Business Law

Moon v. Rushmore Loan Mgmt. Servs., LLC (In re Moon), 2021 Bankr. LEXIS 299 (B.A.P. 9th Cir. 2021)

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

Summary

In Moon v. Rushmore Loan Mgmt. Servs., LLC (In re Moon), 2021 Bankr. LEXIS 299 (B.A.P. 9th Cir. 2021) (unpublished) (“Moon”), the United States Bankruptcy Appellate Panel for the Ninth Circuit (“BAP”) ruled that a creditor was not liable for civil contempt of a chapter 13 plan confirmation order that was entered without prior notice to the creditor. A copy of the BAP’s decision can be found here.

Facts

On March 26, 2013, Willie N. Moon and Adnette M. Gunnels-Moon (collectively, the “Moons”) filed a joint petition for relief under chapter 13 (the “Case”) in the United States Bankruptcy Court for the District of Nevada. With their petition, the Moons submitted a creditor mailing matrix. It contained an incorrect address for Rushmore Loan Management Services, LLC (“Rushmore”), which held a promissory note secured by an entirely underwater junior trust deed from Adnette Moon.

Also on March 26, 2013, using the creditor mailing matrix, the bankruptcy court clerk mailed notice of the filing of the Case to the Moons’ creditors. By reason of the error in the matrix, Rushmore did not receive this notice. In addition, Rushmore did not receive notice of other filings in the Case.   

On December 5, 2013, on motion of the Moons, the bankruptcy court entered an order (the “Lien Avoidance Order”) voiding Rushmore’s junior lien and classifying Rushmore’s claim as unsecured. On April 7, 2014, the bankruptcy court entered an order (the “Confirmation Order”) confirming the Moons’ amended chapter 13 plan. It provided that a holder “of a claim shall retain its lien until the earlier of (a) the payment of the underlying debt determined under non-bankruptcy law or (b) discharge under” 11 U.S.C. § 1328. The plan provided that, after either of those events occurred, the “creditor shall release its lien and provide evidence and/or documentation of such release within 30 days to Debtor(s).”  

On December 20, 2014, during a telephone call with Willie Moon, Rushmore first received notice of the Case. After this telephone call, Rushmore continued to send mortgage statements to Adnette Moon and to make related written and telephonic communications to the Moons’ residence. Rushmore did not investigate the Case or obtain filings from the Case.

On August 19, 2016, the chapter 13 trustee in the Case filed a final report, which reflected that all chapter 13 plan payments had been made and that Rushmore had an unsecured claim of $73,000 for which it had been paid $0.00. On September 28, 2016, the bankruptcy court granted the Moons a discharge. On October 3, 2016, the bankruptcy court closed the Case. In 2017, the Moons’ bankruptcy counsel recorded the Lien Avoidance Order. In October 2018, Rushmore transferred its rights under its trust deed to a third party.

On January 4, 2019, represented by new counsel, the Moons reopened their Case. On January 18, 2019, the Moons filed a motion (the “First Contempt Motion”) for damages and contempt sanctions against Rushmore for violating the automatic stay and the discharge injunction. The First Contempt Motion did not allege a violation of the Confirmation Order. It appears that Rushmore learned of the Confirmation Order when the First Contempt Motion was served on Rushmore. On February 25, 2020, the bankruptcy court filed a decision (the “2/25/20 Decision”), granting in part and denying in part the First Contempt Motion. In 2021, the BAP vacated and reversed in part the 2/25/20 Decision.

On March 14, 2020, the Moons filed a second motion (the “Second Contempt Motion”) for contempt sanctions against Rushmore and for an order under Fed.R.Bankr.P. 5009(d) that Rushmore’s lien was avoided. The Moons alleged that Rushmore violated the Confirmation Order by failing to release its lien within 30 days after the discharge order. In addition, the Moons alleged that Rushmore committed a continuing violation of the automatic stay by failing to release its lien. Rushmore opposed the Second Contempt Motion.

On April 15, 2020, the parties stipulated that Rushmore’s lien was satisfied. On April 30, 2020, pursuant to Rule 5009(d), the bankruptcy court entered an order to that effect. On July 21, 2020, the bankruptcy court ruled that the Moons were not entitled to contempt sanctions against Rushmore for violating the Confirmation Order or for committing a continuing violation of the automatic stay by failing to release its lien. The Moons appealed. On February 4, 2021, the BAP affirmed the bankruptcy court’s denial of the Second Contempt Motion.

Reasoning

In Moon, the BAP ruled that Rushmore “could not be held in contempt” of the Confirmation Order, because it “was void as to Rushmore for lack of notice.” Moon, 2021 Bankr. LEXIS 299, at 1.  

In affirming the denial of the Second Contempt Motion, the BAP stated that a party cannot be held in contempt for failure to comply with a court order if that order was void. An order may be void against a party if it was entered or obtained in a manner inconsistent with due process of law. If the notice requirement of due process is not satisfied in obtaining an order, then the order is void. Moon, at 10. “[T]o find a party in contempt for violating a specific plan confirmation order, there must be certainty that notice of the specific court order was given.” Id. at 13 n.6.

In the Lien Avoidance Order and the Confirmation Order, the Moons sought to modify the property rights of Rushmore, a known creditor. It was “undisputed that the Moons did not serve Rushmore with the amended chapter 13 plan, the notice of plan confirmation hearing, or, what is most important here, the Confirmation Order.” Id. at 10-11. Rushmore did not receive notice of the confirmation process and the opportunity to object “regarding the treatment of its property interest,” and this “constitutes a denial of due process as to Rushmore.” Id. at 12. As a result, Rushmore was not bound by the Confirmation Order. Ibid.     

Rushmore’s failure to release its lien was not a continuing violation of the automatic stay. The Moons did not cite any case “where a lien creditor’s post-petition failure to release a lawfully-recorded prepetition lien constitutes an automatic stay violation, much less a continuing one.” Id. at 13. Further, when the alleged violation by Rushmore occurred, i.e., 30 days after entry of the discharge order, the automatic stay had expired by operation of law under 11 U.S.C. § 362(c)(2)(C). In addition, Rushmore had no ability to release its lien by the time of the Second Contempt Motion, because Rushmore transferred its lien to a third party in October 2018. Id. at 14. 

Author’s Comments

Even when a debtor provides adequate notice of a proposed plan and confirmation order, they may not support civil contempt sanctions against a party who subsequently fails to comply. To obtain civil contempt sanctions, the moving party must show by clear and convincing evidence that the alleged contemnor violated a “specific and definite order of the court.” Moon, at 10. An equivocal, indefinite, or incomprehensible confirmation order (or underlying plan) does not constitute a specific and definite order. A takeaway is that a plan and confirmation order should be definite and specific (and properly served at correct addresses) so that they can be enforced through civil contempt sanctions.

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).

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