MD Ala. Holds Servicer Did Not Violate Discharge By Sending Periodic Statements, NOI, Delinquency Notices, Hazard Insurance Notices

The U.S. Bankruptcy Court for the Middle District of Alabama recently held that a mortgage servicer did not violate the discharge injunction in 11 U.S.C. § 524 by sending the discharged borrowers monthly mortgage statements, delinquency notices, notices concerning hazard insurance, and a notice of intent to foreclose.

Moreover, because the borrowers based their claims for violation of the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692, et seq., on the violation of the discharge injunction, the Court also dismissed their FDCPA claims with prejudice.

A copy of the opinion in Golden et al v. Carrington Mortgage Services, LLC is available at: Link to Opinion.

In August 2010, the borrowers filed a petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code.  In their petition, the borrowers reported a foreclosure action in their Statement of Financial Affairs but inaccurately stated its status as having been disposed of by way of a judgment.  In fact, a foreclosure action was filed against the borrowers in state court but it was still pending at the time they filed their Chapter 7 petition.

Moreover, the borrowers made no mention of the property in their Statement of Intention.  Essentially, the borrowers’ petition indicated that they were no longer the owners of the mortgaged property, which was inaccurate.

In October 2010, the prior servicer filed a motion for relief from automatic stay.  The Court granted the motion in November 2010.  Subsequently, the borrowers received a discharge in December 2010.

In December 2016, the borrowers filed a complaint alleging that their new mortgage servicer violated the discharge injunction and the FDCPA, when it mailed them monthly mortgage statements, delinquency notices, notices of lender placed hazard insurance, and a Notice of Intent to Foreclose.  The borrowers alleged that the servicer “had absolutely no legitimate reason to correspond with [them] regarding the Property” because they allegedly vacated the property before filing bankruptcy.

In rejecting the borrowers’ arguments, the Court held “that acts reasonably taken to service a mortgage or to foreclose a mortgage [did] not violate the discharge injunction, even if the debtor discharged his personal liability on the indebtedness secured by the mortgage.”

According to the Court, the servicer’s communications did not violate the discharge injunction because a creditor has a right to foreclose a mortgage after discharge.  Because the servicer was required to give the debtor certain notices either under the terms of the mortgage or applicable law, “it necessarily follows that the giving of such notices [did] not violate the discharge injunction.”

Moreover, the Court noted, until the time the mortgage is foreclosed, and for a period thereafter, a debtor has a right to redeem the property from the creditor upon the payment of the amount due.  Therefore, the Court held that a creditor who did not advise the debtor as to how much is due on the mortgage impinged upon the debtor’s right of redemption.

Additionally, the Court stated that debtors should not be permitted to “game the system” where the creditors are found to violate the discharge injunction if they gave various notices, but violate state and federal law if they do not.

Therefore, the Court concluded that “[a] creditor who acts reasonably and in good faith should not be placed in the horns of a dilemma.”  As the Court explained, “[i]f the act of providing required notices is unlawful, the mortgagee’s right to foreclose is destroyed and, by extension, the mortgage itself is destroyed as well.”

However, the Court was careful to note that a servicer can violate the discharge injunction if it did something in addition to routine mortgage servicing or foreclosure processing to prove that it “intended” to violate the discharge injunction.  But here, according to the Court, the borrowers failed to allege that the servicer did anything beyond routine mortgage loan servicing.

In addition, the fact that the borrowers allegedly moved out of the property before filing bankruptcy, the Court noted, “did not effect a transfer of title to the mortgagee, nor did it change the status of their obligation under the mortgage.”  Thus, the Court held that the servicer had a “legitimate reason” to contact the borrowers about the mortgage servicing and foreclosure.

Because the borrowers based their FDCPA claims on a violation of the discharge injunction, the Court held that the borrowers failed to allege any violation of the FDCPA.

Accordingly, the Court granted the servicer’s motion to dismiss the borrowers’ allegations with prejudice.

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Eric Tsai practices in Maurice Wutscher’s Commercial Litigation and Consumer Credit Litigation groups, and in its Regulatory Compliance group. He concentrates his practice primarily on the defense of consumer and commercial financial services companies, including mortgage lenders and servicers, mortgage loan investors, third party debt collectors, and other financial services providers. He also counsels clients on regulatory compliance, licensing, and other consumer protection matters. Eric earned his undergraduate degree from the University of California, Irvine. Prior to attending law school, he worked as a loan officer for national direct lenders. He earned his Juris Doctor from California Western School of Law and thereafter obtained a Master of Laws (LLM) in Taxation from the University of San Diego School of Law. Eric publishes extensively on various issues affecting consumer lending and litigation, including both federal and California-specific developments. He is licensed to practice law in California, Nevada, and Oregon, and is admitted in all United States District Courts in the State of California, the United States District Court for the District of Oregon, the United States District Court for the District of Nevada, the U.S. Tax Court, and the Ninth Circuit Court of Appeals. He is also a licensed real estate broker in the State of California.