Appellate Judges

Abuses by NewRez Shellpoint by Falsely Inducing Foreclosure Needs Another Review Sayeth CA4

The bankruptcy court found Shellpoint in contempt and awarded $116k in sanctions. Wall Street Judge Terrence W. Boyle reversed.

Summary of Foreclosure Abuses by Mortgage Servicer NewRez/Shellpoint and Sanctions Appealed in an Opinion Authored by Recently Appointed 4th Circuit Judge Toby Heytens.

Appellants filed for Chapter 11 bankruptcy in 2009.

The bankruptcy court approved a repayment plan which allowed Appellants to retain possession of a beach house, with the creditor retaining a secured claim for the total outstanding mortgage balance.

Several years later, the loan servicer switched to NewRez (Shellpoint) for the mortgage.

Despite Appellant’s timely payments, Appellees mistakenly believed that the account was past due.

Eventually, Appellees initiated foreclosure proceedings.

Appellants filed an emergency motion for contempt, which the bankruptcy court granted.

However, the district court reversed under Taggart v. Lorenzen, 139 S. Ct. 1795 (2019), finding Appellees acted in good faith because the error involved the previous loan servicer and Appellees based their actions on the advice of counsel.

The Fourth Circuit found that both the bankruptcy court and district court erred.

The standard announced in Taggart applies to an action to hold a creditor in civil contempt for violating a plan of reorganization of debts entered under Chapter 11.

Nothing in the Taggart decision limits the case to Chapter 7 bankruptcy proceedings.

While there are differences between Chapter 7 and Chapter 11 bankruptcies, the power of a bankruptcy court in either type of case derives from the same statutes and the same general principles.

However, the Fourth Circuit also held that the district court erred in its application of Taggart.

Thus, the court remanded the case for further proceedings.

Gordon Haggott Beckhart, Jr. and Stella Marie Beckhart

(09-07452-8-SWH)

United States Bankruptcy Court, E.D. North Carolina (2009 case opened)

 

Bankruptcy Court awards Gordon Contempt Sanctions.

However on appeal to the District Court, Wall St. Biased Federal Judge Boyle reverses in the order shown above.

Gordon Beckhart, Jr. v. Newrez, LLC, No. 21-1838 (4th Cir. 2022)

APR 15, 2022 | REPUBLISHED BY LIT: APR 16, 2022

ARGUED

Ciara Louise Rogers, LAW OFFICES OF OLIVER & CHEEK, PLLC, New Bern, North Carolina, for Appellants.

Richard Aaron Chastain, BRADLEY ARANT BOULT CUMMINGS LLP, Birmingham, Alabama, for Appellees.

ON BRIEF

Brian M. Rowlson, BRADLEY ARANT BOULT CUMMINGS LLP, Charlotte, North Carolina, for Appellees.

TOBY HEYTENS, Circuit Judge:

In Taggart v. Lorenzen, the Supreme Court addressed the proper standard for “hold[ing] a creditor in civil contempt for attempting to collect a debt that a discharge order” entered under Chapter 7 of the Bankruptcy Code “has immunized from collection.” 139 S. Ct. 1795, 1799 (2019).

The threshold question here is whether the standard adopted in Taggart also applies when a court is considering whether to hold a creditor in civil contempt for violating a plan of reorganization of debts entered under Chapter 11.

We hold that it does.

And because neither the bankruptcy court nor the district court properly applied the Taggart standard here, we vacate and remand for further proceedings.

I.

In 2009, Gordon and Stella Beckhart filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, a form of bankruptcy that “allows debtors and their creditors to negotiate a plan for dividing an estate’s value.”

Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973, 978 (2017).

At the time, the Beckharts owned several properties that had mortgages with significant balances, including a house in Kure Beach, North Carolina, for which they had missed ten months of payments.

After a hearing, the bankruptcy court confirmed a reorganization plan for the Beckharts’ debts.

Under the confirmation order, the Beckharts maintained possession of the Kure Beach house, with the creditor retaining a secured claim for the total outstanding mortgage balance.

The order set a date on which “[t]he first payment shall be due” but did not specify an amount for the payment or state how it would be calculated.

JA 68–69.

The order also provided that, “[i]n the event of default,” the Beckharts would be entitled to “ten days written notice” before the creditor could “exercise its state court remedies with respect to the collateral,” including foreclosure.

JA 68–69.

The relevant section of the confirmation order concluded:

“Except as modified herein, the Debtor shall continue to pay the creditor’s claim according to the original loan terms.”

JA 69.

Several years later, appellees (collectively, Shellpoint) took over as loan servicer on the Beckharts’ account.

Although the Beckharts had been making regular monthly payments under the confirmation order, Shellpoint initially believed the account was past due because of the payments missed before the bankruptcy proceedings.

From 2014 through 2019, Shellpoint sent the Beckharts letters and notices of default showing increasing amounts owed and past due.

Gordon tried without success to correct the account, repeatedly explaining that he and Stella had been through bankruptcy and had been paying the mortgage on time ever since.

Shellpoint acknowledged in December 2019 that “the previous servicer did not adjust the loan in accordance with the Confirmed Chapter 11 Plan.”

JA 300.

Nevertheless, two weeks later, Shellpoint commenced foreclosure proceedings on the Beckharts’ Kure Beach house.

Soon after, Shellpoint sent another letter acknowledging that the loan had not been adjusted following the bankruptcy proceedings and detailing the “major adjustments to the loan structure and to the payment applications” it had made to correct the account.

JA 314.

The letter did not, however, mention the pending foreclosure proceeding or the upcoming court hearing.

Seeking to halt the foreclosure proceeding—which they learned about only when Gordon found a notice on the door of the Kure Beach house—the Beckharts filed an emergency motion for contempt in the bankruptcy court.

According to the Beckharts, Shellpoint had violated the confirmation order by placing their account in default and seeking to foreclose on the property when the Beckharts had been paying on time since the bankruptcy.

Shellpoint claimed that its actions were justified under the confirmation order and, alternatively, that the terms of the order were confusing and ambiguous, meaning it could not be held in civil contempt under the Supreme Court’s decision in Taggart.

After hearing argument and testimony, the bankruptcy court found Shellpoint in contempt and awarded sanctions to the Beckharts.

Without referencing Taggart, the bankruptcy court stated that

“[a] finding of civil contempt is warranted when there is demonstration, by clear and convincing evidence, of” four factors set out in this Court’s pre-Taggart decision in Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000).

JA 17–18.

The bankruptcy court ordered Shellpoint to pay the Beckharts a total of $114,569.86,

consisting of:

(1) $60,000 in damages for 200 hours Gordon spent trying to correct the account;

(2) $20,000 for “the loss of the debtors’ fresh start”;

(3) $1,569.86 in travel expenses;

and

(4) $33,000 in attorneys’ fees.

JA 18–20.

Shellpoint appealed the contempt order to the district court, which reversed.

See 28 U.S.C. § 158(a)(1) (granting district courts appellate jurisdiction over “final judgments, orders, and decrees” of bankruptcy courts).

Concluding that “the Taggart standard” applied, the district court determined that

“the bankruptcy court’s contempt order f[ell] far short of meeting” it because Shellpoint “ha[d] established a fair ground of doubt with regard to the unclear terms of the confirmation order.”

JA 358.

In so ruling, the district court pointed to what it viewed as

“undisputed evidence” that Shellpoint “acted in good faith,” including Shellpoint’s reliance “on the advice of outside counsel.”

JA 358–59.

II.

Seeking to reinstate the bankruptcy court’s contempt order, the Beckharts argue both that Taggart does not apply to violations of Chapter 11 confirmation orders and that the bankruptcy court correctly applied the Taggart standard in any event.

We find both arguments unpersuasive.

Nothing about the Supreme Court’s analysis in Taggart suggests it is limited to violations of Chapter 7 discharge orders—which liquidate a debtor’s assets and then discharge the debt—or that the Court’s decision turned on considerations unique to the Chapter 7 context.

The Court began its discussion with general provisions of the Bankruptcy Code providing that a discharge order “operates as an injunction,” 11 U.S.C. § 524(a)(2), and that a court may “issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title,” § 105(a). See Taggart, 139 S. Ct. at 1801.

These general statutory terms, the Court concluded, incorporate “traditional principles of equity practice” that have “long governed how courts enforce injunctions,” including “the potent weapon of civil contempt.” Id. (quotation marks omitted).

For that reason, the Court emphasized that “[t]he bankruptcy statutes . . . do not grant courts unlimited authority to hold creditors in civil contempt.”

Id.

Drawing on “cases outside the bankruptcy context,” the Court explained that the standard for civil contempt “is generally an objective one” and that such orders are inappropriate “where there is a fair ground of doubt as to the wrongfulness of the defendant’s conduct.”

Id. at 1801–02 (quotation marks and brackets omitted).

Concluding that “[t]hese traditional civil contempt principles apply straightforwardly to the bankruptcy discharge context,” the Court held that the same standard applied to the case before it.

Id. at 1802, 1804.

We hold that the standard articulated by the Supreme Court in Taggart governs civil contempt under Chapter 11 of the Bankruptcy Code as well.

The Beckharts may be right that Chapter 11 reorganization proceedings differ in many ways from Chapter 7 liquidations.

But a bankruptcy court’s authority to enforce its own orders—regardless of which chapter of the Bankruptcy Code those orders were issued under—derives from the same statutes and the same general principles the Supreme Court relied on in Taggart. And those principles make clear that the logic of Taggart applies broadly and cannot be confined to Chapter 7 bankruptcy in the way the Beckharts seek.

We likewise disagree with the Beckharts’ assertion that the bankruptcy court actually applied the Taggart standard in finding Shellpoint in contempt.

Although Taggart was discussed at the contempt hearing, the court’s written order does not mention Taggart or its no-fair-ground-of-doubt standard.

Rather, the bankruptcy court’s order states that “[a] finding of civil contempt is warranted when there is a demonstration . . . of” four factors discussed by this Court in a decision that long predated Taggart and did not even involve bankruptcy.

JA 17–18 (citing Ashcraft v. Conoco, Inc., 218 F.3d 288, 301 (4th Cir. 2000)).

For that reason, we cannot conclude the bankruptcy court applied the correct legal standard in deciding to hold Shellpoint in contempt.

At the same time, we disagree with Shellpoint’s assertion that the district court committed no error in overturning the bankruptcy court’s contempt order.

For one thing, the district court erred in appearing to grant controlling weight to the fact that Shellpoint had requested and received legal advice from outside counsel.

JA 359

(asserting that “[t]he Fourth Circuit has stated that relying on the advice of outside counsel is a sufficient defense to the imposition of civil sanctions” while citing only a single district court decision involving a request for Rule 11 sanctions against a then-unrepresented party).

But this Court had squarely held—long before Taggart—that advice of counsel “is not a defense” to “civil contempt.”

In re Walters, 868 F.2d 665, 668 (4th Cir. 1989) (emphasis added).

And Taggart reaffirmed this approach when explaining that “[t]he absence of wilfulness does not relieve from civil contempt.”

139 S. Ct. at 1802 (quotation marks omitted).

As a result, the district court erred when concluding that Shellpoint’s reliance on the advice of outside counsel was seemingly dispositive as a defense to civil contempt.

Having concluded that both the bankruptcy court and the district court erred in analyzing the threshold question of whether Shellpoint may be held in civil contempt at all, we decline to address Shellpoint’s more targeted objections to certain aspects of the bankruptcy court’s sanctions order.

Instead, we think it is most appropriate for the bankruptcy court—as the court of first instance and the tribunal closest to the facts—to

  • We briefly note that while relying on the advice of outside counsel is not a complete defense in and of itself, it may still be considered in appropriate circumstances as a relevant factor under the Taggart Although Taggart established that “a party’s subjective belief that she was complying with an order ordinarily will not insulate her from civil contempt if that belief was objectively unreasonable,” a party’s reliance on guidance from outside counsel may be instructive, at least in part, when determining whether that party’s belief that she was complying with the order was objectively unreasonable. 139 S. Ct. at 1802. We leave any such analysis to be completed by the bankruptcy court in the first instance on remand.

reconsider the contempt motion under the correct legal standard, including any additional factfinding that may be necessary.

In doing so, we emphasize that even though the appropriate remedy for civil contempt lies within the bankruptcy court’s “broad discretion,” In re Gen. Motors Corp., 61 F.3d 256, 259 (4th Cir. 1995), any sanction that may ultimately be imposed must be supported—both in type and in amount—by a sufficient evidentiary record.

*    *    *

The order of the district court is vacated, and the case is remanded to the district court with instructions to vacate the bankruptcy court’s order and remand for further proceedings consistent with this opinion.

SO ORDERED

Professor Toby Heytens Confirmed as Fourth Circuit Judge

NOV 1, 2021 | REPUBLISHED BY LIT: APR 16, 2022

Professor Toby J. Heytens ’00 of the University of Virginia School of Law has been confirmed as a judge on the Fourth U.S. Circuit Court of Appeals.

The U.S. Senate confirmed Heytens on Monday. He was approved by the Senate Judiciary Committee on Sept. 23 after President Joe Biden nominated Heytens on June 30.

Heytens is the second UVA Law resident faculty member appointed to a federal appeals court while serving on the faculty. The first was Judge J. Harvie Wilkinson III ’72, who has served on the Fourth Circuit since 1984.

Since 1939, 15 federal judges taught at the Law School before taking the bench, including U.S. Supreme Court Justices Amy Coney Barrett and Antonin Scalia. Over 130 alumni are serving as judges nationwide.

Heytens was nominated the same day as Patricia Tolliver Giles ’98 and Michael S. Nachmanoff ’95, who were confirmed to serve on the U.S. District Court for the Eastern District of Virginia in October.

“Based on their fairness, temperament, and integrity, we believe they will all serve Virginia and the country with distinction,” U.S. Sens. Tim Kaine and Mark Warner of Virginia said in a statement.

Heytens’ nomination received bipartisan support, garnering praise from Republicans on the Senate Judiciary Committee. Chuck Grassley of Iowa called Heytens “a mainstream nominee” who “could serve as a moderating force on the Fourth Circuit,” and John Kennedy ’77 of Louisiana said Heytens had a “well-established” intellect.

Heytens was on leave from the Law School from February 2018 to August of this year to serve as Virginia’s solicitor general.

“One of the things that’s so significant about government service is the knowledge that you’re never just representing an individual in the way that you sometimes are in private practice,” Heytens said at his federal confirmation hearing in July about having served as solicitor general. “You are representing the commonwealth as a whole.”

In his role as solicitor general, Heytens successfully argued before the U.S. Supreme Court twice and represented the state on numerous other matters in the Supreme Court of Virginia and federal circuit courts. In 2019, he and his colleagues won the National Association of Attorneys General’s Supreme Court Best Brief Award for the brief filed in Virginia House of Delegates v. Bethune-Hill.

Heytens first joined the faculty in 2006 and then rejoined in 2010 after taking leave for three years to serve in the Office of the U.S. Solicitor General, during which he argued six cases before the Supreme Court.

At the Law School, Heytens served as one of the directors of the Supreme Court Litigation Clinic. He is an expert in civil procedure, constitutional torts, criminal procedure and remedies.

Dean Risa Goluboff said Heytens brought much to the Law School community as a faculty member.

“Toby is a stellar teacher and legendary mentor, as well as an accomplished advocate and scholar,” Goluboff said. “The Fourth Circuit is gaining a brilliant judge who will bring distinction to the bench and humanity and wisdom to the operation of the law. Though we will miss him sorely, we are excited for his next steps and proud of his public service.”

Before joining the UVA Law faculty, Heytens worked in the law firm O’Melveny & Myers’ Supreme Court and Appellate Practice Group in Washington, D.C. After graduating from law school, he clerked for then-Chief Judge Edward R. Becker of the Third U.S. Circuit Court of Appeals, served as a Bristow Fellow in the Solicitor General’s Office and clerked for U.S. Supreme Court Justice Ruth Bader Ginsburg.

During law school, Heytens served as articles development editor of the Virginia Law Review and received the Alumni Association Award for Academic Excellence for having the highest grade point average in his graduating class. His student note, “School Choice and State Constitutions,” received the Alumni Association Best Note Award.

Heytens served as head coach of UVA’s undergraduate trial advocacy team, which won its third national championship during the 2016-17 season. He won a Raven Award in 2015 for “excellence in service and contribution to the University of Virginia” and an All-University Teaching Award in 2016.

Heytens received his B.A. from Macalester College in 1997.

Founded in 1819, the University of Virginia School of Law is the second-oldest continuously operating law school in the nation. Consistently ranked among the top law schools, Virginia is a world-renowned training ground for distinguished lawyers and public servants, instilling in them a commitment to leadership, integrity and community service.

Media Contact

Mike Fox

Director of Media Relations
mfox@law.virginia.edu / (434) 982-6832

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Abuses by NewRez Shellpoint by Falsely Inducing Foreclosure Needs Another Review Sayeth CA4
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