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Confirmed Plans of Reorganization: Recovering Escrow Advances Unaddressed in the Plan

Posted By USFN, Tuesday, November 13, 2018
Updated: Monday, November 5, 2018

November 13, 2018

by Christopher M. McDermott
and Jonathan C. Cahill
Aldridge Pite, LLP
USFN Member (California, Georgia)

Recovering post-petition escrow advances for a loan modified in a confirmed plan of reorganization has become an increasingly challenging issue facing mortgage servicers. Frequently, a plan will not address a debtor’s post-petition obligation to maintain taxes and insurance on real property. When a loan is escrowed for pre-petition taxes and/or insurance, a plan’s failure to address these items often leaves servicers struggling to determine the best means to recover escrow advances.

When a creditor seeks to recover post-petition escrow advances, it is important to first consider the procedural status of the case. In a pre-confirmation scenario, a creditor should seek to recover escrow advances and clarify the debtor’s future post-confirmation escrow obligations in the plan and/or stipulated agreement. If this is not feasible, a creditor should consider filing a motion for administrative expense treatment for post-petition escrow advances pursuant to 11 U.S.C. §§ 503(b)(1)(B) & 503(b)(3)(D).

Many courts, however, have held that 11 U.S.C. § 506(b) governs an oversecured creditor’s right to recover fees, costs, or charges up until plan confirmation. See Countrywide Home Loans, Inc. v. Hoopai, 581 F.3d 1090, 1099 (9th Cir. 2009). Accordingly, a court may rule that pre-confirmation escrow advances for an undersecured claim are either non-recoverable under § 506(b) or only recoverable as part of the creditor’s unsecured claim resulting from the cramdown. See SNTL Corp. v. Centre Insurance Co., 571 F.3d 826, 842 (9th Cir. 2009). For these reasons, a secured creditor encountering a potential cramdown should consider seeking a court order authorizing escrow advances and deeming them recoverable from the debtor prior to making the advances.

When a creditor is seeking to recover escrow advances for a crammed-down loan following plan confirmation, the analysis shifts to whether the plan addressed the escrow requirements of the loan. While a plan confirmation order generally acts as a final order that binds debtors and creditors alike, an ambiguous material term in a plan is subject to judicial interpretation. Miller v. United States, 363 F.3d 999, 1004 (9th Cir. 2004). Confirmed plans are similar to consent decrees and are interpreted pursuant to rules governing the interpretation of contracts. See Hillis Motors v. Hawaii Automobile Dealers’ Ass’n (In re Hillis Motors), 997 F.2d 581, 588 (9th Cir. 1993).

Court decisions vary as to the issue of whether silence in a plan can be interpreted as modifying a creditor’s rights. Some courts interpret confirmed plans as modifying only a creditor’s rights specifically mentioned in the plan. See Eickerman v. La Jolla Group, II, 592 F. App’x 614, 615 (9th Cir. 2015) (creditor’s contractual right to recover fees and costs not limited as plan was silent on this issue). Under this view, the plan’s failure to address the escrow status of a loan would leave those rights unmodified. Conversely, other courts have held that the plan completely replaces any pre-confirmation rights. See, e.g., Salt Creek Valley Bank v. Wellman (In re Wellman), 322 B.R. 298, 301 (B.A.P. 6th Cir. 2004) (confirmed plan exclusively governs the relationship between debtor and creditor). As a consequence, the failure of a confirmed plan to address a creditor’s escrow rights may eliminate a creditor’s rights to tender and recover escrow advances.

In the event the terms of a confirmed plan or applicable bankruptcy law do not limit a creditor’s ability to recover post-confirmation escrow advances, a creditor should ensure compliance with applicable non-bankruptcy law to safeguard those rights. Specifically, a creditor may waive its right to recover escrow advances by failing to provide notices to the debtor of the escrow payment and/or escrow shortage required by non-bankruptcy law. See In re Dominique, 368 B.R. 913 (Bankr. S.D. Fla. 2007) (escrow shortage waived due to noncompliance with RESPA and Fla. Stat. section 501.137(2)); Chase Manhattan Mortgage Corp. v. Padgett, 268 B.R. 309 (S.D. Fla. 2001).

Assuming a creditor is not prohibited from recovering post-confirmation escrow advances based on the terms of a confirmed plan and/or applicable legal authority, it is advisable to engage debtor’s counsel to reach an agreement regarding the recovery of those advances and any future escrow advances. In the event an agreement is not possible, a debtor’s failure to pay taxes and/or insurance on a property generally constitutes a default under the security agreement and provides grounds for a motion for relief from the automatic stay. Likewise, to the extent a debtor’s failure to pay taxes and insurance constitutes a default under a confirmed plan, a motion to dismiss the debtor’s bankruptcy case may be warranted.

Closing Words
In sum, servicers should consult their local bankruptcy counsel to determine whether escrow advances are recoverable prior to making or waiving any escrow advances from a loan that is modified within a confirmed plan; and, if so, to determine the appropriate mechanism for seeking their recovery.

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