The Eleventh Circuit recently affirmed the bankruptcy court’s denial of a sanction motion filed by debtor/mortgagor, Arlene Roth (“Roth” or “the Debtor”), against her mortgage company, Nationstar Mortgage, LLC (“Nationstar”). In re Roth. In her sanction motion Roth asserted Nationstar violated 11 U.S.C. § 524 by sending her monthly mortgage statements after a bankruptcy court had discharged her mortgage debt in bankruptcy proceedings. Section 524 of the bankruptcy code prohibits a creditor from taking action to collect a discharged debt. 11 U.S.C. § 524(a)(2).

By way of background, in 2010 Roth filed for bankruptcy protection under chapter 13 of the bankruptcy code and during the bankruptcy proceedings agreed to surrender real property on which Nationstar held a mortgage.  The bankruptcy court confirmed Roth’s Chapter 13 plan and upon Roth’s completion of the payment plan the court entered an order discharging Roth’s debt in June 2014. The discharge order prohibited a creditor from attempting “to collect from the debtor a debt that has been discharged,” however, the order also stated that “a creditor may have the right to enforce a valid lien, such as a mortgage…against the debtor’s property after the bankruptcy.”[i] Roth’s Chapter 13 plan also provided that secured creditors would “retain the liens” securing their claims.

Despite being notified of Roth’s discharge order four months prior and receiving a cease and desist letter from Roth’s counsel, Nationstar began and continued sending mortgage statements to Roth starting in October 2014. Roth moved for sanctions against Nationstar in her bankruptcy proceedings and filed a separate civil suit based on violations of the Fair Debt Collections Practices Act (“FDCPA”). The parties reached settlement on both the sanctions motion and civil suit. Notwithstanding, in November 2015 Nationstar sent Roth another mortgage statement titled “Informational Statement.” The following month Roth filed a second lawsuit based again on FDCPA violations and a second motion for sanctions in the bankruptcy proceedings based on § 524 violations.

The parties reached settlement a second time to resolve the civil action, but the sanctions motion filed in the bankruptcy court remained at issue. In support of sanctions, Roth argued Nationstar’s statement “was an attempt to collect a discharged debt in violation of the discharge order.” Nationstar rebutted that the “statement was only informational and not a violation of § 524.”[ii] The bankruptcy court agreed with Nationstar, refused to award sanctions and “Roth appealed the denial of this second sanctions motion to the district court, which affirmed the bankruptcy court’s opinion…”[iii]

Roth then appealed the matter to the U.S. Court of Appeals for the Eleventh Circuit. The Eleventh Circuit (hereinafter “the Court”) noted it was a “second court of review and thus examines independently the factual and legal determinations of the bankruptcy court…” Id. The Court surmised the “substantive” issue on appeal was:

“. . . whether the Informational Statement sent by Nationstar was an improper attempt at debt collection in violation of 11 U.S.C. § 524(a)(2), and if so, whether it was…sanctionable under 11 U.S.C. § 105.

The Court explained that § 524(a)(2) and § 105(a) of the bankruptcy code provided the bankruptcy court with the authority to impose sanctions against Nationstar for violations of the discharge order.  The Court elaborated however, that imposition of sanctions under the recent Supreme Court decision in Taggart v. Lorenzen[iv] was only allowed if there was “no fair ground of doubt as to whether the [discharge] order barred the creditor’s conduct.”[v]

The Court began its analysis by looking at “the objective effect” of the Informational Statement to determine if it was “an unlawful attempt at debt collection…”[vi] The Court discussed the disclaimer[vii] included in the statement:

…[T]he disclaimer is printed in bold on the first page of the statement. It declares that it is ‘for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code.’ In case the first sentence is not clear enough, the disclaimer then repeats that if the account ‘has been discharged in a bankruptcy proceeding’ then it is ‘for informational purposes only,’ and ‘is not an attempt to collect a debt.’ Further, the included payment coupon is marked in large lettering as ‘voluntary.’[viii]

The Court pointed out § 524 allowed Roth to voluntarily pay back a discharged debt and if Nationstar’s Informational Statement was deemed “unlawful debt collection” there “would be little daylight between… a legitimate attempt” to inform Roth of the amount due and an “unlawful attempt at debt collection.”[ix] The Court concluded the objective effect of the statement was not “to pressure Roth to repay a discharged debt” but rather to provide “potentially helpful” information about how Roth could “regain the property” if she so chose.  

The Court concluded since it “determined that Nationstar’s Informational Statement did not violate § 524, the ‘no fair ground of doubt’ standard for § 105” was not satisfied and the bankruptcy court’s denial of Roth’s motion for sanctions was proper.[x] The Court also explained that the bankruptcy court’s refusal to conduct an evidentiary hearing on the sanctions motion was proper since there were no disputed factual matters. The Court rejected Roth’s argument that her “subjective belief” that the Informational Statement was an attempt to collect a debt created “a disputed material fact” explaining again that the standard employed for evaluating the Informational Statement was ‘whether the objective effect…[was] to pressure [Roth] to replay a discharged debt.” The Court affirmed the bankruptcy court’s order denying sanctions. The takeaway here is to ensure any communications going to a borrower who obtained a discharge of debt in bankruptcy has a “prominent, clear, and broadly worded disclaimer” like the one Nationstar used in this case.

[i] In re Roth, 935 F.3d at 1273.

[ii] In re Roth, 935 F.3d at 1274.

[iii] In re Roth, 935 F.3d at 1274.

[iv] This U.S. Supreme Court case was the subject of a prior SHD eBlast earlier this year entitled: US Supreme Court Finds Bank Not Subject to Civil Contempt if There is a “Fair Ground of Doubt” as to Whether Bank’s Conduct Was Lawful under Bankruptcy Discharge Order.

[v] In re Roth, 935 F.3d at 1275 (Emphasis provided).

[vi] In re Roth, 935 F.3d at 1276.

[vii] The full text of the disclaimer read: This statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a demand for payment from any individual protected by the United States Bankruptcy Code. If this account is active or has been discharged in a bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation. In re Roth, 935 F.3d at 1274-5.

[viii] In re Roth, 935 F.3d at 1276.

[ix] In re Roth, 935 F.3d at 1276.

[x] In re Roth, 935 F.3d at 1278.