Continuous confusing contact with the discharged debtors by the mortgage servicer was appropriately sanctioned at $1,000 per violation notwithstanding the servicer’s formulaic and contradictory disclaimers in some of the correspondence. Ocwen Loan Servicing v. Marino, Nos. 16-1229, 16-1238 (B.A.P. 9th Cir. Dec. 22, 2017).
Debtors, Christopher and Valerie Marino, surrendered their real property in their chapter 7 bankruptcy. After they received their discharge in June, 2013, the court granted the mortgagee relief from the automatic stay and closed the case. From June, 2013, through April, 2015, Ocwen, as servicer for the mortgagee, sent nineteen letters stating the amount owed on the debt as the “amount you must pay,” and providing payment due dates. Some of the letters contained the disclaimer that, “if you have received a discharge in bankruptcy, this notification is for informational purposes only and is not intended to collect a pre-petition or discharged debt.” Ocwen also made approximately one hundred calls to the Marinos seeking payment on the discharged debt.
The Marinos moved to reopen their bankruptcy and sought an order of contempt against Ocwen for violation of the discharge injunction. At trial they testified that Ocwen’s conduct caused them to argue to the point of considering divorce. Mr. Marino also testified to anxiety attacks, humiliation and stress. Ms. Marino testified to stomach pains and sadness. In its defense, Ocwen argued that the letters were computer-generated and not attempts to collect a debt but merely informational and in accordance with state and federal law.
The bankruptcy court awarded the Marinos $119,000 in compensatory damages, representing $1,000 per violation, but found that Ninth Circuit law precluded it from awarding punitive damages. It denied Ocwen’s motion for reconsideration.
Ocwen appealed the sanctions award and the bankruptcy court’s denial of reconsideration. The Marinos appealed the failure to award punitive damages.
On appeal, the BAP began with the sanctions award. The Ninth Circuit has a two-part test for addressing claims of discharge injunction violations: “the movant must prove [by clear and convincing evidence] that the creditor (1) knew the discharge injunction was applicable and (2) intended the actions which violated the injunction.” Violations of the discharge injunction may be remedied under the court’s contempt powers under section 105(a).
As there was no dispute that Ocwen knew of the discharge, the court addressed whether the letters and calls violated the injunction, bearing in mind that the purpose of the discharge injunction is to give the debtors freedom from the weight of their financial woes. The panel noted that discharge relieves debtors from in personam liability leaving in rem liability intact. Recognizing that in some circumstances it is necessary for a lienholder to contact a discharged debtor, the panel explained that such communication must be solely to protect or enforce the lien and may not be coercive or harassing with respect to the underlying debt payments.
The BAP agreed with the bankruptcy court that Ocwen’s letters to the Marinos went beyond that which was necessary to protect its lien. The letters suggested that the Marinos were responsible for payments on the debt and for such things as force-placed insurance and taxes. The panel took into consideration the volume of letters in finding that even if some of them did not seek payments, the cumulative effect was to create the impression that the Marinos were still responsible for the debt.
The disclaimers did not change this conclusion. Some of the letters did not contain disclaimers at all, and the ones that did improperly treated bankruptcy discharge as a theoretical possibility. But in fact Ocwen had actual knowledge of the Marinos’ bankruptcy discharge. Moreover, Ocwen’s disclaimers were juxtaposed against statements that payments must be made in specific amounts by specific dates. The panel found that a reasonable debtor would be confused by this contradiction.
Nor was the panel persuaded by Ocwen’s attempt to distance itself from the letters by calling them “generic.” The panel found that Ocwen’s failure to tailor its correspondence according to specific situations, and its placement of payment demands at the beginning of the letters and the disclaimer at the end, smacked of a deliberate attempt to confuse recipients and induce payments.
To the extent any of the letters contained information Ocwen was required by law to send, such as notice of force-placed insurance, such legitimate notifications did not negate the inclusion of improper payment demands.
The panel next addressed the bankruptcy court’s treatment of the telephone call evidence. Although the motion for contempt cited only the letters, the bankruptcy court found, and the BAP agreed, that the motion put Ocwen on notice that any violation of the discharge injunction was fair game at trial. In fact, an Ocwen representative testified at trial that he reviewed telephone logs, though he did not offer any specifics at that time as to the number of calls. It was only in its motion for reconsideration that Ocwen produced telephone logs indicating that there were only thirty five calls as opposed to the approximately one hundred Ms. Marino testified to. The panel agreed with the court below that the logs were available to Ocwen at the original trial and did not provide a basis for reconsideration. The fact that Ocwen failed to produce on appeal the transcript of the reconsideration hearing further supported affirmance.
Concluding that “Ocwen’s repeated dunning deprived the Marinos of a fresh start ‘unhampered by the pressure and discouragement of pre-existing debt,’” the panel found that the amount of the sanctions was appropriate. The panel considered the significant harm suffered by the Marinos and the evidence that the harm was caused by Ocwen’s conduct.
The panel found, however, that the bankruptcy erred in concluding it lacked the power to award punitive damages. While Ninth Circuit law does constrain a bankruptcy court’s power to award substantial punitive damages, it permits an award of “relatively minor noncompensatory fines.” The panel reasoned that punitive damages are equivalent to “noncompensatory fines,” and found that the bankruptcy court had three choices: it could have 1) awarded relatively minor punitive damages, 2) issued a recommendation to the district court for an award of punitive damages, or 3) referred the matter to the district court for criminal contempt proceedings.
The BAP, therefore, affirmed the sanctions against Ocwen but reversed and remanded on the Marinos’ cross-appeal on the punitive damages issue.
Marino BAP 9th Cir. opinion Dec 2017
Tags: Sanctions, discharge injunction
