In re Franklin, Bk. No. 09-13399-JMD
| Decision Date | 24 August 2017 |
| Docket Number | Bk. No. 09-13399-JMD |
| Citation | 2017 BNH 011 |
| Parties | In re: Michael S. Franklin, Debtor |
| Court | U.S. Bankruptcy Court — District of New Hampshire |
Note: This is an unreported opinion. Refer to LBR 1050-1 regarding citation.
Darlene M. Daniele, Esq.
Salem Legal Services, LLC
Salem, NH
Attorney for the Debtor
Michael McCormack, Esq.
Concord, NH
behalf of the United States Department of
Agriculture, Rural Development
MEMORANDUM OPINIONThe matter before the Court is the "Debtor's Motion for Contempt and Sanctions for Violation of Order Confirming Chapter 13 Plan and 11 U.S.C. § 362, § 524(i)"1 (the "Motion for Contempt") filed by Michael S. Franklin (the "Debtor") and the objection thereto2 filed by the United States Department of Agriculture, Rural Development (the "USDA"). Through the Motion for Contempt, the Debtor seeks redress for mistakes the USDA made in accounting for his mortgage payments during his Chapter 13 case. The USDA asserts that the Debtor has not suffered any actual damages arising from its misapplication of his payments. For the reasons set forth below, the Court will grant the Motion for Contempt.
This Court has authority to exercise jurisdiction over the subject matter and the parties pursuant to 28 U.S.C. §§ 157(a), 1334, and U.S. District Court for the District of New Hampshire Local Rule 77.4(a). This is a core proceeding under 28 U.S.C. § 157(b)(2).
The Debtor filed a Chapter 13 petition on August 31, 2009. On Schedule A - Real Property ("Schedule A"), he listed a fee simple interest in property located at 3 Blue Boar Lane in Canterbury, New Hampshire (the "Property") with a value of $129,000. According to Schedule D - Creditors Holding Secured Claims ("Schedule D"), the Property is encumbered by a mortgage securing loans by the USDA in the amounts of $80,990 and $4,967. On October 23, 2009, the USDA filed a proof of claim listing a single secured claim in the amount of $87,217.47, with a prepetition arrearage in the amount of $370.68 (the "Claim"). The Claim indicates that the prepetition arrearage arose from a single missed payment that was due on August 19, 2009, shortly before the filing of the bankruptcy petition.
On February 3, 2010, the Court entered an order confirming the Debtor's Chapter 13 plan as orally modified to cure the prepetition arrearage owed to the USDA and maintain regular postpetition payments outside the plan (the "Confirmation Order"). On October 30, 2014, the Chapter 13 trustee (the "Trustee") filed a Notice of Final Cure and Completion of Plan Payments, indicating that the USDA's prepetition claim had been paid in full by the Trustee and that the Debtor had completed his payment obligations under the plan. The USDA did not file a responsealleging the existence of a postpetition payment default. See Fed. R. Bankr. P. 3002.1(g). Despite the completion of the plan, the Debtor did not receive a discharge until August 20, 2015, in light of his failure to file a financial management course certificate or provide the Trustee with an Affidavit of Compliance with Discharge Requirements.
On May 11, 2015, the Debtor filed the Motion for Contempt, asserting that the USDA had regularly misapplied his mortgage payments between April 2010, and April 2014, including those the Trustee paid. The Debtor further alleged that as a result, the USDA reported his mortgage account as delinquent to credit reporting agencies for 40 out of 48 months during that period. He argued that these deficiencies rendered the USDA in contempt of the Confirmation Order, the automatic stay, and, curiously, the discharge injunction. The Debtor requested that the Court award actual damages, attorney's fees, and punitive sanctions.
On May 29, 2015, the USDA filed an objection to the Motion for Contempt, conceding that payments had been misapplied, but denying that the accounting remained inaccurate. The USDA also asserted several affirmative defenses to the Motion for Contempt. They include: (1) incorrect credit reporting is not specifically precluded by 11 U.S.C. § 362; (2) the USDA could not have violated the discharge injunction because the Debtor had not yet received a discharge; (3) sovereign immunity precludes the award of punitive damages against the United States; and (4) the Debtor has not incurred any actual damages.
The Court held an initial hearing on the Motion for Contempt on June 9, 2015, at the conclusion of which the Court entered a pre-trial scheduling order. After numerous extensions and continuances granted at the request of the parties, the Court conducted an evidentiary hearing on April 20, 2017. At the commencement of the hearing, the Court ruled that any alleged violation of the discharge injunction would be outside the scope of the proceedings because a discharge hadnot yet entered at the time the Motion for Contempt was filed. The Debtor also clarified that he was not pursuing a claim for misapplication of payments under the loan documents. Eleven exhibits were admitted into evidence, and only the Debtor testified. At the close of evidence, the Court ordered the parties to file written closing arguments and took the matter under advisement. The Debtor filed his closing argument on May 4, 2017, and the USDA did the same on May 15, 2017.
It is undisputed that the USDA misapplied mortgage payments during the Debtor's Chapter 13 case. The full extent of the USDA's errors, which is relevant to the Debtor's claim for damages, remains in dispute. However, due to deficiencies in the record, the Court is not able to identify all such errors or confirm the adjustments made by USDA. Although the "corrected" loan histories that the USDA transmitted to the Debtor's counsel on August 27, 2014 (the "Amended Loan Histories") were admitted into evidence, no expert witness was called to explain their preparation or contents. Upon review, the Court finds the Amended Loan Histories confusing and patently inconsistent.3 Moreover, because the Debtor did not provide all his monthly mortgage statements, which are the only documents showing the amount due each month,4 or all his bank statementsshowing post-petition payments made to the USDA, the Court cannot determine when many payments were made and in what amount.5
Notwithstanding these deficiencies, the record does permit the Court to discern a range of time during which it is more likely than not that the USDA had consistently misapplied the Debtor's payments. The problems appear to have started on September 1, 2009, the day following the filing of his petition. Generally, the Debtor's mortgage payments are due on the 19th of each month, but varied in amount. Prepetition, the Debtor typically made his mortgage payments up to two weeks after the due date, but neither the Amended Loan History nor the Debtor's bank statements reflect any payments made in the month of August, 2009.6 Therefore, as the Claim indicates, the record supports a conclusion that the Debtor was one payment behind on the petition date.
On September 1, 2009, the Debtor made a partial payment of $300.00 to the USDA, which was placed in an Unapplied Funds Account.7 No explanation was offered for why funds were placed in this account and not immediately applied.8 Notably, the Debtor's mortgage statement dated October 5, 2009, removed the "unapplied balance" column that previously appeared on his statements from February through May 2009,9 and replaced it with a "total delinquent amount"column reflecting that the Debtor was, at that time, two full payments in arrears.10 As such, nothing on the face of the monthly mortgage statements from this point forward disclosed that the USDA credited payments and held balances in the Unapplied Funds Account. Nevertheless, from September 1, 2009, until at least January 17, 2014, funds received from the Debtor were regularly placed in the Unapplied Funds Account before eventually being credited towards outstanding payments.11 As a result, the Unapplied Funds Account often held funds in excess of a single mortgage payment and sometimes with the balance rising to several thousand dollars despite USDA insisting that the Debtor was delinquent.12 No explanation for the application of funds in this manner was provided.
At trial, the Debtor testified that he first contacted the USDA regarding the application of his payments on October 9, 2009, upon receipt of the October 5, 2009 mortgage statement reflecting a two payment delinquency. Although he had an attorney at the commencement of his bankruptcy case, he communicated with the USDA directly.13 The Debtor credibly testified that he was in "constant contact" with the USDA because every month his statement did not reflect payments that had already cleared his bank account. Despite persistent efforts over many years, he was unable to resolve the issue on his own and was forced to retain new counsel in July, 2014 even though his bankruptcy case was coming to an end. With the assistance of counsel, the Debtor was ultimately able to obtain a concession from the USDA that payments had been misapplied, prompting the USDA to produce the Amended Loan Histories in August, 2014. Notwithstandingthe purported corrections contained therein, the Debtor testified that he believes the USDA continues to misapply his payments.14
While the accuracy of the Amended Loan History is doubtful, it contains several indications supporting the assertion that the USDA has yet to properly account for all the Debtor's payments. According to the Trustee's disbursement records, the prepetition arrearage arising from the failure to make the August, 2009 payment was paid in installments of $333.22 on February 17, 2010, and $37.78 on March 30, 2010.15 The Amended Loan Histories do not reflect the receipt of the first payment of $333.22,...
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