Application of Mortgage Payments

The First Circuit recently decided the In re Nosek appeal. The case involved a lady who suffered substantial damages because a mortgage company misapplied payments received during the bankruptcy case. The Bankrtuptcy and District Judges both held that she was entitled to substantial damages under the Bankruptcy Code. The First Circuit agreed that it was a difficult circumstance for the debtor, but found no part of the Bankruptcy Code that provided a remedy for her. In doing so, the First Circuit stated as follows:

Morever, even if such a threat had been demonstrated by those practices, there was no language in Nosek’s Plan, as it was confirmed, or in § 1322(b), that addressed how Ameriquest was to apply the payments it received from Nosek or from the trustee. Under such circumstances, the Plan would have to be amended to prescribe the accounting practices necessary to protect Nosek’s right to cure before Ameriquest could be sanctioned for a violation of an order of the bankruptcy court.
In the absence of such specificity, there was no violation of § 1322(b) or the Plan and therefore no basis upon which to award Nosek damages under § 105(a). Because the bankruptcy court’s judgment in the adversary proceeding is vacated, the order confirming Nosek’s Third Amended Plan, which was based on the erroneous damages award, also must be vacated.

The court also acknowledged that new code section 524(i) was relevant to the discussion at footnote 15: “Congress’s enactment of § 524(i) of the Bankruptcy Code
confirms the widespread nature of these problems and the difficult
issues that courts have faced addressing them.”

Section 524(i) creates a new remedy for a debtor where the plan provides that mortgage payments are to be applied in a particular fashion and the creditor fails to do so. That section provides as follows:

The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.

I think the Nosek case gives a prime example of why it is important to include language in a plan that explains how payments should be applied. I will post langauge I am currently using below, but I would note that at least one judge has rejected this language and I do not make and recommendation or warranty regarding these plan provisions:

7.11 – Application of Payments. Confirmation of the plan shall impose a duty on the holders and/or servicers of claims secured by liens on real property (1) to apply the payments received from the trustee on the pre-petition arrearages, if any, only to such arrearages; (2) to apply the direct mortgage payments, if any, paid by the trustee or by the debtor(s) to the month in which they were made under the plan or directly by the debtor(s), whether such payments are immediately applied to the loan or placed into some type of suspense account; (3) to notify the trustee, the debtor(s) and the attorney for the debtor(s) of any changes in the interest rate for an adjustable rate mortgage and the effective date of the adjustment; (4) to notify the trustee, the debtor(s) and attorney for the debtor(s) of any change in the taxes and insurance that would either increase or reduce the escrow portion of the monthly mortgage payment; and (5) to otherwise comply with 11 U.S.C. Section 524(i).

7.12 – Notice of Additional Charges. The holder and/or servicer of a mortgage claim (“Mortgage Creditor”) shall provide to the debtors, debtors’ attorney and trustee a notice of any fees, expenses, or charges which have accrued during the bankruptcy case on the mortgage account and which the Mortgage Creditor contends are 1) allowed by the note and security agreement and applicable nonbankruptcy law, and 2) recoverable against the debtors or the debtors’ account. The notice shall itemize the fees, expense or other charges. The notice shall be sent annually, beginning within 30 days of the date one year after entry of the initial plan confirmation order, and each year thereafter during the pendency of the case, with a final notice sent within 30 days of the filing of the trustee’s final account under Bankruptcy Rule 5009. The failure of a Mortgage Creditor to give such notice for any given year of the case’s administration shall be deemed a waiver for all purposes of any claim for fees, expenses or charges accrued during that year, and the Mortgage Creditor shall be prohibited from collecting or assessing such fees, expenses or charges for that year against the debtors or the debtors’ account during the case or after entry of the order granting a discharge.

7.13 – Mortgage Current Upon Discharge. Unless the Court orders otherwise, an order granting a discharge in this case shall be a determination that all prepetition and postpetition defaults with respect to all Class 1 mortgages have been cured, and that the mortgage account is deemed current and reinstated on the original payment schedule under the note and security agreement as if no default had ever occurred.