Creutz v. U.S. Bank N.A. (In re Creutz)

In re: LAURENCE C. CREUTZ Debtor

LAURENCE C. CREUTZ Plaintiff v. U.S. BANK NATIONAL ASSOCIATION, as Trustee for the holders of the Asset

Backed Securities Corporation Home Equity Loan Trust, Series AMQ 2006-HE7

Asset Backed Pass-Through Certificates, Series AMQ 2006-HE7, Defendant

Case No. 17-11933-MSH

Adversary Proceeding No. 17-01110-MSH

UNITED STATES BANKRUPTCY COURT DISTRICT OF MASSACHUSETTS EASTERN DIVISION

April 12, 2021

Chapter 13

MEMORANDUM OF DECISION

I. Introduction

Laurence C. Creutz filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code on May 24, 2017.¹ During his chapter 13 case, Mr. Creutz initiated this adversary proceeding, asserting claims against U.S. Bank N.A. and Select Portfolio Services related to theorigination, underwriting and closing of his home mortgage loan.² By the time this proceeding was ready for trial, only a single count in Mr. Creutz's complaint against U.S. Bank remained to be litigated. This was count I in which Mr. Creutz objected to U.S. Bank's proof of claim filed in his chapter 13 case.³ In its proof of claim, U.S. Bank asserted a claim in the amount of $470,730.01 secured by a first mortgage on Mr. Creutz's home in Weymouth, Massachusetts. At the trial, which was conducted by video due to the public health emergency created by the worldwide Covid-19 pandemic, Mr. Creutz presented his case in chief and rested. At that point, rather than presenting its case in defense, U.S. Bank orally moved for a judgment of dismissal but also rested. Subsequently, it filed a written motion for a judgment of dismissal.⁴

After considering the evidentiary record and the parties' written and oral submissions, I now present my findings of fact and conclusions of law.

II. Findings of Fact

In 2006, Mr. Creutz was having trouble paying his bills. His monthly home mortgage payment to IndyMac Bank was $2,323 per month. He was carrying a number of other consumer credit obligations, including credit card debt. He was also behind on his real estate taxes. His wife had abandoned the family sometime prior to 2006, and he was left to raise their two teenaged children on his own. His salary as a mortician in a local funeral home was $47,500 annually or $3,958 per month.

Mr. Creutz began working with a mortgage broker, which he knew as Golden State Lending Group, to try to refinance his home mortgage in order to: (1) lower his monthly mortgage payment and (2) raise extra cash from the refinance to pay off his debts.⁵ He truthfully and accurately disclosed to Golden State his assets and liabilities, supplying it with documents to support those disclosures, and asked Golden State to find him a mortgage loan that met his needs. Golden State agreed to do so.

Golden State worked with Mr. Creutz to put together the necessary paperwork for a loan and Golden State submitted the paperwork to Argent Mortgage Company, LLC, a mortgage lender. In doing so, Golden State falsified financial information about Mr. Creutz in a number of crucial respects. For example, Golden State submitted a false statement to Argent with Mr. Creutz's forged signature stating that any extra cash Mr. Creutz would be receiving from therefinance transaction would be to "invest in his retirement." Golden State submitted to Argent multiple loan applications on behalf of Mr. Creutz—all on identical pre-printed forms. The financial information inserted on the forms was not always the same, but each form contained materially false information. Also, not every form was signed by Mr. Creutz, and in at least one case, Mr. Creutz claims his signature was forged. Critically, the amount listed for Mr. Creutz's income on all versions of the loan application was false. Each one listed his monthly income as $6,038, which was about $2,000 a month more than Mr. Creutz told Golden State he was earning.⁶ Mr. Creutz admits he did not read any of the loan applications he signed, not even the one he signed at the loan closing, and was unaware of the false information they contained until after the Argent loan had closed.

The Argent loan closed on August 25, 2006. A woman, introducing herself as working for Argent, came to Mr. Creutz's home and asked him to sign the loan documents. The two of them stood at the island in Mr. Creutz's kitchen and he signed the documents she presented to him in a folder. He did not read any of the documents or ask any questions. Argent's representative offered no explanation as to any of the documents.

Mr. Creutz borrowed $343,800 from Argent. From the loan proceeds he paid fees, points, and other charges to Argent and the mortgage broker totaling over $14,000, paid off the IndyMac loan balance of approximately $298,000, paid off a number of his consumer debts and real estate taxes totaling about $5,600, paid for title-related services and for hazard insurance,and received around $23,000 in cash.⁷ His monthly mortgage payment to Argent was $2,262 ($61 less than his IndyMac payment) for the first three years based on an introductory interest rate of 7.5% per annum. The payment amount was based on a 40-year amortization schedule even though the loan matured in 30 years. After three years the interest rate would adjust every six months, never lower than 7.5% but no higher than 13.5% per annum. After ten years the principal balance would be reamortized to create a new monthly payment that would pay off the loan over the next 20 years. The adjustment features of the loan, especially the reamortization after ten years, promised to greatly increase Mr. Creutz's monthly payment amount.

When Mr. Creutz expressed his concern to Golden State that the Argent loan was unaffordable, Golden State assured him that he didn't need to keep the loan for very long. Golden State told Mr. Creutz that, having cleaned up his unpaid bills with money from the Argent loan, after a few months of on-time mortgage payments to Argent, his credit score would improve to the point where he could refinance again on more favorable terms. This turned out to be another falsehood cooked up by Golden State. When, later, Mr. Creutz asked Golden State to find him a new, more affordable mortgage loan, he was told he did not qualify for a new loan because of the lack of equity in his home.

By the end of 2006, Mr. Creutz began struggling to stay current on his Argent loan. He was in regular communication with SPS Loan Servicing, the servicer of the loan, dealing with overdue payments and exploring possible options to address the underlying reality that he couldn't afford the monthly payments. Over the next several years, Mr. Creutz and SPS representatives discussed and considered various strategies for how to deal with his paymentchallenges, all while Mr. Creutz scrambled to stave off foreclosure, including using his credit cards to make mortgage payments.

In July 2010, Mr. Creutz was approved for a loan modification that considerably lowered his monthly payment, bringing it to a level he could afford. The modification did not, however, include any forgiveness of Mr. Creutz's outstanding debt. Despite being unhappy about not receiving any loan forgiveness, Mr. Creutz agreed to the modification terms, entering into a modification agreement with U.S. Bank, the successor by assignment of Argent.

No sooner had he achieved his long sought-after monthly payment relief, then a series of new crises confronted Mr. Creutz. In the fall of 2010, he was diagnosed with cancer. In early 2011, he underwent surgery preceded by radiation and chemotherapy treatment. At around the same time, the funeral home where he had been employed for over 25 years was sold, and the new owner would not agree to keep Mr. Creutz as a full-time employee. Instead, he gave Mr. Creutz sporadic, part-time work. Mr. Creutz was losing money gambling, and once again, started falling behind on his mortgage payments. He applied for social security disability assistance and, receiving retroactive approval, used the one-time lump sum benefit to catch up on his overdue mortgage payments. But after that, his monthly social security check was not enough to cover his living expenses and the mortgage payment.

Between 2011 and 2017, Mr. Creutz and SPS resumed their regular communications trying to come up with ways to help Mr. Creutz overcome his ongoing payment struggles. Ultimately, nothing could be worked out, and facing imminent foreclosure, Mr. Creutz filed his chapter 13 petition on May 24, 2017.

III. Legal Standard

In count I, Mr. Creutz objects to U.S. Bank's proof of claim by invoking the doctrine ofrecoupment. Recoupment is a defense that "'permit[s] . . . judgment to be rendered that does justice in view of the one transaction as a whole.'" United Structures of Am., Inc. v. G.R.G. Eng'g, S.E., 9 F.3d 996, 999 (1st Cir. 1993) (quoting Rothensies v. Elec. Storage Battery Co., 329 U.S. 296, 299 (1946)). "Recoupment . . . involves a netting out of debt arising from a single transaction." Oregon v. Harmon (In re Harmon), 188 B.R. 421, 425 (B.A.P. 9th Cir. 1995). As a defense, recoupment's "function is to reduce the amount demanded, but only to the extent of the plaintiff's claim." Long Term Disability Plan of Hoffman-LaRoche, Inc. v. Hiler (In re Hiler), 99 B.R. 238, 243 (Bankr. D.N.J. 1989). Mr. Creutz's claim against U.S. Bank is for damages under the Massachusetts consumer protection law, often referred to as "Chapter 93A" based upon where it is codified in the Massachusetts General Laws. If Mr. Creutz can successfully carry his burden to establish U.S. Bank's liability under Chapter 93A, he can recoup his damages from U.S. Bank's secured claim, but only up to the amount of the proof of claim and no more.⁸

As is relevant here, Chapter 93A prohibits "unfair or deceptive acts or practices in the conduct of any trade or commerce." Mass. Gen. Laws ch. 93A, § 2(a). For a plaintiff to prevail on this type of Chapter 93A claim, four elements must be proven:

first, that the defendant has committed an

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