In re Connor

Decision Date02 April 2007
Docket NumberBankruptcy No. 06-00685.,Adversary No. 06-90076.
Citation366 B.R. 133
PartiesIn re Joseph A. CONNOR III, Debtor. Joseph A. Connor III, Plaintiff, v. Countrywide Bank NA, et al., Defendants.
CourtU.S. Bankruptcy Court — District of Hawaii

Joseph Augustine Connor, III, pro se.

Thomas J. Wong, Devens Nakano Saito Lee Wong & Ching, Honolulu, HI, for Defendants.

MEMORANDUM OF DECISION ON MOTION TO RECONSIDER

ROBERT J. FARIS, Bankruptcy Judge.

The question is whether and to what extent the automatic stay prohibits a secured creditor from communicating with a debtor about a delinquent debt secured by a mortgage. The answer, in my view, is not simple: it all depends on the context.

STATEMENT OF FACTS
Mr. Connor's Bankruptcy Case

Joseph A. Connor III owns a home that is subject to a mortgage held by Countrywide Home Loans, Inc. ("Countrywide").

On September 22, 2006, Mr. Connor filed a petition for relief under chapter 13 of the Bankruptcy Code. This invoked the automatic stay of 11 U.S.C. § 362. Mr. Connor is not represented by counsel.

Mr. Connor's chapter 13 plan provided for the sale of the home within 12 months after the bankruptcy filing, for reduced monthly payments pending the sale, and for payment of any arrears out of the sale proceeds. Mr. Connor acknowledged that these provisions could be confirmed only if Countrywide accepted the plan. See docket number 15 in Case No. 06-00685. Countrywide, the State of Hawaii Department of Taxation, and the standing chapter 13 trustee all objected to the plant Mr. Connor voluntarily converted his case to chapter 7 on December 1, 2006.

On December 14, 2006, Mr. Connor filed a Chapter 7 Individual Debtor's Statement of Intention. He listed his home as "secured property" and Countrywide as the secured creditor, and indicated his intention to surrender the property.

On January 11, 2007, the chapter 7 trustee reported that "there are no assets to administer for the benefit of creditors of this estate." On March 14, 2007, Mr. Connor received his discharge.

Countrywide's Post-Bankruptcy Communications with Mr. Connor

Mr. Connor received a letter, dated December 5, 2006, from a law firm representing Countrywide. This letter was dated after Mr. Connor converted his case from chapter 13 to chapter 7 but before he filed his statement of intention. The letter makes it clear that Countrywide knew that Mr. Connor was in bankruptcy, because the letter refers to the number of Mr. Connor's bankruptcy case. The letter says:

Dear Mr. Connor:

My office has been retained by [Countrywide] to protect their [sic] interest in the above referenced matter with respect to [Mr. Connor's home].

Our records indicate that you are in default for $1,707.16, representing the September 1, 2006, through. December 1, 2006 payments on the loan held by Countrywide.

We are writing this letter in an attempt to avoid the cost of unneeded litigation. Please tender the delinquent amount to [Countrywide]....

In addition, Mr. Connor received monthly statements from Countrywide. The first statement is dated September 28, 2006, while Mr. Connor was still in chapter 13. Countrywide continued to send such statements up to the present. The statements bear the heading "FOR INFORMATION PURPOSES." Each statement includes the principal balance of the loan, the amount of the monthly payment due instructions on how to make a payment, a perforated, detachable payment coupon, and a return envelope. Each statement also includes the following:

IMPORTANT NOTICE

If you do not want us to' send your monthly statements in the future, please contact us at 1-800-* * *_* * * *.

This statement is being furnished for informational purposes only and should not be construed as an attempt to collect against you personally. While your obligation to Countrywide may not [sic?] be discharged, by operation of law, Countrywide has retained the ability to enforce its rights against the property securing this loan should there be a default.

If you are presently involved in a Chapter 13 proceeding, please be advised that you are required to obey all orders of the Court, including those confirming or modifying the terms of your repayment plan. You may disregard the payment information/coupon below to the extent it conflicts with any order or requirement of the Court. Your loan documents provide that if we do not receive your current home loan payment by * */* */* * *, your loan may be assessed a late charge of $* *.* *.

Mr. Connor's Adversary Proceeding against Countrywide

On December 18, 2006, Mr. Connor filed the complaint that commenced this adversary proceeding. The defendants are Countrywide, Countrywide Bank, N.A., Treasury Bank N.A., the law firm that sent the December 5, 2006, letter, and the person who signed the letter. The complaint alleges that the December 5, 2006 letter "is a clear violation" of 11 U.S.C. § 362(a)(6). With regard to the monthly statements, the complaint alleges that:

Plaintiff concedes that the six notices sent to him by Countrywide Bank are not clear and unmistakable violations of 11 USC 362(a)(6), but they do have that odor about them. They are attached here as supporting evidence for plaintiffs claim, and as examples of how close to the line Countrywide is willing to walk. Plaintiff reserves the right to include them as additional violations of 11 USC 362(a)(6) in future amended filings.

The complaint further alleges that, "as a direct and proximate result of the aforesaid acts of the defendants," Mr. Connor had suffered damages in the form of mental anguish and time spent litigating with Countrywide. The complaint prays for injunctive relief "to halt defendants['] collection acts" and monetary relief.

The defendants filed a motion to dismiss the complaint, arguing that it failed to state a claim upon which relief could be granted.1 I granted the motion in part. I ruled that the complaint did state a claim insofar as the December 5, 2006, letter was concerned, but that the monthly statements did not constitute automatic stay violations. Mr. Connor has now moved for reconsideration.

DISCUSSION

Mr. Connor argues that my ruling on the monthly statements was premature. He contends that he did not intend to assert claims based on those notices in his original complaint and that it was error to decide claims that he had not yet asserted.

Mr. Connor's complaint addresses the monthly statements in an equivocal way. It alleges that the notices "are not clear and unmistakable violations" of the stay, which is different from saying that they are not violations of the stay. The complaint alleges that "the aforesaid acts," apparently including the transmission of the monthly statements, harmed Mr. Connor. The prayer for injunctive relief only makes sense with reference to the monthly statements because that is the only ongoing conduct which the complaint mentions. In any event, it is now clear that Mr. Connor thinks the monthly statements are stay violations and he has provided authority for that proposition. Further delay in addressing those statements would serve no useful purpose.

Nonetheless, I have reconsidered Mr. Connor's arguments and I have concluded that he is partly right.

From the commencement of the bankruptcy case until the termination of the automatic stay, creditors may not take "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title." 11 U.S.C. § 362(a)(6). The automatic stay is broad and sweeping, but the statute still must be interpreted using the usual rules of statutory construction. The statute must be read as a whole; individual words and phrases must be construed in context; and a literal interpretation that leads to absurd results must be rejected. Clark v. Capital Credit & Collection Servs., Inc., 460 F.3d 1162, 1168-69 (9th Cir.2006).

It is true that the automatic stay generally prohibits creditors from making formal or informal demands for payment. For example, a creditor violates the automatic stay by sending dunning letters and making collection calls after the debtor files the bankruptcy petition. In re Henry, 266 B.R. 457,470 (Bankr.C.D.Cal.2001).

Taking the allegations of the complaint as true, the letter of December 5, 2006, falls within this category. It is a garden variety demand letter. The complaint sufficiently alleges a claim for violation of the automatic stay based upon that letter.

It is equally true, however, that the automatic stay does not preclude all communication between debtors and creditors. For example, the Bankruptcy Code permits creditors and debtors to enter into reaffirmation agreements. 11 U.S.C. § 524(c). Because an agreement is inherently a bilateral arrangement, the debtor and the creditor must communicate in order to make a reaffirmation agreement. It would be absurd to interpret the automatic stay to prohibit creditors and debtors from speaking about an agreement which another provision of the Code expressly permits. In re Duke, 79 F.3d 43, 46 (7th Cir.1996); In re Bassett, 255 B.R. 747, 758 (9th Cir. BAP 2000), aff'd in part and reed in part on other grounds, 285 F.3d 882 (9th Cir. 2002); In re Epperson, 189 B.R. 195, 198-99 (E.D.Mo.1995).

The question becomes whether the monthly statements which Countrywide mailed to Mr. Connor fall in the category of prohibited demands or permitted communications. The answer depends on whether the debtor needed the information contained in the statements when the statements were sent.

For example, in In re Draper, 237 B.R. 502 (Bankr.M.D.Fla.1999), the debtor filed a chapter 13 case without an attorney and obtained confirmation of a plan which provided for the cure of defaults under his mortgage debt. The debtor made all the payments which his plan required. Both before and after confirmation, the mortgagee sent him monthly statements stating the purported arrearage. Each of the statements included a payment coupon, a...

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