By Mike Appleton, Guest Blogger
As it did for many people, the current recession produced serious financial difficulties for William and Mary Hoagland. So they did what thousands of other families do each year and filed a petition for relief under Chapter 13 of the Bankruptcy Code. Chapter 13 does for individuals what Chapter 11 does for corporations; it enables a family to keep its property and pay all or most of its debts over a period to time under court protection.
Chapter 13 even provides a method for reducing or eliminating secured debt in some cases. For example, if you have a second mortgage on your home, and your home’s value does not exceed the value of the first mortgage, the lien of the second mortgage can be “stripped” in a process known as “cramdown,” converting the holder of the second mortgage into an unsecured creditor. The problem is that cramdown is not available for a residential first mortgage, regardless of how far a homeowner is underwater. Chapter 13 can provide breathing space to catch up with arrearages on a first mortgage, but if you want to keep your home, the first mortgage will have to be honored according to its terms, unless the lender will agree to a modification. In the case of Mr. and Mrs. Hoagland, a modification agreement with Bank of America may have enabled them to satisfy a $227,000.00 first mortgage in slightly less than two years.
Mr. and Mrs. Hoagland filed their Chapter 13 petition in March of 2010 in the bankruptcy court for the Middle District of Florida. In January of 2011, they received a letter from Bank of America (BOA) informing them that their loan modification application had been approved and enclosing documents for their signature. They promptly complied and secured a court order formally approving the modification agreement. The terms of that agreement were incorporated into their Chapter 13 payment plan and confirmed by the court in April of 2011.
One month later, BOA notified the Hoaglands that their modification proposal had been denied and was being cancelled at their request. They immediately contacted their lawyer, who immediately filed a motion asking the court to enforce the modification agreement. BOA failed to appear at the hearing on the motion and it was granted by the court.
Notwithstanding the court order, however, BOA sent a notice to Mr. and Mrs. Hoagland in November of 2011 advising them that their monthly mortgage payment was being increased from $1,262.92 to $1,793.69, a breach of the express terms of the modification agreement. When objections from the Hoaglands’ lawyer produced no response from BOA, he filed another motion with the court and scheduled a hearing in January of 2012. Once again BOA failed to attend the hearing, and once again the bankruptcy judge ordered BOA to comply with the modification agreement or suffer possible sanctions.
Over the course of the following year, BOA continued to ignore the modification agreement and the prior court orders. The Hoaglands received various notices asserting the existence of arrearages, demanding payments beyond those required in the modification agreement and charging an interest rate exceeding the agreed rate. By the end of 2012, BOA was holding more than $12,000.00 in payments which it had classified as “unapplied funds.” When the Hoaglands’ lawyer eventually filed a second motion to enforce the modification agreement, the only response from the bank was a new notice of payment change, increasing the monthly mortgage payment to $1,855.25.
The Court heard the second motion to enforce on March 5, 2013. In accordance with its by now well-established practice, BOA did not attend the hearing. On March 15, 2013, Judge Karen S. Jennemann entered an order reciting the tortured history of the bank’s actions and granting the motion to enforce. But the order did even more. Paragraph 2 of the order reads in part, “The Court further Orders and awards Debtors Sanctions against BOA in the amount of Two Hundred and Twenty Thousand Dollars ($220,000.00). . . .” Absent a timely objection from the bank, a recorded certified copy of the court order “shall serve as a full and complete Satisfaction and Release” of the Hoaglands’ mortgage.
Lawyers who have worked with distressed homeowners in negotiating mortgage modifications over the past few years will find nothing unique in the frustrations experienced by Mr. and Mrs. Hoagland. But they will applaud Judge Jennemann for doing what too few judges have been willing to do, imposing serious consequences for serious wrongdoing by financial institutions. I join in that applause.