1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

NOT FOR PUBLICATION

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE NINTH CIRCUIT

In re: ) BAP No. NC-15-1120-KiTaJu

)

ANTON ANDREW RIVERA and ) Bk. No. 5:14-bk-54193

DENISE ANN RIVERA, )

)

Debtors. )

 )

)

ANTON ANDREW RIVERA; )

DENISE ANN RIVERA, )

)

Appellants, )

)

v. ) M E M O R A N D U M1

)

DEUTSCHE BANK NATIONAL TRUST )

COMPANY, )

)

Appellee. )

______________________________)

Argued and Submitted on July 28, 2016, 

at San Francisco, California

Filed - August 16, 2016

Appeal from the United States Bankruptcy Court

for the Northern District of California

Honorable M. Elaine Hammond, Bankruptcy Judge, Presiding

 

Appearances: Ronald H. Freshman argued for appellants Anton

Andrew Rivera and Denise Ann Rivera; Stefan

Perovich of Keesal Young & Logan argued for

appellee Deutsche Bank National Trust Company as

Trustee for WAMU Mortgage Pass-through Certificates

Series 2005-AR6 Trust.

 

Before: KIRSCHER, TAYLOR and JURY, Bankruptcy Judges.

FILED

AUG 16 2016

SUSAN M. SPRAUL, CLERK

U.S. BKCY. APP. PANEL

OF THE NINTH CIRCUIT

1 This disposition is not appropriate for publication. 

Although it may be cited for whatever persuasive value it may

have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.

-1-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Chapter 132 debtors Anton and Denise Rivera ("Riveras")

appeal an order overruling their objection and allowing the

secured claim of Deutsche Bank National Trust Company as Trustee

for WAMU Mortgage Pass-through Certificates Series 2005-AR6 Trust

("Deutsche Bank" or "Trust") in the full amount of $532,272.10. 

We AFFIRM.

I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY

A. Prepetition events

In 2004, the Riveras obtained a refinance loan for their home

in Bethel Island, California (the "Property"). They executed an

Adjustable Rate Note ("Note") for $440,000, payable to Washington

Mutual Bank, FA. To secure the Note, the Riveras executed a deed

of trust ("DOT") in favor of Washington Mutual and created a lien

against the Property. The DOT was subject to an Adjustable Rate

Rider, which amended and supplemented the DOT. 

Various provisions of the Note and DOT are relevant here. 

The Note provided for monthly interest rate changes on the first

of every month ("Change Date") and changes to the monthly payment. 

Both the Note and the Adjustable Rate Rider conspicuously warned

in all upper case letters:

THIS NOTE CONTAINS PROVISIONS ALLOWING FOR CHANGES IN MY

INTEREST RATE AND MY MONTHLY PAYMENT. MY MONTHLY PAYMENT

INCREASES WILL HAVE LIMITS WHICH COULD RESULT IN THE

PRINCIPAL AMOUNT I MUST REPAY BEING LARGER THAN THE

AMOUNT ORIGINALLY BORROWED, BUT NOT MORE THAN 125% OF THE

ORIGINAL AMOUNT (OR $550,000). MY INTEREST RATE CAN

NEVER EXCEED THE LIMIT STATED IN THIS NOTE OR ANY RIDER

TO THIS NOTE. A BALLOON PAYMENT MAY BE DUE AT MATURITY.

2 Unless specified otherwise, all chapter, code and rule

references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and

the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

-2-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Sections 4(G), 4(H) and 4(I) of the Note provided: 

4(G) Changes in My Unpaid Principal Due to Negative

Amortization or Accelerated Amortization. Since my

payment amount changes less frequently than the interest

rate and since the monthly payment is subject to the

payment limitations described in Section 4(F), my monthly

payment could be less or greater than the amount of the

interest portion of the monthly payment that would be

sufficient to repay the unpaid Principal I owe at the

monthly payment date in full on the maturity date in

substantially equal payments. For each month that the

monthly payment is less than the interest portion, the

Note Holder will subtract the monthly payment from the

amount of the interest portion and will ad [sic] the

difference to my unpaid Principal, and interest will

accrue on the amount of this difference at the current

interest rate. For each month that the monthly payment

is greater than the interest portion, the Note Holder

will apply the excess towards a principal reduction of

the Note.

4(H) Limit on My Unpaid Principal; Increased Monthly

Payment. My unpaid principal can never exceed a maximum

amount equal to 125% of the principal amount originally

borrowed. In the event my unpaid Principal would

otherwise exceed that 125% limitation, I will begin

paying a new minimum monthly payment until the next

Payment Change Date notwithstanding the 7 1⁄2% annual

payment increase limitation. The new minimum monthly

payment will be an amount which would be sufficient to

repay my then unpaid Principal in full on the maturity

date at my interest rate in effect the month prior to the

payment due date in substantially equal payments.

4(I) Required Full Monthly Payment. On the FIFTH

anniversary of the due date of the first monthly payment,

and on that same day every FIFTH year thereafter, the

monthly payment will be adjusted without regard to the

payment cap limitation in Section 4(F).

Thus, Section 4(G) expressly warned the Riveras that their

monthly payment could be less than the amount of the interest

portion and, for each month the interest portion was underpaid,

that the difference would be added to the unpaid principal balance

and interest would accrue on the amount of the difference,

resulting in a loan typically called a negative amortization loan. 

If, however, payments exceeded the interest portion, the excess

-3-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

would be applied towards the principal. Sections 4(H) and 4(I)

indicate that the Riveras' loan was an interest-only loan for the

first five years. 

The DOT provided how the Riveras' mortgage payments were to

be applied:

2. Application of Payments or Proceeds. [A]ll payments

accepted and applied by Lender shall be applied in

the following order of priority: (a) interest due

under the Note; (b) principal due under the Note;

(c) any amounts due under Section 3. Such payments

shall be applied to each Periodic Payment in the

order in which it became due. Any remaining amounts

shall be applied first to late charges, second to

any other amounts due under this Security

Instrument, and then to reduce the principal balance

of the Note.

. . . .

3. Funds for Escrow Items. Borrower shall pay to

Lender on the day the Periodic Payments are due

under the Note, until the Note is paid in full, a

sum . . . to provide for payment of amounts due for: 

(a) taxes . . . (c) premiums for any and all

insurance required by the Lender . . . These items

are called "Escrow Items[.]"

The Prepayment Fee Note Addendum, which amended and

supplemented the Note, allowed the Riveras to make payments of

principal before they were due. Any partial prepayment of

principal before it was due was not subject to a penalty but would

first be applied to the interest accrued on the amount of

principal prepaid and then to the principal balance of the Note. 

The Truth in Lending Disclosure Statement signed by the

Riveras showed that the payment was $1,415.21 for the first year,

$1,889.97 for the fifth year, and $2,327.93 for the final twenty

years of the thirty-year loan. The disclosure warned that the

Note had a variable interest rate feature and stated that

-4-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

disclosures about this feature had been provided to the Riveras. 

Mrs. Rivera denied ever receiving the disclosures.

According to the loan payment history provided by Deutsche

Bank, the Riveras struggled to make the monthly payments from the

beginning, frequently paying them late and being subject to a late

fee of no less than $70.76. 

Each monthly home loan statement sent to the Riveras noted

the current interest rate, the principal and escrow balances and

the year-to-date figures for principal, interest, property taxes

and insurance paid. The year-end "principal paid" figures showed

a negative balance in 2006, 2007 and 2008. In addition, the

"principal balance due" figure fluctuated from statement to

statement, but showed a balance of $469,584.23 in September 2009,

the last month the Riveras made a regular contractual payment. 

Each monthly statement also offered the Riveras what has been

referred to as "pick a pay" payment options. The Riveras were

given four alternatives for payments each month:

1. reduced interest and escrow (the "Minimum Payment");

2. full monthly interest and escrow; 

3. full principal and interest based on the remaining

scheduled loan term and escrow; and

4. full principal and interest based on a 15-year

amortization and escrow. 

Mrs. Rivera admitted at the eventual evidentiary hearing that she

was aware of the "pick a pay" options for the loan.

As part of a HAMP application submitted in September 2009,

the Riveras noted that the principal balance of the Note was

$469,981. In an attached letter, Mrs. Rivera explained that when

-5-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the Riveras obtained the loan, they "specifically asked for a

non-negative amortization program." Mrs. Rivera went on to say

that the Riveras "didn't understand the fine print," and

acknowledged that they "didn't ask the right questions" and could

"blame only [them]selves for [their] rash actions." 

In October 2009, the Riveras entered into a Home Affordable

Modification Trial Period Plan ("TPP") with the then servicer of

the loan, JP Morgan Chase Bank, NA ("Chase"). Between October and

December 2009, the Riveras made three TPP payments of $1,736.00. 

These payments were placed in a suspense account and applied

against the contractual payments due for September and October

2009. Also in October 2009, Chase sent the Riveras a Debt

Validation Notice, which stated that the principal balance on the

Note was $469,584.23. 

In November 2009, Chase sent the Riveras a "Change Date"

letter stating that their new monthly payment amount was changing

starting in January 2010 and was based on an interest rate of

3.358%, a remaining term of 300 months and a "projected principal

balance" of $467,393.65. 

Even though the Riveras were no longer making payments, Chase

sent similar Change Date letters in November 2010 and November

2012. The 2010 letter stated that the Rivera's new monthly

payment starting in January 2011 would be $2,200.79, based on an

interest rate of 2.95300%, a remaining term of 288 months and a

"projected principal balance" of $453,689.47. The 2012 letter

stated that the Riveras' new monthly payment starting in January

2013 would be $2,155.14, based on an interest rate of 2.76%, a

remaining term of 264 months and a "projected principal balance"

-6-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

of $426,104.71. Notably, the "projected principal balance" stated

in each of the Change Date letters was based on the assumption

that "all regularly scheduled payments" were being made. 

B. Postpetition events

The Riveras filed a chapter 13 bankruptcy case on December 7,

2012. Deutsche Bank, with Chase as servicer, filed a proof of

claim evidenced by the Note, the DOT and other supporting

documents ("Claim"). Deutsche Bank asserted a secured claim in

the amount of $532,272.10 against the Property, with prepetition

arrearages of $106,389.03. Deutsche Bank claimed the principal

balance owed on the Note was $468,601.71, with interest of

$43,452.77, for a total of $512,054.48. Foreclosure fees and

costs totaled $2,908.44, and the escrow shortage was calculated at

-$19,448.99. 

1. The objection to Deutsche Bank's Claim

The Riveras filed a pro se objection to the Claim, contesting

a variety of issues ("Claim Objection"). They also filed two

related adversary proceedings against Deutsche Bank, contesting

standing and the validity of its lien. Both adversary proceedings

were ultimately dismissed and those orders have become final. For

our purposes here, the Riveras disputed the principal balance of

$468,601.71 stated in the Claim; they alleged that it conflicted

with the principal amount of $440,000 identified in the Note and

the balance stated in the recent November 2012 Change Date letter.

The Claim Objection hearing was continued several times and

ultimately set for trial. During this time, the Riveras hired and

fired counsel, hired their current counsel and discussed

settlement with Deutsche Bank; Deutsche Bank filed two

-7-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

declarations from Chase employees in support of its opposition to

the Claim Objection. In addition, on November 18, 2013, Chase

sent the Riveras a Change Date letter, which stated that their new

monthly payment starting in January 2014 would be $2,151.98, based

on an interest rate of 2.74400%, a remaining term of 252 months

and a "projected principal balance" of $411,845.68. As with the

other Change Date letters, the "projected principal balance"

figure was based on the assumption that all regularly scheduled

payments were being made. Chase sent the Riveras another Change

Date letter on November 17, 2014, which stated that their new

monthly payment starting in January 2015 would be $2,670.98,

including estimated taxes and insurance, based on an interest rate

of 2.71500% and a remaining term of 240 months. The letter did

not use the term "projected principal balance" but stated that the

loan balance was $397,060.14. 

The Riveras (pro se) also filed a reply to Deutsche Bank's

opposition to the Claim Objection and the declarations, raising

new arguments not previously asserted. In particular, the Riveras

argued that according to Bill Paatalo, an expert in the

securitization of loans and pooling and servicing agreements

(PSAs)3 retained as a witness for one of their adversary

proceedings, Deutsche Bank had been reporting to the Trust

certificate holders that no losses had been incurred on the loan

because the servicer had been advancing payments after the Riveras

3 The Riveras' loan is part of a pool of loans that have

been securitized and are now held in a Real Estate Mortgage

Investment Conduit (REMIC) trust. PSAs are the contracts between

the trust, which holds the mortgage loans, and the servicer, who

collects payments and deposits them into the trust pursuant to the

PSA.

-8-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

stopped paying. The total amount advanced was approximately

$90,714.70. Thus, argued the Riveras, the loan beneficiary had

incurred no default or losses and no arrears were due. The

Riveras contended that because the arrearages were paid by the

servicer, they were not in default and Deutsche Bank had no

grounds to assert a claim for unpaid principal and interest. 

In another statement submitted a few months before trial, the

Riveras argued that based on Paatalo's investigation the principal

balance was at or below $411,000, given the records of Washington

Mutual Securities, Inc., which stated that as of April 2014 the

principal balance was $413,057.64 with zero losses and in decline. 

In a supplement to their Claim Objection, the Riveras argued

that Deutsche Bank had still failed to explain the "gap" in the

principal balance — i.e., why the Claim stated that the principal

balance was $468,601.71, while the Change Date letters stated

different and much lower amounts, as low as $397,060.14 in the

2014 letter. 

The parties then filed their trial briefs. The Riveras

theorized as to why the Change Date letters between 2012 and 2014

had shown a declining principal balance. They contended that the

servicer, which they equated to a co-obligor or guarantor of the

Note, had been making payments on the Note to the Trust in order

to protect its own interest and to avoid breach of its contractual

responsibilities to Deutsche Bank under the PSA. Thus, claimed

the Riveras, these third-party payments had satisfied the debt. 

The Riveras argued that servicers have no subrogation rights, so

Deutsche Bank was unable to collect the advances on the servicer's

behalf. By trying to collect them, argued the Riveras, Deutsche

-9-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Bank was engaging in fraud. The Riveras contended that the most

remaining on the debt was $397,060.14.

Secondly, the Riveras asserted a new argument and contended

that the payment application method used by the servicer violated

the terms of the DOT. Section 2 of the DOT provided that all

payments were to be paid in the following priority: (1) interest

due under the Note; (2) principal due under the Note; and

(3) amounts due under Section 3 — escrow items (taxes, insurance,

etc.). Here, the servicer applied the payments first to escrow,

then to interest, then to principal — in direct violation of the

DOT. The Riveras argued that the impact of misapplying the

payments was an increase in principal, on which the lender earned

more interest, and refunds to borrowers for overpayment on escrow

where they intended to pay the interest and principal on the loan. 

The Riveras contended, without citing to any evidence, that had

the payment been applied pursuant to the terms of the DOT, the

most the principal would have increased by October 2009 was

$1,838.67. 

Deutsche Bank contended that the loan history from 2004 to

the petition date accurately reflected the principal balance due

on the Riveras' loan. Deutsche Bank explained that the principal

balance increased over time from the initial $440,000 because the

Riveras did not make a full payment every month, instead sometimes

making the optional minimum payment that did not cover all of

their monthly interest. As a result, the unpaid interest was

added to the outstanding principal balance.

As for the servicer advances, Deutsche Bank argued that the

Riveras arguments were misplaced. The advances were not made for

-10-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the Riveras or on their behalf; they were made under a contract

between the servicer and the Trust (the PSA) and were reimbursable

to the servicer. As such, the Riveras could not rely upon the

servicer advances to argue that their debt was being satisfied or

extinguished or that their principal balance was decreasing. The

Riveras' reliance on the Change Date letters for the principal

balance due was also misplaced. These letters were meant to

notify borrowers with adjustable rate mortgages of the changes in

their interest rate. The projection figures also assumed that

borrowers were current on their monthly payments and were on

schedule to pay off their loan in full within the scheduled

remaining term of the loan. Here, the remaining term of the

Riveras' loan had not decreased to 288 months, to 264 months or to

240 months, because their payment for November 2009 was still due. 

In addition, argued Deutsche Bank, the Riveras were notified

of the claimed principal balance of $468,601.71 in numerous other

documents, including a modification letter sent to them in March

2010, a statement of ineligibility sent in September of 2011, a

follow up letter in December 2011, correspondence dated

February 7, 2013, and the September 2009 home loan statement,

which stated that the balance was $469,584.23 and was consistent

with the $468,601.71 figure because the Riveras' subsequent

TPP payments slightly reduced the principal balance. Even though

Mrs. Rivera stated that these documents stated the principal

balance of $468,601.71, she testified that she had always disputed

the amounts asserted by Chase.

The parties then filed multiple motions in limine. Deutsche

Bank sought to exclude any evidence regarding the servicer

-11-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

advances to the Trust, which it claimed was irrelevant; the

advances did not extinguish or otherwise alter the Riveras' debt

obligations. Deutsche Bank also sought to exclude any evidence as

to the Riveras' new "payment application" argument; that argument

had already been rejected by California federal courts that have

analyzed similar DOT provisions. Deutsche Bank explained that the

DOT permitted the application of escrow payments when they became

"due under the note," which was every month. Conversely, the

principal and interest payments were not "due under the note" in

full each month because the Riveras' loan contained a negative

amortization feature. Thus, argued Deutsche Bank, the servicer

properly applied the payments to escrow first, then interest, then

principal, as contemplated by the order of priority set forth in

Section 2 of the DOT. Finally, Deutsche Bank sought to exclude

any testimony from Paatalo, the Riveras' purported expert witness. 

The bankruptcy court denied these motions.

2. Trial on the Claim Objection

Witnesses at trial included Margaret Dyer, an employee of

Chase, Mr. Paatalo and Mrs. Rivera. Numerous exhibits were

admitted, many of which are missing from the record.

Dyer testified as to the features of the Riveras' loan, why

the principal balance increased over time, and the relationship

between Deutsche Bank and Chase under the PSA. Dyer explained

that the Riveras signed an adjustable rate loan, which contained a

negative amortization provision and allowed the principal balance

to increase. The Riveras had payment options that allowed them to

make a reduced payment and to increase the unpaid principal

balance. As Dyer explained, when the Riveras made the Minimum

-12-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Payment, which was the reduced interest and escrow option, the

escrow would be paid and the remainder paid toward interest. The

difference between the full interest payment minus the reduced

interest payment would then be added to the unpaid principal

balance, causing it to increase. Dyer explained that a full

principal and interest payment was not due or required until the

unpaid principal balance reached $550,000 (125% of the original

principal) or at year five. As for any "projected principal

balances" noted in the Change Date letters, Dyer testified that

the figures presented assumed the borrower was current on payments

and had not gone into default.

When confronted with the payment options and the loan history

document on cross-examination, Dyer explained that in the case of

a negative amortization loan borrowers are only required to make

the Minimum Payment; the others are options. Chase's system is

set up to process a payment as though a borrower has made only the

Minimum Payment, because that is all that is required to advance

the due date on this type of loan. Dyer explained that when Chase

receives a full payment, it applies the money to escrow, then the

minimum to interest, which then reflects an increase in the

principal balance. However, Chase then applies the remainder to

reduce the principal balance. 

As for servicer advances, Dyer testified that advances are

reimbursable to the servicer under the PSA. She testified that

advances are not made on behalf of the borrower, nor do they

eliminate a borrower's obligation to make payments under the note.

Over Deutsche Bank's objection, the bankruptcy court allowed

Paatalo's testimony on the limited issues of identifying key terms

-13-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

of PSAs and the information he obtained about the Riveras' loan

from ABSNet, a subscriber service that provides "back accounting"

information on mortgage-backed securities. Paatalo testified

generally as to the key terms in a PSA, such as servicer advances

in Section 4.02. He also stated that according to ABSNet, the

servicer had been making advances to the Trust for the Riveras'

loan and no losses were being reported. Paatalo agreed that

ABSNet reflected the balance of the Riveras' loan as $468,601.71,

as stated in the Claim.

Finally, Mrs. Rivera testified that it was never her intent

to make minimum monthly payments between January 2005 and December

2005, and she did not find out until the end of 2005 that their

payments were insufficient to reduce the principal balance. 

Mrs. Rivera testified that she and her husband were told by their

loan broker that the first 12 monthly payments of $1,415.21

included principal and interest. Mrs. Rivera testified that she

and her husband told the loan broker they did not want a negative

amortization loan. In response, the loan broker told the Riveras

their loan was not that type of loan, but that it was a "pick a

pay" loan. Mrs. Rivera testified that nowhere in any of the loan

documents did it explain they were getting a negative amortization

loan.

The bankruptcy court took the matter under advisement, noting

that even though the Riveras' issue of payment application

pursuant to the DOT was not raised until the trial briefs and

motions in limine, it would consider all of the arguments made.

3. The bankruptcy court's decision on the Claim Objection

The bankruptcy court entered its order and Memorandum

-14-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Decision overruling the Riveras' objection, allowing the Claim and

establishing the amount at $532,272.10 ("Claim Order"). The court

initially found that based on the evidence, the Riveras knew they

had an interest-only loan in 2005 and sought to make additional

payments to reduce the principal. However, since the funds they

paid often fell between the Minimum Payment (Option 1) and full

interest payment (Option 2), the result was an increase in the

principal balance — albeit less than if they had only paid the

Minimum Payment. In addition, late fees or pay-by-phone fees

often reduced the funds available to apply towards interest or

principal. The court also found the detailed loan history

provided by Deutsche Bank was more convincing evidence of the

principal balance than references made in the Change Date letters. 

As for the servicer advances, the bankruptcy court first

found that the Riveras were not a party to nor a beneficiary of

the PSA. Secondly, nothing in the PSA provided that servicer

advances satisfied the obligations of the Riveras to the holder of

their Note. The provisions of the PSA authorizing the liquidation

and foreclosure of loans not paid by borrowers underscored this

interpretation. After foreclosure, the servicer is authorized to

reimburse itself for prior advances that are not recoverable from

the liquidation proceeds. Accordingly, the court held that the

Riveras had failed to establish that any party to the PSA became a

guarantor or obligor of the Riveras' obligations on their Note.

Finally, with respect to the disputed payment application

method used by the servicer, the bankruptcy court reasoned that

the Riveras' argument failed to consider that during the time they

made payments from 2005 to 2009, no principal was "due" on the

-15-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Note. In contrast, escrow payments were due each month. The loan

history established that payments were applied to interest and

escrow each month. The court found this complied with Section 2

of the DOT. Accordingly, no adjustment to the Claim was required.

The Riveras timely appealed on April 13, 2015. 

II. JURISDICTION

The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334

and 157(b)(2)(B). We explain our jurisdiction below. 

When the Riveras filed their appeal, the Clerk issued an

Order Re Finality on May 13, 2015, expressing concerns over

whether the Claim Order was final. While the Claim Order

established the amount of the Claim, it also stated the amount was

"subject to further determinations as to the disputed validity of

the claim." After briefing from the parties, the motions panel

considered the notice of appeal as a motion for leave to appeal

and granted leave to the extent necessary.

Subsequent to the appeal, the Riveras' chapter 13 case was

dismissed. Deutsche Bank moved to dismiss the appeal of the Claim

Order as moot due to the dismissal. The motions panel denied that

request, ruling that the establishment of a claim amount is

binding and conclusive on the parties and has a preclusive effect. 

Bevan v. Socal Commc'ns Sites (In re Bevan), 327 F.3d 994, 997

(9th Cir. 2003). The parties were ordered to resume with

briefing.

With the dismissal of the second adversary proceeding against

Deutsche Bank, which was the only proceeding keeping the Claim

Order from being final, it is clear that the Claim Order now is

final, Eastport Assocs. v. City of L.A. (In re Eastport Assocs.),

-16-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

935 F.2d 1071, 1075 (9th Cir. 1991), and the amount established in

the Claim is binding between the parties and has preclusive effect

in courts outside of the bankruptcy court. Therefore, we agree

with the motions panel that the appeal is not moot, as we could

grant the Riveras effective relief if we were to reverse. Motor

Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation

Co.), 677 F.3d 869, 880 (9th Cir. 2012). Accordingly, we have

jurisdiction under 28 U.S.C. § 158(b).

III. ISSUES

1. Were the payment options provided in the Riveras' monthly

home loan statements consistent with the terms of the Note and the

DOT? 

2. Did the servicer properly apply the Riveras' payments in 

accordance with the terms of the DOT? 

3. Did the servicer advances to the Trust satisfy the mortgage 

debt and preclude Deutsche Bank from filing the Claim? 

IV. STANDARDS OF REVIEW

An order overruling a claim objection can raise legal issues,

which we review de novo, as well as factual issues, which we

review for clear error. Veal v. Am. Home Mortg. Servicing, Inc.

(In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011). "De novo

review is independent, with no deference given to the trial

court’s conclusion." Allen v. U.S. Bank, N.A. (In re Allen),

472 B.R. 559, 564 (9th Cir. BAP 2012). Factual findings are

clearly erroneous if they are illogical, implausible or without

support in the record. Retz v. Samson (In re Retz), 606 F.3d

1189, 1196 (9th Cir. 2010).

/ / /

-17-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

V. DISCUSSION

A. The Riveras failed to raise the issue of payment options

before the bankruptcy court.

The Riveras contend the payment options offered in their

monthly home loan statements breached the terms of the Note and

the DOT, because they were not consistent with the terms of those

documents. They assert that the Note does not provide for

"payment options," does not define "pick a pay," and makes no

mention of a "minimum payment." Rather, Sections 3(B) and 3(C) of

the Note define the initial monthly payment and establish that a

new monthly payment will be recomputed annually. Thus, argue the

Riveras, the servicer's monthly statements set up for option

payments designed to be a partial payment resulting in negative

amortization breached the terms of the Note and the DOT. 

The Riveras did not raise this argument before the bankruptcy

court. Generally, an issue raised for the first time on appeal is

deemed waived. WildWest Inst. v. Bull, 547 F.3d 1162, 1172 (9th

Cir. 2008). We have discretion, however, to consider a newly

raised issue (1) in the "exceptional" case where review is

necessary to prevent a miscarriage of justice or to preserve the

integrity of the judicial process, (2) when a change in the law

has occurred while the appeal was pending, or (3) when the issue

is purely one of law and either does not depend on the factual

record developed below, or the pertinent record has been fully

developed. Id. (citing Cold Mountain v. Garber, 375 F.3d 884, 991

(9th Cir. 2004)). 

We decline to exercise our discretion here. This case is not

"exceptional" where review is necessary to prevent a miscarriage

-18-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

of justice, no change in the law has occurred, and the issue is

not purely one of law and the factual record may not be fully

developed. It is unknown what other documents the Riveras may

have received with respect to the four payment options, if any.

B. The servicer properly applied the Riveras' payments in

accordance with the terms of the DOT.

The Riveras contend that the misapplication of payments

resulted in an improper increase in their principal balance. 

Specifically, they contend the servicer applied their payments in

the priority of escrow and other charges first, then interest,

then principal, when it should have applied the payments in

accordance with the priority set forth in the DOT: interest

first, then principal, then escrow. The bankruptcy court

determined that the priority payment scheme utilized by the

servicer was appropriate because no principal was "due on the

Note" as contemplated in Section 2 of the DOT for the first five

years. The evidence had established that the loan was a negative

amortization loan. In contrast, escrow payments were "due on the

Note" each month. We agree with the bankruptcy court. 

Despite the Riveras' contention that principal was due during

the relevant time period, it was not; their loan was an "interestonly" loan for the first five years. The Note and DOT do not

require payments of principal until either (1) the principal

balance increases to 125% of the amount borrowed, or (2) the fifth

anniversary of the due date of the first payment. See Note

Sections 4(H) & 4(I) and the Adjustable Rate Rider in the DOT

Sections 4(H) & 4(I). Section 4(H) of the Note provides that if

unpaid principal exceeds 125% of the principal amount originally

-19-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

borrowed, then the new monthly payment will be in an amount which

would be sufficient to repay the unpaid principal in full on the

maturity date. Section 4(G) provides that for "each month that

the monthly payment is less than the interest portion, the Note

Holder will subtract the monthly payment from the amount of the

interest portion and will ad [sic] the difference to my unpaid

Principal." 

The terms of the Note and DOT provided that the Riveras could

pay less than the full amount of interest that would need to be

paid each month in order to repay the principal by the maturity

date. Contrary to their argument, until the unpaid principal

exceeded 125% of the amount originally borrowed, or until

December 1, 2009, the Note did not require principal to be paid

each month. Dyer's uncontroverted testimony that a full interest

and principal payment was not due or required until the unpaid

principal balance reached $550,000 or on year five is consistent

with the terms of the Note and the DOT. 

Although the Riveras could pay less than the full interest

portion of their monthly payments, and principal payments were not

yet due during the relevant time period, full escrow payments were

"due on the Note" each month. Section 3 of the DOT required the

Riveras to pay "Escrow Items" on the day their payments were due

each month until the Note was paid in full. Section 4(F) of the

Note provides that the payment cap for payment changes does "not

apply to any escrow payments Lender may require under the Security

Instrument." Moreover, Section 3 of the DOT provides that "Escrow

Items" will be included in the monthly "Periodic Payments."

Section 2 of the DOT, upon which the Riveras rely to argue that

-20-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

the servicer applied their payments in the wrong order, provides

that "payments shall be applied to each Periodic Payment in the

order in which it became due. Any remaining amounts shall be

applied first to late charges, second to any other amounts due

under this Security Instrument [including "Escrow Items" under

Section 3], and then to reduce the principal balance of the Note." 

Therefore, because only late charges, if any, the full escrow

payment and a reduced interest payment were "due" each month under

the terms of the Note and DOT for the first five years, the

servicer did not misapply the Riveras' payments; the priority

order of payment applied — late charges and escrow payments, then

interest, then principal – did not violate the terms of the Note

or the DOT. As the court stated in Dunn v. GMAC Mortgage, LLC in

response to a similar payment priority argument plaintiffs raised

there:

The rules of contract interpretation require that

Section 2 of the DOT be construed in a manner that allows

Plaintiffs to perform their obligation to pay for Escrow

Items under Section 3 of the DOT while still enjoying

their right to pay only the minimum payment due under the

Note. Plaintiffs' interpretation would lead to an absurd

result in which no borrower payment could ever be applied

to the Escrow Items despite the borrower's promise to pay

for those items on a monthly basis throughout the loan

term. It would also prevent Defendant from negatively

amortizing the loan for unpaid interest until it first

applied "all" of the payment it receives to interest due

. . . . Additionally, Plaintiffs' interpretation would

nonsensically require the lender to advance its own money

to pay the Escrow Items, thereby lending the borrower

additional sums — at no interest — with no additional

security, and for the entire time any interest or

principal remain owing and unpaid.

2011 WL 1230211, at *3 (E.D. Cal. Mar. 28, 2011).

Accordingly, the bankruptcy court did not err in determining

that the servicer's method of applying the Riveras' payments did

-21-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

not violate the terms of the DOT.4

C. The servicer's advances did not satisfy the Riveras' debt or

affect their obligations under the Note.

Under the PSA, a servicer's duties include collecting loan

payments from the borrower and submitting the payments to the

trust. If the borrower stops making payments on the loan, the

servicer is obligated to submit the delinquent payments; these

payments are referred to as advances. Once the Riveras defaulted,

the servicer began advancing funds equal to the difference between

minimum monthly required payments under the Note and the amount

actually received. Essentially, the servicer has been making

advances to the Trust since the Riveras stopped paying in 2009. 

By June 2013, the advance had grown to $90,714.70. It is

undisputed these advances were required by Section 4.02 of the

PSA. 

The Riveras argue that because Deutsche Bank received

payments on the debt from the servicer, they are not in default. 

Section 9 of the Note provides that "[a]ny person who takes over

these obligations [within the Note], including the obligations of

a guarantor, surety or endorser of this Note, is also obligated to

keep all of the promises made in this Note." The Riveras argue

that when the servicer agreed under the PSA to pay advances on the

Riveras' loan, the servicer "took over" the obligations under the

4 Riveras’ argument that payments should be made to

interest, then principal and then to escrow payments is without

merit. In the final application of payments, whether a payment is

applied to principal or escrow payments, Riveras were properly

charged interest on either category under the DOT at the note rate

pursuant to sections 3 and 9. Consequently, the calculations for

the applied funds reflect identical amounts.

-22-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

Note, including making payments. As a result, they contend that

Deutsche Bank could not file the Claim to collect any arrearages

for the servicer, which the Riveras contend is a third-party

surety. The Riveras' arguments are flawed.

First, it is undisputed the Riveras, as borrowers, are not

parties to the PSA. As neither parties nor beneficiaries of the

PSA, they are unable to invoke its terms or benefits. Turner v.

Wells Fargo Bank, N.A. (In re Turner), 2015 WL 3485876 at *9-10 

(9th Cir. BAP June 2, 2015) (borrowers lack standing to enforce

PSA terms because they are not parties to or third-party

beneficiaries of the PSA); Casault v. Fed. Nat'l Mortg. Ass'n,

915 F. Supp. 2d 1113, 1135 (C.D. Cal. 2012). This interpretation

is supported by Section 10.09 of the PSA, which states: 

Nothing in this Agreement or in any Certificate,

expressed or implied, shall give to any Person, other

than the parties hereto and their respective successors

hereunder . . . any benefit or any legal or equitable

right, remedy or claim under this Agreement.

Second, the Riveras incorrectly characterize the servicer

advances as "payments" on their debt. Servicer advances are not

"payments" made on behalf of or for the benefit of the borrower.

Ouch v. Fed. Nat'l Mortg. Ass'n, 2013 WL 139765, at *3 (D. Mass.

Jan. 10, 2013) (servicer advances would only be considered to be

"on behalf of" the borrower if the servicers actually intended to

extinguish the borrower's repayment obligations, citing 60 Am.

Jur. 2d Payment § 1 (West 2012)); Casault, 915 F. Supp. 2d at 1136

(servicer advances are not payments made on borrower's behalf;

borrower's loan is still in default); Schmeglar v. PHM Fin., Inc.

(In re Schmeglar), 531 B.R. 735, 739 (Bankr. N.D. Ill. 2015)

(rejecting same argument that servicer advances excused debtor

-23-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

from making any mortgage payments that came due during the period

of the advances). 

Servicer advances are loans made to the trust in the amount

of the borrower's unpaid monthly payment. In addition, under the

PSA, the servicer is not required to make advances to cure a

borrower's delinquency if the servicer determines it would be a

"nonrecoverable advance."5 See PSA §§ 4.02, 4.03. Finally,

servicers under the PSA are authorized to liquidate and foreclose

loans not paid by the borrower (see PSA § 3.09 at ER 591), which

further undermines the Riveras' argument that the servicer has

made Note payments "on their behalf" or that the servicer has

"taken over" their repayment obligations. See Pulliam v. PennyMac

Mortg. Inv. Trust Holding I LLC, 2014 WL 3784238, at *3 (D. Maine

July 31, 2014) (rejecting borrower's same "surety" theory;

servicer did not become surety for the note by entering into a

contractual agreement under the trust to advance borrower's

delinquent mortgage payments); Casault, 915 F. Supp. 2d. at 1136

(servicer did not "take over" the borrower's payment obligations

by entering into the PSA); In re Schmeglar, 531 B.R. at 739

(because PSA authorized servicer to foreclose when debtor was in

default of mortgage, the advances made by the servicer could not

be seen as being made for the benefit of the debtor or on his

behalf). Therefore, the Riveras are still in default on the Note

due to their admitted failure to pay.

Lastly, the servicer is entitled to reimbursement of the

5 Specifically, the servicer is only required to make

advances to the extent they are anticipated to be recoverable from

future payments, foreclosure proceeds, or other proceeds or

collections. See PSA §§ 4.02, 4.03.

-24-
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

funds advanced. See PSA §§ 3.05, 4.03. Because the servicer's

advances are reimbursable, the Riveras' debt to the Trust is not

satisfied by those advances. Casault, 915 F. Supp. 2d. at 1135;

In re Schmeglar, 531 B.R. at 739. Hence, Deutsche Bank filed the

Claim.

Accordingly, the bankruptcy court did not err in determining

that the servicer's advances did not satisfy the debt, affect the

Riveras' obligations under the Note or require any adjustment to

the Claim amount. 

VI. CONCLUSION

For the foregoing reasons, we AFFIRM the Claim Order.

-25-