Led by Vincent Howard, our team of Rancho Cucamonga foreclosure defense attorneys regularly reads about "show me the note" cases, in which borrowers challenge their lenders to produce the paperwork giving them the legal right to foreclose. The success of these cases frequently depends on the specific facts of the case, state law and even the sympathies of the judge. So we were very interested to read about a bankruptcy case out of Mammoth Lakes in which a couple attempted to argue that their mortgage debt was unsecured due to the invalidity of the debt. Berenice and Pierre Thoreau de la Salle argued that U.S. Bank had no standing to foreclose on their home and listed the debt as unsecured, causing their plan to be rejected and the bank to move to convert their case from Chapter 13 to Chapter 7. The Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals agreed in In re de la Salle.
Berenice de la Salle took out a $668,000 loan from Countrywide Home Loans in 2005, secured by the couple's home in Mammoth Lakes. In 2008, when she defaulted, she actually owed $840,000 on the note and another $29,000 in arrears (suggesting a subprime loan). A trustee's sale was scheduled for March 2010, and after a federal lawsuit failed to stop it, the couple filed for Chapter 13 bankruptcy. Their amended Schedule F listed the entire amount owed on the mortgage as a disputed unsecured claim, saying three possible creditors could come forward to enforce the note and deed, but U.S. Bank was not among them. After numerous proceedings, the bankruptcy court denied confirmation of their plan, finding no reason to doubt the bank's standing until proven. It also granted the bank's motion to convert to Chapter 7, finding that listing the mortgage as unsecured gave them too much debt for Chapter 13.
On appeal, the BAP affirmed both decisions. Starting with the denial of confirmation of the plan, the panel ruled that debtors may not avoid the bank's claims by simply confirming a plan that ignores those claims. Pending the outcome of a dispute over the claim, the couple was required to follow statutory requirements as to the amount and classification of the debt. Thus, the plan was not confirmable. Nor was it prejudicial to the couple that the court granted the conversion before resolving their standing claim, the BAP found. Bankruptcy law favors speed; confirmation does not impose an amount; and delays were created in this case by the couple's own adversary proceeding. Furthermore, the BAP ruled, the bank had standing as a party in interest to participate in the bankruptcy. A creditor does not need an allowed claim at all to be a party in interest, the panel said, and even a disputed claim qualifies. Finally, the panel ruled that the bankruptcy court did not err in converting the case, finding the couple delayed filing a confirmable plan so long as to constitute bad faith.
Vincent Howard and our Orange foreclosure defense lawyers sympathize with this couple's attempts to get to the bottom of who owns their mortgage debt. It doesn't look like the bankruptcy court ever managed to rule on the merits of their claim; this entire decision focuses on whether they followed the rules of bankruptcy court. If their federal lawsuit also didn't get to the merits, it's possible that all this arguing has failed to get to the most important part of the matter. Standing to foreclose may sound technical, but it's very important; if a bank forecloses without standing, it is essentially getting free property at the expense of a homeowner with a limited ability to fight back. Led by Vincent Howard, our Fallbrook foreclosure defense attorneys fight this kind of slapdash debt collection whenever our clients are victims.
If you believe your lender or servicer is trying to push through an avoidable foreclosure, and you're sick of its lack of responsiveness, call Howard Law, P.C., for a consultation. You can reach us at 1-800-872-5925 or send us a message through our website.