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Financial Services Law Insights and Observations

Massachusetts bankruptcy court: No recoupment absent proof of emotional distress

Courts Bankruptcy State Issues Mortgages

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On April 12, the U.S. Bankruptcy Court for the District of Massachusetts entered judgment in favor of a national bank, determining that the plaintiff failed to, among other things, “carry his burden to prove that he incurred injury” concerning economic or emotional distress damages as a result of the original lender’s violations. During the plaintiff’s chapter 13 bankruptcy proceeding, he initiated an adversary proceeding against the bank and a loan servicer for violations of Massachusetts law related to the origination, underwriting, and closing of his mortgage loan. According to the memorandum, the plaintiff contended he was approved for a loan modification after he struggled to stay current on his loan. While the loan modification did not forgive any of the plaintiff’s outstanding debt, the plaintiff agreed to the terms, entered into a modification agreement with the bank (who was the successor by assignment of the original lender), and eventually filed a chapter 13 petition. The bankruptcy court was ultimately called to review the plaintiff’s objection to the bank’s proof of claim filed in his chapter 13 case, in which the plaintiff invoked the doctrine of recoupment, bringing a claim against the bank for damages under Chapter 93A of Massachusetts’ consumer protection law.

Upon review, the court determined, among other things, that the plaintiff’s loan was “presumptively unfair and also unfair in the specific circumstances in which it was made” and that “[n]o reasonably diligent lender would have approved the loan to [the plaintiff] without taking steps to independently verify critical financial information.” Moreover, the court determined that the original lender’s conduct was “unfair and deceptive” under Chapter 93A. The court further noted that Massachusetts law states that while “an assignee ordinarily cannot be held liable for damages based upon the acts of its assignor,” under “the common law principle that an assignee stands in the assignor’s shoes, ‘assignees may be liable under [Chapter] 93A for equitable remedies such as cancellation of a debt or rescission of a contract’”—a context under which the plaintiff sought to have the bank’s claim “reduced by recoupment in the amount of his damages caused by [the original lender’s] unfair and deceptive acts.” However, the court noted that because the borrower failed to “carry his burden to prove that he incurred injury as a result of [the original lender’s] violation,” he “failed to prove an amount for recoupment in reduction” of the proof of claim the bank asserted against him.