Since December of 2011, secured creditors have had to deal with Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. If you’re not familiar with this Bankruptcy Rule, it deals with notices. Specifically, it applies to claims in Chapter 13 cases that are secured by the debtor’s principal residence. For mortgage lenders, in addition to the filing of a Proof of Claim, it means that under certain circumstances, they are required to file the following: (1) Notices of Payment Change; (2) Notices of Fees, Expenses, and Charges; and (3) Responses to Notice of Final Cure Payment.
For our purposes, we are going to focus primarily on Fed. R. Bankr. P. 3002.1(g) and the Bankruptcy District of New Jersey. Rule 3002.1(g) is the section pertaining to Responses to Notice of Final Cure Payment. However, to understand this, we must first look at Rule 3002.1(f). This is the rule that triggers Rule 3002.1 (g).
Let us assume, in order to collect on their arrearage debt, the lender files a Proof of Claim. The debtor’s bankruptcy plan is confirmed and after a few years, all payments have been made to satisfy the debt. Under Fed. R. Bankr. P. 3002.1(f), the trustee must the file a Notice of Final Cure Payment. This notice is basically telling all interested parties that the debtor has paid in full the amount required to cure any default on the claim.
Okay, now what? Well, the trustee has satisfied their obligation under Rule 3002.1(f) and Rule 3002.1(g) is triggered. The lender is on the clock and has twenty-one (21) days to file a Response to Notice of Final Cure Payment. In that notice, the lender must basically indicate whether they agree or disagree that all payments due with respect to the claim and the plan have been made. This applies to both pre and post petition obligations. Since New Jersey requires the debtor to maintain regular payments directly to the creditor, the lender must indicate whether they are current with those direct payments.
Recently, an issue came upon my desk and it forced me to examine again the requirements of Responses to Notices of Final Cure Payment. What was that issue? A client had obtained relief from the automatic stay a few years prior. Despite this, the trustee filed a Notice of Final Cure Payment. The client asked if a response was still required even though they had obtained relief.
Initially, I thought a mistake was made. For a moment, I questioned whether relief was obtained or if the stay was reinstated. Had we been telling our client that relief was vacated when it was not? For anyone who knows, that would have been a nightmare. Professionally, I have always taken a conservative approach. I never wish to be in a position to tell a client that their file was completely mishandled. I take great pride in stating that I have never had that conversation with a client. As an attorney, the goal is to avoid surprises and minimize risk, not increase exposure to risk.
After careful examination, I discovered that the stay was indeed lifted. Further, at no point in time did any party move to vacate relief. This was good but it left a lingering question. Must a secured creditor file a Response to Notice of Final Cure Payment when the creditor has obtained relief from the automatic stay? Additionally, why would the trustee file a Notice of Final Cure Payment when relief was obtained? I needed to find answers and decided to break it down into steps.
When is a Response to Notice of Final Cure Payment required?
The answer is simple. It is always. Fed. R. Bankr. P. 3002.1(g) does not state the words “may” or “permitted”; it states “shall”. The understanding for this is also simple. The debtor has a right to know if the account is current. Imagine if the debtor reaches the end of their case only to learn several months later that the purpose of their bankruptcy did not fully achieve the intended result.
What if a Response to Notice of Final Cure Payment is not filed?
I initially believed that if the debtor was current, the failure to file a Response to Notice of Final Cure Payment would cause no harm. After all, Rule 3002.1(h) has a mechanism for determining whether the debtor has cured the default and paid all required post petition amounts. If no response, then the debtor’s account would basically be deemed current. My initial view would be that the lender would only be harmed if the debtor was actually not current.
That initial view quickly changed and to understand why, you must first look at Rule 3002.1(i). This is the section that pertains to failure to notify. This sections states that
“…the court may, after notice and hearing, take either or both of the following actions:
(1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(2) award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure.”
Fed. R. Bankr. P. 3002.1(i).
I now read this section in only one way. The court has wide discretion in determining what action to take for failure to file a response. It does not carve out exceptions and it definitely does not state that if debtor is current, the lender is not required to file a response. When considering this, I remind myself that the debtor has a right to know if the account is current.
To further support this conclusion, I discovered that failure to respond to the Notice of Final Cure Payment is a sanctionable offense. Sokoloski v. PNC Mortg., No. 2:14-1374WBS CKD, 2014 WL 6473810, at *7 (E.D. Cal. Nov. 18, 2014). A debtor may also move to reopen a case to seek sanctions against a claimant seeking to recover amounts that should have been disclosed. Id. (citing Fed. R. Bankr. P. 3002.1, Advisory Committee Note).
I also reviewed In re Longmire, 2015 Bankr. LEXIS 3086 (Bankr. W.D. Tenn. September 11, 2015). Here, the claim holder or secured creditor did not file a Response to Notice of Final Cure Payment. After discharge, the creditor threatened the debtor with foreclosure, alleging that the debtor owed thousands in arrears. The debtor motioned to reopen the case and then moved for a Determination of Final Cure Payment under Rule 3002.1(h) and sanctions under Rule 3002.1(i). The court found that by failing to respond to the Notice of Final Cure Payment, the holder failed to adhere to Rule 3002.1(g). The court held that the creditor would be precluded from presenting any omitted information that should have been filed in a response to the Notice of Final Cure Payment. The court also held that the debtor was entitled to fees and expenses caused by the creditor’s failure to provide the required information. It should be noted that the fees and expenses awarded exceed the amount in default.
Can you extend the deadline to file a Response to Notice of Final Cure Payment?
As stated previously, the creditor has twenty-one (21) days to file their response. This should be plenty of time but for various reasons, responses are not always filed timely. I frequently advise clients that they should not rely on the filing of a Motion to Extend Deadline to File a Response to Notice of Final Cure Payment. Frankly, Rule 3002.1 does not expressly state that the time may be extended. Arguments can be made under Fed. R. Bankr. P. 9006 but the reality is that the law with respect to extending the deadline is hazy, at best.
Under In re Gutierrez, No. 13-07-10502 JA, 2012 WL 5355964 (Bankr. D.N.M. 2012), the debtor consented to the creditor’s motion to extend time to respond. The trustee agreed that the failure resulted from excusable neglect but argued that Rule 3002.1(i) does not apply the “excusable neglect” standard, rather the creditor must be “substantially justified” in its failure to comply. The court ruled that Rule 3002.1(g) was not precluded from the extension provisions of Fed. R. Bankr. P. 9006. As a result, provided the requirements of Fed. R. Bankr. P. 9006(b)(1) were met, the court could grant an extension.
Are there exceptions to the filing of a Response to Notice of Final Cure Payment?
There indeed are exceptions with respect to compliance of Fed. R. Bankr. P. 3002.1. In New Jersey, D.N.J. LBR 3002.1-1(a) states that the entry of an order granting relief from the stay terminates the notice requirements of Bankruptcy Rule 3002.1(b) and (c). Unfortunately, it does not address Rule 3002.1(g).
Is a response required even if relief from the automatic stay has been obtained?
As of September 5, 2016, amendments to the Federal Rules of Bankruptcy Procedure are currently pending Congressional review. If passed, effective as early as December 2016, the law may be that the notice requirements will cease to apply when an order terminating or annulling the stay becomes effective. This information can be found by visiting the following website: https://www.supremecourt.gov/orders/courtorders/frbk16_4h25.pdf. However, until that law becomes reality, we must deal with the question at hand.
Although there is much more to consider here, the conclusion reached is to take a conservative approach and file a response. If the trustee files a Notice of Final Cure Payment, the creditor should respond regardless of whether the debtor is current or if relief is obtained. If you fail to do this, it is at your own risk.
You may be saying to yourself that this is good to know but what happened to the case where the trustee filed a Notice of Final Cure Payment even though relief was granted? Well, I recommended that a response be filed and that is exactly what we did. In the response, we indicated that relief was granted and tried to provide as much information as was reasonably possible. It was definitely not a traditional response. Rather than indicating the amount of prepetition and post petition default, we listed the current contractual status of the account. The trustee responded by withdrawing the Notice of Final Cure Payment thereby rendering the issue moot. Despite this, my conclusion has not changed. A Notice of Final Cure Payment requires a Response to Notice of Final Cure Payment, no exceptions.
Ray Anthony Lebron, Esq.
Fein, Such, Kahn & Shepard, P.C.