by The Ninth Circuit is poised to address a set of important issues at the intersection of Chapter 13 practice and discharge enforcement in Valdellon v. Wells Fargo. The appeal challenges how § 524(i) applies when a mortgage servicer fails to honor the cure-and-maintain structure of a confirmed Chapter 13 plan and asks whether emotional-distress damages remain available as a contempt remedy after Taggart v. Lorenzen. The outcome will directly affect the reliability of Notices of Final Cure, the finality of the discharge order, and the remedies available to protect debtors from unlawful post-discharge collection efforts.
NCBRC and NACBA filed a joint amicus brief, authored by D. Eitan Arom of KTS 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.
Background
Melanio and Ellen Valdellon completed payments under their confirmed Chapter 13 plan, which provided for full payment of prepetition arrears and maintenance of ongoing mortgage installments. The Chapter 13 trustee filed a Notice of Final Cure, and the bankruptcy court entered the discharge without objection from Wells Fargo/PHH.
Despite this, PHH continued to treat the loan as delinquent, rejected payments the debtors tendered after discharge, and pursued foreclosure activity. The debtors reopened the bankruptcy case and filed an adversary proceeding alleging a violation of § 524(i) and the discharge injunction.
The bankruptcy court dismissed the complaint, reasoning that (1) the debtors had not identified a specific miscredited plan payment and (2) their plan was not completed within 60 months and therefore was in incurable default.
The BAP reversed, holding that a creditor violates § 524(i) when it fails to give plan payments the curative effect required by the plan, even if it nominally “applied” the payments to the loan. The BAP also held that the discharge order conclusively establishes plan completion and that emotional-distress damages remain available following Taggart v. Lorenzen.
Wells Fargo/PHH appealed to the Ninth Circuit.
Arguments on Appeal
Appellants (Wells Fargo/PHH) — Opening Brief
In their opening brief, creditors argue:
- No § 524(i) violation was pled because debtors did not identify any specific miscredited plan payment.
- The plan was not timely completed, making § 524(i) inapplicable.
- Liens pass through bankruptcy unaffected, and the BAP improperly treated the proof of claim and plan as binding.
- They had an objectively reasonable basis for their post-discharge conduct under Taggart.
- Emotional-distress damages are unavailable under an “objectively reasonable” contempt standard.
Appellees (the Valdellons) — Response Brief
The debtors’ brief argues:
- Failure to treat the loan as current following plan completion constitutes a § 524(i) violation, even without itemizing specific miscredited payments.
- The discharge order proves plan completion, and creditors cannot attack it years later.
- Creditors’ refusal to credit post-discharge payments and initiation of foreclosure efforts violated § 524(a)(2) and § 524(i).
- The debtors pleaded material injury, including threats of foreclosure and emotional distress.
NCBRC/NACBA Amicus Brief
In their joint brief, NCBRC and NACBA emphasize:
- The BAP’s opinion was not an appealable final order. The BAP remanded the case for additional factfinding which means it was not a “final” order and therefore the Court would not have jurisdiction under 28 U.S.C. § 158(d)(1).
- Bankruptcy courts have long awarded emotional-distress damages in discharge-violation contempt proceedings.
- Taggart imposes an objective standard but does not limit the types of compensatory damages available.
- Without effective remedies, servicers would have little incentive to comply with Notices of Final Cure or the discharge injunction.
Key Questions Before the Ninth Circuit
The appeal raises several issues of broad significance:
- Whether § 524(i) requires identification of a specific miscredited payment, or whether failure to reinstate a loan at plan completion suffices.
- Whether the entry of discharge conclusively establishes plan completion, even if payments are extended beyond 60 months.
- Whether emotional-distress damages remain available after Taggart v. Lorenzen.
- What constitutes material injury under § 524(i).
The Ninth Circuit’s ruling may significantly impact mortgage servicer accountability and the enforceability of Chapter 13 cure-and-maintain plans.
NCBRC’s Position
NCBRC supports the affirmance of the BAP.
The amicus brief stresses:
- Loan reinstatement at plan completion is essential to the debtor’s fresh start.
- Discharge orders must retain finality, preventing later attempts to relitigate plan completion.
- Emotional-distress damages remain a necessary part of effective discharge-enforcement remedies.
Status
The case is fully briefed and awaiting argument before the Ninth Circuit. NCBRC will update readers when the court schedules oral argument or issues a decision.
Briefs