556 B.R. 561
Bankr. D. Vt.2016Background
- Chapter 13 trustee moved for contempt, disallowance of post‑petition mortgage charges, and sanctions against PHH Mortgage in three Vermont Chapter 13 cases (Gravel, Beaulieu, Knisley) for failing to file Rule 3002.1(c) notices and, in two cases, for violating court orders declaring debtors current.
- In each case PHH sent automated monthly statements (May 2016) showing old post‑petition charges (>180 days) without the Rule 3002.1(c) notice; PHH later removed/waived the charges after the trustee filed motions.
- PHH previously had been warned and sanctioned in related proceedings (including a 2014 Gravel sanction and an Owens decision criticizing PHH for similar Rule 3002.1 failures), and had represented it implemented remedial processes that the court found ineffective.
- The court concluded PHH had notice of its Rule 3002.1 obligations and of the Debtors Current Orders (PHH had sometimes consented or failed to object), yet continued to issue erroneous statements after representations that the problem was fixed.
- The court disallowed all post‑petition charges in the three cases, imposed sanctions under Rule 3002.1(i), § 105, and its inherent powers: $25,000 per case for 3002.1 violations; additional sanctions for court‑order violations — $200,000 (Gravel) and $100,000 (Beaulieu) — for a total of $375,000 payable to Legal Services Law Line of Vermont within 14 days.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did PHH violate Bankruptcy Rule 3002.1(c) by sending statements showing post‑petition fees without filing/serving required notices? | Trustee: PHH repeatedly sent statements with old post‑petition fees without 3002.1(c) notice; sanctions under 3002.1(i) are warranted to deter systemic misconduct. | PHH: Charges were erroneous one‑time automated errors; it removed/waived charges once alerted and thus no harm; sanctions unnecessary. | Yes. PHH failed to comply with Rule 3002.1(c) in all three cases; sanctioning authority under Rule 3002.1(i) and §105 applies. |
| If Rule 3002.1(c) violated, what sanction amount is appropriate? | Trustee: Substantial sanctions needed to deter and make violations unprofitable; court may set amount. | PHH: Past remediation and removal of charges make large sanctions unwarranted; not systemic. | Court imposed $25,000 per case for 3002.1 failures (computed by reference to persistent months of misconduct and prior warning). |
| Did PHH violate Court orders declaring debtors current (Gravel, Beaulieu), and are additional sanctions appropriate? | Trustee: Sending statements asserting due post‑petition charges after orders declaring debtors current is contempt and warrants civil or punitive sanctions. | PHH: No violation of court orders; conduct was inadvertent and remedied. | Yes. PHH violated the Debtors Current Orders. Civil contempt relief inappropriate (no coercion/compensation needed), but sanctions under the court’s inherent power and §105 are appropriate: $200,000 (Gravel), $100,000 (Beaulieu). |
| To whom should sanctions be paid? | Trustee: Payment to a nonprofit legal services entity is equitable because debtors/trustee suffered no economic loss and payment to them would be an unjustified windfall. | PHH: Did not propose an alternate recipient; asked court to exercise leniency on amount. | Sanctions directed to Legal Services Law Line of Vermont to aid indigent consumer debtors and avoid unjust enrichment of the parties. |
Key Cases Cited
- Chambers v. NASCO, Inc., 501 U.S. 32 (1991) (federal courts have inherent powers to impose sanctions to preserve integrity and orderly administration of the courts)
- Law v. Siegel, 134 S. Ct. 1188 (2014) (limits on bankruptcy courts’ exercise of equitable powers under § 105)
- United States v. Seltzer, 227 F.3d 36 (2d Cir. 2000) (distinguishes types of inherent‑power sanctions and when bad faith is required)
- Wolters Kluwer Fin. Servs., Inc. v. Scivantage, 564 F.3d 110 (2d Cir. 2009) (inherent‑power sanctions ordinarily require a showing of clear bad faith)
- In re Charbono, 790 F.3d 80 (1st Cir. 2015) (bankruptcy court may impose punitive, non‑contempt sanctions for order violations despite belated compliance)
- In re Momentum Mfg. Corp., 25 F.3d 1132 (2d Cir. 1994) (§ 105 construed liberally to enforce bankruptcy process and court orders)