The Nosek case started with a $90,000 mortgage against a home in Massachusetts. After the Debtor defaulted, she filed several chapter 13 proceedings. The Debtor defaulted on her post-petition payments and entered into a stipulation with the lender to bring these amounts current. The Debtor confirmed a plan which provided for her to make her arrearage payments to the chapter 13 trustee and to make her regular payments directly to her mortgage company, Ameriquest.
The Plan did not specifically address how payments made under the plan should be credited. Apparently, Ameriquest used a dual system for recording bankruptcy payments. Under its regular accounting system, payments were applied to the oldest payment due first. If a payment was not sufficient to cover a full payment, it was held in a suspense account until it could be applied to a full payment. Ameriquest also kept a manual ledger where it tracked whether post-petition payments were being received on a timely basis.
Problems arose when Ms. Nosek sought to refinance her mortgage. In connection with her proposed refinancing, she requested a payment history. The history which she received was the general one which applied payments received to the oldest payment due. While it is not completely clear from the court's opinion, it appears that Ms. Nosek was not charged any extra fees or charges based upon the erroneous accounting. Indeed, the manual accounting (which the Debtor did not receive) showed her to be current on post-petition payments. Upon receiving the payment history, the Debtor became very distressed. This in turn distressed her attorney, who pragmatically filed a "Motion to Determine the Amount of Liens." The Bankruptcy Court ordered Ameriquest to provide the Debtor with an explantion of its accounting. When Ameriquest failed to do so, the Bankruptcy Court awarded sanctions of $500 and ordered the Debtor to file an adversary proceeding.
The Debtor filed an adversary proceeding containing multiple causes of action. At trial, the Debtor failed to prove that she had suffered any economic damages from the accounting she received. She did not show that she had been charged any unearned fees and failed to prove that she was denied her refinancing based upon the payment history. The Bankruptcy Court awarded nominal damages under RESPA and the Massachusetts Consumer Protection Act. The Bankruptcy Court also found that Ameriquest had violated the duty of good faith and fair dealing by failing to credit the payments properly. It awarded actual damages of $250,000 for emotional distress and punitive damages of $500,000. The duty of good faith and fair dealing ruling was based upon a violation of 11 U.S.C. Sec. 1322(b)(5), which allows a debtor to include provisions in a plan providing for the cure of a default.
On appeal, the District Court reversed the awards under RESPA and the duty of good faith and fair dealing, finding them to be pre-empted. It remanded for the Bankruptcy Court to consider damages under Sec. 105(a) and to reconsider its award under the Massachusetts Consumer Protection Act. On re-hearing, the Bankruptcy Court determined that the Consumer Protection Act claim was also pre-empted but awarded the same damages as before, but this time under Sec. 105(a). The District Court affirmed this judgment.
The Court of Appeals Ruling
The First Circuit reversed and directed that the judgment be vacated and the case dismissed. The main conclusion of the opinion was that Sec. 105(a) did not provide a basis for damages, since Sec. 1322(b) did not impose any duties upon the lender. The Court referred to Sec. 105(a) as a statutory contempt remedy, but pointed out that it must be used in the enforcement of another provision of the Bankruptcy Code. Since Sec. 1322(b) addresses provisions which a Debtor may include in a plan, it does not impose any duties upon creditors. The Court stated:
Opinion, at 22, 24
Ameriquest contests the bankruptcy court's conclusion that the company defied the text of Sec. 1322(b). It argues that the language of Sec. 1322(b) does not impose obligations on any party, let alone a lender. We agree. The plain language of Sec. 1322(b), relied upon by the bankruptcy court to find a violation of the code, does not impose any specific duties on a lender. It merely lists elements that a Chapter 13 debtor may include in her plan.
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Because Sec. 1322(b) merely provides optional elements that a debtor may incorporate into her Chapter 13 Plan, the provision has no meaning separate and apart from the choices the Debtor makes and incorporates into her Chapter 13 Plan. In other words, to determine whether and how Nosek took advantage of the cure opportunity provided by Sec. 1322(b)(5), and whether her excercise of her cure rights was threatened by Ameriquest's accounting, we must look to the terms of Nosek's Plan itself.
The Court of Appeals found that the Plan did not contain any provisions governing accounting for payments. It merely stated that the Debtor would continue to make her regular payments and would cure the arrearage by making 60 payments of $313.52 per month. The Court found that this language did not impose any duties on the creditor.
Like the text of Sec. 1322(b), this language does not place any specific obligations on Ameriquest, accounting or otherwise. Although we agree that the statement must be read in light of the purposes of Sec. 1322(b)(5) and Chapter 13 more generally--that a debtor can sure a default by paying off her pre-petition arrearages in a reasonable amount of time--this purpose along does not change the nature of appellant's obligations in this case. The Plan language says nothing about how Ameriquest must account for pre- and post-petition payments during the course of the repayment period if payments are short, late, or not made at all. Simply put, the terms of the Plan itself do not provide the specificity required to invoke the enforcement authority of Sec. 105(a).Opinion, page 25.
The Court also faulted the Debtor for failing to prove injury.
Although a debtor need not show proof of economic damages to establish that her cure rights have been violated, she must at least establish that her right to cure the pre-petition default provided by the Chaper 13 Plan has been impaired or threatened by the creditor's actions. Nosek's subjective fear of such impairment, based on a document prepared by Ameriquest for internal purposes only, and in the absence of any evidence that the company regarded her as in default on the basis of its accounting practices, does not suffice. Indeed, Ameriquest stated that its internal records showed that Nosek was considered current in her payment history.
Opinion, page 27.
Finally, the Court of Appeals made clear that its ruling was not an endorsement of sloppy accounting practices.
Notwithstanding these legal conclusions, we are not unsympathetic* to Nosek's predicament as a debtor seeking to satisfy the terms of her Chapter 13 Plan and stave off foreclosure of her home. Her circumstances are all too common today. Given their prevalence, it is troubling that Ameriquest had not established a more efficient and accurate way of handling the accounting issues revealed by this case at the time of trial. We fully understand the bankruptcy court's concerns about the practices that it described.
Nevertheless, the bankruptcy court's legitimate concerns did not justify the remedy that it invoked. Nosek did not demonstrate here that Ameriquest's accounting practices caused her any economic harm or threatened her right to cure her pre-petition default. Moreover, even if such threat had been demonstrated by those practices, there was no language in Nosek's Plan, as it was confirmed, or in Sec. 1322(b), that addressed how Ameriquest was to apply the payments it received from Nosek or from the Trustee. Under such circumstances, the Plan would have to be amended to prescribe the accounting practices necessary to protect Nosek's right to cure before Ameriquest could be sanctioned for a violation of an order of the bankruptcy court.
Opinion, pages 29-30.
What to Make of This
There is a saying that pigs get fat and hogs get slaughtered. Certainly the fact that the Debtor almost recovered $750,000 for failure to correctly apply several thousand dollars worth of payments and did not suffer any economic damages suggests that the Debtor, with the aid of the Bankruptcy Court, had become a hog. As distressing as this must have been for the Debtor, this particular case did not present an abuse which would shock the conscience. Indeed, this fuss could easily have been cleared up once the Debtor got Ameriquest's attention (which appears to have been a little slow in coming).
Having said all that, the Court of Appeals did a good job of keeping its eye on the ball. It focused on the plain language of the statute and the plan and pointed out what could have been done differently. For Debtor's lawyers, the message is clear: draft your plans carefully. A plan which required that payments be applied separately to arrearages and regular payments and required notice of additional fees and charges being incurred would have put more teeth in the Debtor's plan. Since many districts use form plans, this is an excellent opportunity for the bankruptcy bar to cooperatively design plan language which addresses this issue.
In a footnote, the Court of Appeals also noted that BAPCPA added Sec. 524(i), which provides that a creditor violates the discharge injunction if it willfully fails to credit payments received under a plan in the manner specified by the plan if the failure to act causes material injury to the debtor. Under this subsection, Debtor's attorneys would be well advised to seek an accounting for payments made once the plan is completed. That way, if there is a problem, it can be addressed promptly with Sec. 524(i) as an attention getter.