BURLINGTON, Vt. (Legal Newsline) – A U.S. district court judge has overturned a bankruptcy court ruling leveling $375,000 in punitive sanctions against PHH Mortgage Corp. in three Chapter 13 cases pending in the U.S. Bankruptcy Court for the District of Vermont.

District Judge Geoffrey W. Crawford issued the Dec. 18, opinion, which overturned the bankruptcy court’s decision and remanded the case for further proceedings.

Daniel A. Lowenthal, a partner at New York-based Patterson Belknap Webb & Tyler LLP, said other courts have agreed with Crawford’s opinion. 

“I think the judge in this case, and it is the view of a couple of circuit courts of appeal, that bankruptcy judges should not be hitting parties with punitive sanctions,” he told Legal Newsline. “I think the key word is punitive. It is important to note that bankruptcy judges can sanction parties.”

PHH was the mortgage servicer in each case, which all concerned debtors who had remained in their homes after filing their bankruptcy petitions, according to the Dec. 18 decision. 

In each case, the homeowners had made conduit mortgage payments through the office of the U.S. Chapter 13 trustee. At issue in the three suits was PHH's charging of property inspection fees, the decision states.

"The basis for the sanctions was the admitted violation of Bankruptcy Rule 3002.1, which limits the time in which a mortgage creditor is permitted to bill for post-petition charges," the opinion states.

However, Crawford pointed out in the decision that courts are favoring “the narrower construction of the bankruptcy court’s statutory and inherent punitive sanctions power. This narrower construction is also consistent with the direction of 2nd Circuit precedent addressing the scope of the bankruptcy court’s contempt authority in other contexts,” Crawford wrote.

While the courts seemingly have drawn a line in the sand when it comes to sanctions, there are instances when general sanctions can be necessary. 

“As a general matter, judges are not going out of their way to sanction parties,” Lowenthal said. “For some type of sanction to be invoked, there has to be something egregious that has occurred. Usually, there is something that is so out of bounds that a judge would think some type of sanction is warranted..

Crawford's ruling says he took guidance from relevant case law and the U.S. Court of Appeals for the Second Circuit. 

"(T)his court concludes that the statutory and inherent powers of the Bankruptcy Court are not sufficient to support the Bankruptcy Court’s imposition upon PHH of $300,000 in punitive sanctions," the ruling states.

The bankruptcy court made three points as it supported its decision to impose the punitive sanctions, including Bankruptcy Rule 3002.1, its inherent authority and 11 U.S.C. § 105. 

Crawford wasn’t swayed by the trustees’ position on Rule 3002.1. 

“The parties have not cited and the court has not found any case from any American jurisdiction in which a bankruptcy court has imposed sanctions on this basis and in this manner,” he wrote in the decision. “The bankruptcy court acknowledged that it acted without precedent.”

Further, after mulling the evolution of the law and reviewing the "precedential authorities from other circuits on both sides of the circuit split, and having taken some guidance from relevant case law from the 2nd Circuit, this court concludes that the statutory and inherent powers of the bankruptcy court are not sufficient to support the bankruptcy court’s imposition upon PHH of $300,000 in punitive sanctions,” Crawford's decision stated.

The case was remanded back to the lower court for further proceedings, unless a settlement is agreed upon. 

Lowenthal noted that Crawford and other judges are of the opinion that punitive sanctions can be warranted and they can refer that to the district court judge, who would have the power to decide whether such sanctions are warranted. 

“While bankruptcy judges don’t have the power to issue punitive sanctions on their own, they do have the power to have that matter placed before another judge, which would be a district judge,” he concluded. “It would be a referral to the higher judge to decide if the punitive sanctions are warranted.”

In remanding the case, Crawford said the bankruptcy court ultimately can refer the matter of punitive sanctions to the district court. 

“Alternatively, it may take steps to enforce its orders short of punitive sanctions of the scope and type imposed in these cases,” he concluded.

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