Honorable Mike K. Nakagawa, United States Bankruptcy Judge.
On June 21, 2016, an evidentiary hearing was conducted on the Motion for Sanctions for Violation of the Discharge Order ("Sanctions Motion") brought by Jesus Martinez and Marco Ciro Flores ("Debtors"). The appearances of counsel were noted on the record. After the evidence was presented, post-trial briefing was ordered, and the hearing was continued for closing arguments.
On July 18, 2016, closing arguments were presented, and the matter was taken under submission.
This Memorandum Decision constitutes the court's findings of fact and conclusions of law entered pursuant to FRBP 7052 and FRCP 52.
On May 1, 2009, Jesus Martinez filed a voluntary Chapter 11 petition. On the same date, Marco Ciro Flores filed a voluntary Chapter 11 petition. On their respective real property Schedule "A," each Debtor listed the same eight separate parcels of real property, including an investment property located at 4520 36th Street in San Diego, California ("36th Street Property").
On May 5, 2009, four days after filing their Chapter 11 petitions, Debtors filed a motion to jointly administer the two Chapter 11 cases. (MECF No. 11; FECF No. 12).
On May 6, 2009, an order was entered authorizing joint administration of the two
On June 12, 2009, an order was entered valuing the 36th Street Property at $120,000 ("Valuation Order"), thereby treating CMC's claim as allowed in the secured amount of $120,000, and allowed in the unsecured amount of $166,957.58. (ECF No. 41).
On September 3, 2009, CMC filed a proof of claim ("POC"). (Ex. 1). The claim was in the secured amount of $299,788.72. Attached to the POC is a copy of an Adjustable Rate Note ("Adjustable Note") dated February 3, 2005, executed by the Debtors in favor of Downey Savings and Loan Association, F.A., along with a copy of the Deed of Trust against the 36th Street Property. Also attached to the POC as Exhibit "1" is a statement attesting that the monthly payments on the Adjustable Note from November 2008 through March 2009 were $1,054.87 and the monthly payments from April 2009 through May 2009 were $1,133.99.
On October 26, 2009, Debtors jointly filed a Disclosure Statement ("First Disclosure Statement") (ECF No. 82) to accompany their jointly proposed Plan of Reorganization. (ECF No. 81). CMC was served with the Debtors' joint proposed Plan of Reorganization that provided for CMC to retain its lien against the 36th Street Property, for its secured claim to be allowed in the revalued amount of $120,000, and for the allowed amount to be paid in full in accordance with the terms of the original note and mortgage. The unsecured portion of CMC's claim would receive pro rata payments from the amounts paid to unsecured creditors from the Debtors' projected monthly income under the plan. Article VI of the proposed Plan of Reorganization provided that after confirmation, all property would vest in the reorganized debtors. Additionally, like all individual Chapter 11 cases, Article VII of the proposed Plan of Reorganization provided that the Debtors would not receive a discharge of their personal liability on their creditors' claims until completion of all payments under the proposed plan in accordance with Section 1141(d)(5). Article IV of the First Disclosure Statement addressed the means for implementation of the Debtors' proposed plan. It stated in pertinent part that "The Debtors' Cash Flow Analysis is attached hereto as Exhibit D and outlines the Debtors' sources and uses of income." The Cash Flow Analysis attached as Exhibit D to the First Disclosure Statement sets forth each of the Debtors' investment properties, including the original and revalued mortgage payments for each property. As to the 36th Street Property, Exhibit D discloses the existing monthly payment as $1,107.61, and a proposed revalued payment of $465.20.
On December 28, 2009, Debtors filed a Second Amended Plan of Reorganization (ECF No. 101) accompanied by a Second Amended Joint Disclosure Statement. (ECF No. 102). The Second Amended Plan of Reorganization did not change the proposed treatment of any secured creditor claims, including the allowed secured claim of CMC. Attached as Exhibit D to the Second Amended Joint Disclosure Statement is the same Cash Flow Analysis disclosing
On December 29, 2009, CMC filed a motion for relief from stay as to the 36th Street Property ("CMC Stay Relief Motion"). (ECF No. 107). (Ex. 2).
On January 19, 2010, an objection to approval of the Second Amended Joint Disclosure Statement as well as to confirmation of the Second Amended Plan of Reorganization was filed by the Office of the United States Trustee ("UST"). (ECF No. 114). On the same date, CMC objected to confirmation of the Second Amended Plan of Reorganization as well as approval of the Second Amended Joint Disclosure Statement. (ECF No. 115). While CMC's objection cited Section 1322(b)(2), rather than Section 1123(b)(5), it argued only that CMC's claim was misclassified as unimpaired rather than impaired because it was being bifurcated into secured and unsecured portions.
On January 26, 2010, Debtors filed an opposition to the CMC Stay Relief Motion. (ECF No. 127).
On February 3, 2010, Debtors filed a Third Amended Joint Plan of Reorganization (ECF No. 134) along with a Third Amended Joint Disclosure Statement (ECF No. 136).
On February 17, 2010, notice of the hearing to approve the Third Amended Joint Disclosure Statement was filed, that included a certificate stating that the notice was served electronically and by first class mail on CMC and its counsel. (ECF No. 146). No objection to approval of the Third Amended Joint Disclosure Statement was filed or presented by CMC.
On March 17, 2010, the court approved the Third Amended Joint Disclosure Statement and a written order was entered on April 8, 2010. (ECF No. 171). The order scheduled a hearing on confirmation of the Third Amended Joint Plan of Reorganization to take place on May 12, 2010. (ECF No. 171). The order approving the Third Amended Joint Disclosure Statement was not appealed.
On April 8, 2010, notice of the hearing on confirmation of the Third Amended Joint Plan of Reorganization was served on all creditors, including CMC. (ECF No. 174).
On May 11, 2010, objections to confirmation of the Third Amended Joint Plan of Reorganization were filed by secured creditors BankUnited (ECF No. 181) and
On May 12, 2010, the hearing on plan confirmation was continued to May 26, 2010. (ECF No. 191).
On May 26, 2010, the continued hearing on confirmation of the Third Amended Joint Plan of Reorganization was conducted at which both Debtors were available for examination. Although issues surrounding the 1111(b) Election were resolved at plan confirmation, a late-filed objection by America's Servicing Company ("ASC") was presented. As a result, after the confirmation hearing was concluded, the matter was taken under submission.
On June 14, 2011, an order was entered confirming the Third Amended Joint Plan of Reorganization ("Confirmation Order"). (ECF No. 249). (Ex. 3). The Confirmation Order specifically referenced the Cash Flow Analysis set forth in Exhibit D to the approved Third Amended Joint Disclosure Statement.
On August 4, 2011, Debtors filed a proposed Fourth Amended Joint Plan of Reorganization (ECF No. 258) along with a motion to modify the confirmed Third Amended Joint Plan of Reorganization. (ECF No. 259). Notice of the hearing to approve the modification was served on all creditors, including CMC. (ECF No. 260). The purpose of the proposed modification, as set forth in the proposed Fourth Amended Joint Plan of Reorganization was to eliminate any requirement for the Debtors to pay their projected disposable income to unsecured creditors because no holder of an allowed unsecured claim had objected to plan confirmation under Section 1129(a)(15). As a result, the payment of unsecured creditor claims under the Debtors' plan, including the unsecured portion of the claims of secured claimants such as CMC, would no longer be required. No modification of the plan treatment of any secured creditor class, including CMC's allowed secured claim, was proposed.
On August 24, 2011, objections to modification of the confirmed plan were filed by secured creditors Aurora Loan Services (ECF No. 262) and ACT Properties (ECF No. 263). No opposition, objection, or response to the proposed modification was filed by CMC.
On October 25, 2011, an order was entered approving the modification and confirming the Fourth Amended Joint Plan of Reorganization ("Plan Modification Order"). (ECF No. 277). (Ex. 4). Notice of the order was mailed to all creditors, including
On March 5, 2012, Debtors filed a motion for entry of a final decree and an order of discharge. (ECF No. 289). Debtors asserted that payments were not required to be made on unsecured claims as a result of the modified plan. Debtors also represented that Section 522(q) is not applicable. Debtors argued that entry of a discharge was appropriate under Sections 1141(d)(5)(A) and 1141(d)(5)(C). Notice of the hearing on the motion was served on all creditors, including CMC. (ECF No. 290). On March 28, 2012, an objection was filed by the UST. (ECF No. 292). No opposition, objection, or response to the request was filed by any creditor, including CMC. On June 14, 2012, an order was entered granting the Debtors' motion. (ECF No. 298). (Ex. 5).
On June 18, 2012, an order granting the Debtors' Chapter 11 discharge was entered ("Discharge Order"). (ECF No. 299). (Ex. 6). On June 20, 2012, notice of the Discharge Order was mailed to all creditors, including CMC. (ECF No. 300). The Discharge Order was not appealed.
On July 17, 2012, notice of entry of the Chapter 11 discharge was filed and served on all creditors, including CMC. (ECF No. 304). (Ex. 7).
On April 22, 2013, a final decree closing the Chapter 11 case was entered. (ECF No. 305). (Ex. 8).
On August 7, 2014, Debtors filed an ex parte motion to reopen their Chapter 11 case. (ECF No. 308). On August 8, 2014, an order was entered reopening the case (ECF No. 310) (Ex. 9), and notice of entry of the order was served on all creditors, including CMC. (ECF No. 314). (Ex. 11).
On August 8, 2014, Debtors filed a Motion to Clarify and Enforce Confirmation Order and Request for an Accounting ("Clarification Motion") (ECF No. 311), to address certain alleged post-confirmation breaches by three secured creditors, including CMC. (Ex. 10). Notice of the motion was served on all three secured creditors, including CMC. (ECF No. 316). As to CMC, the Debtors alleged that CMC did not adjust its servicing of the loan to comply with the Confirmation Order,
On September 23, 2014, an order was entered requiring CMC to provide a complete accounting of the loan through September 15, 2014. (ECF No. 323). (Ex. 12). Notice of entry of the order was served on CMC. (ECF No. 324). (Ex. 13). Because CMC did not comply, Debtors filed a motion seeking an order to show cause ("OSC") why CMC should not be held in contempt. (ECF No. 329). (Ex. 14). On October 31, 2014, the OSC was entered (ECF No. 332), but a hearing was not scheduled. (Ex. 15).
On February 4, 2015, Debtors filed a Motion for Attorneys Fees and Costs ("Fee Motion") (ECF No. 349) alleging that after the OSC was entered, CMC provided a payment history that showed a dispute of $600.00 between the parties as to the unpaid principal balance of the loan.
On March 2, 2016, counsel for the parties appeared at the scheduled hearing, at which the court determined that numerous factual disputes could be resolved only through an evidentiary hearing. Accordingly, on March 3, 2016, an order was entered scheduling an evidentiary hearing to be conducted on May 24, 2016. (ECF No. 378). (Ex. 22).
On June 17, 2016, Debtors filed their list of witnesses and exhibits (ECF No. 385), along with their trial statement ("Debtors' Trial Statement"). (ECF No. 386). On the same date, Debtors filed their pre-trial brief in connection with the Sanctions Motion ("Debtors' Pre-Trial Brief"). (ECF No. 389). On the same date, CMC filed the declarations of Nathan F. Smith ("Smith Declaration") (ECF No. 388) and James M. McPherson ("McPherson Declaration"). (ECF No. 387).
On June 20, 2016, Debtors filed an amended trial statement ("Debtors' Amended Trial Statement"). (ECF No. 390). On the same date, CMC filed a response to Debtors' pretrial brief and the Debtors' trial statements. ("CMC Pre-Trial Brief"). (ECF No. 391).
On June 21, 2016, the evidentiary hearing was conducted. At the outset, the court granted CMC's request, without prejudice, to strike certain of the Debtors' claims asserted in their pre-trial briefs and trial statements. Those claims sought additional or alternative relief under the Fair Debt Collection Practices Act ("FDCPA"), 15 U.S.C. § 1692,
After the evidentiary hearing was concluded, a post-trial briefing schedule was agreed upon.
On July 15, 2016, Debtors filed their post-trial brief ("Debtors' Closing Brief"). (ECF No. 398). On the same date, CMC
The parties stipulated to the admission of 123 exhibits. Three witnesses were called to testify: debtors Jesus Martinez and Marco Flores, and CMC officer James McPherson.
The following exhibits were admitted into evidence by stipulation.
No. Date Document
1 9/3/2009 CMC's Proof of Claim No. 9
2 12/29/2009 CMC's Stay Relief Motion
3 6/14/2011 Order on Plan Confirmation
4 10/25/2011 Order Granting Mtn. to Modify Debtors' Plan
5 6/14/2012 Order Granting Discharge and Final Decree Closing
Debtors' Chapter 11 Cases
6 6/18/2012 Discharge of Individual Debtor in a Chapter 11 Case
7 7/17/2012 Ntc. of Entry of Order Granting Discharge and Final
Decree Closing Debtors' Chapter 11 Cases
8 4/22/2013 Order Entering Final Decree
9 8/8/2014 Order Reopening Chapter 11 Case 10 8/8/2014 Mtn. Clarify and Enforce Confirmation Order 11 8/8/2014 Ntc. of Entry of Order Reopening Chapter 11 Case 12 9/23/2014 Order Compelling CMC to Provide Accounting 13 9/23/2014 Ntc. of Entry Order Compelling CMC to Provide Accounting 14 10/28/2014 Ex Parte Mtn. for OSC Why CMC Should Not Be Held in Contempt for Failure to Comply with Order to Provide Accounting 15 10/31/2014 Order Granting Mtn. for OSC Re: CMC Not Complying with Order to Provide Accounting 16 4/2/2015 Order Granting Fee Motion 17 4/2/2015 Ntc. of Entry Order Granting Fee Motion 18 1/27/2016 Motion for Violation of Discharge Order 19 1/27/2016 Decl. Flores and Martinez re Motion for Violation of Discharge Order 20 2/17/2016 CMC's Opp. re Motion 21 2/24/2016 Reply to Opp. re Motion 22 3/3/2016 Order Scheduling Evidentiary Hearing 23 4/14/2014 Notice of Default and Election to Sell re San Diego Property 24 4/23/2014 Cahall email to Guiab re Notice of Default and Election to Sell 25 4/23/2014 Cahall email to Northwest Trustee re Notice of Default and Election to Sell 26 4/23/2014 Rasanen (Northwest Trustee) email re case status 27 4/23/2014 Cahall email to Rasanen re Discharge Order 28 4/23/2014 Rasanen email re forwarding all documents to bankruptcy department 29 4/29/2014 Guiab email indicating he forwarded email to CMC 30 6/10/2014 Cahall email to Rasanen following up on Notice of Default and Election to Sell 31 6/10/2014 Cahall email to Guiab following up on Notice of Default and Election to Sell and CMC foreclosure 32 7/7/2014 Cahall email to Guiab following up on Notice of Default and Election to Sell and CMC foreclosure
33 7/8/2014 Guiab email to Cahall in response to Notice of Default and Election to Sell 34 7/8/2014 Guiab email to Cahall regarding plan terms 35 7/8/2014 Cahall email to Guiab regarding plan terms 36 7/8/2014 Guiab email regarding maturity date 37 7/8/2014 Cahall email to Guiab regarding maturity date 38 7/11/2014 Guiab email to Cahall re incorrect plan payments 39 7/11/2014 Cahall email to Guiab requesting loan payment history 40 Notice of Trustee Sale on August 11, 2014 41 7/24/2014 Cahall email to Guiab attaching Notice of Trustee Sale 42 7/25/2014 Guiab email to Cahall confirming received message re Trustee Sale 43 7/28/2014 Schwartz ltr. to tenants at 36th Street Property 44 7/29/2014 Guiab email to Cahall re postponing Trustee Sale and obtaining accounting of the loan 45 7/29/2014 Barry email to Cahall re letter to tenant 46 7/30/2014 Cahall email to Guiab re status postpone Trustee Sale 47 7/30/2014 Cahall email to Barry re revising letter to tenant to correct typographical error 48 8/6/2014 Cahall email to Guiab re reopening case, file mtn clarify, enforce confirmation order, and postpone sale 49 8/8/2014 Cahall email to Guiab attaching filed copy of Order Reopening Chapter 11 Case 50 8/8/2014 Cahall email to Rasanen attaching filed copy of Order Reopening Chapter 11 Case and Ntc. of Trustee Sale w/request to stop foreclosure sale 51 8/12/2014 Schwartz email to Barry re case reopening 52 8/12/2014 Allen email to Katz attaching filed copy of Order Reopening Chapter 11 Case and Ntc of Trustee Sale ... 53 8/13/2014 Katz email to confirm sale was rescinded 54 9/23/2014 Cahall email to Guiab Ntc. of Entry Order Compelling CMC to Provide Accounting 55 Payment history from CMC 6/26/2009-11/6/2014 56 12/9/2014 Schwartz email to Smith indicating CMC's accounting is incorrect 57 12/22/2014 Schwartz email to Smith request loan term and % rate
58 12/29/2014 Exnowski email to Cahall confirm CMC's term/% rate 59 Schwartz Flansburg's loan amortization 60 8/11/2014 CMC ltr to Martinez/Flores re returned funds, etc ... 61 7/8/2014 CMC ltr to Martinez/Flores re returned funds, etc ... 62 5/12/2014 CMC ltr to Martinez/Flores re returned funds, etc ... 63 2/10/2014 CMC ltr to Martinez/Flores re returned funds, etc ... 64 2/4/2014 CMC ltr to Flores mailed to 36th Street Property re past due status & cure default ... 65 2/4/2014 CMC ltr to Flores mailed to Summerhill Rd., LV address re past due status & cure default ... 66 2/4/2014 CMC ltr to Martinez mailed to 36th Street Property re past due status & cure default ... 67 2/4/2014 CMC ltr to Martinez mailed to Summerhill, LV address re past due status & cure default ... 68 1/9/2014 Ltr to Martinez/Flores re credit balance, etc ... 69 11/7/2013 Ltr to Martinez/Flores re credit balance, etc ... 70 8/8/2013 Ltr to Martinez/Flores re credit balance, etc ... 71 7/18/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 72 6/19/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 73 5/18/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 74 4/17/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 75 11/17/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 76 10/20/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 77 9/17/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 78 8/18/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 79 7/20/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 80 6/17/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ...
81 5/19/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 82 4/14/2009 Foreclosure notice from CMC to Martinez/Flores 83 3/20/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 84 2/16/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 85 1/18/2012 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 86 12/20/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 87 11/17/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 88 10/18/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 89 9/19/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 90 8/18/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 91 7/19/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 92 6/17/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 93 5/18/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 94 4/19/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 95 3/18/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 96 2/15/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 97 1/18/2011 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 98 12/20/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 99 11/17/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 100 10/19/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ...
101 09/17/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 102 8/18/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 103 7/20/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 104 6/17/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 105 5/18/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 106 4/19/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 107 3/18/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 108 2/18/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 109 1/19/2010 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 110 12/21/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ... 111 12/18/2009 Rate Adj. Ltr. to Martinez/Flores re payment not going to be adjusted, etc ...
Ltr Date Document
A CMC Post-petition Loan payment history
B 4-14-2014 CMC's notice of default and election to sell
C 7-18-2014 CMC's notice of trustee's sale
D 7-25-2014 Emails between counsel
E 8-8-2014 Emails between Debtors' counsel and foreclosure
trustee
F 1-14-2015 Emails between counsel
G 8-15-2015 Emails between counsel
H Second revised stipulation sent between counsel
I 9-23-2015 Email regarding commencement of litigation
J Loan amortization table from Debtors' counsel
K 8-8-2013 CMC's return payment letters
L 2-4-2014 CMC's letters re notice of default
Three witnesses testified and were subject to cross-examination.
Martinez testified that he grew up in Havana, Cuba, before immigrating to Miami, Florida, when he was twenty-four years old. He was educated in Cuba and lived in Florida for one year before moving to Reno, Nevada. Five years later, he moved to Las Vegas. In Reno, he worked in a kitchen at the MGM Hotel and then worked in the grocery business after moving to Las Vegas. He currently works for a Smith's grocery store.
Martinez testified that he started purchasing investment real estate in around 1992, in San Diego and Las Vegas. He recalled purchasing the 36th Street Property some time in 1996, initially residing in it. Martinez purchased that property with his partner, Marco Flores, and the purchase originally was financed by a lender other than CMC. He recalled that the property was refinanced through CMC two or three years later.
Martinez testified that the amount of the original loan on the 36th Street Property was around $264,000, and that the monthly payment was in excess of $1,000.00. He acknowledged that it was an adjustable interest rate loan, but he did not recall how often the monthly payment amounts changed.
Martinez testified that he makes the mortgage payments on the investment properties while Flores deals with the tenants and property managers. He testified that the arrangement was very successful until the economic recession hit in 2008 and 2009. Martinez stated that Flores attempted to work out the mortgage problems, but was unsuccessful. For that reason, both of them filed separate Chapter 11 cases in May 2009.
Martinez testified that after the bankruptcy cases were filed, the 36th Street Property was revalued at $120,000 and payments of around $465.00 per month were made to CMC based on that value. He stated that he paid that amount each month and never missed a payment.
Martinez testified that during the Chapter 11 proceeding, he received letters from CMC dated October 20, 2009 (Ex. 76) and November 17, 2009 (Ex. 75),
Martinez recalls that his Chapter 11 plan was approved by the court on June 14, 2011. He testified that after the plan was confirmed, he continued to make the $465.00 monthly payments. Martinez acknowledged on cross-examination that Class 2(f) of the confirmed plan does not mention a $465.00 monthly payment on CMC's claim, but testified that he "didn't just make it up." He acknowledged that he never received any document from CMC saying to make monthly payments of $465.00, nor did he receive anything changing the adjustable interest rate on his loan to a fixed rate. Martinez conceded that if the loan was not modified, the monthly payments would be much higher, probably around $1,000.00.
Martinez testified that after his Chapter 11 plan was confirmed, he received letters from CMC dated April 17, 2012 (Ex. 74) and May 18, 2012 (Ex. 73), stating that monthly payments of $1,341.58 were owed instead. CMC, however, had been accepting the $465.00 payments.
Martinez testified that he received a Chapter 11 discharge on June 18, 2012, and that his case was closed. He testified that he remembers receiving a call from CMC some time around October 5, 2012, which is Flores's birthday. He stated that during that call, someone from CMC demanded payment of the amount set forth in the prior letters. Martinez testified that after that initial call, he received calls from CMC approximately three times every week, at home and at work, asking for payment of the amount contained in the prior letters. He testified that those calls continued until CMC eventually foreclosed on the 36th Street Property.
Martinez reviewed a letter from CMC dated August 8, 2013 (Ex. K), indicating that a payment of $547.40 had been received and that an additional $82.20 was due. He testified that he does not know why CMC claimed that $82.20 was due. Martinez testified that he called CMC to obtain an accounting, but CMC never called him back. Martinez was shown letters from CMC dated November 7, 2013, January 9, 2014, and February 10, 2014 (Ex. K), all stating the monthly payment amount to be $547.40.
Martinez testified that CMC stopped accepting payments some time around July 2014, and he received a letter from CMC dated July 8, 2014 (Ex. 61), returning a $465.00 payment even though those payments had been accepted since 2009. He received a letter from CMC dated May 12, 2014 (Ex. 62), returning a check and no accounting of payments was given. Martinez recalled receiving a letter dated February 10, 2014 (Ex. 63), returning an electronic payment, and the letter stated that $547.40 was due rather than $465.00. He stated that CMC's letter did not explain how CMC came up with the higher amount. Martinez testified that he contacted
Martinez testified that CMC filed a Notice of Default and Election to Sell ("NOD") on the 36th Street Property (Ex. 23; Ex. B)
Martinez testified that the NOD led to many arguments with Flores, because it was his responsibility to make the payments. He testified that the stress caused him to lose sleep, interfered with taking care of customers at work, and led to fights with Flores.
Martinez testified that CMC foreclosed on the 36th Street Property on August 11, 2014. He recognized the notice of trustee's sale ("Notice of Sale") and acknowledged that the notice stated that there was a total unpaid loan balance of $104,346.49 (Ex. 40; Ex. C). Martinez testified that he does not believe that he had paid more than $160,000 on the original $264,000 loan. He therefore acknowledged that the $104,346.49 unpaid loan balance set forth in the Notice of Sale must have been based on payments made toward the revalued amount under the confirmed Chapter 11 plan.
Martinez testified that even after the foreclosure, some other company continued to call to collect the debt for CMC. He testified that the caller sought between $70,000 and $80,000, and also told him that he was personally responsible for the debt. Martinez testified that he does not recall the name of the company that called him or the name of the person. He testified that he received three calls per week telling him that the original loan amount was still due. Martinez stated that his Chapter 11 case was reopened on August 8, 2014, and a few weeks later the calls stopped after the foreclosure was unwound and the 36th Street Property was returned. He attested that he continues to pay the $465.00 amount electronically and is current.
Flores testified that he was born in Tijuana, Mexico, and immigrated to San Diego, California, when he was eight years old. He obtained his bachelor's degree in speech communication from San Diego State University and a master's degree from National University. Flores worked in the social services field from 1987 through 2007, primarily for a county public health department focusing on HIV/AIDS education. He testified that he has worked as a therapist and program director for HIV and AIDS treatment in Las Vegas.
Flores testified that to meet his retirement goals, he began investing in real estate in 1992 along with Martinez, whom he had met in Las Vegas. In his business partnership with Martinez, Flores would deal with tenants, property managers, and lenders, due to his fluency in English,
Flores testified that he and Martinez lived in the 36th Street Property for two years before treating it as investment property. After the recession hit in around 2008, he contacted CMC about the mortgage, but he could not refinance the property because its value had dropped to a point where it was underwater. Flores testified that he used his retirement funds to make various mortgage payments, but real estate values had dropped by 30% in San Diego and by 60% in Las Vegas. On May 1, 2009, both he and Martinez filed separate Chapter 11 proceedings in Nevada because they were not viewed as a married couple even though they were domestic partners in California.
After his bankruptcy was filed, Flores thought all mortgage payments would be made in accordance with a list received from his attorneys. He testified that he understood that the monthly payment on the 36th Street Property was $465.00 based on a value of $120,000. Flores testified that he had checked bank statements each month to confirm that the payments were made.
Flores testified that the Chapter 11 process was stressful because he had to go through the confirmation process twice. He testified that after his plan was confirmed in 2011 and he received his discharge in 2012, he thought he was done with the process.
Flores testified that he started receiving calls from CMC around October 20, 2012, which was about two weeks after his birthday. He testified that sometimes there were three calls in a single day, but recalls that he would answer only one of three because they distracted him from his work.
Flores testified that he thought automatic payments were being made to CMC. He does not know when CMC started rejecting the $465.00 monthly payments. Flores testified that CMC never sent him tax statements reflecting interest payments because CMC told him that payments were not being applied to interest. He does not recall ever receiving a loan history document, which was offered by CMC in the form of the Post-petition Loan History at trial, and he does not know if Martinez ever received it.
Flores testified that the NOD recorded by CMC had been received by the tenants
Flores testified that after the foreclosure was completed, he received calls to his cell phone from another company asserting that it represented CMC. The caller told him that $72,000 was due and attempted to collect the debt from him personally. Flores testified that the calls stopped after the Chapter 11 proceeding was reopened by his attorneys, and CMC thereafter returned the 36th Street Property.
Flores testified that he sought professional help for the stress, anxiety, and feeling of helplessness caused by CMC's actions starting in May 2014. He still takes antidepressant medication, although he has not missed work. Flores acknowledges that his job as a therapist, listening to other people's problems, is also very stressful.
McPherson is a litigation supervisor and a vice president at CMC. In December 2010, he graduated from the law school at the University of Arkansas in Little Rock, and he was admitted to practice in Arkansas the following year. McPherson has worked for CMC for more than ten years. According to his declaration, McPherson is familiar with the type of records maintained by CMC for the Debtors' loan. He testified that he has access to the books and records for the loan, and reviewed the records on which his testimony is based. He also testified that he has reviewed a comment history on the loan that involves calls that were made or attempted to be made to the borrowers.
McPherson testified that a document entitled Post-petition Loan History had been prepared for the loan.
McPherson also acknowledged that CMC sent a letter dated April 17, 2012
McPherson testified that the Post-petition Loan History did not reflect several payments that the Debtors had made, but which had been returned by CMC. He acknowledged that CMC sent letters dated February 4, 2014, May 12, 2014 (Ex. 62), July 8, 2014 (Ex. 61), and August 11, 2014 (Ex. 60), returning payments of $465.20 each time, but that those returned payments are not reflected on the Post-petition Loan History.
McPherson testified that CMC sent letters to the Debtors dated August 8, 2013, November 7, 2013, and January 9, 2014. (Ex. K). He testified that the monthly payment amount set forth in the letters reflected the proper amounts under the loan as crammed down by the confirmed plan. McPherson testified that, according to the August 8, 2013 letter, the $465.20 payment made by the Debtors on August 1, 2013, was insufficient, and that the Debtors were delinquent on the payments required by the confirmed plan as of that date.
McPherson testified that he reviewed the post-petition phone call records for the loan. He testified that the first record of an auto-dialed phone call was in August 2013,
McPherson testified that he has no idea who would have made collection calls after the foreclosure was completed. He stated
McPherson acknowledged that the foreclosure sale was completed on August 12, 2014, but after the case was reopened, the foreclosure trustee informed CMC that the sale had to be rescinded.
As previously mentioned, at the beginning of the evidentiary hearing, the court struck without prejudice certain claims in the Debtors' pretrial brief that were never mentioned in their Sanctions Motion. In their statements before trial, as well as their supporting brief, Debtors requested a further award of damages for violation of the FDCPA in addition to NRS 598 and NRS 41.600, as well as damages for violation of the automatic stay under Section 362(k).
CMC conceded at closing argument, however, that the purported settlement was never approved by the court, nor was approval ever sought. It acknowledged that the draft settlement stipulation was never executed.
Because the claims encompassed by the Sanctions Motion have not been resolved, the court will address them in the chronological order in which they could arise in the Debtors' now-reopened bankruptcy proceeding.
Section 362(k) provides for an award of actual damages for an individual injured by a willful violation of the automatic stay. Actual damages may include costs and attorneys' fees, and, in appropriate circumstances, punitive damages.
An award of attorneys' fees under Section 362(k) may include the fees incurred in seeking to enforce the automatic stay, including on appeal, and is no longer limited to the attorneys' fees incurred up to the time the automatic stay violation ceases.
A prerequisite to awarding any actual or punitive damages under Section 362(k) is a finding that the creditor's violation of the automatic stay was willful. Proof of specific intent to violate the automatic stay is not required.
Section 524(a)(1) provides in relevant part that a bankruptcy discharge "voids any judgment at any time obtained, to the extent such judgment is a determination of the personal liability of the debtor with respect to any debt discharged ..." Section 524(a)(2) provides in relevant part that the bankruptcy discharge "operates as an injunction against the commencement or continuation of an action, ... or an act, to collect, recover or offset any such debt as a personal liability of the debtor ..."
A debtor who asserts that the Discharge Injunction has been violated must seek relief from the bankruptcy court by motion rather than through commencement of an adversary proceeding.
The Bankruptcy Appellate Panels for the Ninth Circuit ("BAP") summarized the standards applicable to the enforcement of the Discharge Injunction as follows:
In re Bassett, 255 B.R. at 758.
A bankruptcy court's civil contempt authority under Section 105(a) is limited to relatively mild, non-compensatory fines rather than serious punitive sanctions.
More recently, the BAP also observed as follows:
Debtors allege that CMC violated the automatic stay as to the collection of its claim under the Adjustable Note and as to the enforcement of its lien against the 36th Street Property. Debtors also maintain that CMC violated the Confirmation Order by unilaterally imposing a payment requirement of $547.40 each month rather than $465.20 each month. Finally, Debtors assert that CMC violated the Discharge Order and Discharge Injunction by attempting to collect the full amount of the Adjustable Note.
The automatic stay arose immediately upon the filing of the Debtors' bankruptcy petitions on May 1, 2009. Under Section 362(a)(6), the automatic stay precludes any act to collect, assess, or recover any pre-petition claim against the debtors. Under Section 362(a)(4), the automatic stay precludes any act to enforce any lien against property of the estate. Under Section 362(c)(2)(C), the automatic stay terminates as to the debtors at the time the bankruptcy case is closed, dismissed, or a discharge
CMC clearly knew of the Debtors' bankruptcy filing and therefore had knowledge of the automatic stay. The automatic stay terminated as to the Debtors on June 18, 2012, when they received their Chapter 11 discharge, and their case had not been closed or dismissed.
As to the Debtors, the inquiry under Section 362(k) is whether CMC engaged in any act to collect, assess, or recover their claim under the Adjustable Note between May 1, 2009 and June 18, 2012. Debtors argue that CMC violated the automatic stay by making collection calls and by sending certain correspondence during that period. Debtors argue that the collection calls occurred over a sixteen-week period between June 14, 2011 and October 1, 2011.
Martinez testified that he received three calls per week from CMC after the bankruptcy was filed. As discussed above, Debtors argue that those calls occurred over a sixteen-week period between June 14, 2011 and October 1, 2011. Martinez was protected by the automatic stay until he, along with Flores, received their bankruptcy discharge on June 18, 2012. Flores also testified that he received three calls per week from CMC, but he also stated that those calls did not start until after his birthday in October 2012. Assuming those calls occurred, none of them were during the period in which Flores was protected by the automatic stay because Flores already had received his Chapter 11 discharge.
Martinez testified specifically as to the two Rate Adjustment Letters that he received dated in October and November 2009, as well as two additional Rate Adjustment Letters that he received dated in April and May 2012. Martinez did not testify specifically as to the 36 other Rate Adjustment Letters admitted into evidence, but recalled that he received such letters from CMC every month during the bankruptcy case. Flores did not testify as to any of the Rate Adjustment Letters.
For purposes of this analysis, the court assumes that Martinez received forty-eight phone calls from CMC after the bankruptcy petition was filed and before the discharge was received. The court also assumes for purposes of this analysis, that each of the calls sought to collect the original amount of the Adjustable Note. The
For purposes of this analysis, the court assumes that Martinez received each of the Rate Adjustment Letters sent by CMC, and that Flores received none of them. The court having reviewed each of the Rate Adjustment Letters, however, concludes that none of them demands payment of the Adjustable Note. Instead, each of the Rate Adjustment Letters simply informs the Debtors of the monthly payments that would be required at the time under the terms of the Adjustable Note. The word "due" appears in each of the letters, but only to explain that no adjustment to the monthly payment is due rather than to state that a payment in any amount is due. There is no express statement in any of the Rate Adjustment Letters that CMC is attempting to collect a debt. Rather, the letters provide information that would be equivalent to that provided outside of bankruptcy, and do not demand payment separate from a monthly mortgage statement. Under these circumstances, the court concludes that CMC's issuance of these Rate Adjustment Letters did not constitute willful violations of the automatic stay as to either of the Debtors.
Martinez testified that he received the forty-eight phone calls from CMC, but offered no testimony or documentary evidence establishing that he missed time from work or incurred any medical or legal expenses as a result. He suffered no pecuniary losses which, by itself, does not preclude the recovery of emotional distress damages as a component of actual damages. Martinez's testimony at trial, however, was that the bankruptcy process itself was very stressful, which caused him to lose focus at work.
Martinez also testified that after the NOD was recorded by CMC, it caused him to lose sleep, created problems taking care of customers at work, and led to fights with his partner, Flores. The NOD, however, was recorded well after Martinez received his discharge and the automatic stay had expired.
As previously discussed, the recovery of emotional distress damages under Section 362(k) requires proof that the stay violation caused significant harm distinct from the anxiety and inherent pressure of the bankruptcy process.
No medical evidence was offered and no percipient witness testimony was adduced inferring that Martinez experienced any additional anxiety or stress as a result of
Under these circumstances, the court concludes that Martinez has failed to establish that he suffered any actual damages, both monetary and non-monetary, as a result of any willful violation of the automatic stay by CMC.
CMC maintains that the $465.20 monthly payment amount was "self-selected" by the Debtors and not ordered by the court.
Debtors argue that CMC violated the Confirmation Order after its entry on June 14, 2011, by sending twelve Rate Adjustment Letters through May 18, 2011, that included unpaid principal balances that conflict with the Confirmation Order.
At the evidentiary hearing, CMC attempted to establish through its examination of Martinez, that the $465.20 monthly payment was not required by the language of the confirmed plan. Martinez's partner, Flores, was not examined on the subject, and CMC's only witness, McPherson, also did not address the subject on direct or cross-examination. No one from CMC who had personal knowledge of the servicing of the Debtors' obligation was called to testify. CMC's only witness, McPherson, did not dispute that CMC had notice of the Debtors' reorganization proceeding, actually participated in the confirmation process, and had notice of all of the documents filed in the Chapter 11 case. Because McPherson relied solely on the records prepared by other CMC employees, he had no personal knowledge of whether CMC's employees even read the bankruptcy information in the loan file. Thus, to the extent that the amount of the monthly payment required by the confirmed plan is a factual issue instead of a legal one, the witness testimony infers that CMC, rather than the Debtors, failed to take reasonable steps to comply with the requirements of the Confirmation Order.
All of the Chapter 11 reorganization plans proposed by the Debtors referenced a Cash Flow Analysis setting forth their
At the inception of the Chapter 11 proceedings, Debtors filed the Valuation Motion by which the court determined the fair market value of the 36th Street Property to be $120,000. That valuation resulted in an allowed secured claim in that amount in favor of CMC, with an allowed unsecured claim for the balance owed on the Adjustable Note. CMC was served with the Valuation Motion and never opposed it. It did not appeal the order granting the motion. Instead, CMC filed its POC for the full amount of the Adjustable Note balance and more.
CMC was served with all of the Chapter 11 reorganization plans proposed by the Debtors as well as the Chapter 11 disclosure statements that included the Cash Flow Analysis. It never objected to the proposed monthly payment of $465.20 set forth in the Cash Flow Analysis and never objected to confirmation of proposed Third Amended Joint Plan of Reorganization, nor the amendment proposed in the Fourth Amended Joint Plan of Reorganization.
CMC actively participated in the Chapter 11 proceeding and was represented by counsel. It administered the Adjustable Note throughout the bankruptcy on behalf of the investor holding the interest in the note, and its loan files included the note, the deed of trust, the title policy, any loan modification, and any cramdown information and other bankruptcy data. CMC provided all of that information to its foreclosure trustee.
The Confirmation Order entered on June 14, 2011, approved the Third Amended Joint Plan of Reorganization, including the payments set forth in the Cash Flow Analysis. CMC was served with a copy of the Confirmation Order and never appealed the order. The Plan Modification Order entered on October 25, 2011, approved the Fourth Amended Joint Plan of Reorganization, including the payments set forth in the Cash Flow Analysis. CMC was served with a copy of the Plan Modification Order and never appealed the order.
The notion that CMC could unilaterally change the amount of the payment under the confirmed plan without prior notice to the Debtors is contradicted by CMC's own legal position. In its written response to the Sanctions Motion, CMC expressed its own understanding of the Confirmation Order as follows:
CMC Opposition at 4:23-28 (Emphasis added). Apparently, CMC is unaware of the requirements of the very loan that it is servicing in this case. The loan documents were attached as exhibits to its POC. Those documents consist of the Deed of Trust, an Adjustable Rate Rider, a Condominium Rider, and the Adjustable Note.
Under these circumstances, CMC's assertion that the Confirmation Order did not provide for a monthly payment of $465.20, is contrary to the record. Additionally, its assertion that it did not understand that the $465.20 amount was required by the Confirmation Order, is not credible. More important, its assertion that it was not required to comply with the notice requirements of its loan documents is factually unsupportable. The notion that a loan servicer can unilaterally change the amount of the monthly payment on a consumer loan without notice or explanation, especially in a bankruptcy setting, is risible at best. CMC's additional suggestion that the Debtors had the burden of seeking an explanation for the payment change in this case, while CMC simultaneously is sending Rate Adjustment Letters in connection with the Adjustable Note, is even worse. To the extent that CMC had the burden of demonstrating that it was unable to comply with the Confirmation Order, it utterly failed to meet that burden.
Clear and convincing evidence establishes that CMC violated the Confirmation Order when it unilaterally increased the monthly payment amount and then retroactively applied the amount to the allowed secured claim that was crammed down by the Debtors' confirmed plan. The record also establishes that CMC had the ability to comply with the Confirmation Order, but it offered no evidence that it was unable to comply. The court therefore concludes that a willful violation of the Confirmation Order has been established.
The Confirmation Order was entered on June 14, 2011. The order specified that the Debtors' monthly payment on CMC's allowed secured claim as crammed down under the confirmed plan would be $465.20. The record establishes that CMC accepted those payments for years before starting to reject those payments in August 2013. Additionally, the Payment History indicates that CMC did not unilaterally change the monthly plan payment to $547.40 until August 17, 2012. No contrary evidence was presented as to the date CMC unilaterally changed and retroactively applied the increased monthly payment amount. The court therefore will use the August 17, 2012 date as the beginning
CMC initially argued that there is no evidence of any damages suffered by the Debtors.
After the Confirmation Order was entered, the twenty-seven letters and notices received from CMC included fourteen Rate Adjustment Letters. While each of the Rate Adjustment Letters includes an unpaid principal balance amount that would be owed on the original Adjustable Note, none of them state that the principal balance of the Adjustable Note is owed or that a payment is due. As the court previously concluded in connection with the alleged automatic stay violation, see discussion at 160-61,
The other letters and documents included: a copy of the NOD that was addressed to the tenants at the 36th Street Property (Ex. 23); a copy of the Notice of Sale (Ex. 40); copies of the May 12, 2014 (Ex. 62), July 8, 2014 (Ex. 61), and August 11, 2014 (Ex. 60) letters returning the Debtors' monthly payments and notifying them that their loan had been referred to CMC's legal counsel to begin foreclosure proceedings; copies of the February 4, 2014 letters sent to four different addresses declaring a breach of the Adjustable Note and Deed of Trust (Exs. 64, 65, 66, and 67); a copy of the February 10, 2014 letter returning an electronic payment of $465.20 stating that there are late charges and other amounts due totaling $199.22 (Ex. 63); and copies of the August 8, 2013 (Ex. 70), November 7, 2013 (Ex. 69), and January 9, 2014 (Ex. 68) letters stating that there are unapplied balances and that CMC cannot post the balances because they are less than the payments due.
All of these letters and notices were sent to the Debtors as a result of CMC's unilateral change to the monthly payment. There is no dispute, however, that all of these letters and notices were sent to the Debtors after the Discharge Order was entered. To avoid duplicating any award of actual damages, the court will address below the post-confirmation letters and notices in connection with the violation of the Discharge Order and Discharge Injunction, if any.
After the Confirmation Order was entered, Debtors argue that they received three phone calls each week through October 1, 2011.
As to the post-confirmation calls made by CMC to Martinez through October 1, 2011, i.e., prior to the discharge, the court
Under these circumstances, the court concludes that Martinez has not met his burden of proving that the post-confirmation calls from CMC, if any, were the cause of any emotional distress sufficient to warrant compensation. In short, no actual damages for violation of the Confirmation Order are appropriate.
The Discharge Order entered on June 18, 2012, was straightforward: it granted a discharge to both Martinez and Flores under Section 1141(d). Other than the bankruptcy discharge, the order grants no other relief. As previously discussed, however, the discharge triggered certain statutory consequences, including the Discharge Injunction. Because the Discharge Order provides no additional relief, the court will address only whether CMC violated the Discharge Injunction.
As discussed above, the standard in this circuit for finding a willful violation of the Discharge Injunction requires an analysis of two prongs.
The evidence is clear and convincing that CMC knew that the Discharge Injunction applied to its claim. CMC knew that the Debtors filed for Chapter 11 relief. CMC was scheduled as a secured creditor in both Chapter 11 proceedings.
CMC was served with the Debtors' jointly proposed Chapter 11 plans of reorganization that provided for CMC to retain its lien against the 36th Street Property and for its secured claim to be allowed in the revalued amount of $120,000. Like all individual Chapter 11 debtors, the proposed plans provided that the Debtors would not receive a discharge of their personal liability on CMC's claims until completion of plan payments. CMC was served with the disclosure statements that included
CMC was an active participant in the Debtors' case. It filed its POC in the secured amount of $299,788.72. It filed a motion for relief from stay alleging that it was owed $305,587.20 as of December 29, 2009.
CMC was served with the Third Amended Joint Plan of Reorganization as well as the Third Amended Joint Disclosure Statement. The identical Cash Flow Analysis was incorporated in the Third Amended Joint Disclosure Statement, but CMC did not object to plan confirmation, including the proposed monthly mortgage payment.
CMC was served with notice of the Confirmation Order that expressly discussed the Cash Flow Analysis in support of plan feasibility. CMC did not appeal the Confirmation Order, and it continued to receive and accept payments of $465.20 per month after the Chapter 11 plan was confirmed.
CMC was served with the motion for entry of a final decree and an order of discharge. The Discharge Order was entered on June 18, 2012, and CMC did not appeal the entry of discharge.
Having received notice of the Chapter 11 proceedings, having filed a POC for the balance of the Adjustable Note, having sought relief from the automatic stay, having participated in the plan confirmation process, having received the Confirmation Order, and having received the Discharge Order, CMC clearly knew that the Discharge Injunction applied to its claim under the Adjustable Note.
As previously discussed, the Debtors' discharge did not eliminate CMC's lien against the 36th Street Property, but it did eliminate the Debtors' personal liability for the Adjustable Note pursuant to Sections 1141(d)(1) and 1141(d)(5). As a result, the Discharge Injunction prohibited any "act, to collect, recover or offset any such debt as a personal liability of the debtor ..." 11 U.S.C. § 524(a)(2).
After the Debtors received their discharge, CMC continued to receive and accept payments of $465.20 per month. On August 17, 2012, however, more than a year after the Debtors' Chapter 11 plan was confirmed and nearly two months after the Debtors received their discharge, CMC came to the conclusion that the $465.20 monthly payments were insufficient. It then changed the monthly payment to $547.40 and applied that payment
Almost a year later, CMC mailed the Debtors a letter dated August 8, 2013, in which it finally mentioned that the monthly payment amount was $547.40. The August 8, 2013 letter did not explain how the monthly payment amount of $547.40 was determined; it only stated that the payment of $465.20 left a balance due of $82.20. As previously discussed, during the Debtors' Chapter 11 proceeding, CMC continued to send the Rate Adjustment Letters each month. Out of all of the Rate Adjustment Letters admitted into evidence, only the February 18, 2010 letter (Ex. 108) stated that the monthly payment under the original Adjustable Note would have increased by approximately $52.00, and only the February 16, 2012 letter (Ex. 84) stated that the monthly payment under the Adjustable Note would have decreased by approximately $21.00. All of the Rate Adjustment Letters provided information explaining how any monthly payment adjustment was calculated. If the Debtors would have had to increase their monthly payment under the Adjustable Note, they were notified in advance. If the Debtors would have had to decrease their monthly payment under the Adjustable Note, they were notified in advance. However, no such information was included in the August 8, 2013 letter. Moreover, CMC never explained in the August 8, 2013 letter that it had retroactively applied the increased payment amount to November 1, 2011, and that it would continue to do so.
After August 8, 2013, CMC considered the Debtors to be in default on payment of the allowed secured claim that had been crammed down by the Confirmation Order,
CMC's foreclosure trustee, Northwest Trustee Services, recorded the NOD setting forth an arrearage amount of $2,378.43 that was based on the loan delinquency information obtained from CMC. The NOD also referred to the original Adjustable Note amount of $264,000, rather than the allowed secured claim amount crammed down by the confirmed plan. Under
After recording the NOD emphasizing that it was attempting to collect a debt, CMC's foreclosure trustee subsequently recorded the two-page Notice of Sale that sets forth a total unpaid balance amount of $104,346.49, that made no reference to the original Adjustable Note amount, and that stated in capital letters at the bottom of the last page: `THIS OFFICE IS ATTEMPTING TO COLLECT A DEBT AND ANY INFORMATION OBTAINED WILL BE USED FOR THAT PURPOSE." Unlike the NOD, however, the Notice of Sale does not disclaim that the sale is part of an attempt to collect a debt as a personal liability of the borrowers. In other words, the Notice of Sale announces, without limitation, that the foreclosure trustee is attempting to collect a debt in the amount of $104,346.49 owed by the trustors, Martinez and Flores.
Both prior to the foreclosure sale and even after the foreclosure sale, Debtors testified that they received calls from CMC, or someone on behalf of CMC, seeking to collect from the Debtors personally, either the full amount of the Adjustable Note or up to $80,000. Debtors allege that each of them received three post-discharge calls per week beginning shortly after Flores's birthday on October 5, 2012, through the foreclosure sale date of August 11, 2014.
Because the NOD references the full amount of the Adjustable Note rather than the allowed secured claim crammed down by the confirmed Chapter 11 plan, because the Notice of Sale seeks to foreclose on the balance of the allowed secured claim without limitation, and because they received numerous phone calls seeking up to the full amount of the Adjustable Note, Debtors maintain that CMC's intentional actions violated the Discharge Injunction.
CMC, of course, maintains that it did not attempt to collect either the remaining balance of the Adjustable Note or the unpaid balance of its allowed secured claim. It denies making any of the post-discharge collections calls alleged by the Debtors to have occurred either before or after the foreclosure of the 36th Street Property. CMC's primary evidence consists of the testimony of its only witness.
McPherson testified at length, both in writing and in open court, in response to the Debtors' claims. As previously mentioned at note 10,
It also appears that McPherson does not know who prepared the prior Payment History even though his employer previously submitted it as proof of CMC's servicing of the Debtors' loan, and he clearly did not prepare the Post-petition Loan History that proved to be materially inaccurate. Surely someone at CMC, but not McPherson, actually prepared both documents and could testify on personal knowledge how the documents were prepared and could explain why certain information was omitted.
McPherson also testified that he reviewed CMC's call log (which was never produced by CMC in discovery), but he was not asked to explain how CMC generates, updates, maintains, and secures its phone records. Surely someone at CMC, but not McPherson, actually knows and could have testified on personal knowledge regarding CMC's protocol to assure the accuracy of its phone records and how call information is inserted into the comment history of the loan records. Based on his review of the call log (or perhaps the comment history), McPherson did testify that CMC had four different phone numbers for the Debtors, that CMC started a call campaign in August 2013, and that CMC never talked to the Debtors. However, that testimony contradicted CMC's representations to its foreclosure trustee. In seeking issuance of the NOD, CMC's lead foreclosure employee represented under penalty of perjury on April 1, 2014, that CMC had no telephone numbers by which to contact the Debtors.
McPherson testified, without contradiction, that California is an anti-deficiency jurisdiction that does not permit a lender recourse against its borrower once a non-judicial foreclosure on residential property is completed. He therefore suggested that CMC would have no reason to seek a personal judgment against the Debtors for any balance of the Adjustable Note, or the unpaid balance of the allowed secured claim for that matter, once the foreclosure sale was completed. That suggestion, however, misses the point of the discharge. Under Section 524(a)(2), the discharge operates as an injunction against
Moreover, while McPherson was correct about the California anti-deficiency law applicable to foreclosure of CMC's first deed
McPherson also testified that CMC's loan records do not reflect that CMC ever explained to the Debtors why or how it recalculated the monthly payments, and he further testified that, according to the call log or comment history, CMC never spoke to the Debtors by telephone. Of the calls for which he was aware, however, McPherson testified that he never reviewed any of the auto-dialed phone calls and could testify only about his general belief as to the outbound language of typical CMC auto-dialed calls. In other words, McPherson has no personal knowledge of what actually occurred in connection with any phone calls made to the Debtors before or after August 8, 2013, but he must rely on the call logs and comment history generated by CMC. His testimony is the only evidence offered by CMC to contradict the testimony of Martinez and Flores as to the calls they received from CMC after the Discharge Order was entered.
Having considered the testimony of Martinez and Flores, as well as the testimony of McPherson, the court finds that calls were received by the Debtors from, or on behalf of, CMC seeking to collect at least portions of CMC's claim that was discharged in this case. The court also finds that the NOD and the Notice of Sale represented the culmination of CMC's efforts to collect at least the balance of the allowed secured claim as a personal liability of the Debtors. The court generally finds McPherson to be a credible and at times reluctant witness but limited by his lack of personal knowledge and saddled with records generated and maintained by CMC that appear to be incomplete, inaccurate, or both. Thus, notwithstanding the contrary testimony offered by CMC's only witness, the court finds the Debtors' testimony to more credibly explain the actions taken by, or on behalf of, CMC in this case.
Having concluded that CMC intended the actions that violated the Discharge Injunction, the second prong of the Ninth Circuit standard has been met. Therefore, the court also concludes that CMC's violation of the Discharge Injunction was willful.
Debtors' pecuniary losses from CMC's violation of the Discharge Injunction were minimal. Martinez did not miss work or suffer any wage loss, and Flores did not either. Martinez did not seek medical treatment, but Flores testified that since May 2014, he spends $25.00 each month for his antidepressants. Flores testified that he spends over $200.00 each month for health insurance, but did not specify when those health insurance payments commenced.
Debtors' non-pecuniary losses consist of any emotional distress caused by the violation of the Discharge Injunction. Individual Chapter 11 cases and Chapter 13 adjustment proceedings are different from non-individual Chapter 11 cases and individual Chapter 7 proceedings because the debtor must obtain confirmation of a plan, and is not eligible for a discharge until plan payments are completed. Additionally, once plan payments are completed, the individual Chapter 11 debtor's discharge is not entered until approved by the bankruptcy court. Only after the discharge is entered does the individual debtor receive relief
But that protection was lost when CMC sent the demand letters and notices to the Debtors that led to the NOD and Notice of Sale threatening the assertion of personal liability. It was lost when phone calls hectoring the Debtors to pay amounts not required by the confirmed plan, and threatening to seek the balances of the allowed secured claim or the Adjustable Note, were made by, or on behalf of, CMC. That both Martinez and Flores would suffer significant emotional distress is not unexpected.
In this circuit, a bankruptcy court may award, in addition to actual damages, mildly punitive fines for a violation of the Discharge Injunction.
First, the court already ordered at the evidentiary hearing that claims under the FDCPA and the Nevada consumer protection statutes, belatedly raised by the Debtors, would not be considered in connection with the instant motion. Debtors' suggestion in their post-trial brief that the court should be guided by the FDCPA damage provisions appears to be an end-run on the court's previous ruling. Second, applying a $1,000 per violation figure
Based on the evidence presented, the court finds that Martinez did not suffer any monetary losses caused by CMC's violation of the Discharge Injunction. The court finds that Flores incurred monetary losses in the amount of $25.00 per month for his antidepressant medication beginning in May 2014. The total amount through the date of the evidentiary hearing on the Sanctions Motion is $650.00. The court does not include the $200.00 or more that Flores spends each month on health insurance because there was no evidence establishing that he started purchasing health insurance only after the Discharge Injunction was violated. In other words, the health insurance premiums may have been an ongoing expense that were not caused by the discharge violation.
Based on the evidence presented, the court finds that Martinez suffered significant emotional distress caused by CMC's violation of the Discharge Injunction. The court has found that letters and notices were sent by CMC, and that calls were made by, or on behalf of, CMC, in violation of the Discharge Injunction. Applying a
The court also concludes that the amount of $35,000 appropriately compensates Flores for the emotional distress caused by CMC's willful violation of the Discharge Injunction. This amount is based on the cumulative effect of CMC's actions, which also takes into account: (1) Flores's testimony that he answered only one out of the three calls from CMC after the discharge was entered, (2) Flores's testimony that he was not familiar with the language of the NOD until presented a copy at trial, and (3) Flores's testimony that his occupation as a therapist is an independent source of stress. Those considerations serve to limit the amount of the emotional distress award. However, the amount awarded also is based on Flores's uncontroverted testimony that he sought professional assistance for the additional stress, that he was prescribed antidepressant medication after CMC had commenced steps leading to the foreclosure of the 36th Street Property, and that he still takes such medication. Additionally, the amount awarded takes into account the impact of CMC's action on Flores's domestic relationship with Martinez, the destruction of the peace of mind intended by the discharge, and the credibility of Flores's testimony presented at the evidentiary hearing.
Based on the foregoing, the court concludes that Martinez suffered actual damages in the total amount of $25,000 as a result of the violation of the Discharge Injunction. The court also concludes that Flores suffered actual damages in the total amount of $35,650 as a result of the violation of the Discharge Injunction.
As previously discussed, this court has no authority to award punitive damages for a violation of the Discharge Injunction, but it does have authority to award mildly, non-compensatory fines in appropriate circumstances. In other circumstances, this court has awarded non-compensatory fines not exceeding two percent of the total amount sought by a lender that violated the Discharge Injunction by commencing a post-discharge lawsuit for the full balance of the discharged obligation.
A fine is appropriate in this case because of CMC's refusal to provide prior notice of its change in the Debtors' monthly payment or notice of its retroactive application of the change. Even after it made the unilateral decision to do so on August 17, 2012, and eventually treated the Debtors to be in default as of August 1, 2013, CMC never explained its basis for doing so or revealed its past decisions in the August 8, 2013, letter. CMC's argument that it can unilaterally change a debtor's monthly payments after plan confirmation, and also retroactively apply that amount without prior notice, is the policy equivalent of "shoot first and ask questions later." In this case, however, CMC also argues that it was the victim's duty to ask questions later rather than the shooter's. That untenable position is reflected in the August 8, 2013, letter, as well as the testimony of CMC's officer establishing that CMC never informed the Debtors of its actions. The court has no evidence indicating whether CMC has a policy of unilaterally adjusting confirmed plan payments without notice in other bankruptcy cases, or retroactively applying payment amounts without notice in other bankruptcy cases, or whether it has limited that privilege to these Debtors. In either event, CMC's conduct supports, at the very least, a mildly, non-compensatory fine of $5,000.00 that must be paid to the Debtors.
The court previously awarded attorneys' fees and costs to Debtors' counsel in the amount of $3,500, and also ordered reimbursement of the $1,717.00 filing fee to reopen the bankruptcy case. The Fee Motion filed on February 4, 2015, alleged that such attorneys' fees and costs had been incurred to the date that motion was filed. The Fee Motion was not opposed by CMC, and the requested amount was awarded.
Under these circumstances, the court will allow the Debtors to recover attorneys' fees and costs incurred in connection with the Sanctions Motion
The attorneys' fees and costs shall be awarded under Section 105(a) in connection with CMC's violation of the Confirmation Order and the Discharge Injunction. No attorneys' fees and costs shall be awarded under Section 362(k).
For the reasons discussed in this Memorandum Decision, the Sanctions Motion will be granted in part and denied in part. A separate order has been entered contemporaneously herewith.
548 B.R. at 288 n.11 (citations omitted).
