On October 3, 2008, the First Circuit Court of Appeals decided the case of Nosek v. Ameriquest. Nosek was a Chapter 13 debtor who had to file Chapter 13 three times before she was able to present a confirmable plan to the Bankruptcy Court. She filed Chapter 13 to save her home from foreclosure by Ameriquest. During her most recent Chapter 13 case, she claimed that Ameriquest was improperly crediting her mortgage payments and using a "suspense account" in an improper manner, causing her account to be incorrect and also causing her severe emotional distress.
The Bankruptcy Court held that Ameriquest violated Section 1322 of the Bankruptcy Code by preventing Nosek to pursue her rights to cure her mortgage defaults by its incorrect accounting procedures and sanctioned Ameriquest by awarding Nosek $250,000 in emotional distress damages and $500,000 in punitive damages, pursuant to Section 105 of the Bankruptcy Code. Ameriquest appealed. The First Circuit ruled that Ameriquest didn't violate Section 1322 of the Bankruptcy Code, because that section only provides that debtors be allowed to cure defaults; it doesn't set forth procedures that a mortgagee must follow to assure that a debtor is able to successfully use that section to cure defaults. Since Section 1322 wasn't clearly violated by Ameriquest, the Bankruptcy Court was in error to use Section 105 to sanction Ameriquest.
As a result, the First Circuit eliminated the sanctions and punitive damages and remanded the case to the Bankruptcy Court. The First Circuit suggested that Chapter 13 plans detail the procedures a mortgagee must follow to account for mortgage payments. Detailed procedures would help debtors cure defaults, and enable the use of Section 105 in the future, under the appropriate circumstances.