In a recent opinion in In re Formosa, 2018 Bankr. LEXIS 124 (Eastern District of Michigan, Case No. 17-46215), Chief Judge Shefferly recommended a standard of practice beyond what the law requires of debtors giving notice of their bankruptcies and creditors foreclosing on their mortgages. The case involved a debtor who filed for Chapter 13 on the eve of a foreclosure sale, and a mortgage company that foreclosed on the property after the automatic stay had gone into effect, but before the company had received notice through the mail. Counsel for the debtor did not e-mail, call, or fax to alert the mortgage company that a case had been filed. The debtor was not under a legal duty to do so. The mortgage company did not conduct a PACER search for a potential bankruptcy filing before foreclosing on the property despite Fannie Mae and Freddie Mac’s guidelines requiring servicers to do so. But no law requires such a search.
To undo the foreclosure, the mortgage company hired bankruptcy counsel who incurred over $12,000 in fees and costs to prepare and file a stipulated rescission of the sale. The mortgage company filed a notice for post-petition mortgage fees and expenses, which the Court considered under Federal Rule of Bankruptcy Procedure 3002.1(e). Typically, a mortgage company’s claim for post-petition mortgage fees and expenses is less than $1,000, is paid through the debtor’s Chapter 13 plan, and causes no disruption of the debtor’s case. In this case, both parties sought to hold the other accountable for the expenses incurred, despite no actual breach of legal duty by either side. The issue before the Court was whether the $12,000 incurred by the mortgage company was required to be paid by the debtor to cure a payment default or to maintain payments under the mortgage in accordance with section 1322(b)(5) of the Bankruptcy Code.
Judge Shefferly awarded $2,500 against the debtor, not as a post-petition mortgage expense, but to be added to the mortgage debt. The Court found that it was necessary for the mortgage company to take steps to protect its interest in the property, but that these steps were not necessary to cure a default or to maintain payments under section 1322. The Judge instructed both parties that they could – and should – have done more to avoid the foreclosure which took place two days after the Chapter 13 bankruptcy was filed:
Both the Debtor and the Bank could have taken action requiring little time and money that would have avoided this entire dispute. The Court encourages each of them to adopt a practice going forward that will prevent this from happening again. Not because the law necessarily requires it, but because it is prudent and reasonable for each of them to do so.
This case serves as a reminder that best practices in bankruptcy cases are not always codified.