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Evarts v. U.S. Bank Trust Nat'l Ass'n

United States District Court, D. New Hampshire

May 6, 2019

Joanne C. Evarts, Appellant
v.
U.S. Bank Trust Nat'l Ass'n, as Trustee of Cabana Series III Trust, Defendant

          ORDER

          STEVEN J. MCAULIFFE UNITED STATES DISTRICT JUDGE.

         In July of 2016, Joanne Evarts filed a petition under chapter 13 of the bankruptcy code. Subsequently, U.S. Bank National Trust Association, as Trustee of Cabana Series III Trust (“U.S. Bank”), filed a proof of claim, representing that it had a claim, secured by a mortgage deed to Evarts' home, in the total amount of $237, 948.91. Evarts objected. Following an evidentiary hearing, the bankruptcy court issued a written decision, in which it concluded that Evarts failed to establish grounds for disallowing U.S. Bank's claim. According, it overruled her objection. Evarts appeals that decision.

         For the reasons discussed, the decision of the bankruptcy court dated December 12, 2018, is affirmed.

         Background

         Evarts' challenges to U.S. Bank's proof of claim turn largely on the enforceability of a loan modification agreement that governs the terms of her relationship with U.S. Bank. The relevant background is fully set forth in the bankruptcy court's thorough and thoughtful opinion. See In re Evarts, No. BR 16-11056-BAH, 2018 WL 6584242, at *1-3 (Bankr. D.N.H. Dec. 12, 2018). It need not be recounted in detail. But, because that factual background is somewhat confusing, a brief restatement of those facts necessary to explain the basis for Evarts' claims is in order.

         In June of 2002, Evarts and her (now deceased) husband obtained a loan in the original principal amount of $215, 000. That loan was secured by a mortgage deed to the couple's home in Cornish, New Hampshire. Through a series of assignments, U.S. Bank currently holds both the promissory note and the mortgage deed. So, to minimize confusion, the court will refer to U.S. Bank, as well as all of its various predecessors in interest, collectively, as simply “U.S. Bank.”

         In early 2010, (while in the midst of an earlier chapter 13 bankruptcy proceeding) Evarts and her husband owed U.S. Bank approximately $200, 000 on the loan. They were, however, having difficulty making their monthly payments. In fact, Evarts and her husband purposefully stopped making payments on the loan to build an arrearage sufficient to qualify for assistance under the Home Affordable Modification Program (“HAMP”).

         After failing to make payments on the loan for more than six months, the Evarts began working with U.S. Bank to obtain a HAMP loan modification agreement that would lower their monthly loan repayment obligations. Unfortunately, two distinctly different versions of that loan modification agreement emerged from the parties' negotiations. The first was signed only by Evarts and her husband (the “Draft Agreement”). It is undisputed that U.S. Bank never signed the Draft Agreement. According to U.S. Bank's unrebutted evidence, it discovered an error in the Draft Agreement and notified Evarts. It then corrected the error and submitted a revised agreement to Evarts and her husband, which both of them executed. U.S. Bank then signed the revised agreement (the “Executed Agreement”). Evarts says the Executed Agreement is unenforceable and must be replaced with the original, Draft Agreement.

         The most significant difference between the two versions of the loan modification agreement is this: although both versions call for Evarts to make the same monthly payments on her loan ($1, 484.31), the Executed Agreement calls for Evarts to pay approximately $54, 000 more than required by the Draft Agreement. Specifically, while all agree that the outstanding principal amount on Evarts' loan was approximately $200, 000 when the parties began negotiating the loan modification, [1] the Draft Agreement erroneously represents that Evarts and her husband owed U.S. Bank only $181, 655.60 - a sum referenced in the Draft Agreement as the “New Principal Balance, ” and upon which her monthly payments would be calculated going forward. See Draft Agreement (document no. 4) at 8 of 26. The remaining principal of more than $18, 000 that Evarts acknowledges she owed was not mentioned in the Draft Agreement (and, critically, it was not expressly forgiven). That, one may logically infer, is the error U.S. Bank identified in the Draft Agreement.

         The Executed Agreement, on the other hand, employed that same $181, 665.60 to calculate Evarts' monthly payments, but referenced that sum as the “Interest Bearing Principal Balance.” The Executed Agreement goes on to represent that Evarts' total outstanding loan amount - the “New Principal Balance” - was $235, 932.74. That total indebtedness was comprised of two components: first, the “Interest Bearing Principal Balance” of $181, 665.60; and, second, a “Deferred Principal Balance” of $54, 267.14, on which no interest would be paid. Id. at 17 of 26. The Deferred Principal Balance would become due and payable upon Evarts' sale or transfer of her home, or the date on which she made her final payment on the Interest Bearing Principal Balance (or, of course, in the event of a “default, ” as defined in the underlying promissory note). In other words, the roughly $54, 000 Deferred Principal Balance became a “balloon” payment, due when the loan matured in 40 years.

         The precise terms at issue are set forth in Section 3 of the Executed Agreement:

The modified principal balance of my Note will include all amounts and arrearages that will be past due as of the Modification Effective Date (including unpaid and deferred interest, fees, escrow advances and other costs, but excluding unpaid late charges, collectively, “Unpaid Amounts”) less any amounts paid to the Lender but not previously credited to my Loan. The new principal balance of my Note will be $235, 932.74 (the “New Principal Balance”). I understand that by agreeing to add the Unpaid Amounts to the outstanding principal balance, the added Unpaid Amounts accrue interest based on the interest rate in effect under this Agreement. I also understand that this means interest will now accrue on the unpaid interest that is added to the outstanding principal balance, which would not happen without this Agreement.
$54, 267.14 of the New Principal Balance shall be deferred (the “Deferred Principal Balance”) and I will not pay interest or make monthly payments on this amount. The New Principal Balance less the Deferred Principal Balance shall be referred to as the “Interest Bearing Principal Balance” and this amount is $181, 665.60.

         Executed Loan Agreement at 3 (document no. 4 at 17 of 26) (emphasis supplied).

         Evarts questions the origin of the roughly $54, 000 in “Deferred Principal.” But, the evidence is clear that it arose from Evarts' total arrearage of $37, 585.70 when the Executed Agreement was negotiated.[2] That $37, 585.70 appears to have been capitalized over the loan's 40-year term to arrive at the roughly $54, 000 deferred balloon payment. See HAMP Modification Approval Form - Loan Data (document no. 15), Exhibit I, at 14 of 49 (showing “Amount to be Capitalized: $37, 585.70”). See also Testimony of Lacey Sokolowski, Hearing Transcript (document no. 9) at 100-03.

         Evarts acknowledges that the portion of her debt on which interest (and monthly payments) would be calculated was reduced from approximately $200, 000 to $181, 665.60. See Appellant's Brief (document no. 11) at 14. She appears, however, to mistakenly think that the difference between those sums -roughly $18, 000 - was forgiven. It was not. Instead, it (along with unpaid interest and ...


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