The game isn’t very fair when the players are mismatched.

Though bankruptcy court is hardly a game, it’s been unfair when it comes to attorneys fees for the winning party.

California law provides that when a contract allows one party their fees if they prevail, the other party got their fees if they won.  So, even if the contract only provided that you pay my fees if I have to sue you to collect,  the statute made the right to fees reciprocal.

Only, bankruptcy courts have for decades held that the California statute didn’t control if the issue involved bankruptcy.

And then came Penrod in the 9th Circuit.

The firm of bankruptcy icon Ken Klee argued for the consumer that the fight between the car lender and the debtor in the bankruptcy court was “on the contract” and covered by the agreement.  And the 9th Circuit agreed.

A bankruptcy fight over $7000 in negative equity in a Ford ended up with an attorneys fees award for the car buyer of $245,000.

Going forward, when debtors win in fights with creditors in bankruptcy court, they, too, will get the benefit of the contract they made with the creditor.

Chapter 13 Confirmation Fight Covered

The case that lead to a ruling about attorneys fees started out as an objection to confirmation of the Chapter 13 plan.

Prior to filing bankruptcy in 2007,  Marlene Penrod had traded in a car that was worth less than she owed on it for a new Ford Taurus.  The new loan included not only the purchase price of the new wheels but the unpaid balance of her trade in.

When she filed Chapter 13, she proposed to pay in full that part of the new car loan that reflected the purchase price of the new car, but not the part of the loan that payed off her trade in.

That difference, in bankruptcy lingo, was the “negative equity” in the trade in.

The car lender objected to confirmation of the plan, contending that the entire loan taken when the debtor bought the new car was a “purchase money” loan.  Therefore, said the lender, it was protected from cramdown by the”hanging paragraph” added to 1325 by BAPCPA, the mislabeled bankruptcy reform act of 2005.

Several rounds of appeals later, the 9th Circuit held that the “negative equity” portion of the loan was not “purchase money” and therefore, the debtor could confirm a Chapter 13 plan that paid that part of the loan pennies on the dollar.

Who Pays For Debtor’s Win

Winning wasn’t cheap for Marlene.  By the time she got a ruling in her favor from the 9th Circuit in 2011, and beat back the lender’s petition to the Supreme Court, her attorneys fees were $245,000.

Her loan agreement with Americredit said:

“You will pay our reasonable costs to collect what you owe, including attorney fees, court costs, collection agency fees, and fees paid for other reasonable collection efforts.”

And California’s Civil Code 1717 says:

In any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, then the party who is determined to be the party prevailing on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorney’s fees in addition to other costs.

But, said each court considering her request for an award of her fees, the confirmation fight over treatment in bankruptcy of the loan wasn’t an action “to enforce that contract.”  You won, Marlene, but you pay for the victory out of your pocket.

Not so, held the 9th Circuit.  The Supreme Court’s decision in Traveler’s held that nothing in the Bankruptcy Code expressly disallows claims for attorney’s fees simply because the fees are incurred litigating questions of federal bankruptcy law.

Under the language of the attorneys fees provision in the contract, Americredit would have been entitled to its fees had it won on the issue of plan confirmation.  Accordingly, when the bankrupt borrower prevails, that borrower gets an award of attorneys fees.

Attorneys Fees For Winner, Period

The implications of this second Penrod decision are substantial.  It becomes possible for the debtor to challenge creditor actions in the bankruptcy forum and recover the cost of the challenge, if they prevail.

I see it most important in bankruptcy litigation about the amount of mortgage arrearage claims and in relief from stay actions.

Any number of times, I’ve defeated motions for relief from stay, where the lender’s declaration about my client’s alleged defaults were simply untrue.  But because we were in bankruptcy court, fighting over bankruptcy’s automatic stay, my client had to pay the cost of the fight.

To benefit from the newest Penrod holding, debtor’s counsel may need to get a determination from the court that the debtor is the prevailing party.  But the possibility of such may make it possible to negotiate payment of the debtor’s fees without the necessity of trial.

The fruits of victory are now available to both players.

Homeowners whose loans were originally made by a federally chartered savings bank are excluded from protections of HBOR,  a federal judge has ruled.

Dual tracking is back on the rails

California Homeowners Bill of Rights, enacted January, 2013,  prohibited dual tracking of mortgages:  that is, the lender could not simultaneously consider a loan modification and prosecute a non judicial foreclosure.

That’s exactly what Sonoma County homeowner Keni Meyer alleged in her lawsuit that Wells Fargo did.  On April 3, they send her letters discussing the modification of her mortgage loan and on April 8, sent her a notice of foreclosure sale.

Under the provisions of HBOR, a completed loan modification application halts the foreclosure process.

Northern California federal district court ruled in December, 2013 that  HBOR  is preempted by Depression era law creating federal savings banks.  The preemption doctrine holds that federal law on a subject trumps state law on that subject.

Here’s Judge Alsup’s written decision

While the foreclosing bank was Wells Fargo, the loan had originated with World Savings and World Savings was a federal savings bank subject to the federal Home Owners Loan Act of 1933.

The judge held that federal law occupied the field as to servicing mortgages of federally chartered savings banks and the federal law followed the mortgage, even when now held by an institution that isn’t a federal savings bank.

Thus, Ms. Meyer’s claim that Wells Fargo engaged in dual tracking in violation of California law was denied and those claims grounded in HBOR were dismissed.

Mortgages now unprotected

Mortgage servicing in California sometimes feels like the old Laurel and Hardy routine, Who’s On First.  Loans change hands, banks fail, trusts are created, and entities merge.

Below is my preliminary list of entities which may have been federally charted savings banks.  I make no guarantees that I’ve got them all nor that this information is absolutely reliable.

• World Savings
• First Federal Bank of California
• California Federal Bank
• USAA Federal Savings Bank
• Glendale Federal Bank

If, however, your loan was initially made by a federal savings bank, you cannot rely on the California Homeowners Bill of Rights to prevent a foreclosure while the servicer considers a loan modification.

I would welcome your comments to flesh out or correct my list of federal savings banks to whom HOLA preemption may apply.

Image courtesy of OpenClipArt.

It’s not the foreclosing creditor that really threaten California homeowners.

It’s the forces that follow foreclosure.

The junior lender and the tax man can deliver  truly punishing blows to a family losing a home.

Cut-off Junior Lienholders

Californians enjoy the protection of the one action rule governing foreclosures.

A creditor who conducts a non judicial foreclosure of its security interest cannot collect anything more than the property it forecloses on.

Foreclosure is, as lawyers say, an election of remedies. When the lender chooses to foreclose, it gives up the right to pursue the borrower for anything more.

But, the typical foreclosure sale destroys all liens on the property that are junior (inferior) to the foreclosing creditor.

The HELOC lender, the second deed of trust, the SBA loan are rendered unsecured by the sale. Even though they no longer have a lien on the foreclosed property, those cut off lienholders CAN sue you for what’s owed on the debt.

The exception is the California purchase money rule:   [Read more…]

When the sheriff arrives at your employer,

or your bank,

or your business

with a levy for your money, you  need good information fast.

You need to know NOW, and FOR CERTAIN, what part of your assets are protected by an exemption under California law.

You keep exempt assets

Exemptions define the property that you can keep even when you owe money or have a judgment against you.

What a judgment against you really means

Exemptions keep debtors from being stripped of everything they own.

Exemptions are measured in dollars:   $X of equity in a car, for example, is exempt.

To be meaningful, those dollar amounts change over time and with new legislation.

Yet my Google search this morning returned in first place the exemption amounts for 2005. 

In fact, all but one of the first page results returned by Google on a search for “California exemptions” was outdated.

California exemptions

The 2016 edition of California exemptions, available in bankruptcy and in state law collections, are found, largely, in the California Code of Civil Procedure, starting with Section 704.

But most of the online versions of the CCP are several years behind the times.  Look in the statutes and you are likely to get stale information.

The Judicial Council form is the only reliable online source of the dollar amounts in effect today.

Surprisingly, the state form also lists the exemptions available in a bankruptcy case filed in California.  Those exemptions start in the Code of Civil Procedure at Section 703.140.

In a bankruptcy case, the debtor, the person who owes debts, can choose between the two different exemption sets.

You have to choose one, or the other.  You can’t take one from this column, and another from the other list.

In bankruptcy, the debtor also gets the benefit of exemptions in federal law other than the exemptions in the Bankruptcy Code.

Outside of bankruptcy, only the CCP 704 series of exemptions are available.

Claiming exemptions

In a California collection action Form EJ-156 must be delivered to a judgment debtor any time there is action to enforce a judgment. With the list and amount of assets that can be protected by an exemption comes a form for claiming an exemption.

Exemptions are not self-executing.  You have to claim the exemption to get its benefit.

Complete the form (the link above takes you to a fillable pdf form) and return it to the levying officer.  It does not get filed with the court.

The levying officer’s contact information is on the writ of execution.

If the judgment creditor opposes the claim of exemption, a hearing before the court will be scheduled.

Researching law on the internet

My experience in looking for the current dollar amounts of exemptions should highlight the complexity and the danger of relying on DIY research on the law.

The first list of exemptions I found via Google was 10 years out of date.

And more than any other aspect of bankruptcy law, people who represent themselves in bankruptcy screw up the claims of exemption.

The Real Price of Filing Bankruptcy Without A Lawyer

Even the petition preparers, who take your money to “fill out the forms”,  often botch claims of exemption.

Proceed by yourself with caution and with attention to the “use by” date on the law.

More

The secret exemptions

What’s included in bankruptcy

Is it too late to file bankruptcy

Wage garnishment survival guide

Image courtesy of Clement127.

Facing foreclosure is bad enough; worrying about your exposure afterwards is worse.

Breathe deeply.

California laws shield homeowners from further collection by a lender who has foreclosed.

Understanding Foreclosure Sales

To understand California’s protections for homeowners, you have to understand how a typical foreclosure sale works.

The deed of trust, given to the lender when a loan is made, grants the lender a lien on the home.  If the borrower doesn’t pay as promised, the lender can exercise the power of sale in the deed of trust to conduct a public auction of the home that is security for the loan.

The lender can decide where to start the bidding at the foreclosure sale.  While the lender can bid the entire amount that the lender is then owed, the lender can bid less when the property is worth less than the total debt.

So whether because the debt has grown large because it’s been in default for a long time, or whether the value of the house has dropped,  the winning bid at a foreclosure sale may well be less than the total debt.

What happens to the difference between what the sale price at auction and the amount owed to the foreclosing creditor?

Antideficiency Law

Nothing happens to the deficiency if California Code of Civil Procedure 580(b) applies.  This Depression-era statute says that if the loan at issue was made to buy the house and the borrower lived in the house, then the lender gets only whatever the foreclosure sale brought.

No deficiency judgment is available to the lender.

A non judicial foreclosure is not available to the lender on a purchase money loan for the borrower’s home.

That protection has been extended to refinances of the purchase money loan, to the extent of the amount of original loan.

c) No deficiency judgment shall lie in any event on any loan, refinance, or other credit transaction (collectively, a “credit transaction”) which is used to refinance a purchase money loan, or subsequent refinances of a purchase money loan, except to the extent that in a credit transaction, the lender or creditor advances new principal (hereafter “new advance”) which is not applied to any obligation owed or to be owed under the purchase money loan, or to fees, costs, or related expenses of the credit transaction.

So, if the lender made the loan for you to buy a property that you used as your principal residence, or the lender refinanced the loan used to buy your home, you have no risk of suit by the lender.  Any shortfall between the value of the property and the amount of the debt is uncollectable.

But California law provides a second protection against mortgage deficiencies available to almost everyone.

Non Judicial Foreclosure Is Only Remedy

The broader protection from deficiencies is California’s one-action rule.

It holds that a lender with a lien created by a deed of trust gets only one bite of the apple.  If the lender chooses to foreclose under the power of sale in the deed of trust, that’s all the recovery it gets.

The statute reads

There can be but one form of action for the recovery of any debt or the enforcement of any right secured by mortgage upon real property” Cal. Code Civ. Proc. § 726(a)

The foreclosure sale is the lender’s one action, and the borrower has no further exposure to the foreclosing creditor.

If there are junior liens that go unpaid as a result of the foreclosure, those creditors may have a right to sue for their debt, if they are not barred by the antideficiency statute we talked about above.

Virtually every foreclosure sale of a home or small multi family property goes by non-judicial foreclosure.

So, if you are worried about more grief from the mortgage company following a foreclosure, scratch that worry off your list.

More

Your rights while in foreclosure

You won’t believe how long this foreclosure took

After the foreclosure: cash for keys

Images:  Shields courtesy of The Happy Rower and Flickr.

Apple courtesy of Wikimedia.