Bankruptcy Court Lacked Power to Order $375,000 in Punitive Damages

Posted by NCBRC - January 9, 2018

A bankruptcy court lacks inherent or statutory power to award $375,000 in punitive damages based on the creditor’s violation of Rule 3002.1(c) and disregard of a court order. PHH Mortgage Corporation v. Beaulieu, Nos. 16-256, 16-257, 16-258 (D. Vt. Dec. 18, 2017).

The debtors in three chapter 13 cases had confirmed plans under which they were able to remain in their homes post-petition and pay their mortgages through the trustee. Two sets of debtors, the Gravels and the Beaulieus, successfully completed their payments and the court issued an order stating that they were current on their mortgages and charges through the completion of their plans. PHH sent all three sets of debtors a monthly statement for fees based on property inspection, late charges, and insufficient funds, all of which were were incurred more than 180 days prior to the statement in violation of Rule 3002.1(c). The trustee moved for sanctions in all three cases for violation of Rule 3002.1(c) and, in the Beaulieus’ and the Gravels’ cases, for violation of the Bankruptcy Court’s Order at the close of their cases.

The bankruptcy court imposed sanctions of $25,000 for the Rule 3002.1 violation in each case. It further found, in the case of the Gravels and Beaulieus, that PHH had violated the Debtors Current Orders, and, citing its powers under section 105(a), imposed sanctions in the amount of $100,000 for the Beaulieus and $200,000 for the Gravels. The court ordered the total sanction of $375,000 be paid to Legal Services Law Line of Vermont. On appeal PHH argued that the bankruptcy had no authority to award sanctions, and, if it did, that the sanctions were excessive.

The district court began with Rule 3002.1(c) to determine whether it empowered the bankruptcy court to order the $75,000 in sanctions. Paragraph (i)(2) of the Rule provides that a court finding a violation may order “other appropriate relief, including reasonable expenses.” The court premised its analysis of the scope of the Rule on the principle that “[t]he authority conferred by Rule 3002.1(i) cannot exceed the scope of the substantive powers of the Bankruptcy Court.” It found that the bankruptcy court did not have the power to order the sanctions against PHH for violation of the rule.

Explaining its decision, the court addressed a bankruptcy court’s substantive powers. TUnder section 105(a), a bankruptcy court has broad power to enforce its orders including adjudicating civil contempt cases and awarding compensatory damages. Punitive damage awards and criminal contempt proceedings, however, are not so clearly within the bankruptcy court’s powers. In addressing that question, the court took a stroll through the history of the bankruptcy court’s contempt powers noting a trend since 1983 toward limitations on that power. The court was ultimately persuaded by the Ninth Circuit decision in In re Dyer, 322 F.3d 1178, 1193 n.15 (9th Cir. 2003), to the effect that neither the court’s inherent authority nor its power under section 105(a) were extensive enough to enable an order of “serious” punitive sanctions in light of the less strenuous due process protections available in bankruptcy. The court was further convinced by the Fifth Circuit’s finding in In re Hipp, Inc., 895 F.2d 1503 (5th Cir. 1990), that bankruptcy courts lack authority to conduct criminal contempt proceedings due to the absence of judicial independence caused by the tenure and compensation structure of bankruptcy judgeships.

The court noted that the First Circuit, in In re Charbono, 790 F.3d 80, 85 (1st Cir. 2015), expressed the view that punitive damages are within a bankruptcy court’s inherent powers but disagreed with that court’s conclusion as having been based on too broad a reading of Supreme Court dicta. “The First Circuit also gave little weight to the crucial institutional differences between Article III courts and the Bankruptcy Court, which, in this court’s view, are important to the resolution of this question.”

The district court concluded “that the statutory and inherent powers of the Bankruptcy Court are not sufficient to support the Bankruptcy Court’s imposition upon PHH of $300,000 in punitive sanctions.”

Like the recent case, Ocwen Loan Servicing v. Marino, Nos. 16-1229, 16-1238 (B.A.P. 9th Cir. Dec. 22, 2017) (which held that bankruptcy courts could impose non-substantial punitive damages) (blogged here), the court noted that the bankruptcy court was not without recourse. The district court, unrestrained by the limitations imposed on non-Article III bankruptcy judges, has the power to conduct criminal contempt proceedings based on conduct before the bankruptcy court.

Beaulieu D Vt opinion Dec 2017




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