The Ninth Circuit Bankruptcy Panel used an opinion upholding $119,000 in compensatory damages to declare that a lender must change its standard forms for borrowers who have received a discharge, and that it cannot use a boilerplate disclaimer to disguise a willful violation of the discharge injunction.
The BAP also interpreted Ninth Circuit opinions to mean that a bankruptcy court can award punitive damages so long as they are “relatively mild.”
The debtors owned a home that they scheduled for surrender to the lender. They moved out, the debtors received their discharges, and the lender later obtained an order modifying the automatic stay.
After the debtors received their discharges, the mortgage lender began calling and writing for the next two years, until the lender finally began foreclosure proceedings.
After two years of dunning letters and calls, the debtors reopened their case and filed a motion to hold the lender in contempt of the discharge injunction, employing Ninth Circuit law, which holds that someone who commits a knowing violation of the discharge injunction under Section 524(a)(2) can be held in contempt under Section 105(a).
At a hearing with witnesses, the lender conceded it was aware of the discharge. The remaining issues at trial were the lender’s intent and damages.
Among other defenses, the lender contended it had no liability because some of the correspondence was required by state and federal regulations. Other correspondence included a disclaimer, which said that the lender was making no effort to collect if the debtor was in bankruptcy or had received a discharge.
One of the debtors testified that the lender called two or three times a day for a year after discharge and that she answered the call about 20 times. Based on documents and testimony, the bankruptcy judge found that the lender made 100 calls and sent 19 letters. The judge granted $119,000 in compensatory damages ($1,000 for each call and letter) for emotional distress based on the debtors’ testimony, among other things, that the lender’s attempts to collect caused physical ailments and almost broke up their marriage.
The bankruptcy court did not impose punitive damages. The judge said he “probably” would have imposed punitive damages but did not believe he had the authority under Ninth Circuit law.
The lender appealed to the BAP, and the debtors cross appealed the denial of punitive damages.
In a Dec. 22 opinion for the BAP, Bankruptcy Judge Robert J. Faris upheld the $119,000 damage award but reversed and remanded, with instructions allowing the bankruptcy judge to enter final judgment for “relatively mild noncompensatory fines,” issue proposed findings for the district court on punitive damages, or refer the contempt issue to the district court.
Judge Faris held that the calls and letters were knowing and willful violations of the discharge injunction, despite the lenders’ defenses. He recognized a tension between discharge and the lender’s obligation to give the debtors notices of foreclosure.
To resolve the tension, Judge Faris said that the lender may communicate but “only to the extent necessary to preserve or enforce its lien rights, and may not attempt to induce the debtor to pay the debt.” In that regard, he upheld the bankruptcy court’s findings that the communications “went far beyond what was necessary” to protect lien rights and were “meant to induce” the debtors to make payments after discharge.
Even if some of the notices did not violate the discharge injunction, Judge Faris agreed that the bankruptcy court “correctly noted that the cumulative effect of all of the letters demanding money created the perception that [the debtors] needed to pay” the lender.
With regard to the disclaimer, Judge Faris saw no reason for the lender to obscure the fact, which it knew, that the debtors had received a discharge. He said the lender gave no reason why it sent “generic” notices when it knew the debtors were discharged. He said the lender “could and should prepare notices that are consistent with the known legal status of borrowers.”
The failure to use proper notices, he said, reflected either incompetence, which he doubted, or “a deliberate effort to induce confused borrowers to pay discharged debts.”
On the debtors’ cross appeal, Judge Faris said that some bankruptcy judges have interpreted Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178 (9th Cir. 2003), to mean that bankruptcy courts may only impose “relatively mild noncompensatory fines.”
Other bankruptcy courts have found power to impose punitive damages that are “relatively mild.”
However, they are characterized, Judge Faris said the Ninth Circuit allows awards that are “relatively mild.”
Without saying how the bankruptcy judge should rule, Judge Faris remanded with instructions to consider imposing a fine or punitive damages that are “relatively mild.” Alternatively, the bankruptcy court could make proposed findings and recommend that the district court enter judgment for punitive damages or refer the matter to the district court to consider criminal contempt.