The following is a case update written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., analyzing a recent decision of interest:
In re Heard, 2021 WL 3540412, (Bankr. D. Or. 2021) is a case in which a loan servicer mistakenly filed on inaccurate change notice in a Chapter 13 case, incorrectly claiming that an escrow account was short $3,083.63, such that the Debtor’s monthly payment must increase by $237.75. The lender ultimately admitted the error, but not in time to avoid an award of $17,119.59 in attorney fees.
A copy of the opinion may be found here.
The Debtor’s Chapter 13 plan provided for the cure of a $3,681.98 arrearage on her home mortgage and was confirmed on February 22, 2016 by the Bankruptcy Court for the District of Oregon. On September 16, 2020, a few months shy of five years after plan confirmation, the loan servicer filed a Notice of Mortgage Payment Change pursuant to Federal Rule of Bankruptcy Procedure 3002.1. The Notice stated that the required escrow payment had increased from $523.55 to $761.30 per month and attached an escrow statement (also known as an impound account statement) showing an account shortage of $3,083.63. The Debtor filed an objection to the Notice, stating that she had made all plan payments. The objection noted that the claimed escrow deficiency amount closely matched the pre-petition deficiency on the petition date, and that the mortgage arrearages were cured under the plan. The Debtor requested a five year accounting of escrow payments.
In response, U.S. Bank denied that it carried over a prepetition escrow shortage and indicated that “[c]reditor is further reviewing accounting records . . . .” After a hearing, and then a continued hearing at which the issue was not resolved, the court set an evidentiary hearing with a deadline to submit exhibits. Five days before the deadline to submit exhibits, counsel for the Bank sent an email to the Debtor’s attorney stating that “[i]t appears that some of the funds that should have been applied to escrow may have been applied to postpetition amounts due instead. If so, the application of funds would be reversed, such that the postpetition payment status would change.” The email went on to say that the Bank was still in the process of reviewing its accounting records, but that it believed the matter would be resolved before the evidentiary hearing.
The Debtor did not receive an accurate accounting correcting the error before the deadline to file trial exhibits and thus was obligated to prepare for the scheduled evidentiary hearing. At the hearing, the Debtor’s counsel informed the Court that the Objection had been resolved but that the Debtor would be moving separately for attorney fees.
Ultimately, the Court awarded $17,119.59 in fees to the Debtor.
Federal Rule of Bankruptcy Procedure 3002(b) applies to the holder of a mortgage on the debtor’s principal residence. It requires the creditor to file a notice of payment change, including any change that results from and interest rate or escrow account adjustment, no later than 21 days before the payment in the new amount is due. Subdivision (b)(2) provides that an objection to the payment change may be made by motion. Subdivision (i) states:
If the holder of a claim fails to provide any information as required by subdivision (b), (c), or (g) of this rule, the court may, after notice and hearing, take either or both of the following actions:
(1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(2) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.
The Court first noted a split of authority on the issue of whether attorney fees could be awarded under Rule 3002(i) based on an inaccurate change notice (as opposed to an omitted notice). In re Trevino, 535 B.R. 110, 131 (Bankr. S.D. Tex. 2015) holds that a simply inaccurate notice cannot be the basis for an attorney fee award. To the contrary, the Court cited a case from its home District of Oregon, In re Tollstrup, 2018 WL 1384378, at *3 (Bankr. D. Or. Mar. 16, 2018). Tollstrop in turn cites to other published cases that support an award of attorney fees incurred in challenging an inaccurate change notice. See, In re Howard, 563 B.R. 308, 315 (Bankr. N.D. Cal. 2016); In re Ferrell, 580 B.R. 181, 187 (Bankr. D.S.C.)
The Court agreed with the Debtor that attorney fees incurred as a result of an inaccurate change notice may be awarded under Rule 3002.1(i)(2). The attorney fees awarded included not only fees incurred in making the objection, but also those incurred in connection with a reaffirmation agreement between the Debtor and her attorney. The opinion states:
The reaffirmation hearing concerned a reaffirmation agreement between Heard and her counsel. At the hearing, the court did not approve the reaffirmation agreement because Heard expected to incur more fees because of U.S. Bank’s inaccurate Notice. Doc. 55. Further, the firm did not include any time spent preparing, or otherwise seeking approval of, the reaffirmation agreement. Shortly after the reaffirmation hearing, Heard filed a Precautionary Objection to Entry of Discharge stating that, she wanted to resolve the dispute over the inaccurate Notice before she received her discharge. . . . Thus, I find that there was a causal connection between those fees incurred and U.S. Bank’s inaccurate Notice, and that the fees were reasonable.
The Court reviewed the claimed attorney fees under the lodestar method, disallowing a total amount of $996.75, and allowing $17,119.59.
This case may be reviewed for a loan industry audience as another “horror story” in which a bank was slammed with a $17,119.59 attorney fee award for, basically, being slow to correct a mistake involving a $3,083.63 escrow account error. Far greater examples of disproportionality between attorney fees and amounts in issue abound in consumer law. This is hardly a horror story. Call it merely spooky.
In the Heard opinion, the Court noted that “when an award of attorney fees is a statutory sanction, it must be compensatory rather than punitive in nature.” Yet, one might be skeptical of a claim by a consumer Debtor that she had actually paid that amount of attorney fees (and the Debtor here made no such claim), or even that she had “incurred” the fees in the sense that she would have been expected to pay that amount to her attorney if no fee award were obtained.
It is the nature of the beast that the fees “incurred” in a consumer matter will often, perhaps usually, be disproportionate to the amounts at stake. Still, without the presence of lawyers and law like Rule 3002.1(i), one wonders how much success a consumer might have in getting a mistake like this rectified; or, for that matter, in stopping abusive debt collection, spam phone calls and inaccurate credit reporting. The reality is that most such attorney fee claims are punitive and not compensatory in effect, and that the right of recovery is written into consumer law to incentivize private enforcement and not to compensate the consumer.
These materials were written by Dean T. Kirby, Jr. a member of the firm of Kirby & McGuinn, A P.C., located in San Diego, California. Mr. Kirby is a member of the ad hoc group and a member of the Commercial Transactions Committee of the Business Law Section. Editorial contributions were made by the Honorable Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.