Beckhart v. Newrez, LLC Preventive Maintenance Is For Bankruptcy Plans As Well As Cars

Those among us who were watching television in the 1970’s (yes, there was television that long ago, in color even) will remember the commercials for oil filters in which an auto mechanic told car owners that they could pay him now to install a new oil filter or pay him later for major engine repairs. A recent decision of the United States Court of Appeals for the Fourth Circuit in Beckhart v. Newrez, LLC demonstrates that the same concept applies to negotiating plans in bankruptcy cases.

The Beckharts filed a Chapter 11 case in 2009. When they filed, they were delinquent in paying several mortgages, including one secured by a property in Kure Beach, North Carolina on which payments were 10 months behind.

The Beckharts’ plan provided that Beckharts would retain the Kure Beach property and that the holder of the mortgage would retain its lien for the full balance owed. The order confirming the plan said that: (a) the first payment to the mortgagee was due by a specified date, but did not specify an amount; (b) the mortgagee was required to give the Beckharts 10 days’ written notice before exercising state court remedies; and (c) “Except as modified herein, the Debtor shall continue to pay the creditor’s claim according to the original loan terms.”

Several years after the plan was confirmed, a new servicer (“Shellpoint”) took over the servicing of the Beckharts’ loan. Although the Beckharts had been making monthly payments of what they contended the plan required, Shellpoint sent them notice that their loan was in default because of payments missed prior to their Chapter 11 filing. Shellpoint continued to send the Beckharts default notices claiming growing amounts due over a five-year period while the Beckharts asserted that they were not in default because they were complying with the confirmed plan.

In 2019, Shellpoint acknowledged that “the previous servicer did not adjust the loan in accordance with the Confirmed Chapter 11 Plan.” However, after making what it contended were the correct adjustments, Shellpoint asserted that the Beckharts were still in default and commenced foreclosure proceedings. The Beckharts then filed a motion in the bankruptcy court for an order finding Shellpoint in contempt of the order confirming their plan.

Shellpoint contended that its actions were consistent with the order confirming the plan. Shellpoint also argued that even if its actions were not consistent with the order confirming the plan, it was not in contempt because the order was so confusing that it could not be held in contempt under the standards enunciated by the United States Supreme Court in Taggart v. Lorenzen. In Taggart, the Supreme Court held that the standard for determining whether a creditor was in contempt of a discharge order in a Chapter 7 case was an objective one and that it was not appropriate to find a creditor in contempt “where there is a fair ground of doubt as to the wrongfulness of the [creditor’s] conduct.”

The bankruptcy court disagreed that the Taggart standard was applicable, regarding Taggart as being limited to contempt of Chapter 7 discharge orders. The bankruptcy court awarded the Beckharts $114,596.86 in damages. The United States District Court reversed that award on appeal. On further appeal to the Fourth Circuit, the Fourth Circuit determined that neither lower court had applied the correct standard, reversed the decision of the district court, and remanded the case to the bankruptcy court to determine if Shellpoint was in contempt when the correct standard was applied.

The arguments on appeal, first to the United States District Court and then to the Fourth Circuit, focused on whether the Taggart standard applies only to contempt of Chapter 7 discharge orders or whether it has broader application to contempt of orders confirming plans. The short answer, according to the Fourth Circuit, is that the Taggart standard applies to contempt of all bankruptcy court orders. But focusing on that holding misses the bigger point.

Confirmed plans in bankruptcy cases, whether under Chapter 12, Chapter 13, or Chapter 11, “bind the debtor [and] each creditor.” In other word, the plan becomes the new contract between the debtor and each creditor. In no other context would a creditor allow a borrower or debtor to write its contract. Yet, bankruptcy plans are invariably written by the lawyer for the debtor in the first instance and then negotiated to some degree. The mortgagee in Beckhart allowed a plan to be confirmed that provided for a date on which payments to it were to start, but did not specify the amount to be paid. As a result, it ended up incurring fees for its own lawyer to defend contempt proceedings in the bankruptcy court, to appeal the bankruptcy courts award of damages to the district court, to defend an appeal of the district court’s order reversing the bankruptcy court’s award, and now faces the expense of defending contempt proceedings in the bankruptcy court again following the remand from the Fourth Circuit. Depending on how that goes, it may have to pay the Beckharts’ attorneys’ fees to boot. All of this could have been avoided if the mortgagee had spent the time making sure that the Beckharts’ plan and the order confirming it described the terms of the arrangement with the same specificity that it undoubtedly required in loan documents.

When it comes to negotiating plans in bankruptcy cases, lawyers have much in common with the auto mechanic said in those old commercials. “You can pay me now or you can pay me [much more] later.”