discharge violation

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Creditor Must Resume Statements After Discharge

PNC’s TILA obligation to provide regular statements concerning the plaintiffs’ debt resumed after the debtors received their bankruptcy discharge even though the plaintiffs’ bankruptcy case was not closed until almost four years later. Polonowski v. PNC Bank, NA, No. 20-151 (W.D. Mich. Jan. 23, 2023).

The plaintiffs had a home equity line of credit (HELOC) with PNC which was secured by a mortgage on their residence. Pursuant to its obligation under the Truth in Lending Act (TILA), PNC sent the debtors periodic statements concerning the debt. When the debtors filed for chapter 7 bankruptcy, PNC stopped sending the statements. While their bankruptcy was still pending the plaintiffs reaffirmed their debt to PNC. On November 15, 2018, the plaintiffs received their discharge, but their bankruptcy case remained open until July, 2022. PNC failed to resume the periodic statements, informing the plaintiffs’ counsel that it would not send statements so long as the bankruptcy case remained open.

The plaintiffs filed suit against PNC in district court and moved for partial summary judgment on the issue of liability.

PNC argued that its obligation to send periodic statements under TILA conflicted with bankruptcy’s automatic stay, and that TILA releases creditors from their obligation to issue account statements when doing so would violate other federal laws. In PNC’s view, as long as the bankruptcy remained open, the property remained part of the bankruptcy estate under section 362(c)(1), and it could not send statements.

The court agreed that when the plaintiffs filed for chapter 7 bankruptcy, the stay suspended PNC’s obligation to issue statements, but found that, under section 362(c)(2)(C), its obligation resumed when the plaintiffs received their discharge.

To the argument that the property remained part of the bankruptcy estate, the court emphasized the distinction between in rem and in personam proceedings, noting that because the plaintiffs had reaffirmed the debt, their bankruptcy discharge lifted the stay with respect to them. The court stated that sending information about a debt was not an “act against the property of the estate.” It analogized the case with one involving the discharge injunction noting that a creditor seeking to collect post-discharge on a debt the debtor had reaffirmed, would not violate the discharge order.

The court concluded that the plaintiffs’ interpretation of sections 362(c)(1) and 362(c)(2)(C) was consistent with the parameters of the automatic stay and with the historical distinction between in rem and in personam proceedings, and that “Defendant’s interpretation is not consistent with either the statutory language or the historical approach to acts against the person and acts against property.”

The court granted the plaintiffs’ motion for summary judgment on the issue of liability.

Polonowski WD Mich Jan 2023

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Mortgage Statements Not Attempts to Collect a Debt

Where statements sent by the mortgage servicer listed the higher, pre-modification amount due, but specifically stated they were not an attempt to collect a debt and did not include an amount in potential late fees, the bankruptcy court erred in finding the statements were in violation of the automatic stay. Freedom Mortgage Corp. v. Dean, No. 22-1469 (M.D. Fla. Jan. 26, 2023). 

The debtors had a mortgage with Roundpoint Mortgage Servicing obligating them to monthly payments of $2,102.32. They filed for chapter 13 bankruptcy after falling behind on the payments. Roundpoint and the debtors agreed on a trial mortgage modification which was approved by the court and which lowered their monthly payments to $1,927.15. Freedom Mortgage Corporation then took over the mortgage from Roundpoint. Freedom began sending the debtors monthly statements listing the amount due according to the pre-modification mortgage terms. With each statement, Freedom included a payment coupon. Despite notifications by the debtors’ counsel that the amount listed was incorrect, Freedom did not lower it to the modified amount until after the bankruptcy court permanently confirmed the modification. The court then ordered Freedom to show cause why it should not be sanctioned for violating the automatic stay.

In response, Freedom argued that it was obligated under the Truth in Lending Act to send out monthly statements and that the statements it sent conformed to the Consumer Financial Protection Bureau’s Form H-30(F) and were therefore moored in a “safe harbor.” The bankruptcy court rejected Freedom’s arguments and found its monthly statements were an attempt to collect a debt in violation of the stay. The court sanctioned Freedom in the amount of $15,060.00 representing the costs associated with the mortgage statements and the sanctions hearing.

Freedom appealed to the district court.

The district court rejected Freedom’s “Chevron defense” where it urged the court to adopt the CFPB’s interpretation of bankruptcy’s automatic stay. The court found that defense applies only to agencies interpreting laws which they are charged with administering. Here, the CFPB is not charged with administering the bankruptcy code. Therefore, Freedom’s use of the Form H-30(F) did not insulate it from the requirements of the automatic stay.

Nonetheless, the court found the statements were not an effort to collect on the debt. Though it found no direct precedent, the court analogized the Eleventh Circuit’s interpretation of what constitutes a collection activity under the FDCPA. In Daniels v. Select Portfolio Servicing, Inc., 34 F. 4th 1260 (11th Cir. 2022), the circuit court first noted that a statement’s compliance with TILA did not necessarily make it in compliance with bankruptcy’s section 362. The court went on to set forth four criteria for determining if a statement is an attempt to collect a debt: 1) if the statement contains language to the effect that it is collecting a debt, 2) if the statement requests payment by a certain date, 3) if there is a late fee listed in the statement terms, and 4) if there is history between the parties suggesting that the statement is intended to collect a debt.

Applying those criteria to the case before it, the court found the statements explicitly indicated that they were not intended to collect a debt. The statements instructed the debtors to make their monthly payments to the trustee if required by the bankruptcy plan. To the extent the inclusion of payment coupons with the statements could suggest an attempt to collect, the court found the language to the contrary in the body of the statement overrode that suggestion.

Though the statements included payment dates, they specifically listed $0 as the late fee throughout the entire bankruptcy proceeding.

As to the fourth element, the court found that because Freedom took over the mortgage after the debtors filed for bankruptcy, there was no history to create expectations. Therefore, the fourth element was neutral.

Based on these findings, the court found the statements were not an attempt to collect a debt in violation of the automatic stay. The court cautioned that had the statements included a late fee, that, in combination with the incorrect amount due, might have led to affirmation of the bankruptcy court’s finding.

The court reversed.

Dean MD Fla Jan 2023

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Extension of Stay Applies to Creditor Who Was Not Served with Motion

The bankruptcy court properly exercised its discretion to grant an extension of stay in the debtor’s second chapter 11 case where the case was filed in good faith as to the creditors to be stayed even though one of the creditors to which the stay applied was not served with the motion. FourWs, LLC. V. Miller, No. 21-1273 (E.D. Cal. Jan 30, 2023).

The debtor filed chapter 11 bankruptcy in 2019, but the case was dismissed two months later after his counsel missed deadlines and otherwise failed to represent him adequately. Less than one year later, he filed a new, pro se, chapter 11 case. Three days after filing the second case, the debtor moved for an extension of the automatic stay under section 362(c)(3)(B). He was unaware of FourWs as a potential creditor and did not serve them with the motion. The court held a hearing and granted the motion to extend the stay.

FourWs then learned of the bankruptcy and filed a proof of claim. It also sued the debtor in state court on the promissory note. A month later, the trustee moved to dismiss the debtor’s case as having been filed in bad faith. The bankruptcy court granted the trustee’s motion. The state court dismissed FourWs motion, and FourWs moved to reopen the bankruptcy case seeking a ruling that the automatic stay expired as to them 30 days after the debtor filed his bankruptcy petition. The bankruptcy court denied the motion, and FourWs appealed to the district court.

Section 362(c)(3)(B) provides that on a motion by a party in interest, and “upon notice and a hearing,” the bankruptcy court has broad discretion to extend the stay so long as “the filing of the later case is in good faith as to the creditors to be stayed.” The debtor must move for the extension and the hearing must be held within 30 days of the bankruptcy petition. In Morris v. Peralta (In re Peralta), 317 B.R. 381, 389 (B.A.P. 9th Cir. 2004), the Peralta panel emphasized that, once granted, the extension applies to unknown creditors regardless of notice.

The district court here found that, under section 102(1) the “notice and hearing” requirement means notice and hearing that are “appropriate in the particular circumstances.” Because of the 30-day time limit for dealing with motions to extend stay, the bankruptcy court must act quickly. The court observed that “Miller gave two weeks’ notice to creditors of the hearing, filed proof of service within three days of filing his petition, and appeared to be acting in good faith.” It found that the bankruptcy court reasonably concluded that the notice and hearing were appropriate.

The court found two cases cited by FourWs were distinguishable on their facts. In In re Bronson, No. 09-46592, 2010 WL 9485976, at *1 (Bankr. E.D. Cal. Jan. 4, 2010), the debtor noticed creditors by regular mail only a few days before the hearing, and in In re Collins, 334 B.R. 655, 656 (Bankr. D. Minn. 2005), the debtor served notice on the interim trustee but did not serve the creditors. The court here found that the bankruptcy court gave appropriate consideration to the due process rights of the creditors. Finally, the court noted that FourWs had the option to move for relief from stay under section 362(d) or (f) if there was a reason the stay should not be applied to them.

The court affirmed.

Miller ED Cal Jan 2023