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In Re Sobel

2011 WL 309092 (Bkrtcy. D. N.J. 2011) (Unpublished)

BANKRUPTCY; CONSUMER FRAUD ACT — Where a bankruptcy trustee does not introduce any evidence that a lender knew its borrower could not afford to make loan payments, the mortgage loan will not be discharged in bankruptcy because such a proof would be needed to establish existence of unlawful conduct amounting to an unconscionable predatory lending practice under the Consumer Fraud Act.

While a judgment of foreclosure was pending, the property owner filed a voluntary Chapter 11 Bankruptcy petition. A bankruptcy trustee was appointed to negotiate the transfer and sale of the subject property as well as of other properties. Also, the trustee sued the foreclosing lender for alleged violations of the Truth in Lending Act (TILA) and the New Jersey Consumer Fraud Act (CFA), seeking damages as well as rescission of three loans and associated mortgages.

The proceeds from the foreclosing lender’s loan had been used to refinance a prior loan on the debtor’s personal residence. The lender had agreed to make two mortgage loans, as well as a bridge loan secured by a third lien on the personal residence. It also obtained mortgage liens on two of the debtor’s other properties. At the time the funds were disbursed, the lender delivered TILA disclosure statements. An attorney for the lender attended the closing and a fee of $4,000 was disclosed on the closing statement for the first mortgage and paid from the loan proceeds. That fee was not calculated into the prepaid finance charges disclosed on the TILA form.

Based on the debtor’s loan default, the lender filed a foreclosure complaint as to the bridge loan. The trustee asserted the loans should never have been made, that the closing costs were unreasonable, and that the lender had failed to disclose the $4,000 fee as a finance charge on the disclosure statement. No other facts were alleged to constitute violations of the TILA.

The lender successfully moved for summary judgment, with the Court dismissing the TILA and the CFA claims. First, the Court ruled that the trustee failed, as a matter of law, to demonstrate any inaccurate disclosure sufficient to support a TILA violation. The trustee alleged a $4,000 discrepancy as to a first mortgage associated with a $3 million loan. In order to get rescission under TILA, there must be a discrepancy of more than 0.5% of the loan’s face amount. That would have been $15,000 for this loan. Further, the Court ruled that a special rescission foreclosure tolerance of $35 was inapplicable, as the lender foreclosed only on the third loan (i.e., the bridge loan), and the alleged discrepancy arose from the first mortgage. Lastly, though the tolerance for a damages claim is $100, and the alleged discrepancy was $4,000, the Court held the trustee failed to prove the $4,000 was improperly excluded as a finance charge. The law permits exclusion of attorney’s fees for conducting or attending a closing where the charges cover excludable services such as fees for preparing loan related documents. Lastly, the trustee could not satisfy the Court that the attorney’s fees were unreasonable.

As to the CFA claim, the Court held the trustee failed to introduce any evidence that the lender knew the debtor could not afford to make payments on the loans at issue. That would have been an element needed to establish proof of unlawful conduct amounting to an unconscionable predatory lending practice. According to the Court, the trustee did not support its allegation that the lender only entered into the loans because of substantial equity in the collateral with the intention to seize the equity, at a later time, upon an expected default.

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