Bankruptcy Court Lacked Power to Issue Punitive Sanctions

A Vermont bankruptcy court didn’t have the authority to issue $375,000 of sanctions against a mortgage company, a Vermont district court judge held.

Specifically, the court wasn’t empowered by Bankruptcy Rule 3002.1(i) to issue punitive sanctions, nor could it do so under 11 U.S.C. §105 or the court’s inherent powers, Judge Geoffrey W. Crawford, District of Vermont, said in his Dec. 18 opinion.

This is the first time a court has considered whether Rule 3002.1(i) allows a judge to issue punitive sanctions, the court said.

The matter arose with PHH Mortgage Corp.’s acts in three separate Chapter 13 cases pending in the District of Vermont.

In Chapter 13, individuals receiving regular income can obtain debt relief while retaining their property. To do so, debtors must propose a plan that uses future income to repay all or a portion of their debts over a three- to five-year period.

In these three cases, the plans provided for payment of the debtors’ mortgages going forward, plus installments to pay off pre-bankruptcy arrearages. This type of arrangement is typical in Chapter 13.

The mortgage company improperly billed the debtors for “property inspection fees” without filing a special notice required by Rule 3002.1(c). On Sept. 12, 2016, the bankruptcy court awarded sanctions of $25,000 for each case, pursuant to Rule 3002.1(i), which authorizes the court to “award other appropriate relief, including reasonable expenses and attorneys fees caused by the failure” to file and serve the notice.

In addition, in two of the cases, the court awarded sanctions against PHH because it violated court orders by sending statements representing that post-bankruptcy fees were due. These sanctions were for $100,000 and $200,000, respectively, for a total of $375,000 which the court ordered be paid to Legal Services Law Line of Vermont.

The district court reversed the order. First, it found that Rule 3002.1(i) didn’t authorize punitive sanctions.

Then, noting that the U.S. Courts of Appeals have been deeply divided on the question of whether bankruptcy courts have the power to impose punitive sanctions under Section 105 or the court’s inherent powers, the court followed those circuits which found these were not proper sources of authority for imposing serious punitive sanctions.

The court noted the “crucial institutional differences” between Article III judges (such as district court judges) and bankruptcy court judges, who are not appointed for life.

But the court also said that its conclusions don’t “leave bankruptcy litigants free to engage in contemptuous conduct with impunity.” It points out that the district court retains authority to impose such sanctions, and the bankruptcy courts can refer matters to the district court.

The case is PHH Mortg. Corp. v. Sensenich , 2017 BL 452107, Bankr. D. Vt., 5:16-cv-00256-gwc; 5:16-cv-00257-gwc; 5:16-cv-00258-gwc, 12/18/17 .

To contact the reporter on this story: Daniel Gill in Washington a

To contact the editor responsible for this story: Jay Horowitz at