In re Smith
| Decision Date | 15 May 2014 |
| Docket Number | Case No. 12-12240 |
| Parties | IN RE: CLIFTON JAY SMITH, KATHRYN MARIE SMITH, Debtors. |
| Court | U.S. Bankruptcy Court — District of Kansas |
__________
Robert E. Nugent
United States Chief Bankruptcy Judge
DESIGNATED FOR ONLINE PUBLICATION ONLY
Nationstar Mortgage told Clifton and Kathryn Smith that if they made three trial payments in November and December of 2011 and January of 2012, Nationstar would modify their home mortgage loan. As the lender requested, the Smiths executed a payment forbearance agreement with Nationstar and timely made the trial payments. Nationstar sent them a Loan Modification Agreement that they signed andreturned. Then, even though the Smiths had fully complied with Nationstar's conditions and timely returned the signed modification agreement, Nationstar refused to execute it and instead wrote the Smiths two months later to tell them that their loan "did not meet investor guidelines."1
When a mortgage creditor offers a conditional home loan modification with definite terms to borrowers and the borrowers not only satisfy those conditions, but also accept the loan modification offer, the offer and its acceptance form an enforceable contract. The mortgage creditor cannot thereafter revoke its offer or "reject" the borrowers' acceptance. If the mortgage creditor's offer is not conditioned upon its compliance with undisclosed duties to unidentified third parties, its duties to those third parties cannot excuse its performance of the obligations it undertook to perform, once its offer has been accepted (unless those obligations are somehow unlawful). Here, the Smiths did everything they were supposed to, but Nationstar refused to execute the modification agreement it had offered them because it concluded that its investor, Federal National Mortgage Association (FNMA), would not permit the modification because it had recourse to its assignor and could require the assignor to repay the defaulted obligation.
As Nationstar was bound by the terms of its modification offer, its claim in this case must be allowed under the terms of the loan as modified. Nationstar's calculations are instead based on the terms of the original mortgage note. The debtors' objection toNationstar's proof of claim should be SUSTAINED.2
Objections to claims and confirmation of chapter 13 plans are core proceedings over which the bankruptcy court has subject matter jurisdiction.3
On May 19, 1999, Clifton and Kathryn Smith executed a promissory note to FT Mortgage Companies, promising to repay $65,951 over thirty years at 7.25% per annum in equal monthly installments of principal and interest in the amount of $449.91. They also granted FT a mortgage encumbering their home in Conway Springs, Kansas, to secure repayment of the note. The note is endorsed in blank, "without recourse."5
Attached to the e-mail were two documents, a cover letter and a forbearance agreement. The cover letter sets out the due dates and amounts of the requisite three trial modification payments (in lieu of debtors' normal mortgage payment) and states unequivocally that "[a]fter all trial period payments are timely made, your mortgage will be permanently modified . . . ."9 The Payment Forbearance Agreement that was attached to this e-mail also states at paragraph 3.C. that during the "deferral period" (while the trial payments are being made), the lender will review the loan anddetermine whether "additional default resolution assistance" will be offered, including as a possibility that "Lender will offer to modify my Loan."10 The Forbearance Agreement also provides that, during the trial period, Nationstar agreed to forbear further enforcement proceedings in connection with the Smiths' loan.
To be sure, the Forbearance Agreement left Nationstar several "outs." Paragraph 3.C. contemplates the possibility that the lender might, upon review, decline to modify the loan, offer some other form of assistance, or simply proceed to foreclose. Paragraph 3.D. states "I understand that the [Forbearance] Agreement is not a forgiveness of payment on my Loan or a modification of the Loan Documents" and it further states that the lender is not "obligated or bound" to modify the loan.11 Nothing in the Payment Forbearance Agreement or the correspondence mentioned above refers to a need to meet "investor guidelines" as a condition precedent to modification.12
After they executed and returned the Forbearance Agreement, the Smiths made the three trial payments on time and, on January 18, 2012, Rob Bush sent them a Loan Modification Agreement, an Agreement to Maintain Escrow Account, and a Letter ofAcknowledgment, all attached to an e-mail.13 The subject line of the e-mail read "Please send docs back signed notarized [sic] by 1/24/12 - thank you." The Loan Modification Agreement dated January 18, 2012 provided for the repayment of the outstanding balance of $69,319.84 at a reduced interest rate of 3.75% per annum, amortized from February 1, 2012, and payable in 360 equal monthly principal and interest installments of $321.02 commencing on March 1. The Smiths signed the Loan Modification Agreement before a notary public and returned it to Nationstar, along with the other two documents.
Then, on March 19, 2012, Nationstar wrote them stating that they did not meet the loss mitigation guidelines because "Investor Guidelines Not Met."14 There was no further explanation. The Smiths did everything they were supposed to, but Nationstar refused to execute the modification agreement it had offered them because it concluded that its investor, Federal National Mortgage Association (FNMA), would not permit the modification. At trial, Nationstar's witness, Mr. Hyne, testified that the Smiths' loan was ineligible for loss mitigation because First Horizon had assigned it to FNMA "with recourse," meaning that FNMA could require First Horizon to repay FNMA's investment.15 Because of that, Mr. Hyne said, the Smiths' loan file was "processed in error" and the loan file subsequently flagged for "no mitigation." Neither side offeredevidence about the extent of FNMA's investment or the details of the "recourse" agreement.
Mr. Hyne also testified that after Nationstar "withdrew" its offer to modify, it pursued attempting another form of modification through the Federal Housing Administration that would have allowed Nationstar to file a claim with the Government for payment of the Smith's arrearage. Unfortunately, by the time Nationstar concluded that the Smiths were ineligible for the original modification, they were also ineligible for the FHA relief because that only covers a 12-month deficiency and the Smiths were then behind by more than a year. According to Hyne, the Smiths had no available relief.
But in April of 2012, the Smiths reapplied for modification and, notwithstanding their file having been flagged by the servicer, received another three-month trial period on April 30, 2012.16 They executed and returned another forbearance agreement on May 16, 2012, but did not successfully complete the three-month trial.17
The Smiths filed this chapter 13 case on August 15, 2012, disclosing on their Statement of Financial Affairs that First Horizons had commenced a foreclosure action in 2012, obtained a judgment, and scheduled a sheriff's sale. In the chapter 13 planthey filed with the petition, the Smiths proposed to pay $1,056 per month over 36 months.18 In paragraph 9 of the plan, they provided for payment of the First Horizon mortgage debt through the trustee in the amount of $69,654.57 with an arrearage of $3,888. Nationstar objected to confirmation contending that debtors understated the arrearage and filed a proof of claim in the amount of $73,212.17, including an arrearage of $23,993.14 on the date of the petition.19 The debtors objected to Nationstar's proof of claim.20
For their objection to Nationstar's claim, the Smiths allege that they should only be liable for payments in arrears that came due after they made their last trial payment in January of 2012 and executed the Loan Modification Agreement.21 Had Nationstar honored its offer to modify their loan, that agreement would've taken effect on February 1, 2012 and their arrearage would only include missed payments from and after March 1 - some 6 months. Their prior arrearage was added back into the principal amount of the modified obligation and reamortized. Nationstar argues that its rejected modification is a dead letter that doesn't affect the Smiths' long-term arrearage. The Chapter 13 Trustee advised that the present plan cannot be confirmedbecause the plan payment debtors propose does not cure this large arrearage, rendering the plan unfeasible. She takes no...
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