motion for contempt - michael fuller · motion for contempt and sanctions – page 1 of 15 michael...

MOTION FOR CONTEMPT AND SANCTIONS – of 15

Michael Fuller, OSB No. 09357 Special Counsel for Debtors Olsen Daines PC US Bancorp Tower 111 SW 5th Ave., Suite 3150 Portland, Oregon 97204 [email protected] Direct 503-201-4570

UNITED STATES BANKRUPTCY COURT

DISTRICT OF OREGON In re Ryan Justin McDonald Shay Marie McDonald,

Debtors.

Case No. 11-35180-pcm13

MOTION FOR CONTEMPT AND SANCTIONS

LBR 7007-1 CERTIFICATION

Debtors have repeatedly attempted to resolve this dispute with

Ocwen Loan Servicing, LLC (Ocwen), including through their bank-

ruptcy attorney, and have been unable to do so. McDonald decl. ¶ 2.

Case 11-35180-pcm13 Doc 165 Filed 05/01/17


MOTION

Under 11 U.S.C. §§ 105 and 524(i) and this Court’s inherent

power, debtors move for entry of an order of contempt and sanctions

against Ocwen based on evidence that after December 7, 2016, Ocwen

continued to (1) improperly credit payments according to debtors’ plan,

and (2) violated this Court’s orders by attempting to collect excessive

amounts from debtors, and (3) acted in bad faith, causing debtors

material injury.

QUESTIONS TO BE DECIDED

1. Section 524(i). After December 7, 2016, did Ocwen

willfully fail to credit payments according to debtors’ plan,

causing debtors material injury? (yes)

2. Contempt. After December 7, 2016, did Ocwen willfully

violate this Court’s orders by attempting to collect

excessive amounts from debtors? (yes)

3. Inherent Authority. After December 7, 2016, did Ocwen

engage in intentional bad faith conduct warranting

sanctions? (yes)



PRAYER FOR RELIEF

Debtors pray for the following orders and judgment against

Ocwen:

A. IT IS ORDERED that Ocwen is held in contempt.

B. IT IS ORDERED that Ocwen shall appear at a continued status

conference to discuss its procedures to avoid future violations of this

Court’s orders.

C. IT IS ORDERED AND ADJUDGED that Ocwen shall pay compen-

satory sanctions of $1 million per day Ocwen remains in violation of

this Court’s orders and its own settlement agreement after December

7, 2016.

D. IT IS ORDERED AND ADJUDGED that Ocwen shall reimburse

the law firm of Olsen Daines PC its reasonable fees, costs, and ex-

penses in this matter.



RELEVANT FACTS

A. Chapter 13 Bankruptcy

Debtors filed bankruptcy under Chapter 13 of Title 11 on June

14, 2011. Doc. #1. This Court’s confirmation order dated September 8,

2011 permitted debtors to maintain current mortgage payments and

catch up mortgage arrears through their chapter 13 plan. Doc. #24. This

Court’s subsequent orders entered December 2, 2011 and August 11,

2015 fixed the amount of debtors’ mortgage arrears. Doc. #36; #103. On

September 1, 2015, the Chapter 13 Trustee filed notice that all debtors’

Chapter 13 plan payments had been completed. Doc. #108. This Court’s

September 29, 2015 order found that debtors had fulfilled all require-

ments under their plan, discharged debtors, and closed their bankruptcy

case. Doc. #111.

B. Motion to Reopen

On May 20, 2016, this Court granted debtors’ motion to reopen

their bankruptcy case. Doc. #119. Later on the same day, two lawyers

for Ocwen each filed notices of appearance in the case. Doc. #121; #123.1

On December 7, 2016, this Court entered a stipulated order settling all

misconduct by Ocwen that allegedly took place before December 7, 2016.

Doc. #140.

1 At all times relevant after August 11, 2014, Ocwen had actual notice and knowledge of every Court order entered in this case. See Doc. #76, Transfer of Claim.



C. Misconduct After December 7, 2016

After December 7, 2016, despite having actual notice and

knowledge of this Court’s orders described above, Ocwen continued to

harass debtors with demands to pay excessive amounts on their mort-

gage debt, in clear violation of this Court’s orders entered December 2,

2011 and August 11, 2015. McDonald decl. ¶ 3. Beginning in early 2017,

Ocwen also willfully failed to credit payments according to debtors’ plan.

Id. And at all times after entry of this Court’s December 7, 2016 order,

Ocwen has intentionally engaged in bad faith conduct by failing to com-

ply with the undisputed terms of its settlement agreement. Id. Ocwen

sent debtors a written demand dated February 2, 2017 that debtors pay

$33,971.64 in alleged arrears under implicit threat of foreclosure. Id.

Ocwen’s conduct as alleged above caused debtors material injury

and severe ongoing emotional harm to be proved at trial. Id. at ¶ 4.

D. Ocwen’s Pattern and Practice

Ocwen’s discharge compliance procedures are systematically in-

adequate, resulting in ongoing bankruptcy violations across the country.

See, e.g., In re Dogar-Marinesco, No. 09-35544 (CGM), 2016 Bankr.

LEXIS 4111 (U.S. Bankr. S.D.N.Y. Dec. 1, 2016) (issuing punitive dam-

ages against Ocwen for violation of § 524); In re Adams, No. 04-003875-

5-SWH, 2010 Bankr. LEXIS 2207 (U.S. Bankr. E.D.N.C. July 7, 2010)

(same), etc.



LEGAL POINTS AND AUTHORITIES

E. Authority to Enforce Court Orders and Impose Sanctions

Section 105 of Title 11 empowers bankruptcy courts to issue or-

ders and judgments as necessary to enforce the Code’s provisions. Bank-

ruptcy courts also possess inherent powers to sanction intentional bad

faith conduct, so long as the sanctions don’t contravene express Code

provisions. Law v. Siegel, 134 S. Ct. 1188, 1194 (2014); Hall v. Columbia

Collection Serv., No. 3:14-CV-0006-AC, 2014 U.S. Dist. LEXIS 140825

(D. Or. July 14, 2014) (granting a motion for sanctions against a debt

collector under the Court’s inherent authority based on intentional bad

faith conduct occurring after settlement).

F. Effect of Discharge

Section 524 of Title 11 provides for a broad injunction to ensure

debtors receive a fresh start. Alan N. Resnick & Henry J. Sommer, 4

Collier on Bankruptcy ¶524.02[2] (16th ed. 2012). Specifically, § 524(i)

states that the willful failure to credit payments received under a con-

firmed plan constitutes a violation of the injunction.

1. Excessive mortgage collections prohibited

After bankruptcy, secured creditors may generally contact bor-

rowers to collect voluntary payments and discuss voluntary loan modi-

fications. In re Garske, 287 B.R. 537 (9th Cir. BAP 2002). However, the

plain language of § 524(i) prohibits any act to collect excessive mortgage



amounts after bankruptcy and prohibits any failure to properly credit

payments received in a Chapter 13 plan. See Scott v. Caliber Home

Loans, Inc. (In re Scott), Nos. 09-11123-M, 14-01040-M, 2015 Bankr.

LEXIS 2472 (U.S. Bankr. N.D. Okla. July 28, 2015) (mortgage servicer

liable for damages under § 524(i) based on willful failure to properly

credit payments under confirmed plan).

G. Enforcement of Bankruptcy Orders

In the Ninth Circuit, debtors must enforce bankruptcy orders by

filing motions for contempt. Walls v. Wells Fargo Bank, N.A., 276 F.3d

502, 506-07 (9th Cir. 2002); Barrientos v. Wells Fargo Bank, 633 F.3d

1186, 1191 (9th Cir. 2011); Fed. R. Bnkr. P. 9020.

H. Elements of Contempt

So long as express Code provisions aren’t contravened, bank-

ruptcy courts can always sanction bad faith conduct on a preponderance

of the evidence standard. Law, 134 S. Ct. at 1194. But a finding of con-

tempt requires more.

1. In re ZiLOG, Inc. (9th Cir. 2006)

Contempt requires proof a creditor (1) had knowledge of a bank-

ruptcy court order and (2) intended conduct that violated the order. In

re ZiLOG, Inc., 450 F.3d 996, 1007 (9th Cir. 2006).

In ZiLOG, the Ninth Circuit remanded a finding of contempt

against three women who were the victims of sex discrimination by a



corporate debtor. Id. at 997-98. The trial court had sanctioned the vic-

tims $20,000 for continuing to pursue sex discrimination claims that

were arguably subject to discharge. Id. The trial court record was vague

as to when the victims’ claims actually arose, and the victims appeared

unaware that prosecuting their claims might subject them to sanctions.

Id. at 999-1003, 1008-09. Prior to entry of discharge, the victims had

received misleading notices indicating that their employment-related

claims would not be affected by ZiLOG’s bankruptcy, and they disputed

ever having any knowledge of the discharge injunction. Id. at 1003,

1005.

The Ninth Circuit criticized the trial court for holding the victims

in contempt without providing them an evidentiary hearing, and re-

manded the case with additional instructions to “consider whether costs

and attorneys’ fees incurred by the women … should in equity and good

conscience, be shifted to ZiLOG and its lawyers.” Id. at 1010.

2. In re Chionis (9th Cir. BAP 2013)

A sophisticated creditor who continues collection activities after

learning of the discharge order does so at its own peril. See In re Chionis,

2013 Bankr. LEXIS 5426, at *16-18 (9th Cir. BAP 2013) (unpublished)

(self-serving statement concerning creditor’s subjective belief that his

collections activity did not violate the discharge order was no defense to

contempt where creditor failed to first appear before the bankruptcy



court to assert his theory) (citing McComb v. Jacksonville Paper Co., 336

U.S. 187, 191 (1949) (a court may impose civil contempt sanctions with-

out finding that the contemnor specifically intended to violate the court’s

order)).2

In Chionis, the Ninth Circuit BAP sanctioned a business creditor

who had negotiated a pre-petition loan agreement in contemplation that

his obligation could potentially be discharged in bankruptcy. Id. at *2-3.

(“In Starkus’ own words, he was concerned at the time of the 2006 Loan

transaction that ‘you could just discharge somebody through bankruptcy

and all their money would be lost.’”)

The creditor in Chionis received notice of the bankruptcy and dis-

charge order but “he never attempted to challenge in the bankruptcy

court the Debtors’ right to discharge the Debt.” Id. at *3. The creditor

had actual notice that violating the discharge order may result in sanc-

tions, and he was encouraged to consult an attorney with any questions.

Id. at *4-5. Although the creditor ignored repeated warnings from the

debtor and debtor’s counsel, the bankruptcy court failed to hold him in

contempt because he subjectively (albeit wrongly) believed the “no dis-

charge” provision in his contract created an exception to discharge. Id.

2 See also Espinosa v. United Student Aid Funds, Inc., 553 F.3d 1193, 1205 & n.7 (9th Cir. 2008), aff’d, 559 U.S. 260 (2010) (“A creditor is not free to violate the discharge injunction because it has doubts as to the validity of the discharge.”).



at *5-6, *10. The Ninth Circuit BAP reversed the bankruptcy court’s de-

cision as “illogical, implausible and without support…” Id. at *17, *25.

The BAP distinguished the creditor in Chionis from the discrimi-

nation victims in ZiLOG, and criticized the bankruptcy court for a read-

ing of ZiLOG that would “–render the bankruptcy discharge all but

toothless.” Id. at *22. Citing Supreme Court precedent (McComb), the

BAP held the creditor in contempt and remanded the case for a deter-

mination of damages. Id. at *20, *25. The Chionis opinion cited McComb

for the proposition that “[i]t does not lie in [the contemnors’] mouths to

say that they have an immunity from civil contempt because the plan or

scheme which they adopted was not specifically enjoined. Such a rule

would give tremendous impetus to the program of experimentation with

disobedience of the law…” McComb, 336 U.S. at 192.

3. In re Taggart (9th Cir. BAP 2016)

The Ninth Circuit has been reluctant “to hold an unwitting cred-

itor in contempt.” In re Taggart, 548 B.R. 275, 288 (9th Cir. BAP 2016).

In Taggart, the Ninth Circuit BAP remanded a finding of contempt

against creditors who relied in good faith on a “facially valid determina-

tion” from a state court judge that the discharge did not apply to their

claim. Id. at 289-90. The BAP reasoned that the creditors were not in

contempt because “all along the way, they sought a judicial determina-

tion that the discharge injunction did not apply.” Id. at 291.



Neither ZiLOG, Chionis, nor Taggart permits creditors to simply

bury their heads in the sand or ignore court notices to avoid liability for

contempt. See In re Krow, 2016 Bankr. LEXIS 3688, at *6-7 (Bankr. N.D.

Cal. Oct. 8, 2016) (distinguishing Taggart where a creditor’s subjective

belief that the discharge order was not applicable was not reached in

good faith).

I. Legal Standard for Contempt

To recover contempt sanctions against a creditor, a violation must

be proved with clear and convincing evidence. In re Bennett, 298 F.3d

1059, 1069 (9th Cir. 2002). The burden then shifts to the creditor to

demonstrate why it was unable to comply. Id. Creditors are generally

entitled to an evidentiary hearing as to whether they received actual

notice of a court order. In re Pedroche, 2014 Bankr. LEXIS 4689 (9th Cir.

BAP 2014).

J. Sanctions for Contempt or Bad Faith Conduct

A creditor’s willful violation of a bankruptcy court order (or inten-

tional bad faith conduct) entitles aggrieved debtors to compensatory

sanctions including actual damages, mild coercive sanctions, and reim-

bursed attorney fees and costs through trial. Knupfer v. Lindblade (In

re Dyer), 322 F.3d 1178, 1197 (9th Cir. 2003); In re Segal, BAP No. CC-

14-1175-KuPaTa, pg. 19 (9th Cir. BAP Jan. 29, 2015); In re Culpepper,

2013 Bankr. LEXIS 541, 2013 WL 501662 (Bankr. D. Or. Feb. 11, 2013)



(aff’d, Mosman, J.); Law v. Siegel, 134 S. Ct. at 1194. A debtor is entitled

to recover compensation for emotional harm resulting from a violation,

even in the absence of any economic loss. In re Feldmeier, 335 B.R. 807,

813-814 (Bankr. D. Or. 2005).

“A majority of courts allow punitive damages for violation of the

discharge injunction.” Cherry v. Arendall (In re Cherry), 247 B.R. 176,

189 (Bankr. E.D. Va. 2000); see also In re Jackson, 555 B.R. 86 (Bankr.

D. Mass. 2016) (internal citations omitted).



ARGUMENT

At evidentiary hearing, debtors will prove that Ocwen has shown

a continued, clear disregard for the bankruptcy laws in their case.

McDonald decl. ¶ 1. This motion only seeks to hold Ocwen responsible

for its misconduct occurring after December 7, 2016. This Court has mul-

tiple theories of liability to hold Ocwen accountable:

(1) Section 524(i). Ocwen had actual knowledge of this Court’s order

confirming Chapter 13 plan and of this Court’s subsequent orders

fixing mortgage arrears and of this Court’s discharge injunction,

then, after December 7, 2016, Ocwen willfully failed to credit pay-

ments received under the plan and demanded excessive mortgage

amounts after bankruptcy, causing debtors material injury.

(2) Contempt. Ocwen had actual knowledge of this Court’s orders fix-

ing mortgage arrears, then, after December 7, 2016, Ocwen willfully

violated the orders by demanded excessive mortgage payments from

debtors.

(3) Inherent Authority. After December 7, 2016, Ocwen engaged in

intentional bad faith conduct by demanded excessive mortgage pay-

ments from debtors, in direct violation of its own undisputed settle-

ment terms and this Court’s December 7, 2016 settlement order.



Ocwen is a billion-dollar corporation and a regular creditor in con-

sumer bankruptcy cases. Debtors respectfully request Ocwen pay $1

million per day that it remains in violation of this Court’s orders and its

own settlement agreement after December 7, 2016.

CONCLUSION

For all these reasons, this Court should grant debtors’ motion for

contempt and sanctions.

May 2, 2017

RESPECTFULLY FILED,

/s/ Michael Fuller Michael Fuller, OSB No. 09357 Special Counsel for Debtors Olsen Daines PC US Bancorp Tower 111 SW 5th Ave., Suite 3150 Portland, Oregon 97204 [email protected] Direct 503-201-4570



CERTIFICATE OF SERVICE

I certify that I caused this motion and all supporting documents to be served on Ocwen by hand delivery, and first class regular and cer-tified mail, return receipt requested, postage prepaid to: Ocwen Loan Servicing, LLC c/o R.A. Corporation Service Company 1127 Broadway Street NE Ste 310 Salem, Oregon 97301 May 2, 2017

/s/ Michael Fuller Michael Fuller, OSB No. 09357 Special Counsel for Debtors Olsen Daines PC US Bancorp Tower 111 SW 5th Ave., Suite 3150 Portland, Oregon 97204 [email protected] Direct 503-201-4570


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