Northwest Arkansas, Southwest Missouri Lawyer

JP Morgan Chase recently had the question of whether it was entitled to foreclosure fees and costs listed on its proofs of claims against three debtors. IN RE JOHNSON, Bankr. Court, ED Arkansas 2011.  In the three cases there was no dispute that the foreclosure fees and costs were owed under the loan documents, which granted JP Morgan "the right to be paid back by me for all of its costs and expenses in enforcing this Note . . . ." The only question in each of the three cases was whether the foreclosure fees and costs were allowed by the controlling law. 

In all three cases, the controlling law was the Arkansas' Statutory Foreclosure Act (i.e., Arkansas' non-judicial foreclosure procedure), and whether JP Morgan was qualified to use Arkansas' non-judicial foreclosure procedure when it initiated the foreclosure proceedings against these Debtors.  The Debtors argued JP was not qualified to use the non-judicial foreclosure process because § 18-50-117 of the Statutory Foreclosure Act requires an entity to be authorized to do business in Arkansas, and that JP was not in compliance with that requirement.  JP stipulated that it was not authorized to do business in Arkansas.

 Among other arguements, JP argued that the authorized to do business portion of the Act was preempted by federal law through the provisions of the National Banking Act.  The Court found that JP Morgan was not qualified to use the Arkansas non-judicial foreclosure process when it initiated the foreclosures against the Debtors. 

Attorney Fees

Both parties asked for attorney fees.  The Court stated that generally under the "American rule," parties to litigation must pay their own attorney fees. However, exceptions to the rule exist, one of which was Ark. Code Ann. § 16-22-308, which states,

In any civil action to recover on an open account, statement of account, account stated, promissory note, negotiable instrument, or contract relating to the purchase or sale of goods, wares, or merchandise, or for labor or services, or breach of contract, unless otherwise provided by law or the contract which is the subject matter of the action, the prevailing party may be allowed a reasonable attorney's fee to be assessed by the court and collected as costs.

The Court found that the action was brought by the Debtors to determine whether they owed the foreclosure fees and costs incurred by JP Morgan in conducting non-judicial foreclosure proceedings on its promissory notes. The Debtors were construed the prevailing party, and the Court awarded the Debtors a reasonable amount for their attorney fees. Counsel for the Debtors were requested to submit separate applications fees.

This case is an example of the pitfalls that can befall a creditor.  In this case, the objection to the creditor's proof of claim was sustained, and the creditor's objection to the plan was denied.  JP Morgan did not get included in the plan and had to pay fees to the Debtors to add further insult to injury.