In re Payne, Bankruptcy No. 01-23896.

• Decision Date: 06 May 2008
• Docket Number: Bankruptcy No. 01-23896.,Adversary No. 04-06078.
• Citation: 387 B.R. 614
• Parties: In re Willie Clarence PAYNE and Valerie Evelyn Payne, Debtors. Willie Clarence Payne and Valerie Evelyn Payne, Plaintiffs, v. Mortgage Electronic Registration Systems, Inc., et al., Defendants.
• Court: U.S. Bankruptcy Court — District of Kansas

387 B.R. 614

In re Willie Clarence PAYNE and Valerie Evelyn Payne, Debtors Willie Clarence Payne and Valerie Evelyn Payne, Plaintiffs, v. Mortgage Electronic Registration Systems, Inc., et al., Defendants.

Bankruptcy No. 01-23896.

Adversary No. 04-06078.

United States Bankruptcy Court, D. Kansas.

May 6, 2008.

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William D. Peters, Lion Building, Kansas City, KS, for Plaintiffs.

Linda S.' Mock, Overland Park, KS, for Defendants.

MEMORANDUM OPINION ON COMPLAINT TO DETERMINE VIOLATIONS OF AUTOMATIC STAY AND REAL ESTATE SETTLEMENT PROCEDURES ACT

ROBERT D. BERGER, Bankruptcy Judge.

Debtors'/Plaintiffs' adversary complaint (Doc. No. 1) alleging violations of the automatic stay and the Real Estate Settlement Procedures Act (RESPA)¹ against defendants Mortgage Electronic Registration Systems, Inc. (MERS), and Everhome Mortgage Co. f/k/a. Alliance Mortgage Co. (Everhome) is before the Court after a trial.² The Court has jurisdiction to hear this matter.³ Based on the facts and arguments presented as well as pertinent legal authority, the Court hereby enters the following findings of fact and conclusions of law pursuant to Fed. R. Bank. P. 7052. To the extent these conclusions of law contain any items which more appropriately should be considered a finding of fact, or vice versa, such items are incorporated as such by this reference.

Findings of Fact

A. Background

Debtors executed a $55,726.00 note at nine percent interest with Amerifirst Investment Co. on May 11, 1994, secured by a mortgage on their home. The loan is an FHA insured loan, subjecting the lender and Debtors to FHA/HUD regulations governing default. Immediately after origination, the loan was assigned to Regional Investment Co. In early 2000, the loan was assigned to Alliance Mortgage, now known as Everhome. At the time the note was assigned to Everhome, the mortgage was assigned to MERS on behalf of Everhome. In the course of servicing Debtors' loan, Everhome sent Debtors several letters with a return address in Jacksonville, Florida. Debtor Valerie Payne testified she never received a notice of change of servicer; however, the evidence shows Debtors knew who was servicing the loan and how to contact Everhome.⁴ Everhome established an exclusive address to receive qualified written requests for information concerning a borrower's loan. The parties stipulated Everhome. is the new name for Alliance.

The mortgage agreement provides Debtors shall include an installment for taxes and insurance premiums with their monthly payment for Everhome to hold in escrow to satisfy such obligations as they become due. The mortgage agreement also provides Debtors' payments shall be applied in the following order: (1) mortgage insurance premiums; (2) taxes and hazard insurance; (3) interest; (4) principal; and (5) late charges. If Debtors fail to make the required escrow payments, or if there is a legal proceeding which may affect Everhome's rights (including bankruptcy), then Everhome "may do and pay whatever is necessary to protect the value of the Property and Lender's rights in the Property, including payment of taxes, hazard insurance, and other items mentioned in paragraph 2. Any amount disbursed by Lender under this paragraph shall become an additional debt of Borrower and be secured by this Security Instrument. These amounts shall bear interest from the date of disbursement, at the Note rate, and at the option of Lender, shall be immediately due and payable."⁵

Debtors fell behind on their mortgage payments in April 2000. After a temporary forbearance period, Defendants began a foreclosure action in August 2001. Debtors filed for Chapter 13 bankruptcy protection on December 12, 2001. Pursuant to Debtors' confirmed plan, Debtors would cure their pre-petition arrearage over 21 months through the plan. Debtors would make their ongoing post-petition payments of $589.63 a month directly to Everhome. Since Debtors' case began, Everhome has never notified Debtors to pay any amount other than $589.63 a month to cover Debtors' monthly principal, interest and escrow payments. Debtors at all times postpetition believed they were paying sufficient funds monthly to cover principal, interest and escrow costs.

Everhome filed a proof of claim showing a principal balance of $52,406.38 and arrearage of $7,325.39, which included 10 past due monthly payments totaling $5,996.07, late charges of $247.78, property inspection fees of $185.00, an escrow shortage of $591.54, and foreclosure costs of $305.00. Debtors objected to the allowance of the claim, challenging the late charges, inspection fees, escrow shortages, and foreclosure costs. Debtors disputed the total amount of past due payments, claiming they owed $3,625.00. Everhome failed to respond to Debtors' claim objection, so the Court entered an Order granting Debtor's objection on March 25, 2002. The Order allowed Everhome an unsecured $3,625.00 claim. One year later, Everhome realized it missed the objection and moved the Court to reconsider. After seven months, the parties entered an agreed order on October 6, 2003, whereby the past due payments totaling $5,996.07 would be an allowed secured claim.. By agreeing to the Order, Everhome waived its claim to the other amounts contained in its original proof of claim and those amounts were disallowed.

B. Everhome's Post-Petition Accounting and Servicing of Debtors' Loan

The Order Confirming Plan was entered on March 19, 2002. The first Order granting Debtors' objection to Everhome's proof of claim and establishing Everhome's unsecured claim at $3,625.00 was entered March 25, 2002. Thus, for the next year and a half, until October 2003, the Chapter 13 Trustee made disbursements under the confirmed plan and according to Everhome's allowed unsecured $3,625.00 claim. The Trustee made the following payments to Everhome:

(1) For the period ending April 30, 2002: $2,724.91⁶

Everhome processed the payment on June 18, 2002.⁷ On June 25, 2002, Everhome applied the Trustee's payment to Debtors' August, September, October, and November 2001 monthly payments and to a $23.59 late charge, leaving $329.92 unaccounted for, or held "in suspense."⁸ Everhome applied the Trustee's payments to pre-petition debts; however, the late charge had been disallowed and was never reinstated.

(2) For the period ending June 18, 2003: $139.94⁹

Everhome processed the payment on June 13, 2003, but did not apply it to any balance. Everhome held the entire payment in suspense.

(3) For the period ending November 18, 2003: $760.15¹⁰

Everhome processed four payments totaling $760.15 in this time frame as follows:

(a) Everhome processed a $302.77 payment on July 10, 2003. On August 8, 2003, with amounts already held in suspense, Everhome applied the Trustee's aggregate payments to Debtors' January 2003 monthly payment and a $23.71 pre-petition late charge.

(b) Everhome processed a $151.39 payment on August 14, 2003, but did not apply it. Everhome held the entire payment in suspense.

(c) Everhome processed a $164.55 payment on September 10, 2003, but did not apply it. Everhome held the entire payment in suspense.

(d) Everhome processed a $141.44 payment on October 9, 2003. On October 21, 2003, with the amounts already held in suspense, Everhome applied the Trustee's aggregate payments to Debtors' March 2003 monthly payment. After holding part of the payments for over two months, Everhome finally applied the Trustee's payments to post-petition debts.

The payments made from the Chapter 13 Trustee to Everhome by October 2003 totaled $3,625.00. This would have paid in full Everhome's first allowed arrearage claim. However, the October 6, 2003, Order reinstated $2,371.07 of the original claim, bringing Everhome's claim back up to $5,996.07.¹¹ Thus, if properly applied, the Trustee's payments should have satisfied six of ten months of pre-petition arrearage. The Trustee's payments should not have paid post-petition debts, disallowed late fees, or have been held in suspense for months. After the October 6, 2003, Order, Debtors should have been current on their post-petition payments and should have had four months of prepetition arrearage remaining to pay through the plan.

Everhome does not change its accounting after a borrower files for bankruptcy. Payments are simply entered into a computer and applied. When Everhome received a payment, whether it was from the Chapter 13 Trustee for the arrearage or from Debtors for the then currently due installment, Everhome applied the funds to the oldest outstanding contractual obligation due under the note. If a payment were insufficient to satisfy a contractual obligation in full, Everhome would place the funds in a suspense account. Further, in this case, Everhome refused to remove amounts from its accounting which were specifically disallowed by the Court. Late charges of $247.78, property inspection fees of $185.00, escrow shortages of $591.54, and foreclosure costs of $305.00, disallowed in the October 6, 2003, Order, remained on Everhome's records "[because] they are a part of the routine accounting of the servicing of this loan" and remain on Everhome's records "until it is paid."¹²

In January 2004, Everhome advised Debtors they were in default post-petition for five payments from September 2003 through January 2004. Upon further inquiry by Debtors who maintained they had tendered all payments, Everhome discovered it was holding two uncashed checks and $451.24 in suspense. In late 2003, when the Trustee had made four relatively small payments in four months, Everhome had held the payments in suspense until enough money accumulated to satisfy one monthly post-petition payment. Everhome then began rejecting Debtors' postpetition payments because Everhome's own accounting...