by Denise Carlon, Esq.

KML Law Group, PC *

USFN Member (NJ, PA)

In October, the Superior Court of Pennsylvania affirmed the dismissal of a foreclosure action based on the plaintiff’s failure to file a response to a Notice of Final Cure Payment (“NOFC”) in the defendants’ Chapter 13 bankruptcy case.

In Cascade Funding v. Smeltzer, the defendant filed a Chapter 13 bankruptcy petition.  Following several payment defaults by the debtor, the Bankruptcy Court entered an order allowing the secured creditor to proceed with its foreclosure action.  At the end of the Chapter 13 plan, the trustee’s office filed an NOFC. The secured creditor did not respond to the NOFC, and the debtor received a discharge.

Bankruptcy Court Rule 3002.1, which applies to mortgages on primary residences, requires the Chapter 13 trustee to file an NOFC when the debtor(s) complete all payments under the Chapter 13 plan.  Subdivision (g) of that rule also requires the secured creditor to file a response to the NOFC indicating whether they agree that all pre- and post-petition payments have been made.

Generally, the requirements of Rule 3002.1 cease to apply if the automatic stay as to the secured creditor has been annulled or terminated.

The Superior Court of Pennsylvania held that the order allowing the secured creditor to proceed with its foreclosure action did not specifically annul or terminate the automatic stay, but rather, only modified the stay.  Because the stay was not specifically annulled or terminated, the creditor was still required to file a response to the NOFC.  Based on the lack of response to the NOFC, the Superior Court inferred that the loan was current at the time of discharge.  As a result, the foreclosure action could not be based on a default that occurred before the bankruptcy discharge was entered. The dismissal of the foreclosure complaint was affirmed.

There is some good news, though. The Superior Court specifically held that their ruling does not prevent the secured creditor from foreclosing on a default that occurs post-discharge. There are also steps that all creditors can take to minimize the risk of having a foreclosure complaint dismissed.

File a response to the NOFC in every case. Even though this ruling is limited to Pennsylvania, it may be best to take a cautious approach.  Unless prohibited by local law, it may be sensible to file a response to any NOFC, regardless of the status of the automatic stay.

Include language in stay relief orders that specifically annul or terminate the automatic stay, or make specific reference to the requirements of Rule 3002.1. It may be possible to alter the language of stay relief orders to specifically indicate that the automatic stay is terminated.  It may also be possible to include a clause in a stay relief order that specifies that the requirements of Rule 3002.1 cease to apply.  Some jurisdictions do not allow for additions or changes to the standard form of order, but it is worth reviewing with local counsel to determine if changes can be made to minimize risk.

When in doubt, ask local counsel. Each jurisdiction is different, even within a given state. If there are any questions about what is required or what can be done to minimize risk with regard to NOFCs, local counsel can be an invaluable resource.

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December 2021 USFN Report