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Best Practice in Bankruptcy Notices of Default

Published on April 17, 2012 in Chapter 13. 0 Comments

By Monette W. Cope, Esq.

The mortgage industry is under tremendous scrutiny from the Attorney General and the States’ Attorney Generals, as well as the new Consumer Financial Protection Bureau which just announced it will be drafting rules to regulate all servicers.  In response, most in the industry are stepping up and being more transparent in their communications with borrowers.  A lesser thought of, but important way to do this is in Notices of Default in Chapter 13 bankruptcies.

In Chapter 13, motions for relief from stay are commonly resolved by a provisional order for relief.  Essentially, the debtor agrees to repay a post-petition default in a manner and by a date certain, and simultaneously maintain current payments to a secured creditor. If the debtor defaults on any of the terms, the stay is automatically lifted should the debtor fail to cure the default within a certain period of time after a Notice of Default is sent.

In some jurisdictions, it is acceptable to give a lump sum for the default in the Notice with no other details.  Going forward, the best practice will be for lenders and servicers to provide their attorneys with a detailed payment history showing the default.  Attorneys, in turn, should then provide detailed information in the Notice as to the dates, amounts and nature of the default.

If the default is not cured, and the court requires an Affidavit of Default or Notice of Default to be filed to spring the relief from stay, the best practice is to include the same detail as in the Notice.

This detail in the Notice will show good faith towards the borrower and alleviate any challenge to the Notice for lack of detail and disclosure, while putting the lender or servicer in a good light. 

If you have any questions on this matter, please contact Ms. Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 and .

Anna Nicole Smith and the Supremes

Published on April 10, 2012 in Bankruptcy Court. 0 Comments

by Monette W. Cope, Esq.

While it may appear that Anna Nicole Smith’s legacy will be her controversial public persona, her real legacy will likely be the Supreme Court’s confusing decision in Stern v. Marshall, 131 S. Ct. 2594  (2011).  This decision casts doubt on a bankruptcy court’s authority to issue final and binding orders when an action in bankruptcy is based on a state law and leads to uncertainty as to the enforceability of those bankruptcy court orders.

Anna Nicole married a wealthy man decades her senior, and after his death, sued his son in a Texas state court under a Texas law prohibiting “tortious interference with a gift.”  In short, she accused the son of fraudulently convincing her husband to keep her out of the will.

She then filed bankruptcy and the son filed a proof of claim and an adversary alleging the Texas suit defamed him. She filed a counterclaim, claiming the same tortious interference as she did in the Texas case.  The bankruptcy court found the son did tortiously interfere with her inheritance and awarded her millions. However, the Texas court later found the opposite and awarded her nothing.  The son appealed the bankruptcy court’s decision to the federal district court, which agreed with the bankruptcy court, but slashed the award.

Eventually, the Supreme Court was called upon to sort the mess out.  The son argued that the bankruptcy court did not have authority to enter an order on Anna Nicole’s counterclaim.  The Supreme Court agreed and disagreed.   It decided that while the Bankruptcy Code gives the bankruptcy court authority to enter a final order on the counterclaim arising under state law, the Constitution does not.  Ergo, the bankruptcy court’s order awarding Anna Nicole her supposed widow’s due was not a final and enforceable order.

The case then presents a murky definition of proceedings in which a bankruptcy order is final and enforceable:  1) If “the action at issue stems from the bankruptcy itself” or 2) If “the action would necessarily be resolved in the claims allowance process”. 

Confused?  So are many bankruptcy and other federal judges.

It’s safe to say that orders on routine matters like motions for relief from stay or objections to confirmation are final orders.  The murkiness arises when a claim involves a state court matter or a matter that has a parallel state law.  An example is fraud.  If a creditor has an action for nondischargeability of its claim based on fraud in bankruptcy, it would also have an action for fraud in the state court.   Can a bankruptcy judge issue a final and enforceable ruling of fraud? 

This article greatly simplifies the court’s decision and is not intended to be a scholarly discussion of Stern and its many potential ramifications.  What it is intended to do is alert creditors of this case.  Federal and bankruptcy courts are beginning to issue decisions clarifying bankruptcy courts’ authority, and tend to uphold the authority of the bankruptcy court to issue final orders, but the bankruptcy court’s authority is not always upheld if the issue involves state law.  If you are a litigant in such an action in bankruptcy court, it would be wise to discuss this with your attorney to determine if any special steps need to be taken to either ensure a final order, or not… whichever is to your advantage.

Monette is a Junior Partner in the Bankruptcy Group based in the Chicago office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 312.253.9614 and .

Should This Mortgage Be Saved?

Published on October 11, 2011 in Real Estate. 0 Comments

With residential loans defaulting at a record pace, Congress proposed or passed various bills to staunch this consequence of the economic dive-bomb.  The Home Affordable Modification Program (“HAMP”) was enacted to prevent foreclosures through loan modifications.    The general consensus is that this program has not produced the number of loan modifications as hoped.  The process has proved burdensome for both creditors and debtors.  Other bills proposed in an attempt to prevent foreclosures would have changed the Bankruptcy Code and permit Chapter 13 debtors to “cramdown” and bifurcate underwater residential mortgages.  For good reasons, including the probable disastrous effect this would have on our already damaged economy, these bills were defeated.

Some are predicting we are on the cusp of yet another foreclosure wave.  While this looms in the background, Congress may not extend HAMP when it is set to expire on December 31, 2012, and there will no longer be a federal loss mitigation program.  There is a bill pending on the Senate calendar (which means it is awaiting action in the Senate) that would give each bankruptcy court the power to set up its own loss mitigation program. Senate Bill 222 was born on its Sponsors’ premise that mortgage servicers are bad guys because they profit from foreclosure losses, while the investors are good gals because they want to mitigate losses to protect the value of their portfolios, and so will engage in negotiations.

The bill would permit each court to establish its own program for consensual loss mitigation on loans secured by debtors’ homes. The bill in its current form would not require creditors to engage in loss mitigation.  However, this might not deter some courts from establishing programs or creating complicated requirements that would delay hearings on motions for relief for loss mitigation. This would be especially harmful when the debtor has no realistic chance of a successful modification.

Additionally, because each court could establish its own program, there could be a complex patchwork of programs throughout the country.  While loss mitigation is a worthy goal when both parties can agree, a decree from Congress to require it in bankruptcy could only delay the inevitable relief from stay in the majority of cases while further harming a creditor’s position.

Monette Cope is a Junior Partner practicing in Bankruptcy. She focuses her practice within the Consumer Bankruptcy and Commercial Bankruptcy Groups located in the Chicago office of Weltman, Weinberg & Reis Co., LPA. She can be reached at 312.253.9614 and .

Attacking Confirmation Orders Post-Espinosa

Published on April 19, 2011 in Bankruptcy Court and Chapter 13. 0 Comments

Hope was extinguished for creditors who would seek to overturn illegal provisions in confirmed Chapter 13 plans by the Supreme Court’s recent decision in Espinosa.[1] There, the Court upheld an order confirming a plan that stated all student loans would be discharged upon the debtor’s Chapter 13 discharge even though the provision was illegal – student loans are nondischargeable under bankruptcy law.

The best defense to illegal provisions is to timely review and object to Chapter 13 plans so that creditors do not lose rights upon confirmation that they would otherwise enjoy under the Bankruptcy Code.  Confirmation orders may still be revoked for fraud under the Bankruptcy Code.[2]  However, such cases are extremely rare.  It is important to know that inserting illegal provisions in plans is not considered fraud under the law, so creditors cannot rely on this Code section as grounds to undo confirmation orders.

 But if a plan is confirmed with an illegal provision, Espinosa does not entirely shut the door on challenging the confirmation order.  That case honored the importance of the finality of orders more than the undoing of illegal provisions in Chapter 13 plans. However, a fundamental underpinning of the decision was the fact that the creditor did have notice of the bankruptcy and plan in time to object, but failed to do so.

If a creditor’s due process rights are violated, the confirmation order is void, at least as to that creditor’s treatment.[3] Due process requires that the creditor get notice in time to object.  If a creditor is omitted from the service list, or an obsolete or incorrect address is scheduled so that the creditor does not receive actual notice of the bankruptcy in time to object to confirmation, then it has a due process argument to challenge the confirmation order. 

Many districts now have model plans that debtors are required to use, but allow special provisions or additional treatment than what the model plan provides. Often, these model plans incorporate the Bankruptcy Code’s requirements for confirmation.  An example is the lien retention provision – a creditor has the right to retain its lien until the earlier of a Chapter 13 discharge or payment in full under non-bankruptcy law.[4]  The Erdmann court found that when a debtor tried to override this provision in a model plan, by inserting a special provision that a creditor’s lien was void upon confirmation, the attempt failed, and the model plan language and the Bankruptcy Code prevailed.[5]  Accordingly, the lien was not avoided at confirmation as the plan had provided. While it is important to note that in the Erdmann case, the creditor did not receive notice of the plan in time to object, rendering the confirmation order void as to that creditor’s treatment, this argument may be successful on its own.   If a special plan provision conflicts with model plan language that echoes the Bankruptcy Code, the model plan language should prevail.

Prompt and diligent review of Chapter 13 plans is the best and most dependable protection against any negative plan treatment.  However, if a plan is confirmed with an illegal provision, your bankruptcy attorney may be able to mount a challenge to the order if the facts are favorable, even after the Espinosa decision.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached directly at 312.253.9614 or via email at .

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[1] United Student Aid Funds, Inc. v. Espinosa, 130 S. Ct. 1367(U.S. 2010)
[2] 11 U.S.C. § 1330(a)
[3] Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)
[4] 11 U.S.C. § 1325(a)(5)(B)(i)(I)
[5] Erdmann v. Charter One Bank (In re Erdmann), infra.

When Spouses Cannot Strip Mortgage Liens in Bankruptcy

Published on April 13, 2011 in Chapter 13, Chapter 7 and Real Estate. 0 Comments

In a previous advisory, titled “Lien Stripping Prohibited if Debtor is Ineligible for Discharge”, the discussion centered on emerging case law that prohibits a debtor from stripping liens on wholly unsecured mortgage claims when that debtor is ineligible for a Chapter 13 discharge.  A recent case out of the Northern District of Illinois Bankruptcy Court adds another barrier to stripping wholly unsecured liens – when property is held in a tenancy by the entirety, and only one spouse seeks to strip the lien.[1]

In this case, both the husband and the wife filed a Chapter 13 bankruptcy, but the husband was ineligible for a Chapter 13 discharge because he received a Chapter 7 discharge within four years of filing the case. The wife, however, was eligible for a discharge, and so could conceivably strip the lien.  The plan proposed to strip the second mortgage as wholly unsecured, and an adversary proceeding was filed to determine the secured status of the mortgage lien.  If the husband could not strip the lien, the question became:  could the wife do it for both, or only as to her interest?  The creditor argued that she could not do either, and the court agreed.

Most states recognize tenancy by the entirety as a form of property ownership. Each state may vary its characteristics. But the fundamental aspect remains the same – only married couples may hold property in a tenancy by the entirety.  This is an ancient form of property ownership which, while it recognizes two individuals as owners of a property, it also recognizes only one tenant of the property, that is, the marriage.  In other words, neither spouse has an individual slice of the property. Both together own it all.

Spouses may only affect the property by acting together, but individually they cannot.  For example, neither can mortgage the property without the other’s consent, but together they both can.  Conversely, a creditor cannot hold a lien on only one spouse’s interest, only on the whole of the marital entity’s interest, the whole property. 

Using this reasoning, the judge held that when property is held as a tenancy by the entirety, a lien strip may occur only when both spouses are acting as one. In this case both spouses signed the note and granted a second mortgage on their residence. But, because only one spouse could conceivably strip the lien due to the other’s ineligibility for discharge, neither spouse could do it.

When only one spouse seeks to strip a lien, determine whether the property is held in a tenancy by the entirety. If only one spouse seeks to strip a lien, research whether the property is held in a tenancy by the entireties.  If both spouses seek to strip a lien, verify that neither is ineligible for a discharge.  Consult with your local bankruptcy counsel to review the state law as to tenancy by the entirety and advise you how to proceed.

If you have any questions on this matter, please contact Monette W. Cope, Esq. Monette is a junior partner in the bankruptcy department of Weltman, Weinberg & Reis Co., LPA located in the Chicago office. She can be reached at 312.253.9614 or .

[1]Erdmann v. Charter One Bank (In re Erdmann), 2011 Bankr. LEXIS 845 (Bankr. N.D. Ill. Mar. 10, 2011)