Wells Fargo, Ocwen, Others Sanctioned for Violating Ch. 7 Discharge

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By Diane Davis

Dec. 5 — Wells Fargo, Ocwen, OneWest, and other secured creditors must pay a Chapter 7 debtor $7,000 in emotional distress damages, and $39,142 in punitive damages for willfully violating a debtor’s discharge order ( In re Dogar-Marinesco , 2016 BL 399968, Bankr. S.D.N.Y., No. 09-35544 (CGM), 12/1/16 ).

Judge Cecelia G. Morris of the U.S. Bankruptcy Court for the Southern District of New York Dec. 1 concluded that the five creditors, including RAS Boriskin and Duane Morris, harassed the debtors for years by filing an illegal foreclosure action against the debtors’ property and sending dozens of collection letters after their debt had been discharged in bankruptcy.

The creditors and their attorneys “cavalierly” violated the bankruptcy court’s discharge injunction over a period of years and should be sanctioned as a result, the court said.

The case is noteworthy for the large punitive damages award, plus emotional distress damages, especially in a case where the debtors weren’t represented by counsel.

Debtors Jon Dogar-Marinesco and his wife Manuela Mihailescu filed for Chapter 7 bankruptcy in which their nonexempt assets are liquidated by a trustee and the proceeds are distributed to creditors. They received a discharge of all of their debts in 2009.

The debtors owned two adjacent properties as tenants by the entireties, but stated their intention to surrender the mortgaged property. Subsequently, OneWest Bank FSB received relief from the automatic stay to foreclose on the mortgaged property.

The Chapter 7 trustee sold the non-mortgaged property back to the debtors. Unsecured creditors were paid a dividend of 66.3 percent from this sale, and the case was closed.

Six years later, Wells Fargo filed a second foreclosure action against the mortgaged property but listed the wrong property and failed to send notice to the debtors at the proper address. The debtors attempted to correct these errors, but nothing worked.

The state court ruled that the debtors’ discharge wasn’t violated by the foreclosure action without addressing the fact that Wells Fargo had no valid security interest. Wells Fargo didn’t have any legal right to take action against the non-mortgaged property, and its allegation that it was entitled to foreclose on that property violated the discharge injunction, the court said.

The debtors received more than 100 calls and notices for collection of the discharged debt in the past five years.

The debtors alerted the secured creditors to their “egregious violations,” but they insisted that they had done nothing wrong, the court said. Instead of taking steps to correct the problems, the creditors and their attorneys wrote threatening letters to the debtors, who were representing themselves. The court found evidence that the creditors and their attorneys received notice of the debtors’ bankruptcy and discharge on at least 15 different occasions and acknowledged the same yet failed to correct the violations.

Bankruptcy Code Section 524 provides that a bankruptcy discharge “operates as an injunction against the commencement or continuation of . . . an act, to collect, recover or offset any such debt as a personal liability of the debtor,” according to Bloomberg Law: Bankruptcy Treatise, pt. II, ch. 64 (D. Michael Lynn et al. eds., 2016).

Courts are split on the types of damages that may be awarded for willful violation of the discharge injunction, but a “majority of courts find that punitive damages are an appropriate remedy for violations of the Section 524 discharge injunction,” the Treatise states.

Damages for emotional distress caused by a willful violation are rare, the court said. Emotional distress damages are warranted in this case, the court said, because the debtors spent seven months battling secured creditors in the foreclosure action in state court without any reprieve.

The court also awarded punitive damages to “deter such behavior in the future” so that secured creditors and their attorneys would comply with their duty to actively work to "`un-do’ any known violations as soon as possible.” An award of $500 per discharge violation was an appropriate amount for punitive damages, especially where the violations were consistent and the creditor had knowledge of the stay, the court said.

Judge Morris is an editor of Bloomberg Law: Bankruptcy Treatise.

Debtors Jon Dogar-Marinesco and Manuela Mihailescu represented themselves pro se.

William C. Heuer of Duane Morris LLP, New York, N.Y., represented creditor Duane Morris; Schuyler B. Krauss of Hinshaw & Culbertson LLP, represented creditor Ocwen Loan Services; Michael Samuels and Joseph Battista of RAS Boriskin, Westbury, N.Y., represented RAS Boriskin; Nicole E. Schiavo of Logan Lovells, New York, N.Y., represented OneWest Bank n/k/a CIT Bank; Diana Eng of Blank Rome, New York, N.Y., represented Wells Fargo Bank

To contact the reporter on this story: Diane Davis in Washington, D.C. at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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