February 1, 2017
by Edward J. Boll III
Lerner, Sampson & Rothfuss, LPA
USFN Member (Kentucky, Ohio)
Chair, USFN Bankruptcy Committee
The chief bankruptcy judge for the District of Vermont imposed $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Bankruptcy Rule 3002.1(c). The court’s ruling was based on the motions of a Chapter 13 trustee in three different cases. The trustee asked the court to make a finding of contempt, to disallow certain post-petition fees, and to impose sanctions based upon the creditor’s failure to comply with Bankruptcy Rule 3002.1 and for the violation of court orders.
The court evaluated the goals of Bankruptcy Rule 3002.1, which requires the holder of a claim secured by a Chapter 13 debtor’s principal residence to file a detailed notice setting forth all post-petition charges it seeks to recover from the debtor within 180 days after the expenditure is incurred. Empowered by the rule’s inclusion of a penalty for violations, the court held a consolidated hearing on the three trustee motions to consider whether the creditor had fulfilled requisite transparency.
In the first case, the court had entered an order determining that the debtors had cured all pre-petition mortgage defaults and were current on all post-petition mortgage payments. Five days later, the mortgage company sent the debtors a mortgage statement which, contrary to the recently entered “order deeming current,” asserted that property inspection fees of $258.75 were due.
In the second case, the court had entered an order determining that the debtors had cured all pre-petition mortgage defaults and were current on all post-petition mortgage payments. Less than three weeks later, the mortgage company sent the debtors a mortgage statement that included one NSF fee of $30 and a property inspection fee of $56.25 — charges for which it had never filed a Rule 3002.1 notice.
In the third case, the mortgage company sent the debtor a monthly mortgage statement that included $246.50 in property inspection fees as well as $124.50 in late charges — all of which were more than 180 days old, and without the servicer filing corresponding Rule 3002.1 notices.
Although the court could not find “any case in which a court imposed sanctions under Rule 3002.1(i) or explained how sanctions arising under that rule should be computed,” it drew from several cases sanctioning mortgage creditors for inaccurate post-petition account statements or the assessment of charges without notice. The court honed in on three factors:
(1) whether the creditor had notice of the need to comply with Rule 3002.1;
(2) whether the creditor managed mortgage accounts in dereliction of its bankruptcy rule duties or had previously been sanctioned for similar misconduct; and
(3) whether the creditor was given an opportunity to rectify processes leading to or causing the defalcations; and, if so, whether it fulfilled its commitment to do so.
After finding that the creditor had notice of its obligation to comply with the bankruptcy rule notice requirements, was not a first-time offender and breached its pledge to correct its processes, the court imposed $75,000 in sanctions for the failure to comply with Rule 3002.1 and $300,000 in sanctions for violating the court’s orders declaring the debtors current. Although the court and trustee agreed that no party suffered any direct financial harm, the judge directed that the sanctions be paid to the state’s lead provider of pro bono bankruptcy legal services. The court reasoned “this way, [the mortgage company] suffers a substantial financial penalty purposefully formulated to motivate [it] to bring its procedures into compliance” without unjustly enriching the debtors.
The case, which is now on appeal, bears the citation In re Gravel, 556 B.R. 561 (Bankr. D. Vt. Sept. 12, 2016).
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