in its filings. The court will simply refer to Wells Fargo Bank, N.A. and Wells Fargo Home Mortgage collectively as “Wells Fargo.”

[5] Unless otherwise noted, all references to rules of court shall be to the Federal Rules of Bankruptcy Procedure (“BR”).

[6] Some courts have discussed whether § 307 enlarges or further defines the authority granted to the UST § 586. See e.g., In re Parsley, 384 B.R. 138, 147 (Bankr. S.D. Tex. 2008) (it is well within the authority of the UST to investigate the activities of a loan servicer and its local and national counsel); In re South Beach Securities, Inc., 606 F.3d 366, 371 (7th Cir 2010) (finding, among other things, that section 307 gives the United States UST the power to object to a chapter 11 plan of reorganization in his role as guardian of the public interest in bankruptcy proceedings); In re LWD Inc., 342 B.R. 514, 519 (Bankr. W.D. Ky. 2006) (the UST is not limited to the duties set out in § 586); and Zarnel, 619 F.3d at 161-62. Wells Fargo’s argument relies in large part on this debate, wanting this court to conclude that § 586 limits the authority of the UST, while § 307 is merely a standing provision giving the UST authority to act in bankruptcy cases in those areas expressly mentioned in § 586. While the interaction between § 586 and § 307 and the reach of these statutes continues to be debated, this court only finds that under § 586 and § 307 the UST has sufficient authority to conduct a 2004 examination under these circumstances. Even if § 586 circumscribes § 307, the court finds that the UST has sufficient authority under § 586 to monitor the progress of cases, including the claims process, and that includes the ability to object to claims and to conduct 2004 examinations. See In re Borrows, 2011 WL 721842 at *2 (Bankr. W.D. Wash. Feb. 22, 2011) (“Without deciding whether Section 586 is all inclusive as to the permissible activities of the UST in bankruptcy cases, the Court concludes that subsection (a)(3)(G) of Section 586 provides specific authority for the UST to bring an objection to [a] claim under the circumstances of this case.”).

[7] The United States Supreme Court has long recognized that the pecuniary interest test may not be the only test to confer standing and that noneconomic tests may also confer standing as long as the “interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question.” Ass’n of Data Processing Servs. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970).

[8] See e.g., § 523 (concerning dischargeability of debts); § 524 (c) & (d) (concerning reaffirmation agreements); § 552 (concerning the post-petition effect of prepetition security interests); § 553 (concerning setoffs against claims); § 1111 (deeming proofs of claim or interest in Chapter 11 cases filed for claims or interests scheduled other than as disputed, contingent, or unliquidated and allowing for the “1111(b)” election for secured creditors); and §§ 1122, 1222(a)(3), and 1322(a)(3) (concerning classification and treatment of claims and interests in Chapter 11, 12, and 13 plans).

[9] See e.g., BR 1007 (concerning the filing of the schedules and other documents at the inception of the case); 2016 (professional compensation and reimbursement of expenses); 3021 (distribution to claims under a plan); 4007 (outlining the procedure for determinations of the dischargeability of debts); and 4008 (outlining the reaffirmation process).

[10] Although the obligation to challenge the validity of filed proofs of claim generally falls upon debtors or standing trustees, the overarching duty of the UST is to ensure the proper management of debtors’ debts provides them with the requisite standing to review proofs of claims. See In re Wassenaar, 268 B.R. 477, 479 (W.D. Va. 2001). Wells Fargo argues that the UST cannot interject himself into state law issues as to the validity of proofs of claim. However, in Wassenaar, the court rejected this notion, stating: “[t]he question in this case is whether creditors’ attorney’s fees should be charged as an administrative expense to the bankruptcy estate. While this issue focuses on the state-law question of awarding attorney’s fees, the federal bankruptcy issue remains. The United States Trustee’s interest is plain: to ensure the proper management of Kurt Wassenaar’s debts. The Bankruptcy Court, therefore, properly allowed the Trustee to participate in this case.” Id. at 479. See also Borrows, 2011 WL 721842, at *3 (rejecting BAC Home Loans Servicing, L.P.’s argument that granting the UST authority to investigate proofs of claim “impermissibly encroaches on the province of the Chapter 13 trustee to object to proofs of claim.”).

[11] Wells Fargo also cites to In re Gold Standard Baking, Inc., 179 B.R. 98 (Bankr. N.D. Ill. 1995) and In re Howard Ins. Agency, Inc., 109 B.R. 445, 446 (Bankr. N.D. Okla. 1989). Both cases are distinguishable in that the former dealt with a UST’s attempt to impose a new requirement on Chapter 11 debtors-in-possession to imprint their checks with the phrase “Debtor in Possession” and the latter with the power of the UST to promulgate administrative regulations.

[12] Another court rejected essentially this same argument made by Wells Fargo in In re Michalski, 449 B.R. 273 (Bankr. N.D. Ohio 2011) (“Wells Fargo mistakenly construes the Rule 2004 examination as an attempt by the UST to `unilaterally increase the requirements for filing a valid proof of claim.'” Id. at 280 (internal citations omitted). Noting that determination of proofs of claim in bankruptcy cases frequently requires analysis of state law, the court found that “[t]his argument totally misses the mark” and that the UST could conduct a Rule 2004 examination to obtain information from Wells Fargo concerning the proof of claim it filed in that case. Id.

[13] Under Ohio law, security follows the note and therefore whoever holds the note also holds any security securing such note. See Noland v. Wells Fargo Bank, N.A. (In re Williams), 395 B.R. 33, 47 (Bankr. S.D. Ohio 2008), citing Gemini Services, Inc. v. Mortgage Electronic Registration Systems, Inc. (In re Gemini Services, Inc.), 350 B.R. 74, 82 (Bankr. S.D. Ohio 2006).

[14] The most common, but not exclusive way to establish being the “person entitled to enforce” a negotiable instrument, under the Ohio U.C.C., is to be the holder, such as a typical promissory note. See Ohio Revised Code § 1303.31 (Person entitled to enforce an instrument). If a promissory note is endorsed in blank, possession of the original note, endorsed in blank, establishes the right to enforce it as the holder and, therefore, standing to file a proof of claim. Densmore v. Litton Loan Servicing, L.P. (In re Densmore), ___ B.R. ___, 2011 WL 1181359 (Bankr. D. Ct. March 21, 2011).

[15] It appears that there may be some confusion as to what the UST meant with respect to “transactional loan history.” Wells Fargo appears to construe this request as a request for a “complete loan history,” or in other words, the history of payments made by the Debtors and charges made by the lender relating to the loan account and perhaps this construction of that request is understandable given the ending phrase of that request — “along with payments for escrow advances made by Wells Fargo Home Mortgage.” See doc. 27, pp. 8 & 11.

[16] The UST has suggested the possibility of videoconferencing.

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Conn. Senator Richard Blumenthal announces an investigation on abusive bank and servicer practices

Conn. Senator Richard Blumenthal announces an investigation on abusive bank and servicer practices


Blumenthal Announces Measures to Aid Homeowners, Crack Down on Abusive Practices by Mortgage Services

Monday, July 11, 2011

(Hartford, CT) –Senator Richard Blumenthal today joined with mortgage foreclosure advocates and Bristol resident Janet Driscoll to announce an investigation into the troubling practices of mortgage servicers.

“The rate of foreclosure and families that struggle with their mortgage payments is one of the single largest barriers to economic recovery that we still see today. Homeowners deserve a fair-shake and my office is committed to assisting homeowners, like Janet, who have experienced first-hand the demoralizing effects of impending foreclosure at the hands of poor mortgage servicing practices,” said Blumenthal. “This investigation will ask the tough questions to bring about real changes to this broken system so that people can no longer be given the run-around when trying to stay in their homes.”

The investigation that will be conducted through the Senate Judiciary Committee will ask top mortgage servicers to examine the policies and procedures in place at top mortgage servicers that affect mortgage foreclosures, as well as practices and policies at those institutions related to filing proofs of claim in the bankruptcy courts.

I believe today that it’s because of the Senator’s office that my family still has their home,” said Janet Driscoll, a Bristol homeowner who Blumenthal’s office recently helped avoid foreclosure.

During his first 7 months in office, Blumenthal has been an aggressive supporter of a number of legislative measures that seek to address the foreclosure crisis. This past June, he joined with other lawmakers in writing to the Office of the Comptroller of the Currency, urging them to work with State Attorneys General and other federal agencies while they look into lapses in the foreclosure procedure.

Senator Blumenthal is working with many of his Senate colleagues to level the playing field for those struggling in these tough economic times. He is pursuing a number of measures that will alleviate some of the pressure on home owners and restrict the abusive practices of banks and servicers:

###

Press Contact

Kate Hansen (202) 224-2823 or Lily Adams (860) 258-6942

Kate_Hansen@blumenthal.senate.gov ; Lily_Adams@blumenthal.senate.gov

source: http://blumenthal.senate.gov

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IN RE FONTES | Arizona Bankr. Court Appellate Panel Slams Standing “MERS Assignment, HSBC Affidavit”

IN RE FONTES | Arizona Bankr. Court Appellate Panel Slams Standing “MERS Assignment, HSBC Affidavit”


In re: CARLOS RAMON FONTES and EVA MARIE FONTES, Debtors.
CARLOS RAMON FONTES; EVA MARIE FONTES, Appellants,
v.
HSBC BANK, USA, NA; DIANNE CRANDELL KERNS, Chapter 13 Trustee, Appellees.

BAP No. AZ-10-1345-JUMKPa, Bk. No. 08-13133.

United States Bankruptcy Appellate Panel, Ninth Circuit.

.

Argued and Submitted on February 17, 2011 at Phoenix, Arizona. April 22, 2011.

Ronald Ryan, Esq. argued for Appellants Carlos and Eva Fontes Steven D. Jerome, Esq. of Snell & Wilmer LLP argued for Appellee HSBC Bank USA, NA Craig Morris, Esq. argued for Appellee Dianne Crandell Kerns.

Before: JURY, MARKELL, and PAPPAS, Bankruptcy Judges.

EXCERPT:

A. HSBC’s Theories

HSBC argues that we should affirm the court’s decision on the ground that debtors’ statements in their schedules and confirmed plan regarding ASC were judicial admissions[9] that HSBC had standing to bring the motion for relief from stay because ASC was HSBC’s loan servicer. HSBC further argues that the doctrine of judicial estoppel[10] should bar debtors from challenging HSBC’s standing because debtors acknowledged their debt to ASC, HSBC’s loan servicer, in their schedules and plan. Thus, HSBC maintains that debtors should not be able to take an inconsistent position in the context of the relief from stay proceeding. Finally, HSBC contends that despite these grounds for affirming the bankruptcy court’s ruling, it independently met its burden of proof that it had a colorable claim to debtors’ property.[11]

Although we may affirm the bankruptcy court’s decision on any ground fairly supported by the record, Wirum v. Warren (In re Warren), 568 F.3d 1113, 1116 (9th Cir. 2009), we disagree with HSBC that it should prevail under any of these theories.

We first address HSBC’s argument that it proved it had a colorable claim to debtors’ property. The record shows that the bankruptcy court did not directly address this question because it relied on debtors’ confirmed plan for its decision. Regardless, we review standing issues de novo and there is no evidence in the record that supports HSBC’s contention.

The assignment of the deed of trust from MERS, as nominee for Infinity, to HSBC also purported to assign the note. However, HSBC, as MER’S assignee, would take subject to the rights and remedies of its assignor. HSBC overlooks the fact that there is no evidence in the record that shows MERS had any interest in the note to assign. Although the deed of trust gave MERS, as nominee, the power to assign the deed of trust, it did not mention the note, nor did the note itself name MERS as nominee, so MERS could not take this right from the documents themselves. Further, there is no independent evidence that Infinity conveyed the note to MERS. Finally, debtors were not obligated under the note to make payments to MERS. In short, the language in the deed of trust which names MERS as a beneficiary, solely as nominee of Infinity, was insufficient to confer any economic benefit on MERS. In re Weisband, 427 B.R. 13, 20 (Bankr. D. Ariz. 2010).

In Weisband, the bankruptcy court considered whether a MERS assignment of a deed of trust provided the loan servicer with standing for purposes of obtaining relief from stay. The court concluded that MERS had no interest in the note and would suffer no injury if the note was not paid and the deed of trust not foreclosed. As a result, the court concluded that MERS did not have constitutional standing and, if MERS did not have constitutional standing, its assignee could not satisfy the requirements for constitutional standing either. Id.; see also Wilhelm, 407 B.R. at 404[12] (discussing validity of MERS’s assignments related to the note). We do not perceive a different result is warranted under these circumstances.

Moreover, HSBC gives the Williams’ declaration more credence than the rules of evidence allow. Williams’ declaration was conclusory, simply stating that she was familiar with the business records of HSBC and that HSBC was the “holder or servicer” of the note. Williams also stated that HSBC had a contractual right to collect payments and maintain legal actions for the beneficial note holder, either as the current note holder or pursuant to either a Master Servicing Agreement or Power of Attorney. However, neither of those documents were attached to her declaration and there is no other foundation for her to have made these equivocal statements. Finally, the declaration creates an ambiguity because Williams stated that HSBC was “the holder or servicer” of the Note. Which is it? If HSBC was a servicer of the note, it does not necessarily follow that HSBC was the holder of the note under Ariz. Rev. Stat. § 47-1201(B)(21)(a).[13]Weisband, 427 B.R. at 21 (noting that “[E]ven if a servicer has constitutional standing, it may still not be the `real party in interest’ under Fed. R. Civ. P. 17 and may not, therefore be able to satisfy the requirements for prudential standing.”). In short, Williams’ declaration did not establish that HSBC had constitutional or prudential standing or that HSBC had authority to act for any entity that did have standing. See

HSBC’s judicial admission and estoppel theories as grounds for affirmance are also unpersuasive. HSBC seeks to have these doctrines applied to itself vis-a-vis ASC. The only manner in which HSBC links itself to ASC in the record is through its repeated assertion without reference to any evidence that ASC was its “servicer.”[14] No further details are given. Does HSBC mean that ASC was its agent at the time of debtors’ filing? Or, does HSBC mean it somehow became the successor in interest to ASC? The record does not support either theory.

Generally, a loan servicer acts only as the agent of the owner of the instrument. We do not find any evidence in the record that establishes an agency relationship between HSBC and ASC that existed when debtors filed their petition and proposed their plan. The record contains no servicing agreement between ASC and HSBC indicating that ASC was HSBC’s agent, and ASC’s proof of claim did not state that it was acting as the authorized agent for HSBC. Further, MERS’s assignment to HSBC of the trust deed and note is dated September 11, 2009 — a date well past the petition and plan confirmation dates. Thus, the only inference to be drawn from the record is that ASC was acting as servicer for some party other than HSBC when debtors filed their petition.

We also cannot conclude on this record that HSBC established that it was ASC’s successor in interest. A successor in interest is “one who follows another in ownership or control of property. A successor in interest retains the same rights as the original owner, with no change in substance.” Black’s Law Dictionary, (9th ed. 2009). Nothing in the record shows ASC was in the line of assignments of the note or trust deed. In reality, ASC and HSBC appear to be separate unrelated entities at the time of debtors’ filing. Without a direct link to ASC, HSBC cannot take advantage of the judicial admission or estoppel doctrines to bar debtors’ challenge to its standing.

In sum, the record is devoid of evidence that would support any of HSBC’s theories.

[…]

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