Bankruptcy Court Slams Loan Servicer With $66K Punitive Damage Award To Homeowner For Flagrant Violations Of Discharge Injunction, Related Court Order

A U.S. Bankruptcy Court in Raleigh, North Carolina recently belted Ocwen Loan Servicing LLC with punitive damages in favor of a homeowner/couple in the amount of $66,300 for a "knowing, willful, and flagrant violation of both the discharge injunction" and a related court order.

In a nutshell, Ocwen incorrectly reported information about the homeowners to credit bureaus showing their home was in foreclosure when such was not the case, assessed principal, fees and costs on a debt that was already discharged by the court, applied payments received from the homeowners to these bogus charges instead of to the loan principal, and did nothing to correct its records or otherwise take corrective action despite having the erreonoeus reporting brought to their attention.(1)

For the ruling, see In re Adams, Case No. 04-003875-5-SWH (Bankr. E.D. N.C. Raleigh Div. July 7, 2010).

(1) From the court's ruling (bold text is my emphasis, not in the original text):

• The May 23, 2008 order was in the debtors' "favor" in that it established that their mortgage payments were deemed current and specifically set forth that a violation of the order would be sanctionable. Ocwen not only violated the terms of that decree by continuing to assess discharged principal, fees and costs, but did so, knowingly, over a prolonged period of time even after such violations were brought to its attention by: 1) debtors' counsel, 2) the female debtor, and 3) the filing of the show cause motion.

• The debtors' testimony indicated that they suffered harm as a result of Ocwen's violation of both the May 23, 2008 order and the discharge injunction. They were unable to refinance their home at market rates because their credit report erroneously showed their Ocwen loan in foreclosure; they incurred attorneys' fees to attempt to rectify the erroneous reporting and bring the matter to the court's attention; they incurred appraisal fees in their futile refinancing efforts; they spent time out of court trying to resolve the show cause motion and time in court during the hearing; and their credit was damaged by the detrimental reporting.

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• There is no question whatsoever that Ocwen's actions establish civil contempt of the court's order. At the hearing, the court was presented with no evidence that Ocwen has taken any action to correct its records or the reports it makes to credit companies regarding the debtors' loan, either prior to or after receiving the debtors' motion to show cause. During the period from at least the filing of the debtors' motion to show cause and the hearing on May 26, 2010, the court finds that Ocwen has been in knowing, willful, and flagrant violation of both the discharge injunction and this court's May 23, 2008 order.

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• Ocwen does not dispute that it has, from late 2007 through virtually all of 2008 and well into 2009, reported the Adams' mortgage as being in foreclosure, despite the fact that no foreclosure proceeding ever was commenced. The statements Ocwen sent to the debtors show that it has regularly assessed foreclosure costs and fees, and applied the debtors' payments to those costs and fees instead of to the principal.

• Most recently, Ocwen informed the Adams by letter dated May 26, 2010, in response to the Adams' inquiry regarding the credit history of their loan over the most recent 12 months, that it had reported the loan as in foreclosure for May, June, July and August of 2009. All during that time, Ocwen purportedly was working with the debtors to modify their loan terms — as a result of the original erroneous reporting. Ocwen either intended to hold the debtors hostage to its glacial (and unfruitful) negotiations, or concluded that it could knowingly disregard the responsibilities with which it was charged by both the Bankruptcy Code and the May 23, 2008 order of this court.

• That it did so, with actual knowledge, for such a prolonged period of time is especially egregious. Ocwen's cavalier attitude toward the discharge injunction, the terms of an order of this court, and the effect of its actions on the debtors is wholly unacceptable. The fact that Ocwen is unwilling to acknowledge the seriousness of this matter even today carries significant weight with the court. As the court informed the parties at the conclusion of the show cause hearing, sanctions are warranted in this matter. It is obvious that only significant monetary sanctions will get Ocwen's attention.

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• The court finds it not only appropriate to award punitive damages, but necessary. Ocwen has given every indication that it is and will remain indifferent to the statutory significance of the discharge injunction and to the express terms of the May 23, 2008 order, unless it is compelled to take note. See Cherry, 247 B.R. 176, 189-90 (discussing cases within the Fourth Circuit in which punitive damages for contempt, and violation of the discharge injunction, were in issue). As the Cherry court points out, the standard by which courts assess the propriety of an award of punitive damages varies, but tends to require some indication of "egregious conduct," "malevolent intent," or "clear disregard of the bankruptcy laws" — in other words, some element indicative of a "specific intent to violate an order or discharge injunction." Under any of these measurements, Ocwen's intentional, unfounded, prolonged violation of the discharge injunction and this court's order warrants punitive sanctions.

• An appropriate measure of punitive damages for Ocwen's violation of the discharge injunction and the court's order of May 23, 2008 is a sanction in the amount of $66,300. This amount represents $100 per day from September 12, 2008, which is the date on which Ocwen was served with the debtors' motion to show cause, through the date of entry of this order. These damages will not accrue during the fourteen days following the date of entry of this order, but will resume, if necessary, at $100 per day, as outlined below, if Ocwen does not fully comply with the terms that follow. A punitive sanction of $100 per day for Ocwen's actions over the duration of this matter is commensurate with its offense. The significant total derives from the duration of the offense, which was decidedly within Ocwen's own control.