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Bank of America withdraws lawsuit against Tennessee bankruptcy trustee

In a move that implied it was out of its depth, Bank of America has dropped its lawsuit against a Tennessee Chapter 13 bankruptcy trustee. The bank had claimed the trustee was improperly dispersing money when administering Chapter 13 bankruptcy payments.

To understand the significance of Bank of America’s lawsuit withdrawal, consumers must first understand the role of a bankruptcy trustee and how Tennessee handles foreclosures.

Role of the Chapter 13 bankruptcy trustee & the Tennessee foreclosure process

At heart of Bank of America’s lawsuit was the responsibility of the bankruptcy trustee to administer a bankruptcy filer’s account and ensure money is distributed according to current bankruptcy rules. In general, bankruptcy trustees oversee the administration of various types of bankruptcies to ensure compliance with bankruptcy laws and procedures. Trustees also monitor the actions of the bankruptcy filer and the private trustees of their estates. Bankruptcy trustees are involved in Chapter 7, 11, 12 and 13 bankruptcies.

Another factor that played a role in Bank of America’s lawsuit is the way Tennessee handles foreclosures. Unlike other states, Tennessee does not require judicial approval for foreclosures. As a result, the foreclosure process usually takes place in bankruptcy courts. This means that the state’s bankruptcy laws also apply to foreclosures. The state of Tennessee requires that claims to a filer’s money be filed in a timely manner and that creditors present the original mortgage or loan and the original promissory note in order to receive repayments.

The Bank of America lawsuit: biting off more than it could chew?

Bank of America filed its lawsuit against the Tennessee bankruptcy trustee in July 2012, but dropped it in August after making a deal with individuals foreclosing on their homes. The bank had claimed that the trustee was improperly distributing money to other creditors during the bankruptcy process.

The bank had filed its lawsuit against the trustee as an adversarial proceeding in a bankruptcy case, a rather back-door approach. In the filing, Bank of America claimed the trustee was using mortgage payments from the filer to pay the filer’s other creditors rather than Bank of America. The trustee’s response was that Bank of America failed to present the physical promissory note that proved they owned the mortgage and thus, under Tennessee law, was not entitled to payments.

If Bank of America had not dropped its lawsuit and had gone to court, a win for the bank could have put an end to a common tactic used by bankruptcy filers and trustees-following the rule that requires lenders to produce physical evidence of the mortgages they own. This rule is problematic for lenders because of their practice before the Great Recession of bundling mortgages together and selling them as bonds. This makes it difficult for lenders to locate the physical promissory note for the mortgages they claim to own.

Dropping the lawsuit is a wise move

Not only does dropping its lawsuit against the Tennessee bankruptcy trustee protect filers from predatory lenders, it also helps the bank protect itself. If the lawsuit moved forward, it is likely that the bank’s legal representation would face sanctions under Rule 9011 of the U.S. bankruptcy procedures. This rule states that attorneys may not present a case to harass, cause unnecessary delay or run up costs of litigation, make frivolous arguments for extending or modifying a law or present allegations or deny allegations without evidence.

Bankruptcy trustees help ensure that the bankruptcy process runs smoothly and that both filers and creditors are treated fairly according to bankruptcy laws. In dropping its lawsuit against the Tennessee bankruptcy trustee, Bank of America has acknowledged that the trustee was fulfilling his job duties to the fullest extent of the law. If you or a loved one is considering bankruptcy and wonder how foreclosure may affect your bankruptcy process, contact an experienced bankruptcy attorney.

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