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In re Marino

United States Bankruptcy Appellate Panel of the Ninth Circuit

December 22, 2017


          Argued and submitted on December 1, 2017 at Reno, Nevada

         Appeal from the United States Bankruptcy Court for the District of Nevada Honorable Bruce T. Beesley, Bankruptcy Judge, Presiding

          Christopher A.J. Smith of Wright, Finlay & Zak, LLP argued for appellant/cross-appellee Ocwen Loan Servicing, LLC

          Christopher P. Burke argued for appellees/cross-appellants Christopher Michael Marino and Valerie Margaret Marino.

          Before: FARIS, LAFFERTY, and TIGHE, [*] Bankruptcy Judges.


          FARIS, Bankruptcy Judge.


         Chapter 7[1] debtors Christopher Michael Marino and Valerie Margaret Marino sought sanctions against creditor Ocwen Loan Servicing, LLC ("Ocwen") for its violation of the discharge injunction. The bankruptcy court held a trial and awarded the Marinos $119, 000 - one thousand dollars for each improper contact.

         On appeal, Ocwen argues that the bankruptcy court erred because its correspondence with the Marinos was in compliance with state or federal law. It also contends that the court improperly considered telephone calls, which were not the subject of the motion and not supported by evidence, and that there was no evidence of injury to the Marinos. We discern no error and AFFIRM.

         The Marinos cross-appeal, correctly arguing that the bankruptcy court erred in holding that it lacked the authority to award punitive damages. On this point, we VACATE and REMAND so the bankruptcy court can consider whether it would be appropriate to (a) enter a final judgment for "relatively mild noncompensatory fines, " (b) issue, for the district court's consideration, proposed findings and a recommended judgment for punitive damages, or (c) refer the issue of contempt to the district court.


         A. The Marinos' chapter 7 petition

         The Marinos filed a chapter 7 bankruptcy petition in March 2013 in the United States Bankruptcy Court for the District of Nevada. They scheduled real property located in Verdi, California (the "Property") and noted, "DEBTOR TO SURRENDER."[2]GMAC Mortgage held a secured claim arising from a second mortgage on the Property.

         The Marinos received their discharge on June 18, 2013. The bankruptcy court subsequently granted Deutsche Bank National Trust Company, as Trustee for GMACM Mortgage Loan Trust 2005-AR6 ("Deutsche Bank") relief from the automatic stay. The court closed the case on September 23, 2013.

         B. Written correspondence and telephone calls from Ocwen

         Following the Marinos' discharge, Ocwen, as the servicer for Deutsche Bank, began sending the Marinos mailed correspondence in June 2013 and continued to do so through April 2015. The letters included account statements, notices regarding force-placed insurance, escrow statements, and other matters.

         Some of the items of correspondence contained disclaimers that were located at the bottom of a page or end of the letter in small font. A typical disclaimer read: "If you have filed for bankruptcy and your case is still active and/or if you received a discharge, please be advised that this notice is for information purposes only and is not an attempt to collect a pre-petition or discharged debt." Often, the disclaimers were preceded by demands for payment by a certain date or information about the amount that "you must pay" in a much more conspicuous font.

         Ocwen also called the Marinos numerous times post-discharge to request payment on their mortgage loan.

         C. The motion for contempt

         In November 2015, the Marinos filed a motion to reopen their case and to hold Ocwen in contempt for its alleged violation of the discharge injunction ("Motion for Contempt"). They argued that Ocwen knowingly and willfully violated the discharge injunction by sending the written correspondence after the Marinos' discharge. They identified twenty-two instances of allegedly improper correspondence[3] whereby Ocwen sought to collect from the Marinos personally.

         In opposition to the Motion for Contempt, Ocwen argued that sanctions were not warranted because the letters were not meant to collect any debt against the Marinos personally and complied with federal and state law. It said that fourteen of the twenty-two letters contained disclaimer language stating that the letters were intended for informational purposes only, not to collect any debt. It argued that billing statements did not violate the discharge injunction under California law because they sought only voluntary payments. It contended that the remaining correspondence concerned force-placed insurance, escrow information, or debt validation, not collection of a debt.

         D. Evidentiary hearing

         The bankruptcy court reopened the case and held an evidentiary hearing on the Motion for Contempt. At the outset, and by agreement of the parties, the court found "that Ocwen was aware of the bankruptcy, was aware of the discharge, got stay relief, and sent the various letters." The only remaining issues were Ocwen's intent and damages.

         Mr. Marino testified that the Property was their "dream house, " but they faced financial difficulty starting in 2010. They unsuccessfully tried to work with GMAC and Ocwen to modify their mortgage payments, but eventually moved out in 2011.

         After they filed for chapter 7 bankruptcy and received their discharge in mid-2013, the Marinos began to receive letters from Ocwen "stating that there was money due." The correspondence included account statements with attached payment stubs and demands for payment. Mr. Marino testified that the payment stubs indicated that he had to remit payment on the discharged debt, that he was responsible for the interest payments, and that payments were due by the stated dates. Ocwen also sent notices of force-placed insurance, which made Mr. Marino think that he had to pay for the insurance on the Property, even though they had surrendered and vacated it.

         Mr. Marino said that the notices from Ocwen took a toll on his marriage and caused him to fight with his wife. He said that he suffered from anxiety attacks and felt humiliated, tormented, and harassed. He testified that the stress eventually made them contemplate divorce, although they managed to preserve their marriage.

         Mrs. Marino testified that the letters and calls from Ocwen caused distress to the point that she and her husband considered divorce. She stated that she began having severe stomach pains when they tried to modify the mortgage loan; those pains disappeared when they filed for bankruptcy, but reemerged when they began receiving calls post-discharge. In June 2014, she noted in writing that Ocwen was "calling me three to five times a day" for approximately a year. At trial, she did not provide an exact number of calls that she received, but testified:

Q Okay. I don't want to go -- it sounds like you got anywhere from 60 to 100 calls. Does that sound --
A It was a lot of calls, yes.

         She also stated, "I probably answered maybe a handful of phone calls, probably maybe -- it's hard to think of a number in that time. I mean, 20, I don't know. It seems to me that after a while, I was just -- I couldn't take it anymore."

         A friend of the Marinos, Bernadette O'Kane, testified about her observations of the Marinos during their financial distress. Ms. O'Kane stated that Mrs. Marino became sad and upset due to dealing with creditors, started suffering stomach pains, and told Ms. O'Kane that her marital relationship had become strained. Ms. O'Kane said that Mr. Marino was previously fun-loving but became agitated and angry.

         Ms. O'Kane said that, following the discharge, the Marinos were not able to move on with their lives, because "the calls [from creditors] did not stop." She said that the calls made Mrs. Marino cry; when Ms. O'Kane on occasion picked up such calls, the caller would assume that she was Mrs. Marino and repeatedly ask for payment.

         Sony Prudent, a senior loan analyst for Ocwen, testified as to Ocwen's loan servicing procedure. He stated that Ocwen keeps a comment log of all contacts with a borrower and that Owen might still send notices post-discharge pursuant to federal or state regulation, but that there would be a bankruptcy disclaimer stating that the letter was not an attempt to collect a debt "if you've been discharged or in active bankruptcy."

         Mr. Prudent stated that he reviewed the Marinos' file before testifying, including the transaction history and comment logs. He testified that the comment logs reflect that Ocwen called the Marinos post-discharge but that it did not make any calls to the Marinos after the Property was foreclosed (approximately two years after the court granted Ocwen stay relief).

         The court repeatedly questioned Mr. Prudent as to why post-discharge letters might still say, "you must pay." Mr. Prudent had no direct answer but stated, "[b]est answer, Your Honor, is it would be a generic letter." He later said, "[i]t is an internal policy, Your Honor." He also admitted that "[m]ost of [the letters] are generated by our system" and were never reviewed by a human being.

         The bankruptcy court ordered additional briefing regarding the correspondence, asking Ocwen to cite the specific statute or regulation authorizing each document. Ocwen cited the applicable regulatory or statutory basis that allegedly applied to some of its correspondence: 12 C.F.R. § 1024.37(c) (required notice of force-placed insurance), [4] 12 U.S.C. §§ 2605 and 2609 (required notice of escrow account balance), [5] 15 U.S.C. § 1692g (required notice of debt validation information), [6] and California Civil Code §§ 2924(a)(1)(A) (required notice of default), [7] 2923.5 (required contact prior to notice of default), [8] and 2924.9 (required contact post-default).[9]

         On June 20, 2016, the bankruptcy court announced its ruling in favor of the Marinos. The court rejected Ocwen's defense that the correspondence was authorized by state or federal law, stating that, "I think if all they sent was what was required by the notice [sic], they would be fine. But in each of those cases, they included additional language, which indicated that they were trying to collect money from the debtor."

         The bankruptcy court held that the letters and phone calls indicated that Ocwen was trying to get the Marinos to make payments on their mortgage loan: "Ocwen could not have been doing anything but trying to get the debtor to give them some more money, either for insurance or agree to be responsible for the house that was vacant, even after they had . . . received stay relief." The court said that Ocwen purposefully waited two years to foreclose on the Property, "hoping that if they sent enough letters and gave enough calls, that the debtor would ultimately pay them some money for something."

         The court found the disclaimer language ineffective. It said that the disclaimers stated, "if you have filed for bankruptcy" and "if you have received a discharge, " even though Ocwen knew that the Marinos had filed for bankruptcy and received a discharge. It said that creditors that know that a debtor has filed for bankruptcy, received a discharge, and surrendered their home do not have "the right to have their computer gen out [sic] these various letters, which do comply, at least in some of the provisions, with the various notification statutes, but all of which include language which is not included in those statutes, which, to varying degrees of urgency, want the debtor to undertake a new obligation or pay them money."

         The court also found that Ocwen had called approximately a hundred times following the discharge to ask the Marinos to pay the discharged debt. It noted that Ocwen failed to rebut the Marinos' testimony and failed to produce any records or evidence to the contrary.

         The bankruptcy court awarded the Marinos damages for emotional distress, actual damages, and attorneys' fees and costs. It stated that the Marinos had established that they had suffered emotional distress as a result of Ocwen's harassing calls and letters. The court found that Ocwen had sent nineteen offending letters and made one hundred phone calls, and it awarded $1, 000 per letter and call as emotional distress damages. The court entered an order ("Sanctions Order") awarding the Marinos $119, 000 in emotional distress damages.

         Regarding an award of punitive damages, the court stated: "The issue of damages, I -- as I understand the law of the Ninth Circuit, I do not have authority to impose punitive ...

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