In the first reported decision of its kind under Bankruptcy Rule 3002.1, Bankruptcy Judge Colleen A. Brown, Vermont’s chief bankruptcy judge, imposed $375,000 in sanctions on a mortgage servicer for billing debtors for fees without first filing the required notices under Rule 3002.1(c).
Judge Brown directed that the sanctions be paid to Vermont’s largest pro bono provider of legal services in bankruptcy cases.
Bankruptcy Rule 3002.1 was added in 2011 to avoid situations where chapter 13 debtors would be faced with foreclosure after receiving a discharge on account of undisclosed post-petition charges from mortgage lenders. Rule 3002.1(c) requires mortgage lenders to file notices of post-petition fees and charges within 180 days of when the charges were incurred.
For failure to file a notice, Rule 3002.1(i) allows the bankruptcy court to disallow the charges and “award other appropriate relief, including reasonable expenses and attorneys’ fees caused by the failure.”
Judge Brown’s Sept. 12 opinion involved three debtors handled by the same chapter 13 trustee and a company advertising itself as one of the country’s 10 largest mortgage originators and servicers.
The servicer had been in trouble before for violating Rule 3002.1. Judge Brown said that the servicer had been “chastised” by a bankruptcy judge in North Carolina for violating the rule. In one of the three cases in her court, the servicer previously agreed to pay a $9,000 sanction for sending erroneous mortgage statements for three years.
In two of the three cases, the court had entered an order declaring that the debtors were current on all pre- and post-filing payments, fees and charges. Within a month after the so-called Debtors Current Orders, the servicer began billing the debtors for about $250 in fees allegedly incurred during the periods encompassed by the orders. In those two cases, the servicer did not file the notices required by Rule 3002.1(c).
In the third case, there was no Debtors Current Order, but the servicer billed for expenses without filing the Rule 3002.1(c) notice.
For violating the rule, Judge Brown imposed a total of $75,000 in sanctions under Rule 3002.1(i), representing $1,000 for each of the 25 months in which the servicer billed the three debtors without filing a notice.
In one of the cases where there was a Debtors Current Order, Judge Brown then imposed $100,000 in sanctions under Section 105. In the case with a Debtors Current Order where the lender had previously paid a $9,000 sanction for improper billing, she assessed a $200,000 sanction.
Judge Brown imposed the Section 105 sanctions because the record “categorically demonstrates” that the $9,000 sanction two years earlier had failed to achieve its intended remedial effect of deterring the servicer from sending out “inaccurate account statements.” Since she had given the servicer “an opportunity to bring its practices in line with the mandates of Rule 3002.1,” Judge Brown felt that “the time has come for ‘the imposition of severe sanctions.’”
Judge Brown conceded that the sanctions were not in the nature of coercive civil contempt sanctions because the servicer already had waived the post-filing fees. Citing the First Circuit, she based her action on the court’s “inherent authority” under Section 105 to impose punitive, non-contempt sanctions even when there had been belated compliance.