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Court Rules Recoupment Requires Proof of Emotional Distress

In April, a bankruptcy court entered a judgment in favor of a national bank, determining that the plaintiff had failed to establish that he had experienced an injury involving economic or emotional distress damages due to the lender’s violations. During Chapter 13 bankruptcy proceedings, the plaintiff initiated legal action against the bank and a loan servicer in regards to violation of Massachusetts law related to the origination, underwriting, and closing of his mortgage. The plaintiff argued that he was approved for a loan modification after he had difficulty paying his loan. 

While the loan modification did not forgive any of the plaintiff’s outstanding debt, the plaintiff agreed and entered into a modification. The bankruptcy court reviewed the plaintiff’s objection to the bank’s proof of claim filed in the chapter 13 case. This article reviews the case and discusses the potential impact that this ruling might have on how California handles bankruptcy cases.

How the Case Arose

The petitioner was having a difficult time paying his bills. His monthly mortgage payment was $2,323 a month and he was carrying various other credit debts. The man was also behind on his real estate taxes. His wife had left the family before 2006 and was left to raise two children on his own. The man’s salary was $47,500 a year or $3,958 a month. As a result, the man began working with a mortgage broker who he knew as Golden State Lending Group to refinance his home mortgage to lower his monthly mortgage payment and raise extra cash from the refinance to pay off his debts. The man accurately disclosed his financial details to the lender and provided documents to support these disclosures. 

The petitioner pursued relief under Chapter 13 bankruptcy in 2017. During his case, the petitioner initiated legal action against U.S. Bank N.A. and Select Portfolio Services connected to the origination, underwriting, and closing of his home mortgage loan. By the time the proceeding was prepared for trial, only a single count in the complaint against the U.S. Bank was left to be litigated. In its proof of claim, U.S. Bank asserted a $470,730.01 claim secured by a first mortgage on the man’s Massachusetts home. During the trial, the man presented his case and U.S. Bank then orally moved for a judgment of dismissal, then also rested. The bank later filed a written motion for dismissal. 

The petitioner also requested the lender find a mortgage loan that satisfied his needs. The lender agreed to do so and worked with the petitioner to assemble the appropriate paperwork for a loan and the paperwork was subsequently submitted to a mortgage lender. The lender, however, falsified the financial paperwork in various ways. The new loan closed in 2006 and the petitioner signed the paperwork. The lender paid fees and other charges to the mortgage broker. When the petitioner expressed concern that the mortgage after adjustment would be unaffordable, the lender assured the petitioner that he did not keep the loan for an extended period. The lender told the petitioner that after he resolved some unpaid bills, his credit score would increase and he could refinance on more favorable terms. This promise, however, turned out to be false. 

Later in 2006, the petitioner began struggling to stay current on his loan. He routinely communicated with the loan servicer in regards to overdue payments and exploring options to address the fact that he could not afford the monthly payments. Over the next few years, the petitioner and lender representative reviewed techniques for dealing with payment challenges while the petitioner tried to avoid foreclosure. 

Then in 2010, the petitioner was approved for a loan modification that reduced his monthly payment. The modification  did not include forgiveness of the petitioner’s outstanding debt. The petitioner agreed to the modification terms and entered into a modification agreement with the bank. After the petitioner achieved his desired monthly payment, he met various hardships. In 2010, he was diagnosed with cancer. He underwent chemotherapy and radiation the following year. Around the same time, the funeral home where the petitioner worked was sold and the petitioner was forced to become a part-time worker. The petitioner then applied for social security and received retroactive approval. Between 2011 to 2017, the petitioner and lender tried to arrive at mutually agreeable payment terms. The petitioner later filed for Chapter 13 bankruptcy in 2017. 

The Court’s Decision

On review, the plaintiff’s loan was ruled to be unfair in regards to specific circumstances that were made and that no reasonably diligent lender would have approved the loan without taking steps to independently verify financial details. The court determined that the original lender’s behavior was unfair and deceptive under Chapter 93A. The court also noted that Massachusetts bankruptcy law states that while an assign ordinarily cannot be held liable for damages based on an assignor’s acts, under the common law principle that an assign stands in the assignor’s shoes, assignees may liable under Chapter 93A for equitable remedies like cancelation of a debt or a contract rescission. 

The court also noted that because the borrower failed to carry his burden to prove he experienced an injury due to the lender’s violation, he failed to establish an amount for recoupment in reduction of proof of claim that the bank had pursued against him. 

The Role of 93A

Massachusetts’ Section 93a does not fully define “unfair and deceptive” practices. Instead, state courts have applied this law to various situations involving mortgage lenders. Remember, Section 93a protects Section 93a protects both businesses and individuals who have been subject to unfair and deceptive practices through procuring goods or services. If you pursue a claim under 93A and are successful, you can then recover the full amount of damages as well as two or three times the amount if the business’s violation was “willful.” Besides multiplying damages, it also might be possible to have lawyer costs as well as other fees associated with the lawsuit reimbursed. 

Consequently, while this case involves a Massachusetts statute, it will likely end up having an impact on how other states interpret what constitutes unfair and deceptive practices. As a result, the case could end up influencing California bankruptcy law, as well.

Contact a Knowledgeable Bankruptcy Lawyer

Do not go through bankruptcy alone. It can help greatly to retain the assistance of an experienced bankruptcy attorney. Contact attorney Melanie Tavare today for assistance. 

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