By Alan Steven Wolf of The Wolf Firm(Servicing Management Magazine, October 1995)
By Alan Steven Wolf of The Wolf FirmThe Peters decision can basically be viewed as two main and somewhat distinct issues. The first issue involves the automatic stay. The second issue involves the modification of the automatic stay.
Peters held that the post confirmation postponement of a foreclosure sale is a per se willful violation of the stay. As most servicers are aware, willful violations of the stay subject a creditor to significant liability under section 362(h) of the bankruptcy code. Under that section, a debtor will recover its actual damages plus costs and attorneys' fees.
In other words, the court has no discretion; it must award the debtor all damages suffered by the debtor because of the stay violation. It must also award the debtor reasonable costs and attorneys' fees incurred by the debtor in bringing the violation to the court's attention and in otherwise protecting its interests.
Damages caused to the debtor can alone be quite significant. The damages are not merely limited to the postponement fee (generally $50) for each postponement made in violation of the stay. Damages cover a very wide spectrum, limited only by the debtor's imagination and a court's anger.
For example:
While all of these damages are subject to proof, it is important to remember that the
damages can be wide and varied. It is not something
that a creditor should lightly incur.
Attorney's Fees
But even if there were no damages, the court must still award the debtor its reasonable costs and attorneys' fees incurred in bringing the matter to the court's attention and in otherwise protecting the debtor's rights.
Here, debtor's counsel has virtually a free ride. In addition to the hourly fee and other costs in bringing the motion under section 362(h), debtor's counsel can claim fees and costs for a variety of related actions.
For example, if debtor's counsel traveled to the auction site in order to assure that the sale would not go forward and to argue with the auctioneer that the sale should not be further postponed, the fee for those services could logically be claimed as attorneys' fees under section 362(h).
Similarly, if debtor's counsel brought a state court action to set aside the foreclosure due to the wrongful postponement, the fees incurred in the state court action could be logically claimed. In short, the debtor's absolute right to recover its attorneys' fees opens a Pandora box of potential recovery.
In addition to the absolute recovery of damages and attorneys' fees and costs, section 3B2(h) also allows the court discretion to award punitive damages in appropriate circumstances.
"Appropriate circumstances" is not defined, and thus is subject to the whim of the judge. Generally, the more egregious the facts regarding the creditor's conduct, the angrier the judge and the greater the likelihood of sanctions being assessed against the creditor.
If, for example, the debtor or debtor's counsel called and asked that the sale not be postponed and that it be taken off calendar, and in spite of this request the sale was postponed, such action might trigger punitive damages.
Also, if the debtor could show a pattern of stay violation by the creditor in postponing all sales despite Chapter 13 plan confirmation, it too might trigger an award of punitive damages.
Almost by definition, punitive damages are additional damages in an amount necessary to make it hurt.
In other words, the punitive damages are specifically intended to cause significant harm to a company; they are intended to be an amount so high that any company would not again perform the act that caused the punitive damages.
For a small servicer, punitive damages might be in the thousands of dollars.. For large service, punitive damages might be in the millions of dollars. Subjecting your company to punitive damages is generally a one-way ticket to unemployment.
Although section 362(h) is generally considered a remedy to be employed by the debtor, it should be noted that recovery is not limited to debtors.
The section provides that any individual injured by a willful violation of the stay can recover under the section. Accordingly, junior lien-holders, potential buyers of property, real estate brokers virtually anyone connected with property is a potential party entitled to damages under section 362(h)
Postpone the sale?
After confirmation of a Chapter 13 plan, should you postpone your sale?
Although there are certain defenses that might be made to the Peters decision which are explained in detail below, it makes eminent sense not to postpone a foreclosure sale after confirmation of a Chapter 13 plan. Peters made clear that a post-confirmation postponement is a willful violation of the stay and as noted above, a willful violation of the stay subjects a creditor to significant liable.
On the other hand, by postponing the sale, a creditor merely saves about 45 days and certain costs of republishing. When the potential loss in violating the stay is compared to the potential gain in postponing the sale, it makes no business sense to postpone the sale.
Rescind the foreclosure
After confirmation of a Chapter13 plan, does the foreclosure proceeding have to be rescinded? The more intriguing issue is' whether failure to rescind the foreclosure is a violation of the stay. In other words, must a creditor also rescind its foreclosure proceeding once a Chapter 13 plan is confirmed? Since the appellate court found a violation in the postponement of the sale, the court did not specifically reach this issue. However, the Peters decision implies that there is no requirement to rescind the pending foreclosure proceeding.
First, the court could have used the failure to rescind the foreclosure as an additional basis for finding a willful violation of the stay and failed to do so.
Furthermore, its finding of a stay violation was based on the automatic stay sections that preclude "acts" against the interest of the debtor. While postponing a sale is an act, the failure to rescind a pending foreclosure proceeding is not an act but rather, and quite distinctly, the failure to act.
Thus, under the reasoning in Peters, the failure to rescind the foreclosure proceeding is not an act and thus probably not a violation of the stay.
Unfortunately, this does not end the analysis. In Peters, the Chapter 13 plan revested all of the property in the debtor. Thus, upon confirmation, the estate no longer had any interest in the property and the court did not analyze whether the failure to rescind the foreclosure proceeding might be a violation of the stay protecting the estate.
While most plans revest the property in the debtor upon plan confirmation, some plans, notably those in the Central District of California, often do not revest the property in the debtor upon confirmation. Instead, the estate maintains an interest in the property until the debtor is discharged. In those plans, the stays protecting the estate must also be considered.
While the stays protecting the debtor pertain to acts against the debtor or the debtor's interest, the stays protecting the estate are somewhat broader, providing protection not only against acts but also against the exercise of control over property of or from the estate.
Thus, it has been held that where a lender repossesses a car prepetition but has not sold the car by the time of the bankruptcy filing, the failure to return the car to the debtor is a willful violation of the automatic stay protecting the estate.
By analogy, the estate could claim that the failure to rescind the foreclosure proceeding after confirmation of the plan is the exercise of control over property of the estate, and thus is a willful violation of the stay.
Modification of the note
While the automatic stay issues are important, the real issue raised by Peters is the modification of the note. For example, the court says:
"A confirmed plan adds an additional level to the contractual relations between the debtor and secured creditor.... After confirmation, the debtor is not in default unless and until he fails to make the required payments.
The confirmation of a Chapter 13 plan immediate acts to cure any defaults that are provided for under the plan. The terms of the cure are the payment of the arrearages, but the cure itself is effective immediately unless the plan otherwise provides.... In other words, there is a distinction between an arrearage and a default. Usually the terms are coextensive; an arrearage is also a default, because the payment has not been made under the contract terms.
"Upon confirmation of a Chapter13 plan, however, the debtor's obligation to pay the arrearages is only on the terms contained within the plan. Where the payment of the arrearage is not immediately due upon confirmation [i.e.,where payments are made over the normal 36 month plan term] ... the arrearages are no longer defaults, because the arrearages are no longer past due.
There is no obligation for the debtor to pay the arrearages until such time as the confirmed Chapter 13 plan requires the debtor to do so. The arrearages continue to exist, but because they are no longer past due they will no longer support a foreclosure sale.
A new note
Essentially, the court says that just like any modification of a note, once modified there is a new note which is current until there is a breach under its terms.
A concrete example puts this into focus. Assume that
In this example, it is clear that the note is current when the new modified note is originated, and that the foreclosure sale is set aside because the old note which was the basis for the foreclosure, had effectively been paid off.
As long as the borrower pays $1,500 per month for the fast 36 months and then $1,000 per month thereafter, the borrower is not in default.
When stay is terminated...
Once the stay is terminated, can the lender proceed with the prior foreclosure?
Despite the clear modification of the Peters note, there has been some confusion as to whether a lender can proceed with a prepetition foreclosure in a Chapter 13 case where the plan was confirmed but the stay was later terminated. Under the Peters rationale, and absent other considerations, a lender cannot continue with its foreclosure sale.
The example described above again puts this issue into focus. Assume that the above loan modification was made and the debtor filed bankruptcy. Assume further that creditor obtained relief from stay and wanted to then foreclose. Under these facts, the lender would not have any right to continue prior foreclosure. When the loan was modified, there was a new note with new terms and the prior foreclosure was effectively render moot.
Moreover, the lender could not start a new foreclosure based on the old default; again, the old note no longer exists. There is a new note with new terms and the only breach is a breach under the new note.
Thus, neither the fact that borrower defaulted under the note nor the fact that the debtor obtained relief from stay changes the fact that the new note governs the relationship of the parties.
This analysis also holds true the modification of the note under the Peters decision.
Once the plan is confirmed, unless expressly stated to the contrary, the note is modified to conform to the plan. In short, the creditor has a contracts relationship with the borrower, there is a new note with new terms. A breach in the new note, of the granting of relief from stay by virtue of that breach, does not void the modification and somehow return the parties to the terms of the original note.
Just as in the example, a breach and termination of the stay merely means that the creditor can proceed to foreclose under the terms of the new note.
Start new foreclosure?
Once the stay is terminated, can the lender start a new foreclosure and include as part of the default the prepetition arrearages?
While some lenders understand their inability to continue with the prior foreclosure, there appears to be confusion surrounding the issue of what may be included in the default once the lender restarts foreclosure.
Once more, the example proves useful. As noted above, once relief from stay is granted and a new closure is commenced, the foreclosure can be based only on the terms of the modified note. In short, the prior default no longer exists cannot be the basis for a new foreclosure action.
Similarly, once a Chapter 13 plan is confirmed, the prior default longer exists and any foreclosure can only be based on the post confirmation default.
For further information please contact:
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