Exploring the Rule 3002.1 Minefield

In September 2016, the U.S. Bankruptcy Court for the District of Vermont ordered a mortgage servicer to pay a $375,000 sanction to a nonprofit legal aid organization for failing to comply with Rule 3002.1 of the Federal Rules of Bankruptcy Procedure. This appears to be the first time that a bankruptcy court has awarded sanctions after a violation of Rule 3002.1. If this decision—In re Gravel, 556 B.R. 561 (Bankr. D. Vt. 2016)—serves as a guidepost to other courts that encounter similar violations of this rule in the future, then secured creditors should pay attention. The price to pay for noncompliance may be considerable.

Until this decision, no court had considered what relief is “appropriate” for failure to comply with Rule 3002.1. In an article published recently in ABI Journal (subscription required) that I co-wrote with my colleague, Matt Libby, we explore the implications how this rule presents a number of potential pitfalls for the unwary creditor (despite its well-intentioned rationale), and we describe the creditor’s conduct in In re Gravel as well as the lessons to be learned from this case.

In sum, counsel representing mortgage servicers in chapter 13 cases must diligently advise clients on the importance of complying with Bankruptcy Rule 3002.1. Failure to do so will risk being subject to significant sanctions.

Anthony Manhart is a Partner at Preti Flaherty and serves as Co-Chair of the Bankruptcy, Creditors' Rights and Restructuring Group. His practice focuses on bankruptcy and creditors' and debtors' rights, representation of Chapter 7 trustees and various parties in formal insolvency and collection proceedings and out-of-court workouts. He also serves on the Panel of Chapter 7 Trustees for the District of Maine.