Having decided that “Chapter 13 has morphed into the pursuit of loss mitigation as its sole purpose in which debtors file cases they never intend to bring to confirmation,” Bankruptcy Judge Robert E. Grossman decided it’s time to end so-called loss mitigation in his court.
In his February 28 opinion, Judge Grossman also decided it’s time to adopt a so-called no-look fee of $5,500 for chapter 13 cases in his court. Judge Grossman sits in Central Islip, N.Y.
Although Judge Grossman ended loss mitigation in his court, the case before him resulted in a confirmed chapter 13 plan after the debtor and the home mortgage lender agreed on a loan modification. Aside from the case before him, Judge Grossman said he would no longer approve attorneys’ fees for participation in loss mitigation, “absent extraordinary circumstances.”
The Protracted Loss Mitigation
We will assume everyone knows what “loss mitigation” means. For those who don’t, it’s typically a local rule where bankruptcy judges on request enter orders compelling the debtor and the mortgage lender to negotiate with the aim of agreeing on loan modification. Some courts have entered contempt citations against lenders who did not negotiate in good faith.
Until now, at least, most bankruptcy judges have had favorable views about loss mitigation. They would typically say that loss mitigation has allowed debtors to keep homes they otherwise would have lost absent court-mandated negotiations.
In the case before Judge Grossman, the debtor filed a chapter 13 petition and obtained an order directing loss mitigation. The process took two years but resulted in a confirmed plan and an agreed loan modification approved by the court.
The delay in reaching accord on loan modification, according to Judge Grossman, was occasioned mostly by the lender’s mistakes and ineptitude. The debtor and the debtor’s bankruptcy counsel carried out their part of the negotiations and documentation with dispatch.
The delay came at a cost. Before bankruptcy, the debtor had paid counsel a retainer of $3,000. In the engagement agreement, the debtor consented to an additional $2,500 counsel fee to be paid under the chapter 13 plan.
The client also agreed that the $5,500 would only cover specified services. Notably, the $5,500 fee did not cover participation in loss mitigation.
After confirmation, the debtor’s counsel filed a fee application for payment of about $9,200 on top of the $3,000 retainer. In other words, counsel’s fees for the chapter 13 case totaled some $12,200.
The Eastern District of New York has no local rule establishing a so-called no-look fee for chapter 13 cases. Without filing a fee application, courts with no-look fees will allow payment so long as it doesn’t exceed the prescribed amount. For greater compensation, counsel must file a traditional fee application.
In the absence of a formal no-look fee, some chapter 13 trustees in the New York Eastern District developed a practice where they would review counsel’s time records and advocate approval of the plan (and payment of the fee) if the trustee had no objection to the requested fee.
And so it was in the case before Judge Grossman. The chapter 13 trustee had no objection to confirmation of the plan and payment of the additional $9,200 fee to be paid by the trustee under the plan.
No More Informal No-Look Fees
In substance, the chapter 13 trustee in the case before Judge Grossman had implemented an informal no-look fee where compensation would be approved by the court if the trustee had no objection. No more, Judge Grossman said.
The informal fee approval process, Judge Grossman said, “was never the intent of the statute and is a process that will cease . . . . [T]he awarding of fees is the sole responsibility of the Court.”
Judge Grossman said he would be drafting “new rules” for his court “which give counsel to Chapter 13 debtors the option of either proceeding under what we designate a ‘presumptively reasonable [$5,500] fee’ which will allow the Court to award fees without the need for a hearing or filing a fee application.”
Judge Grossman said he would not require a fee hearing for fees of less than $5,500.
No More Loss Mitigation
“The Court will no longer entertain motions for loss mitigation in Chapter 7 or 13 cases,” Judge Grossman said.
During the housing crisis, Judge Grossman said that loss mitigation allowed “many families” to keep their homes, because otherwise it would have been “difficult for debtors to identify the party that held the mortgage.”
“While the aim of the loss mitigation program is noble, the circumstances that led to its implementation are now absent,” Judge Grossman said.
Now that the “onslaught of foreclosures and bankruptcy filings . . . has abated,” Judge Grossman said,
[L]oss mitigation has morphed into an institutionalized process not supported by the Bankruptcy Code. It now seemingly exists not for the purpose originally intended but rather for the benefit of professionals, trustees, and institutions, often to the economic detriment of the creditors. This is the antithesis of what Chapter 13 was designed to do.
“There is nothing in the Code,” Judge Grossman said, “which permits a bankruptcy court to forcibly restructure a residential mortgage.” Disagreeing with some other courts, he saw no power in Section 105(a) for mandatory loss mitigation.
Judge Grossman said he would still “encourage Chapter 13 debtors and their secured creditors to reach a consensual arrangement.” The judge said he would still order mediation, “but only on consent of the parties.”
The Remedy
Judge Grossman examined the attorney’s fee request, found it reasonable, and allowed payment “in the full amount requested.” He said it would be “the last application for compensation this Court approves which seeks additional fees for loss mitigation absent extraordinary circumstances.”
Judge Grossman said his “decision does not modify, amend, or limit loss mitigation procedures for any other judge in this Court or the Court generally.”
Having decided that “Chapter 13 has morphed into the pursuit of loss mitigation as its sole purpose in which debtors file cases they never intend to bring to confirmation,” Bankruptcy Judge Robert E. Grossman decided it’s time to end so-called loss mitigation in his court.
In his February 28 opinion, Judge Grossman also decided it’s time to adopt a so-called no-look fee of $5,500 for chapter 13 cases in his court. Judge Grossman sits in Central Islip, N.Y.
Although Judge Grossman ended loss mitigation in his court, the case before him resulted in a confirmed chapter 13 plan after the debtor and the home mortgage lender agreed on a loan modification. Aside from the case before him, Judge Grossman said he would no longer approve attorneys’ fees for participation in loss mitigation, “absent extraordinary circumstances.”