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Preliminary Injunctions in Bankruptcy Courts: Can a Litigant Get a Second Opinion?

November 27, 2016

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District courts can hear an appeal from any interlocutory order, as long as they agree to accept the appeal.  28 U.S.C. § 158(a)(3).  Final judgments, orders and decrees are always immediately appealable.  28 U.S.C. § 158(a)(1).  Certain interlocutory orders, such as orders increasing or reducing the exclusive time periods for a debtor to file and obtain acceptance of a plan for reorganization under Chapter 11 are also immediately appealable.  28 U.S.C. § 158(a)(2).  Other interlocutory orders are appealable only “with leave of the court.”  Preliminary injunctions are interlocutory orders that fall into the last category.

The timing and process for perfecting an appeal of a preliminary injunction is not certain.  Recently, Judge James Zagel in the Northern District of Illinois declined to grant leave to appeal a preliminary injunction entered in the bankruptcy court, finding the debtor had no automatic right to appeal.  Gilman v. Goldberg (In re Goldberg), Case No. 16 CV 6993 (N.D. Ill. October 17, 2016) (J. Zagel) (a link to the case is here: in-re-goldberg).  Generally, leave to take an interlocutory appeal is granted for the same reasons that an interlocutory appeal to the court of appeals may be taken from an order of the district court.  For bankruptcy appeals, district courts seek guidance from 28 U.S.C. § 1292 which guides courts of appeals when considering interlocutory appeals.  Goldberg grappled with the analogy to this statute as the court considered the debtor’s efforts to appeal the grant of a preliminary injunction against it.

Background of the Case

The debtor filed a Chapter 11 bankruptcy in August, 2015.  Among the debtor’s assets were membership interests in two real estate entities.  The debtor was the only individual authorized to act for either entity.  The entities leased the real properties to unrelated third parties who also had an option to purchase the real properties.

The debtor’s father loaned the debtor substantial sums of money.  After the debtor’s father passed away in 2010, the debtor entered into a settlement agreement with his mother, siblings, and his father’s estate.  The settlement required debtor to repay the loans he borrowed from his father totaling about $5 million.  The settlement agreement was secured by a security interest in the debtor’s two real estate entities and the collateral assignments of rents and other payments from the tenants.

The debtor proposed a plan of reorganization funded by the rents from the tenants.  The father’s estate filed an adversary proceeding challenging whether the debtor could use the rents because the funds were earmarked for repayment of the settlement agreement.  The debtor moved to dismiss, but the bankruptcy court denied the motion and found that the plaintiff alleged sufficient facts to state a claim for relief, and if the settlement agreement was construed as alleged by the plaintiff, then the bankruptcy court might find the plaintiff entitled to an injunction prohibiting the debtor from receiving the using the rents.

After denying the motion to dismiss, the bankruptcy court entered a temporary injunction enjoining the debtor from disbursing and transferring the rents until the bankruptcy court determined the plaintiff’s rights, if any, to the rents.  The bankruptcy court specifically limited the injunction to four months and set the matter for a hearing that would determine if the injunction would be allowed to expire.  The debtor requested an appeal of the preliminary injunction.

Holding: No Automatic Appeal of the Interlocutory Order

The District Court turned immediately to 28 U.S.C. § 1292.  No certification by the bankruptcy court was necessary.  In re CIS Corp., 188 B.R. 873, 878 (S.D.N.Y. 1995) (agreeing with Third, Seventh, Ninth, and Tenth circuit courts that district court may grant leave to appeal without certification by the bankruptcy court); but see In re General Dev. Corp., 179 B.R. 335, 337 (S.D. Fla. 1995) (district court lacks jurisdiction over interlocutory order unless bankruptcy court certifies that there was no just cause for delay of the appeal).

Section 1292 “guides” the district court’s discretion in whether to grant leave to appeal an interlocutory order.  In re Reserve Production, Inc., 190 B.R. 287, 289-90 (E.D. Tex. 1995). Goldberg quoted Reserve Production for the premise that an appeal of a preliminary injunction should be allowed because “[a]s a policy matter, the rulings of an non-Article III bankruptcy court should not be more insulated from appellate review than the rulings of an Article III district court.”  Section 1292(a)(1) provides that a preliminary injunction is appealable as a matter of right.  But Section 1292(b) provides that leave to hear an appeal of an interlocutory appeal should only be granted if the “order involves a controlling question of law as to which there is substantial ground for difference of opinion and that an immediate appeal from the order may materially advance the ultimate termination of the litigation.  Section 158 does not distinguish between preliminary injunctions and other interlocutory orders as does Section 1292.  Goldberg determined that Section 1292(b) rather than Section 1292(a)(1) applied, and that the court would need to first consider whether it should even hear the appeal before reaching the merits.

Adopting the plain language approach, Goldberg concluded the debtor did not have an automatic right to appeal a bankruptcy preliminary injunction under Section 158(a)(3).  Instead, the court found Section 158(a) requires leave of the district court before jurisdiction is appropriate.  An interlocutory appeal under Section 158(a) must therefore meet Section 1292(b) standards.

Turning to Section 1292(b), Goldberg found the debtor failed to raise a controlling question of law which, if resolved, would speed up the litigation.  Thus, the debtor failed to show an immediate appeal would assist the proceedings in the bankruptcy court below.  The District Court found the injunctive order was set to expire in October, 2016; thus, the appeal would not materially advance the proceedings and remanded the case to the bankruptcy court.

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Helpful Cases for Mortgage Servicers Attempting to Comply with Mortgage Servicing Regulations After a Bankruptcy Discharge

August 15, 2016

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Mortgage lenders and servicers face several regulations in servicing residential mortgages. There are requirements under the Truth in Lending Act (“TILA”), Real Estate Settlement Procedures Act (“RESPA”), the Equal Credit Opportunity Act (“ECOA”), the Fair Debt Collection Practices Act (“FDCPA”), state law, and new regulations implemented by the Consumer Financial Protection Bureau (“CFPB”).  Failure to comply with these regulations and laws may give rise to litigation, as well as statutory penalties.  In many cases, the mortgage borrower files for bankruptcy.  When the mortgage borrower states an intention to surrender the mortgaged property in bankruptcy, non-bankruptcy statutes and regulations often conflict with or at minimum create great uncertainty about the mortgage servicer’s obligations to communicate with these borrowers after discharge.  Neither the Supreme Court nor many of the Circuits have provided clarity for mortgage servicers on whether, how, and to what extent they may communicate with a discharged debtor who still owns the mortgaged property.  Accordingly, for the time being, mortgage servicers must attempt to comply with every applicable statute and regulation while not running afoul of any applicable bankruptcy discharge rules.  The following is a compilation of cases dealing with this dichotomy.

  • “[N]ot every communication from a creditor following the conclusion of a Chapter 7 case violates the discharge injunction.” In re Henriquez, 536 B.R. 341, 345 (Bankr. N.D. Ga. 2015).
  • Correspondence does not violate Section 524 unless it includes a clear demand for payment, accompanied by coercion in the form of a threatened action or some other consequence for nonpayment to induce the debtor to pay. In re Gill, 529 B.R. 31, 40 (Bankr. W.D.N.Y. 2015).

A.  Cases Discussing Foreclosure Notices Required by State Law.

  • Foreclosure notices have been held not to violate the discharge injunction because they are required under both the mortgage and state law. Gill, 529 B.R. at 41; In re Ladebush, No. AP 13-1154-JMD, 2016 WL 675580, at *7 (Bankr. D.N.H. Feb. 18, 2016).
  • The Eighth Circuit has held that foreclosure notices from a secured creditor to a debtor that contain a declaration that they were provided “for information purposes” about the status of the property are not an attempt to collect against the debtor personally, as a matter of law. In re Pennington-Thurman, 499 B.R. 329, 332 (B.A.P. 8th Cir. 2013), aff’d, 559 F. App’x 600 (8th Cir. 2014).
  • Several courts have held that a secured creditor’s communication that acknowledges a bankruptcy discharge has been entered and states the notice is not an attempt to collect personally against the debtor does not violate Section 524. Id.; Pearson v. Bank of Am., No. 3:12-CV-00013, 2012 WL 2804826, at *5-6 (W.D. Va. July 10, 2012); Anderson v. Bank of Am., No. 6:12-CV-00017, 2012 WL 4458474, at *3-4 (W.D. Va. July 11, 2012); In re Mele, 486 B.R. 546 (Bankr. N.D.Ga. 2013); Jones, No. 08–05439, 2009 WL 5842122, at *3 (Bankr. S.D.Ind. Nov. 25, 2009); In re Schatz, 452 B.R. 544, 550 (Bankr. M.D. Pa. 2011).

B.  Cases Discussing Escrow Account Review Statements Required by RESPA and State Law.

 

RESPA and some state law require mortgage servicers to provide escrow account review statements at least annually. 24 C.F.R. 3500.17; see e.g., Fla. Stat § 501.137(2)).

  • Escrow account review statements have been held not to violate the discharge order. Pearson, 2012 WL 2804826, at *5-6; In re Whitmarsh, 383 B.R. 735, 736-37 (Bankr. D. Neb. 2008).
  • One court noted that although the Bankruptcy Code prohibits a mortgagee from exerting pressure on the mortgagor to repay an advance or escrow deficiency, it does not prohibit a mortgagee from providing information or notice to a mortgagor of escrow deficiencies. Chase Manhattan Mortg. Corp. v. Padgett, 268 B.R. 309, 314 (S.D. Fla. 2001).

C.  Cases Discussing Foreclosure Alternative Letters Required by RESPA and Allowed by the Bankruptcy Code.

 

Federal regulations require loan servicers to provide post-discharge communications about loss mitigation options and periodic mortgage statements. Regulation X, which implements RESPA, requires loan servicers to fulfill the “early intervention” obligations of 12 C.F.R. 1024.39 – but to suspend compliance during a borrower’s bankruptcy. Effective January 10, 2014, the CFPB amended Regulation X to require loan servicers to resume compliance upon the first delinquency after a bankruptcy discharge. Comment, 12 C.F.R. 1024.39(d)(1)-2 Cmt.; 12 C.F.R. 1026.41(e)(5)-2 Cmt. In implementing this regulation, the CFPB acknowledged the Bankruptcy Code may prevent attempts to collect a debt personally, but concluded the Bankruptcy Code did not prevent servicers from sending consumers information about the mortgage.

  • Several courts have found that letters offering alternatives to foreclosure have been held not to violate the discharge injunction.   Whitmarsh, 383 B.R. at 736-37; Henriquez, 536 B.R. at 344-45.
  • Letters responding to borrowers’ requests for loss mitigation information have also been held not to violate the discharge injunction. Mele, 486 B.R. at 557.
  • In the situation where the debtor indicates an intention to surrender the property but continues to live in the property, courts have found that information provided to debtors about making voluntary payments post-discharge to avoid foreclosure is allowed under 11 U.S.C. § 524(j). Jones, 2009 WL 5842122, at *3.
  • Regulation X’s “early intervention” requirements also include providing the borrower, at least once every 180 days, with contact information for personnel assigned to assist them and examples of potential loss mitigation options. Similarly, an ECOA statement of the estimated property value must be provided to the property owner without regard to bankruptcy. 12 C.F.R. 1002.14(a)(1); see ECOA Valuation Rule: Compliance Guide, Oct. 3, 2013, at 10 (“The rule covers applications for … loss-mitigation transactions, … covered by Regulation B”).
  • These courts have held that customer relationship letters and property value estimates do not violate Section 524. Henriquez, 536 B.R. at 344-45; Best v. Nationstar Mortgage, LLC, 540 B.R. 1, 10 (B.A.P. 1st Cir. 2015); Leahy-Fernandez v. Bayview Loan Servicing, LLC, — F.Supp.3d –, 2016 WL 409633, at * 8 (M.D. Fla. Feb. 3, 2016)(Covington, J.).

D.  Property Insurance Lapse Notices Required by RESPA.

 

RESPA requires servicers to issue at least two notices to property owners before obtaining lender-placed insurance. 12 U.S.C. § 2605(l). RESPA then requires a notice to be sent upon each renewal of a lender-placed policy. 12 CFR 1024.37(e). The CFPB has concluded that a bankruptcy discharge does not relieve mortgagees from this requirement, and its final lender-placed insurance rule provides no notice exceptions for bankruptcy, default, or foreclosure. See Mortgage Servicing Rules Under the Real Estate Settlement Procedures Act (Regulation X), 78 Fed. Reg. 10696-01, at 10,767 (Feb. 14, 2013).

  • These cases held insurance notice communications did not violate the discharge injunction. Leahy-Fernandez, 2016 WL 409633, at * 8; Myers v. Bank of Am., No. 8:14-MP-00007-MGW, ECF 24-1 at 28:18-31:4 (Bankr. M.D. Fla. Nov. 18, 2014).

Since the mortgage crisis began in 2008, Congress has passed additional regulations to help property owners retain their homes. More clarity for mortgage servicers is needed on how these regulations are enforced after the debtor receives a bankruptcy discharge. In the meantime, we hope this compilation of situations and applicable caselaw is of use to you.

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I Want to Use My Licensed Intellectual Property in My Company’s Chapter 11 Case by Assuming My Already Existing License, but My Lawyer Tells Me We Are in the Wrong State to Do It. Really?

April 11, 2016

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Editor’s Note: Our good colleagues at Willamette Management Associates were kind enough to feature a Bryan Cave Article in its Spring 2016 issue of Insights.  If you are a bankruptcy attorney, then no doubt at some point you have had to deal with the mind-numbing exercise of determining when IP contracts or licenses (or government contracts, remember West Electronics, folks?) can be assumed, or assumed and assigned, or neither.  This analysis can, in some circuits, result in a potentially huge loss of value to debtors and creditors, a la Sunterra.  Your editorial team at the Bankruptcy Cave is annoyed that this problem, and this circuit split, has existed for over 30 years; but we are relieved to have an up-to-date Bryan Cave article on this.  The article also includes a discussion of how the ABI Commission is planning to solve this problem.  The Insights article by can be found by clicking here

Thanks again to Willamette for the opportunity, and the permission to cross post at the Bankruptcy Cave.

 

 

 

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Putative Class Actions in Bankruptcy for Violations of the Discharge Injunction and Bankruptcy Code Section 524(j)

September 11, 2015

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Red Foreclosure Home For Sale Real Estate Sign on White

There has been a relatively recent uptick in plaintiffs’ counsel filing putative class actions in multiple state and federal courts for alleged violations of a debtor’s bankruptcy discharge injunction based upon the debtor’s receipt of post-discharge mortgage-related communications. These claims assert putative class action challenges to post-discharge communications alleged to be attempts at personal collection of the discharged mortgage debt.

Bankruptcy Code Section 524(j) expressly allows a secured creditor with a security interest in the debtor’s principal residence to communicate with the debtor in the ordinary course of business provided the creditor is seeking periodic payments associated with a valid security interest in lieu of pursuing in rem relief to enforce the lien. This section is under-developed in case law, but is receiving some attention because, effective January 10, 2014, 12 C.F.R. 1024.39 and 1026.41 allows mortgagees/servicers to provide debtors with periodic statements regarding the status of the mortgage loan and loss mitigation options post-discharge.

While a discharge extinguishes the debtor’s personal liability on his or her creditor’s claims, a discharge does not extinguish a creditor’s right to enforce its in rem rights against surrendered property. Johnson v. Home State Bank, 501 U.S. 78, 84-85 (1991). A bankruptcy discharge does not affect a secured creditor’s lien in collateral; the lien survives and is enforceable after the bankruptcy proceeding in accordance with state law. Dewsnup v. Timm, 502 U.S. 410, 417 (1992). Further, while the Code provides a discharge of personal liability for debt, it does not discharge the debtor’s post-petition burdens of owning property such as insurance and taxes. In re Arsenault, 456 B.R. 627, 631 (Bankr. S.D. Ga. 2011). Thus, until foreclosure or other transfer of title, the debtor still owns the property, and the secured creditor is entitled to, and sometimes obligated under non-bankruptcy law, to communicate with the property’s owner about the status of the property post-discharge. One such communication a secured creditor is expressly entitled to make under the Bankruptcy Code is to seek periodic payments in lieu of pursuing in rem relief to enforce the lien. 11 U.S.C. § 524(j).

Congress specifically authorized a mortgagee/servicer “seek[] or obtain[] periodic payments associated with a valid security interest” so that debtors might have the option of staying in their homes. Section 524 specifically provides that a debtor may voluntarily pay a debt in spite of the discharge in order to discourage the mortgagee from foreclosing on the property. 11 U.S.C. §§ 524(f) and 524(l ). Information provided to debtors about this option does not violate § 524. In re Jones, No. 08-05439-AJM-7, 2009 WL 5842122, at *3 (Bankr. S.D. Ind. Nov. 25, 2009).

Nonetheless, plaintiffs are attempting to create an independent class action based upon a single debtor’s claim for an alleged violation of his § 524 discharge order. Section 524 does not provide for a private right of action for a discharge injunction violation, much less a class action. Pertuso v. Ford Motor Credit Co., 233 F.3d at 421 (analyzing the legislative history of § 524, contrasting § 524 with Congress’s choice in § 362(h) to create private causes of action for violations of bankruptcy stays, and concluding § 524 does not impliedly create a private right of action)); Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 509 (9th Cir. 2002) (tracking and adopting Pertuso’s analysis); and Cox v. Zale Del., Inc., 239 F.3d 910, 917 (7th Cir. 2001) (agreeing with the result in Pertuso and concluding that a contempt action in the bankruptcy court that issued the discharge is the only relief available to remedy alleged § 524 violations); In re Joubert, 411 F.3d 452, 456 (3d Cir. 2005) (adopting the reasoning of Pertuso, Walls, and Cox in the context of § 506(b) post-petition assessment of fees); see also, Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444-45 (1st Cir.2000) (refusing to address whether § 524 implies a right of action, because, in the First Circuit’s view, a bankruptcy court’s contempt power under § 105(a) offers sufficient remedies).

In the lead case, Pertuso, a group of discharged Chapter 7 debtors brought a purported class action in district court against a common secured creditor, alleging the creditor violated the discharge injunction. Pertuso, 233 F.3d at 420. The issue before the court was whether § 524 impliedly creates a private right of action. After examining the factors to be considered in determining whether a private right of action exists for breach of a federal statute and the legislative history of § 524, the Sixth Circuit determined that, unlike the private cause of action created by Congress for violations of the automatic stay in § 362, Congress did not impliedly create a private right of action in § 524 for violations of the discharge injunction. Id. at 421–422. The Eleventh Circuit has similarly held the power to sanction contempt of the discharge injunction is jurisdictional and exclusive to the issuing court. Alderwoods Grp., Inc. v. Garcia, 682 F.3d 958, 970 (11th Cir. 2012) (the court that issued the injunctive order alone possesses the power to enforce compliance with and punish contempt of that order). Given § 524 does not accord a plaintiff with a private right of action for a violation of the discharge injunction, it would be improper for the court to recognize one based on state consumer protection laws.

The First Circuit is in a distinct minority allowing this procedure. Bessette v. Avco Fin. Servs., Inc., 230 F.3d 439, 444-45 (1st Cir. 2000). The Third, Sixth, Seventh, and Ninth Circuits do not allow it.   The Eleventh Circuit provides the seminal case which limits redress of alleged discharge injunction violations to civil contempt proceedings. In re Hardy, 97 F.3d 1384, 1390 (11th Cir. 1996). Hardy held that § 524 does not authorize an independent claim for damages, and a plaintiff’s remedy for a § 524 violation was under the contempt powers conferred by § 105. Hardy, 97 F.3d at 1389. Civil contempt is a sanction to enforce compliance with an order of the court or to compensate for losses or damages sustained by reason of noncompliance. McComb v. Jacksonville Paper Co., 336 U.S. 187, 191 (1949). It is not an independent cause of action because it is entirely dependent upon the defendant’s knowledge of a pre-existing order in the original case. Hardy, 97 F.3d at 1390; Blalock v. United States, 844 F.2d 1546, 1550-51 (11th Cir. 1988) (per curiam). To sustain a class action, there must first be a cognizable cause of action. Contempt of court is not an independent cause of action, and § 105 does not provide one.

Bankruptcy Rule 9020 states contempt proceedings are contested matters governed by Rule 9014. Fed. R. Bankr. P. 9020. Bankruptcy Rule 9014 specifically excludes from contested matters several rules applicable only in adversary proceedings. Rule 7023 for class actions is excluded and does not apply to contested matters. Fed. R. Bankr. P. 9014. Further, the bankruptcy judge has discretion under Rule 9014 not to apply Rule 7023 in any contested matter. Reid v. White Motor Corp. (In re White Motor Corp.), 886 F.2d 1462, 1463-64 (6th Cir. 1989). Bankruptcy courts routinely exercise that discretion not to invoke Rule 7023 in contested matters. Only occasionally will bankruptcy courts apply Rule 7023 in a contested objection to a proof of claim filed by a pre-petition, putative class-action plaintiff. Reid, 886 F.2d at 1464. Outside the claims objection process, there is no need to apply Rule 7023 to contested matters because contested matters are not sufficiently complicated to warrant the application of adversary rules. In the Matter of Baldwin-United Corp., D.H., 52 B.R. 146, 150 (Bankr. S.D. Ohio 1985). Further, contempt proceedings are fact-specific inquiries which routinely fail to meet the stringent requirements for class certification. In re Montano, 488 B.R. 695, 712, reconsideration denied, 493 B.R. 852 (Bankr. D.N.M. 2013) (Proposed debtor class members, in order to establish discharge injunction violation, would have to present individualized proof of coercive effect which credit union’s conduct had on them, which prevented named class representatives from showing significant questions of law or fact common to class. Citing Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011)).

Thus, a clear majority of courts have held that § 524 does not create a private right of action, making a class action a rare remedy for post-discharge mortgage communications. The development of case law under Section 524(j) should add further clarity.

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