Borrower May Not Sue Mortgage Lender Over Claims Not Disclosed in Bankruptcy – Hamilton v. Greenwich Investors

Our Norco foreclosure defense lawyers frequently talk to clients who are considering bankruptcy as well as a lawsuit to stave off a foreclosure. Both legal actions can stop a foreclosure at least temporarily, but they are not always right for the borrower, so it's best to talk to an experienced attorney about your own situation. In Hamilton et al. v. Greenwich Investors XXVI, LLC, the mortgage borrowers filed for bankruptcy without mentioning legal claims they later decided to pursue, and California's Second District Court of Appeal ruled they could not pursue the lawsuit. Henry and Sharon Hamilton might have been able to go forth with the lawsuit if they had disclosed the claims in their bankruptcy case, the court said, but because they did not, they are barred from litigating those claims. Henry and Sharon Hamilton bought their home in January of 2007 and defaulted in September of that year. In December, they made a forbearance agreement with Select Portfolio Servicing, the authorized agent of Greenwich, which held the loan, agreeing to pay more than $42,000 in arrears over the next ten months. They made the next two or three payments, the court said, but SPS transferred the loan servicing to Greenwich in early March of 2008. Greenwich contacted them about their insurance. They asked for monthly bills and explained the forbearance agreement. Greenwich refused to accept less than the full amount of the arrearages. It then stopped sending any monthly mortgage bills, and the Hamiltons paid none. They wrote to Greenwich once more with a copy of the forbearance agreement before Henry Hamilton filed for Chapter 13 bankruptcy in August. In his bankruptcy, Hamilton listed the debt to Greenwich but did not list a potential lawsuit against Greenwich. Greenwich opposed his first two repayment plans, but a third plan was confirmed in February of 2009, calling for repayment of all arrearages during the plan and payments directly to Greenwich after it ended. Unfortunately, they defaulted again. They filed the instant lawsuit in September of 2009, alleging breach of contract, negligent and fraudulent misrepresentation and abuse of foreclosure laws. They claimed Greenwich ignored the forbearance agreement and foreclosed without following a California law requiring it to discuss alternatives to foreclosure first. In response, the bankruptcy court ended their automatic stay, finding that the bankruptcy was a "scheme to hinder, delay and defraud creditors." Greenwich then demurred to the lawsuit, arguing that the plaintiffs' claims were barred because they were not disclosed in the bankruptcy. Taking note of the bankruptcy ruling, the trial court sustained the demurrer and ended the case. This appeal followed. Before the Second District Court of Appeal, the Hamiltons argued that the trial court was wrong because there was no evidence that Henry Hamilton had acted in bad faith. The court ruled that this didn't matter. Oneida Motor Freight Inc. v. United Jersey Bank, a 1988 decision from the Third U.S. Circuit Court of Appeals, established that preserving the integrity of the bankruptcy system requires debtors to disclose all potential income and debts, including likely litigation. The Second District distinguished this case from post-Onedia cases requiring a finding of bad faith because they did not involve liability to a lender. It also found that several of the Hamiltons' causes of action would have failed anyway. Thus, it upheld the trial court's judgment. One important lesson our Orange foreclosure defense attorneys took away from this case is the importance of fully disclosing claims in bankruptcy. It's possible that Henry Hamilton never mentioned a lawsuit when he filed for bankruptcy because a lawsuit wasn't on his mind. However, debtors filing for bankruptcy must list not only their actual assets and debts, but potential ones as well. This can be difficult for debtors, not only because it's hard to predict the future but also because they may not want to anticipate things like death of a relative that could lead to an inheritance. That's why an experienced Gardena foreclosure defense lawyer should work closely with the bankruptcy filers to make this list, keeping in mind their interest in any future litigation.

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