Use clarity to avoid contempt in bankruptcy

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It’s a story of resentment and clarity.

The story is based on the July 2021 North Carolina district court ruling which overturned a penalty of $115,000 order by an North Carolina bankruptcy court. The tale offers an opportunity to learn and also an ethical. What is learned is a bankruptcy information headquarters court can’t punish a creditor unless there is a reasonable and objective basis to conclude that the creditor’s behavior is legal. The moral is that creditors can reduce the expense, time and risk of the litigation of penalty and contempt by taking the necessary steps to ensure that the Chapter 11 plans are clear and correct.

In 2009, the Beckharts filed for Chapter 11. In 2009, they were nearly a year behind on an unsecured loans secured with Kure Beach. Kure Beach property. The manager of the loan objected to the plan’s confirmation as it did not provide a specific way the mortgage payments made after filing a petition will be applied to interest and principal. The bankruptcy court approved the plan, but did not clarify the issue. However, the duty officer didn’t seek to have the court reconsider his decision, and he did not file an appeal.

The Beckharts paid over five years. Shellpoint took over this loan through the initial servicing agent, and classified the loan as being in default, based on the accrued arrears of unpaid arrears. Occasionally, Shellpoint sent default letters to the Beckharts who challenged the default. Shellpoint’s lawyer said that the confirmation order didn’t alter the terms of the loan contract and the loan remained in default. The situation grew worse with the Beckharts submitting complaints to the Consumer Financial Protection Bureau. Shellpoint initiated the foreclosure but then informed the Beckharts that it would stop the foreclosure process, but later put the notice of foreclosure hearing on Beckharts door (allegedly because of an mistake).

Bankruptcy Court Petition

In January of 2020 the Beckharts filed a bankruptcy petition with the court to declare Shellpoint out of compliance and place financial penalties upon Shellpoint. The court heard a case in June, and in September 2020, ruled Shellpoint as being in contempt. The judge found the company guilty and sentenced Shellpoint to pay up to 115,000 dollars in penalties for the loss of earnings, “loss of a fresh beginning” attorneys’ fees, and travel costs.

Bankruptcy courts are able to convict a party of civil contempt, and to punish a person for breaking the terms of a plan that has been confirmed. The test of liability is built on an earlier United States Supreme Court ruling on Taggart in v. Lorenzen. (To learn more about our discussion of Taggartt go here.) Taggart is a test that prohibits sanctions regardless of whether there was an “objectively plausible basis to conclude that the act of the obligee may be legal”. Contempt can be imposed for breaching an order to discharge only “if there is no valid reason to doubt whether the order was a prohibition to the behavior by the obligee.”

In ruling against the bankruptcy court the district court observed that the plan as well as the confirmation order did not specify the amount of debtors due upon confirmation, nor did it specify how the $23,000 arrears will be cleared and did not provide a figure for how much debtors are owed following confirmation. The court did not set any amount due to the initial payment. . The confirmation order also stipulated that the original loan conditions were in place in the event of a change. The court also stated that Shellpoint was informed numerous times by a lawyer of the fact that the behavior of the company was authorized and that the recourse to the advice of an outside lawyer is an adequate defense against civil penalties. Based on all of these factors the district court concluded that Shellpoint was acting in good faith, and was able to interpret its confirmation decision in a way which was consistent with the terms of the loan which was considered to be reasonable.

Creditors are reassured by the no good reason for doubt test which is more relaxed than the strict liability standard. Creditors are also able to consult with a lawyer prior to engaging in reckless driving. This adds an additional layer of security. The most important thing to remember is the basic principle that creditors should insist upon specific and clear plans and conditions. Shellpoint ultimately prevailed and escaped sanctions, but it was following more than 18 years of court battle. The whole thing would have avoided if the loan manager argued that the plan was clearly stated how Beckhart installments would be used to pay off the arrears.

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