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Mortgage Litigation in Bankruptcy

David Leibowitz has become nationally known for his work in this field. His monograph Residential Mortgage Issues in Consumer Bankruptcy Cases published in Norton’s Annual Survey of Bankruptcy Law has been widely read and highly regarded. Real estate is frequently central to bankruptcy cases. Sometimes, issues related to real estate get resolved by negotiations. In many instances, the lenders and the debtor-borrowers can’t come to agreement. In this instance issues have to be litigated.

Frequently Asked Questions about Mortgage Litigation in Bankruptcy

What issues arise in mortgage litigation in bankruptcy?

In bankruptcy, debtors can try to modify the terms of non-residential mortgages. In this instance, the first question which comes up is the valuation of the real estate. That’s because the valuation of the real estate determines the valuation of the mortgage lender’s secured claim. If the mortgage lender’s claim is greater than the value of the real estate, the shortfall becomes an unsecured claim. This is a big deal in real estate cases in bankruptcy. In valuation litigation, we get a trustworthy appraiser. We help organize the appraisal process. We prepare the appraiser to appear as a witness. We review the lender’s appraisal. We take a deposition of the lender’s appraiser. We do this so that we can gather evidence to prove the most favorable valuation possible to further our client’s case.

Another issue which arises in mortgage litigation in Chapter 11 bankruptcy and even Chapter 13 bankruptcy is the proper interest rate for non-residential real estate. This is because a secured creditor is entitled to interest on its secured claim but not necessarily at the contract rate. If the interest rate is too high – as is often the case today – we can frequently get the court to reduce it to a more favorable rate. Again, we have to prepare. We may need expert testimony about current lending markets. At Lakelaw, you can count on us being ready to put your best foot forward.

Does my lender have to show the note to the court?

Not always. In some litigation, such as litigation involving the automatic stay, the lender doesn’t have to make very much of a showing. You may have to make this sort of argument – an argument related to standing in the state court. On the other hand, in the event that you are objecting to a proof of claim, a lender which doesn’t provide adequate documentation to support a claim may not be able to recover anything from you in your bankruptcy case. Lakelaw will object to mortgage claims in your case if it is cost effective and can work to your benefit.

What are some of the causes of action which might be brought to defend against mortgage claims?

Because of developing law in the Supreme Court, many mortgage claims can’t be brought in bankruptcy court today. They can be raised as defenses to proofs of claim. However, claims which exist which we might bring in state or federal court include many of the following:

  • Improper mortgage servicing
  • Failure to give credit for payments
  • Improper use of suspense accounts
  • Improper forced place insurance
  • Breach of HAMP agreement
  • Breach of Trial Modification Agreement
  • Violations of TILA (Truth in Lending Act)
  • Violations of RESPA (Real Estate Settlement Procedures Act)
  • Breach of Contract