by In an unpublished memorandum disposition, the Ninth Circuit affirmed a Bankruptcy Appellate Panel decision reviving Chapter 13 debtors’ claim that their mortgage creditors violated the discharge injunction by failing to properly credit payments made under their confirmed plan. In Valdellon v. PHH Mortgage Corp., No. 25-538 (9th Cir. Apr. 20, 2026), the court held that the debtors plausibly stated a claim under Section 524(i) and that emotional distress damages may be available as a civil contempt remedy for violation of the discharge injunction.
Read more: Ninth Circuit Allows Section 524(i) Discharge-Violation Claim to Proceed Against Mortgage CreditorsThe court affirmed the BAP’s order in full. Judge R. Nelson concurred in part and dissented in part, agreeing that the debtors stated a Section 524(i) claim but disagreeing that emotional distress damages are available for discharge-injunction contempt.
This disposition is not precedential except as provided by Ninth Circuit Rule 36-3.
NCBRC and NACBA filed a joint amicus brief, authored by D. Eitan Arom and Daniel J. Bussel of KTBS Law, urging the court to affirm the Bankruptcy Appellate Panel’s (BAP) ruling. The brief highlights the long-standing historical basis for compensatory contempt remedies—including emotional-distress damages—and emphasizes the importance of meaningful enforcement of the Chapter 13 fresh start.
Facts
Melanio and Ellen Valdellon filed a Chapter 13 bankruptcy case. During the case, their mortgage debt was serviced or held by PHH Mortgage Corporation and Wells Fargo Bank, N.A. The Chapter 13 trustee filed a Notice of Completion of Plan Payments and Notice of Final Cure Payment on September 27, 2019. The creditors responded on October 18, 2019, agreeing that the debtors had cured the prepetition arrears in full and were current on their post-petition monthly mortgage payments.
The bankruptcy court entered the debtors’ discharge on June 1, 2020.
The debtors later filed an adversary proceeding alleging that the creditors violated the discharge injunction. They brought their claim under Section 524(i), which treats a creditor’s willful failure to properly credit payments received under a confirmed plan as a violation of the discharge injunction, unless the plan is in default.
The bankruptcy court dismissed the debtors’ second amended complaint for failure to state a claim. The BAP reversed and remanded, holding that the debtors had plausibly alleged a Section 524(i) violation and that emotional distress damages may be available as a contempt remedy. The creditors appealed.
The Ninth Circuit’s Analysis
The Ninth Circuit first held that it had jurisdiction to review the BAP’s decision even though the BAP had remanded the case to the bankruptcy court. The court concluded that the BAP’s order resolved discrete legal issues affecting the parties’ substantive rights: whether the debtors had stated a Section 524(i) claim and whether emotional distress damages could be available. Immediate review, the court explained, would avoid piecemeal litigation and prevent the parties from having to climb the appellate ladder again on the same legal issues.
On the merits, the Ninth Circuit agreed with the BAP that the bankruptcy court erred in dismissing the Section 524(i) claim.
The court explained that creditors may not willfully fail to credit payments received under a bankruptcy plan unless the plan is in default. Doing so violates the discharge injunction. The debtors alleged that they paid the full arrearage amount required under the plan, and that the creditors nevertheless failed to give those payments their curative effect. Those allegations were enough to state a claim.
Crediting payments under the plan requires more than merely accepting payments from the trustee; creditors must apply the payments to the debt in the manner directed by the plan. When a plan provides for a cure of prepetition arrears and maintenance of ongoing mortgage payments, the creditor must reinstate the loan and treat prepetition arrears as satisfied upon completion of plan payments. Section 524(i) serves to ensure that creditors abide by the terms of the plan and allow debtors to exit bankruptcy current on their mortgage, owing no past due amounts.
Conditioning relief under § 524(i) on a debtor’s ability to show a specific misapplication of cure payments would obviate the statute’s purpose in cases where the creditor refuses reinstate a loan and effectuate a cure of prepetition arrears. Thus, even if PHH applied every cure payment to the outstanding loan balance, it could still willfully fail to “credit” those payments if it intentionally did not give them the curative effect required by the plan.
The creditors argued that the debtors were in default because some payments were made outside the sixty-month plan term. The Ninth Circuit rejected that argument. The court distinguished In re Kinney, where the bankruptcy case had been dismissed without a discharge after the debtors failed to make required payments. Here, by contrast, the debtors completed the payments required under the plan, the creditors did not object to the trustee’s notice of final cure, and the bankruptcy court entered a discharge. That discharge was final.
Because the bankruptcy court had entered a discharge, the Ninth Circuit reasoned, the plan could not be treated as still in default for purposes of barring Section 524(i) relief. The court held that the debtors plausibly alleged that the creditors failed to treat the arrears as satisfied and failed to reinstate the loan after completion of the plan.
Emotional Distress Damages
The Ninth Circuit also affirmed the BAP’s holding that emotional distress damages may be available as a civil contempt remedy for violation of the discharge injunction.
The creditors argued that Taggart limited contempt remedies to traditional civil contempt remedies and that emotional distress damages were not available. The majority disagreed. It read Taggart as addressing when civil contempt is appropriate, not as limiting the range of compensatory remedies available once contempt is established.
The court relied in part on the BAP’s decision in In re Marino and on traditional equity principles, recognizing that civil contempt remedies are designed to compensate the injured party. The majority concluded that full and equitable relief in the discharge-injunction context may include damages for emotional distress, especially in light of the fresh-start purpose of bankruptcy discharge.
The court stressed that it was not deciding whether emotional distress damages should actually be awarded in this case, or in what amount. It held only that such damages are not categorically unavailable.
Result
The Ninth Circuit affirmed the BAP’s order in full. The debtors’ Section 524(i) discharge-violation claim may proceed, and emotional distress damages remain available as a potential civil contempt remedy if the debtors prove a violation of the discharge injunction.
The opinion was issued on April 20, 2026.