A relatively puny case from south Texas involving a false notice under Bankruptcy Rule 3002.1 is making important law on the rule and the federal Fair Debt Collection Practices Act, or FDCPA, 15 U.S.C. § 1692-1692p.
In his 41-page opinion on January 31, Bankruptcy Judge Eduardo V. Rodriguez of McAllen, Texas, awarded $1,000 in statutory damages and $9,000 in punitive damages. However, attorneys’ fees he is yet to assess may dwarf the judgment for damages.
The case revolved around Rule 3002.1, which requires a lender to file a notice specifying changes in payments under a plan that a chapter 13 debtor is required to make on a secured loan. As Judge Rodriguez said, the rule is designed to prevent “unexpected deficiencies in a home mortgage when a case is completed and closed.” Although the “rule allows a court to take appropriate action when a creditor fails to notify a debtor,” he went on to say that it “is silent regarding incorrect information.”
The Mistake About Real Estate Taxes
The litigation, ongoing since late 2013, involves mistakes by the debtors, the chapter 13 trustee and the mortgage servicer about the payment of real estate taxes.
The debtors filed a chapter 13 plan to cure some $14,500 in arrears and continue payments on their $95,500 home mortgage. The debtors forgot to schedule real estate taxes that were assessed before filing but became due for payment after filing. Their plan also failed to list the payment of real estate taxes.
Nonetheless, the bankruptcy court confirmed the plan, and more significantly, the trustee paid the real estate taxes. Evidently because the plan did not list real estate taxes to be paid by the trustee, the mortgage servicer at the time paid two years of taxes.
The taxing authority apparently discovered the double payment and sent the original servicer a refund for the taxes it had paid. Nonetheless, the servicer filed a Rule 3002.1 notice six weeks later claiming that it had paid about $4,500 in taxes.
Ten days after filing the Rule 3002.1 notice, the holder of the mortgage loan sold or transferred the loan to another bank, which retained a different servicer.
The new servicer never withdrew or attempted to withdraw the erroneous notice, even though the record indicates that the new servicer was aware of the mistake.
The erroneous notice prompted the trustee to file a motion to dismiss the chapter 13 case. To avoid dismissal, the debtors amended their plan to pay the taxes. The bankruptcy court confirmed the amended plan.
Just before confirming the amended plan, the debtors filed the instant adversary proceeding in December 2013, alleging that the Rule 3002.1 notice was erroneous. The prior holder of the mortgage and its servicer settled. The debtors continued the suit against the bank and the servicer that acquired the loan just after the filing of the erroneous notice.
The debtors amended the complaint in early 2015 and received their discharges in 2016. Years of litigation preceded trial in bankruptcy court in the third quarter of 2019. Judge Rodriguez handed down his decision on January 31, doling out modest damages but signaling the possibility of assessing substantial attorneys’ fees. Significantly, the judge upheld only a few of the debtors’ many claims for relief.
Abuse of Process
Judge Rodriguez first dealt with the debtors’ claim for abuse of process under Section 105(a), the bankruptcy version of the All Writs Act that authorizes the court to “issue any order” necessary to “carry out the provisions” of the Bankruptcy Code. Sanctions, he said, may include attorneys’ fees on a finding of bad faith.
Once the debtors had objected to the Rule 3002.1 notice, the servicer could not withdraw it unilaterally. Nonetheless, Judge Rodriguez said the servicer had “other options,” such as Bankruptcy Rule 3006.
The failure by the servicer and the bank to “verify the status of the taxes” and to withdraw or amend the notice “caused complications within Plaintiffs’ bankruptcy case that cannot be overlooked,” Judge Rodriguez said. Although mistakes by the debtors and the trustee “contributed to the confusion,” he said that the servicer and lender “cannot disclaim their responsibility to ensure the accuracy of all filings inherited by them.”
Judge Rodriguez decided that action and inaction by the servicer and the bank “undermined the integrity of the bankruptcy system, disrupted the bankruptcy process, and were a deliberate abuse of the judicial process.” On the claim for abuse of process, he therefore awarded the debtors “reasonable and necessary” attorneys’ fees in an amount to be determined.
Under Rule 3002.1, Judge Rodriguez also sustained the debtors’ objection to the claim for taxes.
The FDCPA
Judge Rodriguez made several rulings under the FDCPA.
He had no difficulty concluding that the servicer was a debt collector. Although some courts have held that filing a claim is not a “collection activity” within the ambit of the FDCPA, he decided that it was.
Citing Midland Funding, LLC v. Johnson, 137 S. Ct. 1407 (2017), the defendants argued that filing a claim in bankruptcy was not a false or deceptive collection practice proscribed by the FDCPA. Midland Funding held there was no FDCPA claim for filing a proof of claim based on a debt whose prosecution would be barred by the statute of limitations.
With no other guidance from the Supreme Court or the Fifth Circuit, Judge Rodriguez parsed the law from other circuits on other elements of an FDCPA claim. He concluded, among other things, that the erroneous notice was a false representation, was an action that the servicer could not take legally, and was an unfair or unconscionable means to collect a debt.
The defendants contended they had no liability because the FDCPA insulates a debt collector from liability for an unintentional violation or bona fide error.
Even assuming the filing of the notice was bona fide error, Judge Rodriguez declined to invoke the defense because he said the servicer failed to show it “had procedures in place designed to avoid such error.”
For failing to amend or withdraw the notice, Judge Rodriguez decided that the defendants violated the FDCPA and will be entitled to an award of attorneys’ fees under FDCPA §§ 1692f and f(1). He also ruled that the debtors were entitled to $1,000 in statutory damages under FDCPA § 1692k.
Punitive Damages
Having already found that the defendants “deliberately abused the bankruptcy process,” Judge Rodriguez assessed $9,000 in punitive damages, plus attorneys’ fees to be determined, on the claim for abuse of process under Section 105(a). For failure of proof, he refused to award any actual damages.
Claims the Debtors Didn’t Win
The debtors sought damages and attorneys’ fees under Rule 3002.1(i). The rule allows the court to award “appropriate relief,” including reasonable expenses and attorneys’ fees, if the creditor fails to provide the information required by the rule.
Judge Rodriguez denied the claim under Rule 3002.1, because it “provides relief in situations involving a lack of notice, rather than incorrect notice.”
Judge Rodriguez found that the bank holding the mortgage had breached the contract, but he denied the claim because the debtors failed to prove “actual damages.” He also declined to impose sanctions under the court’s inherent powers because he had ruled in favor of the debtors for abuse of process.
Similarly, the judge denied claims for injunctive and declaratory relief because he had already granted relief at law.
Finally, Judge Rodriguez declined to impose actual damages under the FDCPA because the plaintiff had not established there were any.
A relatively puny case from south Texas involving a false notice under Bankruptcy Rule 3002.1 is making important law on the rule and the federal Fair Debt Collection Practices Act, or FDCPA, 15 U.S.C. § 1692-1692p.
In his 41-page opinion on January 31, Bankruptcy Judge Eduardo V. Rodriguez of McAllen, Texas, awarded $1,000 in statutory damages and $9,000 in punitive damages. However, attorneys’ fees he is yet to assess may dwarf the judgment for damages.
The case revolved around Rule 3002.1, which requires a lender to file a notice specifying changes in payments under a plan that a chapter 13 debtor is required to make on a secured loan. As Judge Rodriguez said, the rule is designed to prevent “unexpected deficiencies in a home mortgage when a case is completed and closed.” Although the “rule allows a court to take appropriate action when a creditor fails to notify a debtor,” he went on to say that it “is silent regarding incorrect information.”
The Mistake About Real Estate Taxes
The litigation, ongoing since late 2013, involves mistakes by the debtors, the chapter 13 trustee and the mortgage servicer about the payment of real estate taxes.
The debtors filed a chapter 13 plan to cure some $14,500 in arrears and continue payments on their $95,500 home mortgage. The debtors forgot to schedule real estate taxes that were assessed before filing but became due for payment after filing. Their plan also failed to list the payment of real estate taxes.
Nonetheless, the bankruptcy court confirmed the plan, and more significantly, the trustee paid the real estate taxes. Evidently because the plan did not list real estate taxes to be paid by the trustee, the mortgage servicer at the time paid two years of taxes.