20 Aug How Does A Mortgage Lender Collect Reimbursable Expenses In Chapter 13?
In re Padilla, No. 06-03609 SDTX (August 6, 2007) Judge Marvin Isgur ruled that a mortgage lender is required to file an application pursuant to 2016a to collect post-petition expenses for money expended to protect its interests in property securing its loan.
Every mortgage loan contains provisions for the lender to expend reasonable fees to protect its interest in the property. Examples of the types of fees actually charged include property inspections, broker price opinions, legal fees and court costs. When a debtor files bankruptcy, the holder of a mortgage claim typically files a Proof of Claim attempting to collect these fees. Creditors claim these fees are covered by the mortgage and that bankruptcy law prevents the Court from modifying the lender’s rights under the mortgage.
This is the sound bite creditors spew in bankruptcy courts across the country. And it has support in section 1322(b)(2) and per In re Nobleman, 508 U.S. 324 (1993). But the devil is in the details. Mortgage lenders are permitted reasonable expenses according to the mortgage. And under contract law across the country, one party to the contract does not get to unilaterally determine the reasonableness of the expense.
So, Judge Isgur has accepted the responsibility and will decide the reasonableness of such post-petition expenses in his bankruptcy court by requiring creditors to file an itemization of the expenses pursuant to 2016a. This case was decided at the summary judgment stage, with the court denying both sides relief. So, as the case proceeds, the drama continues. Stay tuned.
Andy Miofsky, Esq.
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