The availability of sanctions under rule 3002.1 on bankruptcy for non-compliance


The decision of the Second Circuit of August 2021 in In the gravel, 6 F. 4th 503, has already received considerable attention and generated much debate in recent months. Gravel involved the initial registration of $ 375,000 by the Vermont bankruptcy court against a mortgagee based on the inclusion of charges by the creditor on a monthly mortgage statement – charges for which he did not failed to file a notice under Bankruptcy Rule 3002.1 (c) but which was not included in the “amount owed” on the return and – where the file for bankruptcy online court had previously sanctioned the mortgagee for a claim inappropriate post-request payment. Following a motion filed by the Chapter 13 trustee, the bankruptcy court entered $ 300,000 in contempt penalties for violating its “deemed current” orders at the end of two Chapter 13 cases, and 75,000 $ penalties in both of these cases plus one-third as “other remedy” as provided for in Rule 3002.1 (i), the remedies provision. After the annulment and removal from the district court, the bankruptcy court reduced the penalties for contempt from $ 300,000 to $ 225,000, but reintroduced the penalties of $ 75,000 for violating rule 3002.1 (c). The Second Circuit then accepted the case on a direct appeal.

The Second Circuit overturned the bankruptcy court ruling in a 2-1 panel decision. With respect to the contempt of court penalties of $ 225,000, the majority concluded that the wording of the deemed current orders had not given sufficient notice to the mortgagee that the recording of the charges on the monthly statements violated the law. wording of the orders indicating that the loans were current or constituted “other proceeding” in which the mortgagee did not have the right to dispute the charges. With respect to the penalties of $ 75,000 awarded under Rule 3002.1 (i) as “other appropriate remedy”, the majority considered that, given that the other forms of relief specifically mentioned in paragraph (i) were compensatory , the phrase “other appropriate remedy” should be read as allowing only compensatory and not punitive relief. The majority also noted that other provisions of the Bankruptcy Code specifically allow punitive damages while subsection (i) is silent, and rejected the bankruptcy court’s recourse and analogy to the provisions relating to discovery penalties under Federal Rule of Civil Procedure 37, based on the distinction that rule 37 protects the integrity of the judicial process while Rule 3002.1 protects the individual interests of the debtor. Finally, the majority recognized that a bankruptcy court had the inherent power to sanction parties who act in bad faith, but noted that the bankruptcy court had not found bad faith. Chapter 13 trustee filed for rehearing in bench, but this has recently been denied.

The dissent was exceptionally strong and comprehensive. He offered several challenges to the logic and conclusions of the majority, challenges that other bankruptcy courts may find compelling. Indeed, at least one bankruptcy court has already adopted the dissent and has ruled that subsection (i) allows punitive damages and penalties for breaches of the Rule. In re Blanco, 4190170, at * 26-27 (Bankr. SD Tex. 14 Sep 2021).

Reasonable minds may disagree on the Gravel, but here are a few, at least for future litigation in the second circuit. First, and most importantly, the “other appropriate remedy” in paragraph (i) does not allow for punitive sanctions. Second, on a clear finding of bad faith, a bankruptcy court may impose punitive penalties for breach of the Rule on the basis of its inherent authority. Third, unless the bankruptcy court order very clearly defines the prohibited or required act or omission in the event of a breach of the Rule, the party attempting to enforce the order and comply with the other contempt parties for non-compliance will likely fail.

We would offer the following lessons to mortgage creditors of Gravel. First, mortgage creditors should ensure that their procedures waive any fees, expenses or charges that have been assessed to the borrower during a Chapter 13 bankruptcy case but for which no notice of Rule 3002.1 (c ) was not filed – after all, this is the root cause of the dispute in Gravel. Second, mortgage creditors should ensure that their bankruptcy lawyer responds in a timely manner to notices of final reorganization filed by the Chapter 13 trustee under Rule 3002.1 (f); the answers are the correct way under the Rule to state that the loan is in fact not up to date and to flesh out any disagreement that may arise subsequently as to the status of the loan. Third, mortgage creditors should ensure that their attorney responds to requests to consider them current and possibly oppose any relief sought which goes beyond the loan in question being outstanding at the end of the loan. Chapter 13 case. It is certainly possible that some debtor attorneys are now asking that the “deemed current” orders at the end of Chapter 13 cases be very specific in terms of prohibited acts and communications to circumvent the notice problems recognized in the Chapter 13 case. Gravel (and the U.S. Supreme Court ruling in 2019 Taggart vs. Lorenzen, 139 S. Ct. 1795). Fourth, mortgage creditors should be aware that in bankruptcy cases involving prior sanctions and contempt convictions, a finding of bad faith becomes more likely when there is a second violation, and should ensure that ‘they immediately receive and respond to allegations of a second violation.

© 2021 Bradley Arant Boult Cummings LLPRevue nationale de droit, volume XI, number 347


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