Opinion
Case No. 11-36341
05-19-2023
IN RE: Constance E. DEWITT, Debtor.
DECISION GRANTING IN PART AND DENYING IN PART DEBTOR'S MOTION FOR SUMMARY JUDGMENT (DOC. 118)
Guy R. Humphrey, United States Bankruptcy Judge
I. Factual and Procedural Background
In November 2011 Constance Dewitt ("Dewitt") filed a petition for bankruptcy relief under Chapter 13 and listed her primary residence as an asset. Doc. 114, ¶¶ 1-3. Dewitt's property was subject to a mortgage held by HSBC and serviced by Ocwen Loan Servicing LLC ("Ocwen") and later PHH Mortgage Corporation ("PHH") (collectively, "the Mortgagee"). Id. at ¶¶ 4-6, 8. This Decision follows an earlier decision in this case, 644 B.R. 385 (Bankr. S.D. Ohio 2022) ("Dewitt I"), in which this court found that the Mortgagee violated Federal Rule of Bankruptcy Procedure 3002.1(g) when it, following the closing of the case, sought to collect from Dewitt real estate taxes which it advanced during Dewitt's bankruptcy case and which it failed to disclose as outstanding in its response to the Chapter 13 Trustee's Notice of Final Cure Payment. See Fed. R. Bankr. P. 3002.1(f).
As this court detailed in Dewitt I, Dewitt's Chapter 13 Plan (the "Plan") required the Trustee to pay the Mortgagee "(1) the full amount of the pre-petition arrearages in the amount of $19,543.56; (2) the on-going, post-bankruptcy monthly payments due on the loan through May 2017; and (3) a post-petition fee that Ocwen incurred for paying the 2014 installment of real estate taxes in the amount of $1,655.63 (the Second Advance) . . . ." Id. at ¶ 11. The Plan also required Dewitt to directly pay post-petition property taxes to Clark County. Id. at ¶¶ 10, 13. After she failed to do so, the Mortgagee paid the property taxes on her behalf on three occasions. While the Mortgagee waived the first tax payment and properly noticed the second under Rule 3002.1(c), which was paid through the Plan, the Mortgagee did not notice the third tax payment of $4,155.91 made on April 26, 2017 (the "Third Advance"). Id. at ¶¶ 11-12, 14. The Mortgagee did not seek to collect the Third Advance during the bankruptcy case but later attempted to do so. Id., ¶ 26.
The Mortgagee argued in its defense to Dewitt's contempt motion that it had no duty under Rule 3002.1(c) to notice the third tax payment it made because the case was concluded before the expiration of the 180-day period it had under that Rule to serve that notice. However, this court did not find a violation of Rule 3002.1(c) in Dewitt I, but rather, a violation of Rule 3002.1(g) because the Mortgagee did not assert that payment was due in its response to the Trustee's Notice of Final Cure Payment which the Trustee served pursuant to Rule 3002.1(f).
The Trustee served a Notice of Final Cure (doc. 55) pursuant to Rule 3002.1(f) in May 2017. Id., ¶ 18. In its Rule 3002.1(g) Response to Notice of Final Cure (doc. 56), the Mortgagee "agreed that Debtor was current on all postpetition payments due, including all fees, charges, escrow and costs, and stating that the next postpetition payment was due June 1, 2017." Id. at ¶ 19. Subsequently, the Trustee filed a Certification of Final Payment and Case History (doc. 58) to which HSBC did not object. Id. at ¶ 20. This court entered an order granting Dewitt's discharge in June 2017. Doc. 60; Id. at ¶ 24. Dewitt continued to make monthly mortgage payments of principal and interest after her bankruptcy case concluded. Debtor Affidavit, Doc. 72.
In May 2018 the Mortgagee began attempts to collect the Third Advance through an escrow payment change. Doc. 114, ¶ 25. Dewitt did not pay the monthly escrow amount and continued to make only her monthly principal and interest payments. Doc. 118 at 3-4. The Mortgagee continued attempts to collect the Third Advance by contacting Dewitt, returning her monthly mortgage payments, and ultimately filing a foreclosure complaint. Doc. 114 at ¶ 28.
After failed settlement attempts, Dewitt filed a motion to reopen the present bankruptcy case (doc. 64). Id. at ¶ 36-37; Doc. 118 at 5. The court granted the motion to reopen the case to resolve this contested matter (doc. 75). Id. at ¶ 37. In accordance with the court's scheduling order which bifurcated the issues of whether a violation of Rule 3002.1 occurred and any remedies (doc. 112), both Dewitt and the Mortgagee filed cross-motions for summary judgment as to the Rule 3002.1 violation issues. Docs. 118, 121. On September 30, 2022 the court entered its decision in Dewitt I determining that the Mortgagee violated Rule 3002.1(g) but did not violate the discharge injunction. After a status conference, the parties briefed the bifurcated issues relating to available damages and remedies. Docs. 147-49.
II. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and the Standing Order of Reference (Amended General Order 05-02) of the District Court for the Southern District of Ohio in accordance with 28 U.S.C. § 157(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), and this court has constitutional authority to enter a final judgment. See Waldman v. Stone, 698 F.3d 910, 920 (6th Cir. 2012) (bankruptcy courts may enter final judgment for matters "part and parcel of the claims allowance process in bankruptcy.").
III. Summary Judgment Standard
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) (made applicable in this contested matter by Federal Rule of Bankruptcy Procedure 7056). A factual disagreement is genuine if "a rational trier of fact could find in favor of either party on the issue." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27, 30 (B.A.P. 6th Cir. 1998) (citing Schaffer v. A.O. Smith Harvestore Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996)). A fact is material if it might affect the outcome of the suit under substantive law. Niecko v. Emro Mktg. Co., 973 F.2d 1296, 1304 (6th Cir. 1992) (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986)). When reviewing a motion for summary judgment, a court views all evidence and draws all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).
IV. Statement of the Parties' Positions
Dewitt argues that Rule 3002.1(i) allows the court to award attorney fees and costs; other compensatory damages, including damages for emotional distress; and punitive damages. If the court declines to award punitive damages under Rule 3002.1, Dewitt asks the court to do so under Bankruptcy Code § 105 and the court's general powers or, in the alternative, to make punitive damage recommendations to the district court so that it could enter such damages against the Mortgagee. Dewitt also asks the court to enjoin the Mortgagee from presenting evidence concerning or otherwise referencing the Third Advance as a basis for default under Dewitt's mortgage contract in any court or proceeding, including in the state court foreclosure. Finally, Dewitt asks the court to permit discovery into the Mortgagee's other alleged violations of Rule 3002.1 in other cases across the country and to consider such evidence when determining the amount of any punitive damages to be awarded in this case.
The Mortgagee argues that no damages should be awarded because its actions were harmless. The Mortgagee asserts that unless Dewitt can establish that she would have paid the Third Advance and avoided default had the charge been properly disclosed during the case, the court cannot find harm to Dewitt as a result of the Mortgagee's violation. The Mortgagee urges the court to adopt the Second Circuit's reasoning in In re Gravel and find that Rule 3002.1(i) does not authorize the award of punitive damages. The Mortgagee also asserts that the court should limit any attorney fee award to legal fees incurred in reopening the bankruptcy case and pursuing the present contempt action, eliminating Dewitt's recovery of attorney fees she incurred in the foreclosure proceeding. Finally, the Mortgagee contends that compensatory damages for emotional and mental distress are likewise unavailable under Rule 3002.1.
V. Legal Analysis
A. Chapter 13 and Bankruptcy Code § 1322(b)(5)
Chapter 13 of the Bankruptcy Code allows individuals with regular income to retain their primary residence and other real or personal property by proposing a plan which provides for the payment of their creditors over a three or five-year period. The plan is funded through the debtors' income and must be confirmed by the bankruptcy court. See 11 U.S.C. §§ 1322 and 1325; see also Seafort v. Burden (In re Seafort), 669 F.3d 662, 663 (6th Cir. 2012) ("Chapter 13 of the Bankruptcy Code permits 'individual[s] with regular income' whose debt falls within statutory limits . . . to keep their property if they agree to a court-approved plan to pay creditors out of their future 'disposable income.' "). Frequently a debtor files a Chapter 13 case to hold onto their residence after they have defaulted on their mortgage loans. Chapter 13 permits debtors to cure arrearages on those loans and continue to make their regular mortgage payments through their Chapter 13 plans. See 11 U.S.C. § 1322(b)(5) and (e); Fed. Land Bank of Louisville v. Glenn (In re Glenn), 760 F.2d 1428, 1442 (6th Cir. 1985) (holding that a Chapter 13 debtor may cure a mortgage loan default on their principal residence even after the debt has been accelerated and a foreclosure judgment has been granted, unless the foreclosure sale has occurred).
B. Background of Bankruptcy Rule 3002.1
Rule 3002.1 was implemented in response to widespread challenges faced by debtors and Chapter 13 trustees in obtaining accurate information from mortgagees and mortgage servicers. See In re Gordon, No. 10-13885 EEB, 2011 Bankr. LEXIS 3848, at *9 (Bankr. D. Colo. Mar. 25, 2011) (noting that debtors sometimes struggle to ascertain the amount of a mortgage arrearage because "the mortgage holder . . . fails to adequately communicate with the debtor"); see also Harker v. Wells Fargo Bank, NA (In re Krause), 414 B.R. 243, 251 (Bankr. S.D. Ohio 2009) (stating that "growth over the last decade of the secondary mortgage market . . . has engendered numerous problems in bankruptcy courts . . . related to the documentation of motions for relief from stays, proofs of claim, and foreclosure actions filed by the banking and mortgage industry"). Mortgage servicers often misapplied plan payments, added undisclosed fees to the debtor's loan balance, or recalculated escrow payments without advance notice, among other actions. See In re Pillow, No. DK 11-11688, 2013 Bankr. LEXIS 5711, at *6, 2013 WL 10252924, at *2 (Bankr. W.D. Mich. Mar. 18, 2013) (describing the types of undisclosed charges that mortgage servicers frequently added to mortgage loan balances prior to the implementation of Rule 3002.1); see also Ameriquest Mortg. Co. v. Nosek (In re Nosek), 609 F.3d 6, 9 (1st Cir. 2010) (citing Katherine Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Tex. L. Rev. 121, 123-24 (2008)) ("Studies have shown that mortgage holders and servicers routinely file inaccurate claims, some of which may not be lawful.").
These failures frequently meant that debtors completed the rigorous Chapter 13 requirements to obtain a discharge and reinstate their home mortgage only to emerge from bankruptcy and find themselves immediately facing foreclosure once again. See Pillow, No. DK 11-11688, 2013 Bankr. LEXIS 5711, at *6, 2013 WL 10252924, at *2 (explaining the history of Rule 3002.1 and noting that "the drafters hoped that by requiring lenders to give periodic notice of payment changes, debtors could avoid the shock that some have experienced at the end of their plan terms upon discovering that, despite having made all payments in good faith, their mortgage arrears quietly grew - in some instances, substantially").
For a discussion of these challenges, see Keith M. Lundin, Lundin on Chapter 13, § 131.3 at ¶¶ 10-21 (last visited May 1, 2023) (discussing the impact of mortgage servicer accounting issues in Chapter 13); see also Is Misconduct in Bankruptcy Fueling the Foreclosure Crisis?: Three ABI Members Testify Before U.S. Senate Judiciary Subcommittee, 27-5 ABIJ 10, 43 (2008) ("The upsetting reality is that the current bankruptcy system routinely forces borrowers to pay bloated amounts and permits mortgage servicers to misbehave without serious consequence. This situation significantly threatens bankruptcy's purpose of helping families save their homes."); USTP Actions against Mortgage Fraud, Abuse Are Part of FFETF Sweep, 29-6 ABIJ 20 (2010) (discussing bankruptcy settlements involving mortgage servicer abuse that occurred before the implementation of Rule 3002.1).
Before Rule 3002.1 took effect in 2011, bankruptcy courts responded to this issue by implementing various local procedures to verify that debtors' Chapter 13 mortgage payments were current and that no post-petition mortgage fees or charges remained outstanding at the time of discharge entry and closing of the bankruptcy case. These procedures were intended to ensure that the debtors had clean slates in making their mortgage payments going forward and the chance for a "fresh start" as they exited Chapter 13. In this district, as in many other districts, Chapter 13 Trustees filed and served "Motions to Deem the Chapter 13 Case Current" or similar motions, to achieve that result. Those motions compelled mortgagees to in effect "speak or forever hold their peace" if they believed they were owed any arrearage, pre-petition or post-petition. Upon adjudication, courts entered an order finding the mortgage current to effectuate the debtors' fresh start. These orders determined that the mortgage loan had been brought current and instructed debtors to continue making their regular mortgage payments to their lenders on a monthly basis in accordance with the contractual terms.
See Keith M. Lundin, Lundin on Chapter 13, § 131.3 at ¶ 25 (last visited May 12, 2023) (noting that prior to Rule 3002.1, home mortgage issues were addressed by local "best practices" with "lackluster" results).
See Stellwagen v. Clum, 245 U.S. 605, 617, 38 S.Ct. 215, 62 L.Ed. 507 (1918) ("The federal system of bankruptcy . . . intends to aid the unfortunate debtor by giving him a fresh start . . . . Our decisions lay great stress upon this feature of the law—as one not only of private but of great public interest in that it secures to the unfortunate debtor, who surrenders his property for distribution, a new opportunity in life.").
See In re Shaw, No. 2:05-bk-53828 (docs. 37 and 40) for examples of a Motion to Deem Mortgage Current and an Order Deeming Mortgage Current.
The adoption of Bankruptcy Rule 3002.1 brought uniformity to such local practices used to effectuate the debtors' fresh start in Chapter 13 cases at the conclusion of the cases. The Advisory Committee Note to the Rule, in pertinent part, states:
See Eugene R. Wedoff, Proposed New Bankruptcy Rules on Creditor Disclosure and Court Enforcement of the Disclosures, 83 Am. Bankr. L.J. 579 (2009) ("The existence of a national rule on this subject would also have the effect of making more uniform what has become a range of responses at the local level, through court orders, model plans, and local rules.").
This rule is new. It is added to aid in the implementation of § 1322(b)(5), which permits a chapter 13 debtor to cure a default and maintain payments on a home mortgage over the course of the debtor's plan . . . .Fed. R. Bankr. P. 3002.1, Advisory Committee Note (2011).
In order to be able to fulfill the obligations of § 1322(b)(5), a debtor and the trustee have to be informed of the exact amount needed to cure any prepetition arrearage, see Rule 3001(c)(2), and the amount of the postpetition payment obligations. If the latter amount changes over time, due to the adjustment of the interest rate, escrow account adjustments, or the assessment of fees, expenses, or other charges, notice of any change in payment amount needs to be conveyed to the debtor and trustee. Timely notice of these changes will permit the debtor or trustee to challenge the validity of any such charges, if appropriate, and to adjust postpetition mortgage payments to cover any undisputed claimed adjustment. Compliance with the notice provision of the rule should also eliminate any concern on the part of the holder of the claim that informing a debtor of a change in post-petition payment obligations might violate the automatic stay.
Rule 3002.1 both facilitates information sharing during the Chapter 13 case and provides a mechanism for an end of the case reconciliation. During the case, mortgagees must comply with two reporting requirements that help to ensure mortgages are current when the plan ends. First, mortgagees are required to file and serve notices of payment changes on the debtor, debtor's counsel, and the Chapter 13 Trustee no later than 21 days before a payment change takes effect. Fed. R. Bankr. P. 3002.1(b). Such changes are usually due to a change in the interest rate or a need to adjust the escrow account. Second, mortgagees are required to file notices itemizing all recoverable post-petition fees, charges, or expenses incurred in connection with the claim within 180 days of the date these amounts are incurred. Fed. R. Bankr. P. 3002.1(c). At the end of the case, within 30 days of the debtor's final plan payment, the Chapter 13 Trustee is to serve a Notice of Final Cure Payment "stating that the debtor has paid in full the amount required to cure any default on the claim" and advising the mortgagee that it must "file and serve a response." Fed. R. Bankr. P. 3002.1(f). Under subsection (g), mortgagees are required to file and serve a response to the Trustee's Notice of Final Cure Payment. The response must indicate whether they agree that the debtor has cured any default on the claim and whether the debtor is "otherwise current on all payments consistent with § 1322(b)(5) of the Code." Fed. R. Bankr. P. 3002.1(g). This statement "shall itemize the required cure or postpetition amounts, if any, that the holder contends remain unpaid as of the date of the statement." Id.
By requiring the mortgagee to share accurate and complete information on a timely basis, Rule 3002.1 provides a system whereby any outstanding amounts can be addressed by the debtor, the Chapter 13 Trustee, and the Court while the Chapter 13 case is pending. This information sharing mechanism is central to the integrity of Chapter 13. As one court explained:
Rule 3002.1 was adopted in December 2011 to address a significant problem caused when mortgage companies applied fees and costs to a debtor's mortgage while the debtor was in bankruptcy without giving notice to the debtor and then, based on these post-petition defaults, sought to foreclose upon the debtor's property after the debtor completed the plan. Rule 3002.1 deals with this problem by requiring notice of payment changes and providing an opportunity for the debtor to contest them during the chapter 13 case. Accurate representations are required under Bankruptcy Rule 3002.1 to prevent the very problem that the [debtors] are facing. Providing information to a debtor about the status of his or her mortgage loan is why the procedures outlined in Bankruptcy Rule 3002.1 were enacted. This Court considers the give and take between the Trustee, creditor, and debtor outlined in Bankruptcy Rule 3002.1 to be a critical part of the administration of a Chapter 13 case.Culberson v. Nationstar Mortg., LLC (In re Culberson), Nos. 1:15-bk-15519-SDR, 1:21-ap-01012-SDR, 2022 Bankr. LEXIS 1629 at *32-33, 2022 WL 2111268, at *10 (Bankr. E.D. Tenn. June 10, 2022) (cleaned up). Put simply, timing is central to Rule 3002.1. After the case concludes, these issues are significantly more difficult to resolve and may require the debtor to expend time and resources to reopen the bankruptcy case and seek relief. While the case is still open and the plan ongoing, the debtor can readily use bankruptcy specific tools to address a noticed mortgage payment change or an added fee. Among other actions, the Chapter 13 plan may be modified to ensure that these amounts are paid before the case concludes. 11 U.S.C. § 1329. If there is a dispute as to any such charge, a motion can be filed and the court can resolve that dispute pursuant to Rule 3002.1(h).
Bankruptcy Rule 3002.1(h) invites the bankruptcy court to engage in a broad inquiry to determine the status of the mortgage. "All required postpetition amounts" includes consideration whether postpetition installment payments and postpetition fees, expenses and charges have been paid.Keith M. Lundin, Lundin on Chapter 13, § 131.3 at ¶ 144 (last visited May 1, 2023).
In sum, Rule 3002.1 not only provides a mechanism to ensure that the debtor has cured all arrearages and is current with respect to all mortgage obligations at the end of the case, but it also provides the information which the parties need to address any outstanding amounts due under the mortgage so that there are no "surprises" later. See In re Ferrell, 580 B.R. 181, 184 (Bankr. D.S.C. 2017) (citing the Advisory Comm. Note to Rule 3002.1) ("Rule 3002.1 was added 'to aid in the implementation of § 1322(b)(5),' and to ensure that chapter 13 trustees and debtors receive timely notice of any changes or charges to their mortgage loans to enable them 'to challenge the validity of any such charges, if appropriate, and to adjust post-petition mortgage payments to cover any undisputed claim adjustment.' "). C. Remedies Available Under Rule 3002.1(i)
Recognizing that Rule 3002.1(i) is titled "Failure to Notify" and references the failure to provide information in accordance with Rule 3002.1, courts have explained how a Rule 3002.1(g) response which contains inaccurate information is as troubling as the failure to file a response or the filing of a response with no information. See In re Heard, No. 15-35564-pcm13, 2021 Bankr. LEXIS 2193 at *4-5, 2021 WL 3540412, at *2 (Bankr. D. Or. Aug. 11, 2021) (determining that a mortgagee who provides an inaccurate response violates Rule 3002.1(g)) In re Howard, 563 B.R. 308, 315 (Bankr. N.D. Cal. 2016) (noting that an inaccurate response "complies with neither the letter nor the spirit" of the rule); In re Ferrell, 580 B.R. 181, 187 (Bankr. D.S.C. 2017) (stating that an incorrect statement may be "worse than no statement").
Rule 3002.1(i) outlines remedies for violations of Rule 3002.1. It is titled "Failure to Notify" and provides that:
If the holder of a claim fails to provide any information as required by subdivision (b), (c), or (g) of this rule, the court may, after notice and hearing, take either or both of the following actions:
Fed. R. Bankr. P. 3002.1(i); see In re Legare-Doctor, 634 B.R. 453, 458 (Bankr. D. S.C. 2021) (explaining that "the Court has authority to fashion a remedy under Rule 3002.1(i), including the award of reasonable attorney's fees and costs.").(1) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or
(2) award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure.
1. Rule 3002.1(i) Authorizes Evidence Exclusion as a Sanction.
Rule 3002.1(i)(1) authorizes bankruptcy courts to bar mortgagees from presenting information that should have been noticed under the rule in any proceeding within the bankruptcy case. In determining whether to exclude evidence, the courts consider whether a violation occurred, and if so, whether the resulting failure to comply with the rule was either "substantially justified" or "harmless." A violation is not substantially justified or harmless if the debtor is prejudiced as a result of the mortgagee's failure. See In re Navarro, No. 15-10301-SMG, 2020 Bankr. LEXIS 1406, at *7-8, 2020 WL 2843033, at *4 (Bankr. S.D. Fla. May 29, 2020) (finding a mortgagee's failure to comply with Rule 3002.1's procedures for disclosing additional fees to be unjustified because the mortgagee's position was unsupported by relevant authority and the mortgagee was required to comply with Rule 3002.1); Legare-Doctor, 634 B.R. at 462 (finding that the mortgagee's violation was not substantially justified or harmless because the debtor was prejudiced by the late disclosure at the end of her case); In re Roe, No. 18-50046, 2021 Bankr. LEXIS 1849, at *10-12, 2021 WL 2946167, at *4-5 (Bankr. W.D. Mo. July 13, 2021) (finding that the mortgagee's violation was not substantially justified or harmless because the debtor was unfairly surprised by the late disclosure and the mortgagee offered no evidence to show its failure was justified); Figueroa v. Banco Popular de P.R. (In re Figueroa), Nos. 09-07725 (MCF), 19-00032, 2021 Bankr. LEXIS 3337, at *12-14, 2021 WL 5815641, at *5 (Bankr. D.P.R. Dec. 7, 2021); In re Howard, 563 B.R. 308, 315-17 (Bankr. N.D. Cal. 2016) (finding that the mortgagee's violation was not harmless or justified because the mortgagee's repeated actions in filing "wildly inaccurate" responses and in failing to attach an itemization of fees as required by the rule prevented the debtor from requesting that the court resolve the matter on the record in accordance with Rule 3002.1(h)); In re Kinderknecht, No. 17-12530-13, 2023 Bankr. LEXIS 129, at *18-20, 2023 WL 320984, at *8 (Bankr. D. Kan. Jan. 18, 2023) (excluding evidence of undisclosed fees because the court was not persuaded that the mortgagee's violation was harmless or justified); but see In re Tollios, 491 B.R. 886, 892 (Bankr. N.D. Ill. 2013) (declining to exclude evidence as a sanction because the debtors were not harmed by the mortgagee's failure to provide notice of an escrow fee change).
Subsection (i)(1) explicitly authorizes the court to exclude evidence of undisclosed charges in "any contested matter or adversary proceeding in the case." Fed. R. Bankr. P. 3002.1(i)(1). But for debtors who have completed their plan, this protection is incomplete. Disallowing evidence of an undisclosed charge during the Chapter 13 case but permitting the mortgagee to later present evidence of the charge or reference it as an act of default leaves the debtor exposed to the negative consequences that Rule 3002.1 was enacted to avoid. See Legare-Doctor, 634 B.R. at 462-63 (noting that allowing a creditor to present evidence of an undisclosed charge after a bankruptcy case has concluded would jeopardize the debtor's fresh start and circumvent Rule 3002.1's very purpose). For this reason, other courts have relied on the broader grant of authority in subsection (i)(2) to expand evidence exclusion of an undisclosed charge to any proceeding, including those outside the bankruptcy case. Id. at 463; see also In re Roper, 621 B.R. 899, 903 (Bankr. D. Colo. 2020) (noting that additional charges properly disclosed to a debtor during a bankruptcy case remain due and are not included in the general discharge). As another bankruptcy court explained, "[t]he remedy authorized by Rule 3002.1(i)(1) appears to limit the treatment of the disputed advance during Debtor's pending Chapter 13 case if the creditor's failure was not substantially justified or harmless, but Rule 3002.1(i)(2) is not so limited and expands the Court's authority to provide a remedy by authorizing it to 'award other appropriate relief[.]' " Legare-Doctor, 634 B.R. at 461 (citing In re Lescinskas, 628 B.R. 377, 382 n.9 (Bankr. D. Mass. 2021)). See also Ferrell, 580 B.R. at 188-89 (Ordering that "[t]o the extent that there exists any other post-petition amounts for fees, charges, and/or expenses that Shellpoint might assert were incurred in connection with Claim #5 and are recoverable against the Debtors or their property, these sums are deemed waived, cancelled, and discharged [and] . . . [a]ny attempt by Shellpoint to collect[ ] the Disputed Amounts or any other post-petition amounts for fees, charges, and or expenses, is and shall be a willful violation of this Order and the discharge injunction of § 524, and punishable by the contempt powers of this Court.").
Dewitt asks the court to issue an order enjoining the Mortgagee from presenting evidence regarding the Third Advance or otherwise referencing it as an act of default under her mortgage in this case or any other case before any court, including the pending state court foreclosure case. The Mortgagee argues that relief under subsection (i)(1) is unavailable because its actions were harmless. In support, the Mortgagee cites Tollios and states that Dewitt has not demonstrated that she would have been able to pay the Third Advance or taken different actions had the Mortgagee timely disclosed the fee. 491 B.R. at 892-93.
While Tollios also involved joint debtors who failed to pay property taxes in accordance with their Chapter 13 plan, those circumstances differed from the case at bar in important ways. The Tollios mortgagee added an escrow payment to the debtors' monthly statement without appropriately noticing the change under Rule 3002.1(b) after the debtors failed to pay the property taxes directly. Id. at 888. There, the debtors did not make the escrow payments and admitted during the proceeding that they were financially unable to pay the taxes or the escrow payments. Id. Seven months after the improperly noticed escrow payment change, the debtors sought sanctions against the mortgagee, while the case was still ongoing. Id. While the court found a Rule 3002.1(b) violation and awarded attorney fees, the court declined to exclude evidence of the improperly disclosed escrow charges because courts were at that time split regarding the applicability of Rule 3002.1 to mortgagees in the absence of a pre-petition arrearage. Id. at 891-92. In addition, the Tollios court found that the debtors were not harmed by the violation because they would not have taken different actions had the charges been properly noticed. Id.
Dewitt's case is much different than Tollios. Here, the Mortgagee filed a response under penalty of perjury affirming that Dewitt's mortgage was current, but later attempted to collect the Third Advance after the case concluded and cited Dewitt's failure to pay the Third Advance as an act of default and a basis for foreclosure. Courts have consistently interpreted Rule 3002.1(i)(1) to place the burden on the mortgagee to demonstrate that its conduct was substantially justified or harmless. See e.g. Legare-Doctor, 634 B.R. at 462 (discussing creditor's failure to justify conduct in violation of Rule 3002.1); Figueroa, Nos. 09-07725 (MCF), 19-00032, 2021 Bankr. LEXIS 3337, at *12-14, 2021 WL 5815641, at *5 (similar). The court does not find that the Mortgagee has met its burden. The Mortgagee's conduct harmed Dewitt by subjecting her to collection actions, including a state foreclosure proceeding, and forcing her to reopen her bankruptcy case to seek relief. She has incurred significant attorney fees in responding to the Mortgagee's actions. The Mortgagee's failure to file an accurate report indicating that one or more tax advances were owed prevented Dewitt's ability to pay any such obligation during the Chapter 13 case while she was operating under the protection of the automatic stay. Thus, the Mortgagee's pursuit of Dewitt on the tax advance after the case was closed harmed and prejudiced her. For those reasons, pursuant to its authority under Rule 3002(i)(1), the court will preclude the Mortgagee from presenting any information relating to or referencing the Third Advance in Dewitt's bankruptcy case. See Legare-Doctor, 634 B.R. at 462; Roe, No. 18-50046, 2021 Bankr. LEXIS 1849, at *14, 2021 WL 2946167, at *5 (Bankr. W.D. Mo. July 13, 2021) (precluding presentation of evidence related to fees that were not timely or properly disclosed under Rule 3002.1 in any proceeding arising in debtor's bankruptcy case).
Under Dewitt's Chapter 13 plan (doc. 5 at 8, ¶ 9), the property of the estate, including her residence, did not re-vest in her and remained property of her bankruptcy estate "until the case [was] dismissed, discharged or converted." See 11 U.S.C. § 1327(b) (property of the estate re-vests in the debtor at confirmation, unless otherwise provided in the plan or confirmation order). Therefore, the automatic stay protected both the debtor and her residence throughout the Chapter 13 case. 11 U.S.C. § 362(c). In addition, the Mortgagee was bound by the terms of the Plan. 11 U.S.C. § 1327(a).
Further, the court will exercise its authority under Rule 3002.1(i)(2) and § 105(a) to preclude the Mortgagee from citing to or referencing the Third Advance as the basis for default under the terms of the Mortgage in any court proceeding in perpetuity, including in any foreclosure. This exercise of authority is necessary to prevent the Mortgagee from benefitting from its failure to comply with Rule 3002.1(g) and to protect DeWitt from foreclosure on this basis. Legare-Doctor, 634 B.R. at 463.
Section 105(a) provides:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.11 U.S.C. § 105(a) (emphasis added). The broad language of § 105(a) grants the court the power to prevent abuses of process and to issue orders necessary or appropriate to carry out provisions of the Code, court orders, and rules. See Ferrell, 580 B.R. at 188; Trevino v. HSBC Mortg. Servs. (In re Trevino), 615 B.R. 108, 145-46 (Bankr. S.D. Tex. 2020); In re Rayford, No. 16-29914, 2020 Bankr. LEXIS 3635, at *12-13, 2020 WL 8551780, at *5 (Bankr. W.D. Tenn. Dec. 17, 2020) (stating that the court has authority under Rule 3002.1(i) and § 105(a) to award appropriate relief for a violation of Rule 3002.1(g)); In re Fivecoate, 634 B.R. 720, 730 (Bankr. D.S.C. 2021) (Determining that Section 105 allowed the court to preclude the collection of three post-petition payments when the court found that the mortgagee's actions were an abuse of process and were in violation of the Court's confirmation order.); see also Amer. Hardwoods, Inc. v Deutsche Credit Corp. (In re Amer. Hardwoods, Inc.), 885 F.2d 621, 625 (9th Cir. 1985) ("[S]ection 105 permits the court to issue . . . injunctions after confirmation of a plan to protect the debtor and the administration of the bankruptcy estate."); Rojas v. Citi Corp Trust Bank FSB (In re Rojas), Nos. 07-70058, 09-07003, 2009 Bankr. LEXIS 2220, at *19-26, 2009 WL 2496807, at *5-6 (Bankr. S.D. Tex. Aug. 12, 2009) (stating that Section 105 may be used to enforce Bankruptcy Rules relating to filing of proofs of claim in addition to other possible remedies).
Precluding the Mortgagee from presenting evidence of Dewitt's failure to pay the real estate taxes in a foreclosure proceeding after it failed to disclose those taxes in its Rule 3002.1(g) response carries out the provisions of §§ 1322(b)(5), 1328(a), and § 524, in addition to Rule 3002.1. Otherwise, allowing the Mortgagee to introduce evidence of Dewitt's failure to pay those real estate taxes in the foreclosure case would eviscerate the purpose of Chapter 13 and Rule 3002.1(g). See In re Roper, 621 B.R. at 902 (stating that Rule 3002.1 "does not allow the secured creditor to silently accrue additional amounts and then spring a 'gotcha' foreclosure after the debtor has completed her plan and emerged from bankruptcy protection."). Accordingly, precluding the Mortgagee from introducing such evidence in a foreclosure proceeding is necessary to prevent an abuse of process and to enforce the Bankruptcy Code and Rule 3002.1.
2. Rule 3002.1(i)(2) Authorizes the Award of Attorney Fees and Expenses.
It is beyond dispute that Rule 3002.1(i)(2) authorizes bankruptcy courts to award attorney's fees and reasonable expenses. Here, the Mortgagee asserts that no attorney's fees should not be awarded because its actions were harmless and Dewitt cannot demonstrate that she would have avoided a default under the mortgage even if the Third Advance fee had been properly noticed. Doc. 148 at 7-8. To the extent the court does award attorney's fees, the Mortgagee contends that the award should be limited to the contempt proceeding presently before the court and exclude any work relating to the state foreclosure action. Id. The Mortgagee further argues that awarding attorney's fees for work beyond that required to reopen this case and pursue the contempt action would amount to an impermissible punitive sanction because that work is not causally related to Rule 3002.1. Id. at 8.
The Mortgagee's arguments are not persuasive. Unlike subsection (i)(1), subsection (i)(2) includes no requirement that the court consider whether the mortgagee's conduct was substantially harmless or justified before awarding appropriate relief. See Blanco v. Bayview Loan Servicing, LLC (In re Blanco), 633 B.R. 714, 756 (Bankr. S.D. Tex. 2021); Meyer v. Wells Fargo Bank, N.A. (In re Meyer), Nos. 1-12-bk-04042-RNO, 1-17-ap-00138-RNO, 2018 Bankr. LEXIS 1041 at *33, 2018 WL 1663292, at *12 (Bankr. M.D. Pa. Apr. 4, 2018) ("Upon examination of Rule 3002.1, I cannot find that the Debtor is required to establish harm or a lack of substantial justification in order to state a claim for relief . . . . [U]nder 3002.1(i)(2), the court may still award reasonable expenses and attorney's fees regardless of whether there was harm."). In addition, Rule 3002.1(i)(2) does not limit "reasonable expenses and attorney fees caused by the failure" to the bankruptcy case. Instead, the court is given broad discretion to craft an appropriate remedy. See Blanco, 633 B.R. at 754 ("The plain language of Rule 3002.1(i) places few restrictions on the types of remedies bankruptcy courts can issue."). Here, the court has already determined that the Mortgagee did violate Rule 3002.1(g). In Dewitt I, this court unequivocally stated:
Mortgagee's noncompliance did cause harm - the Debtor was forced to defend a state court foreclosure action and to reopen her bankruptcy case to assert her rights. There is no basis to find that HSBC's failure to file an accurate 3002.1(g) response and act in accordance with its sworn statements was substantially justified.644 B.R. at 398. Accordingly, the court will award reasonable attorney fees and expenses to Dewitt for all legal services performed in response to the Mortgagee's Rule 3002.1(g) violation, including legal work related to both reopening the bankruptcy case and pursuing remedies in the bankruptcy court and also those incurred in defending the state court foreclosure action.
3. Rule 3002.1(i)(2) Does Not Authorize Bankruptcy Courts to Award Compensatory Damages.
Dewitt requests that this court award compensatory damages for "mental and emotional distress caused by the actions of HSBC, PHH, and Ocwen." Doc. 147 at 5. The Mortgagee argues that compensatory damages for emotional or mental suffering are unavailable under Rule 3002.1(i)(2) and suggests that the phrase "other appropriate relief" authorizes the court to award only remedies within the same category as attorney fees and reasonable expenses.
This issue raises the question of whether "other appropriate relief" in Rule 3002.1(i)(2) includes compensatory damages, such as damages for emotional distress suffered by Dewitt. Compensatory damages are distinct from punitive damages and are intended to compensate a debtor for loss. See In re Tapp, No. 19-62481, 2020 Bankr. LEXIS 1843, at *8, 2020 WL 4810074, at *3 (Bankr. N.D. Ohio July 10, 2020) (quoting In re Roman, 283 B.R. 1, 9 n. 9 (B.A.P. 9th Cir. 2002)) ("Generally, actual damages include compensatory damages, as opposed to noneconomic or punitive damages, and are defined as '[a]n amount awarded to a complainant to compensate for a proven injury or loss; damages that repay actual losses.' "). " 'Actual damages' and 'compensatory damages' are synonymous terms and are intended to compensate a plaintiff for its loss." Berry v. Fay Servicing, LLC (In re Berry), Nos. 21-8005/8007, 2022 Bankr. LEXIS 2496, at *52, 2022 WL 4115752, at *18 (B.A.P. 6th Cir. Sept. 9, 2022) (citing McMillian v. F.D.I.C., 81 F.3d 1041, 1055 n.15 (11th Cir. 1996)). Such damages may include recompense for costs incurred and for actual injury, including emotional injury. See Ridley v. M & T Bank (In re Ridley), 572 B.R. 352, 366 (Bankr. E.D. Okla. 2017) (awarding $620 in actual damages for lost wages in enforcing discharge injunction);
The court in In re Tollstrup determined that the Rule 3002.1(i) does not allow the recovery of compensatory damages, stating:
Rule 3002.1 is a procedural rule. Rules of procedure cannot create independent causes of action that are unavailable under applicable substantive law. I am unaware of any court that has viewed Rule 3002.1(i), or its close cousin, Rule 3001(c)(2)(D), to permit an award of compensatory damages for violations.No. 15-33924-dwh13, 2018 Bankr. LEXIS 767 at *11-12, 2018 WL 1384378, at *5 (Bankr. D. Or. Mar. 16, 2018). After Tollstrup, another court drew a similar conclusion, finding that because Rule 3002.1 does not provide a private right of action, it does not allow compensatory damages. See Harlow v. Wells Fargo & Co. (In re Harlow), Nos. 17-71487, 20-07028, 2022 Bankr. LEXIS 3512, at *13-14, 2022 WL 17586716, at *5 (Bankr. W.D. Va. Dec. 12, 2022). In doing so, it relied upon an earlier decision in that district discussing Bankruptcy Rule 3001(1)(c)(2)(D) which opined that:
Although the Rules of Procedure may permit sanctions or other penalties as a part of enforcement, the Rules of Procedure do not allow for a private cause of action for damages from violating a rule of procedure (in other words, as noted by Midland, there is no private cause of action to seek damages for a violation of Rule 3001). Instead Rule 3001 gives the Court authority to patrol the parties before it to achieve the efficient, speedy, and just resolution of adversarial and contested matters.Thomas v. Midland Funding LLC (In re Thomas), 592 B.R. 99, 111-12 (Bankr. W.D. Va. 2018), aff'd by 606 B.R. 687 (W.D. Va. 2019); see also Steed v. Educ. Credit Mgmt. Corp. (In re Steed), 614 B.R. 395, 411 (Bankr. N.D. Ga. 2020) (Rule 3001 does not create "an independent cause of action."). The Harlow court concluded that while the Rule does not allow for compensatory damages, it should be construed to allow courts to sanction creditors who violate the Rule, including with punitive damages.
Bankruptcy Rule 3001 contains almost identical language to Rule 3002.1(i)(2): "If the holder of a claim fails to provide any information required by this subdivision (c), the court may, after notice and hearing, take either or both of the following actions: (i) preclude the holder from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding in the case, unless the court determines that the failure was substantially justified or is harmless; or (ii) award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." Fed. R. Bankr. P. 3002(c)(2)(D).
When Congress has intended to create a private right of action, it has done so expressly. Rule 3002.1(i)(2), providing for "other appropriate relief," is quite different from § 362(k), which does provide a private right of action for individuals to address violations of the automatic stay. The statute specifically provides for compensatory damages:
Except as provided in paragraph (2), an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys' fees, and, in appropriate circumstances, may recover punitive damages.11 U.S.C. § 362(k)(1) (emphasis added). See Pettitt v. Baker, 876 F.2d 456, 457-58 (5th Cir. 1989); Harker v. Eastport Holdings, LLC (In re GYPC, Inc.), 634 B.R. 983, 991 (Bankr. S.D. Ohio 2021).
While Rule 3002.1(i)(2) provides that the court may "award other appropriate relief," the court finds that this language embodied within a procedural rule does not provide for a private right of action. Accordingly, this court follows Tollstrup and Harlow in finding that Rule 3002.1 does not allow for the recovery of actual or compensatory damages beyond the attorney fees and expenses provided for by the Rule. Accordingly, Dewitt's request for damages on account of emotional distress is denied.
4. Rule 3002.1(i)(2) Authorizes Bankruptcy Courts to Award Punitive Damages.
The few courts to address Rule 3002.1(i)(2) have debated the meaning of "other appropriate relief" and reached opposing conclusions on whether punitive damages can be awarded under Rule 3002.1(i)(2). To date, the Second Circuit is the only circuit court to have addressed this question. See PHH Mortg. Corp. v. Sensenich (In re Gravel), 6 F.4th 503, 508 (2d Cir. 2021). The Gravel majority determined that Rule 3002.1 does not authorize a bankruptcy court to impose punitive damages, while the dissenter found to the contrary. The bankruptcy courts who have addressed the issue are also split.
The following bankruptcy courts have found that Rule 3002.1(i)(2) authorizes the imposition of punitive damages: Blanco v. Bayview Loan Servicing (In re Blanco), 633 B.R. 714, 755 (Bankr. S.D. Tex. 2021); In re Legare-Doctor, 634 B.R. 453, 462 (Bankr. D.S.C. 2021); Harlow v. Wells Fargo & Co. (In re Harlow), 2022 Bankr. LEXIS 3512 *13-14, 2022 WL 17586716, at *5 (Bankr. W.D. Va. Dec. 12, 2022); Trevino v. HSBC Mortg. Servs. (In re Trevino), 615 B.R. 108, 145 (Bankr. S.D. Tex. 2020) (relying on § 105(a)). But see In re Tollstrup, 2018 Bankr. LEXIS 767 at *13, 2018 WL 1384378, at *5-6 (Bankr. D. Or. Mar. 16, 2018) (finding that Rule 3002.1(1)(2) does not authorize punitive damages).
In Gravel, a bankruptcy judge awarded $75,000 in punitive damages in response to a mortgage servicer's Rule 3002.1 violations in three cases. In a split decision, the panel decided in favor of the mortgage servicer and concluded that punitive damage awards are beyond the scope of authority granted to bankruptcy courts in Rule 3002.1(i)(2). Id. The majority determined that the general authority implied by the language "other appropriate relief" should be read as authorizing only other remedies within the same category as the specific remedies listed in the subsection, namely attorney fees and reasonable expenses. Id. at 514-15. Because attorney fees and expenses are compensatory damages, the court concluded that Congress intended that the more general language be read to include other remedies within the same category as the specific remedies mentioned. Id. The majority explained, "Because 'other appropriate relief' is a general phrase amid specific examples, it is best 'construed in a fashion that limits the general language to the same class of matters as the things illustrated.' " Id. (quoting Canada Life Assurance Co. v. Converium Ruckversicherung (Deutschland) AG, 335 F.3d 52, 58 (2d Cir. 2003)). The majority also noted that the preceding remedy contained in subsection (i)(1) is also remedial in nature because evidence preclusion is a sanction imposed to limit to harm caused by the mortgagee's failure to comply with Rule 3002.1 rather than to punish the mortgagee for its conduct. Id. at 515.
Judge Bianco reached the opposite conclusion in his dissent: subsection (i)(2)'s broad language, when read plainly, authorizes bankruptcy courts to impose punitive damages. Id. at 517-18. Because § 102(3) of the Code defines the term "including" as "not limiting," a plain reading of subsection (i)(2) suggests that a court may award other appropriate relief (beyond the evidence preclusion authorized in subsection (i)(1)), including, but not limited to, attorney's fees and reasonable expenses. Id. at 520-21. Judge Bianco also concluded that subsection (i)(1)'s evidence exclusion remedy is itself a punitive sanction rather than compensatory in nature. Id. at 521. Judge Bianco explained:
Although [Rule 3002.1(i)(1)] does allow the violator to avoid the sanction if the failure to provide the requisite notice was harmless, it also allows for the imposition of the drastic sanction of exclusion regardless of the precise nature or amount of such harm. In other words, the sanction is not required to be proportionate to the harm - i.e., compensatory in nature — but rather seeks to punish with the broad brush of evidence-preclusion to deter such violations in the future. Indeed, we have noted that in other contexts the preclusion of evidence can be a more extreme sanction than monetary sanctions . . . .Id. at 521-22 (emphasis added) (citations omitted).
* * * *
Once the evidence-preclusion penalty in Rule 3002.1(i)(1) is properly classified as a potentially punitive sanction that also operates as a deterrent, then the "other appropriate relief" language in Rule 3002.1(i)(2) naturally includes, from a textual standpoint, punitive monetary sanctions because they are part of "the same class of matters" contained within the related penalty provision.
Judge Bianco also looked to the history of Rule 3002.1(i) as support for a broad interpretation. Id. Rule 3002.1(i) was modeled on Federal Rule of Civil Procedure 37(c)(1) which has long been read to authorize the award of punitive damages. See e.g. Olivarez v. GEO Grp., Inc., 844 F.3d 200, 203 (5th Cir. 2016) ("Pursuant to Rule 37[(c)(1)] and the court's inherent authority, the district court imposed sanctions requiring each Appellant to pay a $1,000 fine."); see also Memorandum from Subcomm. on Consumer Issues to Advisory Comm. on Bankr. Rules (April 7, 2010) (document at 63) (available at https://www.uscourts.gov/sites/default/files/fr_import/BK2010-04.pdf) ("The proposed sanctions [in Rule 3001(c)(2)(D)] most closely resemble the sanction available under Civil Rule 37(c)(1) for the failure to provide information required under the disclosure provisions of Rule 26(a)."). The Gravel majority considered this analogy but ultimately rejected it for two reasons. First, the majority looked to the purpose of Rule 37 in punishing recalcitrant litigants for discovery violations and determined that this purpose justifies more severe sanctions those warranted for a Rule 3002.1 violation. Gravel, 6 F.4th at 515. While compliance with discovery is integral to the function of the courts and the ability to conduct speedy trials, compliance with Rule 3002.1 serves a more limited, though important, function. Id. The majority explained, "Federal Rule 37 protects more than the interest of a party in remedying or avoiding certain costs; it protects the interests of the parties, the court, and the public in a speedy and just resolution of the case." Id. Second, the majority gave great weight to the inclusion of the language "further just orders" in Rule 37(b)(2)(A), and its absence in Rule 3002.1(i). Id.
Rule 37(c)(1) states:
If a party fails to provide information or identify a witness as required by Rule 26(a) or (e), the party is not allowed to use that information or witness to supply evidence on a motion, at a hearing, or at a trial, unless the failure was substantially justified or is harmless. In addition to or instead of this sanction, the court, on motion and after giving an opportunity to be heard:
Fed. R. Civ. P. 37(c)(1) (emphases added).(A) may order payment of the reasonable expenses, including attorney's fees, caused by the failure;
(B) may inform the jury of the party's failure; and
(C) may impose other appropriate sanctions, including any of the orders listed in Rule 37(b)(2)(A)(i)-(vi).
In Blanco v. Bayview Loan Servicing, another bankruptcy court considered the question of punitive damages and adopted Judge Bianco's reasoning. 633 B.R. 714 (Bankr. S.D. Tex. 2021). The Blanco court agreed that Rule 3002.1 should be interpreted to include punitive damages in a manner similar to Rule 37. The court also concluded that Gravel majority's fundamentally mischaracterized Rule 3002.1's purpose as one existing solely to protect the more limited purpose of protecting individual debtors. The court opined that "it is equally important to the bankruptcy courts and the public who have an interest in ensuring that the "fresh start" objective of the Bankruptcy Code is not undermined, and that speedy and just resolutions of chapter 13 cases take place." Id. at 753. Two other bankruptcy courts have joined the Blanco court in rejecting the Gravel majority's interpretation and adopted Judge Bianco's reasoning. See In re Legare-Doctor, 634 B.R. 453 (Bankr. D.S.C. 2021). The third bankruptcy court phrased it in this manner:
Rule 3002.1 must have teeth to achieve its purposes, and that, different from a private right of action for compensatory damages, punitive, non-compensatory sanctions can be warranted to achieve its purposes. Otherwise, Rule 3002.1(i), the sanctions provision of the Rule (which is exactly what it is), would have little deterrent ability as to future violations. In that respect, a claim for punitive, noncompensatory sanctions for violation of Rule 3002.1 can and should be able to be maintained.Harlow, Nos. 17-71487, 20-07028, 2022 Bankr. LEXIS 3512, *13-14, n.6, 2022 WL 17586716, at *5 n.6.
This court respectfully disagrees with the Second Circuit's analysis regarding the availability of punitive damages for Rule 3002.1 violations and follows Blanco and Harlow in concluding that "other appropriate relief" authorizes bankruptcy courts to award punitive damages for Rule 3002.1 violations. The court does so for two reasons. First, this court agrees with its sister bankruptcy courts that compliance with Rule 3002.1 is fundamental to the integrity of Chapter 13. Accordingly, the ability of courts to award appropriate punitive damages is a critical deterrent to induce mortgage holders and servicers to make systemic changes that ensure future compliance. Id. at 755. Second, as explained, this court concludes that compensatory damages for actual harm are unavailable under Rule 3002.1 because the rule does not and cannot create a private right of action without congressional authorization. Because of this, the language "other appropriate relief" must be read to authorize punitive damages unless it is to be rendered meaningless altogether. It is a " 'cardinal principle' that courts 'must give effect, if possible, to every clause and word of a statute.' " United States v. Haynes, 55 F. 4th 1075, 1080 (6th Cir. 2022) (quoting Williams v. Taylor, 529 U.S. 362, 404, 120 S.Ct. 1495, 146 L.Ed.2d 389 (2000)). While "general terms should be construed in the light of the specific examples that are expressly identified," the court finds no contradiction of this axiom when Rule 3002.1(i)(2) is read to authorize the imposition of remedies appropriate to patrol the parties and obtain compliance rather than to compensate for actual loss. In re Reynolds, 470 B. R. 138, 144 (Bankr. D. Colo. 2012) (quoting Dept. of Labor v. Perini North River Assocs., 459 U.S. 297, 327, 103 S.Ct. 634, 74 L.Ed.2d 465 (1983)); Gravel, 6 F.4th at 514-15 (similar). As the Blanco court reasoned:
Beyond the plain language, this Court cannot conclude from the enumerated examples in (i)(2) that courts should be limited to compensatory relief. Evidence preclusion is a particularly harsh punitive sanction, warranted only under rare circumstances. Reasonable expenses and attorney's fees do not conclusively establish that only compensatory awards are appropriate either. The explicit mention of attorney's fees is necessary for courts to depart from the American Rule when considering fee shifting and therefore provides little indication as to how courts should interpret "other appropriate relief."633 B.R. at 754. This interpretation is buttressed by both the drafters' exclusion of any harm requirement in subsection (i)(2) and the language at the beginning of subsection (i), which emphasizes compliance of the creditor rather than harm to the debtor. Fed. R. Bankr. P. 3002.1(i) (framing the sanctions as available when "the holder of a claim fails to provide any information as required . . ."); see also Gravel, 6 F.4th at 521 (Bianco, J., dissenting) (concluding that subsection (i)(1) is punitive in nature because its evidence exclusion sanction is not tied to the proportionality of harm caused by the creditor's action); Blanco, 633 B.R. at 755-57 (similar). Rule 3002.1(i) is a procedural rule intended to facilitate the sharing of information that is integral to the Chapter 13 system, and these remedies are properly interpreted as tools for the court to compel compliance.
D. Remedies Available Under § 105 and the Court's Inherent Power
In addition to seeking remedies under Rule 3002.1(i), Dewitt requests that the court issue sanctions against the Mortgagee pursuant to § 105(a). The Sixth Circuit has affirmed that "[b]ankruptcy courts, like Article III courts, enjoy inherent power to sanction parties for improper conduct." Mapother & Mapother, P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 477 (6th Cir. 1996) (citing In re Rainbow Magazine, Inc., 77 F.3d 278, 283-84 (9th Cir. 1996)); In re Nicole Gas Prod., LTD., 519 B.R. 723, 736-37 (Bankr. S.D. Ohio 2014) (discussing the civil contempt power under § 105); see Chambers v. NASCO, Inc., 501 U.S. 32, 43, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991) (affirming that courts have inherent contempt powers to "achieve the orderly and expeditious disposition of cases").
Section 105(a) vests bankruptcy courts with the power to prevent abuses of the bankruptcy process, including the power to sanction parties for such conduct where appropriate. In re Trevino, 535 B. R. 110, 132 (Bankr. S.D. Tex. 2015) (quoting In re Jacobsen, No. 07-41092, 2009 Bankr. LEXIS 3150, at *43, 2009 WL 3245418 at *13 (Bankr. E.D. Tex. Sep. 30, 2009)); In re Kestell, 99 F.3d 146, 149 (4th Cir. 1996) ("[T]he Bankruptcy Code, both in general structure and in specific provisions, authorizes bankruptcy courts to prevent the use of the bankruptcy process to achieve illicit objectives."); In re Banner, No. 15-31761, 2016 Bankr. LEXIS 2214, at *21, 2016 WL 3251886, at *7 (Bankr. W.D.N.C. June 2, 2016) (similar). Bankruptcy courts may, within their discretion, "fashion an appropriate sanction for conduct which abuses the judicial process." Chambers, 501 U.S. at 44-45, 111 S.Ct. 2123. Another bankruptcy court explained "abuse of process" in this manner:
While "abuse of process" under § 105(a) is not defined in the Bankruptcy Code, a few courts essentially define it as "maneuvers or schemes which would have the effect of undermining the integrity of the bankruptcy system." Plaintiffs offered several cases demonstrating situations where courts have relied on § 105(a) for authority to sanction conduct, or to prevent an abuse of the judicial process. In most of those cases, bankruptcy courts have found that the filing of false documents—which disrupted the bankruptcy process and prejudiced debtors—constituted an abuse of process.Trevino, 615 B.R. at 128; Harlow, Nos. 17-71487, 20-07028, 2022 Bankr. LEXIS 3512 at *24, 2022 WL 17586716, at *9 (same). This court agrees with Trevino and Harlow and adopts this definition: an abuse of process occurs when a creditor engages in "a maneuver or scheme sufficient to undermine the integrity of the bankruptcy system" that disrupts the bankruptcy process and prejudices debtors. Harlow, Nos. 17-71487, 20-07028, 2022 Bankr. LEXIS 3512, at *24, 2022 WL 17586716, at *9. In Harlow, a bankruptcy court found that a creditor's conduct in filing allegedly false forbearance notices could constitute such an abuse of process. Id. at *24-25. The court concluded that "mortgage creditors and their agents have an obligation to ensure the filings are accurate and truthful. Indeed, the forms filed on the claims docket are certified as filed under penalty of perjury." Id. at *25.
In addition, while § 105 is not a "panacea for all ills confronted," bankruptcy courts may exercise § 105 authority and inherent authority when necessary to enforce provisions of the Bankruptcy Code or Rules, including to "fill the gaps left by the statutory language." Smart World Techs., LLC v. Juno Online Servs., Inc. (In re Smart World Techs., LLC), 423 F.3d 166, 183-84 (2d Cir. 2005) (quoting 2 Collier ¶ 105.01[2]); see Blanco, 633 B.R. at 761 ("[B]ankruptcy courts have both inherent contempt authority and equitable authority under [§ 105]."). As the Second Circuit explained in Smart World Techs, "The equitable power conferred . . . by section 105(a) is the power to exercise equity in carrying out the provisions of the Bankruptcy Code[.]" Smart World Techs., 423 F.3d at 184 (quoting New England Dairies, Inc. v. Dairy Mart Convenience Stores, Inc. (In re Dairy Mart Convenience Stores, Inc.), 351 F.3d 86, 91-92 (2d Cir. 2003)). Thus, this court in its discretion may exercise authority under § 105(a) to enforce the provisions of Rule 3002.1 if this court determines it to be necessary and appropriate to do so. Blanco, 633 B.R. at 761.
The bankruptcy court's sanctioning authority includes the power to impose "mild noncompensatory punitive damages," but not "serious noncompensatory punitive damages." Adell v. John Richards Homes Bldg. Co. L.L.C. (In re John Richards Homes Bldg. Co. L.L.C.), 552 F. App'x 401, 414 (6th Cir. 2013) (citing Tenn-Fla Partners v. First Union Nat'l Bank of Fla. (In re Tenn-Fla Partners), 226 F.3d 746, 751 (6th Cir. 2000)) (discussing Sixth Circuit jurisprudence on bankruptcy court sanctioning powers and collecting cases). Because bankruptcy courts are courts of limited jurisdiction, the general sanctioning power of bankruptcy courts does not encompass the imposition of criminal-like sanctions, absent other statutory authority. Id. at 415; but see Bavelis v. Doukas, 835 F. App'x 798, 811 (6th Cir. 2020) (distinguishing the bankruptcy court's more limited power to impose punitive sanctions for litigation misconduct from its power to do so in a "substantive state-law adversary proceeding"). Nonetheless, bankruptcy courts may award appropriate noncompensatory punitive damages when necessary or appropriate to enforce the Bankruptcy Code. Adell, 552 F. App'x at 414 (citing Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1193, 1189-97 (9th Cir. 2003)). The Sixth Circuit has declined to define the limits of this sanctioning power but noted that a $5,000 sanction awarded in another case was not serious, while the $2.8 million in sanctions awarded by the bankruptcy court in Adell clearly rose to the level of a serious punitive sanction. Id. at 415-16. In In re Mention, Judge Buchanan explained that civil punitive damages awarded by bankruptcy courts should seek to coerce the offending party into compliance with the Bankruptcy Code or the court's orders rather than punish the offending party in the manner of a criminal sanction. No. 15-13347, 2019 Bankr. LEXIS 3576, at *19, 2019 WL 11639530, at *7. Further, "[T]he Supreme Court has made clear that monetary sanctions imposed under a court's inherent powers require a finding that the misconduct 'constituted or was tantamount to bad faith.' " Gravel, 6 F.4th at 528 (Bianco, J., dissenting) (quoting Roadway Express, Inc. v. Piper, 447 U.S. 752, 767, 100 S.Ct. 2455, 65 L.Ed.2d 488 (1980)); see Desiderio v. Parikh (In re Parikh), 508 B.R. 572, 597 (Bankr. E.D.N.Y. 2014) (similar).
This court has already determined that the Mortgagee violated Rule 3002.1 when it knowingly filed an inaccurate 3002.1(g) response under penalty of perjury and willfully acted in direct opposition to its sworn statements by attempting to collect undisclosed charges and initiating a foreclosure action on that basis. At the time of her discharge, Dewitt was deemed current on her mortgage by operation of the Rule 3002.1 process. See Figueroa, Nos. 09-07725 (MCF), 19-00032, 2021 Bankr. LEXIS 3337, at *14, 2021 WL 5815641, at *5 ("In other words, the Debtor was deemed current because [the mortgagee] failed to notify otherwise . . . . [The mortgagee] could not pursue any alleged arrears that may have incurred during the bankruptcy case as a result of [the mortgagee's] failure to object to the Notice of Final Cure."). The Mortgagee argues that "Debtor failed to make a showing that Respondents violated a court order or willfully violated bankruptcy laws." Doc. 148 at 18. In fact, this court did address the Mortgagee's willful violation of Rule 3002.1:
In plain terms, HSBC argues that it changed its mind about waiving the Third Advance and added the charge back onto the Debtor's account after this court entered a discharge and closed the case and despite its affirmation to this court that the debt was current at the time of discharge - an assertion equivalent to crossing fingers behind one's back. This court is hardly amused . . . .
Even though the waiver was apparently pending internal approval, HSBC swore under penalty of perjury that the account was current. Doc. 57 at 2. At no time did HSBC request an extension of time to file the 3002.1(g) response or submit an accurate showing that the amount remained outstanding. The careful review conceived by the 3002.1(f) and (g) notice and response process ought to have triggered HSBC to either file a 3002.1(c) notice of the Third Advance and an appropriate 3002.1(g) response indicating the outstanding amount or, in the alternative, to request an extension
of the response deadline under Rule 9006(b) to ensure that the internal process to approve the waiver was complete. Instead, HSBC apparently filed a statement that, at best, it hoped would be true. In any case, it is clearly impermissible for a creditor to aver one set of facts to the court and then later take the opposite position, offering the excuse that it simply changed its mind.Dewitt, 644 B.R. at 396-97 (emphasis added). In taking these actions, the Mortgagee disrupted the bankruptcy process and prejudiced Dewitt. Had the Mortgagee filed an accurate statement indicating that the Third Advance remained outstanding, Dewitt could have filed a Rule 3002.1(h) motion asking the court to determine whether the mortgage was current or otherwise resolved her outstanding obligation through the Chapter 13 process. Instead, the Mortgagee contends that it could, after the conclusion of the case and expiration of Dewitt's bankruptcy protections, change its mind and seek to collect this unnoticed amount with impunity. This course of action constitutes "a maneuver or scheme sufficient to undermine the integrity of the bankruptcy system," and a sanctionable abuse of the bankruptcy process.
The Mortgagee argues that its conduct, even if in violation, does not amount to bad faith but was "at worst, an operational oversight or sloppiness[.]" Doc. 148 at 14. The Mortgagee also repeats its previous explanation and states that it initially chose to process a waiver of the Third Advance and responded to the Trustee's Notice of Final Cure Payment on that basis, then later reversed the waiver, despite having previously agreed on penalty of perjury that the account was current at the time of the Response. Id. The court rejects this argument. As Dewitt notes, the Mortgagee continues, even after this court's determination that its actions were in violation of Rule 3002.1, "to this day to seek to foreclosure against Dewitt's residence in the state foreclosure proceedings." Doc. 149 at 10.
Finally, the Mortgagee also suggests that it is unclear whether fees that have not been noticed under Rule 3002.1(c) can be included on a Rule 3002.1(g) response and pleads this confusion as the reason for the waiver reversal. Id. Common sense, of course, dictates that a review of the account should have prompted the Mortgagee to file a Rule 3002.1(c) notice for the Third Advance and simultaneously disclose it on its Response if the Mortgagee planned to collect the Third Advance. Instead, the Mortgagee reversed the waiver after Dewitt exited bankruptcy, demonstrating a willful disregard for the Bankruptcy Rules and for its actions in filing a sworn statement attesting that the mortgage was current and that there were no post-petition obligations owed to it. After the evidentiary hearing to be scheduled, the court will determine whether punitive damages should be awarded under § 105(a) on this basis and, if so, the appropriate amount of such damages.
E. This Court Declines to Issue Recommendations to the District Court
Dewitt has requested that, in the event the bankruptcy court does not engage in the process of imposing punitive damages against the Mortgagee, that the court submit proposed findings of fact and conclusions of law to the District Court to enable it to award punitive damages. By statute, bankruptcy courts only submit proposed findings of fact and conclusions of law to the District Court in two situations. First, the bankruptcy court does so when addressing non-core proceedings, absent consent of all the parties. 11 U.S.C. § 157(c). Second, even if the proceeding is designated as core, absent the knowing and voluntary consent of the parties, the court may not enter final judgment on Stern claims that otherwise can only be determined by an Article III court. Wellness Intern. Network, Ltd. v. Sharif, 575 U.S. 665, 686, 135 S.Ct. 1932, 191 L.Ed.2d 911 (2015).
This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B). Additionally, without reviewing the scope of possible Stern claims, it is sufficient to note that Stern claims do not include actions covered by Rule 3002.1 that function as "part and parcel of the claims-allowance process in bankruptcy." Waldman v. Stone, 698 F.3d at 919 (citing Stern v. Marshall, 564 U.S. 462, 497, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011)).
F. Discovery Disputes Cannot be Resolved Through a Summary Judgment Motion
Telegraphing their next battle in this matter, the parties have already been sparring as to whether Dewitt should be able to conduct discovery as to "other violations of Rule 3002.1 by the Respondents." Doc. 149 at 10. Dewitt argues that such discovery beyond the Mortgagee's conduct in this case "has the potential to assist the Court to assess punitive damages per Rule 3002.1(a)(2)." Dewitt asks the court to authorize discovery "for the period beginning three years prior to the date of her bankruptcy discharge to the present[,] of other cases in which HSBC, PHH, and Ocwen have been charged with violations of Rule 3002.1, been sanctioned for violations of Rule 3002.1(i)(1) and (2), and settled with or without legal proceedings for alleged violations of Rule 3002.1, and of related matters." Doc. 147 at 12. The Mortgagee argues that this request is procedurally improper and that such evidence, if any exists, would be irrelevant to any damages determination in this case. Doc. 148 at 14-15 n.5. The Mortgagee states that an affirmative discovery request is beyond the scope of the briefing order and generally cites Bankruptcy Rules 7026-7037. Id.
Rule 26 authorizes "extremely broad discovery." United States v. Leggett & Platt, 542 F.2d 655, 657 (6th Cir. 1976), cert. denied, 430 U.S. 945, 97 S.Ct. 1579, 51 L.Ed.2d 792 (1977) (quoting C. Wright, Law of Federal Courts § 81 at 355 (2d ed. 1970)) (internal quotation marks omitted); Ledford v. State Farm and Casualty Co. (In re Sams), 123 B.R. 788, 792 (Bankr. S.D. Ohio 1991). Rule 26(b)(1), incorporated in this contested matter by Rule 7026, defines the scope of discovery as "any nonprivileged matter that is relevant to any party's claim or defense and proportional to the needs of the case[.]" Indeed, information within this scope of discovery "need not be admissible in evidence" to be discoverable. Fed. R. Civ. P. 26(b)(1); see Oppenheimer Fund, Inc. v. Sanders, 437 U.S. 340, 351-52, 98 S.Ct. 2380, 57 L.Ed.2d 253 (1978); see also Mellon v. Cooper-Jarrett, Inc., 424 F.2d 499, 500-501 (6th Cir. 1970) (noting that "[t]he scope of examination permitted under Rule 26(b) is broader than that permitted at trial").
Despite this, courts are vested with broad discretionary power to "pare down discovery requests, which, although technically relevant, are unreasonably burdensome and overbroad." Per-Co Ltd. v. Great Lakes Factors, Inc. (In re Great Lakes Factors, Inc.), 331 B.R. 347, 352 (Bankr. N.D. Ohio 2005) (citing Thompson v. United States Dep't of Hous. & Urban Dev., 219 F.R.D. 93, 101 (D. Md. 2003)); see also Lavado v. Keohane, 992 F.2d 601 (6th Cir. 1993) ("[I]t is well established that the scope of discovery is within the sound discretion of the trial court.") (quoting Chrysler Corp. v. Fedders Corp., 643 F.2d 1229, 1240 (6th Cir. 1981). When determining whether to limit a discovery request, "[t]he court should consider the totality of the circumstances, weighing the value of the material sought against the burden of providing it, discounted by society's interest in furthering the truthseeking function." Rowlin v. Alabama Dep't of Pub. Safety, 200 F.R.D. 459, 461 (M.D. Ala. 2001); see also Great Lakes Factors, 331 B.R. at 352-53 (limiting an overly broad discovery request). As a district court explained:
The proportionality analysis requires consideration of a number of factors, including the importance of the issues at stake in the action, the amount in controversy, the parties' relative access to relevant information, the parties' resources, and the importance of the discovery in resolving the issues. Consideration must also be given to whether the burden or expense of the proposed discovery outweighs its likely benefit. Fed. R. Civ. P. 26(b)(1)'s inclusion of the proportionality factors enforces the collective obligation to consider proportionality in discovery disputes; it does not, however, permit a party to refuse discovery simply by making a boilerplate objection that the information requested is not proportional. See Advisory Committee Notes to December 1, 2015 amendments. Further, the party seeking discovery does not bear the burden of addressing all of the proportionality factors. Id.Martin v. Posey, No. 2:15-cv-2294, 2017 U.S. Dist. LEXIS 13214, at *6, 2017 WL 412876, at *3 (S.D. Ohio Jan. 31, 2017).
The parties should consider these fundamental principles of discovery and attempt to reach an amicable resolution on the scope of discovery for the damages hearing. But the court cannot resolve discovery matters in a decision on a summary judgment motion. Further, it should be addressed through the proscribed discovery resolution process before court intervention. LBR 7026-1.
VI. Conclusion
For these reasons, the court grants in part and denies in part Dewitt's motion for summary judgment. The court will issue an order incorporating this decision and a separate scheduling order setting an evidentiary hearing to determine appropriate damages.
IT IS SO ORDERED.