In re Canning

• Decision Date: 17 February 2011
• Docket Number: Bankruptcy No. 09–20263.,Adversary No. 09–02080.
• Citation: 442 B.R. 165,65 Collier Bankr.Cas.2d 30
• Parties: In re Ralph G. CANNING, III and Megan L. Canning, Debtors.Ralph G. Canning, III and Megan L. Canningv.Beneficial Maine, Inc., HSBC Mortgage Services, Inc., and HSBC Mortgage Corp.
• Court: U.S. Bankruptcy Court — District of Maine

442 B.R. 165

65 Collier Bankr.Cas.2d 30

In re Ralph G. CANNING, III and Megan L. Canning, Debtors.Ralph G. Canning, III and Megan L. Canning

v.Beneficial Maine, Inc., HSBC Mortgage Services, Inc., and HSBC Mortgage Corp.

Bankruptcy No. 09–20263.

Adversary No. 09–02080.

United States Bankruptcy Court, D. Maine.

Feb. 17, 2011.

Tanya Sambatakos, Esq., Biddeford, ME, for Plaintiff.Gayle Allen, Esq., Portland, ME, Peter Haley, Esq., Sean Higgins, Esq., Boston, MA, for Defendant.

MEMORANDUM OF DECISION

JAMES B. HAINES, JR., Bankruptcy Judge.

On a stipulated record, the parties have submitted the question whether the defendants are vulnerable to sanctions for violating the Bankruptcy Code's discharge injunction. ¹ Chapter 7 debtors Ralph and Megan Canning assert that Beneficial Maine, Inc.; HSBC Mortgage Services, Inc.; and HSBC Mortgage Corp., (collectively, “HSBC”) did so in two ways: first, through post-discharge correspondence asserting that the Cannings' personal obligation to repay a mortgage endured; and, second, by refusing to immediately foreclose upon the Cannings' surrendered home or, alternatively, to release the mortgage held against it. I conclude that HSBC's post-discharge correspondence violated the discharge injunction while its refusal to act upon its mortgage did not.

Facts²

The Cannings voluntarily filed for relief under chapter 7 of the Bankruptcy Code in March 2009. HSBC was listed as a creditor on the bankruptcy schedules, and received actual notice of the filing. Consistent with their obligations under the Code, the Cannings filed a “statement of intention” declaring they would “surrender” their home.³ HSBC's claim against the debtors was secured by a mortgage on the Cannings' Sanford, Maine residence and at the time the bankruptcy was filed it was prosecuting a state court foreclosure action.

In due course, the Cannings received their bankruptcy discharge.⁴ About two months later, HSBC, whose foreclosure action had been stayed by the bankruptcy, informed the Cannings by letter that it was electing not to proceed with foreclosure. The letter stated:

Subject: MORTGAGE UPDATE

Dear Valued Customer:

This letter is to inform you that HSBC will not initiate and/or complete foreclosure proceedings on [the Sanford residence]. You will retain ownership of the property.

HSBC also relinquishes possession of the property. In addition, we will no longer advance any payments for taxes and insurances. You will be solely responsible for the payment of taxes, insurance, and the maintenance of this property.

Per the terms of your Loan Agreement, you still have a financial obligation to repay HSBC for the money that was borrowed. This financial obligation to repay HSBC or applicable successor remains intact, and HSBC reserves all rights and remedies under the terms of your Agreement.

If you have questions, please contact us at 1–800–365–6730.

You may also visit http:// www. hsbc mortgage services. com to manage your account online.

Sincerely,

HSBC ⁵

The Cannings' counsel responded to the letter, reminding HSBC that it was “prohibited from attempting to collect” its debt from the Cannings as, after discharge, her clients no longer had a legal obligation to pay. ⁶ She demanded that HSBC withdraw its demand for payment in writing within ten days.⁷ She then stated:

HSBC must either [sic] do one of the following: 1) immediately commence foreclosure proceedings or 2) immediately discharge the mortgage on the property. Failure to act will result in further violation of the discharge injunction.⁸

HSBC did not respond, and on October 1, 2009, debtors' counsel wrote again, declaring that, since HSBC had not withdrawn its demand for payment, it was required to execute and record a formal discharge of the mortgage encumbering the Sanford real estate. In closing, she stated, “If I am not in receipt of the executed Discharge of Mortgage by October 13, 2009, I will seek a remedy with the bankruptcy court for your violations of the discharge injunction provision.” ⁹ Two and a half weeks later, HSBC responded:

We apologize for any inconvenience you have experienced while attempting to resolve this issue. This is the first request this department has received from your office. Our records confirm that Mr. and Mrs. Canning filed [c]hapter 7 [b]ankruptcy on March 5, 2009 and the bankruptcy was discharged on June 3, 2009. Although the account was included in the chapter 7 bankruptcy, there is still a lien balance that will need to be satisfied. Unfortunately, we are unable to honor your request to release the lien until the lien balance is satisfied in the amount of $186,324.18. However, we could consider a settlement option or a short sale. Please be advised Mr. and Mrs. Canning's account was charged off on June 27, 2009. Mr. and Mrs. Canning's account is now with the Recovery Management Services (RMS) Bankruptcy Department and you may contact them via facsimile at (877) 829–6944 or directly at (800) 562–7830, and speak with Roshan Anand, regarding any questions that you may have or to discuss a settlement offer or a short sale.

Please note that this is not an attempt to collect from Mr. and Mrs. Canning, as they have obtained a discharge of personal liability in bankruptcy. Mr. and Mrs. Canning are not personally liable to make any payment on their mortgage loan, and any payment that Mr. and Mrs. Canning may make is voluntary. Because Mr. and Mrs. Canning received a discharge under the United States Bankruptcy Code, they have no personal obligation under the note, or for any of the amounts shown above. This letter is not an effort by HSBC to collect, assess, or recover a claim against a discharged customer. The information in this letter is being provided in response to your request.¹⁰

Characterizing the response as a further violation of the discharge injunction because of its refusal to “either release the lien or foreclose on the property,” the Cannings' counsel gave HSBC another 15 days to act before filing this adversary proceeding.¹¹

HSBC responded quickly, denying that it had violated the discharge injunction by forbearing foreclosure and retaining its mortgage lien. It stated, “We maintain that we will not release the lien on the above account until the balance is satisfied in the amount of $186,324.18.” It reiterated its willingness to discuss “a settlement offer or a short sale,” and again invited the Cannings to contact its representatives.¹² In response, the Cannings informed HSBC that they had abandoned the property and that they had advised the town and utility companies that HSBC was the responsible party for the obligations on the home.¹³

HSBC has yet to foreclose on its mortgage or release its lien. The Cannings no longer reside at the Sanford property, which remains vacant. The appraised value of the property was $86,000 when the order for relief entered. In February 2010, nearly a year after the Cannings' filing, its appraised value had fallen to $75,000.

Procedural History

Notwithstanding their extensive correspondence, the parties remained at impasse, whereupon the Cannings initiated this adversary proceeding seeking sanctions for HSBC's alleged violations of the discharge injunction. The parties have agreed to bifurcated treatment, presenting solely the issue of liability and reserving evidence and argument regarding sanctions, if appropriate.

Discussion

The Law

While § 362(a)'s automatic stay is the key Code provision providing debtors “breathing space” to reorganize, or for an orderly liquidation to take place, § 524(a)'s discharge injunction provides the “fresh start” to which honest debtors are entitled. See, e.g., Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444 (1st Cir.2000). It provides:

(a) A discharge in a case under this title—

(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived ...

“Discharge carries with it an injunction against debt collection efforts. The injunction imposed by Code § 524(a)(2) is intentionally broad in scope and is intended to preclude virtually all actions by a creditor to collect personally from the debtor.” William L. Norton, Jr., 3 Norton Bankr. Law & Prac. § 58.3 (3d ed. 2011).

The discharge injunction is appropriately enforced via § 105, which empowers a bankruptcy court to “issue any order, process, or judgment that is necessary or appropriate to carry out” the Bankruptcy Code's provisions. Pratt v. General Motors Acceptance Corp. (In re Pratt), 462 F.3d 14, 21 (2006); Bessette v. Avco Fin. Servs., 230 F.3d at 444; see, also, In re Schlichtmann, 375 B.R. 41, 94 (Bankr.D.Mass.2007). Among other things, damages for contempt may be awarded to compensate a debtor injured by a discharge injunction violation. In re Pratt, 462 F.3d at 21. A court's contempt power is potent and potentially damaging; courts levying sanctions must exercise restraint. See Project B.A.S.I.C. v. Kemp, 947 F.2d 11, 16 (1st Cir.1991).

Here, the Cannings assert that HSBC should be held in contempt for violating the discharge injunction. A bankruptcy discharge relieves the debtor of personal liability for pre-petition debts. Absent avoidance or modification, a discharge does not affect a secured creditor's lien in its collateral; the lien survives and is enforceable after the bankruptcy proceedings in accordance with state law. In re Pratt, 462 F.3d at 17.

Relying on In re Pratt's formulation, In re Schlichtmann set forth a two-part test for analyzing assertions of contempt for violations of the discharge injunction. The debtor seeking a finding of contempt must prove: (1) that the alleged contemnor committed an act that violated the discharge injunction with general intent to commit the act; and (2) that it acted with knowledge of the discharge order. 375 B.R. at 96. In...