Mortgagees Misapplication of Plan Payments Not Tortious

American Bankruptcy Institute Law Review Staff

 

 

In In re Oliver, the Bankruptcy Court for the District of Kansas held that a debtor did not meet the threshold requirements to proceed on a claim of outrage (i.e., intentional infliction of emotional distress)[1] by alleging that a creditor had misapplied payments received from the debtor and the trustee in violation of the debtor’s chapter 13 plan.[2] Mr. and Mrs. Oliver (the “Debtors”) entered into a loan agreement with CitiCorp Trust Bank FSB (the “Creditor”) to finance the purchase of their home.[3] Roughly three years later, the Debtors filed a chapter 13 bankruptcy petition.[4] The Debtors’ confirmed chapter 13 plan stipulated that the Creditor must apply any mortgage payments to the mortgage balance immediately upon receipt as opposed to holding the payments in a suspense account.[5] The plan also required the Creditor to apply payments made by the chapter 13 trustee and the Debtors to pre-petition arrearages and post-petition claims respectively.[6] The Debtors alleged that the creditor violated the terms of its chapter 13 plan by holding partial mortgage payments in suspense accounts, which resulted in improper interest calculations.[7] Additionally, the Debtors alleged that the Creditor had also violated the plan by failing to provide complete and accurate accountings of payment received from the Debtor and the chapter 13 trustee.[8] Finally, the Debtors also claimed that the Creditor’s misapplication of payments caused the Debtors to file incorrect tax returns, and that as a result, they were denied credit or offered credit at a higher rate.[9]

 

The bankruptcy court determined that the Creditor’s conduct did not go “beyond the bounds of decency” and therefore, the Debtor’s outrage claim was insufficient to survive the Creditor’s motion to dismiss on summary judgment.[10] The court noted two threshold requirements for an outrage claim, including, that the Defendant’s conduct be so extreme and outrageous that recovery is required.[11] Conduct associated with successful outrage claims must go “beyond the bounds of decency and [is] to be regarded as atrocious and utterly intolerable.”[12] The court contrasted the Creditor’s actions with cases where successful outrage claims were made, including where a creditor harassed a debtor over the phone and threatened to harm the debtor and his family with financial destruction and physical harm if the debt was not paid.[13] In contrast, the court found that the Creditor’s conduct in this case did not go “beyond the bounds of decency” nor was it “atrocious and utterly intolerable,” because the alleged conduct here was simply not as outrageous when compared to cases involving successful claims.[14] Although the court admitted that no clear line defines outrageous conduct, the court found that “this case is clearly insufficient to reach even the blurred edges of that line.”[15

 

The Bankruptcy Court for the District of Kansas joins a number of other courts that have dismissed claims for intentional infliction of emotional distress as a matter of law, when creditors misapply payments from the provisions of an approved chapter 13 plan.[16] Such courts have emphasized that a cognizable claim for intentional infliction of emotional distress is difficult to establish and have demonstrated their willingness to dismiss claims that are not predicated on truly egregious conduct. However, debtors have other statutory remedies available,[17] and creditors should not take their obligations under chapter 13 plans lightly. Courts have sanctioned creditors for misapplying payments in violation of their obligations[18] and have awarded punitive damages when appropriate.[19] Although punitive damages for creditors can result in substantial fines,[20] creditors misapplying plan payments need not fear unpredictable tort liability for claims of intentional infliction of emotional distress.

---