I have trained more than 350 attorneys at my bankruptcy boot camps, and to my surprise less than 10 percent know what I mean when I refer to a “QWR.” This is shocking in that a reasonable QWR can provide the attorney for the chapter 13 debtor with some of the very best discovery outside of a contested case or adversary proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor’s money and the disbursements by the chapter 13 trustee. It can also be used to identify all of the “ancillary fees” and “collateral charges” that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account.

The provisions of RESPA that deal with mortgage servicing are generally found in either 12 U.S.C. §2605 or 2609. Section 2605, known as the “Servicer Act,” requires servicers to respond to borrower requests for information and correction of account errors. The “Servicer Act” provisions are where you find the authority for a Qualified Written Request or QWR. The Servicer Act provisions in §2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in §2605(f). 

But what is a QWR? As noted, the statute provides that it can be used to secure information about the note or to assert a dispute about the factual basis for any dispute about the status of the payments on the notes or any alleged default. Whenever I speak at a seminar involving attorneys who represent mortgage servicers, the largest number of complaints I receive involve the “excessive” and in some cases “outrageous” use of a QWR. I have seen QWRs that will ask a servicer more than 150 questions about a debtor’s loan. This number is beyond the intended scope of the statute, and quite frankly is beyond the scope of most of the discovery rules of the Federal Rules of Bankruptcy Procedure and the local rules of the bankruptcy courts. Such numbers are excessive and should be objected to by the servicer.

But what are legitimate subjects for a QWR where there is a dispute about the receipt and/or application of payments?  In my bankruptcy practice, I have only 10 questions in my standard QWR.  I am requesting the Servicers (in a letter mailed to the designated QWR address by the Servicer) to produce the following:

1. a complete life of loan transactional history;
2. the Transaction Codes for the software platform;
3. the Code definitions in plain English;
4. the Key Loan Transaction history, bankruptcy work form or any summary of all of the accounts in an XLS spreadsheet format;
5. the MERS Milestone Reports and the Edgar Web site address for the Pooling and Servicing Agreement;
6. the name, address and telephone number of the current holder and owner of the mortgage note;
7. copies of all collection notes and communication filed;
8. an itemized statement of the amount needed to reinstate the loan;
9. all communications with any non-lawyer third-party provider; and
10. All of the P-309 screen shots of all of the accounts (principal, interest, escrow, late charges, legal fees, property inspection fees, property preservation fees, broker price opinion fees, statutory expense fees, miscellaneous fees, corporate advance fees, trustee suspense accounts, debtor suspense accounts) associated with the loan.

Very few Servicers still try to make the argument that RESPA is preempted by the Bankruptcy Code. Without going into all of the cases, the simple answer to this argument can be found in §1322(e). This section states that that amount necessary to cure a default shall be determined in accordance with the “underlying agreement and applicable nonbanrktupcy law.” Since nonbankruptcy law includes RESPA, it is clear that RESPA compliance is required for all servicers of loans involved in chapter 13 cases.

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The U.S. Supreme Court just ruled 9-0 in United Student Aid Funds Inc. v. Espinosa, 559 U.S. ____ (2010), which held that the bankruptcy court’s order confirming the debtor’s plan is not voidable under Federal Rule of Civil Procedure 60(b) when no jurisdictional and/or due process violations have occurred. The Court noted that United’s remedy should have been to timely appeal the confirmation order, which it did not do. The Court further noted that while it is the duty of the bankruptcy court to make a finding of undue hardship, the lack of that finding amounted to legal error, and therefore, the confirmation order is binding.

Espinosa filed a chapter 13 plan that treated only the principal portion of the student loan debt, and the remainder of the claim would be subject to discharge. United received actual notice of these provisions, filed a proof of claim and failed to object to confirmation or raise any issues regarding the violation of the rules of procedure. The plan was subsequently confirmed by the bankruptcy court. Espinosa completed his plan and received a discharge order, discharging, among other things, the balance of the student loan owed to United.  Post-discharge, United sought to collect. Espinosa filed a motion to enforce the discharge order in the bankruptcy court, which was granted. The district court reversed, and Espinosa appealed. The Ninth Circuit reversed the district court, holding that the bankruptcy court committed legal error in confirming the plan; however, as actual notice was admitted by United, the error did not provide a basis for setting aside the valid judgment.

In affirming the Ninth Circuit’s ruling, the Supreme Court noted that Rule 60(b)(4), the rule United used to seek relief from the confirmation order, only voided judgments in instances where there was a jurisdictional deficiency or lack of due process. The Court further went on to note that in order to void a judgment based on jurisdictional grounds, the Court issuing the judgment would have to assert a clear “usurpation of power” and lack even an “arguable basis” for jurisdiction.

United’s next contention was that Espinosa failed to follow the Rules of Bankruptcy Procedure, specifically Rule 7004(b)(3), and that this deprived United of its due process for failure to serve a summons and complaint. The Court rejected this argument, indicating that due process only requires notice “reasonably calculated, under all circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” See Mullane v. Central Hanover Bank and Trust Co., 547 U.S. 220 (1950). As United had actual notice of the pendency of the proceedings, the procedural deficiencies of Espinosa did not entitle United to void the judgment based on Rule 60(b)(4).

Lastly, United argued that the order confirming the plan was void due to the bankruptcy court lacking the authority to confirm the plan absent the finding of hardship. United argued that 11 U.S.C. §§523(a)(8) and 1325(a)(1) read together voided a confirmation order that discharged student loan debt without a finding of undue hardship. The Court found that the failure of the bankruptcy court to find an undue hardship did not render the confirmation order void, but was merely legal error on the Court’s behalf. The Court pointed out that United had notice of the error and failed to object and/or timely appeal, and that absent those remedies, Rule 60(b)(4) did not allow United to set aside the judgment.

The Supreme Court also acknowledged the bankruptcy court’s duty to not confirm plans that have provisions that attempt to circumvent the requirements of 11 U.S.C. §1325(a) and other applicable provisions of the Code. The Court seemed to instruct bankruptcy courts to direct debtors to conform to the requirements of the statute and indicated that bankruptcy courts had “the obligation” to police plans that failed to conform to BAPCPA’s requirements.

Going forward, it appears that debtors will be able to include provisions in chapter 13 plans that run afoul of the statute’s requirements on the hope that a plan will get confirmed prior to the creditor being able to act. In fact, the Supreme Court noted the potential of bad-faith litigation tactics as a part of this ruling, and even suggested that Congress might enact additional provisions to address the situation likely to follow from this ruling. The remedy, the Court noted, would be the bankruptcy court’s powers to sanction under Federal Rule of Bankruptcy Procedure 9011. This ruling will require creditors, trustees and interested parties to review plans very carefully, watching for clever debtors who seek to confirm plans that may try to discharge taxes, student loans, marital obligations, etc. and plans that fail to follow the Federal Rules of Bankruptcy Procedure.

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