Bankruptcy & Foreclosure- Related?

Posted by Kevin on February 22, 2011 under Bankruptcy Blog | Be the First to Comment

Of course, they are related.  People who cannot pay their mortgages are likely to be people who are having trouble paying other debt, like credit cards.

But, I am talking about strategy.  Some of the same arguments that are being used by the cutting edge foreclosure defense attorneys were actually used first by bankruptcy attorneys.

In or around 2005, bankruptcy courts in Ohio were becoming disturbed by the fact that lenders (either banks or trustees in securitized trusts) were not providing sufficient backup on the Proofs of Claims that the lender filed in Chapter 13 cases.  It was not clear from the documents whether the entity filing the Proof of Claim was the right person or entity.  Ultimately, a judge in Ohio threw out about 26 Proofs of Claim in various cases for lack of standing, and the rest, as they say, is history.

In a Chapter 13 case (or a foreclosure case) standing means that a person or entity must show that it has a right to enforce the mortgage note.  The note or promissory note is the document that the borrower signs that says, “I promise to pay X “.  The mortgage is the document that says if I do not pay X, then X can foreclose on my house.

In a Chapter 13, the standing issue plays out when the supposed lender files a proof of claim.  If the debtor is successful in arguing that standing does not exist, the claim is thrown out.

In a recent case (Kemp v. Countrywide Home Loans, Inc) the debtor listed two mortgages to Countrywide.  Only the first mortgage became an issue.  That mortgage was sold to a trust.  Countrywide filed a Proof of Claim but as servicer.  The note was never endorsed over to the trust.  Moreover, the note was never delivered to the trustee.  After a thorough and intelligent analysis of the New Jersey law relating to negotiable instruments, the Court concluded that the trustee was not entitled to enforce that note, and the claim was disallowed.

This was a major victory for debtors.  It should also help borrowers in foreclosure cases.