National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

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$119,000 Sanctions for Discharge Injunction Violations

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. [Read more…] about $119,000 Sanctions for Discharge Injunction Violations

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Special Counsel Violates Code and Rules by Failure to Disclose Fee Agreements

Special counsel representing a bankruptcy debtor in a separate tort action must comply with bankruptcy statutes and rules relating to disclosure of their employment arrangements, including any fee-sharing agreements. Wright v. Csabi (In re Wright), No. 13-10472, Adv. Proc. No. 16-1004 (Bankr. S.D. Tex. Dec. 2017).

During her bankruptcy, chapter 13 debtor, Vicky Wright, presented to the court an agreement she had entered into with James Grissom to represent her in a contingency-fee tort claim. The court approved the agreement. Unbeknownst to the court, Mr. Grissom had separately entered into fee-sharing agreements with Francisco Rodriguez and William Csabi. After the tort case settled for $650,000, the court ordered that Mr. Grissom be paid $90,000 pursuant to the prior-approved agreement, and that the rest of the settlement proceeds go to the chapter 13 estate for distribution to creditors. Notwithstanding this order, Mr. Grissom distributed $73,330 each to Mr. Rodriguez and Mr. Csabi pursuant to the fee-sharing agreements. Ms. Wright’s bankruptcy counsel, Abe Limon, sent demand letters to Messrs. Rodriguez and Csabi notifying them that the transferred funds were property of the bankruptcy estate and demanding turnover. Mr. Csabi turned the funds over several months later and Mr. Rodriquez did not turn over the funds. Ms. Wright filed an adversary complaint seeking disgorgement and turnover.

The court proceeded to address the allegations in the adversary complaint with the following conclusions having been established in previous orders: 1) Ms. Wright’s portion of the settlement proceeds were part of the bankruptcy estate, and 2) Mr. Grissom never disclosed his fee agreements with either Mr. Rodriguez or Mr. Csabi to the court.

The court began with the admonition that special counsel seeking employment in a tort case related to a chapter 13 bankruptcy must comply with Rule 2014, local rule BLR 2014-1, and section 327(e), including filing an application with the bankruptcy court disclosing the terms of employment and fee-sharing agreements, and that, under Fifth Circuit precedent, this obligation is ongoing. As these violations were not specifically pled in the adversary complaint, the court relied on its power under section 105(a) to “attend to” them.

The court went on to address the statutory violations alleged in the complaint.

Section 329 and Rule 2016 mandate that any lawyer representing a debtor in connection with a bankruptcy case, including in a capacity that will impact the debtor’s case, must disclose to the court the financial arrangement under which he is employed. Section 504 prohibits fee sharing including fee-sharing agreements that might be permitted under non-bankruptcy state bar rules.

The court further found that because the settlement proceeds, except that portion carved out to pay the court-approved fees to Mr. Grissom, were property of the bankruptcy estate, Mr. Grissom’s unauthorized use of those funds to comply with his fee-sharing agreements violated the automatic stay. Both Mr. Rodriguez and Mr. Csabi also violated the automatic stay by accepting and retaining the funds after being made aware of the bankruptcy at the latest, when Ms. Wright’s chapter 13 attorney notified them in a letter seeking turnover of the funds.

As this order dealt only with liability, the court did not address the allegations in the complaint relating to damages. Nor did the court address alleged violation of the Texas Disciplinary Rules of Professional Conduct, citing interests of comity.

Wright Bankr SD Tex opinion Dec 2017

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Chapter 20 and Who May Be a Debtor

In a Chapter 20 case, a wholly unsecured junior lien for which the debtor has no personal liability does not enter into the calculation in the subsequent Chapter 13 case, of either secured or unsecured debt under section 109(e). Asset Management Holdings v. Hernandez, No. 16-1228, 1244 (B.A.P. 9th Cir. April 11, 2017) (unpublished).

Aleli Hernandez filed for Chapter 7 bankruptcy and included in her schedules two debts secured by deeds of trust on her residence. More than four years after she obtained a discharge in that case, she filed for Chapter 13 bankruptcy and sought to avoid the junior lien on the basis that the senior lien exceeded the value of the property. AMH moved to dismiss on the basis that Ms. Hernandez was ineligible for Chapter 13 relief under section 109(e) and, in the alternative, that she filed her petition in bad faith. The bankruptcy court denied the motion and confirmed Ms. Hernandez’s plan. [Read more…] about Chapter 20 and Who May Be a Debtor

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Circuit Court Upholds Punitive Damages Eight Times Compensatory

There was sufficient evidence of the mortgage servicer’s reckless indifference to the mortgagor’s rights to support a punitive damage award eight times the compensatory damage award for invasion of privacy. May v. Nationstar Mortgage, No. 16-1285, 16-1307 (8th Cir. March 29, 2017).

While in chapter 13 bankruptcy, Jeannie May entered into an agreement with her mortgagee to pay down her mortgage and arrears. After she was discharged from bankruptcy, the mortgage servicer, Nationstar, sent her a mortgage statement in which it misstated a $51 credit as a $5,162 debit. Nationstar also damaged Ms. May’s credit score by incorrectly reporting a delinquent debt. Ms. May spent the next two years trying to get Nationstar to correct the admitted error. Instead of correcting the problem, however, Nationstar commenced aggressive collection efforts including threatening of foreclosure, conducting periodic property inspections, and making numerous mocking and sarcastic phone calls to her. Ms. May sued Nationstar alleging invasion of privacy under state law, and federal claims under RESPA, FDCPA and FCRA. The jury awarded compensatory damages of $50,000 for the invasion of privacy, and $50,000 for the violation of the FCRA.  It also awarded $400,000 in punitive damages for the invasion of privacy.

The parties cross-appealed with Nationstar arguing that its culpability was limited to a series of inadvertent errors that did not add up to reckless indifference or evil motive as required under Missouri law to support a punitive damages award.

The circuit court disagreed. It was the province of the jury to weigh the conflicting evidence and a finding of reckless indifference will be overturned only in the complete absence of probative facts. The court found sufficient evidence to support the jury’s finding.

Nationstar next argued that the $400,000 punitive damage award was excessive and in violation of its due process rights under the Fourteenth Amendment. To violate due process, punitive damages must “shock the conscience of the court or demonstrate passion or prejudice on the part of the trier of fact.” A court will consider: 1) the degree of reprehensibility, 2) the compensatory to punitive damage ratio, and 3) how the award compares to awards in similar cases.

With respect to reprehensibility—the most important of the three factors—the court found that it may be demonstrated by showing any of the following: physical harm, indifference or reckless disregard of health or safety of others, financial vulnerability of the victim, repeated conduct, or intentionality. The court found there was evidence of each of these factors to support the jury finding.

As to the compensatory to punitive damage ratio, Nationstar argued that the 8:1 ratio was excessive. Again the court disagreed. Noting that it had affirmed ratios as high as 5.7:1, the court considered the degree of Nationstar’s culpability as well as the percentage of the company’s net worth the punitive damage amount represented: thirty-three thousandths of one percent. It found that the ratio did not render the award unconstitutional.

Finally, in a comparison of this case with others, the court noted that while few cases of this type rested on a theory of state law invasion of privacy, compared to cases with similar facts the award was in line.

The court concluded that the punitive damage award was adequately supported.

Ms. May cross-appealed on the grounds that the lower court erroneously excluded the testimony of a witness who was unrelated to Ms. May’s case but who had had similar experiences with Nationstar and whose testimony Ms. May offered to rebut Nationstar’s anticipated defense of innocent inadvertence. The court found no abuse of discretion in excluding the testimony, as Ms. May was still able to counter Nationstar’s evidence of good faith and, allowing the testimony would have resulted in a “mini-trial” on an unrelated case.

Ms. May also challenged the district court’s jury instructions on her RESPA claim. The controversy surrounded an instruction based on an amendment to the statute under which the requirement that a creditor respond to a request for information does not apply if the request is identical to an earlier request to which it did respond. Nationstar argued that the amendment was merely a codification of a common sense application of the law and therefore the instruction was correct. Nationstar also noted that Ms. May did not object to the instruction at the time.

Because of her failure to object the court reviewed the instruction for “plain error.” It found none. There were many grounds upon which her RESPA claim might have failed and no indication that this instruction was dispositive. The fact that Ms. May received a jury verdict of $500,000 in damages suggests that she was vindicated at trial without regard to the RESPA claim.

May 8th Cir opinion March 2017

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Court Issues $45m Punitive Damages Award Against BofA

“The mirage of promised mortgage modification lured the plaintiff debtors into a kafkaesque nightmare of stay-violating foreclosure and unlawful detainer,” for which the court ordered over $1 million dollars in actual damages plus a significant punitive damage award. Sundquist v. Bank of America, No. 10-35624, Adv. Proc. No. 14-2278 (Bankr. E.D. Cal. March 23, 2017).

In the first 30 pages of the 109-page opinion, the court walked through the facts of the case illustrating Bank of America’s egregious conduct and including extensive quotes from Renee Sundquist’s journal. A few highlights include the following facts. Though struggling financially, Erik and Renee Sundquist were current on their home loan, defaulting only after Bank of America told them that the only way they could get loan modification would be if they were in default. After that began a series of abortive modification attempts during which Bank of America consistently lost paperwork, denied modification for no apparent reason, or otherwise dangled modification before the Sundquists without actually providing it, while at the same time going forward then retreating on foreclosure actions. At one point, a Bank of America employee told Renee that modifications were “not real” but were simply a way for Bank of America to make more money before foreclosure.

The Sundquists filed for chapter 13 bankruptcy under threat of imminent foreclosure. After foreclosing in violation of the stay, Bank of America sent thugs to stake out the residence and intimidate the family, and gave them a three-day notice of eviction causing the Sundquists and their children to find temporary housing. Upon learning that they were no longer the owners of the home, the Sundquists voluntarily dismissed their bankruptcy case thereby ending the automatic stay. Meanwhile, and without the Sundquists’s knowledge, Bank of America rescinded the foreclosure and returned title of the home to them. When they later returned to the house they found that major appliances had been removed. In keeping with its conduct throughout, Bank of America attempted to collect mortgage payments for the months the Sundquists had been without their home.

The court found Bank of America’s conduct to be willful and intentional and that it resulted in “emotional distress, lost income, apparent heart attack, suicide attempt, and post-traumatic stress disorder, for all of which Bank of America disclaim[ed] responsibility.”

Finding that state tort principles inform damage awards in bankruptcy, the court applied a “but for” analysis to the issue of damages: “If a consequence would not have occurred ‘but for’ the automatic stay violations, then courts make awards based on that consequence.” Actual damages including economic loss, emotional distress, attorney’s fees, and punitive damages are all recoverable under appropriate circumstances.

In detailed analysis of the evidence, the court concluded that actual damages, including $70,000.00 in fees to trial counsel, medical expenses, loss of employment income, HOA fees, and lost property, came to over $1 million.

Turning to punitive damages, the court balanced the desire to properly punish Bank of America beyond what it might consider “cost of doing business,” and a reluctance to award the Sundquists vastly more than would be reasonable. It concluded that it had the power to make a portion of the award payable to organizations devoted to the public purposes of education and consumer protection. To that end, the court ordered that a portion of the punitive damages be directed to seven entities: the National Consumer Bankruptcy Rights Center, the National Consumer Law Center and five University of California Law Schools.

The decision is likely to be appealed.

Sundquist Bankr ED Cal opinion March 2017

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NCBRC’s Year in Review

Financially distressed debtors seeking the fresh start offered by bankruptcy, often lack the resources to pursue important issues at the appellate level. To equalize the playing field between consumer debtors and their creditors, the NACBA Board created the National Consumer Bankruptcy Rights Center (NCBRC or “Nicbric”), a 501(c)(3) organization. Since its inception in 2010, NCBRC has provided support to consumer bankruptcy debtors and their attorneys in cases of national importance. NCBRC fulfills its mission through three programs. Under the Amicus Program, NCBRC has filed briefs in cases addressing such vital issues as the invidious practice of debt collectors filing stale claims and the misapplication of judicial estoppel by the courts. In its Pro Bono Appellate Program, NCBRC has worked with attorneys from leading bankruptcy firms around the country who have donated over 300 hours to the amicus project. Finally, NCBRC’s Educational Program is devoted to supporting the bankruptcy bar by providing education on current issues in consumer bankruptcy. To this end, NCBRC’s Project Director, Tara Twomey, is an active participant in in-person and online training programs.
To learn more about NCBRC in general and to read about specific cases in which NCBRC filed amicus briefs in 2016, go to NCBRC Year in Review 2016.
To continue this great work we need your help. Consider contributing today by clicking here.

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Nice Win for Debtors on Means Test Expense Issue

Section 707(b)(2) permits a debtor to take the full National and Local Standard amounts for expenses even though the debtor’s actual expenses are less. Lynch v. Jackson, No. 16-1358 (4th Cir. Jan. 4, 2017).

When above-median debtors, Gabriel and Monte Jackson, filed for chapter 7 bankruptcy they complied with Form 22A’s instructions to list their expenses using the IRS National and Local Standard amounts rather than their actual expenses which were less. The bankruptcy administrator moved to dismiss their case as abusive under section 707(b)(2)(A)(i). The bankruptcy court denied the motion to dismiss. In re Jackson, 537 B.R. 238 (Bankr. E.D. N.C. 2015), and the Fourth Circuit accepted direct appeal.

The administrator argued that Form 22A’s instructions are erroneous and that the expense deduction amounts listed in the IRS Standards represent a cap on how high an expense amount may be claimed for certain expenses, but that if the actual amount is less, the debtor must use the lesser amount.

In Ransom v. FIA Card Servs., 562 U.S. 61 (2011), the Court addressed application of the IRS Standard expense deductions in the context of abuse under section 707(b). That Court held that, in order to take the IRS Standard expense deduction, a debtor must actually incur the type of expense designated, i.e. the “vehicle ownership” expense requires that the debtor have lease or loan payments on the vehicle. But that Court left open the question of whether, once the expense is found to be “applicable,” the debtor may take the full IRS Standard amount regardless of actual expenses.

The Fourth Circuit found the answer in the plain language of the statute: “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards. 11 U.S.C. § 707(b)(2)(A)(ii)(I).” The fact that Congress used the word “actual” elsewhere in the same statute indicates that it made a distinction between applicable and actual. The court also recognized the absurdity of punishing a frugal debtor should the bankruptcy administrator’s interpretation of the statute be accepted.

As a procedural matter, the court held that the time to file a petition for direct appeal in section 158(d)(2)(A) is not a jurisdictional constraint and, therefore, the parties’ late filing did not deprive the court of jurisdiction over the appeal where other substantive factors favored direct appeal.

Congratulations to Lee Roland who represented the Jacksons, and to Erik Heath who authored NACBA’s amicus brief in support of the debtors.

Jackson 4th Cir. amended opinion Jan 2017

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Seventh Circuit Discusses Application of Co-Debtor Stay

Bankruptcy’s co-debtor stay was intended to prevent indirect pressure created by creditors attempting to collect against a co-signatory on a debt belonging to the bankruptcy debtor. Therefore, it does not apply to a debt solely belonging to the bankruptcy debtor’s spouse even though state law provides for collection of that debt through marital property. Smith v. Capital One Bank, No. 16‐1422 & 16‐1423 (7th Cir. Dec. 22, 2016). [Read more…] about Seventh Circuit Discusses Application of Co-Debtor Stay

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NCBRC and NACBA Weigh In on Midland v. Johnson

NCBRC is wrapping up its year-end funding campaign.  There’s still time to make a tax-deductible contribution for 2016.

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Meanwhile…NCBRC and NACBA weighed in on the Midland v. Johnson case pending before the Supreme Court.  Click here for the brief.   A big thank you to Whitman Holt, Robert Pfister, Daniel Bussel, and Ken Klee at Klee, Tuchin, Bogdanoff & Stern, LLP for all their work on the brief.