North Carolina District Court Reverses Bankruptcy Court’s Order in Favor of Mortgage Servicer

North Carolina District Court Reverses Bankruptcy Court’s Order in Favor of Mortgage Servicer

On July 6, 2021, the U.S. District Court for the Eastern District of North Carolina reversed the order delivered by the U.S. Bankruptcy Court for the Eastern District of North Carolina. Newrez, LLC v. Beckhart, No. 7:20-cv-00192-BO, 2021 U.S. Dist. LEXIS 125293, at *1 (E.D.N.C. July 6, 2021). The bankruptcy court’s order held the mortgage servicer and the holder of the mortgage note, liable for civil contempt as they failed to abide by the terms of the individual debtors’ confirmed chapter 11 plan.

The case surrounds the Chapter 11 bankruptcy plan’s treatment of the mortgage servicer’s secured claim. The debtor filed a voluntary chapter 11 bankruptcy petition in the year 2009. At the time they owned a beach house subject to a mortgage with a prepetition arrearage in excess of $22,000 arising from ten months of missed payments. However, the plan did not address the same and made no provision for the repayment of the prepetition arrearage or even for the post-petition payments that became due prior to confirmation. In 2010, the mortgage servicer raised an objection, and the same was confirmed. Soon after, the debtors began making payments under the plan. The mortgage servicer began servicing the mortgage in 2014 and it treated the loan as if it were in default from 2014 through 2019, basing the same on the significant uncured arrearage. This was challenged by the debtors as they claimed that the loan was currently based on the terms of the plan and that the mortgage servicer was wrong in saying that the debtors were in default.

Thereafter, in January 2020, the debtors filed a motion in bankruptcy court and alleged that the mortgage servicer and the mortgage note holder should be held liable in civil contempt for failing to comply with the terms of the plan. The debtors also sought significant sanctions. Following an evidentiary hearing, the bankruptcy court held the mortgage servicer and the mortgage note holder in civil contempt and assessed monetary sanctions in excess of $110,000. The same was appealed by the mortgage holder and was reversed by the district court.

The district court referred to the standard for civil contempt laid down by the Supreme Court, “A creditor may be held in civil contempt for violation of a bankruptcy court’s order if there is no fair ground of doubt as to whether the order barred the creditor’s conduct.”[1] And civil contempt would only be appropriate where there is “no objectively reasonable basis for concluding that the creditor’s conduct might be lawful.”[2] It further held that there was the reasonable ground of doubt for whether the plan required the mortgage servicers to treat the mortgage as current and not in default. It also observed that the plan created additional confusion as it purported to leave the rights of the mortgage holder unmodified except as expressly provided in the plan, but it did not expressly provide for any treatment of the arrearage or post-petition payments. Lastly, the district court noted that the mortgage servicer had hired an outside counsel which indicated that it acted in good faith in adopting a reading of the plan “that seemed consistent with the contractual terms of the loan”

The ruling of the district court highlights the importance of seeking competent legal advice where there is a question about the interpretation of bankruptcy court’s orders on the creditor’s claims.

[1] Taggart v. Lorenzen, 139 S. Ct. 1795 at 1799 (2019)

[2] Id.