Judge Tosses Trustee's Suit Seeking Sanctions Against Countrywide

A Justice Department official had no legal basis for seeking monetary sanctions against Countrywide Home Loans for filing inaccurate motions in a Miami couple's Chapter 13 bankruptcy case, a federal judge has ruled.

U.S. Bankruptcy Judge A. Jay Cristol said U.S. trustee Donald Walton did not have the authority to pursue punitive sanctions on behalf of the public through an adversary proceeding against the mortgage lender.

The proper parties to seek sanctions were debtors Jose and Fanny Sanchez, who did not participate in the trustee's lawsuit.

Walton, a Justice Department official charged with enforcing bankruptcy laws, filed an adversary proceeding March 1 against Countrywide in the Sanchezes' Chapter 13 case.

He claimed that the mortgage lender abused the bankruptcy process by filing two inaccurate motions for relief from the bankruptcy stay and a subsequent mortgage foreclosure action.

The Sanchezes filed for Chapter 13 protection in November 2001 in the U.S. Bankruptcy Court for the Southern District of Florida.

Through their repayment plan, which the Bankruptcy Court confirmed Jan. 17, 2002, the couple "stripped off" a second mortgage on their Miami home held by Countrywide through a home equity loan, valuing the collateral securing the lender's claim at zero and treating the claim as unsecured.

Countrywide did not object to the plan.

Twice during the bankruptcy proceedings, Countrywide filed motions for relief from the stay, seeking to foreclose on the Sanchezes' home. Both times, the lender asserted that it still held a secured claim on the property and sought relief based on the alleged lack of protection for its security interest.

Countrywide failed to pursue the first motion and voluntarily withdrew the second one.

The Bankruptcy Court granted the Sanchezes a discharge Dec. 13, 2006, and closed their bankruptcy case.

Despite the discharge, Countrywide filed a foreclosure action against the couple in the Miami-Dade County Circuit Court in June 2007, alleging that its lien on the home still existed.

The couple responded that the lien was stripped in the bankruptcy.

They also filed a motion in the Bankruptcy Court to reopen their Chapter 13 case, enjoin Countrywide's foreclosure action and hold the lender in contempt for violating the discharge.

Countrywide then voluntarily dismissed its lawsuit. In turn, the Sanchezes dismissed their contempt motion.

In his adversary suit Walton alleged that Countrywide's failure to ensure the accuracy of its pleadings and claims led to the improper filing of the foreclosure action and the two motions for relief from the stay.

Claiming authority based on his role as a "watchdog of the bankruptcy system," Walton sought monetary sanctions against Countrywide and an injunction prohibiting it from continuing its allegedly abusive practices.

Countrywide filed a motion to dismiss Walton's suit, challenging his authority to bring such claims.

Despite dismissing the case, Judge Cristol lauded Walton's "noble intentions and efforts to protect the public from reprehensible conduct by an apparently overreaching mortgage lender." However, he said, the laws just do not permit Walton's suit.

Judge Cristol said a trustee may seek sanctions only to compensate a party harmed by allegedly abusive conduct, not to punish misconduct during the bankruptcy process.

Only the U.S. attorney has the power to bring such punitive actions, the judge said.

Judge Cristol also found that Walton had "failed to suggest a specific imminent threat of future harm," which is necessary for a court to enter injunctive relief.

As the abusive conduct in the Sanchezes' case had ended already, Walton's allegation that the conduct would continue without an injunction was a "speculative, conclusory assertion."

Two other trustee suits over abusive bankruptcy practices are pending against Countrywide: one filed by Walton in Georgia and one filed by another trustee in Ohio. It is unclear whether the judges presiding over those case will follow Judge Cristol's lead.

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