In re Demers

• Decision Date: 05 June 2014
• Docket Number: BK No: 13-11539
• Parties: In re: Donnalee M. Demers Debtor
• Court: U.S. Bankruptcy Court — District of Rhode Island

In re: Donnalee M. Demers Debtor

BK No: 13-11539

UNITED STATES BANKRUPTCY COURT DISTRICT OF RHODE ISLAND

Dated: June 5, 2014

Chapter 13

MEMORANDUM AND ORDER

Donnalee Demers ("Ms. Demers") filed a Chapter 13 petition on June 7, 2013, and shortly thereafter proposed a five year plan to address the claims of her creditors. The Court confirmed a modified plan in August 2013 (the "Plan").¹ Under the Plan Ms. Demers will pay in full a pre-petition mortgage arrearage owed to America's Servicing Company ("ASC").² ASC filed a proof of claim listing an arrearage owed on its mortgage of $14,181.61. Ms. Demers objected to the amount of ASC's claim, contending that ASC included in the arrearage calculation $1,979.40 it is not entitled to be paid, consisting of counsel fees of $1,170.00, advertising costs of $534.40, and title costs of $275.00 (together the "Disputed Charges"), all of which relate to a foreclosure proceeding ASC commenced prior to the filing of Ms. Demers' Chapter 13 petition. See Limited Objection to Allowance of Claim #4 (Doc. #28). Ms. Demers asserts that ASC is not entitled to payment of the Disputed Charges because it "failed to provide a proper notice of default prior to acceleration and the commencement of foreclosure" as required by the loan agreement. ASC counters that it complied with all contractual provisions of the loan agreement, and even if it did not strictly comply it is contractually entitled to recover the Disputed Charges from Ms. Demers. After consideration of the parties' arguments, I concludethat ASC failed to satisfy a condition precedent to its rights to accelerate the debt and pursue its foreclosure remedy. Accordingly, it is not entitled to recover the Disputed Charges as part of its claim.

I. Jurisdiction

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334 and DRI LR Gen 109(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B).

II. Facts

The facts are undisputed. Ms. Demers received a loan from New Century Mortgage Corporation on November 15, 2005. That loan was evidenced by an adjustable rate note (the "Note") and secured by a mortgage (the "Mortgage") on Ms. Demers' real estate in Woonsocket, Rhode Island (the "Property").³ ASC is the loan servicer for Deutsche Bank National Trust Company, the present holder of the Note and the Mortgage.

Paragraph 22 of the Mortgage ("Mtg. Paragraph 22") states that in the event of Ms. Demers' breach of the Mortgage, prior to accelerating the Note, ASC "shall" give Ms. Demers notice of, among other things, "the right to bring a court action to assert the non-existence of a default or any other defense of Borrower to acceleration and sale." Other potentially relevant provisions of the loan documents include paragraph 14 of the Mortgage ("Mtg. Paragraph 14") and paragraph 7 of the Note ("Note Paragraph 7"). Mtg. Paragraph 14 states:

Lender may charge Borrower fees for services performed in connection with Borrower's default, for the purpose of protecting Lender's interest in the Property and rights under this Security Instrument, including, but not limited to, attorneys' fees, property inspection and valuation fees . . . .

Note Paragraph 7 states:

If the Note Holder has required me to pay immediately in full as described above, the Note Holder will have the right to be paid back by me for all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law. Those expenses include, for example, reasonable attorneys' fees.

After Ms. Demers defaulted on the Note in June 2012, ASC sent her a notice of default dated September 17, 2012 (the "Notice") stating in part: "If foreclosure is initiated, you have the right to argue that you did keep your promises and agreements under the Mortgage Note and Mortgage, and to present any other defenses that you may have." Memorandum in Opposition to Debtor's Objection to Proof of Claim, Exhibit D (Doc. #38) ("ASC Memorandum"). The Notice did not inform Ms. Demers that she had a right to bring an action in court.

Ms. Demers failed to cure the default, and ASC accelerated the Note and initiated the foreclosure process. In doing so, ASC incurred the Disputed Charges of $1,979.40. Before a foreclosure sale took place Ms. Demers filed her Chapter 13 petition. At issue is whether ASC is entitled to recover the Disputed Charges as part of its claim to be paid by Ms. Demers through her Chapter 13 plan. At a hearing held on December 4, 2013, counsel for Ms. Demers and ASC agreed that the issue is a question of law, and both parties submitted memoranda of law for my consideration.

III. The Parties' Arguments

Ms. Demers argues that Mtg. Paragraph 22 "contains a clear unambiguous condition precedent to acceleration." In other words, before ASC could accelerate the Note and commence foreclosure proceedings it was required to provide Ms. Demers a notice specifically stating that she had "the right to bring a court action to assert the non-existence of a default or any other defense." She maintains that because the Notice did not so state, ASC did not satisfy thecondition precedent to exercising the power of sale provided for in Mtg. Paragraph 22 and should not be reimbursed for the Disputed Charges related to the acceleration and foreclosure process.

ASC responds with several arguments in support of its recovery of the Disputed Charges, although it does so with little citation to legal authority. First, that the Notice complied with Mtg. Paragraph 22, because ASC was not required to "mirror the exact language" of Mtg. Paragraph 22 to provide effective notice to Ms. Demers of the right to dispute the default. Second, even if the Notice did not comply with Mtg. Paragraph 22, Note Paragraph 7 and Mtg. Paragraph 14 entitle it to collect the Disputed Charges. Third, even if the Notice did not comply with Mtg. Paragraph 22, it was a "technical failure in the notice requirement" that would constitute a "non-material breach" of the Mortgage and thus not relieve Ms. Demers of the obligation to reimburse ASC for these expenses. Lastly, even if the Notice is defective, because Ms. Demers received in 2008 "numerous prior notices of her default that did contain the language that she complains was lacking," she was on notice of her right to bring a court action to refute the default or offer another defense to acceleration.⁴

IV. Applicable Law and Burden of Proof

Bankruptcy courts generally apply state law to determine the validity and amount of claims. See Travelers Cas. and Sur. Co. of Am. v. Pac. Gas and Elec. Co., 549 U.S. 443, 450-51 (2007) (quoting Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156, 161 (1946) ("What claims of creditors are valid and subsisting obligations against the bankrupt at the time a petition in bankruptcy is filed is a question which, in the absence of overruling federal law, is to be determined by reference to state law.")); City Sanitation, LLC v. Allied Waste Servs. of Massachusetts, LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir. 2011) ("Creditors'entitlements in bankruptcy arise in the first instance from the underlying substantive law creating the debtor's obligation."). Paragraph 16 of the ASC Mortgage states that it "shall be governed by federal law and the law of the jurisdiction in which the Property is located." The Property is in Rhode Island, therefore, I apply Rhode Island law to determine the allowed amount of ASC's claim.

A properly filed claim is deemed allowed unless a party in interest objects, and a properly filed proof of claim is prima facie evidence of the validity and amount of the claim. See 11 U.S.C. § 502(a); Fed. R. Bankr. P. 3001(f). "In order to rebut the presumption that attaches to a proof of claim, a party objecting must produce 'substantial evidence.'" United States v. Clifford (In re Clifford), 255 B.R. 258, 262 (D. Mass. 2000) (citing Juniper Dev. Group v. Kahn (In re Hemingway Transp., Inc.), 993 F.2d 915, 925 (1st Cir. 1993)). "If the objecting party sufficiently rebuts the claimant's prima facie case, the burden shifts back to the claimant as it is ultimately 'for the claimant to prove his claim, not for the objector to disprove it.'" Notinger v. Auto Shine Car Wash Sys., Inc. (In re Campano), 293 B.R. 281, 285 (D.N.H. 2003) (quoting In re G. Marine Diesel Corp., 155 B.R. 851, 853 (Bankr. E.D.N.Y. 1993)). The Supreme Court has stated that the "basic federal rule" that state law governs the substance of claims includes the burden of proof. See Raleigh v. Illinois Dept. of Revenue, 530 U.S. 15, 20-21 (2000). Thus, if Ms. Demers produces substantial evidence in support of her objection to ASC's claim, then ASC bears the ultimate burden of proving its claim should be allowed in the amount filed.

V. Discussion

There are two documents at issue here - the Note and the Mortgage. Ms. Demers refers only to the Mortgage and argues that ASC failed to comply with Mtg. Paragraph 22 and consequently did not have the contractual right to accelerate the Note and commence foreclosureproceedings against the Property. ASC refers to both the Note and the Mortgage and argues that even if it failed to comply with Mtg. Paragraph 22 (which it disputes) it is entitled to recover the Disputed Charges under Note Paragraph 7 and Mtg. Paragraph 14.

Rhode Island case law instructs that "instruments executed in the course of a single transaction at the same time and to accomplish the same purpose should be read and construed together." R.I. Depositors Econ. Prot. Corp. v. Coffey & Martinelli, Ltd., 821 A.2d 222, 226 (R.I. 2003). Here, the Note and the Mortgage were executed at the same time as part of one transaction and to accomplish the same purpose - Ms. Demers' receipt of a loan secured by the Property. As a result, the Note and the Mortgage constitute one agreement and must be read and construed together. See also Emigrant Mortg., Co., Inc. v. D'Agostino, 896 A.2d 814, 821 (Conn. App. 2006) (a note and a...