NCBRC Project Director, Tara Twomey, and co-author, Prof. Katie Porter, have written a chapter in the newly released book Shared Responsibility, Shared Risk: Government, Markets and Social Policy in the Twenty-First Century (Jacob S. Hacker and Ann O’Leary eds., Oxford University Press 2012). The chapter, “Risk Allocation in Home Ownership,” focuses on how changes in mortgage contract terms increased home ownership risks for families. After discussing how recent decades of mortgage product innovation both increased the risk of home ownership and shifted more of that risk to borrowers, the chapter offers three core principles to guide the future regulation of mortgages. “First government should collect comprehensive reliable data on mortgage products and should monitor the way in which those products allocate the risks between borrowers and lenders. Second, any effort to rebalance the risks inherent in the mortgage process must consider consumers’ limited abilities to evaluate complex financial products. Third, any successful regulation of mortgage products requires the development and deployment of effective enforcement tools for consumer protection laws.”
Sidestepping the 544 Standing Issue
Two weeks ago the Fourth Circuit Court of Appeals side-stepped the issue of whether a chapter 13 debtor has standing under section 544 to avoid a pre-petition transfer. In re Lee, 2012 WL 29185, No. 10-1772 (Jan. 6, 2012) (per curiam). The bankruptcy court had previously ruled against the debtor on the standing issue and the district court affirmed. In the case, involving a family dispute over real property, the Fourth Circuit held that the debtor was collaterally estopped from asserting the existence of an avoidable transfer or interest in the property on the date of filing.
Whether a debtor has standing to exercise section 544 avoidance powers has long been a contentious issue that has divided bankruptcy courts and bankruptcy appellate panels. Most recently, in U.S. Bank Nat’l Ass’n v. Barbee, No. 10-8074 (B.A.P. 6th Cir., Dec. 12, 2011), the Bankruptcy Appellate Panel for the Sixth Circuit concluded that a debtor had derivative standing to seek avoidance of an unperfected lien on his manufactured home under section 544. The court identified certain economic realities that supported its finding: the trustee’s lack of resources to pursue every legitimate avoidance claim, the requirement that the plan conform to section 1325(a)(4), and the possibility of the debtor’s being accused of bad faith if he proposes a plan that does include avoidance of a clearly avoidable lien. (U.S. Bank filed a notice of appeal to the Sixth Circuit Court of Appeals on Jan. 10, 2012.)
Oklahoma Requires Proof of Standing at Time of Foreclosure Petition
The Oklahoma Supreme Court recently held Deutsche Bank’s feet to the fire when the debtor challenged Deutsche Bank’s (DB) standing to bring a foreclosure action against him. Deutsche Bank v. Brumbaugh, No. 109223 (January 17, 2012). DB attached the note, mortgage, and loan modification papers to its foreclosure petition but Mr. Brumbaugh denied that the papers were the ones he had signed. He argued that DB had not proved that it was the proper party to bring a foreclosure action. DB filed for summary judgment supported by an affidavit by the servicer averring that DB was the current holder of the note and mortgage. However, the affidavit failed to state when DB became the holder. In its response to debtor’s brief DB attached a copy of the note with an undated indorsement to DB. The trial court granted summary judgment and the Oklahoma Supreme Court reversed and remanded, finding that “It is a fundamental precept of the law to expect a foreclosing party to actually be in possession of its claimed interest in the note, and have the proper supporting documentation in hand when filing suit.” Because the indorsed note finally presented to the court was undated, there was insufficient proof that DB was the holder at the time the foreclosure petition was filed. See also Patterson v. GMAC Mortgage, No. 2100490 (Ala. Ct. Civ. App., Jan. 20, 2012) (mortgage assigned to GMAC after it initiated foreclosure proceedings therefore GMAC lacked standing for ejectment action).
Supreme Court Denies Cert. in Baud v. Carroll
Today the Supreme Court denied certiorari in the case of Baud v. Carroll, which raised the issue of the appropriate applicable commitment period for an above-median income debtor with no “projected disposable income.” The Sixth Circuit Court of Appeals held below that above-median income debtors with no projected disposable income must propose five year plans if the trustee or unsecured creditor objects to a shorter plan period. See 634 F.3d 327 (6th Cir. 2011). Attention will now turn to Flores v. Danielson, No. 11-55452 (9th Cir.), where the Ninth Circuit will consider whether the Supreme Court’s ruling in Hamilton v. Lanning, 130 S.Ct.2464 (2010), abrogated the Ninth’s Circuit prior ruling on the applicable commitment period in Kagenveama v. Maney, 541 F.3d 868 (9th Cir. 2008).
Seventh Circuit on Jurisdiction Post-Stern
The fallout from Stern v. Marshall, — U.S. —, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) is really picking up. The Seventh Circuit Court of Appeals became the first circuit court to weigh in, ruling, in a case with facts similar to those of Stern, that the bankruptcy court lacked jurisdiction to issue a final judgment on a claim, asserted by debtors in two proposed class actions, that a medical services creditor violated a Wisconsin state statute by filing proofs of claim revealing the debtors’ medical information. In re Ortiz, — F.3d —-, 2011 WL 6880651 (7th Cir., Dec 30, 2011). Courts disagree over whether a bankruptcy court may issue a final judgment in a proceeding to avoid an allegedly fraudulent transfer. Compare In re Citron, 2011 WL 4711942 (Bankr. E.D. N.Y., Oct. 6, 2011) (court may issue final judgment), with In re Heller Ehrman LLP, — F.Supp.2d —-, 2011 WL 6179149 (N.D. Cal., Dec. 13, 2011) (court may not issue final judgment). A question several courts have asked is what a bankruptcy court should do when a matter designated as “core” in 28 U.S.C. § 157(b)(2) is one that must be decided by an Article III court. The two possibilities are that “unconstitutional core” matters default to the procedure used for non-core matters, (i.e., proposed findings and recommendations under 28 U.S.C. § 157(c)) or, alternatively, that such matters should be entirely removed from the bankruptcy courts. Most courts considering the issue hold that bankruptcy courts retain the power to enter proposed findings and recommendations in this class of cases. See, e.g., In re Byce, 2011 WL 6210938 (D. Idaho, Dec. 14, 2011); In re Mortgage Store, Inc., 2011 WL 5056990 (D. Hawai’i, Oct. 5, 2011); In re Heller Ehrman LLP, above.