Divorce Attorneys Fees and Bankruptcy

In a recent decision in the case of In re Maria D. Lopez, Case No. 08-18101-BKC-LMI (Bankr. S.D.Fla. April 17, 2009)(Isicoff, J.), the Bankruptcy Court held that the involved attorney fees were not entitled to priority status as a "domestic support obligation".

The debtor's ex-husband was awarded his attorney fees in their dissolution of marriage proceeding and sought priority status for the claim in the debtor's chapter 13 case. Priority status would require full payment and the lack thereof would subject to claim to status as a general unsecured creditor and typically only a small dividend.

The Court explained that the Bankruptcy Code provides that a domestic support obligation ("DSO") owed to a former spouse is entitled to priority status and that while an award of attorney fees in some instances may be considered a DSO, not every award of attorney fees in a dissolution of marriage case are entitled to DSO status.

The Court states that for a claim to be considered as a DSO, it must meet all the requirements of section 101(14A) of the Bankruptcy Code. Generally, the claim must be

1. owed to a spouse, former spouse, or child of the debtor, or such child's parent or guardian
2. be in the nature of alimony, maintenance or support
3. established or subject to establishment by reason of a separation agreement, divorce decree, or property settlement agreement or by court order
4. not assigned to a nongovernmental entity unless voluntarily assigned for purposes of collection

At issue in this case was whether the attorney fees are "in the nature of alimony, maintenance, or support." The Court noted that the 2005 BAPCPA amendments to the Bankruptcy Code amended certain provisions relating to claims arising from "alimony, maintenance, or support" and renamed these obligations "domestic support obligations," but that the pre-BAPCPA case law does to a certain extent continue to have applicability post-BAPCPA.

The Court rejected the claimant's argument that the attorney fees met the requirement of being "in the nature of alimony, maintenance or support" as they related to custody, parentage, or visitation. The Court noted that the determination of what constitutes "support" is a matter of federal law. The Court further noted that in determining whether an award of state court attorneys' fees constitutes "support", the Bankruptcy Court may "only undertake a simple inquiry as to whether the debt can be characterized as 'support'" and that it may look to state law for guidance on whether the obligation should be considered in the nature of "support". The Court noted that the state court judgment awarded claimant attorney fees based on the debtor's litigation misconduct and not based on their respective wages or ability to pay.

Dragnet Clauses

Dragnet clauses are agreements in lending documents that the collateral will secure in addition to the involved debt, other pre-existing and after after acquired debt.

Some courts in Florida have held that "dragnet clauses" are generally enforceable so long as the language of the clause is clear and unambiguous as to the parties intent to secure pre-existing and after acquired debt. Robert C. Roy Agency, Inc. v. Sun First National Bank of Palm Beach, 468 So.2d 399 (Fla. 4th DCA 1985). But the 4th District Court of Appeals has held that the dragnet clause would not be enforced against someone other than the borrower unless it specifically includes within its terms or unless it can be shown that the third party otherwise had notice that the specific pre-existing debt was to be included within the grasp of the dragnet clause. Starlines International Corp. v. Union Planters Bank, N.A., 976 So. 2d 1172 (2008).

Other Florida courts though hold that dragnet clauses are unenforceable to secure pre-existing debt unless the pre-existing debt is specifically identified in the dragnet clause of the mortgage and possibly also in the note. United National Bank v. Tellam, 644 So. 2d 97 (Fla. 3d DCA 1994).

Senator Durbin Gives Banks Mortgage Cramdown "Ultimatum"

The media reports that Senator Durbin has "put the banks and mortgage servicers on notice" that Congress will renew efforts in three months for bankruptcy reform to allow residential mortgage cramdown unless the banks become aggressive in modifying mortgages to prevent foreclosure. It is reported that Senator Durbin want to see 500,000 mortgage modifications by November. Recently House Financial Services Committee Chairman Barney Frank made a similar threat.

This is amid recent revelations that the Administration's foreclosure mitigation efforts, of which the $75 billion Home Affordable Mortgage Program ("HAMP") is the centerpiece, have failed to slow the foreclosure crisis and stabilize the nation's housing market. The Administration initially estimated that HAMP would prevent 3 to 4 million foreclosures, but yet only about 200,000 modifications have been accepted and most of these are merely three month trial period agreements. This amounts to only 9% of delinquent borrowers.

The Treasury Department reports that approximately 85% of mortgages are covered by HAMP participating servicers, that 38 servicers have signed servicer participation agreement to modify loans under HAMP and that approximately 2,300 others automatically participate in HAMP as they service loans owned or guaranteed by Fannie Mae or Freddie Mac.

The banking industry reportedly spent $42 million on lobbyists to defeat bankruptcy reform efforts earlier this year when it failed to pass the Senate by 15 votes.

It is reported that mortgage companies are reluctant to modify mortgages as they collective lucrative fees on mortgages in default.

Options for the Distressed Florida Homeowner

Summary
In recent days, some distressed homeowner have started to receive offers for mortgage modifications from their mortgage companies. These appear to be prompted by the new guidelines under the Treasury Department's "Making Home Affordable Program." The proposed modifications appear to reduce the monthly payment on a first mortgage to about 37% of the family's gross monthly income. The proposed modifications do not appear to propose to reduce the principal balance which usually greatly exceed the value of the home. A further amount may also be due on a second mortgage. Distressed homeowners may contact their mortgage servicer if they desire to review options for refinancing or modification.

One approach which may be considered where appropriate, is to "piggy-back" or combine a first mortgage modification with avoidance of a wholly "underwater" second mortgage while in a chapter 13 bankruptcy reorganization. The goal would be to avoid a wholly underwater second mortgage and modify a first mortgage. The modification of the first mortgage would either under the Treasury Department's "Making Home Affordable Program" or possibly a even better modification terms upon any appropriate review of "defects" of the first mortgage (such as a "lost note", unfair terms, etc.) during the chapter 13 case. Proposed changes to the chapter 13 laws are pending in Congress and may be adopted in the near futures. These changes are expected to be retroactive to pending chapter 13 cases and may offer modification of first mortgages by reducing the principal balance down to the present value and a reduction in interest rate.


1. Present Real Estate Crisis
Many homeowners owe more on their home mortgages than their present value (are “underwater”) and many are unable to pay their monthly payments. Many South Florida homeowners are in a situation where the amounts owed on their first and second mortgages substantially exceed the value of his or her home. Many of the comparable sales are short sales or sales of foreclosed homes. Many first mortgages may be adjustable rate mortgages. Property taxes may be high as they are based on pre-decline assessments. Condominium and association fees may have risen dramatically due to the default of other unit owner’s default.

2. Non-Bankruptcy Refinancing or Modification - the Treasury Department's New Guidelines for the “Making Home Affordable Program”
Most distressed homeowners should immediately contact their mortgage servicers or lenders to attempt refinancing or modifications. Patience may be required as the new provisions of the “Making Home Affordable Program” are now being implemented. Efforts should be made even if you were previously turned down.

Last week the federal government announced updated information on its “Making Home Affordable Program.” This program provides for the refinancing or modification of a mortgage on owner occupied principal residences (1-4 units) under certain circumstances. More information is available from the federal government’s “Homeowner’s HOPE Hotline” at (888) 995-HOPE. Borrowers in bankruptcy are not apparently excluded from consideration for modification. There is "no requirement to use principal reduction" under this program but "servicers may forgive principal to achieve" a certain monthly debt service to gross monthly income target.


3. Participate in Florida Circuit Court Foreclosure Actions
A person who has been served with a mortgage foreclosure action should appropriately address foreclosure actions filed in the the Circuit Court. There may be opportunities to mediate a modification with the mortgage company. The participation should begin by “answering” the foreclosure complaint within the time period set forth in the summons attached to the foreclosure complaint.

4. Chapter 13 Bankruptcy for Mortgages on Principal Residences
In the past (before the general decrease in South Florida real estate prices), Chapter 13 bankruptcy plans typically provided to reinstate first and second mortgages on a principal residence over a five year plan while at the same time paying the ongoing regular monthly mortgage payments. This was due to the fact that mortgages secured only by a principal residence are generally not “modifiable” under chapter 13 bankruptcy laws. Second mortgages though that are wholly “underwater” may be avoided and deemed as “unsecured” claims and put in the same category as credit cards.

5. Negotiation of First Mortgage Modification in Chapter 13 for Principal Residences
Although under the present provisions of chapter 13, a debtor cannot force the modification of his or her first mortgage on his or her principal residence, he or she may be able to obtain an agreed modification while under chapter 13. The debtor may pursue modification under President Obama's “Making Home Affordable Program” or on any other voluntary basis. As mortgage companies usually appoint a bankruptcy attorney to represent their claim in the chapter 13 process, there is usually an increased ability to communicate with the mortgage company. While in chapter 13, the debtor is able to explore any defenses to or defects in the mortgage which may provide more leverage to negotiate a mortgage modification.

Furthermore, the homeowner may yet be able to obtain modification of his or her first mortgage if the proposed changes to chapter 13 bankruptcy are passed as in their present form, they are retroactive to pending cases. The proposed bill allows certain mortgage modification by way of reduction of the principal balance down to the value of the home and a change in interest rate. Adjustable rate mortgages may be modified to be fixed.

6. Chapter 13 Bankruptcy for Investment Property
The rules as to modification of mortgages on non-principal residences in chapter 13 bankruptcy are actually be more liberal although prior to the recent steep declines in property values, modifications of mortgages on non-principal residences was not very common. Modification may include reduction in principal amount and interest rate. The ability to modify may be limited by a need to payoff or refinance the reduced principal amount during the five year chapter 13 plan. There may be arguments available or an ability to negotiate a payoff that continues after the chapter 13 plan is over. Since the recent declines in property values, many mortgage companies have agreed to reduce the principal balance upon the filing of a motion to value during the chapter 13 process.

7. Chapter 12 Bankruptcy for Family Farmers
Chapter 12 also provides for more extensive mortgage modification for family farmers.

8. Proposed Changes to Chapter 13
The proposed changes to chapter 13 include a provision allowing in some circumstances the modification of a first mortgage (as well as junior mortgages) on a principal residences by reducing (“cramming-down”) the principal balance down to the value of the home as well as a possible reduction in interest rate. The proposed changes to chapter 13 bankruptcy may require an attempt by the homeowner to refinance or modify under the federal government’s new “Making Home Affordable Program” prior to attempting to modify the mortgage under chapter 13 bankruptcy. Changes to chapter 13 bankruptcy laws have not yet been enacted by Congress (as of March 13, 2009). Although a bill was passed by the House of Representatives on March 6, 2009, the bill has not yet been passed by the Senate.

9. Other Chapter 13 Considerations
a. Automatic Stay – With certain exceptions, the filing of a chapter 13 bankruptcy stays or stops much creditor collection actions, including mortgage foreclosure. The automatic stay provides a homeowner a “breathing spell” in order to allow him or her an opportunity to reorganize their debt while under the protection of the U.S. Bankruptcy Court.

b. Timing – Generally, a chapter 13 bankruptcy must be filed before a foreclosure sale if a person desires to attempt to save their home under a chapter 13 bankruptcy plan. A foreclosure sale is normally set by the Florida Circuit Court a number of weeks after the entry of the final judgment of foreclosure.

Hearing Set for HAMP Constitutional Claim for Preliminary Injunction

A hearing on the motion for a preliminary injunction in the case of Nichole Williams et al. vs. Timothy F. Geithner, et al., case 09-CV 1959 (DC Minn.) has been set for September 28, 2009 in the Federal District Court of Minnesota. The Plaintiffs seek the injunction of all foreclosures by the involved defendants in the State of Minnesota until the HAMP program is procedurally sound. The lawsuit alleges the the homeowners' Constitutional right to procedural due process was violated, including by way of lack of notice of the basis of the decision and lack of an opportunity to appeal. The HAMP application of one of the plaintiffs was denied and he was not give any reason or an opportunity to appeal. The HAMP application of another plaintiff was ignored.

The memorandum of law in support of the motion for a preliminary injunction detailed the background of HAMP. The Emergency Economic Stabilization Act of 2008 (the "Act") was signed on October 3, 2008. 12 U.S.C. Section 5201. The Act allocated $700 billion to the Treasury Department and granted the Treasury Secretary the authority to establish the Troubled Asset Relief Program or "TARP." 12 U.S.C. Sections 5211, 5225. Section 109 of the Act provides for the Treasury Secretary to implement a plan to "maximize assistance for homeowners." 12 U.S.C. Section 5219(a). The Act also requires the Treasury Secretary to consent to any loan modification offer. Section 110 requires the Federal Housing Finance Agency, as conservator of Fannie Mae and Freddie Mae, to create and implement a plan to prevent foreclosures.

Pursuant to this authority, the Department of Treasury, the Federal Housing Finance Agency, Fannie Mae and Freddie Mac created and announced the Making Home Affordable Program, which consists of two sub-programs, on February 18, 2009. The first provides for certain mortgage refinancing and was called Home Affordable Refinance Program or HARP. The second provides for the implementation of a uniform loan modification protocol and was call Home Affordable Modification Program or HAMP. Approximately 3 to 4 million homeowners are potentially eligible for HAMP and the Treasury Department allocated $75 billion of TARP and non-TARP funds to fund HARP and HAMP. Beginning with March 4, 2009, a series of directives as to HAMP were issued to mortgage servicers.

The memorandum argues that as HAMP is being presently implemented, there are no requirements that homeowners be told the specific reasons for the denial of a HAMP modification and there is no uniform procedure to provide for the ability to appeal. The Plaintiffs argue that approximately 40-60% of the foreclosures conducted in Minnesota are by mortgage servicers bound by HAMP requirements. It is also points out that the General Accountability Office (the "GAO") just last week confirmed that procedural safeguards were not yet in place to protect homeowners.

Plaintiffs seek a preliminary injunction to preserve the status quo. They note the similarity to cases related to the government's loss mitigation and foreclosure prevention programs during the farm foreclosure crisis in the early 1980's. In these cases, the courts issued preliminary injunction of foreclosure proceedings until the government promulgated proper procedures making its foreclosure prevention program constitutionally sound. In the case of Allison v. Block 723 F.2d 631 (8th Cir. 1983), the Court ruled that "[n]otice to the borrower is therefore indispensable...the Secretary is required to give notice to defaulting CFRDA borrowers and to create a procedure for asserting section 1981a claims." The Allison Court also held that [a]gainst this backdrop of statutory language and legislative history, we cannot accept the Secretary's assertion that Congress left the implementation of section 1981a a matter of unfettered administrative discretion." The Court enjoined the farm foreclosure until "the intent of Congress becomes the action of the Secretary."

The Plaintiff also cited the case of Johnson v. U.S. Dep't of Agric., 734 F.2d 774 (11th Cir. 1984) where the 11th Circuit Court of Appeals held that the District Court abused its discretion by denying a motion for preliminary injunction in view of the fact that there was a substantial likelihood that the mortgagors would prevail, at least in part, on due process and equal protection claims. The Court found that the farm loans involved a statutory entitlement and a property interest protected by the due process clause of the Fifth Amendment and that, at a minimum, due process assures notice and a meaningful opportunity to be heard before a right or interest is forfeited.

The memorandum argues that HAMP is a government program authorized by Congress and jointly created by the Department of Treasury, Fannie Mae, and Freddie Mac. 12 U.S.C. Section 5201. The memorandum further argues that there is government action by the Department of Treasury and the Federal Housing Finance Agency (as conservator for Fannie Mae and Freddie Mac), the program creates an entitlement, and that the administration of Sections 109 and 110 of the Act are at issue. In short, the plaintiffs argue that the case involves government actors implementing a federal law with federal funds, that is not an issue of private actors making private decisions and that it satisfies the "government action" requirement for bringing a constitutional claim.

In summary, the memorandum argues that the Plaintiffs are entitled to due process in the administration of HAMP - a $50 to $75 billion federal entitlement program. The Fifth Amendment of the Constitution requires "due process of Law" before any person can be "deprived of life, liberty, or property" and the concept of property includes statutory entitlements derived from an independent source as well as government-fostered expectations. "Once a property interest in a statutory entitlement is identified, a person is entitled to notice, an opportunity to be heard, and reasonably accurate process for determining eligibility." The Plaintiffs also argued that the lack of the right to appeal to a neutral party is also a violation of their procedural due process rights.