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Home›Fishing Store›Use Clarity to Avoid Contempt in Bankruptcy Ward and Smith, Pennsylvania

Use Clarity to Avoid Contempt in Bankruptcy Ward and Smith, Pennsylvania

By Sharon D. Horowitz
September 9, 2021
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It is a story of contempt and clarity.

This comes to us from a July 2021 North Carolina district court ruling overturning a $ 115,000 penalty order issued by a North Carolina bankruptcy court. The story offers a lesson and a moral. The lesson is that the bankruptcy court cannot sanction a creditor if there is an objectively reasonable basis for concluding that the creditor’s conduct is legal. The moral of the story is that a creditor can avoid the time, expense, and risk associated with contempt and penalty litigation by taking basic steps to ensure that confirmed Chapter 11 plans are clear and accurate.

In 2009, the Beckharts filed Chapter 11. At the time, they were almost a year behind on a loan secured by the Kure Beach property. The loan manager objected to a plan confirmation because it did not specify how the post-petition mortgage payments would be applied to principal and interest. The bankruptcy court upheld the plan without clarifying the matter, but the duty officer did not ask the court to reconsider his order and did not appeal.

The Beckharts paid for five years. Shellpoint acquired the loan from the original servicing agent and treated it as in default based on the accumulated unpaid arrears. Periodically, Shellpoint sent default letters to the Beckharts, who disputed the default. Shellpoint’s attorney said the confirmation order did not change the terms of the loan agreement and that the loan remained in default. The case escalated with the Beckharts filing complaints with the Consumer Financial Protection Bureau. Shellpoint started the foreclosure, then told the Beckharts it was ceasing the foreclosure, but then posted a notice of foreclosure hearing on the Beckharts door (allegedly due to an error).

In January 2020, the Beckharts petitioned bankruptcy court to find Shellpoint in contempt and impose financial penalties on them. The court held a hearing in June and, in September 2020, found Shellpoint in contempt. The court sentenced Shellpoint to $ 115,000 in penalties for lost wages, “loss of a fresh start”, attorney fees and travel expenses.

Bankruptcy courts have the power to convict a party for civil contempt and to impose penalties for violating a confirmed plan. The liability test is based on a recent United States Supreme Court ruling – Taggart vs. Lorenzen. (To read our discussion on Taggart, Click here.) The Taggart the test prohibits sanctions whether there was an “objectively reasonable basis for concluding that the obligee’s conduct might be lawful”. There can be contempt for breach of the discharge order only “if there is no good cause in doubt as to whether the order prohibited the conduct of the obligee.”

In overturning the bankruptcy court, the district court noted that the plan and confirming order did not indicate how much debtors owed upon confirmation, did not indicate how the $ 23,000 in arrears would be paid, and did not indicate how much the debtors owed upon confirmation. did not fix the amount of the first payment. . Confusingly, the confirmation order also stated that the original loan terms would remain in effect unless they were changed. Finally, the district court stressed that Shellpoint had been informed on several occasions by a lawyer that its behavior was authorized, and that recourse to the opinion of an external lawyer is a sufficient defense against civil sanctions. On the basis of all these facts, the district court found that Shellpoint had acted in good faith and interpreted the confirmation order in a manner consistent with the contractual terms of the loan, which was objectively reasonable.

Creditors can be reassured by the no good cause for doubt test, which is more lenient than a strict liability standard. Creditors can also seek and take legal advice before engaging in dangerous driving, which provides another layer of protection. But most important to remember is the obvious principle that creditors should insist on clear and precise plan terms. Shellpoint eventually prevailed and avoided the sanctions, but only after more than 18 months of litigation. All of this could have been avoided had the loan manager insisted that the plan spelled out how the Beckharts’ payments would be applied to settle the arrears.



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