Court Rejects Bank’s “Devil Made Me Do It” Defense

Posted by NCBRC - June 10, 2015

A bankruptcy court awarded almost $70,000.00 in damages for PNC’s stay violation. In re Ogden, No. 11-19841 (Bankr. D. Colo. June 1, 2015). It is easy to feel imaginary malice behind the often frustrating interactions with impersonal, computer operated, entities with which we all find ourselves conducting business. In this case, however, the court found that the debtor’s sense of actual ill will was confirmed by testimony from PNC’s representative in its defense to the charge of stay violation. 

The conflict between PNC and Brenda Ogden originated with the bank’s misapplication of her mortgage payments. After the bank threatened foreclosure, the debtor filed her chapter 13 bankruptcy petition and confirmed a plan to pay mortgage arrears through the plan and maintain payments on the mortgage outside the plan. After filing her bankruptcy case the debtor filed a federal lawsuit against PNC under TILA and RESPA. That case settled with PNC agreeing to pay the debtor $5,000 and reduce the principal balance on her loan by $12,500. Though the principal reduction should have taken place immediately, PNC did not actually make the reduction until the debtor filed an adversary complaint in her bankruptcy case.

Six months after filing for bankruptcy, PNC sent the debtor a letter offering an unsolicited loan modification and threatening to resume the previously discontinued foreclosure proceedings. PNC responded to the debtor’s panicked inquiries regarding imminent foreclosure with stonewalling and form letters. PNC sent another follow-up letter notifying the debtor that she had failed to comply with the earlier letter. This communication included the postscript: “We understand that you have filed for bankruptcy and have not yet received a discharge. None of the information requested in this letter will be used for . . . purposes prohibited by the Bankruptcy Code . . . .”

The debtor filed an adversary complaint concerning PNC’s application of her post-petition payments. Testimony at that trial extended, however, to the post-bankruptcy letters and the debtor’s resulting emotional distress. The court awarded $5,000 in damages based on the automatic stay violation. PNC moved to alter or amend the ruling because the issue of stay violation had not been raised in the original adversary complaint. The court granted the motion and dismissed the stay violation claim without prejudice. The court then filed its own show cause order requiring the parties to address the issue.

At a second hearing on the stay violation the parties submitted testimony that had been taken in connection with the first adversary proceeding. The court found that PNC had violated the stay and awarded damages.

In its order, the court walked through the evidence of PCN’s recalcitrance which it found exceeded ordinary incompetence and mindless computer maladministration and amounted to actual ill will on the part of the bank toward the debtor.

The court began with PNC’s lack of responsiveness noting that it was not until the adversary proceedings that PNC provided the debtor with a reinstatement quote which included post-petition fees and corporate advances. Explaining the reinstatement quote, Dorothy Thomas of PNC testified the bank kept two accounts for the debtor’s loan, one reflecting the bankruptcy case and the other disregarding the bankruptcy. The reinstatement quote was based on the non-bankruptcy account, and ignoring the fact that the debtor was curing the pre-petition arrears through the plan. Ms. Thomas back-pedaled, explaining that the quote was not official because it was not on bank letterhead and had not been reviewed by bank’s counsel, though the bank never informed the debtor that she could get a more accurate quote.

The court was also dismayed by the bank’s persistent refusal to take responsibility for its error in sending out letters to modify the loan when it was in bankruptcy, stating: “If the Bank had ever acknowledged that these form letters had been sent in error, these two trials would never have been necessary.”

Finding that no reasonable person could find that the two letters threatening foreclosure did not violate the stay, the court swatted away the bank’s “frivolous defenses” like so many mosquitos.

The bank argued that the absence of the word “default” in the letters indicated that it did not intend to collect a pre-petition debt. The court reminded PNC that willfulness is found when the actor intended the action that violated the stay without regard to whether there was intent to commit the violation itself. The letters themselves acknowledged the bankruptcy and threatened foreclosure. The bank’s efforts to recast the language of the letters to conform to stay requirements were unavailing. A threat to resume foreclosure proceedings constitutes an “act” in furtherance of collection on a debt.

The court differentiated this case from the more typical case in which a bank’s computer system shoots out a letter in electronic obliviousness to the borrower’s bankruptcy. Here, the bank did not correct the error and the threats contained in the letters were not idle. “The foreclosure sale date was merely continued from week to week such that resuming foreclosure would require very little and the actual sale could take place within one week’s time. Moreover, the Debtor had already experienced pre-petition a foreclosure that had been commenced based on erroneous accounting for her payments and she was powerless to stop it without filing bankruptcy. In this context, no reasonable person would construe these as empty threats. It was as coercive as it could possibly be.” The court found that the bank’s threats to foreclose robbed the debtor of the “temporary breathing space” the automatic stay was intended to provide.

Recalling Flip Wilson’s comic defense to bad behavior, “the Devil made me do it,” the court rejected the bank’s blame-shifting efforts. Though Fannie Mae may have required it to offer loan modifications to appropriate borrowers, it did not demand that the bank threaten foreclosure nor did it require the bank to violate the automatic stay. The bank’s attempt to blame the computer met with equal lack of success. Though the system employed by the bank may have led to automatic issuance of the offending letters, the bank was responsible for the system and the consequences of its use.

Turning to damages, the debtor sought $25,000 for emotional distress. While she had no documentary evidence to support the damage award because she did not have health insurance and could not afford medical care, she testified to hiding in her bedroom to avoid the bank’s “inspection” photographs, losing weight, having difficulty eating and sleeping, and experiencing hair loss. The court found the debtor’s testimony compelling and a reasonable response to the continued threat of the loss of her home. Acknowledging that its award was “arbitrary” the court awarded $10,000.

With respect to attorney fees the court found the itemization of expenses and attorney and staff time properly encompassed time spent in the first trial where the relevant testimony about the letters was generated. It found that even though the amount was higher than was typical for stay violations, the reason for the higher amount was the vigor with which the bank fought the case and the time spent addressing its frivolous arguments. The court awarded the entire $24,404.57.

Finally, the debtor sought $100,000 in punitive damages. The court weighed “the nature of the creditor’s conduct; the creditor’s ability to pay damages; the level of sophistication of the creditor; the creditor’s motives; and any provocation by the debtor.” The court found that the bank’s behavior in sending out form letters offering loan modification and threatening foreclosure was reckless and could adversely affect many borrowers. The additional factors of the bank’s sophistication, the uncooperative nature of its dealings with the debtor and the court, the disingenuousness of Ms. Thomas’s testimony, and the bank’s apparent ill will toward the debtor, led the court to award $35,000 in punitive damages.  The total damage award was $69,404.57 and costs.

Ogden Bankr Colo opinion


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  1. By Bankruptcy News Briefs 6/10 | NACBA Now on June 10, 2015 at 5:41 pm

    […] Court Rejects Bank’s “Devil Made Me Do It” Defense […]

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