A federal bankruptcy appellate court held the servicer liable for violating the couple’s discharge order by sending numerous letters and making phone calls to the couple. The court sided with the debtors even though many of the notices contained a disclaimer designed to limit the servicer’s liability of communicating with a debtor after discharge. This ruling adds an appellate decision to a number of lower-court decisions claiming periodic statements and account letters can be interpreted as an attempt to collect a discharged debt even if blanket disclaimer statements are included.
The case, In re Marino, 2017 WL 6553691, was decided by the United States Bankruptcy Appellate Panel for the Ninth Circuit, which covers California and other western states. The couple, Christopher and Valerie Marino, filed Chapter 7 bankruptcy in March 2013 and agreed to surrender their home in exchange for a discharge of the mortgage debt.
However, not long after the discharge, the mortgage servicer, Ocwen Loan Servicing, continued to send notices which included servicing statements, demand letters, insurance notices, and even some letters that demanded payments from the debtors. The majority of the letters sent included the verbiage, “If you have filed for bankruptcy and your case is still active and/or if you received a discharge, please be advised that this notice is for information purposes only and is not an attempt to collect a pre-petition or discharged debt.”
After two years of continued phone calls and notices from the servicer, the Marinos decided to reopen their bankruptcy case and filed an action against the mortgage servicer for violating the discharge injunction.
During an evidentiary hearing, the Marinos provided details to the appellate panel about how they felt humiliated and harassed by the servicing agent’s persistent contact, noting that the phone calls and letters from the servicer negatively impacted their marriage.
After reviewing the letters, the court noted that even though the standard disclaimer was included in notices sent to the debtors, some statements demanded payment by a specific date and were therefore contradictory of the language disclaiming the debt at the end of the letter. The court also found that the servicer continued contacting the couple even though it was fully aware that their debt had been discharged through bankruptcy.
In the end, the appellate panel ruled that the general disclaimers did not protect the servicer from the violating the discharge injunction since the use of new technology allows a creditor to know the legal status of its borrowers and provide appropriate disclosures for each statement.
The court specifically noted that when a borrower faces a pending foreclosure after the mortgage debt has been discharged through bankruptcy, a custom message can be designed to inform borrowers that a payment may delay foreclosure while ensuring it does not make a demand for payment. The court also said it is the responsibility of the lienholder to communicate appropriately with discharged debtors so as to not include any statements that appear as an attempt to force the debtor to make a payment.
The court awarded the Marinos $119,000.00 in compensatory damages for the emotional stress and hardship arising from the servicer’s bad faith attempts to collect a debt. The panel also sent the case back to federal bankruptcy court to consider possible punitive damages in the case.
The appellate panel’s decision speaks to the trend of increasing the expectation of more detailed disclosure statements to be included in notices sent to discharged debtors.
If you are a creditor or loan servicer and have questions about whether your borrower has been discharged, whether your notices violate the discharge, or what your next steps should be, please call the Geraci Law Firm at 949-379-2600 for a free consultation.