Post-Confirmation: Ignoring Court Orders Is Not A Good Idea

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In re Castle Home Builders, Inc., 520 B.R. 98 (Bankr. N.D. Ill. 2014) –

The debtors obtained confirmation of plans of reorganization that restructured prepetition mortgage loans.  When the servicer for some of the loans continued to ignore the terms of the plans, the reorganized debtors sought enforcement of the court’s confirmation order and sanctions.

The reorganized debtors sought relief after confirmation of the plan but before the bankruptcy case was closed.  In considering the scope of its jurisdiction, the court acknowledged that its subject matter jurisdiction is “sharply reduced” post­‑confirmation, but determined that it still retained jurisdiction.  Among other things, Section 1142(b) of the Bankruptcy Code provides:

The court may direct the debtor and any other necessary party to execute or deliver or to join in the execution or delivery of any instrument required to effect a transfer of property dealt with by a confirmed plan, and to perform any other act, including the satisfaction of any lien, that is necessary for the consummation of the plan.

Thus, the court’s role post-confirmation is focused on implementation of a plan of reorganization.  The court concluded this meant that (1) a matter must have “a close nexus to the bankruptcy plan or proceeding,” and (2) the plan must provide that the court retains jurisdiction over the matter.

In this case the dispute clearly related to implementation of the plan, and the plan itself provided that the court would retain jurisdiction for all matters arising out of and related to the bankruptcy case and plan, including for the purpose of enforcing the plan and issuing orders in aid of execution of the plan.

The debtors’ prepetition business involved renovating and renting historic houses to wealthy tourists as luxury accommodations.  The primary goal of the bankruptcy was to modify their mortgage loans to make debt service more manageable.  After almost two years of negotiation with the mortgage lenders, the debtors proposed plans of reorganization that were accepted by all voting classes for both debtors.

The mortgage loans were underwater.  So, the plans provided for valuation of the property securing a mortgage, and then dividing a loan into a secured claim equal to the value of the property and an unsecured claim for the deficiency.  The new lower principal amount of the secured claim was reamortized over a shorter 10‑year period.  Under the plan, the seven business properties were to be transferred to a newly formed entity, which was primarily responsible for making all plan payments, including mortgage payments.

The dispute involved two mortgages held by Bank of America.  Post-confirmation the “responsibility for making future payments under this plan [on these mortgages] shall belong exclusively to the Reorganized Debtor and shall not be the personal liability of Ms. Long [one of the debtors].”   With the exception of payments on a residence, “all other Class 2 [Bank of America claims] payments will be the exclusive responsibility and liability of the Reorganized Debtor under this Plan.”

Bank of America voted to accept the plans.  However, post-confirmation the servicer for its loans continued to bill based on the prepetition mortgages, without reflecting the new principal amount, new interest rate, new amortization period and new borrower name in “blatant disregard” of the plans.  Further, 15 months after confirmation the loan documents still listed Ms. Long.

The reorganized debtors requested an order compelling the servicer to modify its loan file to mirror the terms of the plan and awarding legal fees and punitive damages.

The opinion walks through various instances in which the servicer was recalcitrant.  For example, the servicer’s representative apparently made no attempt to produce documents in response to the debtors’ production request.  When asked if he did anything to gather responsive documents, the response was simply: “I did not.”

In addition, the court had previously entered an order requiring the servicer to immediately come into compliance with the plans, including a direction that (1) the only name to appear on account statements or files should be the reorganized debtor liable for payment, (2) the outstanding principal was to be reset to the designated amount, and (3) the servicer was required to purge late fees, default charges, delinquency charges, interest and default interest, etc. that should not have been charged based on the restructure loans and proper application of payments.  The servicer was also required to (i) purge charges for unilateral payment of insurance, (ii) modify its records and give third‑party notification that the debtor had not been in payment default, (iii) provide suitable documentation to support claims for reimbursement from an escrow account, and (iv) send future account statements to the reorganized debtor.  At that time the court also ordered the servicer to pay ~$36,000 in attorney fees and costs.  However, the servicer did not comply:  it did not pay the fees, did not conform the loan documents to the terms of the plan, etc.

In response to the debtors’ latest request, the court noted that the confirmation order was binding on parties that received notice and were afforded due process.  Further, if a creditor fails to object to a plan, it cannot later challenge the terms of the plan.  The court emphasized that it is critical that creditors respect court orders, and determined that when a party does not comply, the court has inherent authority to punish the party and coerce compliance.

The servicer attempted to argue that it had no “affirmative duty” to change the loan documents or payment coupons based on the plan.  However, as the court noted, that argument disregarded the subsequent court order compelling it to do so.

Consequently the court awarded $100,000 in actual based on attorney fees, quarterly fees payable to the US Trustee, a reduction in Ms. Long’s personal credit rating, and her testimony that the dispute adversely affected her health.

However, the court did not grant the request for $1,000,000 in punitive damages.  Section 524 authorizes a court to impose punitive damages when there is a violation of a discharge order.  In an individual chapter 11 case, the debtor is not discharged until completing all plan payments or the court orders otherwise.  Since the discharge had not yet been granted, the court denied punitive damages.

It took the debtors more than 15 months and almost $100,000 in attorney fees to obtain this relief.  Given that the court determined that the servicer was in “blatant disregard” of the plans and “has intentionally defied bankruptcy law,” the result seems like a surprisingly mild response.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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