In re: Melanio L. Valdellon AND Ellen C. Valdellon
Appeal from the United States Bankruptcy Court for the Eastern District of California
Christopher D. Jaime, Bankruptcy Judge, Presiding
APPEARANCES:
Mark A. Wolff of Wolff & Wolff argued for appellants; Neil J. Cooper of Houser LLP argued for appellees.
INTRODUCTION
Chapter 131 debtors Melanio L. Valdellon and Ellen C. Valdellon (“Debtors“) completed their plan and received a discharge. Although the plan provided for payment of arrears and cure of their mortgage default, Debtors allege that mortgage servicer PHH Mortgage Corporation and note holder Wells Fargo Bank, N.A. (together “PHH“) continued to assert past due amounts and ultimately accelerated
The bankruptcy court dismissed the complaint with prejudice, holding: (1) Debtors did not plausibly allege a violation of
We hold that the bankruptcy court erred by dismissing Debtors’ claim for relief under
We have previously held that bankruptcy courts can award compensatory damages for emotional distress caused by willful violations of the discharge injunction, Ocwen Loan Servicing, LLC v. Marino (In re Marino), 577 B.R. 772, 788-88 (9th Cir. BAP 2017), aff‘d in part & appeal dismissed in part, 949 F.3d 483 (9th Cir. 2020), and we disagree with the bankruptcy court that Taggart v. Lorenzen, 587 U.S. 554 (2019) alters its authority to do so.
We REVERSE the bankruptcy court‘s order dismissing Debtors’ second amended complaint as it pertains to their claim for violations of
FACTS3
A. Debtors’ bankruptcy case
Debtors filed a chapter 13 petition in March 2014, and the bankruptcy court confirmed their first amended plan in April 2014. The plan classified PHH‘s claim as a class 1 secured claim to be treated according to
Debtors filed a first modified plan in July 2015 to adjust for payment of certain tax debts, which the court confirmеd in December 2015. In 2018, the chapter 13 trustee (“Trustee“) filed a motion to dismiss the case, and though Debtors opposed the motion, they agreed to propose a second modified plan in July 2018, which the court confirmed.
In September 2019, approximately six months after the plan term, Trustee filed a motion to dismiss the case, contending that Debtors were delinquent in the amount of $10,246.37. Trustee stated that Debtors’ mortgage was delinquent by four post-petition payments, but all other claims had been paid.4 According to Trustee, Debtors were in month sixty-six of a sixty-month plan and thus, were required to make the delinquent payment in a lump sum. Trustee‘s exhibits indicated that Debtors had made total plan payments of $166,184.21.
Although Debtors did not file a written objection, they argue that Trustee was asserting a delinquency for ongoing mortgage payments which came due after the sixty-month plan period, and pursuant to their second modified plan, they were required to make total plan payments of only $164,549. Trustee withdrew the motion to dismiss on September 24, 2019, and at the hearing, the court dismissed the motion without prejudice. Three days later, Trustee filed a notice of completed plan payments and notice of final cure payment (“NOFC“).
In October 2019, PHH filed a response to the NOFC, stating that it agreed Debtors had paid the full amount required to cure the default. PHH further stated that Debtors were “current with all postpetition payments consistent with
B. The adversary proceeding
1. The first complaint and motion to exclude evidence
In January 2021, Debtors filed an adversary complaint against PHH. Debtors alleged that they made all post-plan mortgage payments until PHH refused their July 2020 payment, after the court entered the discharge order. They sought declaratory and injunctive relief, contempt sanctions, and other damages, but they did not clearly articulate their causes of action or delineate allegations among the defendants. PHH filed an answer denying allegations of wrongdoing.
In May 2021, Debtors filed a motion to exclude evidence and to conclusively determine facts pursuant to
PHH opposed the motion and argued it was essentially a motion for summary judgment and unauthorized by
After conducting an in camera review of Debtors’ tax returns, the bankruptcy court held that
2. The first amended complaint and motion to dismiss
In July 2021, Debtors filed their first amended complaint. They asserted claims for: (1) violations of the disсharge injunction under
In response, PHH filed a motion to dismiss under
The bankruptcy court granted PHH‘s motion to dismiss without argument. The court reasoned that it had discretion to consider a violation of the discharge injunction as part of an adversary proceeding, but it held that Debtors failed to state a claim for relief under
The bankruptcy court also dismissed with prejudice the claims for intentional infliction of emotional distress and negligent infliction of emotional distress because those claims were based on the same common factual allegations as count one. Finally, the court dismissed the remaining claims because it lacked jurisdiction over non-core state law claims, and alternatively, it abstained from hearing аll non-core state law claims under
3. The District Court appeal
Debtors appealed the bankruptcy court‘s order to the District Court for the Eastern District of California (“District Court“). The District Court affirmed the bankruptcy court‘s dismissal with prejudice of Debtors’
The District Court agreed that payments made after October 1, 2019, were not payments “under the plan,” and thus, the bankruptcy court did not err in dismissing the claims for relief under
The District Court noted that Debtors alleged they completed their plan payments, yet they received statements from PHH immediately after completion of their plan, showing significant arrears. Id. In rejecting PHH‘s assertion that prepetition amounts remained due because of Debtors’ underreported arrears, the District Court reasoned that PHH failed to file a proof of claim to correct any alleged underreporting, and admitted in its response to the NOFC that Debtors had cured the prepetition default and were current on the loan. Id. at *7. The District Court concluded that PHH was “bound by the Plan, the terms of which cured Debtors’ pre-petition arrearages and positioned Debtors to exit bankruptcy current on their Loan.” Id.
The District Court furthеr held that the evidence indicated that PHH‘s “misapplication of payments was likely willful,” and “Debtors have alleged that this willful misapplication of Plan payments caused them harm in the form of additional fees, costs, and expenses.” Id. at *8. The District Court held:
Debtors’ allegations are sufficient to find that Debtors may have a cause of action under
section [524] (i) for the misapplication of payments made by the trustee under the Plan. Indeed, this is “[O]ne of the classic situations that led to the adoption of§ 524(i) : a chapter 13 debtor makes all the required payments on long-term debt required through the life of his confirmed plan, receives a discharge, and is then told that his mortgage is in default, he owes additional charges, and is threatened with foreclosure. Often, this is the same scenario that drove him to bankruptcy in the first place.Section 524(i) presents a remedy for such cases.”
Id. (quoting Ridley v. M&T Bank (In re Ridley), 572 B.R. 352, 361 (Bankr. E.D. Okla. 2017)). The District Court granted Debtors leave to amend their complaint and remanded the case to the bankruptcy court.
4. The second amended complaint and motion to dismiss
In March 2024, Debtors filed their second amended complaint, asserting claims for: (1) violations of
PHH responded by filing a motion to dismiss for failure to state a claim and lack of standing. It argued that Debtors failed to identify any plan payment which was misapplied, and they failed to allege that such misapplication occurred while Debtors were not in material default. PHH further argued that Debtors did not allege a material injury because its lien was unaffected by the discharge, and the lien continued to secure all pre- and post-petition amounts under the loan. According to PHH, regardless of whether it credited payments to arrears or ongoing monthly payments, Debtors remained liable for all amounts and could not demonstrate injury. PHH argued that Debtors’ remaining claims were preempted by the
At the bankruptcy court‘s request, the parties filed briefs addressing whether the Supreme Court‘s decision in Taggart altered the authority of the court to award emotional distress damages for violations of
After a hearing, the bankruptcy court granted PHH‘s motion to dismiss counts one and two with prejudice and counts three and four without prejudice. The court issued a written opinion holding that compensatory damages awardable by a bankruptcy court for violations of the discharge injunction, or under
The bankruptcy court reasoned that Taggart instructs courts to look to the “old soil” of injunction enforcement and “traditional principles” of civil contempt—and not to
The bankruptcy court further held that Debtors failed to identify any specific plan payment which PHH failed to credit, and instead relied on an inference of misapplication. However, since the court was required to accept as true that Debtors’ postpetition payments were current as of September 2019, it concluded that plan payments must have been credited appropriately. And because any failure to credit post-plan payments could not give rise to a violation of
The court also held that Debtors failed to state a claim for relief under
Debtors filed a motion for reconsideration, which the court granted in part. In its amended order and opinion, the court clarified that Debtors’ claim for emotional distress damages was dismissed with prejudice to the extent it was based on a violation of
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUES
Did the bankruptcy court err by dismissing with prejudice Debtors’ claim for violations of
STANDARDS OF REVIEW
We review de novo the bankruptcy court‘s grant of a
Under de novo review, “we consider a matter anew, as if no decision had been made previously.” Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
DISCUSSION
A. Legal standards governing Civil Rule 12(b)(6)
A motion to dismiss “may be based on either a ‘lack of a cognizable legal theory’ or ‘the absence of sufficient facts alleged under a cognizable legal theory.‘” Johnson v. Riverside Healthcare Sys., LP, 534 F.3d 1116, 1121 (9th Cir. 2008) (quoting Balistreri v. Pacifica Police Dep‘t, 901 F.2d 696, 699 (9th Cir. 1990)).
B. Debtors stated a claim for relief for violations of § 524(i).
Congress enacted
The willful failure of a creditor to credit payments received under a plan confirmed under this title, unless the order confirming the plan is revoked, the plan is in default, or the creditor has not received payments required to be made under the plan in the manner required by the plan (including crediting the amounts required under the plan), shall constitute a violation of an injunction under
subsection (a)(2) if the act of the creditor to collect and failure to credit payments in the manner required by the plan caused material injury to the debtor.
Because
In Taggart, the Supreme Court clarified the standard by which bankruptcy courts may impose contempt sanctions for violations of the discharge injunction. 587 U.S. at 559-60. The Court held that bankruptcy courts should not impose civil sanctions “where there is a fair ground of doubt as to the wrongfulness of the defendant‘s conduct.” Id. at 561 (cleaned up). Accordingly,
But “[t]he Taggart refinements of the civil contempt standard in the bankruptcy discharge context did not otherwise alter a movant‘s threshold burden of going forward.” Mellem v. Mellem (In re Mellem), 625 B.R. 172, 178 (9th Cir. 2021). To state a claim for contempt sanctions under
1. Debtors alleged a plausible claim for relief under § 524(i).
The bankruptcy court erred by determining that Debtors failed to allege a willful failure to credit plan payments. The bankruptcy court held, in part, that Debtors failed to state a claim because they did not specify a particular payment which PHH failed to credit. But it is not necessary for Debtors to specify exactly how PHH failed to crеdit the payments, when the allegations are that PHH failed to give the arrearage payments their curative effect.
Crediting payments under the plan requires more than merely accepting payments from the trustee; creditors must apply the payments to the debt in the manner directed by the plan. When a plan provides for a cure of prepetition arrears and maintenance of ongoing mortgage payments, the creditor must reinstate the loan and treat prepetition arrears as satisfied upon completion of plan payments.
Conditioning relief under
Here, Debtors alleged that Trustee made all payments under the confirmed plan, and they made all post-plan monthly payments until PHH refused their July 2020 payment. Despite curing the default and maintaining ongoing mortgage payments, Debtors alleged that PHH sent post-plan statements showing “past unpaid amounts” of several thousand dollars. These allеgations, and the reasonable inferences from them, are plausibly suggestive of a violation of
At oral argument, counsel for PHH claimed that the past due amounts were caused by Debtors underreporting prepetition arrears in their proof of claim. Like the District Court before us, we reject this argument.
PHH is bound by the terms of the confirmed plan. The amount necessary to cure the prepetition arrearage was fixed by the proof of claim and confirmation order at $19,140.48. PHH received the cure payments from Trustee. Upon completion of those payments, the prepetition arrears were completely satisfied, and the default was cured. PHH‘s continued insistence otherwise demonstrates that it did not give the plan payments their curative effect, and the reasonable inference from Debtors’ allegations is that PHH failed to credit payments in accordance with the plan.
2. The court erred by holding Debtors were precluded from seeking relief based on its finding that the plan was in default.
Debtors argue that the court erred by making a factual finding of an incurable default in the context of a
We agree that the existence of a plan default is typically a question of fact which cannot be determined in the context of a motion to dismiss. But in this case, whether Debtors were in default at the time of Trustee‘s motion is not determinative of their ability to assert a
It necessarily follows that, upon cure of a plan default, creditors must give effect to payments received while the plan was in default. Thus, we are not concerned with prior plan defaults which were ultimately resolved. Instead, because PHH was required to reinstate the loan and treat arrears as satisfied upon completion of plan payments, we must consider whether the plan remained in default after the cure was effectuated.
Debtors argue that the discharge order bars a later finding of a plan default. Discharge is not necessary to effectuаte a cure. See HSBC Bank USA, N.A. v. Blendheim (In re Blendheim), 803 F.3d 477, 488 (9th Cir. 2015) (discussing Chapter 13 restructuring tools available to discharge-ineligible debtors, including the ability to cure a default). But completion of plan payments is a necessary condition to entry of discharge. See
Here, Debtors completed all “payments under the plan,” and the plan terminated. A plan cannot be complete, with discharge entered, and simultaneously be in default. Because Debtors’ plan was not in default when PHH allegedly failed to give thе cure payments their curative effect, Debtors are not precluded from seeking relief under
C. The court erred by determining that Debtors cannot be awarded compensatory damages for emotional distress.
The bankruptcy court dismissed Debtors’ claim for intentional infliction of emotional distress because it held as a matter of law that emotional distress damages are unavailable for violations of the discharge injunction, either directly or through
Bankruptcy courts can remedy violations of the discharge injunction through civil contempt sanctions under
Based on Taggart, the bankruptcy court rejected our analysis in Marino and instead looked to the “old soil” of injunction enforcement and its “traditional principles” of civil contempt to hold that nonpecuniary emotional distress damages are not compensable.
We do not read Taggart so broadly. The question presented in Taggart “concerns the criteria for determining when a court may hold a creditor in civil contempt for attempting to collect a debt that a discharge order has immunized from collection.” 587 U.S. at 556. The Supreme Court clarified that the standard is neither purely subjective nor akin to strict liability; it requires “no objectively reasonable basis for concluding that the creditor‘s conduct might be lawful.”9 Id. at 557. But the Court did not address the range of permissible compensatory damages available under civil contempt, nor did it hold that courts should not look to
We are not persuaded that Taggart compels us to depart from our precedent in Marino. See McLean v. Green Point Credit, LLC (In re McLean), 794 F.3d 1313, 1325 (11th Cir. 2015) (holding that emotional distress damages are compensable for discharge injunction violations because such damages are available “in the materially similar context of a violation of the automatic stay“). We agree with the Eleventh Circuit that, although the automatic stay and discharge injunction serve different purposes, “there is no material difference in the equitable interests a bankruptcy court must consider in imposing emotional distress damages for the violation of one provision as opposed to the other.” Id. at 1325 n.5.
Compensatory civil contempt sanctions are “remedial,” Oracle USA, Inc. v. Rimini Street, Inc., 81 F.4th 843, 859 (9th Cir. 2023), and courts have “longstanding authority” to “enter broad compensatory awards for all contempts though civil proceedings,” International Union, United Mine Workers of America v. Bagwell, 512 U.S. 821, 838 (1994). See also Melendres v. Skinner, 113 F.4th 1126, 1134 (9th Cir. 2024) (“District courts have broad equitable power to order appropriate relief in civil contempt proceedings.“) (cleaned up). Because civil contempt sanctions “compensate the complainant for losses sustained,” they must be “based upon evidence of complainant‘s actual loss.” United States v. United Mine Workers of Am., 330 U.S. 258, 303-04 (1947).
The measure of compensation for сivil sanctions is not limited to pecuniary losses. See Leman v. Krentler-Arnold Hinge Last Co., 284 U.S. 448, 455-56 (1932). In Leman, the Supreme Court held that lost profits are compensable through civil contempt sanctions. The bankruptcy court reads Leman as treating lost profits as the “equivalent of or substitute for the injured party‘s actual pecuniary loss” and it reasons that the Supreme Court did not add new or different types of damages to the “bucket of pecuniary losses recoverable as compensatory damages for civil contempt.” Again, we disagree.
In Leman, the Supreme Court held that a party injured by a violation of an injunction could be awarded lost profits as compensatory civil sanctions. Id. at 456-57. The Court noted the “clear distinction” between “actual pecuniary loss” and lost profits, which are nonрecuniary, but held that lost profits are nevertheless “included in the concept of compensatory relief.” Id. at 456. Because a contempt proceeding is equitable in nature, the Court held “there is no reason why in such a proceeding[,] equitable principles should not control the measure of relief to be accorded to the injured party.” Id. at 457. Leman stands for the clear proposition that compensatory civil sanctions are not limited to pecuniary losses.
We expect that violations of the discharge injunction often will involve nonpecuniary damages. A central purpose of a bankruptcy proceeding is the “fresh start” granted to debtors through the bankruptcy discharge. See Grogan v. Garner, 498 U.S. 279, 286 (1991). As one court has observed:
One of the benefits an individual receives from a discharge is peace of mind. The individual need no longer be concerned that a discharged debt will be enforced against him or her. When a creditor disregards the discharge and attempts to collect a debt, it is certainly within the realm of possibility that the debtor will be harmed emotionally. When such occurs, the harm may be remedied.
In re Nordlund, 494 B.R. 507, 523 (Bankr. E.D. Cal. 2011). When a creditor contumaciously defies the discharge injunction, it deprives a debtor of the peace of mind inherent in the Bankruptcy Code‘s “fresh start” policy, but it may not always result in pecuniary losses to the debtor. The broad equitable power in the bankruptcy court‘s civil sanctioning authority is sufficient to compensate debtors for damages incurred by violations of the discharge injunction, including emotional distress damages.
CONCLUSION
Based on the foregoing, we REVERSE the bankruptcy court‘s order dismissing with prejudice Debtors’ claim for violations of
GAN
Bankruptcy Judge