Vincent Howard and our Rancho Cucamonga foreclosure defense lawyers have written many times about adversary proceedings in bankruptcy. These are essentially lawsuits filed in bankruptcy court that can, among other things, have a debt declared non-dischargeable. Most of the time, we write about adversary proceedings that succeeded in exempting a debt from discharge, but in In re Machuca, the bankruptcy court not only denied the exemption from discharge, but also awarded attorney fees to the bankruptcy filer. Raul Machuca, the Chapter 13 bankruptcy debtor, took out a home loan on which the lender made a mistake that exaggerated his income significantly, and was unable to keep making payments. The Ninth Circuit BAP upheld the attorney fee award to Machuca.
Machuca was a prison guard when he applied in 2007 for a loan to buy a house in Salinas, Calif. A junior loan for $147,000 was the subject of this case. He first applied over the phone in December of 2006; he was later asked to sign a variety of loan papers, which he admitted he did not read, for a "stated income" (liar) loan. The record includes an unsigned and undated application the court believed was filled out over the phone; an application signed and dated January 16, 2007; and a promissory note signed and dated four days before the application. The signed application said Machuca's salary as a prison guard was $20,725 a month, which was untrue and, Machuca claimed, patently absurd. He defaulted on the loan after a year and filed for bankruptcy in 2010. The successor in interest to the loan, Heritage Pacific Financial, filed an adversary proceeding to have the debt declared non-dischargeable.
Machuca moved for summary judgment, arguing that the lender did not rely on his income representation, and that if it did, that would have been unreasonable. HPF argued that it could reasonably rely on his statements because he signed his application certifying the statements in it as true. The bankruptcy court found no evidence presented by HPF allowed it to find reasonable reliance on the application, then granted summary judgment for Machuca. Machuca then filed for attorney fees, which were granted.
HPF appealed. The BAP started by noting that HFP officially appealed only the attorney fees order, but its briefing suggests it also wanted to appeal the underlying summary judgment order--which the panel did not permit. In order to avoid an attorney fees award, the panel said, creditors must show that their requests for fees were "substantially justified" even if unsuccessful. That is, HFP must show that it had reasonable legal and factual justification for its claim. Unfortunately, the panel observed, HPF's failure to appeal the summary judgment order means it had to defend its case with a record that includes a court finding that it could not have reasonably relied on Machuca's application. Because that issue was precluded, the panel said, HPF cannot argue that it had a reasonable basis for its fraud claim. The BAP also upheld the bankruptcy court on the merits before affirming the ruling.
The reasoning of this decision confirms much of what Vincent Howard and our Huntington Beach foreclosure defense attorneys see in our work. The panel noted in footnotes that the kind of loan given to Machuca is commonly called a "liar loan" in the mortgage industry, because lenders simply accept whatever income claims the borrower makes. In fact, the BAP noted, even the stated incomes on "liar loans" were frequently falsified by lenders--or borrowers were encouraged to falsify them by lenders--during the mortgage bubble, because there was no economic incentive to be prudent. After all, the lender was going to sell the risky loan on the secondary market right away. This is how many bad loans ended up securitized, feeding a market crash and a bureaucratic nightmare for homeowners. Vincent Howard and our Chino foreclosure defense lawyers have spent the last several years helping clients cut through that bureaucracy in order to fight for their homes.
Howard Law, P.C., is an Orange County law firm that helps California homeowners fight foreclosure through lawsuits over predatory lending, wrongful foreclosure and more. If you'd like to discuss the possibility of a legal claim with an experienced attorney, call us today at 1-800-872-5925 or send us a message through our website.