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.
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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When Nosek began missing payments on the Note, Ameriquest instituted foreclosure
proceedings. Id. 	To halt 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
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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 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. δ 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
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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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
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
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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 MASS . CODE REGS . 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 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. δ
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)
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(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. δ 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 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. §
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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. δ 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 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
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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 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
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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 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,
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_________________________
Joel B. Rosenthal
United States Bankruptcy Judge
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