Amicus Curiae Brief — Jan M. Sensenich, Petitioner v. PHH Mortgage Corporation

No. 21-1322

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In The

Supreme Court of the United States

---------------------------------♦--------------------------------JAN M. SENSENICH, CHAPTER 13 TRUSTEE,

Petitioner,

v.

PHH MORTGAGE CORPORATION,

Respondent.

---------------------------------♦--------------------------------On Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Second Circuit

---------------------------------♦--------------------------------MOTION FOR LEAVE TO FILE BRIEF AS

AMICUS CURIAE AND BRIEF OF THE

NATIONAL ASSOCIATION OF CHAPTER

THIRTEEN TRUSTEES AS AMICUS CURIAE

IN SUPPORT OF THE PETITIONER

---------------------------------♦--------------------------------HENRY E. HILDEBRAND, III

Chapter 13 Standing Trustee

Counsel of Record

JAMES M. DAVIS

Staff Attorney

P.O. Box 340019

Nashville, TN 37203-0019

615-244-1101

hank@ch13bna.com

Counsel for the NACTT

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COCKLE LEGAL BRIEFS (800) 225-6964

WWW.COCKLELEGALBRIEFS.COM

1

MOTION OF THE NATIONAL ASSOCIATION

OF CHAPTER THIRTEEN TRUSTEES FOR

LEAVE TO FILE BRIEF AS AMICUS CURIAE

The National Association of Chapter 13 Trustees

(NACTT), a nonprofit organization of Chapter 13 bankruptcy trustees and practitioners, respectfully requests leave under Supreme Court Rule 37 to file the

accompanying brief as amicus curiae.

The NACTT has obtained the consent of the Petitioner, Jan M. Sensenich, to the filing of the brief, but

the Respondent, PHH Mortgage Corporation, has not

consented.

This case presents a question of the authority of

bankruptcy courts to impose noncompensatory sanctions for repeated noncompliance with mortgage servicing requirements, including noticing requirements

under Rule 3002.1. The NACTT’s member trustees

disburse funds to mortgage creditors every month in

accordance with confirmed Chapter 13 plans and in

reliance on the notices under Rule 3002.1. The

NACTT’s member trustees, moreover, practice primarily in bankruptcy courts and thus have strong interests

in questions of the authority of those courts.

The NACTT offers expertise and a national perspective on these issues and submits that its input may

assist the Court in its consideration of this petition. As

a general matter, moreover, “it is preferable to err on

the side of granting leave” to file an amicus curiae brief.

See Neonatology Associates, P.A. v. Comm’r of Internal

Revenue, 293 F.3d 128, 133 (3d Cir. 2002).

2

WHEREFORE, the premises considered, the

NACTT requests the Court approve the filing of the

accompanying brief as amicus curiae.

Dated: May 3, 2022

Respectfully submitted,

HENRY E. HILDEBRAND, III

Chapter 13 Standing Trustee

Counsel of Record

JAMES M. DAVIS

Staff Attorney

P.O. Box 340019

Nashville, TN 37203-0019

615-244-1101

hank@ch13bna.com

Counsel for the NACTT

i

TABLE OF CONTENTS

Page

TABLE OF CONTENTS ......................................

i

TABLE OF AUTHORITIES .................................

ii

STATEMENT OF THE IDENTITY OF THE

AMICUS CURIAE, ITS INTEREST, AND THE

SOURCE OF ITS AUTHORITY .......................

1

SUMMARY OF THE ARGUMENT .....................

2

ARGUMENT ........................................................

4

I.

II.

III.

Bankruptcy Rule 3002.1 is crucial for

Chapter 13 plans that involve residential

mortgages ..................................................

4

The Circuit Court below erred in holding

that Rule 3002.1 authorizes only compensatory relief................................................

7

The Circuit Court’s error is harmful ......... 11

CONCLUSION..................................................... 13

ii

TABLE OF AUTHORITIES

Page

CASES

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384

(1990) .......................................................................10

Gaffney v. Riverboat Servs. of Indiana, Inc., 451

F.3d 424 (7th Cir. 2006) ...........................................10

In re Blanco, 633 B.R. 714 (Bankr. S.D. Tex.

2021) ........................................................................12

In re Jones, 366 B.R. 584 (Bankr. E.D. La. 2007) .........6

In re Jones, No. 03-16518, 2007 WL 2480494

(Bankr. E.D. La. Aug. 29, 2007)...............................12

In re Jones, No. 03-16518, 2012 WL 1155715

(Bankr. E.D. La. Apr. 5, 2012) ...................................6

In re Rodriguez, 629 F.3d 136 (3d Cir. 2010) ...............6

Nat’l Hockey League v. Metro. Hockey Club, Inc.,

427 U.S. 639 (1976) ...................................................9

Reich v. Cambridgeport Air Sys., Inc., 26 F.3d

1187 (1st Cir. 1994) .................................................10

Saccameno v. U.S. Bank, N.A., 943 F.3d 1071

(7th Cir. 2019)...................................................... 6, 12

Sossaman v. Texas, 563 U.S. 277 (2011) .......................7

Tanzin v. Tanvir, 141 S. Ct. 486 (2020) ........................7

Update Art, Inc. v. Modiin Pub., Ltd., 843 F.2d 67

(2d Cir. 1988) .............................................................8

Wells Fargo Bank, N.A. v. Jones, 391 B.R. 577

(E.D. La. 2008) ...........................................................6

iii

TABLE OF AUTHORITIES—Continued

Page

STATUTES AND RULES

11 U.S.C. § 102(3) ........................................................10

11 U.S.C. § 1322(b)(2) ...................................................5

11 U.S.C. § 1322(b)(5) ..................................... 2, 5, 6, 12

Fed. R. Bankr. P. 3002.1 ...................................... passim

Fed. R. Bankr. P. 3002.1(i) .................................. passim

Fed. R. Bankr. P. 3002.1 advisory comm. note to

2011 adoption ............................................................6

Fed. R. Civ. P. 37 ........................................................ 8, 9

Fed. R. Civ. P. 37(b)(1) ...................................................9

Fed. R. Civ. P. 37(c)(1) ...................................................9

Supreme Court Rule 37 ................................................1

OTHER AUTHORITIES

John Rao, Fresh Look at Curing Mortgage Defaults in Chapter 13, Am. Bankr. Inst. J., Feb.

2008 ...........................................................................5

Kara Bruce, Closing Consumer Bankruptcy’s

Enforcement Gap, 69 Baylor L. Rev. 479

(2017) .......................................................................12

Keith M. Lundin, Lundin on Chapter 13 ........... 5, 6, 11

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STATEMENT OF THE IDENTITY OF

THE AMICUS CURIAE, ITS INTEREST,

AND THE SOURCE OF ITS AUTHORITY

The National Association of Chapter 13 Trustees

(NACTT) is a nonprofit organization of Chapter 13

bankruptcy trustees and practitioners.1 The NACTT’s

member trustees, whose interests the NACTT represents, play a vital role in the implementation of Chapter 13 plans, receiving payments from debtors and

distributing those payments in accordance with confirmed plans.

The NACTT’s members are regular practitioners

and parties in bankruptcy courts and rely on the authority of those courts. They thus have strong interests in questions about bankruptcy courts’ powers to

ensure compliance by all parties with the rules for

bankruptcy notices and with the requirements for

properly applying payments under confirmed Chapter 13 plans.

The petitioner, Trustee Jan M. Sensenich, has consented to the filing of this brief, but the respondent,

PHH Mortgage Corporation, has not consented. The

1

Pursuant to Supreme Court Rule 37, the NACTT states

that notice was given and that the Petitioner has consented to the

filing of this brief, but that the Respondent has not. The NACTT

further states that no counsel for a party authored this brief in

whole or in part and that neither counsel for a party nor any party

made a monetary contribution intended to fund the preparation

or submission of the brief. The NACTT is a nonprofit association

and has used its own resources in preparing this brief.

2

NACTT is filing, along with this proposed brief, a request for leave to file it.

---------------------------------♦---------------------------------

SUMMARY OF THE ARGUMENT

Bankruptcy courts need the power to respond appropriately when confronted with systemic failures in

the servicing of mortgage loans during bankruptcy

cases. These failures threaten the fresh start that the

Bankruptcy Code promises to debtors who attempt to

cure and maintain mortgage payments on their homes

under Chapter 13 plans. The decision below would

strip courts of authority granted by the Rules of Bankruptcy Procedure to support the requirements of the

Bankruptcy Code.

A key feature of Chapter 13 of the Bankruptcy

Code is the power, codified in § 1322(b)(5), to cure a

mortgage default over time while maintaining the regular payments on the claim. Bankruptcy Rule 3002.1

supports the Congressional desire to allow families in

arrears on their mortgages to keep their homes, by

mandating that lenders provide notices of postpetition

payment changes and notices of any fees, costs, or

charges incurred during the case, ensuring that all

parties are aware of the mortgage status and can see

the records that will survive bankruptcy. Before the

adoption of Rule 3002.1, a debtor could diligently complete payments under a Chapter 13 plan only to find

that the mortgagee had misapplied payments or a new

3

mortgage default had arisen during the plan, undermining the success achieved.

Consistent with the importance of the Rule, Rule

3002.1 includes robust authority to impose sanctions

for noncompliance. It specifically permits courts to exclude evidence of information not properly noticed under the Rule, and it authorizes awards of reasonable

costs and attorney’s fees caused by a creditor’s noncompliance. It also provides open-ended authority to

award “other appropriate relief.” Fed. R. Bankr. P.

3002.1(i).

Despite the broad language, the Circuit Court

below adopted a restrictive interpretation of this authority, concluding that the sanctions specifically authorized by the Rule involve only compensatory relief

and that the “other appropriate relief ” must be limited

to similar relief. That holding is at odds with the text

of the Rule. The Rule does not contain an extensive

list of specific sanctions from which to derive a common thread—at most, it involves two specific items.

And one of those is not even clearly limited to compensatory relief. The structure of the Rule, moreover,

is fully consistent with broader authority. Courts have

construed similar language in statutory text in just

this way.

The holding of the Circuit Court on this important

question of federal law undermines bankruptcy court

authority to address systemic noncompliance with

the requirements of properly servicing mortgages during Chapter 13 cases. This Court’s intervention is

4

necessary to avoid the perception that creditors face

little financial risk from neglecting the systems involved.

---------------------------------♦---------------------------------

ARGUMENT

The Bankruptcy Court imposed sanctions on PHH

based on its systemic disregard of procedures and orders in Chapter 13 cases. The requirements that PHH

ignored are important; they are crucial to the success

of many Chapter 13 plans. Yet the Circuit Court below

concluded that the Bankruptcy Court had almost no

power to sanction PHH for its noncompliance (even

though the same court had previously found similar

violations by PHH). This holding sends the wrong

message. Material sanctions are not a routine matter,

but parties assume that systemic indifference to the

rules will be costly. The decision below undermines

that assumption and thus discourages the investments needed to comply with the Bankruptcy Code

and Rules.

I.

Bankruptcy Rule 3002.1 is crucial for

Chapter 13 plans that involve residential

mortgages.

Bankruptcy Rule 3002.1 is critical to the success

of Chapter 13 cases that involve residential mortgages.

It requires mortgage claimholders to provide information needed to keep the claims current during a

Chapter 13 plan. Without that information, debtors

5

might dutifully make payments under a Chapter 13

plan over a three- to five-year period only to learn, at

the conclusion of the case, that the mortgage servicer

had not accurately accounted for payments or had assessed additional, undisclosed costs or fees and that

the claim had fallen behind. The Rule is thus crucial to

the “fresh start” promised by Chapter 13.

Though the Bankruptcy Code protects loans secured by a debtor’s principal residence from most types

of modification, see 11 U.S.C. § 1322(b)(2), it does allow

a debtor in a Chapter 13 case to cure a default on a

mortgage obligation over time while maintaining the

regular payments that come due after the filing of the

case, see 11 U.S.C. § 1322(b)(5). When a plan includes

this kind of provision, it requires the creditor to accept

regular payments, as if the loan were current, while

the debtor repays the arrearage. See John Rao, Fresh

Look at Curing Mortgage Defaults in Chapter 13, Am.

Bankr. Inst. J., Feb. 2008, at 14.

This process is more complicated than it sounds.

The nonbankruptcy accounting remains relevant if the

debtor’s plan fails, so servicers generally maintain

“two sets of books” during a plan treating a mortgage

under § 1322(b)(5): one record tracks the status of

the loan under the bankruptcy plan and one tracks the

status under nonbankruptcy law. See generally Keith

M. Lundin, Lundin on Chapter 13, § 131.3, at ¶ 22,

LundinOnChapter13.com (last visited April 27, 2022).

Servicers must handle escrow payment determinations differently during the case to account for escrow

amounts included in the prepetition claim arrearage.

6

See id. at ¶¶ 65; In re Rodriguez, 629 F.3d 136, 140-42

(3d Cir. 2010). They must also ensure that automated

assessments of fees and costs are not asserted improperly. See In re Jones, 366 B.R. 584, 590 (Bankr. E.D. La.

2007), supplemented, No. 03-16518, 2007 WL 2480494

(Bankr. E.D. La. Aug. 29, 2007), rev’d in part sub nom.

Wells Fargo Bank, N.A. v. Jones, 391 B.R. 577 (E.D. La.

2008) (noting, prior to the adoption of Rule 3002.1, that

it was “common to see late charges, fees, and other expenses assessed to a debtor’s loan as a result of postpetition accounting mistakes made by lenders” and

positing that “lenders refuse to make [required] adjustments because few debtors challenge their accounting and even less pay out their entire loan before

discharge”). And, if a debtor completes payments under

a plan, the creditor must properly incorporate the

bankruptcy accounting into the post-bankruptcy accounting. Without adequate systems and training in

place, that process can go horribly wrong. See Saccameno v. U.S. Bank, N.A., 943 F.3d 1071, 1078-81 (7th

Cir. 2019) (detailing the years-long ordeal a borrower

endured to correct errors made by Ocwen Loan Servicing—an entity that later merged into the current PHH

Mortgage Corporation—in connection with a successful Chapter 13 case).

Bankruptcy Rule 3002.1 was added to “aid in

the implementation of § 1322(b)(5).” Fed. R. Bankr. P.

3002.1 advisory comm. note to 2011 adoption. Prior

to its adoption, no rule directly required creditors to

notify anyone of payment changes or postpetition assessments. Between creditor concern about violating

7

the automatic stay and systemic breakdowns and servicing errors, this information was not being communicated fully.

Consistent with its importance, the Rule provides

courts robust authority to sanction parties for noncompliance. It consists of two subdivisions. Subdivision

(i)(1) authorizes the specific sanction of excluding evidence of information not properly noticed. But subdivision (i)(2) provides broader authority to award “other

appropriate relief.” It also specifies the power to assess

costs and attorney’s fees. Fed. R. Bankr. P. 3002.1(i).

II.

The Circuit Court below erred in holding

that Rule 3002.1 authorizes only compensatory relief.

Despite the broad language under Rule 3002.1(i)(2),

the Circuit Court below held that the Rule authorizes

only compensatory relief. That holding undermines the

Rule’s enforcement mechanism and thus threatens its

effectiveness.

The Circuit Court’s holding is at odds with the

text of the rule. The phrase “appropriate relief ” is not

defined in the Rules of Bankruptcy Procedure, and its

meaning in normal usage is “open-ended,” as this

Court has recognized in recent cases. See Tanzin v.

Tanvir, 141 S. Ct. 486, 491 (2020) (citing Sossaman v.

Texas, 563 U.S. 277, 286 (2011)).

The Circuit Court majority, however, interpreted

the language narrowly, concluding that the specific

8

relief authorized by the Rule is compensatory in nature and that the general language is thus best construed to be in the same class. Both steps in that

reasoning are suspect.

First, the specific relief authorized under the Rule

is not strictly compensatory. As Judge Bianco noted in

his dissent, the sanction of excluding evidence based

on a failure to provide notice is not always proportionate to the harm. In the context of Civil Rule 37, courts

have recognized that the sanction can include a punitive aspect that serves a deterrent purpose. See, e.g.,

Update Art, Inc. v. Modiin Pub., Ltd., 843 F.2d 67, 71

(2d Cir. 1988) (“[A]lthough preclusion of evidence and

dismissal of the action are harsh remedies . . . , they

are necessary to achieve the purpose of Rule 37 as a

credible deterrent. . . .”).

Second, the structure of Rule 3002.1(i) does not

support the limitation the Circuit Court read into the

broad sanctioning authority. The Rule does not involve

a long list of specific examples accompanied by a

catchall term. It includes two provisions. One is the

specific authorization in subdivision (i)(1) to exclude

evidence. The other is the broad power in subdivision

(i)(2) to “award other appropriate relief,” with a specification that this power includes the power to award

reasonable expenses and attorney’s fees. The list of

specific examples, in other words, consists of barely

more than one item. Defining a class based on such a

limited set involves a great deal of subjectivity.

9

The structure of the Rule suggests that the drafters intended to provide bankruptcy courts broad authority to impose appropriate sanctions in addition to

the power to exclude evidence. Construing the broad

language to be limited by the specific examples in this

situation would undermine its purpose.

The Rules Committee modeled Rule 3002.1(i) on

sanctioning authority under Rule 37 of the Federal

Rules of Civil Procedure. Courts have interpreted the

authority under Rule 37 expansively. This Court, in

fact, concluded that trial courts must have the power

to impose severe sanctions in “appropriate cases” for

discovery abuses, “not merely to penalize those whose

conduct may be deemed to warrant such a sanction,

but to deter those who might be tempted to such conduct in the absence of such a deterrent.” Nat’l Hockey

League v. Metro. Hockey Club, Inc., 427 U.S. 639, 643

(1976).

The majority opinion below, however, parsed Rule

37 and perceived a distinction between the power to

impose “appropriate” sanctions under Rule 37(c)(1)—

language similar to Rule 3002.1(i)—and the authority

to issue “just” orders under Rule 37(b)(1). The distinction between these two qualifiers is elusive. Both are

open-ended terms that require courts to weigh the propriety of sanctions based on the circumstances.

The point that Rule 3002.1(i) calls on bankruptcy

courts to exercise their judgment in addressing noncompliance is worth emphasizing. Bankruptcy courts

have expertise in this area and familiarity with the

10

goals of Rule 3002.1. And, as the trial courts in the

bankruptcy system, bankruptcy courts have the best

vantage to evaluate a party’s failure or misconduct. Cf.

Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 404

(1990) (“The district court is best acquainted with the

local bar’s litigation practices and thus best situated to

determine when a sanction is warranted to serve Rule

11’s goal of specific and general deterrence.”). Rule

3002.1(i) sensibly gives bankruptcy courts the power

to craft any “appropriate” relief.

Subdivision (i)(2) does not suggest otherwise just

because it states that the broad power to award appropriate relief includes the specific power to award costs

and attorney’s fees. The term “including” is not generally a limiting term, see 11 U.S.C. § 102(3), and it

serves the obvious purpose in Rule 3002.1(i) of overriding the “American Rule” regarding attorney’s fees.

Other circuit courts have correctly concluded that

similar statutory language does not cabin a broad

grant of discretionary authority. See Reich v. Cambridgeport Air Sys., Inc., 26 F.3d 1187, 1191 (1st Cir.

1994) (“[T]he key language of the OSH Act is broad. It

authorizes a court to ‘order all appropriate relief.’ The

further language including certain remedies, like reinstatement, indicates the availability of the named

remedies, but does not purport to limit ‘all appropriate relief ’ to those remedies only.”); Gaffney v. Riverboat Servs. of Indiana, Inc., 451 F.3d 424, 460 (7th Cir.

2006) (“[W]e read ‘any appropriate relief ’ as an umbrella label; in turn, the phrase ‘including restraining

violations . . . and reinstatement’ indicates that the

11

umbrella of available remedies encompasses both legal

and equitable relief [including compensatory and punitive damages].”).

III. The Circuit Court’s error is harmful.

The panel majority clearly believed that PHH’s

conduct did not warrant the sanction the Bankruptcy

Court imposed, dismissing the concerns as “overwrought” and “hyperventilation.” For the reasons Judge

Bianco articulated in his dissent, the NACTT disagrees

with that assessment. But that is not the question presented to this Court. The decision below did more than

just find the sanctions excessive; it held, as a matter of

law, that noncompensatory sanctions are simply unavailable under Rule 3002.1(i), regardless of how appropriate they may be. That holding leaves bankruptcy

courts without adequate power to respond to systemic

noncompliance. Bankruptcy courts “are engaging in a

broad search for appropriate remedies when mortgage

holders or servicers fail to follow the Rule,” recognizing

that “persistent noncompliance will defeat the goal

of curing mortgages through Chapter 13 cases if tolerated by the bankruptcy courts.” Keith M. Lundin, Lundin

on Chapter 13, § 131.3, at ¶ 157, LundinOnChapter13.com

(last visited April 27, 2022). The Circuit Court’s holding in this case undercuts those efforts.

Practical considerations all but guarantee that

only a fraction of the instances of noncompliance with

Rule 3002.1 lead to claims for any relief. In some

cases, that may be because debtors do not know of the

12

noncompliance. Invalid charges and errors may lurk on

accounts as amounts owed but not immediately due. A

debtor might confront these amounts only when he or

she refinances the mortgage or sells the home. See In

re Jones, No. 03-16518, 2012 WL 1155715, at *7 (Bankr.

E.D. La. Apr. 5, 2012) (“Most debtors simply do not have

the personal resources to demand the production of a

simple accounting for their loans, much less verify its

accuracy, through a litigation process.”). In other cases,

the amounts may be known, but they may be small

enough in relation to the burden and potential cost of

litigation that the debtor just pays them. See, e.g., In re

Blanco, 633 B.R. 714, 755 (Bankr. S.D. Tex. 2021) (citing Kara Bruce, Closing Consumer Bankruptcy’s Enforcement Gap, 69 Baylor L. Rev. 479, 480 (2017)).

These circumstances support noncompensatory

sanctions in appropriate cases. Cf. Saccameno v. U.S.

Bank, N.A., 943 F.3d 1071, 1089 (7th Cir. 2019) (noting

that high punitive tort damages in relation to compensatory damages might be permissible when, for example, “the probability of detection is low” or “there is a

risk that limiting recovery to barely more than compensatory damages would allow a defendant to act

with impunity”). Compliance with the requirements of

Rule 3002.1 and § 1322(b)(5) demands attention and

investment from mortgage servicers. Any indication

that courts are not serious about compliance is likely

to threaten progress on these issues. Faced with evidence of systemic neglect, bankruptcy courts need the

power to respond appropriately.

---------------------------------♦---------------------------------

13

CONCLUSION

Consistent with its importance to the Chapter 13

bankruptcy process, Rule 3002.1 expressly grants

broad powers to address noncompliance with its mandatory provisions. Neither the text of the Rule nor its

purpose supports the Circuit Court’s restrictive interpretation of its enforcement provisions. The majority’s

dismissal of the systemic concerns sends a message to

mortgage servicers that they need not take these issues seriously. The NACTT urges the Court to grant

the Trustee’s petition for a writ of certiorari to correct

that error.

Dated: May 3, 2022

Respectfully submitted,

HENRY E. HILDEBRAND, III

Chapter 13 Standing Trustee

Counsel of Record

JAMES M. DAVIS

Staff Attorney

P.O. Box 340019

Nashville, TN 37203-0019

615-244-1101

hank@ch13bna.com

Counsel for the NACTT