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Pretty Penny to Pay for Violating Rule 3002.1(c)

Posted By USFN, Monday, October 21, 2019
Updated: Tuesday, October 15, 2019

by Nisha B. Parikh, Esq. and Steven Lindberg, Esq.
Anselmo Lindberg & Associates
USFN Member (IL)

The United States Bankruptcy Court for the District of Vermont recently imposed sanctions against a mortgage servicer for violations of Rule 3002.1(c) of the Federal Rules of Bankruptcy Procedure in three consolidated cases: In Re Gravel, In Re Beaulieu and In Re Knisley, 2019 WL 2710197 (D. Vt. June 27, 2019). Rule 3002.1(c) requires that a notice be filed itemizing all recoverable fees, expenses or charges advanced post-petition by a creditor. The notice shall be filed within 180 days of the fees being incurred and shall be served on a debtor, debtor’s counsel and the trustee. 

In the consolidated cases, which all involved violations of Rule 3002.1(c), the U.S. District Court remanded the matter back to the bankruptcy court solely to focus on the court’s authority to impose punitive sanctions for violations of the bankruptcy code, ultimately levying a $300,000.00 sanction to the mortgage servicer. In its opinion, the court held the imposition of sanctions was warranted because the mortgage servicer violated Rule 3002.1(c) by failing to file Notices of Post-petition Mortgage Fees, Expenses and Charges (PPFNs).

Further, the mortgage servicer sent the debtors approximately 25 incorrect mortgage statements listing fees and costs incurred during the bankruptcy which showed the loan to be in default, post-discharge, when the loans were already determined to be current. As a result, the Chapter 13 trustee filed a motion in each case requesting that the court impose sanctions against the servicer.

In Gravel, the court entered a Debtor Current Order on May 20, 2016, determining the debtors cured all prepetition mortgage defaults and were current on their post-petition mortgage payments and any other charges or amounts due under their mortgage. Five days after the Order was entered, the Gravels received a mortgage statement from the servicer which listed outstanding property inspection fees in the amount of $258.75, even though the servicer failed to file a PPFN for those fees during the bankruptcy.

Similar to Gravel, in Beaulieu, the debtors received a mortgage statement less than three weeks after the court entered a Debtor Current Order which included a $30.00 fee for Non-sufficient funds  and another $56.25 fee for a property inspection. Again, the servicer did not file PPFNs regarding those fees during the bankruptcy.

Finally, the Knisley case mirrors the first two. In Knisley, although a Debtor Current Order was not yet entered, the servicer sent the debtors mortgage statements that included charges of $246.50 for property inspection fees and $124.50 in late charges. These charges were over 180 days old and, similar to the other consolidated cases, the servicer again failed to file PPFNs in the bankruptcy case.

By including charges on the debtors’ mortgage statements without filing PPFNs, the servicer was found to be in direct violation of Rule 3002.1(c) in all three cases. Although the fees were technically recoverable against these debtors pursuant to their respective loan documents, the servicer did not comply with the requirements of the Bankruptcy Code. These relatively small charges ultimately cost the servicer hundreds of thousands of dollars because it did not file PPFNs, which would have allowed the fees to survive a discharge and be recoverable against the debtors.

In all Chapter 13 bankruptcy cases, a mortgage creditor has 180 days from the date charges are incurred to file a PPFN. It is best practices for PPFNs be filed every 180 days to protect a creditor’s ability to collect fees, expenses, and/or other charges incurred during the course of a bankruptcy.

Outstanding and unpaid PPFNs should also be included in a creditor’s response to the trustee’s Notice of Final Cure. This will ensure that the court, debtor(s), and trustee are fully advised of the amounts due and owing to a creditor at the time the trustee filed the notice. To avoid sanctions, it is imperative that creditors consult with their local counsel to determine what fees, expenses, and/or charges are recoverable over the course of a Chapter 13 bankruptcy and can be collected post-discharge.

The servicer is currently appealing the decision, and updates will be provided through e-Update as they become available.


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