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Financial Services Law Insights and Observations

2nd Circuit: Bankruptcy rule on post-petition mortgage fee notices does not authorize punitive sanctions

Courts Mortgages Bankruptcy Appellate Second Circuit

Courts

On August 2, the U.S. Court of Appeals for the Second Circuit vacated a sanctions order imposed on a mortgage servicer in three chapter 13 cases. According to the opinion, the servicer sent the debtors monthly mortgage statements listing fees that allegedly had not been properly disclosed in the three bankruptcy cases. The United States Bankruptcy Court for the District of Vermont then sanctioned the mortgage servicer $225,000 for violating court orders issued in two of the debtors’ cases, which had declared the debtors current on their mortgages and enjoined the servicer from challenging that fact in any other proceeding. The bankruptcy court also sanctioned the servicer $75,000 for violating Bankruptcy Rule of Procedure 3002.1, which requires creditors to provide formal notice to a debtor and trustee of new post-petition fees and charges and authorizes the bankruptcy court to impose sanctions for non-compliance.

On appeal, the 2nd Circuit held that Rule 3002.1 “does not authorize punitive monetary sanctions,” and that the servicer “did not, as a matter of law, violate the court orders.” The appellate court added that “[a] broad authorization of punitive sanctions is a poor fit with Rule 3002.1’s tailored enforcement mechanism and limited purpose,” noting that the bankruptcy court in this case is “apparently the first and only one to impose punitive monetary sanctions under the rule.” While the bankruptcy court raised “serious concerns” about whether the servicer “is making a good faith effort to comply with Rule 3002.1,” the appellate court concluded that “[a] concern, even a serious concern, is not a finding.” Concluding that the $225,000 sanction was based on an improper finding of contempt, the appellate court vacated and reversed the order.