665 B.R. 420
9th Cir. BAP2024Background
- Melanio and Ellen Valdellon (Debtors) completed a Chapter 13 bankruptcy plan, which cured mortgage arrears and provided for ongoing mortgage payments, after which they received a discharge.
- Upon completion and discharge, the mortgage servicer (PHH Mortgage Corporation, with Wells Fargo as noteholder) continued to assert past due amounts and ultimately initiated foreclosure based on alleged unresolved arrears.
- The Debtors filed suit alleging PHH failed to properly credit their plan payments as required by 11 U.S.C. § 524(i), causing them harm including fees, costs, and emotional distress.
- The bankruptcy court dismissed the claim, holding Debtors failed to allege a plausible violation of § 524(i) and that emotional distress damages were unavailable as a matter of law; state law claims were dismissed for lack of jurisdiction or were abstained from.
- The District Court reversed in part, holding that Debtors alleged sufficient facts under § 524(i), and remanded for further proceedings; on remand, the bankruptcy court again dismissed, interpreting Supreme Court precedent to preclude emotional distress damages.
- On appeal, the Bankruptcy Appellate Panel held that Debtors' § 524(i) claim was improperly dismissed and that emotional distress damages can be awarded for willful violations of the discharge injunction.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Did Debtors allege a plausible § 524(i) violation? | PHH failed to properly credit plan payments. | Debtors didn’t specify a misapplied payment or show plan wasn’t in default. | Debtors’ allegations are sufficient; dismissal reversed. |
| Can emotional distress damages be awarded for § 524(i) violations? | Emotional distress is a compensable injury for discharge violations. | Traditional contempt law bars non-pecuniary damages; Taggart precludes them. | Emotional distress damages may be compensable under civil contempt. |
| Does a plan’s completion/discharge bar later default findings? | Discharge and plan completion conclusively bar finding of plan default. | Late payments mean incurable default; plan still in default. | Discharge order is conclusive; no ongoing default at discharge. |
| Court’s jurisdiction over related state law claims | (Waived on appeal) | Bankruptcy Code preempts, plus lack of jurisdiction. | Affirmed lower court; no jurisdiction or abstained. |
Key Cases Cited
- Ocwen Loan Servicing, LLC v. Marino, 577 B.R. 772 (9th Cir. BAP 2017) (bankruptcy courts can award emotional distress damages for willful discharge violations)
- Taggart v. Lorenzen, 587 U.S. 554 (2019) (sets standard for holding creditors in contempt for discharge violations, but does not preclude emotional distress damages)
- Walls v. Wells Fargo Bank, N.A., 276 F.3d 502 (9th Cir. 2002) (no private right of action for discharge violations; exclusive remedy is contempt)
- HSBC Bank USA, N.A. v. Blendheim, 803 F.3d 477 (9th Cir. 2015) (completion of plan payments is a prerequisite to discharge and effective cure)
- Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178 (9th Cir. 2003) (civil contempt sanctions may be compensatory or coercive)
- United States v. United Mine Workers of Am., 330 U.S. 258 (1947) (compensatory contempt sanctions must be based on actual loss and may be nonpecuniary)