by The mortgage creditor’s failure to comply with notice requirements of Rule 3002.1(b) when escrow and interest rates changed during bankruptcy, led the court to determine that the debtors were current on their mortgage payments and to sanction the mortgagee. In re Kinderknecht, No. 17-12530 (Bankr. D. Kans. Jan. 18, 2023).
When the debtors filed for chapter 13 bankruptcy they were current on their mortgage with Golden Belt Bank. The lending agreement included a variable interest rate which was 5.25% at the petition date and the debtors were required to maintain an escrow account. Their amended plan committed them to paying the mortgage and related fees through the trustee.
The debtors completed their payments under the plan and the trustee filed a Final Accounting, A Notice of Completion of Plan Payments, and Notice of Final Cure Payment. The Notice of Final Cure Payment included a notification pursuant to Rule 3002.1(g) to creditors including Golden Belt Bank to file within 21 days a statement indicating whether they agreed that any claimed default had in fact been paid. Golden Belt failed to file the statement.
After the debtors received their discharge but before the case was closed, Golden Belt sent them a notice of deficiency with respect to escrow payments. Though the record was unclear the court found that “[a]t some point, presumably in July 2019, Golden Belt Bank changed the interest rate on the mortgage without informing the Court under Rule 3002.1(b). At some point, possibly in July 2021, Golden Belt Bank ran an escrow analysis and projected a needed increase to escrow payments, but again did not inform the Court, the Chapter 13 Trustee, or the Debtors under Rule 3002.1(b).”
The debtors moved the court for a determination that they were current on their mortgage and sought an order requiring Golden Belt to credit their escrow account and perform a new escrow analysis. The debtors also sought an order prohibiting Golden Belt from charging any fees related to these issues and to pay the debtors’ attorney fees.
Under Rule 3002.1(b)(1) a mortgage creditor for a debtor in bankruptcy is required to file and serve within 21 days any changes to the payment or escrow amount or to the interest rate. That and the other end-of-plan filings such as those made by the trustee in this case are intended to avoid the problem of debtors successfully completing plan payments only to find that they have incurred and defaulted on new debt while in bankruptcy.
The court found that Golden Belt failed to comply with its obligations under Rule 3002.1(b). It was unpersuaded by Golden Belt’s argument that, as a lender of a federally-related mortgage loan, it was exempt under RESPA from escrow analysis and notice requirements when the borrower is in bankruptcy. The court found the RESPA exemption did not likewise exempt the lender from its contractual and bankruptcy obligations.
The court also rejected Golden Belt’s argument that its noncompliance was harmless because it did not seek to foreclose on the property and because the debtors’ bankruptcy case was still open giving them time to pay the escrow amount. The court found “the harm Debtors are experiencing is the exact harm Rule 3002.1 was designed to avoid. Debtors have completed payments on their Chapter 13 plan. Debtors’ discharge has been entered. Golden Belt Bank had ‘numerous, obvious opportunities’ to identify the needed increase to the escrow payment at any point between June 2018 and June 2022, but failed to do so.”
As a consequence of Golden Belt’s failure to comply, the court granted the debtors’ motion for an order that their mortgage payment was current. It further sanctioned Golden Belt under Rule 3002.1(i) by ordering it to credit the deficient escrow account the amount needed to be current and to run a new escrow analysis. The court noted that its order requiring Golden Belt to credit the escrow account where Golden Belt had advanced money that should have been paid by Debtors, could be deemed inequitable. But it found “the Bankruptcy Rules are in place to instill certainty in the bankruptcy process and eliminate surprises. Golden Belt Bank did not follow those systems, and the Rules mandate this result.” Finally, the court order Golden Belt to pay the debtors’ attorney fees and not to charge any additional fees related to this action.