                                                             FILED
                                                              AUG 16 2016
                                                          SUSAN M. SPRAUL, CLERK
 1                        NOT FOR PUBLICATION               U.S. BKCY. APP. PANEL
                                                            OF THE NINTH CIRCUIT
 2
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
 4                            OF THE NINTH CIRCUIT
 5   In re:                        )         BAP No.   NC-15-1120-KiTaJu
                                   )
 6   ANTON ANDREW RIVERA and       )         Bk. No.   5:14-bk-54193
     DENISE ANN RIVERA,            )
 7                                 )
                    Debtors.       )
 8                                 )
                                   )
 9   ANTON ANDREW RIVERA;          )
     DENISE ANN RIVERA,            )
10                                 )
                    Appellants,    )
11                                 )
     v.                            )         M E M O R A N D U M1
12                                 )
     DEUTSCHE BANK NATIONAL TRUST )
13   COMPANY,                      )
                                   )
14                  Appellee.      )
     ______________________________)
15
                    Argued and Submitted on July 28, 2016,
16                        at San Francisco, California
17                          Filed - August 16, 2016
18             Appeal from the United States Bankruptcy Court
                   for the Northern District of California
19
          Honorable M. Elaine Hammond, Bankruptcy Judge, Presiding
20
21   Appearances:    Ronald H. Freshman argued for appellants Anton
                     Andrew Rivera and Denise Ann Rivera; Stefan
22                   Perovich of Keesal Young & Logan argued for
                     appellee Deutsche Bank National Trust Company as
23                   Trustee for WAMU Mortgage Pass-through Certificates
                     Series 2005-AR6 Trust.
24
25   Before:   KIRSCHER, TAYLOR and JURY, Bankruptcy Judges.
26
27        1
             This disposition is not appropriate for publication.
     Although it may be cited for whatever persuasive value it may
28   have, it has no precedential value. See 9th Cir. BAP Rule 8024-1.

                                       -1-
 1        Chapter 132 debtors Anton and Denise Rivera ("Riveras")
 2   appeal an order overruling their objection and allowing the
 3   secured claim of Deutsche Bank National Trust Company as Trustee
 4   for WAMU Mortgage Pass-through Certificates Series 2005-AR6 Trust
 5   ("Deutsche Bank" or "Trust") in the full amount of $532,272.10.
 6   We AFFIRM.
 7                I. FACTUAL BACKGROUND AND PROCEDURAL HISTORY
 8   A.   Prepetition events
 9        In 2004, the Riveras obtained a refinance loan for their home
10   in Bethel Island, California (the "Property").   They executed an
11   Adjustable Rate Note ("Note") for $440,000, payable to Washington
12   Mutual Bank, FA.   To secure the Note, the Riveras executed a deed
13   of trust ("DOT") in favor of Washington Mutual and created a lien
14   against the Property.   The DOT was subject to an Adjustable Rate
15   Rider, which amended and supplemented the DOT.
16        Various provisions of the Note and DOT are relevant here.
17   The Note provided for monthly interest rate changes on the first
18   of every month ("Change Date") and changes to the monthly payment.
19   Both the Note and the Adjustable Rate Rider conspicuously warned
20   in all upper case letters:
21        THIS NOTE CONTAINS PROVISIONS ALLOWING FOR CHANGES IN MY
          INTEREST RATE AND MY MONTHLY PAYMENT. MY MONTHLY PAYMENT
22        INCREASES WILL HAVE LIMITS WHICH COULD RESULT IN THE
          PRINCIPAL AMOUNT I MUST REPAY BEING LARGER THAN THE
23        AMOUNT ORIGINALLY BORROWED, BUT NOT MORE THAN 125% OF THE
          ORIGINAL AMOUNT (OR $550,000).     MY INTEREST RATE CAN
24        NEVER EXCEED THE LIMIT STATED IN THIS NOTE OR ANY RIDER
          TO THIS NOTE. A BALLOON PAYMENT MAY BE DUE AT MATURITY.
25
26
27        2
             Unless specified otherwise, all chapter, code and rule
     references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and
28   the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.

                                      -2-
 1   Sections 4(G), 4(H) and 4(I) of the Note provided:
 2        4(G) Changes in My Unpaid Principal Due to Negative
          Amortization or Accelerated Amortization.       Since my
 3        payment amount changes less frequently than the interest
          rate and since the monthly payment is subject to the
 4        payment limitations described in Section 4(F), my monthly
          payment could be less or greater than the amount of the
 5        interest portion of the monthly payment that would be
          sufficient to repay the unpaid Principal I owe at the
 6        monthly payment date in full on the maturity date in
          substantially equal payments. For each month that the
 7        monthly payment is less than the interest portion, the
          Note Holder will subtract the monthly payment from the
 8        amount of the interest portion and will ad [sic] the
          difference to my unpaid Principal, and interest will
 9        accrue on the amount of this difference at the current
          interest rate. For each month that the monthly payment
10        is greater than the interest portion, the Note Holder
          will apply the excess towards a principal reduction of
11        the Note.
12        4(H) Limit on My Unpaid Principal; Increased Monthly
          Payment. My unpaid principal can never exceed a maximum
13        amount equal to 125% of the principal amount originally
          borrowed. In the event my unpaid Principal would
14        otherwise exceed that 125% limitation, I will begin
          paying a new minimum monthly payment until the next
15        Payment Change Date notwithstanding the 7 ½% annual
          payment increase limitation. The new minimum monthly
16        payment will be an amount which would be sufficient to
          repay my then unpaid Principal in full on the maturity
17        date at my interest rate in effect the month prior to the
          payment due date in substantially equal payments.
18
          4(I) Required Full Monthly Payment.        On the FIFTH
19        anniversary of the due date of the first monthly payment,
          and on that same day every FIFTH year thereafter, the
20        monthly payment will be adjusted without regard to the
          payment cap limitation in Section 4(F).
21
22        Thus, Section 4(G) expressly warned the Riveras that their
23   monthly payment could be less than the amount of the interest
24   portion and, for each month the interest portion was underpaid,
25   that the difference would be added to the unpaid principal balance
26   and interest would accrue on the amount of the difference,
27   resulting in a loan typically called a negative amortization loan.
28   If, however, payments exceeded the interest portion, the excess

                                     -3-
 1   would be applied towards the principal.   Sections 4(H) and 4(I)
 2   indicate that the Riveras' loan was an interest-only loan for the
 3   first five years.
 4        The DOT provided how the Riveras' mortgage payments were to
 5   be applied:
 6        2.   Application of Payments or Proceeds. [A]ll payments
               accepted and applied by Lender shall be applied in
 7             the following order of priority: (a) interest due
               under the Note; (b) principal due under the Note;
 8             (c) any amounts due under Section 3. Such payments
 9             shall be applied to each Periodic Payment in the
               order in which it became due. Any remaining amounts
10             shall be applied first to late charges, second to
               any   other   amounts   due  under   this   Security
11             Instrument, and then to reduce the principal balance
               of the Note.
12
          . . . .
13
          3.   Funds for Escrow Items.      Borrower shall pay to
14             Lender on the day the Periodic Payments are due
15             under the Note, until the Note is paid in full, a
               sum . . . to provide for payment of amounts due for:
16             (a) taxes . . . (c) premiums for any and all
               insurance required by the Lender . . . These items
17             are called "Escrow Items[.]"
18        The Prepayment Fee Note Addendum, which amended and
19   supplemented the Note, allowed the Riveras to make payments of
20   principal before they were due.    Any partial prepayment of
21   principal before it was due was not subject to a penalty but would
22   first be applied to the interest accrued on the amount of
23   principal prepaid and then to the principal balance of the Note.
24        The Truth in Lending Disclosure Statement signed by the
25   Riveras showed that the payment was $1,415.21 for the first year,
26   $1,889.97 for the fifth year, and $2,327.93 for the final twenty
27   years of the thirty-year loan.    The disclosure warned that the
28   Note had a variable interest rate feature and stated that

                                       -4-
 1   disclosures about this feature had been provided to the Riveras.
 2   Mrs. Rivera denied ever receiving the disclosures.
 3        According to the loan payment history provided by Deutsche
 4   Bank, the Riveras struggled to make the monthly payments from the
 5   beginning, frequently paying them late and being subject to a late
 6   fee of no less than $70.76.
 7        Each monthly home loan statement sent to the Riveras noted
 8   the current interest rate, the principal and escrow balances and
 9   the year-to-date figures for principal, interest, property taxes
10   and insurance paid.    The year-end "principal paid" figures showed
11   a negative balance in 2006, 2007 and 2008.      In addition, the
12   "principal balance due" figure fluctuated from statement to
13   statement, but showed a balance of $469,584.23 in September 2009,
14   the last month the Riveras made a regular contractual payment.
15        Each monthly statement also offered the Riveras what has been
16   referred to as "pick a pay" payment options.      The Riveras were
17   given four alternatives for payments each month:
18        1.     reduced interest and escrow (the "Minimum Payment");
19        2.     full monthly interest and escrow;
20        3.     full principal and interest based on the remaining
21               scheduled loan term and escrow; and
22        4.     full principal and interest based on a 15-year
23               amortization and escrow.
24   Mrs. Rivera admitted at the eventual evidentiary hearing that she
25   was aware of the "pick a pay" options for the loan.
26        As part of a HAMP application submitted in September 2009,
27   the Riveras noted that the principal balance of the Note was
28   $469,981.    In an attached letter, Mrs. Rivera explained that when

                                      -5-
 1   the Riveras obtained the loan, they "specifically asked for a
 2   non-negative amortization program."     Mrs. Rivera went on to say
 3   that the Riveras "didn't understand the fine print," and
 4   acknowledged that they "didn't ask the right questions" and could
 5   "blame only [them]selves for [their] rash actions."
 6           In October 2009, the Riveras entered into a Home Affordable
 7   Modification Trial Period Plan ("TPP") with the then servicer of
 8   the loan, JP Morgan Chase Bank, NA ("Chase").    Between October and
 9   December 2009, the Riveras made three TPP payments of $1,736.00.
10   These payments were placed in a suspense account and applied
11   against the contractual payments due for September and October
12   2009.    Also in October 2009, Chase sent the Riveras a Debt
13   Validation Notice, which stated that the principal balance on the
14   Note was $469,584.23.
15           In November 2009, Chase sent the Riveras a "Change Date"
16   letter stating that their new monthly payment amount was changing
17   starting in January 2010 and was based on an interest rate of
18   3.358%, a remaining term of 300 months and a "projected principal
19   balance" of $467,393.65.
20           Even though the Riveras were no longer making payments, Chase
21   sent similar Change Date letters in November 2010 and November
22   2012.    The 2010 letter stated that the Rivera's new monthly
23   payment starting in January 2011 would be $2,200.79, based on an
24   interest rate of 2.95300%, a remaining term of 288 months and a
25   "projected principal balance" of $453,689.47.    The 2012 letter
26   stated that the Riveras' new monthly payment starting in January
27   2013 would be $2,155.14, based on an interest rate of 2.76%, a
28   remaining term of 264 months and a "projected principal balance"

                                       -6-
 1   of $426,104.71.     Notably, the "projected principal balance" stated
 2   in each of the Change Date letters was based on the assumption
 3   that "all regularly scheduled payments" were being made.
 4   B.      Postpetition events
 5           The Riveras filed a chapter 13 bankruptcy case on December 7,
 6   2012.    Deutsche Bank, with Chase as servicer, filed a proof of
 7   claim evidenced by the Note, the DOT and other supporting
 8   documents ("Claim").     Deutsche Bank asserted a secured claim in
 9   the amount of $532,272.10 against the Property, with prepetition
10   arrearages of $106,389.03.     Deutsche Bank claimed the principal
11   balance owed on the Note was $468,601.71, with interest of
12   $43,452.77, for a total of $512,054.48.     Foreclosure fees and
13   costs totaled $2,908.44, and the escrow shortage was calculated at
14   -$19,448.99.
15           1.   The objection to Deutsche Bank's Claim
16           The Riveras filed a pro se objection to the Claim, contesting
17   a variety of issues ("Claim Objection").     They also filed two
18   related adversary proceedings against Deutsche Bank, contesting
19   standing and the validity of its lien.     Both adversary proceedings
20   were ultimately dismissed and those orders have become final.      For
21   our purposes here, the Riveras disputed the principal balance of
22   $468,601.71 stated in the Claim; they alleged that it conflicted
23   with the principal amount of $440,000 identified in the Note and
24   the balance stated in the recent November 2012 Change Date letter.
25           The Claim Objection hearing was continued several times and
26   ultimately set for trial.     During this time, the Riveras hired and
27   fired counsel, hired their current counsel and discussed
28   settlement with Deutsche Bank; Deutsche Bank filed two

                                       -7-
 1   declarations from Chase employees in support of its opposition to
 2   the Claim Objection.   In addition, on November 18, 2013, Chase
 3   sent the Riveras a Change Date letter, which stated that their new
 4   monthly payment starting in January 2014 would be $2,151.98, based
 5   on an interest rate of 2.74400%, a remaining term of 252 months
 6   and a "projected principal balance" of $411,845.68.   As with the
 7   other Change Date letters, the "projected principal balance"
 8   figure was based on the assumption that all regularly scheduled
 9   payments were being made.   Chase sent the Riveras another Change
10   Date letter on November 17, 2014, which stated that their new
11   monthly payment starting in January 2015 would be $2,670.98,
12   including estimated taxes and insurance, based on an interest rate
13   of 2.71500% and a remaining term of 240 months.   The letter did
14   not use the term "projected principal balance" but stated that the
15   loan balance was $397,060.14.
16        The Riveras (pro se) also filed a reply to Deutsche Bank's
17   opposition to the Claim Objection and the declarations, raising
18   new arguments not previously asserted.   In particular, the Riveras
19   argued that according to Bill Paatalo, an expert in the
20   securitization of loans and pooling and servicing agreements
21   (PSAs)3 retained as a witness for one of their adversary
22   proceedings, Deutsche Bank had been reporting to the Trust
23   certificate holders that no losses had been incurred on the loan
24   because the servicer had been advancing payments after the Riveras
25
          3
             The Riveras' loan is part of a pool of loans that have
26   been securitized and are now held in a Real Estate Mortgage
     Investment Conduit (REMIC) trust. PSAs are the contracts between
27   the trust, which holds the mortgage loans, and the servicer, who
     collects payments and deposits them into the trust pursuant to the
28   PSA.

                                     -8-
 1   stopped paying.   The total amount advanced was approximately
 2   $90,714.70.    Thus, argued the Riveras, the loan beneficiary had
 3   incurred no default or losses and no arrears were due.   The
 4   Riveras contended that because the arrearages were paid by the
 5   servicer, they were not in default and Deutsche Bank had no
 6   grounds to assert a claim for unpaid principal and interest.
 7        In another statement submitted a few months before trial, the
 8   Riveras argued that based on Paatalo's investigation the principal
 9   balance was at or below $411,000, given the records of Washington
10   Mutual Securities, Inc., which stated that as of April 2014 the
11   principal balance was $413,057.64 with zero losses and in decline.
12        In a supplement to their Claim Objection, the Riveras argued
13   that Deutsche Bank had still failed to explain the "gap" in the
14   principal balance — i.e., why the Claim stated that the principal
15   balance was $468,601.71, while the Change Date letters stated
16   different and much lower amounts, as low as $397,060.14 in the
17   2014 letter.
18        The parties then filed their trial briefs.    The Riveras
19   theorized as to why the Change Date letters between 2012 and 2014
20   had shown a declining principal balance.   They contended that the
21   servicer, which they equated to a co-obligor or guarantor of the
22   Note, had been making payments on the Note to the Trust in order
23   to protect its own interest and to avoid breach of its contractual
24   responsibilities to Deutsche Bank under the PSA.   Thus, claimed
25   the Riveras, these third-party payments had satisfied the debt.
26   The Riveras argued that servicers have no subrogation rights, so
27   Deutsche Bank was unable to collect the advances on the servicer's
28   behalf.   By trying to collect them, argued the Riveras, Deutsche

                                      -9-
 1   Bank was engaging in fraud.   The Riveras contended that the most
 2   remaining on the debt was $397,060.14.
 3          Secondly, the Riveras asserted a new argument and contended
 4   that the payment application method used by the servicer violated
 5   the terms of the DOT.   Section 2 of the DOT provided that all
 6   payments were to be paid in the following priority:   (1) interest
 7   due under the Note; (2) principal due under the Note; and
 8   (3) amounts due under Section 3 — escrow items (taxes, insurance,
 9   etc.).   Here, the servicer applied the payments first to escrow,
10   then to interest, then to principal — in direct violation of the
11   DOT.   The Riveras argued that the impact of misapplying the
12   payments was an increase in principal, on which the lender earned
13   more interest, and refunds to borrowers for overpayment on escrow
14   where they intended to pay the interest and principal on the loan.
15   The Riveras contended, without citing to any evidence, that had
16   the payment been applied pursuant to the terms of the DOT, the
17   most the principal would have increased by October 2009 was
18   $1,838.67.
19          Deutsche Bank contended that the loan history from 2004 to
20   the petition date accurately reflected the principal balance due
21   on the Riveras' loan.   Deutsche Bank explained that the principal
22   balance increased over time from the initial $440,000 because the
23   Riveras did not make a full payment every month, instead sometimes
24   making the optional minimum payment that did not cover all of
25   their monthly interest.   As a result, the unpaid interest was
26   added to the outstanding principal balance.
27          As for the servicer advances, Deutsche Bank argued that the
28   Riveras arguments were misplaced.   The advances were not made for

                                      -10-
 1   the Riveras or on their behalf; they were made under a contract
 2   between the servicer and the Trust (the PSA) and were reimbursable
 3   to the servicer.   As such, the Riveras could not rely upon the
 4   servicer advances to argue that their debt was being satisfied or
 5   extinguished or that their principal balance was decreasing.     The
 6   Riveras' reliance on the Change Date letters for the principal
 7   balance due was also misplaced.    These letters were meant to
 8   notify borrowers with adjustable rate mortgages of the changes in
 9   their interest rate.   The projection figures also assumed that
10   borrowers were current on their monthly payments and were on
11   schedule to pay off their loan in full within the scheduled
12   remaining term of the loan.   Here, the remaining term of the
13   Riveras' loan had not decreased to 288 months, to 264 months or to
14   240 months, because their payment for November 2009 was still due.
15        In addition, argued Deutsche Bank, the Riveras were notified
16   of the claimed principal balance of $468,601.71 in numerous other
17   documents, including a modification letter sent to them in March
18   2010, a statement of ineligibility sent in September of 2011, a
19   follow up letter in December 2011, correspondence dated
20   February 7, 2013, and the September 2009 home loan statement,
21   which stated that the balance was $469,584.23 and was consistent
22   with the $468,601.71 figure because the Riveras' subsequent
23   TPP payments slightly reduced the principal balance.   Even though
24   Mrs. Rivera stated that these documents stated the principal
25   balance of $468,601.71, she testified that she had always disputed
26   the amounts asserted by Chase.
27        The parties then filed multiple motions in limine.   Deutsche
28   Bank sought to exclude any evidence regarding the servicer

                                       -11-
 1   advances to the Trust, which it claimed was irrelevant; the
 2   advances did not extinguish or otherwise alter the Riveras' debt
 3   obligations.   Deutsche Bank also sought to exclude any evidence as
 4   to the Riveras' new "payment application" argument; that argument
 5   had already been rejected by California federal courts that have
 6   analyzed similar DOT provisions.   Deutsche Bank explained that the
 7   DOT permitted the application of escrow payments when they became
 8   "due under the note," which was every month.   Conversely, the
 9   principal and interest payments were not "due under the note" in
10   full each month because the Riveras' loan contained a negative
11   amortization feature.   Thus, argued Deutsche Bank, the servicer
12   properly applied the payments to escrow first, then interest, then
13   principal, as contemplated by the order of priority set forth in
14   Section 2 of the DOT.   Finally, Deutsche Bank sought to exclude
15   any testimony from Paatalo, the Riveras' purported expert witness.
16   The bankruptcy court denied these motions.
17        2.    Trial on the Claim Objection
18        Witnesses at trial included Margaret Dyer, an employee of
19   Chase, Mr. Paatalo and Mrs. Rivera.    Numerous exhibits were
20   admitted, many of which are missing from the record.
21        Dyer testified as to the features of the Riveras' loan, why
22   the principal balance increased over time, and the relationship
23   between Deutsche Bank and Chase under the PSA.   Dyer explained
24   that the Riveras signed an adjustable rate loan, which contained a
25   negative amortization provision and allowed the principal balance
26   to increase.   The Riveras had payment options that allowed them to
27   make a reduced payment and to increase the unpaid principal
28   balance.   As Dyer explained, when the Riveras made the Minimum

                                     -12-
 1   Payment, which was the reduced interest and escrow option, the
 2   escrow would be paid and the remainder paid toward interest.     The
 3   difference between the full interest payment minus the reduced
 4   interest payment would then be added to the unpaid principal
 5   balance, causing it to increase.   Dyer explained that a full
 6   principal and interest payment was not due or required until the
 7   unpaid principal balance reached $550,000 (125% of the original
 8   principal) or at year five.   As for any "projected principal
 9   balances" noted in the Change Date letters, Dyer testified that
10   the figures presented assumed the borrower was current on payments
11   and had not gone into default.
12        When confronted with the payment options and the loan history
13   document on cross-examination, Dyer explained that in the case of
14   a negative amortization loan borrowers are only required to make
15   the Minimum Payment; the others are options.     Chase's system is
16   set up to process a payment as though a borrower has made only the
17   Minimum Payment, because that is all that is required to advance
18   the due date on this type of loan.      Dyer explained that when Chase
19   receives a full payment, it applies the money to escrow, then the
20   minimum to interest, which then reflects an increase in the
21   principal balance.   However, Chase then applies the remainder to
22   reduce the principal balance.
23        As for servicer advances, Dyer testified that advances are
24   reimbursable to the servicer under the PSA.     She testified that
25   advances are not made on behalf of the borrower, nor do they
26   eliminate a borrower's obligation to make payments under the note.
27        Over Deutsche Bank's objection, the bankruptcy court allowed
28   Paatalo's testimony on the limited issues of identifying key terms

                                      -13-
 1   of PSAs and the information he obtained about the Riveras' loan
 2   from ABSNet, a subscriber service that provides "back accounting"
 3   information on mortgage-backed securities.     Paatalo testified
 4   generally as to the key terms in a PSA, such as servicer advances
 5   in Section 4.02.     He also stated that according to ABSNet, the
 6   servicer had been making advances to the Trust for the Riveras'
 7   loan and no losses were being reported.     Paatalo agreed that
 8   ABSNet reflected the balance of the Riveras' loan as $468,601.71,
 9   as stated in the Claim.
10           Finally, Mrs. Rivera testified that it was never her intent
11   to make minimum monthly payments between January 2005 and December
12   2005, and she did not find out until the end of 2005 that their
13   payments were insufficient to reduce the principal balance.
14   Mrs. Rivera testified that she and her husband were told by their
15   loan broker that the first 12 monthly payments of $1,415.21
16   included principal and interest.     Mrs. Rivera testified that she
17   and her husband told the loan broker they did not want a negative
18   amortization loan.     In response, the loan broker told the Riveras
19   their loan was not that type of loan, but that it was a "pick a
20   pay" loan.     Mrs. Rivera testified that nowhere in any of the loan
21   documents did it explain they were getting a negative amortization
22   loan.
23           The bankruptcy court took the matter under advisement, noting
24   that even though the Riveras' issue of payment application
25   pursuant to the DOT was not raised until the trial briefs and
26   motions in limine, it would consider all of the arguments made.
27           3.   The bankruptcy court's decision on the Claim Objection
28           The bankruptcy court entered its order and Memorandum

                                       -14-
 1   Decision overruling the Riveras' objection, allowing the Claim and
 2   establishing the amount at $532,272.10 ("Claim Order").   The court
 3   initially found that based on the evidence, the Riveras knew they
 4   had an interest-only loan in 2005 and sought to make additional
 5   payments to reduce the principal.   However, since the funds they
 6   paid often fell between the Minimum Payment (Option 1) and full
 7   interest payment (Option 2), the result was an increase in the
 8   principal balance — albeit less than if they had only paid the
 9   Minimum Payment.   In addition, late fees or pay-by-phone fees
10   often reduced the funds available to apply towards interest or
11   principal.    The court also found the detailed loan history
12   provided by Deutsche Bank was more convincing evidence of the
13   principal balance than references made in the Change Date letters.
14        As for the servicer advances, the bankruptcy court first
15   found that the Riveras were not a party to nor a beneficiary of
16   the PSA.   Secondly, nothing in the PSA provided that servicer
17   advances satisfied the obligations of the Riveras to the holder of
18   their Note.   The provisions of the PSA authorizing the liquidation
19   and foreclosure of loans not paid by borrowers underscored this
20   interpretation.    After foreclosure, the servicer is authorized to
21   reimburse itself for prior advances that are not recoverable from
22   the liquidation proceeds.   Accordingly, the court held that the
23   Riveras had failed to establish that any party to the PSA became a
24   guarantor or obligor of the Riveras' obligations on their Note.
25        Finally, with respect to the disputed payment application
26   method used by the servicer, the bankruptcy court reasoned that
27   the Riveras' argument failed to consider that during the time they
28   made payments from 2005 to 2009, no principal was "due" on the

                                      -15-
 1   Note.    In contrast, escrow payments were due each month.       The loan
 2   history established that payments were applied to interest and
 3   escrow each month.    The court found this complied with Section 2
 4   of the DOT.    Accordingly, no adjustment to the Claim was required.
 5           The Riveras timely appealed on April 13, 2015.
 6                               II. JURISDICTION
 7           The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334
 8   and 157(b)(2)(B).    We explain our jurisdiction below.
 9           When the Riveras filed their appeal, the Clerk issued an
10   Order Re Finality on May 13, 2015, expressing concerns over
11   whether the Claim Order was final.       While the Claim Order
12   established the amount of the Claim, it also stated the amount was
13   "subject to further determinations as to the disputed validity of
14   the claim."    After briefing from the parties, the motions panel
15   considered the notice of appeal as a motion for leave to appeal
16   and granted leave to the extent necessary.
17           Subsequent to the appeal, the Riveras' chapter 13 case was
18   dismissed.    Deutsche Bank moved to dismiss the appeal of the Claim
19   Order as moot due to the dismissal.       The motions panel denied that
20   request, ruling that the establishment of a claim amount is
21   binding and conclusive on the parties and has a preclusive effect.
22   Bevan v. Socal Commc'ns Sites (In re Bevan), 327 F.3d 994, 997
23   (9th Cir. 2003).    The parties were ordered to resume with
24   briefing.
25           With the dismissal of the second adversary proceeding against
26   Deutsche Bank, which was the only proceeding keeping the Claim
27   Order from being final, it is clear that the Claim Order now is
28   final, Eastport Assocs. v. City of L.A. (In re Eastport Assocs.),

                                       -16-
 1   935 F.2d 1071, 1075 (9th Cir. 1991), and the amount established in
 2   the Claim is binding between the parties and has preclusive effect
 3   in courts outside of the bankruptcy court.     Therefore, we agree
 4   with the motions panel that the appeal is not moot, as we could
 5   grant the Riveras effective relief if we were to reverse.     Motor
 6   Vehicle Cas. Co. v. Thorpe Insulation Co. (In re Thorpe Insulation
 7   Co.), 677 F.3d 869, 880 (9th Cir. 2012).     Accordingly, we have
 8   jurisdiction under 28 U.S.C. § 158(b).
 9                                 III. ISSUES
10   1.      Were the payment options provided in the Riveras' monthly
11   home loan statements consistent with the terms of the Note and the
12   DOT?
13   2.      Did the servicer properly apply the Riveras' payments in
14   accordance with the terms of the DOT?
15   3.      Did the servicer advances to the Trust satisfy the mortgage
16   debt and preclude Deutsche Bank from filing the Claim?
17                           IV. STANDARDS OF REVIEW
18           An order overruling a claim objection can raise legal issues,
19   which we review de novo, as well as factual issues, which we
20   review for clear error.    Veal v. Am. Home Mortg. Servicing, Inc.
21   (In re Veal), 450 B.R. 897, 918 (9th Cir. BAP 2011).     "De novo
22   review is independent, with no deference given to the trial
23   court’s conclusion."    Allen v. U.S. Bank, N.A. (In re Allen),
24   472 B.R. 559, 564 (9th Cir. BAP 2012).      Factual findings are
25   clearly erroneous if they are illogical, implausible or without
26   support in the record.    Retz v. Samson (In re Retz), 606 F.3d
27   1189, 1196 (9th Cir. 2010).
28   / / /

                                       -17-
 1                               V. DISCUSSION
 2   A.   The Riveras failed to raise the issue of payment options
          before the bankruptcy court.
 3
 4        The Riveras contend the payment options offered in their
 5   monthly home loan statements breached the terms of the Note and
 6   the DOT, because they were not consistent with the terms of those
 7   documents.    They assert that the Note does not provide for
 8   "payment options," does not define "pick a pay," and makes no
 9   mention of a "minimum payment."    Rather, Sections 3(B) and 3(C) of
10   the Note define the initial monthly payment and establish that a
11   new monthly payment will be recomputed annually.   Thus, argue the
12   Riveras, the servicer's monthly statements set up for option
13   payments designed to be a partial payment resulting in negative
14   amortization breached the terms of the Note and the DOT.
15        The Riveras did not raise this argument before the bankruptcy
16   court.   Generally, an issue raised for the first time on appeal is
17   deemed waived.   WildWest Inst. v. Bull, 547 F.3d 1162, 1172 (9th
18   Cir. 2008).   We have discretion, however, to consider a newly
19   raised issue (1) in the "exceptional" case where review is
20   necessary to prevent a miscarriage of justice or to preserve the
21   integrity of the judicial process, (2) when a change in the law
22   has occurred while the appeal was pending, or (3) when the issue
23   is purely one of law and either does not depend on the factual
24   record developed below, or the pertinent record has been fully
25   developed.    Id. (citing Cold Mountain v. Garber, 375 F.3d 884, 991
26   (9th Cir. 2004)).
27        We decline to exercise our discretion here.   This case is not
28   "exceptional" where review is necessary to prevent a miscarriage

                                       -18-
 1   of justice, no change in the law has occurred, and the issue is
 2   not purely one of law and the factual record may not be fully
 3   developed.   It is unknown what other documents the Riveras may
 4   have received with respect to the four payment options, if any.
 5   B.   The servicer properly applied the Riveras' payments in
          accordance with the terms of the DOT.
 6
 7        The Riveras contend that the misapplication of payments
 8   resulted in an improper increase in their principal balance.
 9   Specifically, they contend the servicer applied their payments in
10   the priority of escrow and other charges first, then interest,
11   then principal, when it should have applied the payments in
12   accordance with the priority set forth in the DOT:     interest
13   first, then principal, then escrow.     The bankruptcy court
14   determined that the priority payment scheme utilized by the
15   servicer was appropriate because no principal was "due on the
16   Note" as contemplated in Section 2 of the DOT for the first five
17   years.   The evidence had established that the loan was a negative
18   amortization loan.   In contrast, escrow payments were "due on the
19   Note" each month.    We agree with the bankruptcy court.
20        Despite the Riveras' contention that principal was due during
21   the relevant time period, it was not; their loan was an "interest-
22   only" loan for the first five years.     The Note and DOT do not
23   require payments of principal until either (1) the principal
24   balance increases to 125% of the amount borrowed, or (2) the fifth
25   anniversary of the due date of the first payment.     See Note
26   Sections 4(H) & 4(I) and the Adjustable Rate Rider in the DOT
27   Sections 4(H) & 4(I).    Section 4(H) of the Note provides that if
28   unpaid principal exceeds 125% of the principal amount originally

                                      -19-
 1   borrowed, then the new monthly payment will be in an amount which
 2   would be sufficient to repay the unpaid principal in full on the
 3   maturity date.    Section 4(G) provides that for "each month that
 4   the monthly payment is less than the interest portion, the Note
 5   Holder will subtract the monthly payment from the amount of the
 6   interest portion and will ad [sic] the difference to my unpaid
 7   Principal."
 8           The terms of the Note and DOT provided that the Riveras could
 9   pay less than the full amount of interest that would need to be
10   paid each month in order to repay the principal by the maturity
11   date.    Contrary to their argument, until the unpaid principal
12   exceeded 125% of the amount originally borrowed, or until
13   December 1, 2009, the Note did not require principal to be paid
14   each month.    Dyer's uncontroverted testimony that a full interest
15   and principal payment was not due or required until the unpaid
16   principal balance reached $550,000 or on year five is consistent
17   with the terms of the Note and the DOT.
18           Although the Riveras could pay less than the full interest
19   portion of their monthly payments, and principal payments were not
20   yet due during the relevant time period, full escrow payments were
21   "due on the Note" each month.    Section 3 of the DOT required the
22   Riveras to pay "Escrow Items" on the day their payments were due
23   each month until the Note was paid in full.    Section 4(F) of the
24   Note provides that the payment cap for payment changes does "not
25   apply to any escrow payments Lender may require under the Security
26   Instrument."    Moreover, Section 3 of the DOT provides that "Escrow
27   Items" will be included in the monthly "Periodic Payments."
28   Section 2 of the DOT, upon which the Riveras rely to argue that

                                       -20-
 1   the servicer applied their payments in the wrong order, provides
 2   that "payments shall be applied to each Periodic Payment in the
 3   order in which it became due.   Any remaining amounts shall be
 4   applied first to late charges, second to any other amounts due
 5   under this Security Instrument [including "Escrow Items" under
 6   Section 3], and then to reduce the principal balance of the Note."
 7        Therefore, because only late charges, if any, the full escrow
 8   payment and a reduced interest payment were "due" each month under
 9   the terms of the Note and DOT for the first five years, the
10   servicer did not misapply the Riveras' payments; the priority
11   order of payment applied — late charges and escrow payments, then
12   interest, then principal – did not violate the terms of the Note
13   or the DOT.   As the court stated in Dunn v. GMAC Mortgage, LLC in
14   response to a similar payment priority argument plaintiffs raised
15   there:
16        The rules of contract interpretation require that
          Section 2 of the DOT be construed in a manner that allows
17        Plaintiffs to perform their obligation to pay for Escrow
          Items under Section 3 of the DOT while still enjoying
18        their right to pay only the minimum payment due under the
          Note. Plaintiffs' interpretation would lead to an absurd
19        result in which no borrower payment could ever be applied
          to the Escrow Items despite the borrower's promise to pay
20        for those items on a monthly basis throughout the loan
          term. It would also prevent Defendant from negatively
21        amortizing the loan for unpaid interest until it first
          applied "all" of the payment it receives to interest due
22        . . . . Additionally, Plaintiffs' interpretation would
          nonsensically require the lender to advance its own money
23        to pay the Escrow Items, thereby lending the borrower
          additional sums — at no interest — with no additional
24        security, and for the entire time any interest or
          principal remain owing and unpaid.
25
26   2011 WL 1230211, at *3 (E.D. Cal. Mar. 28, 2011).
27        Accordingly, the bankruptcy court did not err in determining
28   that the servicer's method of applying the Riveras' payments did

                                     -21-
 1   not violate the terms of the DOT.4
 2   C.     The servicer's advances did not satisfy the Riveras' debt or
            affect their obligations under the Note.
 3
 4          Under the PSA, a servicer's duties include collecting loan
 5   payments from the borrower and submitting the payments to the
 6   trust.     If the borrower stops making payments on the loan, the
 7   servicer is obligated to submit the delinquent payments; these
 8   payments are referred to as advances.    Once the Riveras defaulted,
 9   the servicer began advancing funds equal to the difference between
10   minimum monthly required payments under the Note and the amount
11   actually received.    Essentially, the servicer has been making
12   advances to the Trust since the Riveras stopped paying in 2009.
13   By June 2013, the advance had grown to $90,714.70.    It is
14   undisputed these advances were required by Section 4.02 of the
15   PSA.
16          The Riveras argue that because Deutsche Bank received
17   payments on the debt from the servicer, they are not in default.
18   Section 9 of the Note provides that "[a]ny person who takes over
19   these obligations [within the Note], including the obligations of
20   a guarantor, surety or endorser of this Note, is also obligated to
21   keep all of the promises made in this Note."    The Riveras argue
22   that when the servicer agreed under the PSA to pay advances on the
23   Riveras' loan, the servicer "took over" the obligations under the
24
25          4
             Riveras’ argument that payments should be made to
     interest, then principal and then to escrow payments is without
26   merit. In the final application of payments, whether a payment is
     applied to principal or escrow payments, Riveras were properly
27   charged interest on either category under the DOT at the note rate
     pursuant to sections 3 and 9. Consequently, the calculations for
28   the applied funds reflect identical amounts.

                                       -22-
 1   Note, including making payments.   As a result, they contend that
 2   Deutsche Bank could not file the Claim to collect any arrearages
 3   for the servicer, which the Riveras contend is a third-party
 4   surety.   The Riveras' arguments are flawed.
 5        First, it is undisputed the Riveras, as borrowers, are not
 6   parties to the PSA.   As neither parties nor beneficiaries of the
 7   PSA, they are unable to invoke its terms or benefits.   Turner v.
 8   Wells Fargo Bank, N.A. (In re Turner), 2015 WL 3485876 at *9-10
 9   (9th Cir. BAP June 2, 2015) (borrowers lack standing to enforce
10   PSA terms because they are not parties to or third-party
11   beneficiaries of the PSA); Casault v. Fed. Nat'l Mortg. Ass'n,
12   915 F. Supp. 2d 1113, 1135 (C.D. Cal. 2012).   This interpretation
13   is supported by Section 10.09 of the PSA, which states:
14        Nothing in this Agreement or in any Certificate,
          expressed or implied, shall give to any Person, other
15        than the parties hereto and their respective successors
          hereunder . . . any benefit or any legal or equitable
16        right, remedy or claim under this Agreement.
17        Second, the Riveras incorrectly characterize the servicer
18   advances as "payments" on their debt.   Servicer advances are not
19   "payments" made on behalf of or for the benefit of the borrower.
20   Ouch v. Fed. Nat'l Mortg. Ass'n, 2013 WL 139765, at *3 (D. Mass.
21   Jan. 10, 2013) (servicer advances would only be considered to be
22   "on behalf of" the borrower if the servicers actually intended to
23   extinguish the borrower's repayment obligations, citing 60 Am.
24   Jur. 2d Payment § 1 (West 2012)); Casault, 915 F. Supp. 2d at 1136
25   (servicer advances are not payments made on borrower's behalf;
26   borrower's loan is still in default); Schmeglar v. PHM Fin., Inc.
27   (In re Schmeglar), 531 B.R. 735, 739 (Bankr. N.D. Ill. 2015)
28   (rejecting same argument that servicer advances excused debtor

                                     -23-
 1   from making any mortgage payments that came due during the period
 2   of the advances).
 3        Servicer advances are loans made to the trust in the amount
 4   of the borrower's unpaid monthly payment.   In addition, under the
 5   PSA, the servicer is not required to make advances to cure a
 6   borrower's delinquency if the servicer determines it would be a
 7   "nonrecoverable advance."5   See PSA §§ 4.02, 4.03.   Finally,
 8   servicers under the PSA are authorized to liquidate and foreclose
 9   loans not paid by the borrower (see PSA § 3.09 at ER 591), which
10   further undermines the Riveras' argument that the servicer has
11   made Note payments "on their behalf" or that the servicer has
12   "taken over" their repayment obligations.   See Pulliam v. PennyMac
13   Mortg. Inv. Trust Holding I LLC, 2014 WL 3784238, at *3 (D. Maine
14   July 31, 2014) (rejecting borrower's same "surety" theory;
15   servicer did not become surety for the note by entering into a
16   contractual agreement under the trust to advance borrower's
17   delinquent mortgage payments); Casault, 915 F. Supp. 2d. at 1136
18   (servicer did not "take over" the borrower's payment obligations
19   by entering into the PSA); In re Schmeglar, 531 B.R. at 739
20   (because PSA authorized servicer to foreclose when debtor was in
21   default of mortgage, the advances made by the servicer could not
22   be seen as being made for the benefit of the debtor or on his
23   behalf).   Therefore, the Riveras are still in default on the Note
24   due to their admitted failure to pay.
25        Lastly, the servicer is entitled to reimbursement of the
26
          5
             Specifically, the servicer is only required to make
27   advances to the extent they are anticipated to be recoverable from
     future payments, foreclosure proceeds, or other proceeds or
28   collections. See PSA §§ 4.02, 4.03.

                                     -24-
 1   funds advanced.   See PSA §§ 3.05, 4.03.    Because the servicer's
 2   advances are reimbursable, the Riveras' debt to the Trust is not
 3   satisfied by those advances.   Casault, 915 F. Supp. 2d. at 1135;
 4   In re Schmeglar, 531 B.R. at 739.   Hence, Deutsche Bank filed the
 5   Claim.
 6        Accordingly, the bankruptcy court did not err in determining
 7   that the servicer's advances did not satisfy the debt, affect the
 8   Riveras' obligations under the Note or require any adjustment to
 9   the Claim amount.
10                              VI. CONCLUSION
11        For the foregoing reasons, we AFFIRM the Claim Order.
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