IF YOUR LOAN IS “LIEN-STRIPPED” IN A BANKRUPTCY AND YOU RECEIVE NOTICE OF COMPLETION OF THE PLAN, YOU HAVE A DUTY UNDER CALIFORNIA LAW AND BANKRUPTCY LAW TO RECONVEY YOUR DEED OF TRUST AND CANCEL YOUR NOTE.
Since the mortgage crisis hit in 2008, borrowers have been filing bankruptcies and stripping off junior deeds of trust due to the enormous drop in value that took place on real property. The first order of business was for the bankruptcy debtor to obtain an order in bankruptcy determining that the value of the property did not exceed the amount owing on senior property taxes and the first deed of trust (and any other senior deeds of trust). Many of those motions were unopposed because it was obvious to the junior lender that there was no longer any equity in the property to secure its loan.
Once an order valuing the property at less than the senior liens was obtained, the junior lender was then treated as a general unsecured creditor in the bankruptcy and likely received pennies on the amount owed to that lender at the time the bankruptcy was filed.
In order to maintain those “lien-strips” and to avoid paying those junior deed of trust holders, debtors have to confirm a plan, maintain all payments under the plan, make all property tax payments, and maintain payments to the first deed of trust holder through the entire term of the plan.
Once the plan is completed, and a junior lender is provided notice of completion, the lender is required statutorily under California law and bankruptcy law to reconvey its deed of trust. Failure to do so could subject the lender to payment of damages in bankruptcy court.
A recent case in the Eastern District of California, before the Honorable Ronald Stargis, held that a junior “lien-stripped” lender that did not timely reconvey its deed of trust was subject to payment of damages that included attorney fees and costs in having to force the reconveyance through legal action filed with the bankruptcy court.
In re Luchini 511 B.R. 664 (Bankr. E.D.CA 2014)
Facts: Chapter 13 debtor had two liens on her residence. She sought to strip off the junior loan with Chase and set a valuation hearing. After the valuation hearing, the Court determined that the junior deed of trust with Chase was completely unsecured, and was to be treated as a general unsecured claim. The chapter 13 plan was confirmed, making the valuation order and confirmation final and binding on all creditors under United States Aid v. Espinosa 559 U.S. 260 (2010).
Debtor completed her plan and notice of completion and notice that a discharge would be entered was served by the Chapter 13 trustee to all parties to the bankruptcy. Thereafter, debtor received a discharge on November 4, 2013. Her counsel made demand in writing upon Chase to reconvey its deed of trust.
Upon Chase’s failure to do so, debtor filed an adversary proceeding against Chase, alleging that it had refused to reconvey its deed of trust even though the chapter 13 plan had been completed. The complaint alleged seven claims for relief; (1) Ratification of Prior Order Valuing Secured Claim; (2) Determination of Extent of Second Deed of Trust; (3) Extinguishment of the Second Deed of Trust; (4) Violation of CA Fair Debt Collection Practices Act (“FDCPA”); (5) Violation of CA Constitutional Right of Privacy; (6) Violation of CA Civil Code section 2941(d); and (7) Violation of Fair Credit Reporting Act.
Debtor’s counsel obtained service on Chase on December 18, 2013. Chase failed to respond to the Complaint and debtor sought a default judgment. In preparing the motion for default judgment, debtor’s counsel became aware that Chase had recorded a reconveyance of the deed of trust on December 17, 2013. Debtor’s counsel later testified that it was never notified of the reconveyance or provided with a copy. The reconveyance had a return address for Chase and not debtor or its counsel. Chase did not appear at the motion for default judgment.
Decision: In determining whether to grant a default judgment, the Court has an independent duty to consider each claim for relief, the evidence submitted, and whether a plaintiff has established its right to such relief. Following the above standards, the Court granted judgment only on the third and sixth claims and denied relief under the first, second, fourth, fifth, and seventh claims for relief.
The first and second claims sought to have the court “reaffirm” the Chase claim was zero and the Chase deed of trust had zero value. The Court refused to grant a judgment on those two claims because it held that the prior valuation order and confirmation of the plan provided finality to those claims and that it did not need to reaffirm them.
The fourth, fifth, and seventh, claims were also denied. Debtor had not sufficiently pleaded a claim in each of them and provided no evidence to support those claims.
Third Claim Extinguishing Second Deed of Trust.
The Court granted judgment on the third claim seeking extinguishment of the Chase deed of trust. The Court held that upon completion of the plan, Chase was required contractually and statutorily to reconvey its deed of trust. The plan was a final modified contract between the parties, and completion of the plan left no obligation remaining because it was now satisfied, thus no secured lien existed. The language of the deed of trust requires reconveyance once payment of all sums are paid and the obligation is satisfied.
In addition to those contractual requirements, California Civil Code § 2941(b)(1) statutorily requires Chase to reconvey the deed of trust when its obligation has been satisfied by the completion of the plan. Additionally, the lien was void under 11 U.S.C.§ 506(d) of the Bankruptcy Code. As a result, debtor received judgment that the second deed of trust was void and of no force and effect.
Sixth Claim for Violation of CA Civil Code § 2941.
The sixth claim for violation of CA Civil Code § 2941(d) was also granted. Subsection (b) of that statute requires a beneficiary, within 30 days of satisfaction, to deliver to the trustee under the deed of trust, a request for reconveyance, and the original note and deed of trust. Thereafter, a trustee shall execute and record the reconveyance within 21 calendar days after receipt. The reconveyance instrument shall specify either the trustor or successor’s last known address for delivery or the trustee’s address. If the trustee is listed, then it shall mail the recorded instrument to the trustor or its successor at its last known address.
Under the facts presented by debtor, Chase failed to have recorded the reconveyance by the trustee within the time required. Chase also failed to properly list the trustee or trustor on the reconveyance and failed to return the original note. In determining the timeliness of the reconveyance, the Court started with the date of notice of the plan completion, and added 3 days for service. The Court then added, as required under Civil Code § 2941, 30 days for the trustee’s compliance and an additional 21 days for the reconveyance to be recorded.
Under those facts, Chase missed the deadline by about a week. The court did reference in a footnote that Chase could have come into Court and possibly presented facts that would have shown compliance, but that the Court did not have a duty construct such an argument on its behalf when it consciously chose not to appear.
Subsection (d) of § 2941 allows a person affected by a violation to receive a statutory penalty of $500.00 along with actual damages sustained by the violation. The Court awarded the statutory damages, but did not award attorney fees, finding no statutory basis for such an award as actual damages.
Award of Attorney Fees in the Complaint.
Debtor sought attorney fees for having to bring the adversary complaint. The Court first reiterated the standard for seeking attorney fees under the Federal Rules of Bankruptcy Procedure. The Court held that the complaint had the minimum pleading necessary to seek attorney fees, even though a clear specific claim for attorney fees had not been made in the complaint.
The evidence in support of the attorney fees of less than $5,000 was reasonable according to the Court, even though the Court was denying relief under five of the seven claims for relief. It included fees for the pre-filing due diligence of checking to make sure the reconveyance had not been recorded before filing the adversary complaint and all other fees incurred. The Court did not specifically provide a basis for granting attorney fees.
Lesson to be learned: Lenders and trustees must be aware of their requirements to reconvey those lien stripped deeds of trust within the time limitations of plan completion. Once receipt of the plan completion is received by lender or trustee under the deed of trust, the deed of trust must be reconveyed within 51 days and the note cancelled. The lender or trustee should make sure to fill out the reconveyance properly, and make sure to mail it along with the original note to debtor and a copy of the reconveyance to debtor’s bankruptcy counsel. This will avoid the filing of any adversary complaint for non-compliance. Failure to take these steps could subject both lenders and trustees to paying damages, including an award of attorney fees and costs in an action filed by debtor.
Written by: Benjamin R. Levinson, Esq.
Law Office of Benjamin R. Levinson
46 N Second Street, Suite A
Campbell, CA 95008