Rushmore Loan Mgmt. Servs., LLC v. Moon (In re Moon), 2021 Bankr. LEXIS 28 (B.A.P. 9th Cir. 2021)

The following is a case update written by Leonard Gumport analyzing a recent case of interest.

Summary

In Rushmore Loan Mgmt. Servs., LLC v. Moon (In re Moon), 2021 Bankr. LEXIS 28 (B.A.P. 9th Cir. 2021) (unpublished) (“Moon 2”), the United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) affirmed in part and reversed and remanded in part the decision of the United States Bankruptcy Court for the District of Nevada in In re Moon, 613 B.R. 317 (Bankr. D. Nev. 2020) (“Moon 1”).

In Moon 2, the BAP decided that Rushmore Loan Management Services, LLC (“Rushmore”) was not liable for violating the discharge injunction but was liable for willfully violating the automatic stay. Rushmore was not liable for contempt of the discharge injunction because the debtors, Willie N. Moon (“Willie”) and Adnette M. Gunnels-Moon (“Adnette”) (collectively, the “Moons”), did not prove when Rushmore had actual knowledge of the discharge injunction. Rushmore was liable under 11 U.S.C. § 362(k)(1) for willfully violating the automatic stay because Rushmore had informal notice of the Moons’ bankruptcy. A copy of Moon 2 can be found here.

On April 19, 2021, in a one-page unpublished order, the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit”) dismissed the appeals from the BAP’s decision in Moon 2 for lack of jurisdiction because the order on appeal was not a final order.    

Facts

In 1998, the Moons married. In 2005, Adnette and her daughter purchased a residence (the “Residence”) in Las Vegas. In 2007, Adnette refinanced the Residence in her name only. After the refinancing, the Residence was encumbered by a first trust deed in favor of JPMorgan Chase Bank, N.A. (“Chase”) and a second trust deed in favor of Rushmore.  

On March 26, 2013, the Moons filed a joint petition for relief under chapter 13 (the “Case”). With their joint petition, the Moons filed a creditor mailing matrix, which listed an incorrect address for Rushmore. As a result, Rushmore did not receive notice of the Case until December 2014.

On May 6, 2013, the Moons filed their bankruptcy schedules, which represented that the Residence had a value of $120,000. The amount owed on Chase’s first trust deed was scheduled as $154,000, and the amount owed on Rushmore’s second trust deed was scheduled as $73,000. In their schedules, the Moons alleged joint ownership of the Residence, although only Adnette was a borrower on Rushmore’s second trust deed.  

On September 25, 2013, the Moons filed a motion under 11 U.S.C. § 506(a) to value the Residence, to avoid Rushmore’s second trust deed, and to reclassify Rushmore’s claim as unsecured. Rushmore did not respond. On December 5, 2013, the bankruptcy court entered an order granting the motion.

On April 7, 2014, the bankruptcy court confirmed the Moons’ amended chapter 13 plan (the “Plan”), which provided that the Moons would receive a discharge of their unsecured debts upon completing monthly payments of $500.00 over approximately two years. The Plan provided that distributions would be made only to creditors who timely filed proofs of claim. The chapter 13 trustee sent a notice of proposed distribution showing that Rushmore would receive $0.00 under the Plan because it did not timely file a proof of claim.  

On December 20, 2014, in a telephone call, Willie told Rushmore that he and Adnette were in bankruptcy. Rushmore did not check with PACER to see whether this information was correct. Under Rushmore’s internal policies, Rushmore did not regard Willie as an authorized source of information. Unlike Willie, Adnette formally was Rushmore’s borrower. During December 2014-September 2016, Rushmore continued to send mortgage statements and collection letters to the Residence. Rushmore also made telephone calls to the Residence. Willie answered the calls and dealt with the mail.   

On August 19, 2016, the chapter 13 trustee filed a final report, showing that all contemplated Plan payments had been made (and that Rushmore was paid $0.00). On September 28, 2016, the bankruptcy court granted the Moons a discharge.

On January 4, 2019, on ex parte motion of the Moons, the bankruptcy court reopened the Case. On January 18, 2019, the Moons filed a motion (the “Contempt Motion”) for damages, fees, and contempt sanctions against Rushmore for violating the automatic stay and the discharge injunction.

On September 16 and 17, 2019, the bankruptcy court conducted an evidentiary hearing on the Contempt Motion. A Rushmore employee testified about Rushmore’s internal procedures and policies. An expert witness for the Moons testified about mortgage industry standards. The Moons also testified.

On February 25, 2020, in Moon 1,the bankruptcy court ruled that, during December 2014-September 2016, Rushmore intentionally tried to collect on its debt through phone calls and mailings to the Moons. The bankruptcy court awarded $100,742.10 in compensatory damages against Rushmore for willfully violating the automatic stay, plus $200,000 in punitive damages (and attorney’s fees and costs in an amount to be determined). The compensatory damages included $100,000 in emotional distress damages to Willie. The compensatory award included $482.10 in lost wages to Adnette and the $260.00 filing fee paid to reopen the Moons’ Case. The bankruptcy court ruled that Rushmore was not liable for contempt of the discharge injunction because, although Rushmore violated the discharge injunction, the evidence did not show when Rushmore knew of the discharge injunction.

On May 29, 2020, the bankruptcy court awarded $56,150 in attorney’s fees and $10,857.94 in costs against Rushmore. On June 24, 2020, the bankruptcy court awarded an additional $3,500 in fees against Rushmore.  On January 7, 2021, in one of five related decisions, the BAP decided Moon 2, affirming in part and reversing and remanding in part the bankruptcy court’s judgment.

Reasoning

First, the BAP reversed the $100,000 in emotional distress damages awarded against Rushmore to Willie. When the Moons filed their joint petition, it created one bankruptcy case but a separate bankruptcy estate for each spouse. In seeking payment, Rushmore did not seek to collect from Willie or his bankruptcy estate in violation of the automatic stay. Moon 2, at 13-15.

Second, the BAP ruled that Rushmore’s collection efforts against Adnette   justified an award of punitive damages under 11 U.S.C. § 362(k)(1). While the automatic stay applied, Rushmore sought to collect from Adnette after Willie informally notified Rushmore of the Moons’ bankruptcy case. In the bankruptcy court, a Rushmore employee “testified that a bankruptcy notice from even a borrower’s spouse who lives in the home with the borrower will not trigger a PACER search to verify the information.” Id. at 19. Rushmore’s “institutional policy of disregarding a bankruptcy notice from an ‘unauthorized’ third party is contrary to law.” Id. at 20. “Notice of a bankruptcy filing need not be formal for knowledge of the automatic stay and for purposes of a willful stay violation.” Ibid. After Willie informally notified Rushmore of the Case, Rushmore had a duty to ensure that it complied with the automatic stay. Id. at 21. “A sophisticated loan servicer like Rushmore with a policy that intentionally limits the means by which it gains knowledge of a bankruptcy filing supports a finding of [a] reckless or callous disregard for the law and the rights of its borrowers.” Ibid.

Third, the BAP vacated the bankruptcy court’s award of $200,000 in punitive damages against Rushmore. The vacating of $100,000 of the compensatory award required a remand to the bankruptcy court to decide punitive damages, because they must have an appropriate ratio to compensatory damages. Punitive damages that exceed a single-digit ratio to compensatory damages rarely satisfy due process. Id. at 22-23. “Nonetheless, bankruptcy courts may consider the amount of attorney’s fees and costs in determining the size of a punitive damages award under § 362(k)(1).” Id. at 24-25 (citing Diviney v. Nationsbank of Tex., N.A. (In re Diviney), 225 B.R. 762, 777 (10th Cir. B.A.P. 1998)).   

Fourth, the BAP rejected Rushmore’s argument that the bankruptcy court erroneously permitted the Moons’ expert witness to testify. The BAP stated that the only expert testimony relevant to the appeal was that mortgage industry standards required Rushmore to investigate the status of the Moons’ bankruptcy in response to the December 20, 2014 telephone call with Willie. However, the BAP added that the bankruptcy court could have decided that issue without the benefit of expert testimony, because “bankruptcy law dictates that once Rushmore received actual notice of the Moons’ bankruptcy filing from Willie it had a duty to verify that information.” Id. at 26. Any error by the bankruptcy court in permitting the expert testimony was harmless. Ibid.  

Fifth, the BAP affirmed the bankruptcy court’s decision to deny contempt sanctions against Rushmore for violating the discharge injunction. A party who knowingly violates the discharge injunction of 11 U.S.C. § 524(a)(2) can be held liable for civil contempt under 11 U.S.C. § 105(a). Although Rushmore knew of the Case in December 2014, clear and convincing evidence did not show when Rushmore knew of the discharge. Id. at 26-30. Further, Rushmore’s post-discharge collection efforts against the Moons did not constitute a continuing violation of the automatic stay. Id. at 30-31.

AUTHOR’S COMMENTS

The decisions in Moon 1 and Moon 2 show that liability for civil contempt of the discharge injunction is harder to establish than liability under 11 U.S.C. § 362(k)(1) for willfully violating the automatic stay. Contempt liability required proof that Rushmore actually knew of the discharge injunction. In contrast, Rushmore’s disregard of an informal notice of the Moons’ bankruptcy supported imposing liability on Rushmore for willfully violating the automatic stay. One takeaway is that a creditor should not disregard an informal notice that a debtor is in bankruptcy.        

In Moon 2, the BAPapproved using attorney’s fees and costs as a component of compensatory damages in calculating a permissible ratio of punitive-to-compensatory damages. A takeaway is that protracted litigation of disputes under 11 U.S.C. § 362(k)(1) raises the ceiling on the amount of punitive damages that may be awarded.

These materials were written by Leonard L. Gumport of Gumport Law Firm, PC in Pasadena (lgumport@gumportlaw.com). Editorial contributions were provided by Aaron E. de Leest of Danning, Gill, Israel & Krasnoff, LLP (adeleest@danninggill.com).