The bankruptcy court’s contempt order against a student loan servicer requiring it to pay off the entire amount of the debtor’s student loan was punitive rather than compensatory or coercive and, therefore, the award exceeded the court’s civil contempt power. Great Lakes Educ. Loan Serv. Inc. v. Leary, No. 20-8050 (S.D.N.Y. June 22, 2021). [Read more…] about Sanction Against Student Loan Servicer Exceeded Court’s Civil Contempt Power
PHH Mortgage Corp. v. Sensenich (In re Gravel), 20-1, 20-2, 20-3 (2d Cir.)
Type: Amicus
Date: August 13, 2020
Description: Whether PHH was properly sanctioned for its fee harvesting practice.
Result: Judgment vacated and reversed. August 2, 2021
Cert. Denied in Stay Case Involving Passive Conduct
The Supreme Court declined cert. in Davis v. Tyson Prepared Foods, No. 18-941 (May 20, 2019), a case out of the Tenth Circuit presenting the issue of whether section 362(a) applies when a creditor passively holds or obtains an interest in property of the debtor or the estate. The case involved a lien that arose automatically out of post-petition Worker’s Compensation payments made to the debtor. The trustee sought to avoid the lien as violating the automatic stay. The Tenth Circuit found that based on WD Equip., LLC v. Cowen (In re: Cowen), 849 F.3d 943 (10th Cir. 2017), section 362(a)(4), which prohibits “any act to create, perfect, or enforce any lien,” requires affirmative conduct on the part of the creditor. Here, because the lien was created by operation of law, there was no such affirmative conduct and the Tenth Circuit found no stay violation.
7th Circuit Rules Creditor Should be Held in Contempt for Jailing Discharged Debtor but No Contempt for Creditor’s Counsel
On August 13, 2019, the Seventh Circuit Court of Appeals reversed in part and affirmed in part the lower courts. On appeal, NACBA board member Tara Twomey submitted an amicus brief on behalf of the National Consumer Bankruptcy Rights Center (NCBRC) supporting the Debtor.
The facts underlying the case started in 2001. Jacqueline M. Sterling (“Debtor”) was sued in state court for approximately $520.00 in membership fees owed to Southlake Nautilus Health & Racquet Club (“Creditor”). The Creditor was represented by the law firm Austgen, Kuiper & Associates (“Creditor’s Counsel”). After obtaining a judgment in 2002, the Creditor’s Counsel filed a “proceeding supplemental” in state court to collect on the judgment. The Debtor did not appear at the collection hearings and ultimately the state court issued a “body attachment” (bench warrant) against Debtor to show cause for violating the court’s orders.
In 2010, the Debtor filed for bankruptcy protection and listed the Creditor but not the Creditor’s Counsel. The Debtor obtained a discharge. The Creditor was notified of the discharge but did not forward the discharge to the Creditor’s Counsel. Creditor’s Counsel did not know the discharge order.
In 2011, the Debtor had a flat tire and was assisted by the local police. The police discovered the bench warrant and the Debtor was arrested and held in jail for two days.
Subsequently, the Debtor sued the Creditor and Creditor’s Counsel in Bankruptcy Court for violation of the discharge injunction found in Section 524 of the Bankruptcy Code.
The Bankruptcy Court ruled in favor of the Creditor and Creditor’s Counsel. The Bankruptcy Court found the Debtor had failed to prove that the Creditor’s Counsel knew of the discharge when it continued collection proceedings. Further, the Creditor didn’t violate the discharge injunction because it was unaware of the status of the case against the Debtor, and that it didn’t direct Creditor’s Counsel to take any particular actions. The ruling was affirmed by the District Court.
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Bankruptcy Court Suspends Counsel for Changing Schedules After Signing. Employing “Trust But Verify” the Court “Peeked and Shrieked.”
It’s going to be a bad opinion when the judge brings up Pandora’s Box at the beginning of the
opinion and titles the last section of the opinion “This Is The End.”
On June 25, 2019, the Bankruptcy Court for the Southern District of Florida, in a 172-page opinion (including attachments), suspended an attorney from practice for two years before the Bankruptcy Court, terminated her CM/ECF privileges, referred the attorney to District Court’s attorney review committee and the Florida Bar with recommendations to disbar, and referred the attorney to the United States attorney for investigation.
The Debtor filed a Chapter 7 bankruptcy. He was represented by the Attorney. Neither the Debtor nor the Attorney attended the 341 meeting. Subsequently, the trustee filed an adversary objecting to the Debtor’s discharge under 11 U.S.C. § 727(a)(2), (3), and (4). The basis of the Trustee’s complaint was that the Debtor’s schedules indicated virtually no detail, were not consistent with other documents the trustee received (tax returns), and that required information was missing (missing lawsuit). In addition, the Trustee cited the Debtor’s and Attorney’s failure to attend the 341 meeting. When asked by the Trustee, the Attorney said they didn’t plan on proceeding and wanted the case dismissed.
Two days after the adversary was filed, the Attorney moved to withdraw as counsel for the Debtor. The Debtor, now pro se, stated to the Trustee that the schedules were not provided to him before filing and that he did not sign the schedules that were filed.
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SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation
In a unanimous decision, the Supreme Court held that “a court may hold a creditor in civil contempt for violating a discharge order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.” Taggart v. Lorenzen, No. 18-489, 587 U. S. ___ (June 3, 2019).
Chapter 7 debtor, Bradley Taggart, was involved in pre-petition litigation in state court at the time he filed for bankruptcy. After he obtained his discharge, Sherwood, an opposing party in the state court litigation, obtained a judgment against him. Sherwood then sought attorney’s fees, and the state court awarded those fees notwithstanding Ninth Circuit precedent making clear that the post-petition attorney’s fees were discharged along with Taggart’s other debts. The bankruptcy court found that Sherwood was aware of the discharge and intended the act that violated it and, under that standard, it held Sherwood in contempt of the discharge order. The bankruptcy appellate panel reversed the sanction award and the Ninth Circuit affirmed, holding that Sherwood could not be held in contempt in light of its good faith belief that its conduct did not violate the discharge injunction regardless of whether that belief was reasonable. [Read more…] about SCOTUS Adopts No Fair Ground of Doubt Standard for Discharge Order Violation
Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation
The creditor and her counsel were found liable for violation of the discharge injunction to the tune of over $200,000 after the creditor and her counsel blindsided the debtor during closing arguments in their state court litigation by grossly expanding the scope of the creditor’s claimed damages to encompass discharged debts. In re Renfrow, No. 17-1027 (Bankr. N.D. Okla. April 23, 2019). [Read more…] about Ambush at State Trial Costs Creditor and Her Counsel over $200,000 for Discharge Injunction Violation
Attorney Fee Award Upheld Against Student Loan Servicer
The district court found that the bankruptcy court did not abuse its discretion in holding the student loan servicer in contempt for failing to apply the student debtor’s payments outside the plan in accordance with pre-petition payments as required by the debtor’s confirmed chapter 13 plan. Penn. Higher Educ. Assistance Agency v. Berry, No. 18-444 (D. S.C. March 5, 2019).
Berry had student loans issued by the Department of Education (DOE) and administered by the Pennsylvania Higher Education Assistance Agency (PHEAA). She was paying off her loans under an Income-Driven Repayment plan (IDR) and a Public Service Loan Forgiveness (PSLF) program. In her chapter 13 bankruptcy, her confirmed amended plan provided for continued payments on her student loan debts outside the plan with those payments being applied exactly as before thereby allowing her to continue to benefit from the IDR and PSLF. The PHEAA, however, put the loans into administrative forbearance under which it applied the payments to principal and interest. Ms. Berry filed a Motion to Enforce seeking sanctions in the amount of $22,317.30, representing the attorney fees she incurred pursuing proper application of the payments. The DOE eventually settled its portion of the action for $6,000 and Ms. Berry sought the remaining amount from PHEAA. The bankruptcy court granted Ms. Berry’s entire attorney fee request consisting of $22,317.30 of which, after the DOE’s $6,000 settlement, the PHEAA owed $16,317.30.
On appeal, the district court began with PHEAA’s defense that it was limited in its authority by its servicing contract with the DOE. The court found that the bankruptcy court did not commit clear error in its application of law or in its findings of fact when it concluded that PHEAA had a contractual obligation to deal with borrower’s complaints and to bring unresolved problems to the attention of the DOE. In this case, it did neither.
The district court turned to the bankruptcy court’s conclusion that bad faith was not necessary to imposition of sanctions under section 105(a), reciting the necessary elements of contempt as: “(1) The existence of a valid decree of which the alleged contemnor had actual or constructive knowledge; (2) . . . that the decree was in the movant’s ‘favor’; (3) . . . that the alleged contemnor by its conduct violated the terms of the decree, and had knowledge (at least constructive knowledge) of such violations; and (4) . . . that [the] movant suffered harm as a result.” Here, even if PHEAA lacked authority to treat Ms. Berry’s payments as provided for in her plan, the bankruptcy court did not err in finding that it could not simply ignore the confirmed plan. At the very least, it should have sought guidance from the DOE, or objected to the plan.
Along the same lines, PHEAA argued that the bankruptcy court abused its discretion by holding it in contempt where its conduct was governed by its contract with the DOE and was therefore not willful. The court found that the bankruptcy court’s authority to impose sanctions under section 105(a) did not require a finding of willfulness.
The court found that the bankruptcy court correctly based its decision on its broad authority to craft a remedy based on the particular circumstances of a given case and that, here, the bankruptcy court was persuaded by PHEAA’s failure to make any attempt to either comply with the debtor’s plan or seek guidance from the DOE. This finding was not an abuse of discretion.
Finally, the district court affirmed the bankruptcy court’s allocation of sanctions as having been based on the debtor’s efforts to obtain compliance from PHEAA.
Bankruptcy Court Says Call First Before Seeking Attorney’s Fees
The Bankruptcy Court for the Eastern District of Michigan recently ruled whether a creditor must pay attorney’s fees to the objecting party when the creditor filed a claim with deficient information. In re Ball, No. 17-22574 (Bankr. E.D.MI. Jan. 22, 2019).
The issue was brought before the court by the chapter 13 trustee. A creditor, Financial Edge Credit Union (FECU), was owed a debt for overdraft charges which was an open-end consumer debt. FECU filed a deficient proof of claim that only attached a copy of the deposit account contract and did not include the last payment date or the date of the debtor’s last transaction.
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Ocwen To Show Cause Why It Shouldn’t Be Held in Contempt
Ocwen’s misconduct led the bankruptcy court to not only grant the debtor’s motion for a temporary restraining order but to order Ocwen, as servicer for U.S. Bank, to show cause why it should not be held in contempt for violation of a Consent Order entered between the debtor and lender during her chapter 13 bankruptcy. Arrington v. Ocwen Loan Servicing, LLC, No. 12-70435, Adv. Proc. No. 17-70029 (Bankr. N.D. Ala. Sept. 25, 2017). [Read more…] about Ocwen To Show Cause Why It Shouldn’t Be Held in Contempt