The Debtors filed a Chapter 13 bankruptcy in 2004, which they successfully completed and received a discharge in 2008. Shortly before the entry of their discharge, the Bankruptcy Court granted a motion to declare their mortgage, serviced by Ocwen, to be current. Thereafter, the Debtors attempted to refinance their mortgage, but were refused because Ocwen provided an inaccurate payoff statement and loan history. After being notified, Ocwen persisted in failing to rectify the error and the Debtors reopened their bankruptcy, seeking to have Ocwen held in contempt.
The bankruptcy court ultimately found Ocwen in contempt, ordered $2,500.00 in compensatory damages, $2,250.00 in attorneys’ fees, lowered the mortgage interest rate to 6% and set the principal balance owed at $65,373.12. The bankruptcy court further awarded punitive damages in the amount of $66,300.00. Essentially, this resulted in the cancellation of the entire mortgage.
Ocwen appeal to the District Court for the Eastern District of North Carolina, arguing as follows:
First, Ocwen argued that the bankruptcy court lacked the authority to modify the terms of debtors’ residential mortgage under 11 U.S.C. § 1322(b)(2). The District Court rejected this, finding that while § 1322(b)(2) prohibits modification of a mortgage by the plan, it does not prohibit modification of a mortgage on other basis, here as a sanction.
Next, Ocwen argued that the bankruptcy court lacked the authority to order a contempt sanction for violations of the discharge injunction. The District Court found that a bankruptcy court has full authority under 11 U.S.C. § 105 to sanction violations of a discharge order. It further found that while some case law holds that mere inaccurate reporting of credit information regarding a discharged debt does not rise to the level of a discharge violation, such reporting would if the creditor failed, as Ocwen did in this case, to correct the inaccurate information after receiving notice.
Ocwen further asserted that the punitive damages award constituted an impermissible criminal contempt sanction, as heightened due process protections must be provided. The District Court held that a contempt award is criminal in nature if it is intended to vindicate the authority of the court and punish and civil if it is meant to coerce compliance and compensate for damages. Here the record clearly reflected that the punitive damages were intended to coerce Ocwen into both correcting its records and to comply with the discharge injunction. These damages were necessary and appropriate to carry out the "fresh start" provisions of the Bankruptcy Code and were a proper civil contempt sanction under the facts here.
Lastly, Ocwen complained that the amount of the punitive damages award is constitutionally excessive. Relying on BMW of N. Am., Inc. v. Gore, 517 U.S. 559, 574-84 (1996), the District Court looked at the following factors:
1. The degree of reprehensibility of the wrongdoer’s conduct, including whether:
a. The harm done was physical as opposed to economic;
b. The conduct involved indifference to the health or safety of others;
c. The victim was financially vulnerable;
d. The conduct involved repeated actions or was isolated;
e. The harm suffered by the plaintiff resulted from conduct that was known or suspected to be unlawful.
2. The ratio of the punitive damages award to compensatory damages; and
3. Punitive damage awards or sanctions for comparable misconduct.
Based on these factors the District Court found Ocwen’s behavior had been reprehensible. And while a ratio of punitive to actual damages greater than a single-digit would generally be impermissibly excessive, the District Court held that the loan balance modification by the bankruptcy court had to be included in such calculation, bringing the ratio within the allowable range.
Read expansively, the District Court’s holding that mortgage modification, while prohibited a Chapter 13 plan under § 1322(b)(2), is permissible under other bases, could be used to support the argument that 11 U.S.C. § 510(c) allows equitable subordination of a mortgage claim where a mortgage servicer is guilty of misconduct, possibly including failure to negotiate a voluntary loan modification in good faith.
This opinion also serves as a strong affirmation of the inherent authority of a bankruptcy court to enforce its orders, including the discharge.
It also charts a very clear map for how to prosecute discharge violations for credit reporting errors, first by requesting corrections, then with a Motion to Re-open the bankruptcy that in essence serves as a preliminary Complaint, both of which provide a creditor with ample opportunity to remedy its errors.