by The bankruptcy court did not err in finding the mortgage servicer violated the discharge injunction or in awarding over $10,000 in sanctions where the servicer continued to dun the debtor for payment after the debtor had received her chapter 7 discharge and relinquished the home in a foreclosure sale. Berry v. Fay Servicing, LLC, No. 21-8005/8007 (B.A.P. 6th Cir. Sept. 9, 2022).
Two years after the debtor received her discharge and relinquished her home, the lender transferred the deed of trust to a new owner. Five months after that, in August, 2020, Wells Fargo Home Mortgage sent the debtor a letter informing her that Fay Servicing had taken over as servicer on the loan. Wells Fargo sent the debtor another letter in September, 2020, titled “Final Escrow Review Statement.” In response to correspondence from the debtor notifying it of her discharge and of the foreclosure, Wells Fargo sent her a letter stating that the dispute was under review, followed by confirmation that the mortgage was extinguished. Wells Fargo then stopped all correspondence with the debtor.
Fay, however, was not so easily stopped. Beginning in September, 2020, it sent the debtor various “welcome” correspondences with information about future payments on the loan, as well as letters concerning how to pay the mortgage, paying insurance on the property, and providing information for collection purposes. Fay also called the debtor and left threats of lawsuits on her voicemail. In October, 2020, Fay informed the debtor that she was in default to the tune of $542,350.79. After repeated correspondence from the debtor, Fay finally acknowledged its error and ceased contact with the debtor.
The debtor moved to reopen her bankruptcy and sought sanctions against Wells Fargo and Fay for violation of the discharge injunction. The bankruptcy court found Fay in contempt and ordered it to pay $10,749.72 in sanctions. The court found Wells Fargo’s conduct did not violate the injunction.
The debtor appealed to the Bankruptcy Appellate Panel for the Sixth Circuit arguing that the bankruptcy court erroneously limited its examination of Fay’s conduct, and also that the court should have found Wells Fargo’s conduct to have been sanctionable. Fay cross-appealed.
The panel began by noting the distinction between section 524(a), which prohibits a mortgagee from attempting to collect personally against the debtor who has given up possession of the property, and the “safe harbor” created by section 524(f) which permits the mortgagee to continue to seek regular mortgage payments to protect its in rem rights where the debtor’s personal liability has been discharged but where the debtor continues to reside on the property. Here, because the debtor had relinquished the house, the safe harbor offered no shelter to Wells Fargo or Fay.
The panel found that the communication from Wells Fargo to the debtor was merely notification that the original mortgagee had transferred the deed of trust and that servicing of the loan was transferred from Wells Fargo to Fay. The panel agreed with the bankruptcy court that the debtor failed to show that Wells Fargo either transferred the deed of trust, or could be held liable for the transfer as an agent of the mortgagee. “[A]n agent is not liable to a third party for acts committed by the agent’s principal.”
More importantly, the panel found that the transfer of the deed of trust itself was not a violation of the discharge injunction. Where the mistake here was the transfer of servicing rights for an extinguished mortgage, the panel found the mistake was attributable to the original mortgagee rather than to Wells Fargo.
The panel also found that the debtor failed to sustain her burden of providing clear and convincing evidence that the letter Wells Fargo sent to the debtor concerning the transfer, was an effort to collect a debt. The letter was “informational” and did not include an “amount due” or a payoff amount.
It therefore affirmed the bankruptcy court’s decision with respect to Wells Fargo.
With respect to Fay, the debtor argued that the bankruptcy court should have calculated damages from April, 2020, when the deed of trust was transferred to Fay’s principle instead of in August, 2020, when Fay became the servicer on the debtor’s loan. The panel disagreed, finding that there was no evidence that Fay was involved in the transfer of the deed of trust or that it took any action to collect a debt from the debtor prior to August, 2020.
The panel was also unpersuaded by Fay’s arguments that the bankruptcy court relied on clearly erroneous findings of fact for its finding that Fay violated the discharge injunction at all. Specifically, Fay argued that the court erred in “(1) disregarding Fay’s internal process; (2) assuming Fay received Ms. Berry’s correspondence the same day it was drafted; (3) assuming Fay could investigate and immediately modify the account; and (4) assuming Fay knew property records were online.”
The panel found that a court, when addressing whether correspondence from a creditor violates the discharge injunction, is constrained to look only at the four corners of the document alleged to constitute the collection effort. If the document is an effort to collect, the fact that it includes a bankruptcy disclaimer does not necessarily redeem it.
The panel turned to the specifics of Fay’s conduct including the October, 2020, phone call in which Fay threatened to sue on the debt, and three correspondences: 1. the notice of default with the threat of foreclosure and deficiency judgment, 2. the letter demanding hazard insurance payments, and 3. the mortgage statement with an “amount due” and a payment due date.
Given that the debtor had discharged her personal liability on the debt and the property had been sold in foreclosure prior to any of these communications, the panel found each of the instances were an attempt to collect a debt without justification.
The panel also found that there was “no fair grounds for doubt” to excuse Fay’s conduct. The panel pointed to the fact that when the debtor informed both Wells Fargo and Fay at the same time of her discharge and the foreclosure, Wells Fargo acknowledged that the mortgage had been extinguished and discontinued correspondence with the debtor. Fay, on the other hand, continued to pursue the debtor for payments, ignoring letters of protest from the debtor. The panel found the bankruptcy court did not clearly err in concluding that Fay’s conduct was objectively unreasonable and that Fay’s belated letter acknowledging its errors did not rectify its violation of the discharge order.
Finally, the panel addressed the amount of the award against challenge by both parties. The panel found that a bankruptcy court has broad discretion under section 105 to award damages for violation of the discharge injunction under section 524.
Here, the evidence supported the debtor’s claims of actual damages, including multiple trips to the post office to send repeated letters to Fay. With respect to the debtor’s claim that she was entitled to an award based on emotional distress, the panel found that, while some jurisdictions have found that a bankruptcy court may grant such damages, they are typically supported by objective evidence and the debtor offered no such evidence here.
Notwithstanding some language in the bankruptcy court’s order to the effect that it took the debtor’s emotional distress into consideration, the panel found the award of damages consisted of $449.72 for actual damages and $10,300.00 for punitive damages. In creating the punitive damage award, the court assigned a value to each instance of violative conduct, but the panel drew a “distinction between compensatory damages for emotional distress, and noncompensatory sanctions for causing emotional distress.”
The panel rejected Fay’s argument that the sanctions were prohibitively “serious” finding instead that amount was justified by the fact that Fay is a corporate entity and that its conduct was egregious. “The $1,000.00 sanction for each piece of communication was tied to and proportionate with the acts that were found to clearly violate the discharge order’s injunction. Additionally, proportionality of the bankruptcy court’s $100.00 per day sanction must be viewed in light of Fay’s failure to take effective corrective action in response to the discharge order, its obligations under the Bankruptcy Code, and the objectively clear proof the debt was discharged. This portion of the award was proportionate when considering Fay’s failure to take effective corrective action when confronted with the proof Ms. Berry provided of her discharge and the sale of the Property.”
The panel affirmed.