Judge Nugent

12-12240 Smith (Doc. # 75) - Document Text

SIGNED this 15th day of May, 2014.




Case No. 12-12240
Chapter 13



Nationstar Mortgage told Clifton and Kathryn Smith that if they made three
trial payments in November and December of 2011 and January of 2012, Nationstar
would modify their home mortgage loan. As the lender requested, the Smiths executed
a payment forbearance agreement with Nationstar and timely made the trial
payments. Nationstar sent them a Loan Modification Agreement that they signed and


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returned. Then, even though the Smiths had fully complied with Nationstar’s
conditions and timely returned the signed modification agreement, Nationstar refused
to execute it and instead wrote the Smiths two months later to tell them that their loan
“did not meet investor guidelines.”1

When a mortgage creditor offers a conditional home loan modification with
definite terms to borrowers and the borrowers not only satisfy those conditions, but
also accept the loan modification offer, the offer and its acceptance form an enforceable
contract. The mortgage creditor cannot thereafter revoke its offer or “reject” the
borrowers’ acceptance. If the mortgage creditor’s offer is not conditioned upon its
compliance with undisclosed duties to unidentified third parties, its duties to those
third parties cannot excuse its performance of the obligations it undertook to perform,
once its offer has been accepted (unless those obligations are somehow unlawful). Here,
the Smiths did everything they were supposed to, but Nationstar refused to execute the
modification agreement it had offered them because it concluded that its investor,
Federal National Mortgage Association (FNMA), would not permit the modification
because it had recourse to its assignor and could require the assignor to repay the
defaulted obligation.

As Nationstar was bound by the terms of its modification offer, its claim in this
case must be allowed under the terms of the loan as modified. Nationstar’s calculations
are instead based on the terms of the original mortgage note. The debtors’ objection to

1 And that’s all they told them. See Ex. E.


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Nationstar’s proof of claim should be SUSTAINED.2


Objections to claims and confirmation of chapter 13 plans are core proceedings
over which the bankruptcy court has subject matter jurisdiction.3


On May 19, 1999, Clifton and Kathryn Smith executed a promissory note to FT
Mortgage Companies, promising to repay $65,951 over thirty years at 7.25% per
annum in equal monthly installments of principal and interest in the amount of
$449.91. They also granted FT a mortgage encumbering their home in Conway Springs,
Kansas, to secure repayment of the note. The note is endorsed in blank, “without

No later than November of 2009, the Smiths defaulted on their mortgage

2 Dkt. 28. Following an evidentiary hearing held on April 15, 2014, the Courttook this matter under advisement. Debtors appeared in person and by theirattorney Martin J. Peck. Nationstar Mortgage appeared by its counsel Carrie
Mermis. Karin Amyx appeared on behalf of the chapter 13 trustee Laurie B.

3 28 U.S.C. § 157(b)(1) and (b)(2)(B) and (L); 28 U.S.C. § 1334.

4 The parties stipulated to the admission of all exhibits. Even though Exhibits1 and 2 contain unexecuted copies of the Payment Forbearance Agreement andLoan Modification Agreement (and related documents), counsel advised the Courtthat there was no dispute that the debtors properly executed all of the necessaryagreements and timely returned them to Nationstar in accordance with thedirections provided by Nationstar (and Nationstar’s witness so testified).

5 See Ex. A.


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payments.6 At that time, the remaining principal balance due was $53,948.7 The
parties offered no evidence about what occurred in the ensuing two years, but did agree
that, in October of 2011, the Smiths applied to Nationstar Mortgage, by now the
servicer of the loan for First Horizon Home Loans, a division of First Tennessee Bank
National Association, for a loan modification. On October 24, 2011, Rob Bush, a
“foreclosure prevention specialist” at Nationstar e-mailed the Smiths and told them –

You have been approved for a modification that starts in February. Beforethe modification is official, there are 3 months of trial payments that needto be made. The funds need to be in by the 1st of the month so thepayments need to be made before the 31st of each month so the funds willbe in house on the 1st. For example: the first trial payment is dueNovember 1st, so the payment needs to be made on or before the 31st ofOctober by certified funds, either by Western Union, Moneygram ormoney order. If you have any questions please call me directly.8

Attached to the e-mail were two documents, a cover letter and a forbearance
agreement. The cover letter sets out the due dates and amounts of the requisite three
trial modification payments (in lieu of debtors’ normal mortgage payment) and states
unequivocally that “[a]fter all trial period payments are timely made, your mortgage
will be permanently modified . . . .”9 The Payment Forbearance Agreement that was
attached to this e-mail also states at paragraph 3.C. that during the “deferral period”
(while the trial payments are being made), the lender will review the loan and

6 See Ex. D, p. 10.
7 Id.
8 See Ex. 1.
9 Id.


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determine whether “additional default resolution assistance” will be offered, including
as a possibility that “Lender will offer to modify my Loan.”10 The Forbearance
Agreement also provides that, during the trial period, Nationstar agreed to forbear
further enforcement proceedings in connection with the Smiths’ loan.

To be sure, the Forbearance Agreement left Nationstar several “outs.”
Paragraph 3.C. contemplates the possibility that the lender might, upon review,
decline to modify the loan, offer some other form of assistance, or simply proceed to
foreclose. Paragraph 3.D. states “I understand that the [Forbearance] Agreement is not
a forgiveness of payment on my Loan or a modification of the Loan Documents” and it
further states that the lender is not “obligated or bound” to modify the loan.11 Nothing
in the Payment Forbearance Agreement or the correspondence mentioned above refers
to a need to meet “investor guidelines” as a condition precedent to modification.12

After they executed and returned the Forbearance Agreement, the Smiths made
the three trial payments on time and, on January 18, 2012, Rob Bush sent them a Loan
Modification Agreement, an Agreement to Maintain Escrow Account, and a Letter of

10 Id.

11 Id.

12 Paragraph 3.C. of the Forbearance Agreement described five possiblealternatives of default resolution assistance that Nationstar could offer. See Ex. 1,

p. 5. The Court acknowledges that the fourth alternative – to offer some form ofpayment assistance or alternative to foreclosure on the lender’s terms in ¶ 3.C.(4)–
was subject to the further approval of the investors or insurers on the loan, butconcludes, in the absence of any contrary contention by Nationstar, that it offered
the third alternative – to modify the Smiths’ loan – under ¶ 3.C.(3).

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Acknowledgment, all attached to an e-mail.13 The subject line of the e-mail read “Please
send docs back signed notarized [sic] by 1/24/12 - thank you.” The Loan Modification
Agreement dated January 18, 2012 provided for the repayment of the outstanding
balance of $69,319.84 at a reduced interest rate of 3.75% per annum, amortized from
February 1, 2012, and payable in 360 equal monthly principal and interest
installments of $321.02 commencing on March 1. The Smiths signed the Loan
Modification Agreement before a notary public and returned it to Nationstar, along
with the other two documents.

Then, on March 19, 2012, Nationstar wrote them stating that they did not meet
the loss mitigation guidelines because “Investor Guidelines Not Met.”14 There was no
further explanation. The Smiths did everything they were supposed to, but Nationstar
refused to execute the modification agreement it had offered them because it concluded
that its investor, Federal National Mortgage Association (FNMA), would not permit
the modification. At trial, Nationstar’s witness, Mr. Hyne, testified that the Smiths’
loan was ineligible for loss mitigation because First Horizon had assigned it to FNMA
“with recourse,” meaning that FNMA could require First Horizon to repay FNMA’s
investment.15 Because of that, Mr. Hyne said, the Smiths’ loan file was “processed in
error” and the loan file subsequently flagged for “no mitigation.” Neither side offered

13 See Ex. 2.
14 Ex. E.
15 The Court cannot square this testimony with the non-recourse

endorsement stamped on the face of the original note.


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evidence about the extent of FNMA’s investment or the details of the “recourse”

Mr. Hyne also testified that after Nationstar “withdrew” its offer to modify, it
pursued attempting another form of modification through the Federal Housing
Administration that would have allowed Nationstar to file a claim with the
Government for payment of the Smith’s arrearage. Unfortunately, by the time
Nationstar concluded that the Smiths were ineligible for the original modification, they
were also ineligible for the FHA relief because that only covers a 12-month deficiency
and the Smiths were then behind by more than a year. According to Hyne, the Smiths
had no available relief.

But in April of 2012, the Smiths reapplied for modification and, notwithstanding
their file having been flagged by the servicer, received another three-month trial period
on April 30, 2012.16 They executed and returned another forbearance agreement on
May 16, 2012, but did not successfully complete the three-month trial.17

The Smiths filed this chapter 13 case on August 15, 2012, disclosing on their
Statement of Financial Affairs that First Horizons had commenced a foreclosure action
in 2012, obtained a judgment, and scheduled a sheriff’s sale. In the chapter 13 plan

16 Ex. C. The April 30, 2012 cover letter signed by Foreclosure PreventionSpecialist Kim Graham contained identical language to the first trial period coverletter sent to the Smiths: “After all trial period payments are timely made, yourmortgage will be permanently modified.”

17 Likewise, the new Payment Forbearance Agreement contained virtuallyidentical terms as the 2011 Forbearance Agreement. Ex. C, ¶s 3.C. and 3.D.


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they filed with the petition, the Smiths proposed to pay $1,056 per month over 36
months.18 In paragraph 9 of the plan, they provided for payment of the First Horizon
mortgage debt through the trustee in the amount of $69,654.57 with an arrearage of
$3,888. Nationstar objected to confirmation contending that debtors understated the
arrearage and filed a proof of claim in the amount of $73,212.17, including an
arrearage of $23,993.14 on the date of the petition.19 The debtors objected to
Nationstar’s proof of claim.20

For their objection to Nationstar’s claim, the Smiths allege that they should only
be liable for payments in arrears that came due after they made their last trial
payment in January of 2012 and executed the Loan Modification Agreement.21 Had
Nationstar honored its offer to modify their loan, that agreement would’ve taken effect
on February 1, 2012 and their arrearage would only include missed payments from and
after March 1 – some 6 months. Their prior arrearage was added back into the
principal amount of the modified obligation and reamortized. Nationstar argues that
its rejected modification is a dead letter that doesn’t affect the Smiths’ long-term
arrearage. The Chapter 13 Trustee advised that the present plan cannot be confirmed

18 Dkt. 8.

19 Proof of Claim 4-1.

20 Dkt. 28.

21 In their objection, the debtors also initially challenged Nationstar’sstanding as the real party in interest to enforce the mortgage loan but advised attrial that Nationstar’s standing was no longer an issue in the case. The Court
deems this issue abandoned or waived. Dkt. 28.


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because the plan payment debtors propose does not cure this large arrearage,
rendering the plan unfeasible. She takes no position on the debtors’ objection to
Nationstar’s claim.


To prevail on their objection to Nationstar’s claim, the debtors had the burden
of meeting the presumption of its validity that the Bankruptcy Code and Rules
provide.22 They met the presumption by presenting evidence that they made the
requisite three trial payments in November and December, 2011 and January 2012,
that Nationstar offered to them a loan modification, and that they accepted the offer
by returning the signed Loan Modification Agreement before Nationstar “withdrew”
the offer.23 The burden of persuasion then shifted to Nationstar to prove its claim by
a preponderance of the evidence. Whether the parties’ correspondence, the executed
forbearance agreement, and the debtors’ execution of the proffered Loan Modification
Agreement separately or together amount to an enforceable contract is a matter of
state law as is the determination of the extent to which Nationstar’s claim should be

The Forbearance Agreement states that it is governed by Texas law even though

22 See 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3001(f).

23 At the hearing, counsel stipulated that the debtors executed the LoanModification Agreement and that Nationstar received it.

24 See 11 U.S.C. § 502(b)(1) (Claim allowed except to extent unenforceableunder applicable law).


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it affects a note that is secured by Kansas real property.25 The Loan Modification

Agreement, Agreement to Maintain Escrow Account, and Letter of Acknowledgment

were all accepted and executed by the debtors in Kansas. None of them contains a

choice of law provision. In general, federal courts apply the choice of law principles

employed by the courts of the forum state.26 Kansas courts generally apply the law the

parties have chosen unless honoring that choice would offend public policy.27 While

Texas law specifically applies to interpreting the Forbearance Agreement, its legal

effect is not in dispute here. The Loan Modification Agreement involves the same note

secured by the same Kansas property and does not contain a choice of law clause.28

25 Ex. 1, ¶ 3.J.

26 Dang v. UNUM Life Ins. Co. of America, 175 F.3d 1186, 1190 (10th Cir.
1999); In re Patterson, 375 B.R. 652 (Bankr. D. Kan. 2007) (While dischargeabilityof debt is a bankruptcy issue, whether debt was owed was a state law issuerequiring Kansas bankruptcy court to apply Kansas choice of law principles.).

27 See Davis v. Miller, 269 Kan. 732, 739, 7 P.3d 1223 (2000) (parties’ choice oflaw provision incorporating Kansas Uniform Premarital Agreement Act inpostmarital settlement agreement was not contrary to public policy and thereforeenforceable). See also Restatement (Second) of Conflict of Laws, § 187 (1969) (Lawof the state chosen by the parties to govern their contractual rights is an exceptionto general conflict of law principle that law of the state where land is locatedapplies); Mark Twain Kansas City Bank v. Cates, 248 Kan. 700, 705-07, 810 P.2d
1154 (1991) (applying Missouri choice of law provision to a mortgage coveringKansas property and executed in Missouri); In re Hildyard, 2014 WL 222113 at *4-5
(Bankr. D. Kan. Jan. 17, 2014) (applying Kansas choice of law provision in loanagreements and notes executed in Kansas to Colorado property encumbered by deedof trust).

28 Except as modified by the Loan Modification Agreement, the terms of theoriginal note and mortgage remain in full force and effect. Ex. 2, p. 4, ¶ 5.(b). Theunderlying Note contains no choice of law provision and is prepared on a FHAKansas fixed rate note form. Ex. A. The mortgage is a FHA Kansas Mortgage formand provides that it is governed by the law of the state where the property is located


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In the absence of a choice of law provision in the Loan Modification Agreement,

Kansas choice of law principles must be applied to determine which substantive state

law should apply.29 The Kansas courts have not adopted the Restatement (Second) of

Conflict of Laws which utilizes the “significant relationship” test.30 Instead, they follow

the first Restatement’s lex loci contractus rule – the law of the state where the contract

is made.31 Under either Restatement’s rule and on these facts, I conclude that Kansas

law governs the Loan Modification Agreement in question. Kansas is the place of

contracting.32 The first Restatement provides that the state from which the acceptance

-Kansas. Ex. B, ¶ 14.
29 Clements v. Emery Worldwide Airlines, Inc., 44 F. Supp. 2d 1141, 1146 (D.
Kan. 1999) (Case brought in Kansas was governed by Kansas choice of laws).

30 Id.; Layne Christensen Co. v. Zurich Canada, 30 Kan. App. 2d 128, 38 P.3d757 (2002) (Kansas appellate courts follow the Restatement (First) of Conflict ofLaws when addressing choice of law issues); Central Power Systems & Services, Inc.

v. Universal Underwriters Ins. Co., __ Kan. App. 2d __, 319 P.3d 562 (2014) (Indeciding which state’s law to apply to a contract dispute, Kansas courts apply theRestatement (First) of Conflict of Laws). See also Restatement (Second) of Conflictof Laws, § 188 (1971).
31 Restatement (First) of Conflict of Laws, § 332 (1934) (law governingvalidity of contract); Wilkinson v. Shoney’s, Inc., 269 Kan. 194, 210, 4 P.3d 1149
(2000) (citing Restatement (First) of Contracts, § 74 (1932) – a contract is made
when the last act necessary for its formation occurs and at the place where thatfinal act is done); Central Power Systems & Services, Inc., supra (applying law ofplace of contract formation and for choice of law purposes that is the place in whichthe last act required for formation occurs); Foundation Property Investments, LLC v.
CTP, LLC, 37 Kan. App. 2d 890, 894-95, 159 P.3d 1042 (2007) (Kansas applies the
lex loci contractus doctrine for contractual disputes, which include promissory notesand mortgages).

32 Restatement (First) of Conflict of Laws, § 311 (place of contracting) and §
326 (1934) (place of contracting when acceptance sent from one state to another).


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is sent is the locus of the contract. 33 The Smiths accepted the loan modification offer

 when they signed and returned the agreement – the last act necessary to the making

of a binding contract – in Kansas.34 Thus the doctrine of lex loci contractus doctrine

indicates that Kansas law governs here. Kansas also has the most significant

relationship to the transaction and parties.35 The Smiths and their property subject to

the mortgage are located in Kansas and the Smiths executed the agreement in Kansas.

The ultimate issue here is whether the debtors’ signing the Loan Modification

Agreement operated as an acceptance of an offer that formed a binding contract and

Kansas law applies in making that determination.

Kansas courts follow the rule stated in the Restatement (Second) of Contracts

that an offer, once accepted, cannot be revoked by the offeror.36 An offeree’s exercise of

33 Restatement (First) of Conflict of Laws, § 326(b) (1934) (place ofcontracting when acceptance sent from one state to another).

34 See Clements, 44 F. Supp. 2d at 1146 (applying lex loci contractus to choice
of law issue and applying substantive law of Kansas since that was the place ofcontract formation.); Layne Christensen Co., 30 Kan. App. 2d at 144 (contract ismade where the last act necessary for its formation occurs); Wilkinson, 269 Kan. at

35 See Restatement (Second) of Conflict of Laws, § 188 (1971).

36 Restatement (Second) of Contract § 36(1) provides that an offeree’s powerof acceptance may be terminated inter alia by revocation by the offeror. The powerof acceptance is terminated when the offeree receives the offeror’s manifestation ofan intention not to enter into the proposed contract. Restatement (Second) ofContracts § 42 (1981). See Berryman v. Kmoch, 221 Kan. 304, 310, 559 P.2d 790
(1977) (an offer to sell may be revoked before the offeree exercises the power ofcreating a contract by acceptance of the offer); Talbott v. Nibert, 167 Kan. 138, 144,
147, 206 P.2d 131 (1949) (an option to purchase property becomes an enforceablecontract after acceptance and before the offer is withdrawn); Nieschburg v. Nothern,


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the power of acceptance creates a contract.37 As the comment to Restatement (Second)

of Contracts states, “[o]nce the offeree has exercised his power to create a contract by

accepting the offer, a purported revocation is ineffective as such.”38 So, after the Smiths

successfully made their three trial payments as the Forbearance Agreement required,

Nationstar sent them a proposed Loan Modification Agreement with all pertinent

terms defined. The agreement came under cover of an e-mail that required the

document to be signed, notarized, and returned by January 24, 2012. The Smiths

complied. Nevertheless, Nationstar argues that it withdrew its offer to modify the

Smiths’ mortgage loan. The Smiths executed and returned (i.e. accepted) the Loan

Modification Agreement in a manner consistent with the instructions they were given

by Nationstar’s representative and prior to their receiving Nationstar’s March 19

101 Kan. 110, 165 P. 857 (1917)(mortgagee’s offer to assign a certificate of purchaseissued under a foreclosure sale may be revoked until it is accepted; if the mortgagoraccepts the offer and gives notice of acceptance with the time required, the acceptedoffer becomes a binding contract.).

37 Restatement (Second) of Contracts § 35 (1981); Nungesser v. Bryant, 283
Kan. 550, 565-66, 153 P.3d 1277 (2007) (an unconditional and positive acceptance isrequired to form a contract); Wachter Management Co. v. Dexter & Chaney, Inc.,
282 Kan. 365, 370, 144 P.3d 747 (2006) (A UCC article 2 contract was formed whenbuyer accepted vendor’s offer to sell it software by signing written proposal issuedby vendor); Steele v. Harrison, 220 Kan. 422, 428, 552 P.2d 957 (1976) (Acommunicated offer creates a power to accept the offer that is made and only thatoffer.); Wallerius v. Hare, 200 Kan. 578, 582, 438 P.2d 65 (1968) (A contract isformed upon a positive and unequivocal acceptance of the offer.); Prince Enterprises,
Inc. v. Griffith Oil Co., Inc., 8 Kan. App. 2d 644, 649, 664 P.2d 877 (1983) (Onemethod by which intention to contract may be demonstrated is by the process ofoffer and acceptance).

38 Restatement (Second) of Contracts § 42, Comment c (1981).


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rejection letter. Once they signed and returned the agreement, it was too late for
Nationstar to withdraw or revoke its offer two months later.

Everything that passed between Nationstar and the Smiths before the March
19, 2012 rejection letter indicated that Nationstar intended to modify if the Smiths
performed. Nothing suggested the existence of the hidden condition that the
modification meet “investor guidelines.” Remember that Nationstar had already
assured the Smiths in the October 24, 2011 cover letter that “your mortgage will be
permanently modified” if all trial period payments were timely made. After the Smiths
made the payments, Nationstar offered them a detailed proposed modification
agreement that they signed and returned. Then Nationstar attempted to terminate the
Smiths’ power to accept the offer by revoking it, claiming as an excuse its alleged
obligations to a third party, FNMA. While a contracting party’s failure to perform may
be justified by impracticability or frustration of purpose, Nationstar did not assert
either theory at trial and did not present any evidence to support that conclusion
here.39 All we know is that Nationstar belatedly concluded it could not modify this note
and remain within FNMA’s “investor guidelines.” We do not know what those are
because there is no evidence concerning the terms of Nationstar’s contractual
obligations, if any, to FNMA. As the party with the burden of persuasion, Nationstar
had the burden to produce that information, but failed to do so.

Because the Smiths accepted Nationstar’s offer to modify their loan before

39 See Restatement (Second) Contracts, § 261 (Supervening impracticabilitydischarges obligation) and § 265 (Supervening frustration discharges obligation).


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Nationstar purported to revoke the offer, and because Nationstar has not substantially
justified its refusal to honor the modification, Nationstar is bound by the provisions of
the Loan Modification Agreement, at least for the purpose of allowing its claim here.
The Smiths’ objection to that claim is therefore SUSTAINED, but because the record
is insufficient for me to determine the extent of their arrearage, if any, under the
mortgage as now modified, the parties are granted 21 days in which to submit a
stipulation as to the arrearage amount to be cured under the plan. If no stipulation is
filed by June 6, 2014, the Clerk will set the matter for an evidentiary hearing. A
hearing on Nationstar’s objection to confirmation is continued until Nationstar’s claim
can be allowed.

# # #


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