Nosek v. Ameriquest Mortgage Company et al

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UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
In re 	:
JACALYN S. NOSEK 	: 	Chapter 13
Debtor 	: 	No. 02-46025
______________________________:
JACALYN S. NOSEK ,
Plaintiff 	:
v. 	: 	A.P. No. 04-04517
AMERIQUEST MORTGAGE 	:
COMPANY, 	:
Defendant 	:
______________________________:
MEMORANDUM OF DECISION ON REMAND FROM UNITED STATES
DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
This matter comes before the Court on remand from the United States District Court
for the District of Massachusetts (“District Court”) following an appeal of this Court’s
decision of June 30, 2006 by the Defendant Ameriquest Mortgage Company (“Ameriquest”).
The District Court remanded the case for further proceedings. Ameriquest Mortgage Co. v.
Jacalyn S. Nosek, 2006 WL 3262629 (D. Mass. 2006). Following the District Court’s decision,
the parties submitted supplemental briefs on the issues now before the Court on remand.
1. Factual Background
The Court’s findings of fact were upheld by the District Court as not clearly erroneous
and are briefly summarized below. 1 Ameriquest v. Nosek, 2006 WL 3262629 at *1. The
Debtor, Jacalyn S. Nosek (“Nosek”) executed a $90,000.00 adjustable rate note (“Note”)
with Ameriquest secured by a mortgage on her principal residence. Id. When Nosek began
missing payments on the Note, Ameriquest instituted foreclosure proceedings. Id. 	To halt
1 For a more detailed discussion of the facts, see the published decisions of this Court and the District
Court. In re Nosek, 2006 WL 1867096, *1-5 (Bankr. D. Mass. 2006); Ameriquest v. Nosek, 2006 WL
3262629 at *1-2.
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the foreclosure, Nosek filed for bankruptcy under Chapter 13 of the United States
Bankruptcy Code, 11 U.S.C. § 101 et al.. See id. Under Chapter 13, Nosek was permitted to
cure her pre-petition arrearage over sixty months through her confirmed Plan and to make
her ongoing post-petition payments directly to Ameriquest. Id. When Ameriquest received
a payment, whether it was from the Chapter 13 Trustee on account of the arrears or Nosek
herself for the then currently due installment, Ameriquest would apply the funds to the
oldest outstanding contractual obligation due under the Note. Id. at *2. If the payment was
insufficient to satisfy a contractual obligation in full, Ameriquest would place the funds in a
“suspense” account. See id. In theory, the suspense account acted like a collection bucket to
hold the payments until there were enough funds to satisfy one in full. Id.
The Court noted several flaws with Ameriquest’s accounting system and found an
overall failure to properly and timely account for Nosek’s payments. See generally Nosek, 2006
WL 1867096. First, the process did not distinguish between pre-petition and post-petition
payments; it simply looked to satisfy the oldest contractual obligation first. Id. at *3. Thus,
when a payment was received from the Chapter 13 Trustee or from Nosek, it was matched
against the oldest outstanding contractual obligation. If the payment did not satisfy that
contractual obligation in full, the funds were placed in a “suspense” account Id. at *12.
Second, even when the total funds in the suspense account were sufficient to satisfy a
contractual obligation in full, Ameriquest did not necessarily post them in a timely manner.
Id. at *3. Third, the accounting system, and the payment history Ameriquest generated for
the rest of the world, gave the impression that Nosek was delinquent in her payments. Id. at
*4, *11. It did not show that Nosek was current, something she claimed prevented her from
refinancing her Note with another lender. Id. at *3- 4, *11. Although Ameriquest claimed to
have manually credited Nosek with having made the payments and internally considered her
current, nothing in its accounting system, or on the payment history provided to her,
reflected this. Id.
2. Procedural Background
The Court found that Ameriquest violated the Real Estate Settlement Procedures Act
(“RESPA”), the Massachusetts Consumer Protection Act (“Chapter 93A”), and the
Massachusetts implied covenant of good faith and fair dealing. Nosek, 2006 WL 1867096 at
*18. Only nominal damages of $1.00 and $25.00 were awarded on the RESPA and Chapter
93A violations, but emotional distress damages of $250,000.00 were awarded for the breach
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of the implied covenant of good faith and fair dealing. Id. As part of its holding on the
implied covenant of good faith and fair dealing, the Court found that Ameriquest had an
obligation to properly and timely credit both pre-and-post-petition payments and that its
failure to do so contravened the terms of Nosek’s confirmed Chapter 13 Plan, and
specifically 11 U.S.C. G 1322(b). Id. at *13. “The purpose of a Chapter 13 plan is to allow a
debtor to pay arrears during the pendency of the plan while continuing to make payments at
the contract rate. Payments made during the pendency of the Chapter 13 plan should have
been applied by [the lender] to the current payments [then] due and owing with the arrearage
amounts [received from the Chapter 13 Trustee] to be applied to the back payments. [The
lender] cannot use its accounting procedures to contravene the terms of a confirmed
Chapter 13 plan and the Bankruptcy Code.” Id. (quoting In re Rathe, 114 B.R. 253, 257
(Bankr. D. Idaho 1990)).
Thereafter, Ameriquest appealed, arguing inter alia that the Bankruptcy Code preempted
Nosek’s recovery under all three of these counts. 2 Ameriquest v. Nosek, 2006 WL 3262629 at
*1. The District Court held that “the Bankruptcy Code preempts both the state claim under
the implied covenant of good faith and fair dealing and the claim under section 2605(e) of
[RESPA]. In addition, the claim under [Chapter 93A] is remanded for consideration on the
merits. Accordingly, Ameriquest’s appeal is allowed and the case is remanded for further
proceedings consistent with this holding.” Id. at *9.
In its appeal, Ameriquest specifically challenged the Court’s Section 1322(b) finding. See
Ameriquest’s Opening Brief, p. 22-25 ; Ameriquest’s Reply Brief, p. 6-13. See also Designation of
Record and Statement of Items to be Presented on Appeal by Ameriquest Mortgage
Company From Order of the Bankruptcy Court Entered June 30, 2006; Docket #124, p. 3, ¶
11, Dated: 7/20/06 (including “whether the Bankruptcy Court erred in ruling that a
mortgage servicing company such as Ameriquest is required to internally account for post-
petition payments in the same manner provided for in a Chapter 13 plan” as one of the
issues on appeal). It devoted several pages in its briefs arguing that its accounting practices
did not violate the Bankruptcy Code or Nosek’s Chapter 13 Plan. Id.
a cornerstone of the Bankruptcy Court’s ruling that Ameriquest breached the
covenant of good faith and fair dealing (under Massachusetts law) was the
Court’s view that the manner in which Ameriquest credited payments
2 At Ameriquest’s request, the Court hereby takes judicial notice of its Opening and Reply Briefs to the
District Court, which will be hereinafter cited to as such.
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violated the Plan. That view was error….The acceptance of [a] payment and
placement of [that] payment in an internal suspense account is not violative
of the Debtor’s cure rights under [Section] 1322(b)(5)…The Bankruptcy
Court had the erroneous belief that Ameriquest was required to apply post-
petition payments in accordance with the terms of the Plan. It then used that
belief to reach the conclusion that Ameriquest “contravened the terms of a
confirmed Chapter 13 plan” and therefore violated the covenant of good
faith and fair dealing.”
See Appellant’s Opening Brief, p. 22-25 (internal citations omitted).
On this issue, the District Court held that
The Bankruptcy Court found a violation of [Section] 1322(b), which
regulates the modification of the Plan and provides the cures for any
defaults. The Bankruptcy Court then grafted onto the Plan an implied
covenant of good faith and fair dealing, a state remedy. This was error.
Section 105 of the Code provides the proper mechanism for the Bankruptcy
Court to remedy specific violations of the Code. If the Bankruptcy Court is
to assess damages, it must not look to the state law theory employed in this
case, but must do so under the equitable powers granted under the Code.
Ameriquest v. Nosek, 2006 WL 3262629 at *7 (internal citations omitted).
3. Discussion
A. Remand of Chapter 93A Claim
The District Court remanded the Chapter 93A claim “for reconsideration as to
whether the Bankruptcy Code preempts such state claims, and if that court answers in
the negative, for a determination of the claim on the merits.” Ameriquest v. Nosek, 2006
WL 3262629 at *9. The Court declines to decide whether Chapter 93A is preempted by
the Bankruptcy Code because under the facts of this case, Nosek cannot establish a
claim on the merits. Nosek’s Chapter 93A claim cannot stand on its own in the absence
of the RESPA violation, which was overturned on appeal. The Court found that
Ameriquest had violated section 2605(e) of RESPA, a federal consumer protection
statute, based on its failure to respond to Nosek’s qualified written request within the
time specified by the statute. Nosek, 2006 WL 1867096 at *5. Under Massachusetts law,
a violation of a federal consumer protection statute is a per se violation of Chapter 93A.
904 M ASS . CODE R EGS . 3.16(4) (2006). It was on this basis alone that the Court found
that Ameriquest had also violated Chapter 93A. Nosek, 2006 WL 1867096 at *8. It was
a per se violation based solely on the RESPA finding. Id.. See also 10/25/05 Summary
Judgment Hearing; Docket #39. Nosek did not plead, nor did the Court find, facts to
support an independent violation of Chapter 93A, and even if there were, the Court
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found that Nosek failed to prove any actual damages from Ameriquest’s failure to
respond to her request. Nosek, 2006 WL 1867096 at *8. For these reasons, this is not
the appropriate case for the Court to determine whether Chapter 93A is preempted by
the Bankruptcy Code because there is no longer a means of sustaining a per se violation
and there are no facts to support an independent one. Therefore, Nosek’s claim under
Chapter 93A is hereby dismissed.
B. Remedy for Section 1322(b) Violation
The District Court affirmed the Court’s Section 1322(b) finding and merely disagreed
with the remedy applied to it. See Ameriquest v. Nosek, 2006 WL 3262629 at *7. The state
remedy employed by the Court (i.e. implied covenant of good faith and fair dealing)
overlapped those provided for in the Bankruptcy Code, namely 11 U.S.C. G 105(a). Id. It
was preempted and the Court should have used its own equitable powers under Section
105(a) to redress the Section 1322(b) violation. Id.
Section 105(a) of the Bankruptcy Code provides:
The court may issue any order, process, or judgment that is necessary or appropriate
to carry out the provisions of this title. No provision of this title providing for the
raising of an issue by a party in interest shall be construed to preclude the court
from, sua sponte, taking any action or making any determination necessary or
appropriate to enforce or implement court orders or rules, or to prevent an abuse of
process.
11 U.S.C. § 105(a).
“Section 105(a) empowers the bankruptcy court to exercise its equitable powers-where
‘necessary’ or ‘appropriate’- to facilitate the implementation of other Bankruptcy Code
provisions.” Bessette v. Avco Financial Services, Inc., 230 F.3d 439, 444 (1st Cir. 2000) (internal
citations omitted). In Bessette, the First Circuit recognized the considerable (but not
unlimited) discretion conferred on bankruptcy courts under Section 105(a) and held that a
debtor could recover damages under that section for a creditor’s violation of the discharge
injunction, 11 U.S.C. G 524. See id. Bankruptcy and district courts relying on Bessette have
extended the reach of Section 105(a) to remedy other Code violations, including Section
1322(b), not just Section 524. See e.g., In re Harris, 312 B.R. 591 (N.D. Miss. 2004) (holding
that Section 105(a) empowered the bankruptcy court to afford debtor relief when creditor
violated Section 1322(b)(5)); In re Mooney, 340 B.R. 351 (Bankr. E.D. Tex. 2006) (recognizing
that “there is no logical reason why the same [Section 105 used to remedy Section 524
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violations] is not also available to enforce other statutory provisions”). Even Ameriquest
recognizes the reach of Section 105, conceding on appeal that “if Ameriquest had in fact
taken actions that violated the provisions of Nosek’s Plan…such actions may be
sanctionable under Section 105(a) of the Bankruptcy Code.” See Ameriquest’s Reply Brief, p. 6.
It is well settled that a debtor can recover under Section 105 for violation of specific
Code provisions, including Section 1322(b). The next question is to what forms of relief is
the debtor entitled. Section 105 provides bankruptcy courts with statutory contempt
powers. Bessette, 230 F.3d at 445. This includes the power to sanction a party, which
inherently includes the power to award monetary relief to the debtor in the form of actual
and punitive damages. See id. In line with this interpretation of statutory contempt powers,
bankruptcy courts across the country have awarded actual damages under Section 105. See id.
Bankruptcy courts have even awarded emotional distress damages as coming within the
purview of the actual damages recoverable under Section 105. See e.g., In re Curtis, 322 B.R.
470, 486 (Bankr. D. Mass. 2005) (awarding “compensatory damages” for stress, weight loss,
vomiting, and depression); In re Barry, 330 B.R. 28, 38 (Bankr. D. Mass. 2005) (awarding
“emotional distress damages” for violation of discharge injunction); In re Manzanares, 345
B.R. 773 (Bankr. S.D. Fla. 2006) (same); In re Meyers, 344 B.R. 61 (Bankr. E.D. Pa. 2006)
(same); In re Feldmeir, 335 B.R. 807 (Bankr. D. Or. 2005) (same). See also Fleet Mortgage Group
v. Kaneb, 195 F.3d 265 (1st Cir. 1999) (upholding award for emotional distress as within the
“actual damages” recoverable for violation of the automatic stay under 11 U.S.C. § 362(h)).
Furthermore, when faced with this question, the First Circuit declined to resolve it. See In re
Rivera Torres, 432 F.3d 20, 26 n.6 (1st Cir. 2005) (limiting the issue to whether emotional
distress damages were precluded against the government by sovereign immunity under 11
U.S.C. G 106 and declining to decide whether they are recoverable in general against a party
under Section 105). Bankruptcy courts have also awarded punitive damages as a sanction
under Section 105. Bessette, 230 F.3d at 445. See e.g., Curtis, 322 B.R. at 486 (awarding
punitive damages for violation of discharge injunction and automatic stay); In re Al-Jiboury,
344 B.R. 218, 222 (Bankr. D. Mass. 2006) (awarding punitive damages). In this regard,
courts are cognizant that “what would be sufficient to deter one creditor may not even be
sufficient to gain notice from another.” Curtis, 322 B.R. at 486.
Consistent with the District Court’s decision and the relevant case law, the Court
finds that Nosek is entitled to actual damages for her emotional distress as well as punitive
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damages under Section 105(a) for Ameriquest’s violation of Section 1322(b). The Court
finds that its previous award of $250,000.00 for Nosek’s emotional distress is appropriate
and hereby awards that amount under Section 105(a). The Court already found in its
previous decision that Ameriquest’s inability to properly and timely apply Nosek’s payments
caused her emotional distress, which was supported by testimony from herself, her therapist,
her psychiatrist, her primary care physician, and her pastor. Nosek, 2006 WL 1867096 at *15.
Nosek testified that upon seeing her incorrect payment history:
I felt like somebody hit me in the stomach …and you know, sucker-punched
me…so when I saw that [this payment history] doesn’t represent my
payments post-petition,…and to get another mortgage, they need to see that
I was making the correct payments…and this doesn’t show that. I was
devastated. I felt there was no hope…I became tremendously depressed and
really since then I haven’t been able to get my feet under me…
Id.
The Court was outraged by Ameriquest’s actions and found that its failure to maintain
accurate accounts exacerbated Nosek’s emotional distress, something this Court can remedy
by assessing damages under Section 105. The Court cannot award Nosek other actual
damages because the Court already found that she failed to prove any. See Nosek, 2006 WL
1867096 at *6, 15 (explaining that Nosek failed to proffer any evidence that Ameriquest’s
inaccurate accounting prevented her from refinancing her Note on more favorable terms).
As for punitive damages, the Court finds that Ameriquest’s accounting practices are
wholly unacceptable for a national mortgage lender and hereby awards $500,000.00 under
Section 105(a). The Court considered punishing Ameriquest’s conduct in its prior decision,
but was precluded from doing so because the remedy was erroneously based on the implied
covenant of good faith and fair dealing, under which punitive damages are not available.
Nosek, 2006 WL 1867096 at *15 (stating that “punitive damages are not recoverable although
the concept is tempting to the Court considering [Ameriquest’s] egregious behavior”).
In awarding punitive damages, the Court notes that “Ameriquest is one of the largest
and oldest home mortgage lenders and loan servicers in the U.S. It services home loans in
48 states. As of July 2006, Ameriquest service[d] approximately 437,000 loans. Of that,
nearly 7,200 involve borrowers that are currently Chapter 13 debtors.” Ameriquest’s Opening
Brief, p. 4. Ameriquest is a national mortgage company, which supports the contention that
the amount of punitive damages must be significant enough to garner its attention. See
Ameriquest’s Opening Brief, p. 29; Curtis, 322 B.R. at 486. Furthermore, Ameriquest uses the
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same accounting system in servicing all of its Chapter 13 debtors, which shows how
widespread the problem could potentially be.
Ameriquest admitted that “without question, Chapter 13 serves as a comprehensive
statutory scheme for treatment of home mortgage claims in Chapter 13 cases and the
specific relationship between Nosek, as debtor, and Ameriquest, as her home mortgage
lender.” Ameriquest made this point in arguing to the District Court that the Bankruptcy
Code preempted state law remedies. See Ameriquest’s Opening Brief, p. 19. Notwithstanding
this, Ameriquest argued that Chapter 13 did not require lenders to change their accounting
procedures just because a debtor filed for bankruptcy. “If Nosek is correct that Ameriquest
was required to apply payments in a manner different from the underlying contracts,
Ameriquest (and the other mortgage servicers) would be forced to constantly monitor each
debtor’s bankruptcy case, readjust their accounting methodologies, and continually
recalculate how payments should be applied.” See Ameriquest’s Reply Brief, p. 13. That is
exactly the point; Ameriquest must adjust its accounting practices because of Nosek’s
bankruptcy. The Bankruptcy Code is not a cafeteria; lenders do not decide which of its
provisions apply to them. Once a debtor files for Chapter 13, the Bankruptcy Code, and
only the Bankruptcy Code, dictates the protections (such as the preemption of state law
remedies) afforded to the lender and the obligations (such as the separate accounting for
pre-and-post petition payments) required of them.
Ameriquest next argued that “because Ameriquest cannot use its computer system to
track bankruptcy payments and because no software exists to track such payments,
Ameriquest must account for payments from Chapter 13 debtors manually.” See Ameriquest’s
Reply Brief, p. 16. Ameriquest offers this as an apparent excuse as to why Nosek’s payment
history was inaccurate. The Court is unpersuaded. Even if Ameriquest must manually
account for these payments (though the Court is not convinced that a computer system
could not be developed with the appropriate investment of time and money), Ameriquest is
not excused from doing it right, even if it is an administrative burden. It is not sufficient
that Ameriquest only internally accounted Nosek with having made the payments and
internally considered her current. This must be reflected on Ameriquest’s external payment
history, which is shared with the debtor and the outside world and which is usually necessary
for a refinancing, something a lender of Ameriquest’s experience should recognize. In sum,
Ameriquest is simply unable or unwilling to conform its accounting practices to what is
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required under the Bankruptcy Code, something this Court can encourage by assessing
punitive damages under Section 105(a).
4. Conclusion
The Court hereby dismisses Nosek’s claim under Chapter 93A and awards
$250,000.00 in emotional distress damages and $500,000.00 in punitive damages under
Section 105(a) for Ameriquest’s violation of Section 1322(b) of the Bankruptcy Code. A
separate order shall issue.
Dated: March 6, 2007 	By the Court,
_________________________
Joel B. Rosenthal
United States Bankruptcy Judge
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