Narsiza Eppolito

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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: Chapter 7
In re: :
: Case No. 12-36721 (CGM)
Narsiza Eppolito, :
:
Debtor. :
:
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MEMORANDUM DECISION HOLDING CITIMORTGAGE IN CONTEMPT FOR
VIOLATING THE DISCHARGE INJUNCTION
A P P E A R A N C E S :
Frank J. Corigliano
Francis J. O’Reilly, Esq.
1961 Route 6, Suite U-3
Carmel, New York 10512
Attorney for the Debtor
Paul A. Levine
Lemery Greisler LLC
50 Beaver Street
Albany, New York 12207
Attorney for CitiMortgage, Inc.
CECELIA G. MORRIS
CHIEF UNITED STATES BANKRUPTCY JUDGE
In 2012, Narsiza Eppolito (“Debtor”) was granted a discharge of her personal liability on
all of her non-excepted debt that included a note owned by CitiMortgage, Inc. (“Citi”). Years
following the entry of the discharge order, the parties resolved to enter into a loan modification
agreement on the note that had been discharged in bankruptcy. Now pending before the Court is
the Debtor’s Motion for Contempt seeking to impose sanctions against Citi for attempting to
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reaffirm a discharged debt and to direct Citi to honor the loan modification agreement without
imposing personal liability on the Debtor.
Jurisdiction
This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(a), 28 U.S.C. §
157(a) and the Amended Standing Order of Reference signed by Chief Judge Loretta A. Preska
dated January 31, 2012. This is a “core proceeding” under 28 U.S.C. § 157(b)(1) as the Debtor’s
Motion for Contempt for violation of the discharge injunction arises under Title 11, § 524(a).
Background
Narsiza Eppolito (“Debtor”) filed a chapter 7 petition for bankruptcy relief on July 5,
2012. Petition, ECF No. 1. CitiMortgage, Inc. (“Citi”) represented the Debtor’s largest creditor
by virtue of two notes totaling $352,464.00 that secure a mortgage on the Debtor’s home located
at 11 Ashburton Road, Carmel, New York (the “Property”). Citi Opp’n ¶ 6, ECF No. 24. Citi
was served notice of the Debtor’s bankruptcy case on or about July 6, 2012. 341(a) Notice, ECF
No. 5. The Debtor’s bankruptcy case was quickly administered as there were no assets available
for distribution to creditors and the case was closed on October 11, 2012. Discharge Order, ECF
No. 9. As part of the Order declaring the Debtor’s bankruptcy case closed, the Court granted the
Debtor a discharge, i.e. a release from personal liability on debts owed that existed prior to the
bankruptcy filing date. Id. Citi was served notice of the Discharge Order on or about October
11, 2012. Discharge Certificate Mailing, ECF No. 10.
In 2016, four years after the bankruptcy case was closed, the Debtor and Citi engaged in
loan modification discussions as the Debtor had defaulted on her mortgage payments and
insurance and real estate taxes for several years. Citi Opp’n ¶ 7, 8, ECF No. 24. By letter dated
October 14, 2016, Citi advised the Debtor of a proposed loan modification that would have
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reduced the Debtor’s monthly mortgage and escrow payment from $3,044.32 to $2,721.96, with
a corresponding reduction in interest rate from 5.5% to 3.75%. Id. ¶ 11. The proposed loan
modification agreement would take a portion of the substantial arrearage and recapitalize it
together with the unpaid principal balance (the debt that was discharged) to a new total unpaid
principal amount of $391,772.14. Id. ¶ 12. The modification agreement requires the Debtor to
execute a subordinate mortgage and subordinate note in the principal amount of $102,551.13 in
favor of the Secretary of Housing and Urban Development (“HUD”). Id. ¶ 16. The amount of
$102,551.13 represents 30% of the unpaid principal balance of the discharged loan ($341,837.12
x 30% = $102,551.13) – this is the amount which Citi claims it is allowed to seek reimbursement
from through a HUD partial claim amount. Id. ¶¶ 16, 17.
On December 15, 2016, the Debtor filed a Motion to Reopen her closed bankruptcy case
to hold Citi in contempt for violating the discharge injunction under 11 U.S.C. § 524(a)(2) and
(3) arguing that the proposed loan modification agreement is a veiled attempt to have the Debtor
reaffirm a discharged debt. Mot. Reopen, ECF No. 12. A hearing was held on January 24, 2017,
at which Citi failed to appear and an order to reopen the chapter 7 case was entered on January
30, 2017. Order Reopen, ECF No. 14.
Motion for Contempt
The Debtor moves to hold Citi in contempt for its willful violation of the discharge
injunction under 11 U.S.C. § 524(a)(1) and (2) and to further sanction Citi to pay compensatory
and punitive damages under 11 U.S.C. § 105(a) and Federal Rule of Bankruptcy Procedure 9020.
Mot. Contempt, ECF No. 16. The Debtor argues that her personal liability stemming from the
note owned by Citi terminated when she received a bankruptcy discharge under § 524(a) of the
Bankruptcy Code and Citi’s subordinate note requirement in favor of HUD serves to reaffirm
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that discharged debt. Contempt Memo, ECF No. 16-10. The Debtor acknowledges that
requesting an additional subordinate note or even a new mortgage is not itself a violation of the
discharge injunction. Nonetheless, the present facts indicate that the Debtor would owe the
principal sum of $102,551.13. Id. ¶ 20. The Debtor emphasizes paragraph 4 of the subordinate
mortgage states which states that the Debtor would owe the full debt, if not paid earlier, due and
payable October 1, 2046. Id. The Debtor requests that the Court direct Citi to honor and
implement the proposed loan modification agreement without the subordinate note and
subordinate mortgage requirement.
Citi argues that it should not be held in contempt as it has worked in good faith with the
Debtor to modify her loan and, when read as a whole and viewed in context, the loan
modification documents make clear that there is no attempt to impose personal liability for any
obligation that has been discharged in bankruptcy. Citi Opp’n ¶ 3, ECF No. 24. Citi further
argues that the Debtor understates the amount owed to Citi and the Debtor’s present motion
reflects a misunderstanding of the partial claim process for a loan modification under HUD. Id.
Citi points to the primary loan modification agreement in support:
(a) Not withstanding the foregoing, to the extent personal liability has been
discharged in bankruptcy with respect to any amount payable under the Note, as
modified herein, nothing contained herein shall be construed to impose liability to
repay any such obligation where any obligations have been so discharged. If any
bankruptcy proceeding is pending or completed during a time period related to
entering this Modification Agreement. I understand that I enter this Modification
Agreement voluntarily and that this Modification Agreement, or actions taken by
the Lender in relation to this Modification Agreement, does not constitute a
demand for payment or any attempt to collect any such obligation.
Mot. Contempt, Ex. C ¶ 6(a), ECF No. 16-5 (emphasis added).
Citi advises that the terms of the proposed loan modification agreement were realized
using the partial claim program offered through HUD, which “pays down” a lender’s first
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mortgage to bring it to an affordable level for the borrower. Citi Opp’n ¶ 28, ECF No. 24.
HUD’s partial claim program offers to buy down a lender’s loan by up to 30 percent of the
unpaid principal balance. The “partial claim defers the repayment of mortgage principal through
an interest-free subordinate mortgage that is not due until the first mortgage is paid off.” Citi
Opp’n, Ex. A, ECF No. 24. Citi contends that the loan modification agreement’s language
releasing the Debtor from any and all personal liability extends to the subordinate note and
subordinate mortgage that it is requiring the Debtor to sign. Citi Opp’n ¶ 22, ECF No. 24. In the
event that the Court finds Citi in contempt, Citi requests an opportunity for discovery under
Federal Rule of Bankruptcy Procedure 9014 and Local Bankruptcy Rule 9014-1 and an
evidentiary hearing under Local Bankruptcy Rule 9014-2. Citi informs that such discovery
would include document discovery and depositions from the Debtor’s prior counsel who was
involved in loss mitigation to determine what was understood about the HUD partial claim
process and nonrecourse language of the loan modification agreement. Id. ¶ 38.
In reply, the Debtor contends that there is no loan modification agreement provision
stating that the new subordinate loan does not have to be repaid. On the contrary, the
subordinate loan documents indicate that the deferred principal balance of $102,551.13 is to be
repaid in 30 years or when the Property is sold. Opp’n Reply ¶ 5, 8, ECF No. 26. The Debtor
argues that Citi had knowledge of the Debtor’s discharge in bankruptcy, yet Citi has demanded
the reaffirmation of the discharged debt in the form of the subordinate note in violation of the
discharge injunction. Id. ¶ 16.
The Court now considers whether Citi’s demand for a subordinate note under HUD’s
partial claim program as a condition of a loan modification agreement post-discharge is a
violation of the discharge injunction under 11 U.S.C. § 524(a).
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Discussion
Sections 524(a) and 727 of the Bankruptcy Code work in tandem to release a debtor from
his or her personal liability on a debt or claim that existed at the time that the bankruptcy case
was filed. Green v. Welsh, 956 F.2d 30, 33 (2d Cir. 1992) (“the language of these sections reveal
that Congress sought to free the debtor of his personal obligation.”). Section 727 provides the
benefit, while § 524(a) provides the mechanism to further “one of the primary purposes of the
Bankruptcy Code – that the debtor have the opportunity to make a ‘financial fresh start.’” Id.
(internal citation omitted). “Generally, a discharge in bankruptcy relieves a debtor from all pre-
petition debt, and § 524(a) permanently enjoins creditor action to collect discharged debts.”
Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 94 (2d Cir. 2010) (quoting Bessette v. Avco Fin.
Servs., Inc., 230 F.3d 439, 444 (1st Cir. 2000)).
Section 524(a)(2) of the Bankruptcy Code provides that a discharge “operates as an
injunction against the commencement or continuation of an action, the employment of process,
or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether
or not discharge of such debt is waived.” 11 U.S.C. § 524(a)(2). Subsection (c)(1) further
provides that a reaffirmation of a dischargeable debt is only valid and enforceable if such
reaffirmation is made prior to entry of the discharge order. 11 U.S.C. § 524(c)(1). The discharge
injunction survives the closure of a bankruptcy case and applies permanently to every debt that is
discharged. Garske v. Arcadia Fin., Ltd. (In re Garske), 287 B.R. 537, 542 (B.A.P. 9th Cir.
2002) (this furthers the Bankruptcy Code’s primary purpose of providing a debtor a financial
fresh start).
There is no serious question that a violation of the discharge injunction is punishable by
contempt. In re Nassoko, 405 B.R. 515, 520 (Bankr. S.D.N.Y. 2009); see also Spallone v. United
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States, 493 U.S. 265, 276 (1990) (“[C]ourts have inherent power to enforce compliance with
their lawful orders through contempt.”) (quoting Shillitani v. United States, 384 U.S. 364, 370
(1966)); Solow v. Kalikow (In re Kalikow), 602 F.3d 82, 96 (2d Cir. 2010) (“The statutory
contempt powers given to a bankruptcy court under § 105(a) complement the inherent powers of
a federal court to enforce its own orders.”). To hold a creditor in contempt for violation of the
discharge injunction, the movant has the burden to show by clear and convincing evidence that
the offending party had actual or constructive knowledge of the discharge injunction and that the
creditor did not comply with the order. See Huber v. Marine Midland Bank, 51 F.3d 5, 10 (2d
Cir. 1995) (To hold a party in contempt, “the court need only (1) have entered a clear and
unambiguous order, (2) find it established by clear and convincing evidence that that order was
not complied with, and (3) find that the alleged contemnor has not clearly established his
inability to comply with the terms of the order.”); In re Nassoko, 405 B.R. 515, 520 (Bankr.
S.D.N.Y. 2009) (citations omitted); In re Haemmerle, 529 B.R. 17, 26 (Bankr. E.D.N.Y. 2015);
Nicholas v. Oren (In re Nicholas), 457 B.R. 202, 225 (Bankr. E.D.N.Y. 2011) (citation omitted).
“The clarity of the order must be such that it enables the enjoined party ‘to ascertain from the
four corners of the order what acts are forbidden.’” Monsanto Co. v. Haskel Trading, 13 F. Supp.
2d 349, 363 (E.D.N.Y. 1998) (quoting Drywall Tapers & Pointers, Local 1974 etc. v. Local 530
of Operative Plasterers & Cement Masons Int’l Ass’n, 889 F.2d 389, 395 (2d Cir. 1989)).
Citi is in contempt for attempting to collect on a discharged debt
Citi informs that the “Debtor originally obtained her mortgage loan from Citi on
September 21, 2007, in the original amount of $347,256.00. She then borrowed additional
monies from Citi on January 23, 2009 … resulting in a combined first mortgage lien as of that
date of $352,464.00.” Citi Opp’n ¶ 6, ECF No. 24. This debt existed prior to the
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commencement of the Debtor’s bankruptcy case that was filed on July 5, 2012, and as such, it
was discharged upon the entry of the Discharge Order on October 11, 2012. The Court’s
Discharge Order clearly and unambiguously reads that “[t[he Debtor is released from all
dischargeable debts” and that “[a]ll creditors whose debts are discharged by this order … are
enjoined from instituting or continuing any action, employing any process or engaging in any act
to collect such debts as personal liabilities of the Debtor(s).” Discharge Order, ECF No. 9.
While the Debtor’s personal liability on the note ceased to exist upon entry of the discharge
order, it is well settled that a creditor’s right to foreclose on a mortgage survives or passes
through bankruptcy. Johnson v. Home State Bank, 501 U.S. 78, 83 (1991); Drew v. Chase
Manhattan Bank, 185 B.R. 139, 142 (S.D.N.Y. 1995) (“a foreclosure action in which the
mortgagee does not seek a deficiency judgment properly may be brought without violating the
terms of the debtor’s discharge”).
Years following the completion of the Debtor’s bankruptcy case and continuing default
on mortgage payments and insurance and real estate taxes, the parties engaged in loss mitigation
discussions.1 Given the arrearage and in order for the Debtor to qualify for a loan modification,
Citi sought to take advantage of HUD’s partial claim program that would pay down up to 30% of
the unpaid principal. Citi Opp’n ¶ 17, ECF No. 24. In this case, the unpaid principal was
$341,837.12 and Citi would be able to offload up to $102,551.13 of the discharged debt through
HUD’s partial claim program. Id. By letter dated October 14, 2016, Citi offered a loan
modification that required the Debtor to sign a subordinate note and subordinate mortgage in
favor of HUD in the amount to be paid down, in this case $102,551.13. Id. ¶ 11. While the
1 By Citi’s account, the unpaid principal balance on the Debtor’s loan as of February 27, 2017, was $341,837.12 and
the arrearages, including fees and expenses, to bring the loan current were $218,469.02 – for a total due of
$560,306.14. Citi Opp’n at ¶ 26.
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primary loan documents contain limiting language concerning the Debtor’s personal liability on
the modified loan, the subordinate note and subordinate mortgage in favor of HUD do not.
Opp’n Reply ¶ 5, ECF No. 26; Citi Opp’n, ECF No. 24. On the contrary, a HUD “partial claim
defers the repayment of mortgage principal through an interest-free subordinate mortgage that is
not due until the first mortgage is paid off.” Citi Opp’n, Ex. A, ECF No. 24 (emphasis added).
Simply delaying the Debtor’s obligation to repay the deferred amount of $102,551.13 for thirty
years is not the same as releasing the Debtor from any and all obligation to pay that debt – the
same debt that has already been discharged in bankruptcy. Citi’s argument that the release of
personal liability contained in the primary loan documents extends to the subordinate loan fails
for one reason – the primary loan documents do not make any reference to the HUD subordinate
documents, other than listing the same new principal amount of $102,551.13. Citi Opp’n ¶ 22,
ECF No. 24. If Citi intended to release the Debtor from any and all personal liability on the
modified loan and was not attempting to reaffirm a discharged debt, it could have easily included
such language in the subordinate loan documents. Citi has failed to do so even after the Debtor
voiced such objections and concerns. Mot. Contempt ¶ 21, ECF No. 16-2.
By filing for chapter 7, the Debtor chose to liquidate her assets for the benefit of her
creditors – including the Property encumbered by Citi’s mortgage. Citi’s sole remedy to collect
on the note vis a vis the Debtor was and is to foreclose on the Property. Citi may not demand
any payment or remuneration from the Debtor as to the note. Nonetheless, “a debtor may
voluntarily pay any debt that has been discharged.” Discharge Order, ECF No. 9. The key
language here is “voluntarily” and defining that word is at issue in this case. To the extent the
$102,551.13 subordinate note represents a portion of the discharged debt and as Citi had actual
knowledge of the Debtor’s bankruptcy case and discharge, Citi is in contempt of the discharge
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injunction for requiring a reaffirmation of a discharged debt and for attempting to offset the same
as part of a post-discharge loan modification. Just as Citi is unable to coerce the Debtor into
reaffirming a discharged debt, the Court cannot coerce Citi to execute a loan modification
consistent with the Debtor’s desired terms.
Citi’s discovery requests are denied
The Court denies Citi’s request to conduct depositions and discovery to determine what
Debtor’s prior counsel, Paulina Cardenas with the Fuster Law Firm, understood about the partial
claim process and the nonrecourse language in the proposed loan modification agreement and
how that information may have been communicated to the Debtor. Whatever the
communications may have been between the parties during the loan modification negotiation
process does not change the terms of the actual loan modification agreement proposed by Citi –
which is the determinative issue in this case.
The Debtor is awarded attorney’s fees
Where a party violates a court order, such as the discharge injunction, civil contempt
sanctions serve “to coerce the contemnor into future compliance with the court’s order or to
compensate the complainant for losses resulting from the contemnor’s past noncompliance.”
New York State Nat. Org. for Women v. Terry, 886 F.2d 1339, 1352 (2d Cir. 1989) (citing United
States v. United Mine Workers of Am., 330 U.S. 258, 303-04 (1947)). Bankruptcy courts may
appropriately use their civil contempt power under § 105(a) to order monetary relief in the form
of actual damages, including attorney’s fees, and punitive damages for violation of the discharge
injunction. Bessette v. Avco Fin. Servs., 230 F.3d 439, 445 (1st Cir. 2000) (collecting cases); 11
U.S.C. § 105(a) (“The court may issue any order, process, or judgment that is necessary or
appropriate to carry out the provisions of this title.”). To award attorney’s fees, there is no
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requirement in the Second Circuit for the violator to have acted willfully. N. Am. Oil Co. v. Star
Brite Distrib., 14 F. App’x 73, 75 (2d Cir. 2001) (“We decline to resolve the willfulness question
at this stage.”) (comparing King v. Allied Vision, Ltd., 65 F.3d 1051, 1063 (2d Cir. 1995) (“In
order to award fees, the district court had to find that [the defendant’s] contempt was willful.”),
with Weitzman v. Stein, 98 F.3d 717, 719 (2d Cir. 1996) (“While willfulness may not necessarily
be a prerequisite to an award of fees and costs, a finding of willfulness strongly supports granting
them.”)).
Based on the foregoing and the Declaration of Fees of Debtor’s counsel, Aff. Frank J.
Corigliano, ECF No. 59, the Court imposes sanctions against Citi and awards the Debtor
$9,065.00 in legal fees and $69.91 in disbursements for a total award of $9,134.91 for costs
incurred in bringing this Motion.
Conclusion
For the foregoing reasons, the Debtor’s Motion is granted. The Debtor should submit an
order consistent with this decision.
Dated: January 23, 2018
Poughkeepsie, New York
/s/ Cecelia G. Morris
_______________________
Hon. Cecelia G. Morris
Chief U.S. Bankruptcy Judge
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