Rodriguez v. Countrywide Home Loans, Inc.

421 B.R. 341

Ydalia RODRIGUEZ, Maria Antonieta Herrera, David Herrera, Lucy Moreno, Alfonso Moreno, Plaintiffs, v. COUNTRYWIDE HOME LOANS, INC., Defendant.

Civil Action No. B-09-070.

United States District Court, S.D. Texas, Brownsville Division.

December 3, 2009.

COPYRIGHT MATERIAL OMITTED

Ellen C. Stone, The Stone Law Firm, PC, Brownsville, TX, Karen L. Kellett, The Kellett Law Firm, Dallas, TX, Shennan Kavanagh, Roddy Klien, et al., Boston, MA, for Plaintiffs.

Barabara E. Rutkowski, Goodwin Procter, Washington, DC, Elizabeth Carol Freeman, Porter & Hedges, LLP, Thomas H. Grace, Locke Lord Bissell & Liddell, LLP, Houston, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

ANDREW S. HANEN, District Judge.

Before this Court are the objections to a Report and Recommendation, which denies Defendant's Motion to Withdraw the Reference (Docket No. 1). For the reasons set forth below, the Court adopts the recommendation and DENIES the Defendant's motion to Withdraw the Reference.

I. PROCEDURAL HISTORY

Plaintiffs Ydalia Rodriguez, Maria Antonieta Herrera, David Herrera, Lucy Moreno, and Alfonso Moreno (Plaintiffs) are former Chapter 13 debtors who either have or had mortgage contracts with Defendant Countrywide Home Loans, Inc. (Countrywide). Each plaintiff had a Chapter 13 plan confirmed by the United States Bankruptcy Court for the Southern District of Texas. After confirmation, each plaintiff made the payments required under their Chapter 13 plans and received a discharge from bankruptcy. Plaintiffs allege that, after receiving their discharges, Countrywide sought to collect fees and expenses it had allegedly incurred, but not disclosed, during the pendency of the Plaintiffs' Chapter 13 proceedings and that Countrywide also allegedly failed to obtain approval for these fees or expenses from the bankruptcy court. Based on these outstanding fees and expenses, Countrywide allegedly threatened to foreclose, and in some cases actually foreclosed, on the Plaintiffs' homes when they did not pay the accumulated charges.

Plaintiffs filed an adversary proceeding against Countrywide as part of Plaintiff Rodriguez's Chapter 13 bankruptcy case asserting that the collection of these post-petition, pre-discharge fees without prior disclosure or approval to the bankruptcy court violated the Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Plaintiffs' confirmed plans. Plaintiffs also contend that the fees and expenses charged were unreasonable. Plaintiffs further claim that Countrywide used improper accounting methods in allocating mortgage payments they made during the pendency of their bankruptcy cases. Plaintiffs seek to certify two district-wide and nationwide classes of debtors with respect to each of these claims.¹

Countrywide filed a Motion to Dismiss (Bankr.Docket No. 63) and Motion to Withdraw the Reference (Docket No. 64) in the bankruptcy court. The Motion to Dismiss was denied, in part, by the bankruptcy court. Rodriguez v. Countrywide Home Loans, Inc. (In re Rodriguez), 396 B.R. 436 (Bankr.S.D.Tex.2008) (severing certain issues for consideration on summary judgment). The bankruptcy court issued a Report and Recommendation (Report) with respect to the Motion to Withdraw the Reference recommending that this Court deny the motion.

II. CHAPTER 13, MORTGAGES, AND POST-PETITION EXPENSES

There is currently a split among courts on how mortgage lenders may collect post-petition, pre-discharge fees in Chapter 13 plans. Resolution of this split, if proper on a motion to withdraw the reference, could affect whether withdrawal is appropriate. Chapter 13 protects mortgage contracts, but at the same time, enables a debtor to eliminate past arrearages owed on a mortgage. Mortgage contracts may not be modified by a Chapter 13 plan. See 11 U.S.C. § 1322(b)(2). A Chapter 13 debtor, however, is given the opportunity to pay off arrearages owed on a mortgage. Id. § 1322(b)(5). Lenders often incur fees and expenses in order to protect their security interest in a debtor's home during the pendency of a Chapter 13 case. See Rodriguez v. Countrywide Home Loans, Inc. (In re Rodriguez), 396 B.R. 436, 441 (Bankr.S.D.Tex.2008). These fees and expenses are permitted under the mortgage contracts. Id. The split arises with respect to whether the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure require a lender to provide the debtor or the bankruptcy court with notice of these post-petition, pre-discharge fees and expenses and whether such fees and expenses must be approved by the bankruptcy court prior to collection. Compare Padilla v. Wells Fargo Home Mortgage, Inc. ("Wells Fargo"), 379 B.R. 643 (Bankr. S.D.Tex.2007), with Padilla v. GMAC Mortgage Corp. ("GMAC"), 389 B.R. 409 (Bankr.E.D.Pa.2008).

a. The Wells Fargo Case—Disclosure and Approval Required

In Wells Fargo, the United States Bankruptcy Court for the Southern District of Texas held that a lender must disclose and seek bankruptcy court approval of fees and expenses charged post-petition and pre-discharge.² Wells Fargo, 379 B.R. at 659. Both notice and approval of the fees must occur before discharge. Id. The court concluded that, post-petition and pre-confirmation, 11 U.S.C. § 506(b) and Federal Rule of Bankruptcy Procedure 2016(a) govern a mortgage lender's ability to collect fees and expenses. Id. at 654. Section 506(b) authorizes oversecured creditors to recover interest and reasonable fees and expenses that accrue between the petition date and plan confirmation. Id. (citing § 506). Oversecured lenders' requests for fees and expenses are closely scrutinized by bankruptcy courts through Rule 2016(a) applications. Id. Rule 2016(a) provides, in pertinent part:

An entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested.... The requirements of this subdivision shall apply to an application for compensation for services rendered by an attorney or accountant even though the application is filed by a creditor or other entity.

Fed. R. Bankr.P.2016(a). The Wells Fargo court held that Rule 2016(a)'s plain language requires creditors to file an application with the bankruptcy court (i.e., disclose fees and expenses charged) and then obtain court approval before collecting fees and expenses incurred post-petition, but prior to plan confirmation. Wells Fargo, 379 B.R. at 655 (citing Jones v. Wells Fargo Home Mortgage, 366 B.R. 584, 594-95 (Bankr.E.D.La.2007)). The court rejected the lender's argument that Rule 2016(a) only applies to entities seeking reimbursement for services on behalf of the estate, finding that Rule 2016(a) does not contain any such limitation. Id.

The Wells Fargo court concluded that, following confirmation, 11 U.S.C. § 1322(b)(2), Rule 2016(a), the confirmation order, and applicable non-bankruptcy law control how fees and expenses may be collected. Id. at 655-56. While § 1322(b)(2) "requires a confirmed plan to preserve a lenders' pre-petition rights under its pre-petition contract ... [a] lender's exercise of contract rights is not without its limits." Id. The court held that Rule 2016(a) is applicable post-confirmation as its language contains no limitation on its applicability. Id. at 656. The Wells Fargo court noted that Rule 2016 does not deny or modify a lender's contractual rights to charge and collect post-petition expenses in violation of § 1322(b)(2), but merely provides the procedural method for asserting those rights during bankruptcy. Id.

The court also held that § 1322(b)(2) incorporated the lenders' pre-petition contractual rights into the confirmed Chapter 13 plan. Id. at 659 (citing Nobelman v. Am. Sav. Bank, 508 U.S. 324, 328, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993)). Since Texas law and the mortgage contracts only permitted the collection of those fees and expenses that were reasonable and necessary, Wells Fargo held that these limitations were incorporated into the Chapter 13 plan by § 1322(b)(2). Thus, to the extent the lenders collected fees and expenses that were not reasonable under Texas law or authorized by their contracts, the lenders also violated the Chapter 13 plan. Id. at 661. To enforce this term of the plan, Wells Fargo held that the bankruptcy court, the trustee and the debtors had to be informed of the lender's charges, which would be done by virtue of the Rule 2016 application. See id.

Finally, the court in Wells Fargo noted that debtors could not realistically obtain a "fresh start" if mortgage lenders could charge a debtor's account without disclosure. Id. Once debtors pay all of the "cure" payments required by their plans, the lenders could not "deny them the fresh start to which they are entitled." Id. Without Rule 2016(a) applications, the bankruptcy courts, trustees, and debtors would lack any meaningful ability to ensure this "fresh start." Id. at 659. The Wells Fargo court therefore concluded that Rule 2016(a) applies to all fees and expenses charged post-petition, pre-discharge and requires lenders to disclose and seek approval of fees and expenses before discharge. Id.

b. The GMAC Case—No Disclosure or Approval Requirement

The GMAC court initially noted that for a notice or approval requirement to exist, the debtor had to establish the lender had a legal duty to obtain court approval of post-petition legal expenses or at least provide the debtor notice that such expenses were being charged and that the failure to provide notice or seek approval prohibited collection of the charges. 389 B.R. 409, 434 (Bankr.E D.Pa.2008). The court observed that neither the Bankruptcy Code nor the Federal Rules of Bankruptcy Procedure "address directly the mechanics of the debtor's postpetition contractual performance within the chapter 13 rehabilitation environment." Id. The GMAC court...