PHH Mortg. Corp. v. Sensenich (In re Gravel)
| Decision Date | 02 August 2021 |
| Docket Number | 20-2-bk,Nos. 20-1-bk(L),August Term 2020,20-3-bk,s. 20-1-bk(L) |
| Citation | 6 F.4th 503 |
| Parties | IN RE: Nicholas GRAVEL, Amanda Gravel, Debtors. PHH Mortgage Corporation, Creditor-Appellant, v. Jan M. Sensenich, Trustee-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
MATTHEW J. DELUDE, Primmer Piper Eggleston & Cramer PC, Manchester, NH (Alexandra E. Edelman, Douglas J. Wolinsky, on the brief) for Creditor-Appellant PHH Mortgage Corp.
MAHESHA P. SUBBARAMAN, Subbaraman PLLC, Minneapolis, MN, for Trustee-Appellee Jan M. Sensenich.
Henry E. Hildbrand, III, Nashville, TN, for Amicus Curiae National Association of Chapter 13 Trustees.
Tara Twomey, National Consumer Bankruptcy Rights Center, San Jose, CA, for Amici Curiae National Consumer Bankruptcy Rights Center, National Association of Consumer Bankruptcy Attorneys, National Consumer Law Center, Legal Services Vermont, Inc., and Housing Clinic of Jerome N. Frank Legal Services Organization at Yale Law School.
Before: JACOBS, BIANCO, PARK, Circuit Judges.
This appeal involves punitive sanctions imposed in three chapter 13 cases in Vermont. The debtor households are the Gravels, the Beaulieus, and the Knisleys. The sanctioned party is the creditor-appellant PHH Mortgage Corp., which holds or services the mortgage on the principal residence of each debtor household. The appellee, Jan Sensenich, is the chapter 13 standing Trustee for the District of Vermont. The Trustee shepherds the debtors through the chapter 13 process and oversees their payments to PHH under their respective chapter 13 plans.
PHH sent monthly mortgage statements listing fees totaling $716 that had not been properly disclosed in the three cases. The United States Bankruptcy Court for the District of Vermont (Brown, J. ) sanctioned PHH $225,000 for violation of court orders issued in the Gravel and Beaulieu cases, which declared that the debtors were current on their mortgages and enjoined PHH from challenging that fact in any other proceeding.
The bankruptcy court also sanctioned PHH $75,000 for violation of Bankruptcy Rule of Procedure 3002.1 in all three cases. Rule 3002.1(c) requires that a creditor give formal notice to the debtor and trustee of new post-petition fees and charges, and it gives the bankruptcy court power to impose sanctions for non-compliance.
The bankruptcy court's sanctions order was certified for direct appeal. We hold that Rule 3002.1 does not authorize punitive monetary sanctions, and that PHH did not, as a matter of law, violate the court orders.
The sanctions order is VACATED and REVERSED.
Frustration with PHH began early in the Gravel case, which was filed in February 2011. The Gravels’ plan provided for them to remain in their home while making "conduit" monthly mortgage payments for 60 months. Under the District of Vermont's bankruptcy procedures, the Gravels paid the Trustee who then disbursed the payment to PHH.
Pursuant to a (since superseded) standing order, the Trustee accounted for the payments in March and April as an "administrative arrearage" rather than as a regular post-petition monthly mortgage payment. In effect, those payments were treated as a pre-petition arrearage paid as a special claim, so that regular post-petition payments did not begin until the third month. Monthly payments were thus forwarded to PHH as regular mortgage payments beginning with May. Because of this accounting, PHH incorrectly termed the loan delinquent and began to add late penalties on mortgage payments for March and April. PHH sent monthly mortgage statements reflecting this delinquency, and the Trustee responded with three letters in 2012 and 2013 explaining PHH's error, to which PHH failed to respond.
When PHH threatened foreclosure, the Trustee in February 2014 moved to compel PHH to apply the mortgage payments as provided by the chapter 13 plan. The Trustee also requested an award of sanctions to the debtors. PHH corrected the mortgage statements to reflect that the Gravels were current on post-petition payment obligations. PHH promised to prevent future errors. The parties stipulated to a $9,000 sanction, which the bankruptcy court so-ordered in March 2014. (The $9,000 sanction is not the subject of this appeal.)
* * *
Two years later, the Gravels reached the end of their chapter 13 plan. An order on May 20, 2016, confirmed that the Gravels were "current." J. App'x 705. That is, the Gravels had cured all pre-petition arrearages or defaults existing when the case was filed, and made all post-petition payments. (An identical order was issued in the Beaulieu case; they are referenced as "Current Orders.")
When PHH sent another monthly mortgage statement five days later, the Trustee noticed that an old charge for "property inspection fees" was listed under the "loan information" section. Id. at 654. The statement specified that the recorded fee and other account information was provided to comply with local bankruptcy rules and was "not an attempt to collect a debt." Id. Further, the fee--which had grown to $258.75 over at least 25 monthly statements--was not reflected in the "total payment due." Id. The only payment due was the principal/interest and escrow.
Nevertheless, the Trustee moved for a finding of contempt and sanctions on the ground that the charge violated the Current Order, and that each of the 25 charges violated Bankruptcy Rule 3002.1. Rule 3002.1 governs installment payments on a home mortgage in a plan under chapter 13. Fed. R. Bankr. P. 3002.1(a). Under the rule, a mortgage creditor "shall file and serve on ... the trustee a notice itemizing all fees, expenses, or charges" that the creditor "asserts are recoverable against the debtor" and serve this notice "within 180 days after the date on which the fees, expenses, or charges are incurred." Fed. R. Bankr. P. 3002.1(c). If a creditor fails to comply, a bankruptcy court may preclude the creditor from presenting the claim as evidence in the case, or award the debtor other relief including expenses and attorney's fees. Fed. R. Bankr. P. 3002.1(i).
In response to the Trustee's motion, PHH admitted that the fee had not been properly noticed within 180 days under Rule 3002.1, removed the fee from the Gravels’ mortgage statement, and opposed the motion for sanctions.
* * *
Late-noticed fees also appeared on the Beaulieus’ monthly mortgage statements. They filed their chapter 13 case in March 2011. The statements began reflecting a fee for insufficient funds 18 months later and a charge for property inspection two years later; and those fees were still being listed when the bankruptcy court issued the Current Order on May 5, 2016. Twenty days later, PHH sent the Beaulieus a monthly statement, on which the fees were still listed. The insufficient funds fee was $30, and the property inspection fee was $56.25.
Around the time the Trustee filed its motion in the Gravel case, the Trustee moved for a finding of contempt and sanctions in the Beaulieu case on the same basis. PHH removed the charges from the Beaulieus’ mortgage statement and opposed the motion.
* * *
Post-filing of the Knisley case, 25 monthly mortgage statements showed a late charge and property inspection fee that had not been properly disclosed within 180 days. The late charge was $124.50, and the property inspection was $246.50. The Trustee moved for sanctions under Rule 3002.1(i), and PHH removed the charge and fee and opposed the motion. PHH was not alleged to be in contempt of a current order because no current order had issued; the Knisleys had not reached the end of their plan.
* * *
After a consolidated hearing, the bankruptcy court granted the Trustee's motions in September 2016. It found that PHH had violated Rule 3002.1(c) 25 times in each case, as well as the two Current Orders. It sanctioned PHH $75,000 pursuant to Rule 3002.1(i). And it sanctioned PHH for the Current Orders violation pursuant to its inherent power and § 105 of the Bankruptcy Code : $200,000 in the Gravel case and $100,000 in the Beaulieu case.
The bankruptcy court noted that it "levies this substantial penalty on PHH to convey a clear message to PHH, and other mortgage creditors, that they may not violate court orders with impunity and will suffer significant monetary sanctions if they conduct their mortgage accounting operations in a manner that fails to fully comply with Rule 3002.1, violates court orders, or threatens the fresh start of Chapter 13 debtors." In re Gravel ("Gravel I"), 556 B.R. 561, 580 (Bankr. D. Vt. 2016), vacated and remanded sub nom. PHH Mortg. Corp. v. Sensenich, No. 5:16-CV-00256, 2017 WL 6999820 (D. Vt. Dec. 18, 2017). PHH was ordered to pay the $375,000 to "Legal Services Law Line of Vermont." Id.
The United States District Court for the District of Vermont (Crawford, J. ) vacated both sanctions. It held that the $75,000 and $300,000 sanctions exceeded the bankruptcy court's "statutory and inherent powers" because it lacks power to impose "serious punitive sanctions." PHH Mortg. Corp., 2017 WL 6999820, at *7–8. The district court reasoned that bankruptcy courts are ill-equipped to provide the procedural protections that due process requires, and that bankruptcy judges lack the tenure and compensation protections that ensure the judicial independence of Article III judges. The district court observed that the sanctions here were far greater than a punitive sanction of $50,000 that the Ninth Circuit vacated for the same reasons in In re Dyer, 322 F.3d 1178, 1194 (9th Cir. 2003). Remanding the matter, the district court noted that the bankruptcy court may refer a matter for criminal contempt proceedings and sanctions, or may "take steps to enforce its orders short of punitive sanctions of the scope and type imposed in these cases." PHH Mortg. Corp., 2017 WL 6999820, at *9.
The bankruptcy court issued a second sanctions order (the one now before us). See In re Gravel ("Gravel II"), 601 B.R. 873, 903 (Bankr. D. Vt. 2019...
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