Our Rubidoux foreclosure defense attorneys were interested to see a case in which a bankrupt couple were legally obligated to add attorney fees for Countrywide Home Loans to their bankruptcy debt. In Velazquez v. Countrywide Home Loans Servicing, Lawrence and Tracy Velazquez of Texas filed for Chapter 13 bankruptcy about two years after buying their home. Countrywide filed a proof of claim that included a $200 fee for "post-judgment attorney fees" and another $150 fee for preparing the bankruptcy documents, citing language in its Deed of Trust for support. The bankruptcy court denied the fees and the federal district court affirmed. However, the Fifth Circuit reversed, agreeing that the Deed of Trust supported the fee request.
The deed had two relevant sections. Section 9 permits Countrywide to "Lender may... do whatever is reasonable... to protect Lender's interest in the Property and rights under this Security Instrument," including in bankruptcy. Section 14 permits Countrywide to charge the Velazquezes attorneys' fees for "services performed in connection with Borrower's default." Countrywide argued that this permitted it to collect the fees, and also that it should not be subject to Bankruptcy Rule 2016, which governs how creditors may collect fees from the estate. The bankruptcy court declined to reach the Rule 2016 argument, but ruled that the deed language did not apply because Countrywide's interest in the property could not be affected by a Chapter 13 filing, which is forbidden by law to modify a home lender's rights. Countrywide appealed to the federal district court, which incorporated that ruling in full when it affirmed.
It had better luck in the Fifth Circuit. The lower courts interpreted the relevant part of Section 9 as saying Countrywide may take actions that simultaneously protect both its interest in the property and its rights under the deed. Thus, they found that the action of charging attorneys' fees to the Velazquezes didn't meet that burden, since Countrywide's interest could not be affected by the bankruptcy filing. Countrywide interpreted the "and" in the sentence as meaning "either or both," thus lowering the standard for when it may act. The Fifth Circuit acknowledged that caselaw prefers that "and" be interpreted according to its semantic meaning, unless that would frustrate the document's intent. Nonetheless, it took up Countrywide's interpretation, finding that the document as a whole required this. The next sentence refers to Countrywide's right to pay attorney fees to protect its property interest "and/or" rights, which the Fifth said shows that the deed expressly contemplates situations where only one or the other right must be enforced. For this reason, it found the Rule 2016 issue moot and declined to rule. It noted in a footnote that this contradicted an earlier panel's ruling in Wells Fargo Bank v. Collins, but it disagreed as to the meaning of the contract language.
As Costa Mesa foreclosure defense lawyers, we wonder whether this issue might not end up in the full Fifth Circuit, given the split. In fact, these attorney fee provision arguments are common enough that the issue may end up in the U.S. Supreme Court. We are not aware of a split in the circuits on this issue, but here in California, the Central District has taken action in the past few years to avoid hidden fees. Because lenders were piling on fees at the end of the bankruptcy, surprising debtors who thought they were paid off, the district introduced an optional form to promote communications, which survived a Ninth Circuit appeal recently. Similar issues may be solved on a case-by-case basis, but as Temecula foreclosure defense attorneys, we'd be interested to see a court ruling giving regional or national clarity to the issue.
If you believe you can avoid foreclosure with some help, but your lender isn't interested in providing any help, you should call Howard Law, P.C. to discuss your legal options. For a consultation, send us a message online or call 1-800-872-5925.