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Creditor Avoids Host Of Damages Claims By Refunding Payments Received Pursuant To A Mistaken Proof of Claim

Lesson. If, as a lender in a bankruptcy proceeding involving a borrower, you learn that your proof of claim was false, either through mistake or otherwise, quickly withdraw the claim and reimburse the trustee or the debtor for any payments made. A quick, good-faith effort to correct the problem could help you avoid any damages arising out of the mess.

Case cite. Carter v HSBC, 2016 U.S. Dist. LEXIS 128682 (S.D. Ind. 2016) (.pdf).

Legal issue. Whether a mistaken BK proof of claim, together with debtor payments based on the claim, give rise to one or more actions for damages by the debtor.

Vital facts. In Carter, a bizarre situation, the debtor/borrower paid to the creditor/lender/mortgagee over $30,000 pursuant to the debtor’s Chapter 13 bankruptcy plan. The debtor had a mortgage loan with the lender. The mortgage itself identified MERS as lender’s nominee (see post re: MERS below). About six years after the closing of the loan, for reasons not stated in the Court’s opinion, and without the debtor’s knowledge, MERS recorded a satisfaction of mortgage. The lender continued to service the mortgage loan, however, and pursued collection of the debt from the debtor following the debtor’s default, which led to the debtor filing a Chapter 13.  In the BK case, the lender filed a proof of claim alleging secured status based on the mortgage that previously had been released. The plan was confirmed, and the debtor made payments to the trustee, which in turn paid the lender. Although not detailed in the Court’s opinion, at some point the lender discovered that the mortgage had been released, so it amended its proof of claim and withdrew its right to receive any further payments. The debtor herself later discovered the satisfaction of mortgage. Ultimately, the bankruptcy court ordered the lender to repay the 30k it received through the plan.

Procedural history. The debtor filed an action against the lender seeking damages under many theories, including: (1) violation of the automatic BK stay, (2) actual and constructive fraud and (3) unjust enrichment. The lender filed a Rule 12(b)(6) motion to dismiss the debtor’s claims.

Key rules.

11 U.S.C. 362(a)(6) bars any “act to … recover a [preexisting] claim against a debtor…” during the pendency of an automatic stay, which is triggered when a debtor files for bankruptcy.

• Both actual and constructive fraud actions require, among other things, proof of a misrepresentation that caused an injury.

• In Indiana, a party may have a claim for unjust enrichment when a “measurable benefit has been conferred on the defendant under such circumstances that the defendant’s retention of the benefit without payment would be unjust.”

Holding. United States District Judge Tonya Walton Pratt granted the lender’s motion to dismiss the debtor’s case in its entirety.

Policy/rationale.

The debtor claimed the lender violated the automatic stay by collecting a debt falsely labeled as being secured when the claim was unsecured. However, the Court reasoned that the payments were made by mutual mistake and that the money was collected pursuant to a confirmed BK plan. “Once the bankruptcy was filed, [lender] never attempted to recover a claim … rather [it] filed a claim and received … payments from the trustee.” Since the lender did not act outside of the BK process, there was no violation of the automatic stay.

The debtor’s fraud and unjust enrichment claims failed because the lender repaid the trustee in full for all payments received. The trustee, in turn, repaid the debtor in full. Further, the debtor was unable to show that alleged filing fees and administrative costs resulted from the false proof of claim.

Related posts.

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I frequently represent lenders, as well as their mortgage loan servicers, entangled in loan-related litigation. If you need assistance with such a matter, please call me at 317-639-6151 or email me at john.waller@woodenmclaughlin.com. Also, don’t forget that you can follow me on Twitter @JohnDWaller or on LinkedIn, or you can subscribe to posts via RSS or email as noted to your left.

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