The Beckharts filed chapter 11 case in 2009, with their vacation beach house subject to a mortgage, with a prepetition arrearage in excess of $22,000. Despite their Plan making no provision for the repayment of the pre- or post-petition arrearage, it was confirmed over the objection of Newrez’s predecessor in late 2010. Newrez began servicing the mortgage in 2014, and treated the loan as if it were in default from that time through 2019, based on the significant uncured arrearage. The Beckharts repeatedly contended that the loan was current based on the terms of the Plan, and challenged Newrez’s determination that it was in default, eventually filing a motion seeking to have Newrez in civil contempt for failing to comply with the terms of the Plan. Following an evidentiary hearing, the bankruptcy court entered an order finding Newrez and the holder in civil contempt, and assessing monetary sanctions in excess of $110,000, consisting largely of lost wages, a loss of a fresh start, and attorneys’ fees. Newrez appealed.
On appeal, the district court reversed finding that the nebulous terms of the Plan, coupled with Newrez’s good faith reliance on the advice of counsel in interpreting those terms, was sufficient to establish that Newrez had an objectively reasonable basis for its conduct, thus insulating it from civil contempt sanctions under the rule established in Taggart v. Lorenzen, 139 S. Ct. 1795 (2019). The district court relied heavily on the the Supreme Court decision in Taggart, namely that a creditor may be held in civil contempt for violation of a bankruptcy court’s order only if there is no “fair ground of doubt as to whether the order barred the creditor’s conduct.” Taggart, 139 S. Ct. at 1799. Thus, civil contempt is appropriate only where there is “no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.” Id. Here, NewRez faced multiple unanswered questions regarding the plan, including the principal balance, the treatment of the arrearage, and the amount and timing of future payments.
Further, the district court found that because Newrez had repeatedly sought and relied upon the advice of outside counsel in conducting itself under the Plan, it had an objectively reasonable basis to believe that its conduct was lawful and that it was proceeding in good faith.
This case has been appealed to the Fourth Circuit.
The district court’s reversal emphasizes the benefits to a creditor of securing legal advice when the bankruptcy court orders governing the creditor’s claim are unclear. This case is complemented by the recent decision from the Middle District of North Carolina of DFWMM Holdings LLC v. Richmond, which allowed this same defense to a debtor who relied on the advice of counsel. In neither of these case, however, does the court seem to expect the attorney, upon whose advice it being relied, to actually take the modest step of contacting opposing counsel for clarification. Nor is there any thought given to whether the poorly advised client should simply sue that attorney for malpractice. (Query: Would North Carolina law allow a third-party liability action against the lawyer for NewRez by the Beckharts? Might be a good way to disqualify the lawyer and turn the parties against each other.)
That this was the Beckhart's beach house does, which they were able to retain with little apparent hostility from the bankruptcy court, yet again shows that Chapter 11 debtors are allowed a post-bankruptcy lifestyle that would never be pass muster for regular consumers debtors in a Chapter 13.
That aside, this case is remarkably similar to the contemporaneous Middle District of North Carolina decision in Bivens v. NewRez, except in that Chapter 13 case, the bankruptcy court denied the motions to dismiss by NewRez finding more than sufficient evidence to allow the case to proceed regarding the willful failure of NewRez to accurately credit payments made under the plan in violation of 11 U.S.C. § 524(i).
This also stands as a warning for plans that are proposed to not provide for the treatment of a secured claim, as that lack of specificity is likely to limit the ability to later deal with noncompliance or misapplication of payments by such a creditor.
Additionally, NewRez itself is the successor to Ditech, following its bankruptcy, which was far more complex than the Beckharts, to the point that creditors (including consumer) faced a full on circus of doubt, not a mere fairground, in attempting to understand the terms of that bankruptcy.
For a copy of this opinion, please see: