In re Rhodes

Citations: 563 B.R. 380; 26 Fla. L. Weekly Fed. B 211; 2017 Bankr. LEXIS 335Docket: Case No. 6:11-bk-18257-ABB

Court: United States Bankruptcy Court, M.D. Florida; February 3, 2017; Us Bankruptcy; United States Bankruptcy Court

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The Amended Order Imposing Sanctions Against Nationstar Mortgage, LLC, issued by U.S. Bankruptcy Judge Arthur B. Briskman, addresses the failure of Nationstar to comply with court orders, thus hindering Debtor Mary Katherine Rhodes' fresh start as intended by the Bankruptcy Code. Debtor seeks sanctions under 11 U.S.C. § 105 due to Nationstar's improper accounting of payments and failure to timely release liens as directed by the Court. 

The matter arose from Debtor's Motion for Contempt and related motions, leading to a trial on August 15, 2016, where testimonies were provided by the Debtor, her spouse, her accountant, and a representative from Nationstar. The Debtor's Chapter 13 case commenced on December 6, 2011, involving two properties listed solely in her name, neither being her principal residence, for which Nationstar held mortgages. 

Nationstar filed claims secured by the properties, totaling $485,156.74. The Debtor's Chapter 13 plan aimed to value the properties and modify the mortgages, prompting Nationstar to oppose these motions. A confirmation hearing on January 30, 2013, resulted in the Court valuing the properties at $115,000 and $95,000, bifurcating the claims, and determining that upon successful completion of the plan, the liens could be avoided. The Court has since reviewed the evidence and motions filed by both parties to reach its findings.

An order confirming the Debtor's modified Chapter 13 plan was entered on February 13, 2013, which included provisions for Nationstar regarding the secured claims. Nationstar was to receive payment for Claim 3 and Claim 7 in twenty-three monthly installments, followed by balloon payments of $87,001.74 and $109,771.69 respectively in the twenty-fourth month, along with pro-rata distributions for unsecured balances over sixty months. Nationstar actively participated in the case and was properly notified of all relevant motions and orders but chose not to appeal the Confirmation Order, which became final on February 27, 2013. 

Due to the Debtor's inability to secure financing for the balloon payments, Mr. Rhodes agreed to purchase the Properties to enable the payments. The Debtor filed a Motion to Sell the Properties to Mr. Rhodes on November 1, 2013, as Nationstar did not respond to requests for a payoff letter, which was essential for the sale. The court granted the Motion to Sell on December 3, 2013, allowing the sale free of Nationstar’s liens, with no appeal filed by Nationstar.

The Sale Order specified the properties, the claims, and outlined that upon payment, Nationstar’s liens would be released. The Debtor was granted an extension of up to 60 days to make the balloon payments. In January 2014, the Chapter 13 Trustee received $220,553.57, including the balloon payments, and subsequently issued a check for $196,773.43 to Nationstar, which was negotiated in February 2014. However, Nationstar failed to release the liens or apply the funds as directed by the Sale Order until May 2016. During this time, the Debtor made multiple inquiries about compliance with the Sale Order, but Nationstar did not provide written responses or direct the Debtor to consult her bankruptcy counsel.

Nationstar issued six notices regarding forced-placed hazard insurance and seven corrected IRS Tax Form 1098s for the Debtor’s properties while paying real property taxes. Despite these actions, the Debtor had relinquished title to the properties and settled all payments to Nationstar as of February 2014, as per the Confirmation and Sale Orders. Frustrated, the Debtor sought assistance from Senator Bill Nelson in December 2015, who contacted Nationstar about the Sale Order and related issues. In response, Nationstar indicated that it was reviewing the bankruptcy court's cramdown approval and required investor approval to apply the funds received, promising updated IRS forms once this was resolved. Nationstar acknowledged errors in the Debtor's IRS Tax Forms from 2012 to 2014, which necessitated the Debtor to hire Mr. Pilhorn to amend her tax returns. The Debtor testified that Nationstar's non-compliance with the Sale Order resulted in significant emotional distress, corroborated by Mr. Rhodes. 

On February 9, 2016, Nationstar filed a Notice of Mortgage Payment Change, which prompted the Debtor's counsel to object based on the case's history. Nationstar withdrew the Notice on March 1, 2016, citing it was submitted in error. The Debtor filed a Motion for Contempt the same day, leading to a scheduled preliminary hearing. Nationstar failed to appear, prompting an Order to Show Cause on April 8, 2016, requiring Nationstar to explain its non-compliance. Following this, Nationstar released the mortgage liens on the properties in May 2016 and later appeared at the Show Cause hearing, confirming compliance with the Sale Order and acknowledging that the balloon payments had only been properly applied at that time.

Mr. Mays reported a delay in the application of balloon payments and the release of liens, but could not specify the nature of the problem that caused this over a two-year period. Nationstar, with extensive experience in Chapter 13 cases and significant disbursements from the Chapter 13 Trustee, failed to comply with the Court's Confirmation and Sale Orders, causing the Debtor damage. The Debtor experienced time-consuming efforts to gain compliance, emotional distress, and incurred substantial accountant and attorney fees. The Court found Nationstar's disregard for its authority and the Debtor's rights to be egregious, warranting punitive sanctions. The Debtor was awarded compensatory damages totaling $23,927.50, including specific amounts for time and effort, emotional distress, accountant fees, and attorney fees, along with punitive damages of $25,000.

Chapter 13 aims to assist overextended individuals in repaying their debts, contingent upon adherence to court orders. Bankruptcy courts have statutory contempt powers under section 105 of the Bankruptcy Code, allowing them to enforce compliance through various types of orders. To impose civil contempt sanctions, the following must be established: the existence of a valid court order, its clarity, and the violator's ability to comply. Sanctions can be compensatory or coercive in nature.

Nationstar, a sophisticated creditor, actively participated in the Debtor’s Chapter 13 bankruptcy case and received adequate notice of all proceedings. It objected to the Debtor's requested “cramdown” and upheld its proof but chose not to appeal the Confirmation or Sale Orders, acknowledging their validity. The Confirmation Order specified the amount and interest rate for secured claims, while the Sale Order mandated Nationstar to release mortgage liens upon payment. Nationstar failed to seek clarification or appeal for over two years, despite having the ability to comply with the orders, which placed an undue burden on the Debtor. The Debtor demonstrated clear and convincing evidence of Nationstar's contempt for the Court’s orders, a claim Nationstar did not contest. 

Compensatory sanctions may be imposed for actual damages incurred due to a creditor's violation of court orders, requiring proof of actual loss with some certainty. In cases where the extent of damage is difficult to ascertain, courts may consider reasonable inferences from the evidence. The Debtor's actual damages include: (1) time and effort spent; (2) mental and emotional distress; (3) accountant fees; and (4) attorney fees. The Court found that the Debtor spent at least 30 hours attempting to compel Nationstar's compliance, attributing specific hours for various tasks, such as phone calls and reviewing documents. With an hourly rate of $75, the total damages for the Debtor's efforts amounted to $2,295.

Debtor is awarded $6,750 for mental and emotional distress, having initially requested $15,000. The Court establishes that compensatory damages for emotional distress require significant distress, clear evidence of it, and a causal link to the wrongful conduct of the contemptor, referencing In re McLean. Nationstar acknowledges some recovery for Debtor's anguish, proposing $2,700 based on $100 per month for 27 months. However, the Court finds Debtor's distress significant, lasting 27 months due to Nationstar's failures to properly process payments and release liens. The Court adjusts the monthly compensation to $250, indicating Nationstar's offer failed to recognize the full impact of its actions.

Regarding accountant fees, the Court applies a review standard similar to attorney fees. It confirms Mr. Pilhorn’s fees of $4,220, already approved, as reasonable, despite Nationstar's claim that they are excessive. Mr. Pilhorn, a certified public accountant, has a history of preparing tax returns for Debtor and Mr. Rhodes, and his fees align with industry standards. Nationstar suggested a $1,000 fee but provided no supporting evidence. The Court concludes that the fees charged are justified given the services rendered.

Motions for Attorney Fees have been filed, seeking a total of $13,315.00, which encompasses 33.9 hours of work by Debtor’s counsel at a rate of $350.00 per hour and 11.6 hours by a paralegal at $125.00 per hour, related to Nationstar’s noncompliance with Confirmation and Sale Orders over nearly three years. While Nationstar does not contest the entitlement to recover attorney fees, it challenges the reasonableness of the claimed fees, arguing that some fees were incurred before the Sale Order and that the overall amount is excessive given the issues' simplicity, proposing a reasonable fee of $1,000.

The Court agrees that fees incurred before March 2014, totaling $2,652.50, cannot be awarded, as they were not associated with efforts to enforce compliance with the orders. The Court allows the remaining fees, finding them reasonable and not excessive, awarding $10,662.50 as appropriate given the services rendered. This figure reflects a reduction from the total sought, based on disallowed fees. Nationstar's assertion that the matter was uncomplicated is contradicted by testimony and other filings.

Regarding punitive sanctions, they are intended to punish wrongful conduct and deter future violations, applicable when the actor has actual knowledge of their violation or acts with reckless disregard of a protected right.

An award of punitive damages requires consideration of three factors: (1) the degree of reprehensibility of the violator's conduct; (2) the disparity between the harm suffered by the wronged party and the punitive damages awarded; and (3) the difference between the awarded amount and civil penalties in similar cases. Nationstar, a major home mortgage provider, demonstrated a reckless disregard for bankruptcy law and the authority of the Court by failing to comply with Confirmation and Sale Orders for over two years despite the Debtor's repeated requests for assistance. The Court found Nationstar's indifference and inaction to be appalling and unjustifiable, noting a lack of reasonable explanations for its conduct. The Debtor had made diligent efforts to resolve these issues without Court intervention, and Nationstar's failure to act forced the Debtor to seek judicial assistance. The Court concluded that punitive sanctions of $25,000 were warranted due to Nationstar's conduct undermining the Debtor's fresh start. Additionally, the Court awarded the Debtor compensatory damages totaling $23,927.50, which included amounts for time spent, emotional distress, accountant fees, and attorney fees.

Nationstar is found to have violated court orders, leading to an award of compensatory and punitive sanctions under 11 U.S.C. § 105. The Debtor is granted actual damages of $13,265.00 and attorney fees of $10,662.50, with both amounts to be paid immediately by Nationstar. Additionally, punitive sanctions of $25,000.00 are to be assessed against Nationstar, payable to the Debtor. The court retains jurisdiction to enforce the order and assess any further sanctions. 

Nationstar was represented by multiple attorneys throughout the case and had received all necessary notices. The Debtor attempted to modify her mortgages through mediation, which resulted in an impasse. Objections to Nationstar's proof of claims were also filed by the Debtor, which were resolved by the court's ruling on related motions. The Debtor successfully completed her five-year plan and now awaits discharge. 

Testimony indicated the Debtor's persistent attempts to contact Nationstar, with records showing numerous calls. The court considered several factors regarding attorney fees, referencing the Johnson factors. Specific charges from Mr. Pilhorn for services related to amended tax returns and trial preparation were noted. A paralegal's time entry regarding a trustee inquiry was included among disallowed fees. The court's decisions on motions filed by the Chapter 13 Trustee were linked to issues stemming from Nationstar's actions.