In re Gill

529 B.R. 31

In re: Deanna J. Gill, Debtor.

Case No. 14–21173

United States Bankruptcy Court, W.D. New York.

Signed April 16, 2015

Thomas A. Corletta, Rochester, NY, for Debtor.

DECISION AND ORDER DENYING MOTION TO REOPEN CHAPTER 7 CASE

PAUL R. WARREN, United States Bankruptcy Judge

Before the Court is a motion by Deanna J. Gill (“Debtor”) seeking to reopen her Chapter 7 case, in order to bring a contested matter to seek sanctions against ESL Federal Credit Union (“ESL”) for an alleged violation of her discharge injunction (ECF No. 29). The alleged “patent violation” of the discharge injunction under 11 U.S.C. § 524(a)(2) consists of a single preforeclosure notice issued by ESL—a secured creditor with a mortgage lien on real property that is the Debtor's principal residence (ECF No. 29 ¶ 16). The offending notice contains the exact language that is statutorily mandated by New York Real Property Actions and Proceedings Law § 1304 (“RPAPL”) (ECF No. 29, Exhibit B ¶ 16 and Exhibit D). The discharge injunction does not prevent a secured creditor from enforcing its mortgage lien in rem once the stay terminates—and, under New York law, a foreclosure action against a mortgagor's principal residence requires a preforeclosure notice in compliance with RPAPL § 1304. The New York preforeclosure notice is not a demand for payment, but an informational foreclosure avoidance notice. The Debtor has not demonstrated cause to reopen under 11 U.S.C. § 350(b) because she would not prevail on her proposed sanctions claim if her Chapter 7 case was reopened. As a result, the Debtor's motion to reopen the closed case is DENIED.

I.JURISDICTION

The Court has jurisdiction of this matter under 28 U.S.C. §§ 157(a), 157(b)(1) and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(1). This decision constitutes the Court's findings of fact and conclusions of law to the extent required by Rule 7052 FRBP.

II.QUESTIONS PRESENTED

The first issue is whether the Debtor has demonstrated cause, under 11 U.S.C. § 350(b), for reopening her closed Chapter 7 case. The second question—necessarily arising out of factors to be considered in resolving the first question—is whether the delivery of the statutorily mandated preforeclosure notice under New York RPAPL § 1304 by the lender of a home loan, secured by a mortgage lien on the Debtor's principal residence, can serve as the basis to award sanctions against the mortgagee for a violation of the discharge injunction arising from 11 U.S.C. § 524(a). The answer to both questions is no.

III.FACTS

The Debtor filed a voluntary petition for Chapter 7 relief on September 18, 2014 (ECF No. 1). Schedule A lists real property located at 274 Briarwood Lane, Scottsville, New York as her only real property (ECF No. 1, Schedule A). The Debtor listed a value of $112,000 for the property, subject to two mortgage liens held by ESL, with combined principal balances of over $95,000 (ECF No. 1, Schedules A and D; ECF No. 35, Exhibit A ¶ 2 and attachments). In the Statement of Intention, filed with the petition, the Debtor listed both ESL mortgages and indicated her intention to reaffirm both loans secured by those mortgages (ECF No. 1, Official Form 8 at 29). The Debtor did not reaffirm or attempt to reaffirm the ESL debts, contrary to her stated intentions (ECF No. 35, Exhibit A ¶ 12). The Debtor continues to occupy the property as her principal residence (ECF No. 36). However, she admits that she has not made any mortgage payment to ESL since October 2014 (ECF No. 40).

On October 28, 2014, the Chapter 7 Trustee filed a Report of No Distribution, commonly referred to as a “No Asset Report” (ECF No. 8). On January 6, 2015, the Court entered an Order of Discharge (ECF No. 16).¹ A Final Decree was entered by the Court and the bankruptcy case was closed on February 6, 2015 (ECF No. 18). Later that same day, but after the case was closed, counsel for the Debtor filed a motion seeking sanctions for an alleged violation of the discharge injunction (ECF No. 19). The alleged violation consisted of a notice from ESL to the Debtor, dated January 22, 2015, and addressed to her residence (ECF No. 29, Exhibit D). The first paragraph of the notice stated: “As of 1/22/2015, your home loan is 32 days in default. Under New York State law, we are required to send you this notice to inform you that you are at risk of losing your home. You can cure this default by making payment of $4,534.12 by 02/06/2015” (Id. ). Although not provided to the Court, the notice included an attached list of government-approved housing counseling agencies, as well as contact information for the New York State Department of Financial Services (Id. ). The Debtor contacted her attorney immediately upon receiving the ESL notice (ECF No. 29 at 15).

Because the case had been closed prior to filing the sanctions motion, the Clerk of Court notified counsel that a motion to reopen the case was required before the Court would consider the sanctions motion (ECF No. 21). Counsel filed an ex parte motion to reopen the bankruptcy case (ECF No. 22). At the Court's direction, an amended motion was filed, on notice to ESL (ECF No. 29).² ESL filed opposition to the motion to reopen, arguing that the Debtor had failed to demonstrate cause and that no purpose would be served by granting the motion to reopen because ESL's notice—mandated by New York RPAPL § 1304(1) and permitted by logical extension of 11 U.S.C. § 524(j) —could not serve as the basis to grant sanctions relief in favor of the Debtor (ECF No. 35).

The Court heard initial oral argument on the Debtor's motion on March 19, 2015. The Debtor argued—without pointing to any legal authority—that the Court should find that New York RPAPL § 1304(1) was an improper impingement on 11 U.S.C. § 524(a)(2). Alternatively, counsel argued that ESL, or any lender with a home loan secured by a debtor's principal residence located in New York, should simply delete the entire first paragraph of the legislatively mandated notice under New York RPAPL § 1304(1). Counsel did concede that the Debtor had failed to make any mortgage payments to ESL since October 2014, that she did not reaffirm the debt, that she had no intention of making any further payments on the mortgage, that the Debtor continued to reside at the property, and that ESL had the right to foreclose its mortgage (ECF No. 40, Mar. 26, 2015 Hearing). ESL observed that it was statutorily required, as a mandatory precondition to commencing a foreclosure action on the Debtor's principal residence, to send the notice under RPAPL § 1304. The motion was adjourned to March 26, 2015, to afford counsel an opportunity to further brief the issue (ECF No. 36).

On March 23, 2015, ESL submitted a supplemental memorandum of law, citing authority to support its position that in order to foreclose its mortgage on the property, it was statutorily obligated to comply with RPAPL § 1304 (ECF No. 37). That same day, the Debtor submitted a memorandum of law, by which the Debtor now took the position that the ESL preforeclosure notice should have included additional bankruptcy-disclaimer language, without which the Debtor asserted the statutorily mandated RPAPL § 1304 notice was per se sanctionable as an improper demand for payment of a discharged debt (ECF No. 38).

On March 26, 2015, the Court heard final oral argument from both parties (ECF No. 40). Prior to the hearing, ESL submitted a second memorandum of law, responding to the Debtor's memorandum of law (ECF No. 39). At the conclusion of the hearing, the Court set April 6, 2015 as the date for final submissions by the parties on the legal issues (ECF No. 40). The Debtor submitted a supplemental memorandum of law (ECF No. 41). ESL filed the affidavit of Jeremy Newman, its associate general counsel (ECF No. 42) and a third supplemental memorandum of law (ECF No. 43). Debtor's counsel filed a letter, criticizing the Newman affidavit, but adding nothing of substance (ECF No. 44). The submissions are now complete and the issues are ripe for determination.

IV.ARGUMENTS

The Debtor contends that, despite having been notified of the Debtor's discharge, ESL's correspondence was an attempt to collect a discharged debt in “patent violation” of 11 U.S.C. § 524(a)(2) (ECF No. 29 ¶ 16). At oral argument, the Debtor conceded that the offensive ESL notice precisely tracked the statutory language mandated by RPAPL § 1304 (ECF No. 38 at 3). The Debtor also conceded that ESL was required to comply with RPAPL § 1304 as a condition precedent to a foreclosure action (Id. at 3, 8). However, the Debtor argues that RPAPL § 1304 does not prohibit the addition of bankruptcy-disclaimer language (Id. at 5). The Debtor argues that such language would bring the notice mandated by state law in compliance with the Bankruptcy Code (Id. at 15–16). The Debtor further contends that—even though not required by the prescribed statutory notice language—the ESL notice was also infirmed because it did not indicate that the 90–day standstill period under RPAPL § 1304 did not apply because the Debtor had obtained an Order for Relief (Id. ). The Debtor argues that the issuance of the statutorily mandated preforeclosure notice is a per se violation of the discharge injunction because the notice did not specifically state that ESL was not attempting to collect the underlying debt as a personal liability of the Debtor (ECF No. 37).

ESL argues that no purpose would be served in reopening the case (ECF Nos. 35, 39). As a home loan lender, ESL was statutorily required by RPAPL § 1304(1) to send the notice as a precondition to exercising its right to commence a foreclosure action (ECF No. 35). Therefore, the Debtor's anticipated sanctions motion could not serve as the basis to grant relief, because ESL sent the notice in strict compliance with the New York foreclosure statute (Id. ). ESL contends that—in any event—the statutory notice is merely informational, providing a consumer-mortgagor with an opportunity to...