In re Sosa

• Decision Date: 28 January 2011
• Docket Number: No. 10–11702.,10–11702.
• Parties: In re Alberto G. SOSA, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Rhode Island

443 B.R. 263

In re Alberto G. SOSA, Debtor.

No. 10–11702.

United States Bankruptcy Court, D. Rhode Island.

Jan. 28, 2011.

Michael W. Favicchio, Esq., Warwick, RI, for the Debtor.Lynn Bouvier Kapiskas, Esq., Law Offices of Mark L. Smith, North Smithfield, RI, for Creditor, PHH Mortgage Corporation d/b/a PHH Mortgage Service Center.Susan W. Cody, Esq., John McNicholas, Esq., Chelmsford, MA, for Creditor, PHH Mortgage Corporation d/b/a PHH Mortgage Service Center Korde & Associates, P.C.John Rao, Esq., National Consumer Law Center, Inc., Boston, MA, Amicus Counsel.

DECISION AND ORDER OVERRULING CREDITOR'S OBJECTION TO LOSS MITIGATION

ARTHUR N. VOTOLATO, Bankruptcy Judge.

Heard on November 18, 2010, on the Objection of PHH Mortgage Corporation d/b/a PHH Mortgage Service Center (“PHH”), a secured creditor, to the Debtor's Request for Loss Mitigation.¹ PHH objects on several grounds, which, when reduced to the basics, challenges the Bankruptcy Court's authority to require home mortgage lenders to participate in the Court's loss mitigation program. Because this dispute involves issues of first impression, an explanation of the Rhode Island Loss Mitigation Program and Procedures (“ LMP ” or “Program”) should be helpful to readers generally, as well as in assisting the Court to address the parties' arguments in an orderly way.

INTRODUCTION

The Rhode Island LMP became effective on November 1, 2009, pursuant to R.I. Bankr. Gen. Ord. 09–003, issued October 22, 2009. Thereafter, in response to growing pains associated with the implementation of the relatively new program, it was amended several times and is now operating under the Third Amended Loss Mitigation Program, effective August 23, 2010. R.I. Bankr. Gen. Ord. 10–003, issued August 17, 2010. The amendments have been aimed, essentially, at increasing the efficiency and user friendliness of the Program, and to simplify the use of recommended forms. As the Debtor's request for loss mitigation was filed on April 27, 2010, this proceeding is governed by the terms of the Second Amended LMP. The substantive provisions, however, are similar and applicable to all versions of the Program.

Since late 2007, bankruptcy case filings in this District have nearly doubled, reflecting the economic downturn experienced nationwide since that time, and which continues as of the writing of this decision. The LMP was implemented in response to the home mortgage and foreclosure crisis generally, and also to address an associated issue that at about the same time was being raised with increasing regularity in this Court. Specifically, at hearings on motions for relief from stay, debtors were routinely advising the Court that they had been seeking out of court loan modifications, forbearance agreements, or similar relief regarding their home mortgages, but that lenders' responses were virtually impossible to come by, despite multiple requests made to the mortgage holder or servicer. The stories were familiar and nearly identical. Creditors' counsel regularly stated that they were either unaware of such requests, or had no information to share—not even the name of a contact person. With communication between parties and a consensual resolution as the objectives, but too often without enough information to assess the likelihood of an agreement, the Court repeatedly had to postpone hearings, order the parties to confer, and report their progress at yet another hearing. These multiple postponements were the result of the Court's inability to fix what had become a very disruptive information exchange deficit.² That, in turn, resulted in calendars crowded with unresolved litigation. Other courts were experiencing similar problems.

At each weekly calendar of relief from stay motions, debtors plead with the court for assistance in obtaining loan modification. Sometimes they have been unable to penetrate the lenders' impenetrable phone tree to talk to a live person; or having reached someone at the other end of the line, they are unable to obtain answers to their inquiries after weeks or months of trying; or having submitted paperwork to the lender, only to be told more papers are required, or that the papers they've already submitted have been lost.Clawson v. Indymac Bank (In re Clawson), 414 B.R. 655, 661 (Bankr.N.D.Ca.2009), rev'd on other grounds, 434 B.R. 556 (N.D.Ca.2010)(bankruptcy court order enforcing settlement agreement reversed and remanded). This practice of parties repeatedly seeking more time simply because they had not yet connected was counter productive, it was a huge waste of time for the parties and the Court, and was forcing needless litigation, with costs and fees being wasted on useless services.

To address that condition, and with no end to it in sight, we decided to break the log jam by introducing a process “for debtors and lenders to [mediate and to] reach consensual resolution when a debtor's residential property is at risk of foreclosure” by “opening communications between debtors' and [the] lenders' decision-makers.” ³ LMP § I Purpose, 1.

In order to address certain anticipated issues, this Court crafted, as carefully as it could, a process intended to ease some of the concerns of the residential lending community. Following are several examples of provisions intended to maintain the rights of the parties: (1) either the debtor or a creditor can initiate the process, Second LMP, § V(A) & (B), 3–4; (2) if objections are filed, loss mitigation may not begin unless and until such opposition is resolved, Second LMP § V(D), 5; (3) after entry of a Loss Mitigation Order, a “Party ... may request that the loss mitigation period be terminated for cause.” Second LMP § IX.C.(1), 10; (4) if cause for early termination is shown, the loss mitigation process is ended. In re Cayard, BK No. 09–12378, 2010 WL 1137931 (Bankr.D.R.I. March 17, 2010). The foregoing list is illustrative, and not all inclusive.

DISCUSSION

The Debtor filed this Chapter 7 case on April 20, 2010, and requested loss mitigation on April 27, 2010. On May 11, 2010, Creditor PHH filed its objection to the Debtor's request, and on June 2, 2010, an initial hearing was held before Bankruptcy Judge Henry Boroff. On July 12, 2010, this Court appointed John Rao, Esq., of the National Consumer Law Center as pro bono amicus counsel. Thereafter, the parties filed briefs and arguments were heard on November 18, 2010. Relief from stay had not been requested as of the date of the loss mitigation request, nor has a motion since been filed by PHH or any other creditor in the seven months since the initial request was filed. Other than a general objection to having to participate in the program, PHH has not offered any “specific reasons why loss mitigation [concerning Mr. Sosa] would not be successful.” Second LMP § V(D), 5. In fourteen months since the start of the Program, this Court has consistently overruled objections to loss mitigation if the only reason alleged was “[m]y client does not wish to participate.” In re Simarra, BK No. 09–14245, 2010 WL 2144150 (Bankr.D.R.I. April 14, 2010) (“objection lacks any substantive merit” when it fails to “address the only relevant issue, i.e., ‘specific reasons why loss mitigation would not be successful’ ”).

In its oral and written arguments, PHH points out that the LMP refers only to 11 U.S.C. § 105(a) as authority to enforce the Program. PHH Memorandum of Law, at 2. From that, PHH argues that the LMP: (i) has enlarged the substantive rights of debtors by creating or granting a previously unauthorized retention option under 11 U.S.C. § 521(a)(2)(A); (ii) violated the relief from stay time constraints of 11 U.S.C. § 362(d); (iii) exceeds what Bankruptcy Courts are authorized to do under § 105; PHH Memorandum, at 3–5; and (iv) that “the Procedures are outside of the scope of the Court's Section 105(a) powers.” Id. at 5.

The Debtor and Amicus, National Consumer Law Center, Inc. (NCLC) contend that even without a formal loss mitigation program in place, there is ample authority and precedent for the Court to regulate the administration of cases pending before it. Such authority is in the Bankruptcy Code, the Bankruptcy Rules, and in particular Fed. R. Bankr.P. 7016, which incorporates Fed.R.Civ.P. 16, and 9014. 11 U.S.C. § 105(d) provides that a “court on its own motion ... (1) shall hold such status conferences as are necessary to further the expeditious and economical resolution of the case.” Rule 7016 incorporates Fed.R.Civ.P. 16, which provides “[i]n any action, the court may order the ... [parties] ... to appear for one or more pretrial conferences for such purposes as ... (5) facilitating settlement.” (Emphasis added). While Rule 7016 is not, per se, applicable to contested matters, Rule 9014(c) authorizes “the court ... at any stage in a particular matter [to] direct that one or more of the other rules in Part VII shall apply.” Rule 7016 is one “of the other rules in Part VII.”

The Court's interest in loss mitigation is twofold: (1) to encourage and facilitate home mortgage modifications, and thereby reduce foreclosures; and (2) to alleviate Court congestion and delay. While PHH emphasizes that R.I. Bankr.Gen. Ord. 09–003 issued October 22, 2009, references only § 105(a), the Second Amended LMP requires a status conference to be held if loss mitigation is requested after the creditor has sought relief from stay. Second Amended LMP § V.A(3), 3. The current LMP clearly implicates Rules 9014 and 7016, which assist courts in determining early on: (1) whether a loan modification is likely; or (2) if the mediation has little or no chance of success, to terminate the loss mitigation and schedule a prompt hearing on relief from stay. In addition, requests for early termination are granted upon request where it is shown that a loan modification is not feasible, and that further discussions would be futile. In re Cayard, supra.

That the Court has not compiled an all...