National Consumer Bankruptcy Rights Center

Protecting The Rights Of Consumer Debtors In Bankruptcy

§ 524 – Effect of discharge

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4th Circuit Considers Whether the FDCPA Protects Discharged Debtors From Improper Collection

The 4th Circuit Court is considering an appeal from the District Court for the Northern District of West Virginia which dismissed the Debtor’s FDCPA complaint due to lack of standing since his debt was discharged in a prior chapter 7 bankruptcy.

Facts

John Koontz entered into a mortgage loan with CitiFinancial, which was later serviced by SN Servicing Corporation (SNSC) and then by Land Home Financial Services (LHFS). After Koontz received a Chapter 7 bankruptcy discharge in 2017, he continued to make voluntary payments on the loan. He alleged that SNSC and LHFS charged excessive late fees and failed to respond to his requests for information.

Analysis

The district court analyzed whether Koontz had standing to pursue claims under the FDCPA and WVCCPA, given his bankruptcy discharge. Under the FDCPA, the court determined that Koontz was not obligated or allegedly obligated to pay the debt because the bankruptcy discharge extinguished his personal liability. The court referenced the Fourth Circuit’s decision in Lovegrove v. Ocwen Home Loans Servicing, LLC, where post-discharge mortgage statements containing disclaimers were not considered attempts to collect a debt. The court concluded that SNSC’s and LHFS’s communications, which included similar disclaimers, were not attempts to collect a debt under the FDCPA.

For the WVCCPA claims, the court held that Koontz was not a “consumer” as defined by the statute because his personal obligation to pay the mortgage debt was discharged in bankruptcy. The court referenced its previous decision in Fabian v. Home Loan Center, Inc., which held that a discharged debtor is not a “consumer” under the WVCCPA and therefore lacks standing to bring claims under the Act. The court rejected Koontz’s reliance on other federal court cases, noting that many involved phone calls rather than written correspondence and did not alter the applicability of Fabian.

The court dismissed Koontz’s claims, reaffirming that a bankruptcy discharge eliminates personal liability for the debt, thereby negating standing under the FDCPA and WVCCPA. The court emphasized the importance of clear and unequivocal disclaimers in post-discharge communications to avoid violating debt collection laws.

NCBRC along with the National Association of Consumer Bankruptcy Attorneys and the National Consumer Law Center filed a brief in support of the Debtor.

Amici Brief in Support of Appellant – Koontz vs SN Servicing

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Debtor Misled Lender as to Discharge of Debt

The debtor’s conduct gave the lender reason to believe that the debt owed to him was not discharged, so the bankruptcy court did not err in finding that the lender’s continued collection efforts lacked the requisite scienter to support a contempt sanction for violation of the discharge injunction. Bernhard v. Kull (In re Bernhard), No. 22-854 (E.D. Pa. Feb. 3, 2023).

When his business began to suffer financially, the debtor borrowed $60,000 from a childhood friend. He made sporadic efforts to pay the debt, but at one point he told the lender he might have to file for bankruptcy. He assured the lender that if he did file, he would not include the debt in his bankruptcy. When the debtor finally did file for Chapter 7 bankruptcy, he did not list the debt in his schedules, inform the trustee or the court of the debt, or inform the lender of the bankruptcy. The lender therefore didn’t learn of the bankruptcy until the debtor received his discharge. Over a year after discharge, the debtor executed a new promissory note to the lender and made more payments on the debt.

At some point, however, the lender grew impatient with the slow progress on repayment and filed suit in state court. The debtor returned to the bankruptcy court and filed an adversary proceeding against the lender and his attorneys seeking a finding of contempt for violation of the discharge injunction. The bankruptcy court found that the debt had been discharged and that the defendants violated the discharge injunction. But the court declined to hold the defendants in contempt finding that they lacked the requisite scienter.

The only issues raised in the debtor’s appeal to the district court related to the bankruptcy court’s findings that 1) the lenders had no notice of the bankruptcy case until it was too late to seek a finding that the debt was nondischargeable, 2) that the defendants lacked the requisite scienter to justify a contempt order, and 3) that the debtor was not entitled to any relief other than a declaration that the debt was discharged.

The court set out the requirements for establishing contempt for a discharge violation: “(1) a discharge order has been entered (discharging the applicable debt); (2) the creditor had notice of the discharge order; (3) collection efforts continued regardless; and (4) there is no objectively reasonable basis for concluding that the creditor’s conduct might be lawful under the discharge order.”

Here the court took into consideration the long-term friendship between the parties, the debtor’s efforts to repay the loan including executing a post-discharge promissory note and making payments, and the debtor’s failure to tell the lender that he had filed for bankruptcy. The court found no error in the bankruptcy court’s finding that the defendants were unaware of the debtor’s bankruptcy filing until it was too late to file objections. In addition, the court found that the debtor indicated through word and action that he intended to repay the debt even after he received his discharge. All of these things gave the lender a reasonable basis to believe that the debt was not discharged and that he was within his rights to pursue repayment.

The court thus concluded that the bankruptcy court did not commit clear error in finding no basis for a contempt order against the defendants, nor did it err in finding that the only relief to which the debtor was entitled was an order declaring the $60,000 debt discharged.

The debtor has filed an appeal to the Third Circuit, case no. 23-1358.

Bernhard ED Pa Feb 2023

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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.

Gunnels-Moon D Nev Feb 2023

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Debt Collector Can’t Blame Debtor or FDCPA for Discharge Violation

A debt collector’s efforts to collect an unsecured judgment that had been discharged in bankruptcy violated the discharge injunction even though the debtor requested information about the debt. The statement sent to the debtor was explicitly designated an “attempt to collect a debt,” and the debt collector had sufficient information to alert it to the debtor’s bankruptcy discharge. Skaggs v. Gooch (In re Skaggs), No. 17-50941 (Bankr. W.D. Va. Jan. 19, 2023).

In 1988, Virginia Cellular One, Inc., obtained a judgment against the debtor on a contract liability. The debtor owned no real estate so the judgment was unsecured. The debtor filed for bankruptcy in 2017. In 2019, he received his discharge, including Virginia Cellular’s judgment. Months later, he inherited real property. When he attempted to sell the property, the title agency erroneously told him that he would have to pay the judgment. The debtor contacted the debt collection agency handling the debt, the defendants in this case, and they provided him with a payoff statement and a discounted payoff amount. The payoff statement stated that it was “an attempt to collect a debt.” The debtor then emailed the defendants informing them that the debt had been discharged in bankruptcy. There was continued correspondence between the debtor and the defendants concerning repayment of the debt until the debtor’s bankruptcy attorney stepped in and informed the title agency that the debt had been discharged. The sale of the property was then completed, and the defendants’ collection efforts stopped.

The bankruptcy court found that the defendants’ collection efforts violated the discharge injunction and held a separate hearing to determine the appropriate damages. The debtor sought $25,000 in attorney’s fees and an additional $2,000 in various other costs.

The court noted at the outset that the defendants’ conduct did not warrant punitive damages because they ceased collection efforts and there was therefore no need to coerce compliance with the discharge order. Turning to the question of remedial damages, the court took into consideration whether the defendants had acted in good faith, finding that a court may consider good faith when determining the amount of compensatory damages.

The court was unconvinced by the defendant’s contention that its conduct was compelled by the FDCPA. The court found the statement here was more than “information about the debt” but was an unequivocal effort to collect the debt. Furthermore, the defendants’ effort to pass the blame to the debtor for failing to provide additional information about his bankruptcy was unavailing because the debtor had alerted the defendants to his bankruptcy and the further information they sought was a matter of public record.

The court concluded that the defendants had not demonstrated good faith such that they were worthy of a reduction in the damages award.

The defendants next asked the court to limit the award to $910.00, the loss the debtor incurred before the sale of the property when the defendants ceased their collection efforts. The court declined. “In effect, the defendants argue that it is reasonable for a bankruptcy debtor to incur greater costs and expenses to obtain reimbursement than the actual reimbursement, in effect rendering an award of compensatory damages meaningless.” The court found the amount of the attorney’s fees was reasonable and ordered the defendants to pay $25,000.00.

Turning to the debtor’s request for an additional $2,000 for damages related to time away from work, transportation expenses to attend hearings and depositions, and emotional distress, the court declined to award those damages, finding the debtor had not provided sufficient evidence to support them. Concerning emotional distress, the court added that the Fourth Circuit does not permit such damages in civil contempt cases.

Skaggs Bankr WD Va Jan 2023