In Re: Gravel
Before: JACOBS, BIANCO, PARK, Circuit Judges.
PHH Mortgage Corp. appeals from the order of the United States Bankruptcy Court for the District of Vermont (Brown, L.) imposing sanctions in three chapter 13 cases. PHH was sanctioned $75,000 for violation of Bankruptcy Rule of Procedure 3002.1 and $225,000 for violation of bankruptcy court orders.
PHH argues that Rule 3002.1 does not authorize punitive monetary sanctions, and that PHH did not violate the court orders as a matter of law. We agree.
We VACATE the sanctions order and REVERSE.
JUDGE BIANCO concurs in part and dissents in part in a separate opinion.
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.
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 appelleе, 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
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, L.) 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.
BACKGROUND
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 supersedеd) 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.)
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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-рetition 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
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.
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.
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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.
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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
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After a consolidated hearing, the bankruptcy court granted the Trustee‘s motions in September 2016. It found that PHH had violated
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
The United States District Court for the District of Vermont (Crawford, L.) 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 sаnctions 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). It adopted the factual findings of the first order and imposed the same sanctions for the Rule 3002.1 violation. However, the sanctions for violation of the Current Orders were reduced 25%: from $200,000 to $150,000 in the Gravel case and from $100,000 to $75,000 in the Beaulieu case. The reduced Current Orders sanctions were still to be paid to Legal Services; but the Trustee was made the recipient of the Rule 3002.1 sanction.
PHH appealed the second sanctions order to the district court, but the Trustee requested the bankruptcy court to certify the order for direct review by this Court, which the bankruptcy court granted. The Trustee petitioned this Court for direct review, which we granted.
DISCUSSION
A. Jurisdiction
This case is before us on direct appeal from the bankruptcy court‘s second sanctions order. Under
There is no doubt that we have jurisdiction to review the second sanctions order; but we must first clarify the scope of our jurisdiction over this appeal.
The bankruptcy court certified three questions of law. The questions, which the Trustee formulated, concern the power of bankruptcy courts to impose “punitive non-contempt sanctions” under Rule 3002.1, to impose such sanctions under
The Trustee contends that we can (or should) answer all three questions because they were certified. The statute, however, authorizes appeals of “orders,”
We may answer the certified questions only insofar as they help resolve the questions of law raised in the issues on appeal: whether the bankruptcy court properly sanctioned PHH for violating the Current Orders, and whether the bankruptcy court properly sanctioned PHH for violating Rule 3002.1.
B. Standard of Review
A bankruptcy court‘s award of sanctions, including findings of contempt, are reviewed for abuse of discretion. In re Kalikow, 602 F.3d 82, 91 (2d Cir. 2010). A bankruptcy court “necessarily abuses its discretion if it based its ruling on an erroneous view of the law or on a clearly erroneous assessment of the evidence.” Id. (quoting In re Highgate Equities, Ltd., 279 F.3d 148, 152 (2d Cir. 2002)) (brackets omitted).
The bankruptcy court‘s factuаl determinations are reviewed for clear error. U.S. Polo Ass‘n, Inc. v. PRL USA Holdings, Inc., 789 F.3d 29, 33 (2d Cir. 2015). Questions of law and interpretation of an order underlying a contempt finding are reviewed de novo. Id.
C. The $225,000 Sanction
PHH argues that the $225,000 sanction was an abuse of discretion because PHH did not, as a matter of law, violate the Current Orders. We agree. Though the orders declared that the debtors were current, they did not enjoin the recording of expired fees on the statements. Without an express injunction, there is fair ground of doubt as to whether the listed fees can form the basis for contempt.
A bankruptcy court‘s contempt power, like that of a district court, is “narrowly circumscribed.” Perez v. Danbury Hosp., 347 F.3d 419, 423 (2d Cir. 2003); see Taggart v. Lorenzen, 139 S. Ct. 1795, 1801 (2019) (“[T]he bankruptcy statutes incorporate the traditional standards in equity practice for determining when a party may be held in civil contempt for violating an injunction.“). Accordingly, “our review of a contempt order is more exacting than under the ordinary abuse-of-discretion standard.” Perez, 347 F.3d at 423; see United States v. Local 1804-1, Int‘l Longshoremen‘s Ass‘n, 44 F.3d 1091, 1095 (2d Cir. 1995) (“The contempt power is different.“).
Given the restricted scope of the contempt power, a prior question is whether the sanction here was actually based on contempt. The bankruptcy court invoked its “authority to impose punitive sanctions on parties who violate court orders,” observing that it “may hold a creditor in contempt for that party‘s violation of an injunction order.” Gravel II, 601 B.R. at 903. Then, applying the Supreme Court‘s recently-articulated standard for contempt in Taggart, the bankruptcy court “impos[ed] punitive sanctions on PHH for its violation of the Debtor Current Orders.” Id. at 903; see also id. at 888-89. Moreover, the Trustee‘s mоtion was one “for contempt and sanctions.” J. App‘x 651. The bankruptcy court plainly based its sanction on contempt.
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A bankruptcy court‘s contempt power derives from a court injunction and
Under Taggart, a bankruptcy court may hold a creditor in contempt for violating the court‘s injunction only “if there is no fair ground of doubt as to whether the order barred the creditor‘s conduct.” Id. at 1799. The “fair ground of doubt” standard has long been used in this Circuit to determine when a party may be held in contempt in the district court. See King v. Allied Vision, Ltd., 65 F.3d 1051, 1058 (2d Cir. 1995) (quoting Cal. Artificial Stone Paving Co. v. Molitor, 113 U.S. 609, 618 (1885)). The standard derives from two principles that are reemphasized in Taggart: “civil contempt is a severe remedy” and “basic fairness requires that those enjoined receive explicit notice of what conduct is outlawed.” 139 S. Ct. at 1802 (cleaned up). In particular, a contempt order is warranted only where the party has notice of the order, the order is clear and unambiguous, and the proof of noncompliance is clear and convincing. King, 65 F.3d at 1058; see U.S. Polo, 789 F.3d at 33.
The Current Orders had two components relevant to the contempt finding. The orders declared that the Gravels and Beaulieus are current on their mortgage payments to PHH, including all charges:
the debtors, by their payments through the Office of the Chapter 13 Trustee, have made all payments due during the pendency of this case . . . including all monthly payments and any other charges or amounts due under their mortgage with PHH Mortgage Corporation.
The orders also prohibited PHH from contesting that fact in any other proceeding:
the mortgagee [PHH] shall be precluded from disputing that the debtors are current (as set forth herein) in any other proceeding.
J. App‘x 705-06, 709. These paragraphs, the bankruptcy court held, gave PHH “notice it was enjoined from seeking to collect any fees or expenses allegedly incurred during the period encompassed by each Order, if not specified in the Order.” Gravel II, 601 B.R. at 890. We disagree.
The Current Orders were not a clear and unambiguous prohibition on PHH‘s sanctioned conduct. To form the basis for contempt, an order must leave “no doubt in the minds of those to whom it was аddressed . . . precisely what acts are
The declaration that a debtor is current does not in itself clearly forbid any conduct. Standing alone, it is an inadequate basis for contempt. The very purpose of the civil contempt power is to induce compliance with a court‘s injunction. Taggart, 139 S. Ct. at 1801. Aside from enjoining acts in other proceedings, there is no injunction here (or similar command or equitable remedy) to enforce--i.e., the orders fail to describe an “act or acts restrained or required.”
The Current Orders imposed a single injunction: PHH may not dispute the current status of the debtors “in any other proceeding.” J. App‘x 706, 709. However broad “other proceeding” may be in this context, there is fair ground of doubt as to whether it would reach PHH‘s out-of-court conduct in these proceedings.
The Trustee argues that, unless PHH is held in contempt, mortgage creditors will be able to assess improper fees with impunity. These concerns are overwrought. The bankruptcy court could have crafted an order that would have forbidden the conduct troubling the Trustee. The orders in Taggart, for example, relieved the debtor “from all debts that arose before the date of thе order for relief” and operated “as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset’ a discharged debt.” 139 S. Ct. at 1799, 1801 (quoting
Although a bankruptcy court has “unique expertise in interpreting its own injunctions and determining when they have been violated,” In re Anderson, 884 F.3d 382, 390-91 (2d Cir. 2018), this insight does not command deference. Anderson--in recognizing the expertise-- holds that a bankruptcy court is not required to compel arbitration of claims alleging violation of its discharge injunction. Id.; see also MBNA Am. Bank, N.A. v. Hill, 436 F.3d 104, 110 (2d Cir. 2006). But this Court still has a duty to conduct its own “exacting” review of contempt orders. Perez, 347 F.3d at 423. Expertise does not excuse a bankruptcy court from the fundamental limit on its power; a bankruptcy court cannot hold a party in contempt for violating an order that is subject to varying interpretations.
Moreover, the questionable proof of PHH‘s non-compliance could provide a second ground for vacatur, though we need not rely on it.1 Because
“ambiguities and omissions in orders redound to the benefit of the person charged with contempt,” Gucci Am., Inc. v. Weixing Li, 768 F.3d 122, 143 (2d Cir. 2014), the Current Orders already lack the requisite clarity to hold PHH in contempt.
Dear Mr. and/or Ms.
Below is the monthly Bankruptcy statement for the above loan. This statement is provided with the intent of complying with the United States Bankruptcy Court Vermont District Permanent Rule (3071-1). This is not an attempt to collect a debt.
Loan Information:
| Unpaid Principal balance: | $ | 11,851.98 |
| Escrow Balance: | $ | 3,962.45 |
| Maturity Date: | 07-18 | |
| Interest Rate: | 5.37500% | |
| Contractual Due Date: | 03-01-16 | |
| Post-Petition due date: | 03-01-16 | |
| Late Charge Balance to date: | $ | .00 |
| NSF fees: | $ | 30.00 |
| Property Inspection fees: | $ | 56.25 |
| Interest Paid Year to Date: | $ | 485.79 |
| Property Taxes Paid Year to Date: | $ | .00 |
Breakdown of Contractual Monthly Payment:
| Principal and Interest: | $ | 437.66 |
| Escrow: | $ | 306.74 |
| Total Payment Due: | $ | 744.40 |
J. App‘x 675 (emphasis added).
D. The $75,000 Sanction
The bankruptcy court imposed sanctions on PHH for violation of
To impose the sanction, the bankruptcy court invoked
This is an issue of first impression among the circuit courts. And few bankruptcy courts have opined on it. Although one court declined to dismiss a plaintiff‘s claim for
* * *
Before
As a solution,
The last subdivision of the rule provides an enforcement mechanism. If a creditor fails to give the requisite notice, the bankruptcy court may preclude the creditor from presenting evidence of its claim in the case--unless the failure was substantially justified or harmless.
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.” Canada Life Assurance Co. v. Converium Ruckversicherung (Deutschland) AG, 335 F.3d 52, 58 (2d Cir. 2003).
Reasonable expenses and attorney‘s fees are compensatory forms of relief. They expressly remedy harms to the debtor “caused by the [creditor‘s] failure” to give proper notice of a claim.
The rule‘s only other sanction reinforces that inference. It prevents a creditor from collecting an un-noticed claim so that a surprise deficiency does not later frustrate the debtor‘s fresh start. The rule makes an exception for harmless non-compliance, demonstrating that this evidence-preclusion sanction is tied to prejudice that a failure to notice causes the debtor. The sanction thus prospectively serves the remedial goal of shielding the debtor from unforeseen charges, and thus is also not a punishment.
Moreover, other sections of the Bankruptcy Code explicitly authorize punitive damages, whereas
A broad authorization of punitive sanctions is a poor fit with
The bankruptcy court reasoned that
Discovery sanctions under
To that end,
- order payment of reasonable expenses, including attorney‘s fees, caused by the failure;
- inform the jury of the party‘s failure; and
- impose other appropriate sanctions, including any of the orders listed in
Rule 37(b)(2)(A)(i) -(vi).
The bankruptcy court cites district court decisions imposing punitive monetary sanctions on counsel under that “just orders” clause. See, e.g., J. M. Cleminshaw Co. v. City of Norwich, 93 F.R.D. 338, 355 (D. Conn. 1981); see also Dissent at 15 (collecting cases). This Court has not decided whether such sanctions are
In the alternative, the Trustee argues that the $75,000 sanction is authorized under the bankruptcy court‘s inherent power. True, “bankruptcy courts, like Article III courts, possess inherent sanctioning powers,” which “include[s] the power to impose relatively minor non-compensatory sanctions on attorneys appearing before the court in appropriate circumstances.” Sanchez, 941 F.3d at 628. But while the bankruptcy court alluded to its inherent power, it did not assess whether the sanction was authorized under it; we cannot reach this question. See Kalikow, 602 F.3d at 96 (“[It is] imperative that the court explain its sanctions order with care, specificity, and attention to the sources of its power.” (quoting Sakon v. Andreo, 119 F.3d 109, 113 (2d Cir.1997)). In any event, there is no finding of bad faith; so it is dubious that the bankruptcy court could exercise its inherent power to do that which is unavailable under powers expressly defined. See Schlaifer Nance & Co. v. Estate of Warhol, 194 F.3d 323, 338 (2d Cir. 1999); see also Chambers v. NASCO, Inc., 501 U.S. 32, 47 (1991). The sanction was imposed under
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The dissent challenges our ruling on
The dissent concedes that sanctions may only be imposed based on “specific authority invoked.” Dissent at 26 (quoting Kalikow, 602 F.3d at 96). But the invocation identified by the dissent is no more than a perfunctory mention. That does not do. A court must justify the sanction in view of the specific source of its authority--especially when the source is inherent power. Inherent power is constrained: it requires “caution” and nоtice before use; and it is a last resort for when an express authority is not “up to the task.” Chambers, 501 U.S. at 50. Although, as the dissent observes, the bankruptcy court analyzed cases on inherent power, it did so to decide what amount it should sanction under
In any event, there is still the matter of bad faith. The dissent posits that the bankruptcy court found bad faith, at least more or less. Dissent at 31. When it came to the issue, the bankruptcy court said that PHH‘s actions “cannot realistically be attributed to an innocent mistake” and raised “serious concerns about whether
No wonder the dissent leans heavily on a non-finding to support the $75,000 sanction--PHH never charged the debtors a dime, and never collected a dime. The fees to which no notice was given were never due. The dissent fastidiously avoids acknowledging this little thing: the mortgage statements are said to have been “incorrect“; and they were “showing” fees. Dissent at 5, 7. On the final statements, the fees were $86.25 in the Beaulieu case, $371 in the Knisley case, and $258.75 in the Gravel case. Iterations of the same fees were re-listed on monthly statements in each case, none of them reflected in the amount due, and none of them paid. The rest is hyperventilation. It is surely of some matter there was no damage or harm here.
As for
The dissent is concerned that our interpretation of
CONCLUSION
For the foregoing reasons, the order of the bankruptcy court is VACATED and REVERSED.
JOSEPH F. BIANCO, Circuit Judge, concurring in part and dissenting in part:
I agree with the majority opinion that the Current Orders did not clearly and unambiguously prohibit PHH‘s conduct for which the bankruptcy court imposed the $225,000 sanction, and that the $225,000 should therefore be vacated. However, I respectfully part company with the majority opinion when it concludes that the bankruptcy court did not have the authority to impose $75,000 in sanctions under
I also separately conclude that, even assuming arguendo such authority does not exist under the Rule itself, the bankruptcy court possessed the independent authority under its inherent powers to impose this $75,000 sanction against PHH for its egregious conduct in violation of the Rule. The majority holds that the bankruptcy court, in imposing sanctions for this misconduct, only “alluded” to its inherent powers and did not provide sufficient reasoning to allow this Court to analyze the potential application of that power to the facts here. I respectfully disagree.
The bankruptcy court‘s explicit invocation of its inherent powers in both its order and its separate opinion, as well as its detailed reasoning regarding PHH‘s violations of the Rule and its thorough analysis of the “inherent powers” case authority relating to the sanction amount, together provided a more than sufficient record for us to hold that the imposition of the $75,000 sanction under such inherent powers was not an abuse of discretion. Moreover, although the majority suggests that it is “dubious” that a bankruptcy court can invoke its inherent powers in the absence of an explicit finding of bad faith, the Supreme Court and this Court have made clear that conduct that is “tantamount to bad faith” can provide the requisite factual predicate for imposing sanctions under a court‘s inherent powers, and I conclude that the bankruptcy court‘s findings satisfied that standard. This precedent regarding a district court‘s inherent powers to sanction in such situations applies with equal force to a bankruptcy court, which likewise has a correspondingly clear and compelling need to use such powers to vindicate its authority and ensure basic compliance with its rules and procedures.
In sum, I conclude that the bankruptcy court had the authority under
I therefore join in the opinion of the majority, except with respect to Part D.
DISCUSSION
A. The Bankruptcy Court‘s Finding Regarding PHH‘s Pattern of Sanctionable Misconduct
Before reviewing the bankruptcy court‘s authority to impose sanctions for violations of
In this action, PHH sent the Gravels incorrect mortgage statements for two-and-one-half years from 2011 until 2014. In order to attempt to correct the misapplication of payments, the Trustee mailed multiple letters attaching detailed spreadsheets directly to PHH, in addition to filing the letters with the bankruptcy court so they would be sent to PHH‘s counsel via ECF. Receiving no response from PHH, the Trustee filed a motion for sanctions in the amount of a little over $12,000. Only in response to that motion did PHH acknowledge its error and indicate that it had implemented new remedial processes to prevent future accounting errors. At oral argument on that motion, PHH‘s counsel acknowledged to the bankruptcy court that it “obviously has the authority to offer sanctions.” Joint App‘x at 734. However, PHH‘s counsel averred that the sanctions motion had successfully brought this accounting problem to PHH‘s attention, and asked that the amount of any monetary sanctions be modest in light of PHH‘s response. In particular, PHH‘s counsel told the bankruptcy court that PHH had “taken remedial steps” and had “corrected the underlying problem.” Id. at 724. PHH‘s counsel further explained, “[i]f [PHH has] problems again, they are not going to have – they are not going to have that excuse. They are not going to have that defense.” Id. Although the bankruptcy court expressed concerns about whether using progressive sanctions would curb the misconduct in a timely fashion, the bankruptcy court ultimately agreed to the amount of $9,000, which had been negotiated by PHH‘s counsel and the Trustee.
At least one other bankruptcy court had similarly warned PHH about its violation of
Notwithstanding the prior sanction and warnings by bankruptcy courts about these violations, PHH‘s violations continued. More specifically, after orders were issued in the Gravel and Beaulieu actions, each of which attested that “the debtors have cured any mortgage arrearage or default” and were “current,” Joint App‘x at 705-06, 709, PHH sent twenty-five mortgage statements showing late charges and property inspection fees in both actions. PHH did the same in the Knisley action. Again, the Trustee filed motions for contempt and sanctions (this time in each action), and again, PHH waived the fees and removed them from the debtors’ accounts. Only this time, in the exact reverse of its prior stance, PHH argued that motion practice was unnecessary, and that it would have happily removed the fees if the Trustee had only contacted PHH advising PHH of its error.
Among other sanctions, the bankruptcy court assessed a $1,000 sanction per violation of
B. Sanctions Under Federal Rule of Bankruptcy Procedure 3002.1(i)
I respectfully dissent from the majority‘s conclusion that
At the start, in support of its conclusion, the majority cites to a bankruptcy case, in which the bankruptcy court determined that it lacked the power to impose punitive sanctions under
“[T]he starting point in any case of interpretation must always be the language itself, giving effect to the plain meaning thereof.” Ret. Bd. of the Policemen‘s Annuity and Benefit Fund of the City of Chi. v. Bank of N.Y. Mellon, 775 F.3d 154, 165 (2d Cir. 2014) (alteration in original) (internal quotation marks omitted). As set forth by the majority,
the court may, after notice and hearing, take either or both of the following actions: (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.
The Bankruptcy Code instructs that ““includes’ and ‘including’ are not limiting[.]”
Notwithstanding this expansive language, the majority limits the Rule to allowing only non-punitive sanctions because, in its view, “reasonable expenses and attorney‘s fees” are both forms of compensatory relief and, when a statute provides specific examples, it is best to limit the general language to the same type of matters as those illustrated. Maj. Op. at 24-25 (quoting Canada Life Assurance Co. v. Converium Ruckversicherung (Deutschland) AG, 335 F.3d 52, 58 (2d Cir. 2003)). The use of that canon of construction, however, does not withstand closer scrutiny when the phrase “other appropriate relief” is analyzed in the context of this particular sanctions provision.
As a threshold matter, one should not overlook the fact that
The majority nevertheless seeks to cabin the bankruptcy court‘s authority to impose punitive sanctions under the broad phrase “other appropriate relief,” within this sanctions provision, by asserting that the other enumerated sanctions under both
In fact, in the context of the evidence-exclusion sanction under
Once the evidence-preclusion penalty in
This interpretation of the plain text of
Advisory Comm. on Bankr. Rules, Subcomm. on Consumer Issues, Memorandum on Comments on Proposed Amendments to Rule 3001(c) and Proposed New Rule 3002.1, 12 (PDF page 63) (Apr. 7, 2010) (“The proposed sanctions [in
As the bankruptcy court noted below, district courts have concluded that the similar language of
The majority nevertheless concludes that
The majority also seeks to cast aside the analogous
However, I find no daylight between the deterrent purpose of the sanctions provisions in
Importantly, the evidentiary exclusion was already in
Thus, there is no doubt that the expansion of the sanctions, to include “other appropriate relief,” was an effort to bring greater compliance under this Rule in the industry through the deterrence that such additional punitive sanctions would bring. Cf. Advisory Comm. on Bankr. Rules, Subcomm. on Consumer Issues, Memorandum on Comments on Proposed Amendments to Rule 3001(c) and Proposed New Rule 3002.1, 12 (PDF page 63) (Apr. 7, 2010) (“The proposed addition of
Bankruptcy courts have highlighted the importance of using these sanctions to achieve greater deterrence and, therefore, greater compliance under
Given the broad language utilized and the clear intent to strengthen these sanctions to allow for additional deterrence, there is no basis to conclude that there was any intent to limit “other appropriate relief” to compensatory sanctions such as “reasonable expenses and attorney‘s fees,” and to exclude non-compensatory punitive sanctions. For the same reason that the evidence exclusion sanction was insufficient to foster deterrence, such a restriction on the “other appropriate relief” would frustrate the provision‘s deterrent purpose especially because, as the bankruptcy
In addition to the shared purpose of deterrence, the scope of the intended sanctions under
One of the primary reasons that the award of costs and attorney‘s fees may provide woefully insufficient deterrence is that debtors may often pay the fees and charges that violate the Rule, either because they go unnoticed to the debtor or because it is easier to pay the small fees/charges rather than to litigate them, and such decisions by the debtor expose the offending party to no sanction whatsoever. The amicus brief from the National Association of Chapter 13 Trustees explained this economic incentive for non-compliance with the Rule by mortgage servicers:
[PHH] waves off its errors, in part, by emphasizing the relatively small dollar amount at issue in these cases. But that misses the systemic point. These types of undisclosed fees are at the heart of the problem that
Rule 3002.1 attempts to address. When fees and charges creep into accounts without proper notice, debtors may pay them, even if invalid. That may be because the fees and charges are not designated as immediately collectible and simply inflate the amounts debtors must pay to satisfy the loans. Or it may be because debtors conclude that the burden of challenging the amounts exceeds the likely benefit – especially if they learn of the exaggerated payoff only when they are attempting to close a refinancing of the loan or a sale of the mortgaged property. If the only cost to a claimholder for improperly аssessing fees is to occasionally forego the (relatively small) fees when caught, it encourages servicers to just treat those forfeitures as a cost of doing business and never take the systemic measures required to service loans properly in Chapter 13.
In short, beyond any interest that a particular debtor may have in the enforcement of the Rule, the bankruptcy courts and the public have an equally important and independent interest in ensuring that the “fresh start” objective of Chapter 13 proceedings is not undermined, and that a speedy and just resolution of those proceedings takes place. See In re Sutherland, 161 B.R. 657, 661 (Bankr. E.D. Ark. 1993) (“The longer the process to confirmation [under Chapter 13], the greater the harm to the creditors and the increase in adequate protection issues and problems for the creditors, the debtor, and the Court.“); see also In re Carr, 468 B.R. 806, 808 (Bankr. E.D. Va. 2012) (“The purpose of
Thus, the judicial branch and the public have a compelling interest in ensuring that the bankruptcy process is not abused by Rule violations or other misconduct. In fact, it is the role of the Trustee to represent the public interest with regard to the enforcement of the bankruptcy rules, including
In sum, I conclude that the plain meaning of “other appropriate relief” under
C. Sanctions Under a Bankruptcy Court‘s Inherent Power
Even assuming, arguendo, that the bankruptcy court did not have the authority to impose punitive monetary sanctions against PHH under
As the majority correctly explains, it is well settled that “‘[b]ankruptcy courts, like Article III courts, possess inherent sanctioning powers,’ which ‘include[s] the power to impose relatively minor non-compensatory sanctions on attorneys appearing before the court in appropriate
Notwithstanding its recognition of this inherent power possessed by the bankruptcy court, the majority concludes that the bankruptcy court here only “alluded to its inherent powers” and that “[t]he sanction was imposed under
I also respectfully disagree with the majority‘s conclusion that the bankruptcy court did not sufficiently assess whether the sanction was authorized so as to allow this Court to reach the question. Although the bankruptcy court did not include a section in the opinion separately discussing its basis for invoking its inherent authority to impose the $75,000 in sanctions for PHH‘s violations of
Moreover, the bankruptcy court spent several pages of its decision analyzing multiple inherent powers cases in great detail in discussing and determining the potential amount of the sanctions to be imposed under the court‘s inherent powers. See Gravel II, 601 B.R. at 905-07. Thus, this is not a case where the bankruptcy court failed to show “care, specificity, and attention to the sources of its power,” In re Kalikow, 602 F.3d at 96 (quoting Sakon v. Andreo, 119 F.3d 109, 113 (2d Cir. 1997)); cf. Sakon, 119 F.3d at 113 (“[A]n award [of sanctions] either without reference to any statute, rule, decision, or other authority, or with reference only to a source that is inapplicable will rarely be upheld.“).
Indeed, it is hard to imagine (and the majority fails to articulate) what additional factual or legal reasoning would be needed to aid our review of this determination under the bankruptcy court‘s inherent powers. Interestingly, PHH has not even
As to the requirements for thе exercise of that authority and discretion under a bankruptcy court‘s inherent powers, although the majority suggests that it is “dubious” that a bankruptcy court can impose monetary sanctions without an explicit finding of bad faith, the 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.” Roadway Express, Inc., 447 U.S. at 767 (emphasis added). As to the nature of conduct that can be “tantamount to bad faith,” we have explained that “a federal court – any federal court – may exercise its inherent power to sanction a party . . . who has acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” Ransmeier v. Mariani, 718 F.3d 64, 68 (2d Cir. 2013) (emphasis added) (internal quotation marks omitted).
Therefore, although courts often make an explicit finding of bad faith on behalf of a party before imposing sanctions, see Int‘l Techs. Mktg., Inc. v. Verint Sys., Ltd., 991 F.3d 361, 368 (2d Cir. 2021), a court may impose a monetary sanction on a party (or an attorney) under its inherent power if the factual findings supporting the sanctions are tantamount to bad faith, see, e.g., First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501, 520-21 (6th Cir. 2002) (concluding that, although the district court‘s finding that the plaintiff‘s conduct was “laced with bad faith” was an explicit finding of bad faith, “the district court‘s other findings [that] Plaintiff‘s litigation conduct [was] ‘tantamount’ to bad faith provid[ed] more than ample grounds to justify the exercise of its inherent authority and to impose the sanction of attorney fees and costs“).
Here, the bankruptcy court observed, in its initial opinion imposing the sanctions, that:
[w]hile there is no requirement to make a bad faith finding, PHH‘s conduct cannot realistically be attributed to an innocent mistake. PHH had knowledge of [its obligations] . . . , only corrected the statements after the Trustee filed a motion for sanctions, and then asserted it did not violate a court order at all. Taken together, particularly in the context of prior court warnings, these actions raise serious concerns about whether PHH is making a good faith effort to comply with
In re Gravel (“Gravel I“), 556 B.R. 561, 576 n.10 (Bankr. D. Vt. 2016) (emphases added), vacated and remanded by PHH Mortg. Corp. v. Sensenich, Case No. 5:16-cv-00256-gwc, 2017 WL 6999820 (D. Vt. Dec. 18, 2017). In addition to this finding in the initial opinion that PHH‘s conduct was not “an innocent mistake,” the bankruptcy court reiterated in its second opinion
Simply put, the record is replete with findings by the bankruptcy court of PHH‘s repeated violations of the Rule despite having the wherewithal to know better and its assurances to the bankruptcy court that it would amend its processes to comply with its obligations. In my view, that record is more than sufficient to constitute the finding, which was necessary to support monetary sanctions under the bankruptcy court‘s inherent powers, that PHH‘s conduct was “tantamount to bad faith.” Roadway Express, Inc., 447 U.S. at 767; see also Matter of Betts, Nos. 94-2018, 94-2668, 1995 WL 108940, at *2 (7th Cir. 1995) (imposing sanction on an attorney pursuant to a bankruptcy court‘s inherent powers based on “egregious misconduct“); In re AOV Indus., Inc., 798 F.2d 491, 498 (D.C. Cir. 1986) (noting the litigant “was on clear notice of what action was expected of him in the district court: the Bankruptcy Rules, the district judge, and the motion for fees made it crystal clear” what action the litigant must take, and sanctions were appropriate because he did not do so).
In any event, even if the bankruptcy court‘s reasoning for the imposition of sanctions under its inherent powers (including on the issue of bad faith) was not sufficiently developed to allow review by this Court (as the majority finds), we should remand the matter, and the bankruptcy court should be afforded the opportunity to provide additional reasoning for its determination. See, e.g., Hollon v. Merck & Co., 589 F. App‘x 570, 572 (2d Cir. 2014) (remanding where the district court did not provide sufficient reasoning to allow appellate review on the issue of bad faith for the imposition of sanctions under the court‘s inherent powers); Weaver v. Chrysler Corp., 14 F. App‘x 136, 137 (2d Cir. 2001) (holding that findings for imposition of sanctions were insufficient and “retain[ing] jurisdiction over th[e] appeal while vacating the order and remanding to the district court for additional findings and reasoning as appropriate“), order rescinded, 99 F. App‘x 330, 333 (2d Cir. 2004) (affirming district court‘s imposition of sanctions after it issued a supplemental order “in light of [its] additional findings and articulated reasoning“). Here, the bankruptcy court is not being afforded such an opportunity to supplement the record on remand.
In short, I conclude that the record is sufficient to allow this Court to determine that the bankruptcy court did not abuse its discretion in imposing sanctions under its inherent powers for PHH‘s flagrant misconduct in repeatedly violating
D. The Amount of the Sanctions
Although the majority did not need to analyze the amount of the sanctions in light of its holdings, I briefly write to explain why there would have been no basis to disturb the bankruptcy court‘s determination that $75,000 was the appropriate amount.
As a threshold matter, given that PHH is a multi-billion-dollar company, $75,000 was a modest, non-serious sanction that did not present the type of financial impact on PHH that would warrant heightened
With respect to the determination as to the amount of the sanction, the bankruptcy court properly considered the amount that would be necessary to provide deterrence in light of PHH‘s ability to pay and its sophistication. See Oliveri v. Thompson, 803 F.2d 1265, 1281 (2d Cir. 1986) (“[I]t lies well within the district court‘s discretion to temper the amount to be awarded against an offending [person or entity] by a balancing consideration of his [or its] ability to pay.“); see also Farmer v. Banco Popular of N. Am., 791 F.3d 1246, 1259 (10th Cir. 2015) (“[B]ecause the principal purpose of punitive sanctions is deterrence, the offender‘s ability to pay must be considered.“); Johansen v. Combustion Eng‘g, Inc., 170 F.3d 1320, 1338 (11th Cir. 1999) (“A bigger award is needed to attract the attention of a large corporation.” (alteration and internal quotation marks omitted)). In particular, in its initial opinion, the bankruptcy court explained:
[T]he Court must take into account that PHH is a sophisticated commercial lender and an entity of substantial financial means. According to the public statements on its website, PHH is a top-ten originator and servicer of residential mortgages in the United States, boasting approximately $41 billion in mortgage financing and maintained an average servicing portfolio of approximately 1.1 million loans in 2015 alone. PHH has the expertise and experience to be charged with knowledge of the Bankruptcy Rules, of its duty to comply with court orders, and of its obligation to fulfill the commitments it makes to courts and debtors.
Gravel I, 556 B.R. at 578 (footnote and internal quotation marks omitted). The bankruptcy court also addressed that factor in its second opinion. See, e.g., Gravel II, 601 B.R. at 901 (“PHH administers millions of dollars in mortgages every day, and therefore it is all too easy for it to pay a $10,000 sanction as a cost of doing business, and there is no way of selecting a specific amount that will necessarily deter.” (internal quotation marks omitted)).
Similarly, it was well within the bankruptcy court‘s discretion to link the amount of the sanctions to the number of violations. See Int‘l Techs. Mktg., 991 F.3d at 369 (holding that the “number of misrepresentations that a party makes are perfectly acceptable data points for a court to consider in determining whether – and, perhaps more importantly, what – sanctions are warranted“). Here, the bankruptcy court determined that a sanction of $1,000 per violation should be imposed in light of PHH‘s repeated violations. Because
* * *
In sum, I conclude that the bankruptcy court did not exceed its authority or abuse its discretion in imposing $75,000 in sanctions against PHH under either
Notes
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:(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).
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.