Maxwell v. Fairbanks Capitol

Maxwell, Chapter 13 Case No. 00-14283-JNF; Adv.P No. 00-1568, July 16, 2002

VICTORY IN PREDATORY LENDING CASE

…Nevertheless, Fairbanks in a shocking display of corporate irresponsibility repeatedly fabricated the amount of the debtor’s obligation to it out of thin air.  There is no other explanation for the wildly divergent figures it concocted in correspondence with the Debtor and her agents and in pleadings and documents filed with the bankruptcy court.

Judge Joan Feeney from her memorandum supporting her order in favor of the debtor. [1]

The Community Enterprise Project  (“CEP”) of the Hale and Dorr Legal Services Center  (“The Center”) regularly receives calls from low-income homeowners facing foreclosure.  Tara Twomey, who came to the Center as a Skadden Fellow in 1999, responds to these calls, which are frequently referred by local community groups.   Aware that many of these callers have been victims of unscrupulous lending practices, Ms. Twomey has developed a protocol for scrutinizing her client’s loans for violations of federal and state statutes that protect consumers against dishonest and illegal lending practices by mortgage brokers, lenders and their agents.   Eighty-three year old Ms. Maxwell was one such client.

In 1977, Ms. Maxwell purchased her Dorchester home for thirty thousand dollars.  Her original mortgage was a 30-year fixed rate loan at 8.5% with monthly payments of $207.63.  In 1988, Ms. Maxwell was approached by a door-to-door salesman who suggested a variety of home repairs including the installation of new vinyl siding and windows. The salesman referred Ms. Maxwell and her granddaughter to ITT Financial Services (ITT), a subsidiary of Aetna Finance, to finance the repairs and consolidate other outstanding loans.  In 1988, Ms. Maxwell received a 15-year fixed rate loan with an Annual Percentage Rate (“APR”) of 16.78% from ITT in the principal amount of $137, 611.01.   In 1991, ITT refinanced its 1988 loan and provided Ms. Maxwell and her granddaughter a new loan which ITT said would lower their monthly payments.  However, the new five-year loan had a principal amount of $149,150.00 with an APR of 16%.    The 1991 loan was also negatively amortized, that is, the balloon payment due at the end of the five years was greater than the principle amount of the loan.  The monthly payment of $2005.71 constituted 98.5% of Ms. Maxwell and her granddaughter’s combined incomes.

Predictably, it was not long before Ms. Maxwell and her granddaughter realized that they could not make the monthly payments.  Afraid of losing her home, Ms. Maxwell contacted ITT who agreed to lower the monthly payments to $800, failing; however, to explain to Ms. Maxwell and her granddaughter that these reduced payment would result in further negative amortization and increase the amount of the balloon payment when it became due.  In 2001, Fairbanks Capital Corporation, who claimed to be an assignee of the ITT loan, initiated foreclosure proceedings against Ms. Maxwell and her granddaughter.  At the time, Fairbanks claimed that Ms. Maxwell owed approximately $363,000. 

Ms. Twomey’s involvement in this case began after Ms. Maxwell had filed her own Chapter 13 bankruptcy petition to prevent a scheduled foreclosure. She did not, however, file the required schedules or a Chapter 13 plan.  In July 2000, facing the dismissal of her case and a motion from the bank to proceed with its foreclosure, Ms. Maxwell came to the Legal Services Center. The initial assessment of the case was bleak, in part, due to the lack of documentation for the loan and Ms. Maxwell’s vague memory. As the story unfolded, it became apparent, however, that Ms. Maxwell and her granddaughter had been victims of predatory lending practices. 

 Ms. Twomey first obtained an extension of time to submit Ms. Maxwell’s remaining schedules and with the assistance of law students, Claire Connolly and David Dologite, from the Center’s summer program, began researching potential defenses to Fairbanks’ motion to proceed with the foreclosure.  The strongest argument to emerge centered on Fairbanks’ Lost Note Affidavit.  Fairbanks, who did not have the original note, or even a copy, had proceeded against Maxwell on a Lost Note Affidavit.  The initial review of the Lost Note Affidavit submitted to the court revealed technical deficiencies.  Among other things, the affidavit was dated prior to the date that Fairbanks claimed to have acquired the note.  This defense was sufficient to delay the hearing on the Fairbanks’ motion and provided Ms. Twomey with more time to develop the case.  In November 2000, Ms. Twomey filed an adversary complaint in bankruptcy court on Ms. Maxwell’s behalf asserting nine causes of action, including violations of Truth-in-Lending (TILA) violations, Real Estate Settlement Procedures Act (RESPA), Fair Debt Collection Practices Act (FDCPA), Massachusetts Consumer Credit Cost Disclosure Act, (MCCDA) and Massachusetts Consumer Protection Act.  On May 9, 2002, Judge Feeney heard arguments on the parties cross-motions for summary judgment on four of the nine counts, FDCPA, RESPA, MCCCDA and unconscionability.

In an order and Memorandum dated July 16, 2002, Judge Feeney granted partial summary judgment in favor of Ms. Maxwell finding violations of the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act, and the Massachusetts Consumer Credit Cost Disclosure act.  In her stinging opinion, Judge Feeney also held that  “The 1991 transaction was unconscionable and [took] notice that it and the 1988 transaction satisf[ied], in all material respects, the paradigm of predatory lending”.    In holding that the 1991 transaction was unconscionable and that ITT had failed to provide Ms. Maxwell and her granddaughter the required disclosures under MCCDA, Judge Feeney stated that Ms. Maxwell would be entitled to rescind the loan by way of recoupment.[2]

Following this decision, the case was resolved favorably in an out-of-court settlement. Ms. Maxell remains in her home, the mortgage was discharged, and she received an additional $50,000 from Fairbanks.  For its work, the Center was paid $75,000 in attorney’s fees.

[1] See in Re: Maxwell, Chapter 13 Case No. 00-14283-JNF; Adv.P No. 00-1568, July 16, 2002. (There is also a regular BR cite for this case)

[2] “Recoupment is the common law doctrine that resurrects countervailing claims, which otherwise could not have been raised. The reasoning is that if recoupment claims are barred by the relevant statute of limitations, lenders could avoid the legal consequences of their actions by simply waiting until the expiration of the relevant limitations period to sue on the borrower’s default, thereby frustrating fundamental policies of debtor/creditor regulation.  Allowing a creditor to profit from a violation of the law simply because the consumer’s limitations period had passed, but the creditor’s had not, would obstruct the purposes of the law.

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