How Much Notice is Enough?

The Eleventh Circuit found that even though Nationstar did not receive notice of the debtor’s objection to its claim, it was enough that Nationstar had actual notice of a court-ordered change in the status of its claim from secured to unsecured and failed to take timely action to protect its interest. Nationstar Mortgage v. Iliceto, No. 16-16815 (11th Cir. Dec. 11, 2017) (unpublished).

Robert Iliceto filed for chapter 13 bankruptcy listing U.S. Bank as his mortgage creditor. Nationstar filed a transfer of claim establishing itself as the assignee of the mortgage from U.S. Bank. Nationstar listed both its street address and a P.O. Box as “preferred” addresses. Mr. Iliceto filed a claim on Nationstar’s behalf in his chapter 13 bankruptcy and, at the same time, objected to the claim on the basis that Nationstar was not a proper assignee. Mr. Iliceto failed to serve the objection on Nationstar as required by Rule 3007(a) and section 502 of the Code.

In April, 2014, the court sustained Mr. Iliceto’s objection in the absence of objection by Nationstar and issued an order that the lien would be void upon Mr. Iliceto’s discharge. Nationstar received this order. The court then granted Mr. Iliceto early discharge and he filed a motion to declare Nationstar’s lien extinguished. The court granted the motion and Nationstar appealed, arguing that it had been deprived of due process for its undisputed failure to receive notice of several of the bankruptcy court motions and orders. It also argued that it could not be deprived of its lien without an adversary proceeding. The district court affirmed.

On appeal to the Eleventh Circuit, the court relied on the reasoning in United Student Aid Funds, Inc. v. Espinosa, 559 U.S. 260, 272 (2010), where the Supreme Court acknowledged that the bankruptcy court erred when it confirmed the debtor’s chapter 13 plan in which he would pay only the principal on his student loan debt and the interest would be discharged even though the debtor had failed to initiate an adversary proceeding concerning treatment of the debt as required by the Code. The Court held, however, that the Code violation did not amount to a violation of United’s due process rights where United had actual notice of the court’s treatment of its claim.

While it was undisputed that Nationstar did not receive notice of several of the filings, including Mr. Iliceto’s objection to its claim, the circuit court agreed with the lower courts that Nationstar received sufficient actual notice of the underlying proceedings to alert it to the need to protect its interest, and that Nationstar had ample time within which to do so. Specifically, the court found that Nationstar received notice of: “(1) Iliceto’s proof of claim in Nationstar’s name; (2) the April 28, 2014 Order sustaining Iliceto’s objection to the proof of claim; (3) Iliceto’s June 19, 2014 motion to modify the Chapter 13 plan to remove all future payments to Nationstar because it only had an unsecured claim; (4) Iliceto’s September 10, 2014 motion to strike notices filed by Nationstar and the bankruptcy court order February 3, 2015 granting the motion and striking the notices because it only had an unsecured claim; and (5) the September 23, 2015 discharge order.” Key to the decision was the fact that Nationstar received the April, 2014, order in which the treatment of its claim was clearly set forth, and it did not seek reconsideration or appeal the court’s order until over one year later after it had become bound by Mr. Iliceto’s confirmed plan and when Mr. Iliceto sought to have the lien extinguished.

The court likewise rejected Nationstar’s argument that the bankruptcy court erred in not requiring Mr. Iliceto to initiate an adversary proceeding to extinguish Nationstar’s lien. The court held that the time to raise the need for an adversary proceeding was after the court issued its April, 2014, order and that once the plan was confirmed, Nationstar’s status as an unsecured creditor was binding.

Iliceto 11th Cir. opinion Dec 2017