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(Reuters) – Six retired federal bankruptcy judges warned the U.S. 2nd Court of Appeals last week that the very integrity of the Chapter 13 bankruptcy system had been compromised by the court ruling on 2 august in In re: Nicholas Gravel.
Retired judges said the ruling, which overturned $ 300,000 in penalties against mortgage manager PHH Mortgage Corp for charging hidden fees to bankrupt mortgage creditors, prevents judges from punishing serial violators, threatening “the proper functioning of our bankruptcy courts as a whole”.
In two separate amicus briefs – a retired judges William Brown, Keith Lundin and Eugene Wedoff, The other by Judith Fitzgerald, Bruce Markell and Melanie Cyganowski – the judges urged the 2nd Circuit to award a petition for the rehearing of Jan Sensenich, a Vermont Chapter 13 trustee who accused PHH of improperly charging late fees and property inspection fees in three bankruptcies.
The briefs of the ex-judges do not spare the detrimental effects of the split decision of the 2nd circuit in the Gravel case: “The panel’s decision will likely undermine a well-established practice in bankruptcy courts,” said the brief Brown.
The decision of the 2nd circuit threw two different types of sanctions imposed on PHH by US bankruptcy judge Colleen Brown of Rutland, Vermont. The background is complex, but briefly, in 2014, PHH accepted a penalty of $ 9,000 for improperly charging late fees on Nicholas and Amanda Gravel’s mortgage after the Chapter 13 trustee protested the charges. The mortgage agent attributed the errors to the automated accounting systems and promised to fix the problem. Two years later, the Gravels completed the Chapter 13 process and obtained a bankruptcy court order confirming that they were up to date with their mortgage payments, with no default or arrears.
Nonetheless, when PHH sent out a mortgage statement a few days after the end of Chapter 13 of the Gravels, the trustee, Sensenich, noticed a charge for unpaid “property inspection fees” of approximately $ 260 in the last 26 months. . A similar pattern presented itself in a second Chapter 13: after debtors completed their payment plan and obtained a court order confirming that their mortgage payments were up to date, the trustee realized that PHH was charging fees. inspection of property and offenders for months. In a third case before Circuit 2, PHH allegedly failed to provide timely notice of charges that appeared on debtors’ mortgage invoices.
Bankruptcy judge Brown said PHH scorned its orders finding the debtors to be up to date. Plus, she said, PHH was a repeat offender. The mortgage company, after all, was already committed in the Gravel case to eliminating the wrong fees. Brown imposed contempt penalties of $ 225,000.
She also found that PHH broke a federal bankruptcy rule passed in 2011 to protect Chapter 13 homeowners from sneaky charges that could cost them their home. The rule requires mortgage agents to notify debtors of additional charges. If agents do not provide sufficient notice, the rule allows judges to grant debtors “appropriate relief, including reasonable expenses and attorney fees caused by the failure.”
Brown found 75 cases in the cases of the three debtors in which PHH allegedly violated the rule. She hit PHH with $ 75,000 in penalties for these violations, citing her statutory authority and inherent power. His message: Mortgage creditors, Brown said, “cannot violate court orders with impunity.”
PHH attorney Matthew Delude of Primmer Piper Eggleston & Cramer referred my question to the company, who said in an emailed statement that they “strongly disagreed” with the amicus calls for a bench examination. “PHH did not violate any court order in this case, as evidenced by a panel of the 2nd circuit determining, among other things, that we did not commit any violation,” the statement said.
At the request of the trustee, the bankruptcy judge certified a direct appeal to the 2nd circuit to determine whether it had the power to insult PHH and whether they would have violated the bankruptcy rule authorizes sanctions. All three of the Circuit 2 panel judges – Dennis Jacobs, Joseph Bianco and Michael Park – agreed that PHH could not be found in contempt of Brown’s order because the order did not expressly prohibit PHH from recording. expired charges on mortgage statements to Gravels and other debtors.
Jacobs and Park also stated, in a Jacobs opinion, that the relevant bankruptcy rule did not authorize punitive sanctions as a form of “appropriate remedial action” and that Brown did not have the inherent power to order a punitive sanction for a violation of this rule.
Bianco expressed his dissent, writing that the majority participation would bring bankruptcy judges to their knees attempting to impose liability on serial offenders. Chapter 13, Bianco said, is meant to give debtors a fresh start. And the bankruptcy rule banning hidden mortgage fees, he wrote in dissent, is intended to “protect debtors from predatory practices that interfere with the ‘fresh start.’ politics.
The 2nd Circuit, as you know, is incredibly stingy about granting a bench exam. But the trustee’s pro bono attorney, Mahesha Subbaraman of Subbaraman PLLC, argued in the rehearing motion that the majority’s interpretation of the scope of âappropriate remediesâ under the bankruptcy rule does not is not only bad policy, but is also inconsistent with the interpretive framework of the United States Supreme Court. from 2019 Tanzin v. Tanvir.
In an interview, Sensenich told me that his big concern was that, without the threat of penalties, mortgage agents will impose fine print fees on involuntary homeowners in Chapter 13 and then claim after debtors exit from bankruptcy that they are in default. The majority, Sensenich and Subbaraman said, failed to understand that unpaid mortgage charges can come back to haunt debtors even after the bankruptcy court says they are up to date with their payments.
The former judges agreed, “The panel called concerns about the damage caused by PHH ‘hyperventilation’ and ‘overwork’,” the former judges said in the Fitzgerald brief. “(But) PHH’s contempt for the law is not without danger – both for debtors who do not have the resources to call it, and for the integrity of the bankruptcy system.”
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