Ditech Financial LLC

May 19, 2020

David J. Bradley, Clerk

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF TEXAS

HOUSTON DIVISION

LAURA DENISE § CIVIL ACTION NO.

WASHINGTON, § 4:15-cv-02604

Appellee, §

§

§

vs. § JUDGE CHARLES ESKRIDGE

§

§

DITECH FINANCIAL §

LLC, f/k/a Green Tree §

Servicing LLC, §

Appellant. §

MEMORANDUM AND OPINION

AFFIRMING ORDER OF BANKRUPTCY COURT

Appellant Ditech Financial LLC, formerly known as Green

Tree Servicing LLC, appeals an order of the bankruptcy court in

the Southern District of Texas. This order sustained Appellee

Laura Washington’s objection to Green Tree’s proof of claim

regarding her mortgage.

The order is affirmed.

1. Background

This dispute boils down to whether Washington was

required to continue paying Private Mortgage Insurance (PMI)

premiums after her home loan was modified. The Court recites

the facts based on documentary evidence in the record, as

supplemented by the testimony of Washington given at a hearing

before the bankruptcy court.

Washington obtained a $125,000 loan in June 2007 that she

used to purchase a home in Fresno, Texas. The loan was

evidenced by a promissory note and secured by a deed of trust.

Dkt 3-8 at 16–18 (promissory note), id at 20–35 (deed of trust).

Washington was required to pay PMI of $267.71 per month

because she financed the entire sales price of the home. Dkt 3-8

at 60, line 1002 (June 2007 HUD-1 settlement statement); id at

68–69 (Fannie Mae Underwriting Findings reflecting PMI).

Washington signed a Private Mortgage Insurance Disclosure that

provided for payment of PMI as part of the loan. Id at 75–76.

Washington testified that she became ill and unable to work

in 2010, which qualified her for a Home Affordable Modification

Agreement (HAMP Modification). Dkt 3-13 at 21. She further

testified that she was put on a modification trial period, during

which she made several payments that did not include PMI and

were accepted by then-lender Litton Loan Servicing. Id at 21, 24.

The length of the trial period is unclear. Washington signed the

HAMP Modification on September 22, 2010. Dkt 3-8 at 46. The

HAMP Modification states that the new interest rate would begin

to accrue on the new principal balance as of October 1, 2010 and

that the first new monthly payment would be due on

November 1, 2010. Id at 42.

Washington offered into evidence two statements from

Litton Loan Servicing that did not include PMI. One was titled

“Annual Escrow Account Disclosure Statement” and dated June

23, 2010. Dkt 3-9 at 57. The other was a “Monthly Statement”

dated December 20, 2010. Id at 58. Green Tree objected to these

on hearsay grounds. Dkt 3-13 at 14. The bankruptcy court

excluded the latter from evidence but admitted the former as a

recorded recollection under FRE 803(5). Id at 28, 30.

The note was transferred to Green Tree about six months

after the HAMP Modification went into effect. Id at 11. The

exact date of transfer is unclear. Green Tree then began issuing

statements that included PMI. Ibid; see also Dkt 3-8 at 75–76

(March 10, 2015 Green Tree Escrow Account Disclosure

Statement).

Washington could not afford her monthly payments with the

added cost. She initiated her bankruptcy proceedings in

December 2014. Green Tree filed its proof of claim in April 2015

for $150,106.00, with $39,334.86 in arrears and an ongoing

monthly payment of $1,778.02. Dkt 3-12.

Washington filed an objection to Green Tree’s proof of

claim. Dkt 3-5. The bankruptcy court held an evidentiary hearing

on this objection in August 2015. See Dkt 3-13. Washington

argued that the HAMP Modification modified the PMI

requirement. She testified she had been employed for over a

decade with title companies doing closings on mortgage loans. Id

at 18–19. She had state certification as a signing agent to do so,

as well as familiarity with mortgage loan documents. Id at 19. She

testified it was her understanding at the time that the HAMP

Modification wholly eliminated PMI. Id at 33.

The bankruptcy court ultimately disallowed Green Tree’s

proof of claim to the extent it included past and future PMI. Dkt

2-20; see also Dkt 3-13 at 60–61. It determined that the HAMP

Modification excluded PMI, that it was Washington’s

understanding that PMI had been removed, and that her lender

at the time accepted the payments without PMI included in them.

Dkt 3-13 at 58.

Green Tree timely appealed this order. Dkt 1. This appeal

was eventually reassigned to this Court in October 2019. Dkt 14.

2. Legal standard

Federal district courts have jurisdiction to hear appeals from

final judgments or orders of the bankruptcy courts. 28 USC

§ 158(a)(1). Because the district court functions as an appellate

court, it applies the same standard of review that federal appellate

courts use when reviewing district court decisions and may

affirm, modify, reverse, or remand with instructions for further

proceedings. See Webb v Reserve Live Insurance Co, 954 F2d 1102,

1103–04 (5th Cir 1992).

A district court reviews a bankruptcy court’s findings of fact

for clear error and its conclusions of law and mixed questions of

fact and law de novo. In re Seven Seas Petroleum Inc, 522 F3d 575, 583

(5th Cir 2008); see also Fed R Bankr P 8013. Matters within a

bankruptcy court’s discretion are reviewed only for abuse of

discretion. In re Gandy, 299 F3d 489, 494 (5th Cir 2002); In re Waco

Town Square Partners, LP, 536 BR 756, 760 (SD Tex 2015). A

bankruptcy court abuses its discretion when it applies an

improper legal standard or bases its decision on clearly erroneous

findings of fact. In re Crager, 691 F3d 671, 675 (5th Cir 2012).

The standard of review is of particular importance in this

case. Both parties advert to it, but neither actually applies it. For

its part, Green Tree largely complains about many of the

bankruptcy court’s determinations that required exercise of

discretion or fact-finding. “In such cases it is inappropriate and

unwise for an appellate court to step in.” In re SBMC Healthcare

LLC, 547 BR 661, 683 (SD Tex 2016).

3. Analysis

Green Tree asserts two main errors by the bankruptcy court

when sustaining Washington’s objection to the subject proof of

claim. The first is that the bankruptcy court should not have

admitted the Litton Loan Servicing escrow statement. The other

is that it incorrectly found the HAMP modification to eliminate

Washington’s obligation to pay PMI.

a. Admission of the escrow statement

The bankruptcy court admitted the Litton Loan Servicing

annual escrow account disclosure statement from June 23, 2010

as a recorded recollection under Federal Rule of Evidence 803(5).

Dkt 3-9 at 57. The exhibit was offered by Washington and

received in evidence over Green Tree’s objection. Dkt 3-13 at 28.

The statement indicates anticipated collection of principal and

interest amounts. As to escrow balances, the only items listed for

payment are county taxes, water district taxes, and hazard

insurance. PMI is nowhere listed on the document.

Green Tree argues admission was error. A trial court’s

decision to admit or exclude evidence is reviewed only for abuse

of discretion. Matter of Corland Corp, 967 F2d 1069, 1074 (5th Cir

1992). This standard affords great latitude in the conduct of a

bench trial. Ibid (citation omitted).

Rule 803(5) provides that a court may admit evidence as a

recorded recollection when that record “is on a matter the

witness once knew about but now cannot recall well enough to

testify fully and accurately; was made or adopted by the witness

when the matter was fresh in the witness’s memory; and

accurately reflects the witness’s knowledge.” The plain language

of the rule establishes that the record need not have been

personally prepared by the witness. But in such circumstances,

the witness must testify that he or she “examined it and found it

to be accurate.” O’Malley v US Fidelity & Guardian Co, 776 F2d

494, 500 (5th Cir 1985); see also 2 McCormick On Evidence § 279

(8th ed 2020).

Upon objection to the escrow statement at hearing,

Washington’s counsel argued that she was using the information

to “back up her personal knowledge.” Dkt 3-13 at 27. On

questioning by the bankruptcy court, Washington testified that

the statement was consistent with her understanding of “the

deal” she made in the HAMP Modification. Ibid. She also

testified that she was “adopting the numbers in this document”

as accurate. Ibid. And she testified that she provided the

statement to Green Tree once it acquired her loan when the

dispute arose as to whether PMI was included in the HAMP

Modification. Ibid. The bankruptcy court then admitted the

exhibit. Id at 28.

Washington did not prepare the statement. But she examined

it and testified to its accuracy, thus adopting it. The information

within the document was therefore admissible. But a further

question concerns the form in which the bankruptcy court should

have admitted this evidence.

Rule 803(5) states, “If admitted, the record may be read into

evidence but may be received as an exhibit only if offered by an

adverse party.” This limitation in Rule 803(5) as to reading

information into evidence as opposed to receiving the document

itself as an exhibit is important when the action proceeds before

a jury. As the Fifth Circuit noted in United States v Judon, “The

drafters precluded the receipt of recorded recollection as an

exhibit of the proponent of the memorandum in order to prevent

the trier of fact from being overly impressed by the writing.” 567

F2d 1289, 1294 (5th Cir 1978); see also 2 McCormick On Evidence

§ 279 (8th ed 2020): “Should the writing be admitted into

evidence and be allowed to be taken to the jury room? Federal

Rule 803(5) resolves the issue by resort to the ancient practice of

reading the writing into evidence but not admitting it as an exhibit

unless offered by the adverse party.”

The bankruptcy court received the exhibit into evidence even

though it was offered by Washington, not an adverse party. This

did not strictly conform to the dictates of Rule 803(5). But the

Federal Rules of Evidence are equally clear that “[a] party may

claim error in a ruling to admit or exclude evidence only if the

error affects a substantial right of the party . . . .” FRE 103(a); see

also FRCP 61 (harmless error rule); Fed R Bankr P 9005 (applying

FRCP 61). The burden of proving that any error was prejudicial

is on the party asserting it as such. Williams v Manitowoc Cranes

LLC, 898 F3d 607, 615 (5th Cir 2018), citing Ball v LeBlanc, 792

F3d 584, 591 (5th Cir 2015).

Nothing suggests that the bankruptcy court compromised

substantial rights of Green Tree by admitting the June 2010

escrow statement. Green Tree’s main contention on this point is

only that the escrow statement was “impermissibly used by the

bankruptcy court to make or bolster its conclusions.” Dkt 10 at

19. But whether the bankruptcy court received the actual

statement as an exhibit or only admitted its information, the

information itself was properly before the court for

consideration. Indeed, Washington testified to her own

recollection that escrow statements after the modification and

prior to the transfer did not include PMI. Dkt 3-13 at 28. Green

Tree neither objected to this testimony during the hearing nor

contests it on appeal. And the bankruptcy court at length found

that Washington was a credible and honest witness and debtor;

that her experience with title companies closing loan mortgages

gave her knowledge and understanding of the process; and, quite

simply, that “her character is unassailable.” Id at 59.

At a minimum, the bankruptcy court did not abuse its

discretion in admitting the information within the escrow

statement into evidence. To the extent any technical error exists

as to admission of the exhibit itself, such error did not affect

substantial rights. Reversal is not warranted where any error was

harmless. Williams, 898 F3d at 615.

b. Modification of the obligation to pay PMI

Green Tree argues that the bankruptcy court erred in finding

that the HAMP modification eliminated Washington’s obligation

to pay PMI. It also asserts that the bankruptcy court incorrectly

applied the burden of proof with respect to its proof of claim.

i. The HAMP Modification

Washington stipulates that she was required to make PMI

payments under the original loan documents. Dkt 3-13 at 10.

That is not at issue. The question is whether this obligation was

modified. Green Tree asserts that Washington failed to prove a

contractual modification of the PMI requirement.

Parties may of course modify their contracts under Texas

law. Hathaway v General Mills Inc, 711 SW2d 227, 228 (Tex 1986).

Such modification must satisfy the same elements familiar to all

contracts—a meeting of the minds supported by consideration.

Ibid. Proper construction of a contract is a question of law

reviewed de novo by this Court. Kona Technology Corp v Southern

Pacific Transportation Co, 225 F3d 595, 604 (5th Cir 2000) (citation

omitted). Whether parties modified their contract depends on

intent and is a question of fact. Hathaway, 711 SW2d at 228–29.

The burden of proving modification to a contract rests on

the party asserting the modification. Id at 229. This remains true

in the bankruptcy context, where the ultimate burden of proof

lies with the party who would bear the burden if the dispute arose

outside of those proceedings. Raleigh v Illinois Department of Revenue,

530 US 15, 17 (2000). Green Tree’s proof of claim rises or falls

depending upon whether there was a modification to remove

PMI from Washington’s loan. The burden of proving the

modification as a factual matter thus rested on Washington.

As to the bankruptcy court’s construction of the contract. The HAMP

Modification stated it would “amend and supplement (1) the

Mortgage on the Property, and (2) the Note secured by the

Mortgage” (together the Loan Documents). Dkt 3-8 at 41.

Washington primarily relied on Section 3(c) of the HAMP

Modification, which in a table set out the “payment schedule for

the modified Loan.” Id at 42. These terms, says this section,

“shall supersede any provisions to the contrary in the Loan

Documents.” Listed there are a monthly principal and interest

payment of $726.60 and an estimated monthly escrow payment

of $456.25. The bankruptcy court ultimately found it

“undisputed” that the escrow amount included only hazard

insurance and taxes. Dkt 3-13 at 54. And indeed, Green Tree

didn’t attempt to argue the math otherwise, which in any event

simply couldn’t support a finding of PMI as included within the

monthly escrow payment amount.

Green Tree instead primarily relied on Section 4(d) of the

HAMP Modification. The bankruptcy court considered this

section but ultimately found it lacking. Ibid. It states that

Washington must continue to pay “mortgage insurance

premiums, if any, or any sums payable to Lender in lieu of the

payment of mortgage insurance premiums in accordance with the

Loan Documents.” Dkt 3-8 at 43. But use of if any makes this

only a conditional statement. It doesn’t support contention of a

flat mandate that the HAMP Modification required Washington

to continue to pay PMI. Indeed, this subsection also states that

Washington “shall pay Lender the Funds for Escrow Items unless

Lender waives [her] obligation to pay Lender Funds for any or all

Escrow Items at any time.” Ibid (emphasis added). This actually

cuts against Green Tree’s position because “Escrow Items” is

defined within the same subsection to include PMI to the extent

it is required. Ibid. And so if PMI were an expressly mandated

item, it would have been included in the calculation of the

estimated monthly escrow payment amount in Section 3(c). But

as just noted, the math simply doesn’t support that reading.

The Court finds no legal error as to the bankruptcy court’s

construction of the contract as it pertains to Sections 3(c)

and 4(d). And the Court finds no clear error as to its related

factual conclusions in this regard.

Green Tree also points to the PMI Disclosure that

Washington originally signed in June 2007. Dkt 3-8 at 75–76.

Green Tree asserts that this disclosure outlines the only

parameters by which PMI could be canceled and that Washington

did not meet any of the requirements for termination. Dkt 10 at

15–16. The bankruptcy court rejected this argument as ignoring

the “reality” of the subsequent HAMP Modification. Dkt 3-13 at

58. Requirements for cancellation are only with respect to

“Borrower Cancellation of PMI.” Dkt 3-8 at 75. But as the

bankruptcy court noted, the PMI Disclosure expressly allows for

loan modification, stating, “If you and lender (or note holder)

agree to a modification of the terms or conditions of your

mortgage loan, then the cancellation date, termination date, or

final termination will be recalculated to reflect the modified terms

and conditions agreed upon.” Id at 76; Dkt 3-13 at 53–54. This

raises—but doesn’t resolve—the factual question whether

Washington and her original lender agreed to a modification with

her lender. As noted below, the bankruptcy court resolved that

question against Green Tree based on the evidence presented.

The Court finds no clear error, and its construction of the

contract in this regard was correct.

Green Tree also relies on Chapter C65 of the HAMP

Regulations. That regulation provides, “Servicers must service all

Mortgages, including any Mortgage to be modified in accordance

with the terms of the Program, so as to preserve and not to impair

existing mortgage insurance coverage.” Green Tree relies on this

to argue, “As a matter of construction, PMI remains a

requirement under a HAMP modification.” Dkt 10 at 17–18. Its

underlying, more sweeping contention is that PMI is never

affected by HAMP modifications.

Green Tree did not present this argument to the bankruptcy

court. There is colloquy with the bankruptcy court regarding the

“Fannie Mae guidelines” generally—but only as to the court’s

question whether Fannie Mae would have recourse against Green

Tree as to PMI premiums. Dkt 3-13 at 38–39. As to that point,

counsel stated, “I honestly don’t know how that would work with

Fannie Mae.” Chapter C65 itself is nowhere referenced, and more

pertinently, Green Tree nowhere argued any regulation to

constrain construction of the HAMP Modification.

A district court reviewing a bankruptcy appeal cannot

consider issues that were not initially presented to the bankruptcy

court. See Barron v Countryman, 432 F3d 590, 594 n 2 (5th Cir

2005). The argument is waived. But in any event, the regulation

appears to impose an obligation by the government only upon

Litton Loan Servicing as the servicer of the loan—not upon

Washington as the borrower. Whether or not the former was

required to abide by this regulation doesn’t resolve the question

whether it in fact acted contrary to the regulation when agreeing

with the latter to a modification eliminating PMI.

As to the bankruptcy court’s factual determinations. The bankruptcy

court ultimately determined that Washington put forward

sufficient evidence to prove modification. It relied on the

following evidence offered by Washington in doing so:

o The calculation of the payments in the HAMP

Modification excluded PMI;

o Washington’s understanding that PMI had been

removed;

o Acceptance by her lender, Litton Loan Servicing, of

payments without PMI after modification.

Dkt 3-13 at 58.

These are all factual determinations reviewed for clear error.

In re Seven Seas Petroleum Inc, 522 F3d at 583. Evidence in the

record supports each. The Court finds no clear error.

ii. Burden of proof

Green Tree also makes a slightly different argument in this

regard. It asserts that the bankruptcy court “erroneously placed

the burden of proof” on it with respect to modification. Dkt 10

at 13. Proper allocation of the burden of proof is reviewed de novo,

and determinations whether the parties met their burden of proof

is reviewed under the clearly erroneous standard. Broussard v State

Farm Fire & Casualty Co, 523 F3d 618, 625 (5th Cir 2008).

Allowance of claims is itself governed by 11 USC § 502. It

provides that a proof of claim filed under § 501 is deemed allowed

unless a party-in-interest objects. Id § 502(a). Once an objection

is made, the court must determine the amount of the claim as of

the petition date and “shall allow such claim in such amount”

unless the claim falls under one of the nine listed statutory

grounds for disallowance. Id § 502(b). Although not specifically

referenced at the hearing, at issue was § 502(b)(1), under which a

claim must be disallowed if it “is unenforceable against the debtor

and property of the debtor, under any agreement or applicable

law.” Green Tree’s argument would seemingly have it bear no

burden of proof in this regard. Dkt 10 at 14–15.

The Fifth Circuit holds to the contrary that sections 501 and

502 of the Bankruptcy Code create a burden-shifting regime.

Together with Bankruptcy Rule 3001, these provide that “a party

correctly filing a proof of claim is deemed to have established a

prima facie case against the debtor’s assets.” In re Fidelity Holding

Co Ltd, 837 F2d 696, 698 (5th Cir 1988). The claimant will prevail

unless a party who objects to the proof of claim produces

evidence to rebut the claim. Ibid. Upon production of this

rebuttal evidence, the burden shifts to the claimant to prove its

claim by a preponderance of the evidence. Ibid; see also In re

DePugh, 409 BR 125, 135 (Bankr SD Tex 2009).

The bankruptcy court properly recognized all this, stating,

“The proof of claim filed by Green Tree Servicing enjoys the

presumption of validity until the debtor comes forward with

some evidence to take away that prima facie validity.” Dkt 3-13

at 58. It then determined that Washington came forward with

sufficient rebuttal evidence to shift the burden back to Green

Tree. In doing so, the bankruptcy court referred to evidence

offered by Washington as described above, finding that PMI was

not included based on the calculation of escrow payments listed

in the HAMP Modification, on Washington’s understanding that

PMI had been removed, and on the fact that her then-lender

Litton Loan Servicing accepted her loan payments without PMI.

Ibid.

Once it determined that Washington produced sufficient

rebuttal evidence, the bankruptcy court shifted the burden to

Green Tree “to come forward with evidence in support of its

claim.” Ibid. This was proper. See In re DePugh, 409 BR at 135.

And it then ultimately concluded that Green Tree failed to meet

its required burden, noting that Green Tree could offer no

“testimonial or documentary support for why the lender did what

it did.” Dkt 3-13 at 59. Indeed, the bankruptcy court found that

Green Tree picked up all of the other adjustments in the HAMP

Modification on a go-forward basis. Id at 58.

The bankruptcy court observed that “there are certainly gaps

in the documentation, but I’m required to make a determination

based upon the record that I am presented with.” Ibid. It

therefore relied on Washington’s testimony, finding her to be

credible. Id at 59. A reviewing court must give due regard to the

opportunity of the bankruptcy court to judge the credibility of

witnesses. In re Dennis, 330 F3d 696, 701 (5th Cir 2003).

Neither conclusion by the bankruptcy court—first, that

Washington met her burden to rebut the prima facie validity of

Green Tree’s claim; second, that Green Tree failed to produce

sufficient rebuttal evidence—was clearly erroneous. Broussard,

523 F3d at 625. Green Tree’s assertion of error regarding the

burden of proof is denied.

4. Conclusion

The order of the bankruptcy court is AFFIRMED.

SO ORDERED.

Signed on May 19, 2020, at Houston, Texas.

Ce 2 Falucdys =

Hon. Charles Eskridge

United States District Judge

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