CLLA NEWSWIRE | FROM THE CLLA NEWSWIRE

Senate Bill Fights Creditor Fraud And Increases U.S. Trustees' Role In Bankruptcy

David Goch, Washington Legislative Counsel | May 26, 2011

On Tuesday, Sen. Patrick Leahy (D-Vt.), chairman of the Senate Judiciary Committee, introduced S.1054, the Fighting Fraud in Bankruptcy Act of 2011, to "support and strengthen" the powers of U.S. Trustees to protect homeowners from creditor fraud in bankruptcy court. Sens. Sheldon Whitehouse (D-R.I.) and Richard Blumenthal (D-Conn.) are original co-sponsors.

According to Leahy’s press release, as part of the Department of Justice's efforts to scrutinize bankruptcy case foreclosure documentation, the U.S. Trustee's office reviewed 10,000 proofs of claim filed by mortgage servicers. The Executive Office of the U.S. Trustee (EOUST) reported an error rate ten times greater than the rate acknowledged by some mortgage servicers.

Leahy stated further that trustees have faced legal challenges from mortgage servicers, challenging the trustee’s legal authority to seek additional documentation or the court’s ability to impose sanctions for defective or fraudulent filings, as a result of the recent increased efforts to hold mortgage servicers accountable in the bankruptcy process.

According to Leahy, his bill “bolster[s] the EOUST's ability to fight creditor fraud and protect homeowners in the bankruptcy process, while preventing needless litigation over its authority to do so.”

Whitehouse, in a release, added: “It's inexcusable when big banks hit homeowners with bogus mortgage fees and improper foreclosures.”

S.1054 has the following four provisions that:

• Formalize the UST’s duty to take action to remedy creditor abuse related to the bankruptcy process;
• Permit the bankruptcy court, on its own or based on a motion from the UST, to correct or sanction creditors in the bankruptcy process for misconduct or fraud;
• Amend 28 U.S.C. § 586 and empower the UST to set audit procedures ensuring compliance with the law by creditors;
• And amend 11 U.S.C. § 362(d) and require mortgage lenders to certify under penalty of perjury that a foreclosure proceeding against deployed active duty military members is in compliance with the Service Members Civil Relief Act.

The bill:

• Adds a new bankruptcy code section, Section 113, offering “remedies for negligent, reckless, or fraudulent assertion of claim,” allowing the imposition of a civil penalty of not more than $5,000 for each such claim;
• Becomes effective with respect to all cases filed or pending under Title 11 on or after the date of enactment;
• And becomes effective with regard to the auditing of proofs of claim, under 28 U.S.C. § 586, 18 months after the date of enactment for all cases filed or pending on or after the date of enactment (the EOUST director may, in his/her sole discretion, establish an earlier effective date by publishing a notice in the Federal Register at least two weeks before the proposed effective date).

 

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