Craig L Adams and Monica L Adams

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
CRAIG L. ADAMS and
MONICA L. ADAMS,
DEBTORS
CASE NO.
04-003875-5-SWH
ORDER FINDING OCWEN LOAN SERVICING LLC
IN CONTEMPT OF THE DISCHARGE INJUNCTION
AND THE COURT’S ORDER OF MAY 23, 2008
AND AWARDING DAMAGES AND SANCTIONS
The matter before the court is the chapter 13 debtors’ motion for Ocwen Loan Servicing LLC
(“Ocwen”) to show cause why it should not be held in contempt for violating the terms of an order
entered in this court on May 23, 2008, which 1) declared that all mortgage payments due from the
debtors to Ocwen were current as of that date and 2) enjoined any action to collect sums discharged.
The motion for show cause was filed on September 12, 2008, and the hearing on that motion was
continued multiple times at the request of the parties. A hearing ultimately took place in Raleigh,
North Carolina, on May 26, 2010. At the conclusion of the hearing, the court announced that it had
found Ocwen in contempt of the May 23, 2008 order, and took the damages issues under
SO ORDERED.
SIGNED this 07 day of July, 2010.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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advisement. 	The court requested counsel to provide it with the parties’ respective damages
calculations, and both parties have done so.
Background
The debtors filed a petition under chapter 13 on October 26, 2004. Ocwen, the debtors’
mortgage servicer, was included on their schedules as a secured creditor holding a first lien on the
debtors’ residence. 	The debtors’ discharge was entered on April 25, 2008. On April 29, 2008, the
debtors filed a motion seeking a declaration that all payments due from the debtors to Ocwen on
their residential mortgage were current (the “Mortgage Declaration Motion”). Ocwen was properly
served with the Mortgage Declaration Motion, but did not respond.1 The May 23, 2008 order
entered as a result of that motion declared the Ocwen indebtedness current and also provides:
Ordered that in the event the holder of the mortgage, the current servicer or
any subsequent assignee or holder of the mortgage debt attempts to collect any of
these discharged principal payments, interest, fees or expenses, such action shall be
deemed to be a willful violation of the discharge injunction and contempt of the
orders of this Court; and that such action shall give the right to the Debtors to pursue
a proceeding before this Court for contempt and appropriate sanctions and such other
state and federal statutory remedies as may be available to the Debtors and that this
Court specifically retain jurisdiction over such claim or claims.
In re Adams, Order Declaring Mortgage Payments Current, Case No. 04-03875-5-ATS (May 23,
2008). The debtors represent that they were, in fact, current at the time of the entry of the order.
Ocwen contends that the debtors may not have been current at that time, but agrees that the issue
is resolved, with finality, by entry of the May 23, 2008 order, which Ocwen did not appeal.
1 The motion was served by regular mail on Ocwen at two addresses in Orlando, Florida,
and on Ocwen’s counsel in Charlotte, North Carolina. A second certificate of service, filed on
May 8, 2008, states that on May 7, 2008, additional copies of the motion were served on Ocwen
at the Florida addresses, this time by certified mail.
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During the summer of 2008, the debtors obtained an appraisal of their residence and
attempted to refinance their mortgage. They were turned down when, upon request of the proposed
new lender, Ocwen transmitted a payoff statement and loan history that was replete with serious
errors, most notably its report that the loan on the debtors’ residence was in foreclosure. The parties
agree that the loan was not then, and had never been, in foreclosure. 	Counsel for the debtors
brought the errors to Ocwen’s attention in a letter dated August 20, 2008, and requested that Ocwen
correct them by 1) recalculating the loan from the date of the May 23, 2008 order; 2) correctly
applying the payments made, and 3) issuing a correct payoff statement. Debtors’ Mot. to Show
Cause, Ex. B.
At the hearing, Ms. Adams testified that in addition to the letter her attorney sent to Ocwen,
she also contacted Ocwen during the summer of 2008 to request the corrections, and Ocwen
informed her that it was unaware of any discharge entered in the bankruptcy case. In response,
Ms. Adams contacted her attorney and arranged to have him fax the discharge order and May 23,
2008 order to Ocwen. When Ms. Adams checked the status of her loan after having caused Ocwen
to be provided with the bankruptcy documents, she determined that the loan continued to be reported
in a foreclosure status. Ms. Adams again contacted her attorney, and the bankruptcy documents
were faxed again. Once again, Ocwen did not respond.
Faced with Ocwen’s failure to rectify its reporting, and its resulting effect on their ability to
refinance their home, the debtors reopened the case and filed the motion to show cause, on
September 12, 2008, to which Ocwen responded on September 30, 2008 by generally requesting a
hearing “while it investigates the claims made by the [debtors].” 	On November 10, 2008, the
hearing was continued on Ocwen’s motion. Since the motion to show cause was filed, this matter
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has been continued no less than thirteen times upon the parties’ representations that they were
attempting to reach an agreement to resolve the show cause motion. 	Ocwen has never filed a
response to the show cause motion, nor denied violation of the May 23, 2008 Order or the discharge
injunction. Ocwen has not offered an explanation in mitigation of its conduct at any point in this
matter. It has instead allowed its conduct to speak for itself.
Civil Contempt
The discharge injunction set forth in 11 U.S.C. § 524 “operates as an injunction against the
commencement or continuation of an action, the employment of process, or an act, to collect,
recover or offset any such debt as a personal liability of the debtor, whether or not such discharge
is waived.” 11 U.S.C. § 524(a)(2). The May 23, 2008 order clearly deemed the debt current as of
that date and specifically prohibited actions contrary to that conclusion, i.e. the collection of fees,
costs and other amounts related to a non-current loan. The court ruled at the hearing that Ocwen was
in contempt of both the discharge injunction and the May 23, 2008 order, and the basis of that ruling
is set forth herein.
The Court of Appeals for the Fourth Circuit articulated the standard to establish civil
contempt in Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000) (internal quotations
omitted), as follows:
(1) the existence of a valid decree of which the alleged contemnor had actual or
constructive knowledge; (2) . . . that the decree was in the movant’s “favor”;
(3) . . . that the alleged contemnor by its conduct violated the terms of the decree,
and had knowledge (at least constructive knowledge) of such violations; and
(4) . . . that [the] movant suffered harm as a result.
Each of these elements must be shown by clear and convincing evidence. Ashcraft, 218 F.3d at 301
(construing Colonial Williamsburg Found. v. The Kittinger Co., 792 F. Supp. 1397, 1405-06 (E.D.
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Va. 1992), aff’d, 38 F.3d 133, 136 (4th Cir. 1994)). 	It is not disputed that the court’s order of
May 23, 2008 is a valid decree of which Ocwen had actual knowledge. The Mortgage Declaration
Motion was served upon Ocwen and its counsel of record on May 8, 2008, in accordance with the
certificate of service filed by debtors’ counsel. The discharge order was served by the clerk’s office
on all parties appearing on the creditor matrix, either by mail or electronically.2 The uncontradicted
testimony of Ms. Adams is that she had a telephone conversation with a representative of Ocwen
concerning her discharge and the May 23, 2008 order, and that Ocwen was supplied additional
copies of the discharge order and the May 23, 2008 order by her counsel during the summer of 2008.
Both Ocwen and its counsel received notice of both the discharge and the May 23, 2008 order as
exhibits to the show cause motion served on them on September 12, 2008. Counsel for Ocwen
began to receive electronic notice of all filings in the case on September 30, 2008. 	Most
importantly, Ocwen did not dispute actual knowledge of both orders at the hearing.
The May 23, 2008 order was in the debtors’ “favor” in that it established that their mortgage
payments were deemed current and specifically set forth that a violation of the order would be
sanctionable. Ocwen not only violated the terms of that decree by continuing to assess discharged
principal, fees and costs, but did so, knowingly, over a prolonged period of time even after such
violations were brought to its attention by: 1) debtors’ counsel, 2) the female debtor, and 3) the
filing of the show cause motion. The debtors’ testimony indicated that they suffered harm as a result
of Ocwen’s violation of both the May 23, 2008 order and the discharge injunction. They were
unable to refinance their home at market rates because their credit report erroneously showed their
2 The ordinary course of practice in the Eastern District of North Carolina is for the
discharge order to be served, through the clerk’s office, on all parties appearing on the creditors’
matrix.
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Ocwen loan in foreclosure; they incurred attorneys’ fees to attempt to rectify the erroneous reporting
and bring the matter to the court’s attention; they incurred appraisal fees in their futile refinancing
efforts; they spent time out of court trying to resolve the show cause motion and time in court during
the hearing; and their credit was damaged by the detrimental reporting.
In the specific context of an alleged violation of the discharge injunction, bankruptcy courts
increasingly also assess whether a creditor’s actions evidence willfulness. 	See, e.g., In re Dendy,
396 B.R. 171,178 (Bankr. D.S.C. 2008); In re Cherry, 247 B.R. 176,187 (Bankr. E.D. Va. 2000).
The Dendy court held that to “hold a creditor in contempt [for violation of the discharge injunction],
Debtors must demonstrate that the creditor willfully violated the discharge injunction, which is
proved by showing that the creditors knew that the discharge injunction was invoked and intended
the act which violated the injunction.” 396 B.R. at 178; see also Workman v. GMAC Mortgage,
LLC (In re Workman), 392 B.R. 1890 (Bankr. D.S.C. 2007). 	In Cherry, the court construed the
test established by the Eleventh Circuit in In re Hardy, 97 F.3d 1384 (11th Cir. 1996), wherein that
court of appeals held that under § 105, a defendant could be found in contempt for a violation of the
discharge injunction if it “(1) knew that the [discharge injunction] was invoked and (2) intended the
actions which violated the [injunction].” Hardy, 97 F.3d at 1390, quoted in Cherry, 247 B.R. at 187;
see also Almond v. Ford Motor Co. (In re Almond), 2007 WL 1345224 at *5 (Bankr. M.D.N.C.
2007) . In contrast to the standard for civil contempt, finding a willful violation of the discharge
injunction appears to rest on the lower preponderance of the evidence standard. Cherry, 247 B.R.
at 188 n.18.
At present there is “no clear rule” in the Fourth Circuit as to whether an alleged violation of
the discharge injunction requires willfulness on the creditor’s part, but the Hardy rule has found
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increasing acceptance by other courts, including courts in this circuit. Almond, 2007 WL 1345224
at *5. 	This court accordingly assumes, but does not decide, that knowledge and intent, as outlined
above, are components of a determination whether the creditor’s violation of the discharge
injunction was willful and in contempt of the injunction. 	And, as to this inquiry as well, the
undisputed facts establish by not only a preponderance of the evidence but also by the higher
standard of clear and convincing evidence that Ocwen knew the discharge injunction was invoked
and intended its actions in violation of it.
There is no question whatsoever that Ocwen’s actions establish civil contempt of the court’s
order. 	At the hearing, the court was presented with no evidence that Ocwen has taken any action
to correct its records or the reports it makes to credit companies regarding the debtors’ loan, either
prior to or after receiving the debtors’ motion to show cause. During the period from at least the
filing of the debtors’ motion to show cause and the hearing on May 26, 2010, the court finds that
Ocwen has been in knowing, willful, and flagrant violation of both the discharge injunction and this
court’s May 23, 2008 order.
Damages
A bankruptcy court has not only the inherent authority to enforce its orders, but also the
statutory authority, under 11 U.S.C. § 105(a), to issue “any order, process, or judgment that is
necessary or appropriate to carry out the provisions” of the Bankruptcy Code. 	This authority
includes the issuance of sanctions as necessary, and encompasses both the court’s authority to
enforce the order of May 23, 2008 and, also, “necessarily includes orders imposing sanctions for
violating the discharge injunction.” In re Barbour, 77 B.R. 530, 532 (Bankr. E.D.N.C. 1987); see
also In re Workman, 392 B.R. at 194 (citing multiple recent cases in which bankruptcy courts
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invoked power under §105(a) to sanction parties who violated the discharge injunction). 	Thus,
while § 524 does not explicitly authorize an award of monetary damages for violation of the
discharge injunction, damages for those violations – as well as violations of an order of the court –
may be awarded under § 105(a). See, e.g., Workman, 392 B.R. at 195.
The duration of time over which Ocwen has maintained an apparent “disconnect” between
its actions and the inevitable result of them is appalling. It has been 25 months since entry of the
May 23, 2008 order and 21 months since the filing of the debtors’ motion to show cause. Ocwen
has taken no action to correct its balance or credit reporting. Its response to the court’s request for
its contentions regarding damages further illuminates Ocwen’s apparent inability to grasp the
seriousness of its actions and the repercussions of them. Ocwen contends that the sole damages that
should be assessed against it are: $400 for the refinancing appraisal, and $1500 in attorney’s fees.
Ocwen “submits that any and all damages suffered by the [Adams] are fairly resolved” by payment
of those sums. Ocwen contends that the debtors took “little action to mitigate any damage” because
they made only one attempt to refinance the loan, even though it is ludicrous to suggest that such
an effort could possibly have garnered the debtors a refinanced mortgage on more attractive terms,
or been anything other than a fruitless and humiliating exercise.
In addition, Ocwen says it “is and will” update its credit reports and give the debtors a copy
of the email communication showing that it has done so. That Ocwen still proposes to correct its
reporting, and has not yet given proof of having done so, is mind-boggling. As the final component
of Ocwen’s proposed resolution of this matter, it would restate the principal balance of the loan as
$75,000 as of June 1, 2010 and modify the terms of the loan to provide an interest rate of 5%
beginning June 1, 2010. 	In accordance with its proposal, Ocwen would retain the original, high
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interest rate of 10.8% over the almost-two years in which it erroneously reported the debtors’
mortgage as in foreclosure, which, in effect, prohibited the debtors’ refinancing at market levels.
Ocwen does not dispute that it has, from late 2007 through virtually all of 2008 and well into
2009, reported the Adams’ mortgage as being in foreclosure, despite the fact that no foreclosure
proceeding ever was commenced. 	The statements Ocwen sent to the debtors show that it has
regularly assessed foreclosure costs and fees, and applied the debtors’ payments to those costs and
fees instead of to the principal. Most recently, Ocwen informed the Adams by letter dated May 26,
2010, in response to the Adams’ inquiry regarding the credit history of their loan over the most
recent 12 months, that it had reported the loan as in foreclosure for May, June, July and August of
2009. All during that time, Ocwen purportedly was working with the debtors to modify their loan
terms – as a result of the original erroneous reporting. 	Ocwen either intended to hold the debtors
hostage to its glacial (and unfruitful) negotiations, or concluded that it could knowingly disregard
the responsibilities with which it was charged by both the Bankruptcy Code and the May 23, 2008
order of this court. That it did so, with actual knowledge, for such a prolonged period of time is
especially egregious. Ocwen’s cavalier attitude toward the discharge injunction, the terms of an
order of this court, and the effect of its actions on the debtors is wholly unacceptable. The fact that
Ocwen is unwilling to acknowledge the seriousness of this matter even today carries significant
weight with the court. 	As the court informed the parties at the conclusion of the show cause
hearing, sanctions are warranted in this matter. 	It is obvious that only significant monetary
sanctions will get Ocwen’s attention.
The court now turns to the appropriate sanctions for such violations. The trustee’s brief, in
which he describes Ocwen’s proffer of damages as “woefully inadequate,” recommends entry of an
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order awarding as compensatory damages a declaration that the debtors’ debt to Ocwen is satisfied
in full and cancelling Ocwen’s lien, along with attorney fees and a punitive component of $1000
. Although the court will not adopt that recommendation in whole, it will take guidance from it.
1) Compensatory Damages
Ocwen has acknowledged that the debtors are entitled to reimbursement of $400 for the
appraisal in connection with the attempted 2008 refinancing, and $1500 for attorney’s fees. The
court’s very conservative estimate of the value of the debtors’ time trying to sort through and correct
Ocwen’s statements, together with the value of their time in court and compensation for the
embarrassment of having false, defamatory information published about them, supports a total award
of $2500 in compensatory damages, plus attorney’s fees of $1500. Ocwen also will be assessed
attorney’s fees payable to the trustee for his preparation and court time in the amount of $750.
An accurate determination of the balance owing Ocwen by the debtors is essential to finally
resolve the issues between the parties. 	The court requested, and received, contentions by both
parties concerning the present mortgage balance. The debtors supplied their counsel’s affidavit
which claimed that the correct balance, using the contract 10.8% rate, through April 30, 2010, was
$71,954. Using a 6% interest rate in 2008, a 5.5% interest rate in 2009 and a 5% interest rate in 2010
yields a balance of $63,702 according to the debtor.
Ocwen submitted the affidavit of Manager Trial Preparation/Discovery, Chomie Neil. The
affidavit indicates that Ocwen contends that the balance due on the mortgage as of July 1, 2010, is
$77,360.13. Ocwen applied the contract rate of interest of 10.8% in its calculations.
Inasmuch as the 10.8% contract rate is above market, in accordance with the unchallenged
proffer of debtor’s counsel, and that the continued improper reporting on the part of Ocwen prohibits
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the debtors from refinancing the loan at market rate, the court will modify the interest rate as part
of the debtors’ compensatory damages to 6% - the highest interest rate offered by the debtors at the
hearing - as a reasonable market rate for the time period of May 23, 2008 through July 1, 2010.
Accepting Ocwen’s principal amount owing as of May 23, 2008 of $76,426.43, and applying a 6%
interest rate with a $831.88 monthly payment,3 with $50.59 going into escrow, the approximate
payoff on July 1, 2010, would be $65,373.12. The court will, therefore, set the balance owing on
July 1, 2010 at $65,373.12.
2) Punitive Damages
The court finds it not only appropriate to award punitive damages, but necessary. Ocwen
has given every indication that it is and will remain indifferent to the statutory significance of the
discharge injunction and to the express terms of the May 23, 2008 order, unless it is compelled to
take note. See Cherry, 247 B.R. 176, 189-90 (discussing cases within the Fourth Circuit in which
punitive damages for contempt, and violation of the discharge injunction, were in issue). 	As the
Cherry court points out, the standard by which courts assess the propriety of an award of punitive
damages varies, but tends to require some indication of “egregious conduct,” “malevolent intent,”
or “clear disregard of the bankruptcy laws” – in other words, some element indicative of a “specific
intent to violate an order or discharge injunction.” Under any of these measurements, Ocwen’s
intentional, unfounded, prolonged violation of the discharge injunction and this court’s order
warrants punitive sanctions.
3 Eight hundred thirty-one dollars and eighty-eight cents ($831.88) is the regular
contractual monthly payment. The debtors actually averaged eight hundred sixty-five dollars
and ninety-two cents ($865.92) each month during the period after May 23, 2008.
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An appropriate measure of punitive damages for Ocwen’s violation of the discharge
injunction and the court’s order of May 23, 2008 is a sanction in the amount of $66,300. 	This
amount represents $100 per day from September 12, 2008, which is the date on which Ocwen was
served with the debtors’ motion to show cause, through the date of entry of this order. 	These
damages will not accrue during the fourteen days following the date of entry of this order, but will
resume, if necessary, at $100 per day, as outlined below, if Ocwen does not fully comply with the
terms that follow. A punitive sanction of $100 per day for Ocwen’s actions over the duration of this
matter is commensurate with its offense. 	The significant total derives from the duration of the
offense, which was decidedly within Ocwen’s own control.
Accordingly, no later than fourteen (14) days from the date of this order, Ocwen Loan
Servicing, LLC shall pay FIFTEEN HUNDRED DOLLARS ($1500) in attorney’s fees and expenses
to DOUG WICKHAM, counsel for the debtors, P.O. Box 527, Raleigh, NC, 27602-0527.
No later than fourteen (14) days from the date of this order, Ocwen Loan Servicing, LLC
shall pay SEVEN HUNDRED FIFTY DOLLARS ($750) in attorney’s fees and expenses to the
standing chapter 13 trustee in this case, JOHN F. LOGAN, P.O. Box 61039, Raleigh, NC, 27661-
1039.
No later than fourteen (14) days from the date of this order, Ocwen Loan Servicing, LLC
shall pay TWO THOUSAND FIVE HUNDRED DOLLARS ($2,500) in compensatory damages and
expenses to CRAIG L. AND MONICA L. ADAMS, 2150 Highway 97, Zebulon, NC 27597.
No later than fourteen (14) days from the date of this order, Ocwen Loan Servicing, LLC
shall pay 	SIXTY-SIX 	THOUSAND THREE HUNDRED DOLLARS ($66,300), as a punitive
sanction, to CRAIG L. AND MONICA L. ADAMS, 2150 Highway 97, Zebulon, NC 27597.
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No later than fourteen (14) days from the date of this order, Ocwen Loan Servicing, LLC
shall provide proof to the debtors’ counsel, the trustee, and to the court that the following actions
have been taken:
1) 	Ocwen has reported to all three major credit reporting companies that the debtors’
loan with Ocwen was in bankruptcy from the debtors’ petition date through the date of discharge;
was current from the date of discharge; and remains current as of the date of this order;
2) 	Ocwen has adjusted its records to reflect that the debtors have a principal balance
remaining, as of July 1, 2010, of $65,373.12, to be paid at 6% interest, fixed rate, over the remaining
life of the loan.
In the event that Ocwen fails to comply with the payment of any of the damages awarded
herein within fourteen (14) days of the date of this order, said sum shall be applied as a setoff against
the amount owing to Ocwen and secured by the mortgage. Upon failure of Ocwen to comply with
such payments, the debtors will supply the court with a verified statement attesting to such failure
and the court will provide the debtors with an order to be recorded in the Wake County Register of
Deeds Office setting forth the set off and the new balance.
For each day after the expiration of fourteen (14) days after the date of entry of this order,
if any provision of this court’s order remains unsatisfied, additional punitive damages will be
assessed against Ocwen in the amount of $100 per day, payable to the Clerk of Court, 300
Fayetteville Street, Suite 209, P.O. Box 1441, Raleigh, NC 27602, until all terms of this order are
satisfied.
SO ORDERED.
END OF DOCUMENT
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