Lateral Appeal in BKR to District Judge Often Overlooked

The PHH case underscores the statistics and the substance of actions brought in U.S> Bankruptcy Court. The fact is that BKR judges, once called magistrates, do not have the jurisdiction or power of ordinary District Court Judges.

In addition out of the three possible venues for appeal from BKR rulings and decisions, the one that gets the most traction the most often is directly to the sitting District Court judge in whose courthouse the BKR proceedings are pending. District judges are the most likely to find that the BKR “judge” lacked jurisdiction or power to even hear many matters.

Let us write the narrative for your appeal: 202-838-6345
Get a consult and TEAR (Title & Encumbrances Analysis and & Report) 202-838-6345. The TEAR replaces and greatly enhances the former COTA (Chain of Title Analysis, including a one page summary of Title History and Gaps).
https://www.vcita.com/v/lendinglies to schedule CONSULT, leave message or make payments. It’s better than calling!
THIS ARTICLE IS NOT A LEGAL OPINION UPON WHICH YOU CAN RELY IN ANY INDIVIDUAL CASE. HIRE A LAWYER.
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Hat tip to Dan Edstrom

see PHH v Sensenich US Dist Lexis 207801

There are three possible routes for appeal. The one that gets the best results is rarely used for unknown reasons. So here are some pointers on bringing an appeal from a ruling or decision entered by a BKR judge:

  1. Lateral appeal to District Court Judge: Success rate around 50%
  2. Bankruptcy Appellate Panel (BAP): Success rate around 15%
  3. Direct appeal to the Circuit Court of Appeals: Success rate less than 15%.

This anomaly was first pointed out by a Bankruptcy Court Judge in Arizona who as presenting at a CLE Bar Seminar for Bankruptcy lawyers. The seminar was in 2009 and still we are waiting for BKR practitioners to pick up the ball.

An apparently little known fact is that BKR courts are courts of limited jurisdiction as to what they can hear and how they can hear the issues. Many practitioners avoid an appeal from BKR to the Federal District Court Judge because they think that the District judge is on the same level as the BKR judge. And they think that two judges on the same bench are not going to rule against each other.

This view is simply wrong. They are not on the same bench. District Judges have authority over everything that happens in BKR court. BKR court is itself broken up into two categories. One category is simple rulings on motions in the administrative court proceeding (which is why the BKR “Judges” were called magistrates).

Most of what happens in the administrative phase of a bankruptcy is ministerial. Rulings that cross the line of ruling from ministerial to substantive judgments on the law regarding consumer rights, foreclosures etc. are subject to challenge and are as likely to get overturned by the District Judge as not. This is the part most people have some familiarity.

The other category is Adversary actions. This means someone has filed a lawsuit in Bankruptcy Court that is separately served and subject to the same rules of procedure as an action filed in U.S. District Court. But the similarity ends there. Many adversary actions go far beyond the jurisdiction of the BKR judge.

Lack of jurisdiction means the judgment or ruling is void. Those void judgments are generally reversed by the District Court judge and not necessarily by the BAP or Circuit Court probably because nobody brings up the issue of whether the BKR action was in the correct court.

Generally speaking there are two categories of appeal: procedural and substantive. Appeals citing errors in procedure (including jurisdiction) generally get the most traction. Appeals citing substantive law or worse, citing errors in apprehending the evidence, have the lowest success rate.

In the case cited above, Federal District Court Judge Geoffrey Crawford reversed a bankruptcy judge’s ruling that had imposed sanctions against a creditor “based on Rule 3002.1(i) of the Rules of Bankruptcy Procedure, the bankruptcy court’s inherent authority, and Bankruptcy Code section 105.”

The sanctions were awarded in three cases where debtors had to make mortgage payments pursuant to chapter 13 plans.  The mortgage servicer had billed the debtors for fees that the bankruptcy trustee asserted were improper. At a trustee’s request, the bankruptcy court imposed sanctions against the servicer of $375,000: $25,000 for each case under Rule 3002.(i) and $300,000 total for violations of court orders under its inherent powers and section 105.

Rule 3002.1 permits bankruptcy courts to provide relief to debtors when mortgage creditors fail to disclose certain fees and charges. Rule 3002.1(i) allows courts to remedy violations of certain provisions of Rule 3002.1 by (among other things) “award[ing] other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.” Whether Rule 3002.1 authorizes punitive sanctions was a matter of first impression. Neither the parties nor the court had found a case where a bankruptcy court had invoked the rule to support sanctions in this manner.

Judge Crawford reasoned that, because Rule 3002.1 is a procedural rule, it cannot enlarge the substantive authority of the bankruptcy courts. If bankruptcy courts do not have the substantive authority under statute and case law to issue punitive sanctions, then a mere procedural rule cannot alter the lack of substantive authority. The court thus concluded that the question under Rule 3002.1(i) was reducible to the question under a bankruptcy court’s inherent powers and section 105.

For homeowners this ruling helps. Citing it puts the banks in the position of opposing a ruling that went in their favor, i.e., this PHH case.  This also puts the homeowner on notice to check carefully before filing an adversary action instead of a collateral action that is directly before the District Judge or even State Court.

The problem is that most BKR attorneys who mostly do Chapter 7 and Chapter 13, have little or no litigation experience. Thus it may be necessary to NOT  charge your BKR lawyer with there responsibility of filing an adversary or collateral action and to bring in separate trial counsel even if the decision is made to file an adversary complaint.

 

 

 

Unfortunate Decision of 9th Circuit

Hat tip to Darrell Neilander and Charles Cox for bringing this one to my attention.

Editor’s Comment: In a twisted display of circular reasoning and reverse logic, the 9th Circuit has issued an opinion that attacks the precise foundation of the Truth in Lending Act. Go to any seminar on TILA and the first thing they will tell you is that the purpose of the act was to provide the borrower with choice of lenders and the ability to apply competitive pressures on one lender versus another.

If a Borrower wants a loan and does NOT want it with Wells Fargo or Merrill Lynch for reasons of his own, then he has a specific right explicitly stated in TILA to know who the lender is and all the parties who received compensation in putting the loan package together for sale to the borrower and sale to the investors. Under Gale vs. Franklin, 686 F. 3d 1055, July 12, 2012, the 9th Circuit said that the right to know the owner of the loan does not apply if you are dealing with the servicer. This directly conflicts with the intent and content of the FCFB definitions in addition to defying  logic. It also strips the specific remedy of clawback of undisclosed compensation.

An additional reason for knowing the name of the obligee is to be able to confirm the balance due and to apply for HAMP or HARP modifications or settlement. How can you do that if you don’t know who the “decider” is?

As for asking for the identity of the creditor, the court incredibly concluded that “Failing to read and respond to letters may be impolite; however, ²a breach of [*1057]  good manners² is not always ²an invasion of any legal right.²  Spaulding v. Evenson , 149 F. 913, 920 (C.C.E.D. Wa. 1906). Richard Gale faults his lender, First Franklin Loan Services (²Franklin²), for failing to respond to his correspondence regarding ownership of his loan, and alleges that this failure amounted to a violation of the Truth in Lending Act (²TILA²), and Nevada’s covenant of good faith and fair dealing. Because Franklin was not legally required to respond in its capacity as loan servicer, we affirm the district court’s dismissal of these claims. However, Gale also alleges [**2] that after failing to respond to his letter, Franklin and the other defendants engaged in illegal conduct by wrong-fully foreclosing on his property. We remand these remaining state law claims to the district court.”

So as an aside, the Court cleaned out the carcass of RESPA as well. This decision cannot and will not stand in my opinion and the entry of politics and ideology clearly clouded the real issues of due process, statutory duties, and justice. But worse, the court put its stamp of approval on screwing around with the title records corrupting them beyond recognition.

This Court has given a back-door to those who engaged in such behavior and left the title problems for future owners, lenders and beneficiaries of trusts. In my opinion I would continue to plead the same actions and bring it up on appeal — perhaps in the state appellate decisions and maybe even direct to the State Supreme Court on public policy and urgency for consistency in decisions.

But once again, we have admissions that helped the court along in this wrong application of the law. The “FACTS” are that Gale “refinanced his home with Franklin.” In order to recite those facts, it would have been necessary to have the borrower admit that the transaction was real and actually took place. Now if Franklin actually did the loan and it was not subject to claims of securitization, this might be an inevitable admission. But Franklin does not appear to be one of the exceptions of those banks that did not play securitization PONZI roulette. The “Facts” show otherwise. [As soon as you see MERS” you know claims of securitization are involved.]

The same applies to “Gale defaulted on the loan.” How did that get in the record unless Gale admitted it? How does Gale know that there was a payment due? He presumed it because Franklin was the originator. With what is in the public domain now, we know that the loan might well have been paid in full or paid in part or that the payments to the real creditor continued to be made even after the borrower stopped paying. If the payment was made, there was no payment due, and thus there could be no default. But the Borrower here appears to have admitted it.

The one sort of bone thrown out to borrowers, is that the Court concluded that if the Gale claim arose after passage of Dodd-Frank, the results might have been different. They completely missed the point that the rules and regulations in Dodd-Frank were already stated or inherent under common law and existing statutory law, both Federal and State.

In short, the 9th Circuit is treating the sham transactions and strawmen of the fake securitization scheme with the deference one might give to a king. If the shoe was on the other foot, such behavior would not be tolerated for even a moment. Can you imagine the same court finding that a borrower does not need to disclose his principal in a loan? This decision is twisted, absurd and wrong.

by Charlie Guy

In Gale v. First Franklin Loan Services, 686 F.3d 1055 (9th Cir. 2012), the Ninth Circuit held that a borrower has no right under the federal Truth in Lending Act (“TILA”) to require a loan servicer to identify the owner of a loan obligation. TILA requires a servicer to identify the owner of the loan only when the servicer owns the loan, and only when the servicer owns the loan by assignment.

In Gale, the borrower refinanced his home mortgage with First Franklin Loan Services, which both originated the loan and serviced it. After the borrower became delinquent, he demanded First Franklin identify the “true” owner of the obligation. First Franklin ignored the requests and proceeded with foreclosure. The borrower filed suit claiming, in part, a violation of TILA. The trial court dismissed the TILA cause of action as a matter of law, and the Ninth Circuit affirmed.

On appeal, the borrower argued that the plain language of TILA, 15 U.S.C. Section 1641(f)(2), required First Franklin to respond to his inquiries regarding the identity of the owner of the loan. That section states that upon written request, “the servicer shall provide the obligor . . . with the name, address, and telephone number of the owner of the obligation . . .” The Ninth Circuit explained that this provision does not apply to all loan servicers, but only those servicers who are owners of the loan by assignment after loan origination. In this case, First Franklin was both the original lender and the servicer, so this section did not apply.

The Ninth Circuit also noted that, since a 2010 amendment to the Real Estate Settlement Procedures Act, all servicers must identify the owner of a real estate loan if requested, under all circumstances. This change, however, does not apply retroactively to claims (like the claim in Gale) that accrued prior to 2010.

gale-v-first-franklin-loan-se

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