Ditech Financial LLC
Filing
15
MEMORANDUM AND OPINION AFFIRMING ORDER OF BANKRUPTCY COURT (Signed by Judge Charles Eskridge) Parties notified.(jengonzalez, 4)
Case 4:15-cv-02604 Document 15 Filed on 05/19/20 in TXSD Page 1 of 12
United States District Court
Southern District of Texas
ENTERED
May 19, 2020
David J. Bradley, Clerk
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
LAURA DENISE
WASHINGTON,
Appellee,
vs.
DITECH FINANCIAL
LLC, f/k/a Green Tree
Servicing LLC,
Appellant.
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CIVIL ACTION NO.
4:15-cv-02604
JUDGE CHARLES ESKRIDGE
MEMORANDUM AND OPINION
AFFIRMING ORDER OF BANKRUPTCY COURT
Appellant Ditech Financial LLC, formerly known as Green
Tree Servicing LLC, appeals an order of the bankruptcy court in
the Southern District of Texas. This order sustained Appellee
Laura Washington’s objection to Green Tree’s proof of claim
regarding her mortgage.
The order is affirmed.
1. Background
This dispute boils down to whether Washington was
required to continue paying Private Mortgage Insurance (PMI)
premiums after her home loan was modified. The Court recites
the facts based on documentary evidence in the record, as
supplemented by the testimony of Washington given at a hearing
before the bankruptcy court.
Washington obtained a $125,000 loan in June 2007 that she
used to purchase a home in Fresno, Texas. The loan was
evidenced by a promissory note and secured by a deed of trust.
Dkt 3-8 at 16–18 (promissory note), id at 20–35 (deed of trust).
Washington was required to pay PMI of $267.71 per month
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because she financed the entire sales price of the home. Dkt 3-8
at 60, line 1002 (June 2007 HUD-1 settlement statement); id at
68–69 (Fannie Mae Underwriting Findings reflecting PMI).
Washington signed a Private Mortgage Insurance Disclosure that
provided for payment of PMI as part of the loan. Id at 75–76.
Washington testified that she became ill and unable to work
in 2010, which qualified her for a Home Affordable Modification
Agreement (HAMP Modification). Dkt 3-13 at 21. She further
testified that she was put on a modification trial period, during
which she made several payments that did not include PMI and
were accepted by then-lender Litton Loan Servicing. Id at 21, 24.
The length of the trial period is unclear. Washington signed the
HAMP Modification on September 22, 2010. Dkt 3-8 at 46. The
HAMP Modification states that the new interest rate would begin
to accrue on the new principal balance as of October 1, 2010 and
that the first new monthly payment would be due on
November 1, 2010. Id at 42.
Washington offered into evidence two statements from
Litton Loan Servicing that did not include PMI. One was titled
“Annual Escrow Account Disclosure Statement” and dated June
23, 2010. Dkt 3-9 at 57. The other was a “Monthly Statement”
dated December 20, 2010. Id at 58. Green Tree objected to these
on hearsay grounds. Dkt 3-13 at 14. The bankruptcy court
excluded the latter from evidence but admitted the former as a
recorded recollection under FRE 803(5). Id at 28, 30.
The note was transferred to Green Tree about six months
after the HAMP Modification went into effect. Id at 11. The
exact date of transfer is unclear. Green Tree then began issuing
statements that included PMI. Ibid; see also Dkt 3-8 at 75–76
(March 10, 2015 Green Tree Escrow Account Disclosure
Statement).
Washington could not afford her monthly payments with the
added cost. She initiated her bankruptcy proceedings in
December 2014. Green Tree filed its proof of claim in April 2015
for $150,106.00, with $39,334.86 in arrears and an ongoing
monthly payment of $1,778.02. Dkt 3-12.
Washington filed an objection to Green Tree’s proof of
claim. Dkt 3-5. The bankruptcy court held an evidentiary hearing
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on this objection in August 2015. See Dkt 3-13. Washington
argued that the HAMP Modification modified the PMI
requirement. She testified she had been employed for over a
decade with title companies doing closings on mortgage loans. Id
at 18–19. She had state certification as a signing agent to do so,
as well as familiarity with mortgage loan documents. Id at 19. She
testified it was her understanding at the time that the HAMP
Modification wholly eliminated PMI. Id at 33.
The bankruptcy court ultimately disallowed Green Tree’s
proof of claim to the extent it included past and future PMI. Dkt
2-20; see also Dkt 3-13 at 60–61. It determined that the HAMP
Modification excluded PMI, that it was Washington’s
understanding that PMI had been removed, and that her lender
at the time accepted the payments without PMI included in them.
Dkt 3-13 at 58.
Green Tree timely appealed this order. Dkt 1. This appeal
was eventually reassigned to this Court in October 2019. Dkt 14.
2. Legal standard
Federal district courts have jurisdiction to hear appeals from
final judgments or orders of the bankruptcy courts. 28 USC
§ 158(a)(1). Because the district court functions as an appellate
court, it applies the same standard of review that federal appellate
courts use when reviewing district court decisions and may
affirm, modify, reverse, or remand with instructions for further
proceedings. See Webb v Reserve Live Insurance Co, 954 F2d 1102,
1103–04 (5th Cir 1992).
A district court reviews a bankruptcy court’s findings of fact
for clear error and its conclusions of law and mixed questions of
fact and law de novo. In re Seven Seas Petroleum Inc, 522 F3d 575, 583
(5th Cir 2008); see also Fed R Bankr P 8013. Matters within a
bankruptcy court’s discretion are reviewed only for abuse of
discretion. In re Gandy, 299 F3d 489, 494 (5th Cir 2002); In re Waco
Town Square Partners, LP, 536 BR 756, 760 (SD Tex 2015). A
bankruptcy court abuses its discretion when it applies an
improper legal standard or bases its decision on clearly erroneous
findings of fact. In re Crager, 691 F3d 671, 675 (5th Cir 2012).
The standard of review is of particular importance in this
case. Both parties advert to it, but neither actually applies it. For
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its part, Green Tree largely complains about many of the
bankruptcy court’s determinations that required exercise of
discretion or fact-finding. “In such cases it is inappropriate and
unwise for an appellate court to step in.” In re SBMC Healthcare
LLC, 547 BR 661, 683 (SD Tex 2016).
3. Analysis
Green Tree asserts two main errors by the bankruptcy court
when sustaining Washington’s objection to the subject proof of
claim. The first is that the bankruptcy court should not have
admitted the Litton Loan Servicing escrow statement. The other
is that it incorrectly found the HAMP modification to eliminate
Washington’s obligation to pay PMI.
a. Admission of the escrow statement
The bankruptcy court admitted the Litton Loan Servicing
annual escrow account disclosure statement from June 23, 2010
as a recorded recollection under Federal Rule of Evidence 803(5).
Dkt 3-9 at 57. The exhibit was offered by Washington and
received in evidence over Green Tree’s objection. Dkt 3-13 at 28.
The statement indicates anticipated collection of principal and
interest amounts. As to escrow balances, the only items listed for
payment are county taxes, water district taxes, and hazard
insurance. PMI is nowhere listed on the document.
Green Tree argues admission was error. A trial court’s
decision to admit or exclude evidence is reviewed only for abuse
of discretion. Matter of Corland Corp, 967 F2d 1069, 1074 (5th Cir
1992). This standard affords great latitude in the conduct of a
bench trial. Ibid (citation omitted).
Rule 803(5) provides that a court may admit evidence as a
recorded recollection when that record “is on a matter the
witness once knew about but now cannot recall well enough to
testify fully and accurately; was made or adopted by the witness
when the matter was fresh in the witness’s memory; and
accurately reflects the witness’s knowledge.” The plain language
of the rule establishes that the record need not have been
personally prepared by the witness. But in such circumstances,
the witness must testify that he or she “examined it and found it
to be accurate.” O’Malley v US Fidelity & Guardian Co, 776 F2d
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494, 500 (5th Cir 1985); see also 2 McCormick On Evidence § 279
(8th ed 2020).
Upon objection to the escrow statement at hearing,
Washington’s counsel argued that she was using the information
to “back up her personal knowledge.” Dkt 3-13 at 27. On
questioning by the bankruptcy court, Washington testified that
the statement was consistent with her understanding of “the
deal” she made in the HAMP Modification. Ibid. She also
testified that she was “adopting the numbers in this document”
as accurate. Ibid. And she testified that she provided the
statement to Green Tree once it acquired her loan when the
dispute arose as to whether PMI was included in the HAMP
Modification. Ibid. The bankruptcy court then admitted the
exhibit. Id at 28.
Washington did not prepare the statement. But she examined
it and testified to its accuracy, thus adopting it. The information
within the document was therefore admissible. But a further
question concerns the form in which the bankruptcy court should
have admitted this evidence.
Rule 803(5) states, “If admitted, the record may be read into
evidence but may be received as an exhibit only if offered by an
adverse party.” This limitation in Rule 803(5) as to reading
information into evidence as opposed to receiving the document
itself as an exhibit is important when the action proceeds before
a jury. As the Fifth Circuit noted in United States v Judon, “The
drafters precluded the receipt of recorded recollection as an
exhibit of the proponent of the memorandum in order to prevent
the trier of fact from being overly impressed by the writing.” 567
F2d 1289, 1294 (5th Cir 1978); see also 2 McCormick On Evidence
§ 279 (8th ed 2020): “Should the writing be admitted into
evidence and be allowed to be taken to the jury room? Federal
Rule 803(5) resolves the issue by resort to the ancient practice of
reading the writing into evidence but not admitting it as an exhibit
unless offered by the adverse party.”
The bankruptcy court received the exhibit into evidence even
though it was offered by Washington, not an adverse party. This
did not strictly conform to the dictates of Rule 803(5). But the
Federal Rules of Evidence are equally clear that “[a] party may
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claim error in a ruling to admit or exclude evidence only if the
error affects a substantial right of the party . . . .” FRE 103(a); see
also FRCP 61 (harmless error rule); Fed R Bankr P 9005 (applying
FRCP 61). The burden of proving that any error was prejudicial
is on the party asserting it as such. Williams v Manitowoc Cranes
LLC, 898 F3d 607, 615 (5th Cir 2018), citing Ball v LeBlanc, 792
F3d 584, 591 (5th Cir 2015).
Nothing suggests that the bankruptcy court compromised
substantial rights of Green Tree by admitting the June 2010
escrow statement. Green Tree’s main contention on this point is
only that the escrow statement was “impermissibly used by the
bankruptcy court to make or bolster its conclusions.” Dkt 10 at
19. But whether the bankruptcy court received the actual
statement as an exhibit or only admitted its information, the
information itself was properly before the court for
consideration. Indeed, Washington testified to her own
recollection that escrow statements after the modification and
prior to the transfer did not include PMI. Dkt 3-13 at 28. Green
Tree neither objected to this testimony during the hearing nor
contests it on appeal. And the bankruptcy court at length found
that Washington was a credible and honest witness and debtor;
that her experience with title companies closing loan mortgages
gave her knowledge and understanding of the process; and, quite
simply, that “her character is unassailable.” Id at 59.
At a minimum, the bankruptcy court did not abuse its
discretion in admitting the information within the escrow
statement into evidence. To the extent any technical error exists
as to admission of the exhibit itself, such error did not affect
substantial rights. Reversal is not warranted where any error was
harmless. Williams, 898 F3d at 615.
b. Modification of the obligation to pay PMI
Green Tree argues that the bankruptcy court erred in finding
that the HAMP modification eliminated Washington’s obligation
to pay PMI. It also asserts that the bankruptcy court incorrectly
applied the burden of proof with respect to its proof of claim.
i.
The HAMP Modification
Washington stipulates that she was required to make PMI
payments under the original loan documents. Dkt 3-13 at 10.
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That is not at issue. The question is whether this obligation was
modified. Green Tree asserts that Washington failed to prove a
contractual modification of the PMI requirement.
Parties may of course modify their contracts under Texas
law. Hathaway v General Mills Inc, 711 SW2d 227, 228 (Tex 1986).
Such modification must satisfy the same elements familiar to all
contracts—a meeting of the minds supported by consideration.
Ibid. Proper construction of a contract is a question of law
reviewed de novo by this Court. Kona Technology Corp v Southern
Pacific Transportation Co, 225 F3d 595, 604 (5th Cir 2000) (citation
omitted). Whether parties modified their contract depends on
intent and is a question of fact. Hathaway, 711 SW2d at 228–29.
The burden of proving modification to a contract rests on
the party asserting the modification. Id at 229. This remains true
in the bankruptcy context, where the ultimate burden of proof
lies with the party who would bear the burden if the dispute arose
outside of those proceedings. Raleigh v Illinois Department of Revenue,
530 US 15, 17 (2000). Green Tree’s proof of claim rises or falls
depending upon whether there was a modification to remove
PMI from Washington’s loan. The burden of proving the
modification as a factual matter thus rested on Washington.
As to the bankruptcy court’s construction of the contract. The HAMP
Modification stated it would “amend and supplement (1) the
Mortgage on the Property, and (2) the Note secured by the
Mortgage” (together the Loan Documents). Dkt 3-8 at 41.
Washington primarily relied on Section 3(c) of the HAMP
Modification, which in a table set out the “payment schedule for
the modified Loan.” Id at 42. These terms, says this section,
“shall supersede any provisions to the contrary in the Loan
Documents.” Listed there are a monthly principal and interest
payment of $726.60 and an estimated monthly escrow payment
of $456.25. The bankruptcy court ultimately found it
“undisputed” that the escrow amount included only hazard
insurance and taxes. Dkt 3-13 at 54. And indeed, Green Tree
didn’t attempt to argue the math otherwise, which in any event
simply couldn’t support a finding of PMI as included within the
monthly escrow payment amount.
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Green Tree instead primarily relied on Section 4(d) of the
HAMP Modification. The bankruptcy court considered this
section but ultimately found it lacking. Ibid. It states that
Washington must continue to pay “mortgage insurance
premiums, if any, or any sums payable to Lender in lieu of the
payment of mortgage insurance premiums in accordance with the
Loan Documents.” Dkt 3-8 at 43. But use of if any makes this
only a conditional statement. It doesn’t support contention of a
flat mandate that the HAMP Modification required Washington
to continue to pay PMI. Indeed, this subsection also states that
Washington “shall pay Lender the Funds for Escrow Items unless
Lender waives [her] obligation to pay Lender Funds for any or all
Escrow Items at any time.” Ibid (emphasis added). This actually
cuts against Green Tree’s position because “Escrow Items” is
defined within the same subsection to include PMI to the extent
it is required. Ibid. And so if PMI were an expressly mandated
item, it would have been included in the calculation of the
estimated monthly escrow payment amount in Section 3(c). But
as just noted, the math simply doesn’t support that reading.
The Court finds no legal error as to the bankruptcy court’s
construction of the contract as it pertains to Sections 3(c)
and 4(d). And the Court finds no clear error as to its related
factual conclusions in this regard.
Green Tree also points to the PMI Disclosure that
Washington originally signed in June 2007. Dkt 3-8 at 75–76.
Green Tree asserts that this disclosure outlines the only
parameters by which PMI could be canceled and that Washington
did not meet any of the requirements for termination. Dkt 10 at
15–16. The bankruptcy court rejected this argument as ignoring
the “reality” of the subsequent HAMP Modification. Dkt 3-13 at
58. Requirements for cancellation are only with respect to
“Borrower Cancellation of PMI.” Dkt 3-8 at 75. But as the
bankruptcy court noted, the PMI Disclosure expressly allows for
loan modification, stating, “If you and lender (or note holder)
agree to a modification of the terms or conditions of your
mortgage loan, then the cancellation date, termination date, or
final termination will be recalculated to reflect the modified terms
and conditions agreed upon.” Id at 76; Dkt 3-13 at 53–54. This
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raises—but doesn’t resolve—the factual question whether
Washington and her original lender agreed to a modification with
her lender. As noted below, the bankruptcy court resolved that
question against Green Tree based on the evidence presented.
The Court finds no clear error, and its construction of the
contract in this regard was correct.
Green Tree also relies on Chapter C65 of the HAMP
Regulations. That regulation provides, “Servicers must service all
Mortgages, including any Mortgage to be modified in accordance
with the terms of the Program, so as to preserve and not to impair
existing mortgage insurance coverage.” Green Tree relies on this
to argue, “As a matter of construction, PMI remains a
requirement under a HAMP modification.” Dkt 10 at 17–18. Its
underlying, more sweeping contention is that PMI is never
affected by HAMP modifications.
Green Tree did not present this argument to the bankruptcy
court. There is colloquy with the bankruptcy court regarding the
“Fannie Mae guidelines” generally—but only as to the court’s
question whether Fannie Mae would have recourse against Green
Tree as to PMI premiums. Dkt 3-13 at 38–39. As to that point,
counsel stated, “I honestly don’t know how that would work with
Fannie Mae.” Chapter C65 itself is nowhere referenced, and more
pertinently, Green Tree nowhere argued any regulation to
constrain construction of the HAMP Modification.
A district court reviewing a bankruptcy appeal cannot
consider issues that were not initially presented to the bankruptcy
court. See Barron v Countryman, 432 F3d 590, 594 n 2 (5th Cir
2005). The argument is waived. But in any event, the regulation
appears to impose an obligation by the government only upon
Litton Loan Servicing as the servicer of the loan—not upon
Washington as the borrower. Whether or not the former was
required to abide by this regulation doesn’t resolve the question
whether it in fact acted contrary to the regulation when agreeing
with the latter to a modification eliminating PMI.
As to the bankruptcy court’s factual determinations. The bankruptcy
court ultimately determined that Washington put forward
sufficient evidence to prove modification. It relied on the
following evidence offered by Washington in doing so:
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The calculation of the payments in the HAMP
Modification excluded PMI;
o Washington’s understanding that PMI had been
removed;
o Acceptance by her lender, Litton Loan Servicing, of
payments without PMI after modification.
Dkt 3-13 at 58.
These are all factual determinations reviewed for clear error.
In re Seven Seas Petroleum Inc, 522 F3d at 583. Evidence in the
record supports each. The Court finds no clear error.
ii.
Burden of proof
Green Tree also makes a slightly different argument in this
regard. It asserts that the bankruptcy court “erroneously placed
the burden of proof” on it with respect to modification. Dkt 10
at 13. Proper allocation of the burden of proof is reviewed de novo,
and determinations whether the parties met their burden of proof
is reviewed under the clearly erroneous standard. Broussard v State
Farm Fire & Casualty Co, 523 F3d 618, 625 (5th Cir 2008).
Allowance of claims is itself governed by 11 USC § 502. It
provides that a proof of claim filed under § 501 is deemed allowed
unless a party-in-interest objects. Id § 502(a). Once an objection
is made, the court must determine the amount of the claim as of
the petition date and “shall allow such claim in such amount”
unless the claim falls under one of the nine listed statutory
grounds for disallowance. Id § 502(b). Although not specifically
referenced at the hearing, at issue was § 502(b)(1), under which a
claim must be disallowed if it “is unenforceable against the debtor
and property of the debtor, under any agreement or applicable
law.” Green Tree’s argument would seemingly have it bear no
burden of proof in this regard. Dkt 10 at 14–15.
The Fifth Circuit holds to the contrary that sections 501 and
502 of the Bankruptcy Code create a burden-shifting regime.
Together with Bankruptcy Rule 3001, these provide that “a party
correctly filing a proof of claim is deemed to have established a
prima facie case against the debtor’s assets.” In re Fidelity Holding
Co Ltd, 837 F2d 696, 698 (5th Cir 1988). The claimant will prevail
unless a party who objects to the proof of claim produces
o
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evidence to rebut the claim. Ibid. Upon production of this
rebuttal evidence, the burden shifts to the claimant to prove its
claim by a preponderance of the evidence. Ibid; see also In re
DePugh, 409 BR 125, 135 (Bankr SD Tex 2009).
The bankruptcy court properly recognized all this, stating,
“The proof of claim filed by Green Tree Servicing enjoys the
presumption of validity until the debtor comes forward with
some evidence to take away that prima facie validity.” Dkt 3-13
at 58. It then determined that Washington came forward with
sufficient rebuttal evidence to shift the burden back to Green
Tree. In doing so, the bankruptcy court referred to evidence
offered by Washington as described above, finding that PMI was
not included based on the calculation of escrow payments listed
in the HAMP Modification, on Washington’s understanding that
PMI had been removed, and on the fact that her then-lender
Litton Loan Servicing accepted her loan payments without PMI.
Ibid.
Once it determined that Washington produced sufficient
rebuttal evidence, the bankruptcy court shifted the burden to
Green Tree “to come forward with evidence in support of its
claim.” Ibid. This was proper. See In re DePugh, 409 BR at 135.
And it then ultimately concluded that Green Tree failed to meet
its required burden, noting that Green Tree could offer no
“testimonial or documentary support for why the lender did what
it did.” Dkt 3-13 at 59. Indeed, the bankruptcy court found that
Green Tree picked up all of the other adjustments in the HAMP
Modification on a go-forward basis. Id at 58.
The bankruptcy court observed that “there are certainly gaps
in the documentation, but I’m required to make a determination
based upon the record that I am presented with.” Ibid. It
therefore relied on Washington’s testimony, finding her to be
credible. Id at 59. A reviewing court must give due regard to the
opportunity of the bankruptcy court to judge the credibility of
witnesses. In re Dennis, 330 F3d 696, 701 (5th Cir 2003).
Neither conclusion by the bankruptcy court—first, that
Washington met her burden to rebut the prima facie validity of
Green Tree’s claim; second, that Green Tree failed to produce
sufficient rebuttal evidence—was clearly erroneous. Broussard,
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523 F3d at 625. Green Tree’s assertion of error regarding the
burden of proof is denied.
4. Conclusion
The order of the bankruptcy court is AFFIRMED.
SO ORDERED.
Signed on May 19, 2020, at Houston, Texas.
Hon. Charles Eskridge
United States District Judge
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