Bankruptcy Lawyers: it starts in the schedules — admission of secured debt is deadly

I was traveling and re listening to an older lecture given by 2 Bankruptcy judges generally held in high esteem. The largest point was that naming a party as the creditor and checking the right boxes showing they are secured basically ends the discussion on the motion to lift stay and restricts your options to either filing an adversary lawsuit attached to the administrative bankruptcy petition or filing an action in state court which is where you will be if you don’t follow this same simple direction. If you file schedules attached to your petition for bankruptcy relief, as you are required to do, these are basically the same as sworn affidavits. They will be used against you in any contested hearing.

So the judge lifts the stay and then often mistakenly enters additional language in the order ending the issue of whom is the real lender. After all, that is who you were making the payments to, right, so they must be a creditor. And this is all about a mortgage foreclosure so they must, in addition to being a creditor, they must be a secured creditor. And if the collateral is worth less than the claim, there is not much else to talk about it is simple to these Judges because nobody has shown them differently and one of the Judges is retired now. By definition when the Bankruptcy Judge says in the order who is the creditor, he or she has gone beyond their jurisdiction and due process because there was no evidentiary hearing.

This all results from a combination of technology (garbage in, garbage out), inexperience with securitized mortgages, laziness and failure to do the research to determine what is the truth and what is not. If you are a bankruptcy practitioner who uses one of the desktop bankruptcy programs, then the questions, boxes, and fill-ins are intuitively placed in the schedule that your client swears to. No problem unless the schedules are wrong. And they are wrong where the debt runs from the Petitioner to the REMIC trust beneficiaries and is unsecured by any mortgage that the homeowner borrower petitioner ever signed or meant to sign.

The first point is that the amount if the debt is unknown and we now this for a fact because there are multiple offsets for Third party payment (like Servicer advances) that must be examined one by one. It could be zero, it could be there is money due to the borrower, it could be more or less what is being demanded by the Servicer or trustee. Another thing we know is that neither the Servicer or trustee is likely to know the amount of their claim. So send out a QWR to all addresses for the Servicer and the REMIC trustee.

If you get several different payment histories it is a fair bet they came off of different records, different systems and require the records custodian to authenticate each Servicer’ rendition, of beginning balance, ending balance and every transaction in between. The creditor who filed a proof of claim has the burden of showing a color able right to enforce the mortgage. That can only come from the pooling and servicing agreement. The parties to the PSA are the REMIC Trust, the REMIC Trust beneficiaries and the broker dealer who sold the bonds issued by the REMIC trust.

But if there is no trust or the REMIC trust never actually acquired the subject loan, then the appointed Servicer in the PSA draws no power from a PSA for a nonexistent or empty trust (at least empty of the subject loan.) it is not the Servicer by right, it has become the Servicer by its intervention into the contractual right between the borrower homeowner and the lender (the REMIC trust beneficiaries). The “apparent authority” of the Servicer will only take it so far.

And every transactions means that as a Servicer they were paying or passing on the borrower’s payments . Where are those records — missing. Does the corporate representative know about those payments? Who was the creditor paid. When did the payments from Servicer start and when did they stop — or are they still on-going right up to and including trial, foreclosure sale auction and final disposition of proceeds from an REO sale.

So from the perspective of the Petitioner he might have made payments to an entity that claimed to be the Servicer and those payments are due back not the bankruptcy estate. OOPS but that is what happens when a company arrogated unto itself the powers of a Servicer for loans that are claimed to be in a trust — where the trust doesn’t own the loan, note or mortgage (deed of trust). Thus the Servicer would be owed zero but you would show them in the unsecured column, unliquidated and disputed. This could have a substantial income on the amount of the claim, whether part or all of it is secured.

But no matter, if you fail to take a history from the client, get the closing documents, title and securitization report together with loan level analysis, you are going to do a disservice to your client. We provide litigation support and analysis to give you the data to make an informed decision, fight the POC, MLS, turnover of rents, etc. Then you might avoid the dreaded call of calling your insurance carrier who will probably tell you neither paid for nor received a tail on your claims made policy.

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Prommis Holdings LLC Files for Bankruptcy Protection

I have not followed Prommis Holdings closely but I can recall that some people have sent in reports that Prommis was the named creditor in some foreclosure proceedings. The reason I am posting this is because the bankruptcy filings including the statement of affairs will probably give some important clues to the real money story on those mortgages where Prommis was involved. I’m sure you will not find the loan receivables account that are mysteriously absent from virtually all such filings and FDIC resolutions.

And remember that when the petition for bankruptcy is filed it must include a look-back period during which any assignments or transfers must be disclosed. So there is a very narrow window in which the petitioner could even claim ownership of the loan with or without any fabricated evidence.

US Trustees in bankruptcy are making a mistake when they do not pay attention to alleged assignments executed AFTER the petition was filed and sometimes AFTER the plan is confirmed or the company is liquidated. Such an assignment would indicate that either the petitioner lied about its assets or was committing fraud in executing the assignment — particularly without the US Trustee’s consent and joinder.

The Courts are making the same mistake if they accept such an assignment that does not have US Trustees consent and joinder, besides the usual mistake of not recognizing that the petitioner never had a stake in the loan to begin with. The same logic applies to receivership created by court order, the FDIC or any other “estate” created.

That would indicate, as I have been saying all along, that the origination and transfer paperwork is nothing more than paper and tells the story of fictitious transactions, to wit: that someone “bought” the loan. Upon examination of the money trail and demanding wire transfer receipts or canceled checks it is doubtful that you find any consideration paid for any transfer and in most cases you won’t find any consideration for even the origination of the loan.

Think of it this way: if you were the investor who advanced money to the underwriter (investment bank) who then sent the investor’s funds down to a closing agent to pay for the loan, whose name would you want to be on the note and mortgage? Who is the creditor? YOU! But that isn’t what happened and there is nothing the banks can do and no amount of paperwork can cover up the fact that there was consideration transferred exactly once in the origination and transfer of the loans — when the investors put up the money which the investment bank acting as intermediary sent to the closing agent.

The fact that the closing documents and transfer documents do not show the investors as the creditors is incompatible with the realities of the money trail. Thus the documents were fabricated and any signature procured by the parties from the alleged borrower was procured by fraud and deceit — causing an immediate cloud on title.

At the end of the day, the intermediaries must answer one simple question: why didn’t you put the investors’ name or the trust name on the note and mortgage or a “valid” assignment when the loan was made and within the 90 day window prescribed by the REMIC statutes of the Internal Revenue Code and the Pooling and Servicing Agreement? Nobody would want or allow someone else’s name on the note or mortgage that they funded. So why did it happen? The answer must be that the intermediaries were all breaching every conceivable duty to the investors and the borrowers in their quest for higher profits by claiming the loans to be owned by the intermediaries, most of whom were not even handling the money as a conduit.

By creating the illusion of ownership, these intermediaries diverted insurance mitigation payments from investors and diverted credit default swap mitigation payments from the investors. These intermediaries owe the investors AND the borrowers the money they took as undisclosed compensation that was unjustly diverted, with the risk of loss being left solely on the investors and the borrowers.

That is an account payable to the investor which means that the accounts receivables they have are off-set and should be off-set by actual payment of those fees. If they fail to get that money it is not any fault of the borrower. The off-set to the receivables from the borrowers caused by the receivables from the intermediaries for loss mitigation payments reduces the balance due from the borrower by simple arithmetic. No “forgiveness” is necessary. And THAT is why it is so important to focus almost exclusively on the actual trail of money — who paid what to whom and when and how much.

And all of that means that the notice of default, notice of sale, foreclosure lawsuit, and demand for payments are all wrong. This is not just a technical issue — it runs to the heart of the false securitization scheme that covered over the PONZI scheme cooked up on Wall Street. The consensus on this has been skewed by the failure of the Justice department to act; but Holder explained that saying that it was a conscious decision not to prosecute because of the damaging effects on the economy if the country’s main banks were all found guilty of criminal fraud.

You can’t do anything about the Holder’s decision to prosecute but that doesn’t mean that the facts, strategy and logic presented here cannot be used to gain traction. Just keep your eye on the ball and start with the money trail and show what documents SHOULD have been produced and what they SHOULD have said and then compare it with what WAS produced and you’ll have defeated the foreclosure. This is done through discovery and the presumptions that arise when a party refuses to comply. They are not going to admit anytime soon that what I have said in this article is true. But the Judges are not stupid. If you show a clear path to the Judge that supports your discovery demands, coupled with your denial of all essential elements of the foreclosure, and you persist relentlessly, you are going to get traction.

A Thought About Bankruptcy Petitions: Creditor ID

Upon finding that a portion of those payments should be applied to the subject loan, the declaration of default would be invalid because it would either be wrong inasmuch that the third party payments would at least be prepayments of future monthly payments, or wrong because the third party payments reflected an inaccurate accounting of the principal due.

OK let’s be clear that I don’t know bankruptcy well enough to even have an opinion, but I do have an idea and I would like this post forwarded to bankruptcy attorneys to get their reaction.

Here is the proposition: A Petitioner files for bankruptcy where one of the issues is a securitized loan. My idea is that the schedules NOT show the any of the known parties as creditors, because they are not. Especially if you have an expert opinion that describes the creditors as being unnamed but readily identifiable investors if the servicer will respond properly to the Qualified Written Request.

Upon reflection I don’t see why we would name the pretender lenders as creditors at all. I would leave them off the list of creditors (on any new cases filed) because they are not creditors. Maybe file amended schedules removing them. I would disclose the non-judicial foreclosure attempt wherever you can do that of course. Show the house as an asset with undetermined value. Wouldn’t that force them into being proactive? They would have to say “Hey! We are creditors secured by this property.” That would force the burden of proof onto them even as to standing, wouldn’t it?

Can someone who is not a creditor on the schedules file a proof of claim? What happens if you deny the claim and deny they are creditors? Do THEY have to file the adversary? Your position would be that you have this Expert Declaration that identifies the creditors, at least by description, and these would-be foreclosers don’t meet the description. So you disclosed the fact that they were claiming a default but you deny they are even creditors, much less secured.

It would seem that this would force them into proving to a bankruptcy court that they actually have authority which in turn would require them to produce all the documents granting them that authority. It also seems to me that they would have to come up with a full accounting for all payments from all parties, including from credit default swaps, insurance and Federal bailouts.

In the course of the proceedings, your allegation would be that they did in fact receive third party payments as has been widely reported by the press. They would probably answer something like those payments are irrelevant.

Your response to their assertion is to ask the court, who decides whether third party payments are relevant or not — the court or the creditor? The court would most likely order them to disclose all such third party payments along with documentation thereon so that the court could determine whether the payments should be applied to the pools in which the subject mortgage loan is Located” (assuming the assignments are valid), and then in turn determine what percentage of the payment should be allocated to the subject loan.

Upon finding that a portion of those payments should be applied to the subject loan, the declaration of default would be invalid because it would either be wrong inasmuch that the third party payments would at least be prepayments of future monthly payments, or wrong because the third party payments reflected an inaccurate accounting of the principal due.

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