On July 24, 2025, the National Consumer Bankruptcy Rights Center (NCBRC) and the National Association of Consumer Bankruptcy Attorneys (NACBA) filed an amicus curiae brief in the U.S. Court of Appeals for the Fourth Circuit in Goldman Sachs Bank USA v. Brown, No. 25-1439. The case concerns whether consumer debtors’ claims under 11 U.S.C. § 362(k)—seeking damages for willful violations of the automatic stay—must be resolved through private arbitration, rather than in the bankruptcy courts tasked with enforcing that stay.
[Read more…] about NCBRC and NACBA File Amicus Brief in the Fourth Circuit to Preserve Enforcement of the Automatic Stay in Brown v. Goldman SachsThe Ninth Circuit Considers Whether the Social Security Administration Can Recoup Overpayments Without Violating the Discharge Injunction
In In re Cooper, Case No. 24-1084 (9th Cir. 2024) the Ninth Circuit is determining whether the Ninth Circuit B.A.P. erred when it held that the Social Security Administration (SSA) could recoup an overpayment of Social Security Disability Insurance (SSDI) benefits from Darrin Cooper’s ongoing SSDI payments, without violating the discharge injunction in bankruptcy.
Darrin Cooper was overpaid SSDI benefits due to an administrative error, receiving $73,112.90 more than he was entitled to because the SSA did not account for his concurrent workers’ compensation benefits. After filing for Chapter 7 bankruptcy and receiving a discharge, Cooper discovered the overpayment and the SSA began deducting the overpaid amount from his ongoing SSDI payments.
The B.A.P.’s legal analysis focused on the equitable doctrine of recoupment, which allows a creditor to offset a debtor’s claim with a counterclaim arising from the same transaction. The court applied the “logical relationship test” to determine whether the overpayment and ongoing SSDI payments arose from the same transaction. The court found that both the overpayment and the ongoing payments stemmed from Cooper’s entitlement to SSDI benefits, establishing a strong logical relationship. Therefore, the SSA’s actions did not violate the discharge injunction. The court distinguished this case from others where recoupment was denied, such as in In re Madigan, by emphasizing that Cooper’s SSDI payments did not involve separate disability periods or different reimbursement agreements. Instead, Cooper’s ongoing SSDI entitlement and the overpayment were part of a continuous disability claim, thereby satisfying the same transaction requirement. The court also noted that Cooper did not seek available remedies under the Social Security Act, such as requesting a waiver or appealing the overpayment decision, which could have addressed his financial concerns.
Both NCBRC and NACBA submitted an amicus brief in support of the Debtor.
The Supreme Court Rules Native American Tribes Do Not Have Sovereign Immunity From The Bankruptcy Code.
On June 15, 2023, the court ruled that Native American tribes are subject to the automatic stay and discharge injunction of the Bankruptcy Code.
“We conclude that the Bankruptcy Code unequivocally abrogates the sovereign immunity of any and every government that possesses the power to assert such immunity. Federally recognized tribes undeniably fit that description; therefore, the Code’s abrogation provision plainly applies to them as well.”
In an 8-1 decision (J. Gorsuch dissenting) in Lac DU Flambeau Band of Lake Superior Chippewa Indians v. Coughlin, No. 22-227, 2023 U.S. LEXIS 2544 (June 15, 2023), the court held that the term “governmental unit” found in 11 U.S.C. § 101(27) includes Native American tribes. As such, Native American tribes are included in the waiver of sovereign immunity under 11 U.S.C. § 106.
NACBA and NCBRC submitted an amici curiae brief in support of the Debtor along with Legal Aid Chicago and the Hon. Judith Fitzgerald, Hon. Joan Feeney, Hon. Phillip Shefferly, Hon. Eugene Wedoff, Hon. Steven Rhodes and the Hon. Carol Kenner. The brief was submitted by Daniel J. Bussel of KTBS Law LLP and G. Eric Brunstad, Jr. of Dechert LLP.
Factual and Procedural Background
The creditor, federally recognized Tribe Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) through its wholly owned business entity, Lendgreen, lent the Debtor, Brian Coughlin, $1,100 in the form of a high-interest, short-term loan.
Coughlin filed for Chapter 13 bankruptcy before he fully repaid the loan. Lendgreen continued its efforts to collect on his debt, even after it was reminded of the pending bankruptcy petition.
Coughlin eventually filed a motion in Bankruptcy Court, seeking to have the stay enforced against Lendgreen, its parent corporations, and the Band (collectively, petitioners). Coughlin also sought damages for emotional distress, along with costs and attorney’s fees.
The Band moved to dismiss. They argued that the Bankruptcy Court lacked subject-matter jurisdiction over Coughlin’s enforcement proceeding, as the Band and its subsidiaries enjoyed tribal sovereign immunity from suit. The Bankruptcy Court agreed; it held that the suit had to be dismissed because the Bankruptcy Code did not clearly express Congress’s intent to abrogate tribal sovereign immunity.
In a divided opinion, the Court of Appeals for the First Circuit reversed, concluding that the Bankruptcy Code unequivocally strips tribes of their immunity. In re Coughlin, 33 F. 4th 600, 603-604 (2022). In so holding, the First Circuit deepened a split among the Courts of Appeals on this question. Compare Krystal Energy Co. v. Navajo Nation, 357 F. 3d 1055, 1061 (CA9 2004) (holding that the Bankruptcy Code abrogates tribal sovereign immunity), with In re Greektown Holdings, LLC, 917 F. 3d 451, 460-461 (CA6 2019) (concluding the reverse).
Analysis
“Petitioner Lac du Flambeau Band of Lake Superior Chippewa Indians (the Band) is a federally recognized Indian tribe. One of the Bands businesses, Lendgreen, extended respondent Brian Coughlin a payday loan. Shortly after receiving the loan, Coughlin filed for Chapter 13 bankruptcy, triggering an automatic stay under the Bankruptcy Code against further collection efforts by his creditors. But Lendgreen allegedly continued attempting to collect Coughlin’s debt. Coughlin filed a motion in the Bankruptcy Court to enforce the automatic stay and recover damages. The Bankruptcy Court dismissed the suit on tribal sovereign immunity grounds. The First Circuit reversed, concluding that the Code unequivocally strips tribes of their immunity. 33 F. 4th 600, 603.
“As an initial matter, the definition of governmental unit exudes comprehensiveness from beginning to end. Congress has rattled off a long list of governments that vary in geographic location, size, and nature. 101(27) (including municipalities, districts, Territories, Commonwealths, States, the United States, and foreign states). The provision then proceeds to capture subdivisions and components of every government within that list. Ibid. (accounting for any department, agency, or instrumentality of the United States …, a State, a Commonwealth, a District, a Territory, a municipality, or a foreign state). And it concludes with a broad catchall phrase, sweeping in other foreign or domestic government[s]. Ibid….
“The pairing of foreign with domestic is of a piece with those other common expressions. For instance, if someone asks you to identify car manufacturers, foreign or domestic, your task is to name any manufacturers that come to mind, without particular regard to where exactly the cars are made or the location of the company’s headquarters. Similarly, at the start of each Congress, a cadre of newly elected officials solemnly swear to support and defend the Constitution of the United States against all enemies, foreign and domestic. 5 U. S. C. 3331. That oath which each Member of Congress who enacted the Bankruptcy Code took indisputably pertains to enemies anywhere in the world. Accordingly, we find that, by coupling foreign and domestic together, and placing the pair at the end of an extensive list, Congress unmistakably intended to cover all governments in 101(27)s definition, whatever their location, nature, or type.
“It is also significant that the abrogation of sovereign immunity in 106(a) plainly applies to all governmental unit[s] as defined by 101(27). Congress did not cherry-pick certain governments from 101(27)’s capacious lists and only abrogated immunity with respect toSection those it had so selected. Nor did Congress suggest that, for purposes of 106(a)s abrogation of sovereign immunity, some types of governments should be treated differently than others. Instead, Congress categorically abrogated the sovereign immunity of any governmental unit that might attempt to assert it. …
“Reading the statute to carve out a subset of governments from the definition of governmental unit, as petitioners view of the statute would require, risks upending the policy choices that the Code embodies in this regard. That is, despite the fact that the Code generally subjects all creditors (including governmental units) to certain overarching requirements, under petitioners reading, some government creditors would be immune from key enforcement proceedings while others would face penalties for their noncompliance. And while the Code is finely tuned to accommodate essential governmental functions (like tax administration and regulation) as a general matter, petitioners would have us find that certain governments are excluded from those provisions reach, notwithstanding the fact that they engage in tax and regulatory activities too. There is no indication that Congress meant to categorically exclude certain governments from these provisions enforcement mechanisms and exceptions, let alone in such an anomalous manner. Cf. Law v. Siegel, 571 U. S. 415, 424 (2014) (declining to read into the Code an exception Congress did not include in its meticulous and carefully calibrated scheme). …
“Putting the pieces together, our analysis of the question whether the Code abrogates the sovereign immunity of federally recognized tribes is remarkably straightforward. The Code unequivocally abrogates the sovereign immunity of all governments, categorically. Tribes are indisputably governments. Therefore, 106(a) unmistakably abrogates their sovereign immunity too. …
Conclusion
“We find that the First Circuit correctly concluded that the Bankruptcy Code unambiguously abrogates tribal sovereign immunity. Therefore, the decision below is affirmed.”
The Supreme Court Takes the Issue of Tribal Immunity Under Consideration
UPDATE: The Supreme Court has since ruled on this case. Click here to read our discussion of their ruling.
On April 24, 2023, the Supreme Court heard oral arguments in the case of In re Coughlin, Case No. 22-227. The question presented is whether the Bankruptcy Code expresses unequivocally Congress’s intent to abrogate the sovereign immunity of Indian tribes. This is an appeal from the First Circuit decision in Coughlin v. LAC Du Flambeau Band (In re Coughlin), 33 F.4th 600 (1st Cir. 2022).
The 1st Circuit held that the Bankruptcy Code abrogates tribal sovereign immunity. At issue was the enforcement of the automatic stay on a payday loan from Lendgreen, a subsidiary of the Lac Du Flambeau Band of Lake Superior Chippewa Indians.
“Two of our sister circuits have already considered the question and reached opposite conclusions. Compare Krystal Energy Co. v. Navajo Nation, 357 F.3d 1055, 1061 (9th Cir. 2004) (holding that the Code abrogates immunity), with In re Greektown Holdings, LLC 917 F.3d 451, 460- 61 (6th Cir. 2019) (holding that the Code does not abrogate immunity), cert. dismissed sub-nom. Buchwald Cap. Advisors LLC v. Sault Ste. Marie Tribe, 140 S. Ct. 2638 (2020). Like the Ninth Circuit, we hold that the Bankruptcy Code unequivocally strips tribes of their immunity.”
NACBA and NCBRC submitted an amici curiae brief along with Legal Aid Chicago and the Hon. Judith Fitzgerald, Hon. Joan Feeney, Hon. Phillip Shefferly, Hon. Eugene Wedoff, Hon. Steven Rhodes and the Hon. Carol Kenner. The brief was submitted by Daniel J. Bussel of KTBS Law LLP and G. Eric Brunstad, Jr. of Dechert LLP.
Observers of the oral argument indicate that the court may be skeptical that Native American tribes are exempt from the automatic stay of the Bankruptcy Code. See Justices dubious of creating “extra-special super-super clear statement rule” to exempt tribes from the obligation to respect bankruptcy process – SCOTUSblog.
A decision is expected in late June or early July 2023.
Too Little, Too Late in Motion to Reopen
The bankruptcy court did not abuse its discretion in declining to reopen the debtor’s case sixteen years after its closure to administer an asset the debtor did not own until after his bankruptcy case closed. Gamez v. Lopez (In re Lopez), No. 22-2379 (E.D.N.Y. March 9, 2023).
In the debtor’s Chapter 7 bankruptcy, he did not list any real property on his schedules, nor did he list Mr. Gamez, the appellant in this appeal, as a creditor. In January 2006, the debtor received his discharge and the case was closed with no distribution. In November 2006, Mr. Gamez deeded the real property to himself and Lopez, each with 50% interest. The debtor had been living in this property at the time of his petition. In 2010, the debtor initiated a partition action concerning the property. That case was settled in 2015. Litigation concerning the settlement agreement kept the case before the state court in the following years.
In 2021, Mr. Gamez moved to reopen the debtor’s bankruptcy case to allow him to seek a stay of all state court proceedings and to have the trustee administer the property. The bankruptcy court declined to reopen the case.
Section 350(b) permits a bankruptcy court, at its discretion, to reopen a bankruptcy case “for cause.” Factors the district court found relevant in this appeal included: 1) the length of time the case was closed; 2) whether a state court would be the appropriate forum; 3) the extent of the benefit to the debtor by reopening; 4) whether it was clear at the outset that no relief would be forthcoming to the debtor by granting the motion, and 5) “the availability of relief in another forum [and] whether the estate has been fully administered.”
Applying these factors, the district court found the bankruptcy court did not abuse its discretion in denying Mr. Gamez’s motion. The court noted that the motion came over sixteen years after the case was closed. More significantly, the court pointed out that, contrary to Mr. Gamez’s assertion, there was no evidence that, at the time the debtor filed for bankruptcy, he had any ownership interest in the property. “Since Lopez’s ownership in the property occurred after his Chapter 7 bankruptcy case closed, and there has been ongoing litigation in the state courts concerning the subject property since 2010, the Bankruptcy Court properly determined that the New York state courts were the more appropriate forum.”
Mr. Gamez filed a notice of appeal to the Second Circuit on March 10. Case no. 23-326.
“Equity Abhors a Forfeiture”
Where the debtor had paid over 70% of the purchase price of real property, the court found that equitable principles precluded granting relief from stay to allow the seller to enforce a provision in the sales documents requiring the defaulting debtor to “forfeit not only the property, but all deposits, improvements and payments made.” Allied Ventures, LLC. v. Cruz, No. 22-23864 (Bankr. W.D. Tenn. Feb. 23, 2023).The debtor entered into an agreement with Allied, titled Seller-Financed Industrial Purchase Agreement, to purchase property Allied had bought at a tax sale. As the “Buyer,” the debtor was able to take possession of the property and was obligated to pay $290,000 in accordance with a schedule of payments beginning with a $30,000 initial payment and $6,500 monthly payments once Allied obtain title. Once the purchase price was satisfied, Allied would transfer title to the Buyer. Allied exercised control over the property only to the extent that the agreement required the Buyer to use it for a purpose that was legal and that the Buyer provide insurance as specified by Allied.
The debtor also signed a promissory note as “Buyer/Borrower” obligating him to pay the entire purchase price of $290,000. Both the Purchase Agreement and the Promissory Note provided that, in the event of default, “[i]f the scheduled amount of payment is not made in sixty (60) days after the invoice date, you will forfeit not only the property, but all deposits, improvements and payments made.”
The debtor missed a payment and Allied sought to enforce the default provision. It obtained a state court judgment for possession in June 2022, and for reasons that weren’t explained, accepted a payment from the debtor in July, 2022. The debtor posted an $86,000 bond and appealed the state court judgment.
The debtor filed for chapter 13 bankruptcy in September, 2022. In his 100% plan he proposed to treat the debt to Allied as a secured debt and pay the remaining balance through the plan.
The case came before the court on Allied’s motion for relief from stay to allow it to possess and sell the property with forfeiture by the debtor of all payments and improvements made. In its motion, Allied argued that the debtor’s plan incorrectly treated its claim as secured when in fact it was a lease agreement, and that the debtor had failed to propose a feasible plan.
In response, the debtor argued the Allied’s interest was protected by the $417,400 actual value of the property and the insurance he had obtained. His proposed plan included adequate protection payments of $1,800 per month. With respect to the nature of the agreement, the debtor took the position that if the court found it was not a secured loan but an executory contract, he would assume the lease, pay any arrearage through the plan and maintain monthly payments directly. The debtor further “propose[d] to use the $86,000.00 presently being held by the Shelby County Circuit Court Clerk to satisfy any such post-petition arrearage, and to otherwise be applied to the plan as may be determined by the Court.”
The court began its analysis with the nature of the underlying claim. It observed that the seller delivered possession of the property to the debtor and, with limited exceptions, the debtor undertook full responsibility for it. The promissory note created an absolute obligation on the debtor to pay $290,000, and title would transfer at the end of the payment period. The court found that “[a]lthough there is some ambiguity in the arrangement contemplated by the parties, the Court believes and finds for purposes of the pending Motion for Relief from Stay that the agreement between the parties is best characterized as an installment land sales contract.” It noted that, under Tennessee law, such contracts create a situation like a deed of trust where “the vendee is regarded as the owner, subject to liability for the unpaid price, and the vendor is regarded as holding only the legal title in trust for the vendee from the time a valid contract for the purchase of land is entered into.”
The court went on to determine whether the language of repossession and forfeiture in the agreement and the note justified granting Allied’s motion for relief from stay. For that analysis, the court looked to equitable principles. By the time the case came before the court, the debtor had paid 71-77% of the total purchase price. If Allied had its way, the debtor’s more than $200,000 in payments would be forfeit to Allied’s right to sell to another buyer.
This was unpalatable to the court. “Equity abhors a forfeiture.” The court observed that states often deny a vendor the right to sell against a defaulting buyer “when forfeiture would be unreasonable or inequitable.” The trend is to allow the buyer an opportunity to pay the remaining purchase price or the defaulted payments, in a redemption-type solution.
In light of the fact that the confirmation hearing was coming up, the court found no good reason to “short circuit that process.” It denied Allied’s motion for relief from stay.
Allied has appealed this decision to the Bankruptcy Appellate Panel for the Sixth Circuit, case no. 23-8009.
Tax Sale Survives Multiple Attacks
The bankruptcy court applied the proper standard for determining “reasonably equivalent value” in the tax sale of the debtor’s home where it used a hypothetical foreclosure sale as the comparator rather than the fair market value. The Rooker-Feldman doctrine prevented the bankruptcy court from nullifying the sale despite procedural irregularities. And even where the debtor won, she lost. The court limited her damages based on the tax buyer’s violation of state consumer protection laws to minor pecuniary loss where it found emotional distress damages are unavailable under state law. Marshall v. Abdoun (In re Marshall), No. 22-10 (E.D. Pa. March 20, 2023).
After the debtor and her husband split up, he agreed to pay taxes on their marital home but failed to do so. The property was sold to Yasir Abdoun for $29,000 in a tax sale without the hearing required by state law. The fair market value of the home was $76,400. In March 2015, before the debtor knew her home had been sold, Mr. Abdoun and two police officers showed up at her house where only her minor son was home and demanded that they vacate the property. Thus began nine months of threats, demands, and public humiliation while the debtor tried to recover her home and Mr. Abdoun tried to evict her from it.
In December 2015, the debtor filed for Chapter 13 bankruptcy proposing to pay 100% of secured debt including that held by Mr. Abdoun. Mr. Abdoun filed a claim for $45,552.11 representing the $29,000 purchase price, $2,900 in interest, $11,200 of “rent,” $593 for homeowner’s insurance, $1,059.11 for real estate taxes, and $800 for water.
The debtor filed an adversary complaint against Mr. Abdoun seeking to avoid the transfer of property as constructively fraudulent under section 548(a)(1)(B)(i)-(ii)(I), and to recover the property under section 550(a)(1). In an amended complaint she claimed Mr. Abdoun’s deed for her property was invalid.
She also alleged that Mr. Abdoun violated Pennsylvania’s Fair Credit Extension Uniformity Act (the “FCEUA”), and the Unfair Trade Practices and Consumer Protection Law (the “UTPCPL”). The debtor asked the court to set a redemption amount of $19,000 and categorize the claim as generally unsecured. At trial, the debtor added a claim for violation of the automatic stay. At that time, Mr. Abdoun also reduced his claim to the $29,000 he paid for the property.
The bankruptcy court denied the debtor’s avoidance claim finding that she failed to show that the amount the property sold for was not what she would have received had the property been sold at foreclosure auction. The court found, however, that Mr. Abdoun’s conduct in trying to remove her from the property violated both the UTPCPL and the FCEUA, and that she was entitled to damages under the UTPCPL. The bankruptcy court found that the Rooker-Feldman doctrine precluded it from nullifying Mr. Abdoun’s deed.
As to damages, the court found that the debtor was entitled to recover only her pecuniary loss of $200 plus a $100 statutory enhancement. It set the redemption price at $28,700 representing the amount Mr. Abdoun paid minus the damages to the debtor. The court denied the debtor’s motion for reconsideration and she filed an appeal to the district court.
On appeal, the district court began with the application of the Rooker-Feldman doctrine to the debtor’s claim that the sale was invalid due to failure to follow state hearing procedures. That doctrine bars review of a state judgment by a federal court if “(1) the federal plaintiff lost in state court; (2) the plaintiff complain[s] of injuries caused by [the] state-court judgments; (3) those judgments were rendered before the federal suit was filed; and (4) the plaintiff is inviting the district court to review and reject the state judgments.”
Here, the debtor relied on James v. Draper (In re James), 940 F.2d 46 (3d Cir. 1991), which established a void ab initio exception to the Rooker-Feldman doctrine. The debtor argued that the court entering judgment of the sale to Mr. Abdoun lacked subject-matter jurisdiction because the sale took place without a hearing by state-required procedures, and therefore the void ab initio exception applied.
The district court found, however, that post-James cases, such as Todd v. United States Bank National Association, 685 F. App’x 103 (3d Cir. 2017), questioned that exception to the Rooker-Feldman doctrine, and in fact, concluded that no such exception existed.
The court also declined to adopt the alternative theory offered by the debtor based on dictum from In re Razzi, 533 B.R. 469 (Bankr. E.D. Pa. 2015), to the effect that Rooker-Feldman is inapplicable when the case involves a bankruptcy debtor objecting to a claim, rather than challenging a state court judgment. The judge in Razzi opined that such a circumstance could be “conceptualized” as the debtor taking a defensive posture rather than one like the one arising in Rooker-Feldman where the “state-court losers complain[ed] of injuries caused by state-court judgments rendered before the district court proceedings commenced and invit[ed] district court review and rejection of those judgments.” The court here found that “[i]n the absence of any persuasive caselaw adopting or applying Judge Frank’s posited ‘theory’ concerning the first requisite of the Rooker-Feldman doctrine, this Court declines to adopt and apply it here.”
The court turned next to the debtor’s assertion that the transfer of the deed to Mr. Abdoun was avoidable as constructively fraudulent under section 548(a)(1)(B)(i)(I). The issue turned to whether the property was sold for its reasonably equivalent value. The bankruptcy court relying on BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), compared what Mr. Abdoun bought the property for with what it would likely have brought in a foreclosure sale. The debtor argued that the proper comparison was with the fair market value of the property.
The court was unpersuaded. BFP held that “reasonably equivalent value” in the context of a forced foreclosure sale, is the actual sales price rather than the fair market value of the property, so long as state foreclosure procedures were followed. Where, as here, the state procedures for the sale were not properly followed, the Supreme Court said that such irregularity could result in invalidation of the sale, but that, in that case, the reasonably equivalent value would be what the property would have garnered in a hypothetical foreclosure sale that followed state procedures. Based on this, the court here found that the bankruptcy court applied the correct comparison for section 548(a)(1)(B)(i)(I) purposes. Where the debtor failed to present evidence that a properly held foreclosure sale would have brought in more than Mr. Abdoun paid for the property, the court found no error in the bankruptcy court’s order.
The court next addressed the debtor’s appeal of the bankruptcy court’s finding that she was not entitled to emotional distress damages under the enforcement provision in the UTPCPL. That statute provides that a successful litigant may recover actual damages or $100, whichever is greater. The court has discretion to award up to three times actual damages and “may provide such additional relief as it deems necessary or proper.” Though this language suggests that a court may award damages for emotional distress, courts have uniformly held that no such damages are recoverable under the statute. Therefore, the district court upheld the bankruptcy court’s denial of those damages.
The debtor next argued that even though her complaint did not allege intentional infliction of emotional distress under state common law, the bankruptcy court had the power under Rules 7054 and 7015 to award damages for that cause of action when the facts at trial support it. But Rule 7054 and its counterpart FRCP 54, have been limited by due process principles to theories of recovery that were squarely brought out and litigated at trial. For issues not raised in the pleadings, Rule 7015 and FRCP 15, provide that unpled causes of action must be addressed at trial by implied or express consent of the parties. But consent will not be implied when the evidence going to the unpled cause of action also supports a cause of action that was pled.
Here, the debtor did not raise intentional infliction of emotional distress as a cause of action until after the Bankruptcy court entered judgment against her and the evidence supporting it at trial was the same as that supporting her emotional distress claim under the UTPCPL. Therefore the court had no implied consent and affirmed the bankruptcy court’s denial of those damages under the state common-law theory.
The court thus affirmed the bankruptcy court’s order and opinions.
Punitive Damages for Stay Violation Were Excessive
The punitive damages awarded by the bankruptcy court were unconstitutionally excessive where they were seven times greater than actual damages and the bankruptcy court increased the damages on remand because it found the lender’s success at the BAP level would eliminate a substantial disincentive to engage in the conduct establishing the automatic stay violation. Rushmore Loan Mgmt Serv., LLC v. Moon, No. 22-1126 (D. Nev. Feb. 6, 2023).
When the debtors, Adnette Gunnels-Moon and Willie Moon, filed for chapter 13 bankruptcy, they listed Rushmore as a mortgage creditor on a loan in Adnette Gunnels-Moon’s name only, but gave the wrong address for Rushmore. For that reason, Rushmore was unaware of the bankruptcy and continued to dun the debtors for monthly mortgage payments. At one point when Rushmore called Willie Moon, he told Rushmore that he and Adnette had filed for bankruptcy. The debtors obtained their discharge in 2016. But Rushmore, apparently adhering to an unwritten policy of not accepting bankruptcy notification from a third party, continued its collection activity through the bankruptcy and after discharge.
The debtors reopened their bankruptcy to seek contempt sanctions against Rushmore for violation of the automatic stay and the discharge order. The bankruptcy court found in favor of the debtors on the automatic stay claim and awarded $742.10 representing the costs of reopening the bankruptcy. It also awarded $100,000 in emotional distress damages to Willie, and $200,000 in punitive damages. The court found no discharge injunction violation because it was unclear when Rushmore became aware of the discharge. The court also awarded $56,150 in attorney’s fees, $10,857.94 in costs, and an additional $3,500 in supplemental fees.
The parties filed cross-appeals. The debtors sought to reverse the bankruptcy court’s denial of the discharge injunction claim and its refusal to award certain fees, and Rushmore sought to reverse the damages award to Willie. Rushmore did not challenge the bankruptcy court’s finding that it violated the automatic stay as to Adnette, and did not seek to overturn the $742.10 in damages based on that claim.
The BAP reversed the $100,000 award to Willie, finding Rushmore did not violate the automatic stay as to him, affirmed the finding that punitive damages were warranted but remanded for reconsideration as to the amount, and affirmed the finding that Rushmore did not violate the discharge injunction. The BAP also remanded for reconsideration of the fee awards.
On remand, the bankruptcy court awarded $67,007.94 in fees and costs and $3,500 in supplemental fees. It increased the punitive damage award to $500,000. It awarded an additional $14,827 for Adnette’s defense of Rushmore’s adversary complaint, $70,415.95 to Adnette in appellate fees related to the first fee decision, and $45,235.82 in appellate fees for the contempt decision appeal, for a total appellate fee award of $115,651.77.
The court began its analysis with Rushmore’s challenge to the attorney’s fee awards noting that the goal of section 362(k) is to return debtors to their status as it was before the automatic stay violation. Rushmore argued that the bankruptcy court should have separated out the fees attributable to litigation of the discharge injunction and deducted those fees from the total fee award on the automatic stay claim.
The district court found the bankruptcy court satisfied the BAP’s instructions by explaining that the litigation of the automatic stay violation was inextricably intertwined with the discharge violation litigation and therefore the fees were inseparable.
The district court also found that the failure of Willie’s claims did not require the court to reduce the fees based on litigation of those claims because the evidence supporting them also either supported the automatic stay claims, or were relevant to the egregiousness of Rushmore’s conduct. The court observed that, although a bankruptcy court is required to award fees causally linked to a stay violation, it may approximate. “The essential goal in shifting fees is to do rough justice, not to achieve auditing perfection.”
The court also rejected Rushmore’s contention that the bankruptcy court should have reduced the punitive damage award based on the BAP’s instruction to revisit that award in light of its having reversed the court’s award of damages to Willie. In fact, the BAP merely instructed the bankruptcy to revisit the award. The bankruptcy court complied with that instruction.
Therefore, the court affirmed the award of $70,507.94 in attorney’s fees and supplemental fees to Adnette for prosecution of the original contempt proceedings.
The court next addressed the bankruptcy court’s award of fees to Adnette for litigation surrounding Rushmore’s adversary complaint. The bankruptcy court originally declined to award those fees, but did so after the BAP remanded with instructions to revisit the issue. At that time, the bankruptcy court determined that Rushmore’s complaint sought to dismiss the automatic stay claim. Therefore, the bankruptcy court concluded that Adnette’s defense of Rushmore’s complaint was part of her litigation in support of her automatic stay claim. The district court found no error in this conclusion and affirmed the $14,827 attorney fee award.
Rushmore challenged the bankruptcy court’s award of fees incurred in the appeals of the fee decision, the supplemental fee decision, and the adversary fee decision. Specifically, Rushmore contended that the bankruptcy court should have required Adnette’s attorney to specify the amount of time he spent on the issues Adnette prevailed on, and not award any fees for the time spent on Willie’s failed claim for discharge violation.
The district court found no error in the bankruptcy court’s attorney fee award. It held that the bankruptcy court did not apportion any fees to litigation of Willie’s claims. It also held that there was no clear distinction between the evidence supporting the discharge injunction and the automatic stay claims. The court upheld the award of Adnette’s full fees for defending the fee award on appeal.
As to the appellate fees related to the appeal of the contempt order, Rushmore argued that because the bankruptcy court reduced those fees after remand by 20%, Rushmore prevailed on that appeal and the debtors were not entitled to fee shifting. While the court did not entirely agree, it found that “[t]he bankruptcy court abused its discretion in failing to apportion fees for time spent on Willie’s unsuccessful appeal on the discharge injunction issue.” It found those fees both severable as a practical matter, and not related to the automatic stay violation. The court found that it could reasonably calculate the proper reduction, and it did so, reducing the total fee award based on the contempt order by 80%, to $11,308.96.
Rushmore next argued that the awards in general were disproportionate to the actual damages of $742.10 which Adnette incurred before Rushmore ceased its offending conduct.
The court disagreed. It found that section 362(k)’s deterrent effect is furthered by permitting the debtor to recover attorney’s fees for successfully litigating an automatic stay violation. In this case, Rushmore followed an unwritten and undisclosed policy of ignoring third party information regarding bankruptcy of its borrowers. Because it learned early on that Adnette was in bankruptcy but ignored that information without telling her that the information had to come from her to compel action, it needlessly perpetuated the automatic stay violation. The bankruptcy court took these facts into consideration and did not abuse its discretion in calculating appropriate damages.
Turning to the issue of punitive damages, the court noted that, on remand, the bankruptcy court increased the punitive damage award from $200,000 to $500,000. The bankruptcy court based its decision on the reprehensible nature of Rushmore’s position that it need not act on third party information of bankruptcy and its continued collection efforts. It was also persuaded that greater deterrent was needed because the BAP’s decision against Willie’s claims eliminated his ability to sue on his own behalf for Rushmore’s conduct.
Rushmore countered that the punitive award violated its due process rights by punishing it for prevailing on appeal as to Willie.
In reviewing a punitive damage award on constitutional challenge the court considered: “the degree of the defendant’s reprehensibility or culpability, the relationship between the penalty and the harm to the victim caused by the defendant’s actions, and the sanctions imposed in other cases for comparable misconduct.”
Based on these factors, the court agreed that the punitive damage award was unconstitutionally excessive. It found the award punished Rushmore for its conduct to Willie and others similarly situated rather than for any harm suffered by Adnette. It also found an award greater than a 4:1 ratio of punitive to actual damages requires both particularly egregious conduct, and relatively small actual damages. Here, though Adnette’s award of $742.10 was small, the entire fee award was not.
Having found that the bankruptcy court erred with respect to the punitive damages award, the court found that remanding with instructions to reconsider that award would merely consume more time and money in what was already an outsized case. Therefore it calculated punitive damages. It found that Rushmore’s appeals were not unreasonable and it’s conduct not malicious. There was no evidence that it extended to other borrowers. The court concluded that a 1.5 multiplier satisfied the principles of punishment and deterrence. It reduced the award of punitive damages to $128,002.41.
As the district court anticipated, Rushmore filed an appeal to the Ninth Circuit.
Creditor Must Resume Statements After Discharge
PNC’s TILA obligation to provide regular statements concerning the plaintiffs’ debt resumed after the debtors received their bankruptcy discharge even though the plaintiffs’ bankruptcy case was not closed until almost four years later. Polonowski v. PNC Bank, NA, No. 20-151 (W.D. Mich. Jan. 23, 2023).
The plaintiffs had a home equity line of credit (HELOC) with PNC which was secured by a mortgage on their residence. Pursuant to its obligation under the Truth in Lending Act (TILA), PNC sent the debtors periodic statements concerning the debt. When the debtors filed for chapter 7 bankruptcy, PNC stopped sending the statements. While their bankruptcy was still pending the plaintiffs reaffirmed their debt to PNC. On November 15, 2018, the plaintiffs received their discharge, but their bankruptcy case remained open until July, 2022. PNC failed to resume the periodic statements, informing the plaintiffs’ counsel that it would not send statements so long as the bankruptcy case remained open.
The plaintiffs filed suit against PNC in district court and moved for partial summary judgment on the issue of liability.
PNC argued that its obligation to send periodic statements under TILA conflicted with bankruptcy’s automatic stay, and that TILA releases creditors from their obligation to issue account statements when doing so would violate other federal laws. In PNC’s view, as long as the bankruptcy remained open, the property remained part of the bankruptcy estate under section 362(c)(1), and it could not send statements.
The court agreed that when the plaintiffs filed for chapter 7 bankruptcy, the stay suspended PNC’s obligation to issue statements, but found that, under section 362(c)(2)(C), its obligation resumed when the plaintiffs received their discharge.
To the argument that the property remained part of the bankruptcy estate, the court emphasized the distinction between in rem and in personam proceedings, noting that because the plaintiffs had reaffirmed the debt, their bankruptcy discharge lifted the stay with respect to them. The court stated that sending information about a debt was not an “act against the property of the estate.” It analogized the case with one involving the discharge injunction noting that a creditor seeking to collect post-discharge on a debt the debtor had reaffirmed, would not violate the discharge order.
The court concluded that the plaintiffs’ interpretation of sections 362(c)(1) and 362(c)(2)(C) was consistent with the parameters of the automatic stay and with the historical distinction between in rem and in personam proceedings, and that “Defendant’s interpretation is not consistent with either the statutory language or the historical approach to acts against the person and acts against property.”
The court granted the plaintiffs’ motion for summary judgment on the issue of liability.
Mortgage Statements Not Attempts to Collect a Debt
Where statements sent by the mortgage servicer listed the higher, pre-modification amount due, but specifically stated they were not an attempt to collect a debt and did not include an amount in potential late fees, the bankruptcy court erred in finding the statements were in violation of the automatic stay. Freedom Mortgage Corp. v. Dean, No. 22-1469 (M.D. Fla. Jan. 26, 2023).
The debtors had a mortgage with Roundpoint Mortgage Servicing obligating them to monthly payments of $2,102.32. They filed for chapter 13 bankruptcy after falling behind on the payments. Roundpoint and the debtors agreed on a trial mortgage modification which was approved by the court and which lowered their monthly payments to $1,927.15. Freedom Mortgage Corporation then took over the mortgage from Roundpoint. Freedom began sending the debtors monthly statements listing the amount due according to the pre-modification mortgage terms. With each statement, Freedom included a payment coupon. Despite notifications by the debtors’ counsel that the amount listed was incorrect, Freedom did not lower it to the modified amount until after the bankruptcy court permanently confirmed the modification. The court then ordered Freedom to show cause why it should not be sanctioned for violating the automatic stay.
In response, Freedom argued that it was obligated under the Truth in Lending Act to send out monthly statements and that the statements it sent conformed to the Consumer Financial Protection Bureau’s Form H-30(F) and were therefore moored in a “safe harbor.” The bankruptcy court rejected Freedom’s arguments and found its monthly statements were an attempt to collect a debt in violation of the stay. The court sanctioned Freedom in the amount of $15,060.00 representing the costs associated with the mortgage statements and the sanctions hearing.
Freedom appealed to the district court.
The district court rejected Freedom’s “Chevron defense” where it urged the court to adopt the CFPB’s interpretation of bankruptcy’s automatic stay. The court found that defense applies only to agencies interpreting laws which they are charged with administering. Here, the CFPB is not charged with administering the bankruptcy code. Therefore, Freedom’s use of the Form H-30(F) did not insulate it from the requirements of the automatic stay.
Nonetheless, the court found the statements were not an effort to collect on the debt. Though it found no direct precedent, the court analogized the Eleventh Circuit’s interpretation of what constitutes a collection activity under the FDCPA. In Daniels v. Select Portfolio Servicing, Inc., 34 F. 4th 1260 (11th Cir. 2022), the circuit court first noted that a statement’s compliance with TILA did not necessarily make it in compliance with bankruptcy’s section 362. The court went on to set forth four criteria for determining if a statement is an attempt to collect a debt: 1) if the statement contains language to the effect that it is collecting a debt, 2) if the statement requests payment by a certain date, 3) if there is a late fee listed in the statement terms, and 4) if there is history between the parties suggesting that the statement is intended to collect a debt.
Applying those criteria to the case before it, the court found the statements explicitly indicated that they were not intended to collect a debt. The statements instructed the debtors to make their monthly payments to the trustee if required by the bankruptcy plan. To the extent the inclusion of payment coupons with the statements could suggest an attempt to collect, the court found the language to the contrary in the body of the statement overrode that suggestion.
Though the statements included payment dates, they specifically listed $0 as the late fee throughout the entire bankruptcy proceeding.
As to the fourth element, the court found that because Freedom took over the mortgage after the debtors filed for bankruptcy, there was no history to create expectations. Therefore, the fourth element was neutral.
Based on these findings, the court found the statements were not an attempt to collect a debt in violation of the automatic stay. The court cautioned that had the statements included a late fee, that, in combination with the incorrect amount due, might have led to affirmation of the bankruptcy court’s finding.
The court reversed.