Trevino v. HSBC Mortgage Services, Inc. (In re Trevino)
Docket: Case No: 10-70594; Adversary No. 13-07031
Court: United States Bankruptcy Court, S.D. Texas; July 31, 2015; Us Bankruptcy; United States Bankruptcy Court
The court granted in part and denied in part the motions to dismiss filed by U.S. Bank Trust, N.A., Caliber Home Loans, Inc., and HSBC Mortgage Services, Inc. regarding the complaint from Jose and Teresa Trevino. The following claims were dismissed:
1. Count I: Abuse of process against HSBC.
2. Count IV: Relief under Fed. R. Bankr. P. 3002.1(i).
3. Count V: Claim objection to Proof of Claim No. 21.
4. Count VIII: Claims against HSBC under 15 U.S.C. 1692e(2) and 1692e(10).
5. Count IX: Claim against Caliber under 15 U.S.C. 1692e(12) (other claims in Count IX were not dismissed).
6. Count X: Claims under the Texas Debt Collection Act.
7. Count XI: Unreasonable debt collection claims against all Defendants.
8. Count XVI: Request for sanctions under 11 U.S.C. 105(a) against HSBC.
9. Count XXI: All negligence claims against HSBC.
The motions to dismiss were denied for all other claims.
The procedural history reveals that the Trevinos filed a Chapter 13 bankruptcy petition on August 25, 2010, and initiated this adversary proceeding against the Defendants on December 30, 2013. Subsequent motions to dismiss were filed by the Defendants, leading to hearings and the eventual filing of an amended complaint. The Trevinos' claims against U.S. Bank and Caliber include objections to claims for 2010 real estate taxes, violations of the Fair Debt Collection Practices Act, unreasonable debt collection, and breach of contract, among others. Claims against HSBC include abuse of process, violations of the automatic stay, and negligence. The Trevinos seek injunctive relief, declaratory relief, sanctions, and both actual and punitive damages.
Factual background indicates that the Trevinos executed a mortgage note on February 21, 2005, which they claim was transferred to HSBC on July 10, 2009, while HSBC contends the transfer occurred on March 31, 2005. The Trevinos filed their Chapter 13 petition and valuation motion on August 25, 2010, which was confirmed on November 18, 2010.
The Chapter 13 plan stipulated that the Trustee would make regular mortgage payments to HSBC and address arrearages totaling $14,521.19. However, the plan did not include provisions for real estate tax payments. Various entities, including local school districts and Hidalgo County, filed claims for unpaid 2010 property taxes amounting to $1,878.76. HSBC submitted a claim on December 20, 2010, for $19,685.50, which included arrearages and fees, but the Trevinos contested the adequacy of HSBC's documentation for pre-petition fees.
On January 24, 2011, the Trustee notified that she would pay HSBC's claims, including the mortgage and arrearages. However, the notice erroneously indicated payment for ad valorem tax claims, which were not authorized by the confirmed plan. The Trustee began paying these tax claims on April 21, 2011. HSBC notified the Trevinos on April 13, 2011, regarding delinquent 2010 property taxes and requested proof of payment, warning that failure to respond could lead to HSBC advancing payments.
On May 17, 2011, HSBC sought permission to pay delinquent property taxes and made subsequent payments to Hidalgo County and Edinburg City. Despite advancing a total of $3,476.40 to taxing authorities, the Trustee informed HSBC that these payments might conflict with the Chapter 13 repayment plan. By October 2011, Hidalgo County refunded HSBC for the property tax payments, and by October 2012, HSBC received the full refund.
In April 2013, HSBC requested permission to pay the 2010 taxes again and subsequently disbursed $4,450.15 to Hidalgo County, which refunded part of this amount. On July 24, 2013, HSBC filed a notice of post-petition mortgage fees detailing payments made for 2010 and 2012 property taxes.
HSBC acknowledges that its Rule 3002.1(c) notice mistakenly included funds that Hidalgo County had refunded twice. The Trustee began reimbursing HSBC based on this notice on October 24, 2013. On September 21, 2013, the Trustee moved to dismiss the Trevinos’ bankruptcy case, citing the non-feasibility of their bankruptcy plan due to HSBC’s notice. The Trevinos amended their Chapter 13 plan to incorporate supplemental claims from HSBC, leading the Trustee to withdraw her dismissal motion. On November 18, 2013, U.S. Bank Trust, N.A. and Caliber Home Loans, Inc. notified the Court of HSBC's transfer of the Trevino Mortgage to them, prompting the Trustee to start payments to these parties, including those required under HSBC's notice.
Jurisdiction for this proceeding is established under 28 U.S.C. 1334, as bankruptcy courts oversee title 11 cases and related civil proceedings. A proceeding is considered 'related to' a bankruptcy case if its outcome can alter the debtor's rights or affect the estate administration. The Trevinos' claims related to the automatic stay and objections to proofs of claim are grounded in title 11, while some claims exist independently of the Bankruptcy Code but still relate to the bankruptcy proceedings. Their potential claims under the FDCPA, TDCA, and common law could benefit the bankruptcy estate.
Despite proper subject-matter jurisdiction, the constitutional authority of an Article I bankruptcy judge remains a concern. In light of Stern v. Marshall, a bankruptcy court's power to issue final judgments depends on whether the claims arise from the bankruptcy or the claims allowance process. This case involves state law and non-bankruptcy federal claims not necessarily resolved in claims allowance. However, under Wellness Int'l Network v. Sharif, parties may consent to a bankruptcy court's adjudication of such claims, allowing the court to enter a final judgment. If no consent is given, the court retains the ability to issue interlocutory orders.
An order that dismisses fewer than all claims in a complaint is deemed interlocutory, and a bankruptcy court retains the authority to issue such orders, as established in O’Toole v. McTaggert and Hernandez v. Hernandez. For motions under Rule 12(b)(6), the court accepts all well-pleaded facts as true, favoring the plaintiffs, but does not stretch to find favorable inferences. To survive a motion to dismiss, a plaintiff must meet the pleading standards of Fed. R. Civ. P. 8(a)(2), requiring a short and plain statement that demonstrates entitlement to relief. The Supreme Court in Ashcroft v. Iqbal clarified that allegations must permit an inference beyond mere possibility of misconduct, and only plausible claims survive dismissal, as highlighted in Bell Atlantic Corp. v. Twombly. General defenses have been asserted by HSBC, U.S. Bank, and Caliber against all claims, with the court addressing these before specific counts. The defendants argue that the Trevinos improperly filed an adversary proceeding instead of following procedures under Federal Rule of Bankruptcy Procedure 3002.1, claiming it led to unnecessary costs and delays. However, the court notes the Trevinos initiated their adversary proceeding within the one-year limit set by Rule 3002.1(e) and asserts their right to pursue claims including FDCPA and TDCA violations, breach of contract, and negligence. The court questions the defendants' preference for a Rule 3002.1(e) objection followed by a separate adversary proceeding for damages, emphasizing that a proceeding to recover money or property must be filed as an adversary proceeding according to Fed. R. Bankr. P. 7001(1).
Consolidating the action into a single adversary proceeding, rather than using a Rule 3002.1(e) objection, promotes judicial economy, and does not violate defendants' due process rights. The distinction between contested matters and adversary proceedings is procedural; dismissing on procedural grounds alone would prioritize form over substance, especially since adversary proceedings offer greater protections. U.S. Bank and Caliber assert they are holders in due course of the Trevino Mortgage from HSBC, claiming immunity from the Trevinos' defenses. However, personal defenses related to the underlying transaction do not negate their status, and the Trevinos are contesting the amounts claimed under the Bankruptcy Code. The court finds U.S. Bank and Caliber cannot be holders in due course because they were aware that the mortgage was overdue when acquired. Their argument that the mortgage became current post-confirmation of the Chapter 13 plan is rejected, as Texas law states that a mortgage remains overdue until defaults are cured. U.S. Bank and Caliber purchased the mortgage during the Trevinos' bankruptcy, with evidence indicating the Trevinos were in arrears at that time.
The Trevinos have been attempting to cure a mortgage default over 55 months within their Chapter 13 bankruptcy plan, but the default was not resolved when their mortgage was acquired by U.S. Bank and Caliber. They do not provide legal authority to support their claim that the confirmation of the bankruptcy plan cures the mortgage, while the movants reference case law indicating that a mortgage is not considered current until the plan is fully performed. Specifically, in Wells Fargo Bank, N.A. v. Jones, the court emphasized that ongoing payments must be made post-petition to maintain a loan as current. Additionally, in In re Mendoza, it was clarified that a modification of a debtor's plan must be executed within a reasonable timeframe while maintaining current payments. The court concludes that U.S. Bank and Caliber are not holders in due course concerning the Trevino Mortgage since the mortgage arrears remain uncured until the plan's full performance.
The complaint alleges that U.S. Bank and Caliber engaged in improper conduct by accepting payments from the Chapter 13 Trustee based on an invalid claim transferred from HSBC. They argue that they are merely "passive recipients" and cannot defend against the claims due to a lack of specific allegations of misconduct. However, the court rejects this defense, pointing out that the complaint alleges U.S. Bank and Caliber accepted funds from an improper claim without returning them and continue to demand additional payments.
Lastly, U.S. Bank and Caliber assert that the Trevinos' state law claims should be dismissed under Texas’s Comparative Fault Statute, which prevents recovery if a claimant is more than 50% responsible for the damages. They argue that the Trevinos' failure to include property tax payments in their Chapter 13 plan led HSBC to pay taxes to avoid foreclosure.
U.S. Bank and Caliber's argument regarding the comparative fault of the Trevinos is rejected for two main reasons. First, under Tex. Civ. Prac. Rem. Code. 33.002, comparative fault provisions do not apply to statutory tort claims that have their own fault-allocation rules, as established in Challenger Gaming Solutions, Inc. v. Earp. Thus, the Trevinos' breach of contract and TDCA claims remain unaffected by this statute. Second, fault apportionment is a factual question, which cannot be determined at the motion to dismiss stage, where all allegations presented by the plaintiffs must be accepted as true.
In their original complaint, the Trevinos objected to proof of claim No. 21 filed by HSBC, disputing the claimed arrearages of $19,685.50, which includes $11,221.89 in various fees. They argued that these fees were not reasonable or appropriate under Texas law as per their mortgage contract. The Trevinos further asserted that HSBC failed to provide adequate documentation to support the claim until over eight months after the proceedings began. Under Rule 3001(c), a proof of claim must be supported by documentation, and if a debtor contests a claim with prima facie validity, they must present sufficient evidence to rebut it.
In the Second Amended Complaint, the Trevinos acknowledge that HSBC submitted the note, deed of trust, and an itemized list of associated costs. They request the Court to penalize HSBC for not providing additional documentation for pre-petition fees, yet the Bankruptcy Rules do not mandate such submissions. Although the Trevinos incurred costs in objecting to HSBC's proof of claim, the Bankruptcy Rules require debtors to challenge the presumption of validity, leading to the dismissal of their request for attorney’s fees under Rule 3001(2)(D)(ii). Their allegations regarding the unreasonableness of Claim No. 21 are deemed conclusory, lacking specific facts to counter its prima facie validity, resulting in the dismissal of their objection.
Regarding Claim No. 82, the Trevinos challenge the Notice of Post-Petition Mortgage Fees filed by HSBC, asserting they have double-paid the 2010 real property taxes of $2,933.83 due to simultaneous payments by the Trustee and HSBC. They filed a timely objection under Bankruptcy Rule 3002.1(c), which allows for such disputes. The Trevinos have adequately stated their objection to this notice.
Under Rule 3002.1(i), the Trevinos seek a declaration that they owe no pre-petition tax payments and an injunction against further collection efforts. However, they have not claimed any party failed to meet the notice requirements but rather that the notice was erroneous. Since Rule 3002.1(i) addresses failures in providing required information rather than incorrect notices, this claim is dismissed.
The Trevinos also allege that HSBC's filing of the Rule 3002.1(c) notice, knowing the funds had been refunded, constitutes an abuse of process. They extend this allegation to U.S. Bank and Caliber for upholding the validity of the notice. They request the Court to use its powers under 11 U.S.C. 105(a) to impose sanctions and provide appropriate relief.
HSBC contends that a bankruptcy court must find bad faith to impose sanctions under 11 U.S.C. § 105(a) and argues that the complaint does not adequately demonstrate bad faith by the defendants, warranting dismissal of the abuse of process claims. Bankruptcy Rule 3002.1, established in 2011, requires creditors with a secured interest in a principal residence to file detailed notices for any post-petition fees, aiding in the enforcement of 11 U.S.C. § 1322(b)(5), which allows debtors to cure mortgage defaults within a Chapter 13 plan. The Fifth Circuit has affirmed that § 105(a) empowers bankruptcy courts to sanction vexatious conduct, with a focus on preventing abuse of process. However, sanctions necessitate a clear finding of bad faith, which must be substantiated by clear and convincing evidence, indicating that a party's actions have undermined the integrity of the judicial process.
The Trevinos’ complaint claims HSBC acted in bad faith by filing a Rule 3002.1(c) notice for repayment of 2010 property taxes after receiving a refund for those taxes. Specifically, they assert that HSBC filed the notice despite knowing it was not entitled to the funds, as it had received a full refund by October 2012. HSBC acknowledges the refund but argues that it did not act in bad faith. The principle of agency law suggests that HSBC is responsible for the knowledge of its agents regarding the refund. Consequently, since the Trevinos fail to present a plausible case of HSBC's bad faith, their abuse of process claim is subject to dismissal.
The implied knowledge rule of agency indicates that a principal's undisclosed knowledge is not attributed to the agent. In the case involving HSBC, the Trevinos allege that the bank improperly filed a 3002.1(c) notice despite knowing that a check for property taxes had been refunded. However, the complaint does not provide evidence that the employee or contractor who filed the notice had knowledge of the refund. Agency law dictates that the knowledge of the bank does not transfer to its agents without specific disclosure. Since the Trevinos did not allege that the individual involved in the filing had awareness of the refund, the court cannot infer bad faith from HSBC's actions, leading to the dismissal of the Trevinos' abuse of process claims.
The complaint contrasts with a previous case, In re Schuessler, where a creditor was found guilty of abuse of process for filing a motion without sufficiently analyzing the situation, suggesting a scheme to avoid the truth. The court was troubled by the creditor's disregard for the debtors' circumstances, which included a significant equity cushion and consistent payment history. This case underscores that while unintentional abuse of process can occur, the Trevinos' claims against HSBC lacked the necessary factual foundation for such a finding.
Key rights afforded to debtors under the Bankruptcy Code include the concept of a "fresh start." HSBC's conduct differs from that of Chase in the Schuessler case in two significant respects. First, HSBC's erroneous filing of the Rule 3002.1(c) notice was partially due to mistakes made by the Trevinos and the trustee. The Trevinos’ Chapter 13 plan did not account for the payment of real estate taxes, and while the trustee may have begun paying the taxes, HSBC had no obligation to ensure the trustee's compliance with the plan. Instead, HSBC was expected to review the plan, which would have indicated the necessity of paying the taxes to avoid default. Under the deed of trust, if the Trevinos did not pay the taxes, HSBC had the contractual right to pay them and seek reimbursement through bankruptcy.
Second, the text of Rule 3002.1 encourages timely filing of notices by creditors, stating that a notice must be served within 180 days after incurring fees or expenses. The liability for an expense is considered incurred when it arises, not when payment is made. Although HSBC mistakenly filed the 3002.1(c) notice, this error does not amount to an abuse of process as described in Schuessler. In contrast, U.S. Bank and Caliber, who purchased mortgage claims from HSBC, did not demonstrate knowledge of the improper notice but have persisted in asserting its validity without withdrawing it. The notice includes claims for 2012 property taxes paid by HSBC, which may be valid; however, it is undisputed that the notice erroneously claims 2010 property taxes. U.S. Bank and Caliber lack a good faith basis to demand payment for these taxes, and their failure to amend or withdraw the notice suggests potential bad faith. Consequently, the motion to dismiss the abuse of process claims against U.S. Bank and Caliber is denied.
The Trevinos allege violations of the Fair Debt Collection Practices Act (FDCPA) by the Defendants, claiming that they filed a notice to collect amounts not permitted by the Note or Deed of Trust, thereby violating the FDCPA's purpose of eliminating abusive debt collection practices. The specific allegations include violations of 15 U.S.C. 1692e(2) for misrepresenting the debt's character and amount, 1692e(5) for taking an action that could not legally be taken (filing a proof of claim for non-existent debts), and 1692f(1) for attempting to collect unauthorized debts. Furthermore, the Trevinos assert that U.S. Bank and Caliber violated 15 U.S.C. 1692e(12) by falsely claiming to be innocent purchasers for value.
HSBC contends that the Trevinos' FDCPA claims are invalid because it does not qualify as a debt collector under the statute. The FDCPA defines a debt collector as someone whose principal purpose is debt collection or who regularly collects debts owed to another, but excludes entities collecting debts not in default when obtained. HSBC argues that as a mortgage servicing company, it would not be classified as a debt collector if it acquired the loan while it was not in default. However, the Trevinos allege that HSBC acquired the loan while it was delinquent. Despite HSBC's assertion that it purchased the note in 2005 when it was not in default, this fact remains disputed. The court, assuming the truth of the Trevinos' allegations, must treat HSBC as a debt collector, especially since HSBC admitted in its original answer that it acquired the loan while it was delinquent, making this admission binding and no longer a point of contention.
HSBC has not amended its answer to retract its judicial admission, and at the 12(b)(6) stage, it cannot dismiss a factual dispute by contradicting this admission. The Trevinos' Fair Debt Collection Practices Act (FDCPA) claims are not time-barred, as the one-year statute of limitations under 15 U.S.C. § 1692k applies. Although the Trevinos filed their claims on October 15, 2014, the relation back doctrine allows amendments to relate back to the original pleading if they arise from the same conduct, which is the case here concerning the 3002.1(c) notice.
HSBC also contends that the Bankruptcy Code preempts FDCPA claims related to the filing of a 3002.1(c) notice. Federal courts have recognized that certain provisions of the Bankruptcy Code can preclude simultaneous FDCPA claims, particularly if they directly conflict. However, preemption by implication is rare. Courts generally uphold the coexistence of both statutes unless there is a clear conflict. Notably, the Randolph case determined that violations of the automatic stay could lead to liability under the FDCPA, as the provisions of both laws did not explicitly conflict. Similarly, the Third Circuit in Simon v. FIA Card Services held that the FDCPA is not preempted when there is no specific conflict with the Bankruptcy Code. The Court concludes that the FDCPA's provisions regarding false representations and unfair practices in debt collection do not conflict with the applicable Bankruptcy Code provisions concerning proofs of claim.
Threatening to sue or suing over a time-barred debt is deemed a violation of the Fair Debt Collection Practices Act (FDCPA) under sections 1692e and 1692f, as established in cases like Castro v. Collecto, Inc. and Huertas v. Galaxy Asset Management. However, the filing of a proof of claim in bankruptcy cannot be subject to FDCPA actions, as 11 U.S.C. § 501(a) permits creditors to file such claims voluntarily. The Bankruptcy Code defines a "claim" broadly, and § 502(b) outlines the court's role in determining the validity of claims after notice and hearing. While threats to sue on time-barred debts can violate the FDCPA, the voluntary nature of filing proofs of claim prevents potential conflicts with the FDCPA. Courts have noted that the Bankruptcy Code allows debtors to object to proofs of claim, which suggests that it anticipates the possibility of false claims. However, the existence of safeguards in the Bankruptcy Code does not immunize creditors from FDCPA liability. The proof of claim process is primarily for validating claims and ensuring orderly asset distribution, not for disciplining errant creditors. There is some debate about the remedies available under the Bankruptcy Code for erroneous proofs of claim, particularly concerning the applicability of § 105. Courts differ on whether this section enables sanctions against creditors for fraudulent claims. Additionally, Rule 9011(c) permits sanctions for false documents submitted to the court. Ultimately, the coexistence of different remedial systems is established, allowing for multiple avenues of accountability beyond those strictly outlined in the Bankruptcy Code.
In Humana Inc. v. Forsyth, the Supreme Court determined that insurers could be liable under both RICO and state law, affirming that federal statutes do not impair state law. Heintz v. Jenkins established that attorneys can be held liable under the FDCPA for debt collection through litigation, despite procedural rules against attorney misconduct. The case of Randolph highlighted that without an express remedy in the Bankruptcy Code, the argument for its exclusivity is weakened. Rule 9011, similar to Fed. R. Civ. P. 11, is not an exclusive remedy, allowing parties to pursue multiple causes of action for the same issue, as illustrated by Watson v. Stonewall Jackson Mem’l Hosp. Co.
Regarding subpoenas under Rule 2004, the Third Circuit indicated no conflict exists between bankruptcy court remedies and those under the FDCPA, affirming that additional liabilities can arise under the FDCPA despite existing enforcement mechanisms in bankruptcy. The Real Estate Settlement Procedures Act (RESPA) mandates mortgage servicers respond to written requests and conduct investigations, with noncompliance resulting in actual damages and potential additional damages. Bankruptcy Code §502 similarly allows debtors to contest mortgage claims, and courts have generally found that RESPA claims are not barred by the Bankruptcy Code.
The FDCPA also offers a means for debtors to challenge creditors, with courts recognizing that the FDCPA does not conflict with the Bankruptcy Code regarding proof of claim filings. The Trevinos allege violations of multiple provisions of the FDCPA, including section 1692e(2), which prohibits false representations about debt.
Section 1692e(5) prohibits threats to take actions that cannot be legally executed, while Section 1692e(12) forbids false representations regarding accounts being transferred to innocent purchasers. Section 1692f(1) prohibits collecting any amounts unless expressly authorized by the debt agreement or permitted by law. The complaint alleges that the Note and Deed of Trust did not allow Defendants to collect fees related to 2010 property taxes after refunds were issued, leading the Court to accept the Trevinos' allegations as true, establishing claims under Sections 1692e(2), 1692e(5), and 1692f(1). However, the complaint did not demonstrate that U.S. Bank and Caliber violated Section 1692e(12) since U.S. Bank and Caliber's assertion of "holder in due course" status was not a misrepresentation in connection with debt collection, differing from the Hartman v. Asset Acceptance Corp. case, where the debt collector sought a judgment based on that status.
Regarding a March 20, 2013 letter from HSBC, the Trevinos claim violations of the FDCPA. HSBC contends it is not a debt collector under the FDCPA, but the Court accepts the Trevinos' allegations as true for the motion to dismiss. The letter stated the Trevinos were delinquent in $636.36 in property taxes for 2010 and warned that failure to provide proof of payment would result in the amount being added to their loan post-bankruptcy discharge. The letter accurately reflected the delinquency status, as the taxes were not fully paid until September 18, 2014. Therefore, HSBC is not liable for mischaracterizing the debt or making false representations under Sections 1692e(2) and 1692e(10). The letter's implications of charging the Trevinos for property tax payments after their bankruptcy discharge could potentially violate the confirmed Chapter 13 bankruptcy plan, which aims to allow debtors to remain in their homes and emerge from bankruptcy current on mortgage payments.
Section 1322(b)(5) of the Bankruptcy Code permits debtors to cure mortgage arrears through a bankruptcy plan. The Trevinos proposed to address their mortgage arrears of $14,521.19 with 10% interest over 55 months. HSBC, having received notice of the plan confirmation hearing, did not object to the exclusion of past due property taxes from the Trevinos' plan. HSBC later indicated it would seek payment for unpaid taxes post-discharge, despite the plan stipulating that all mortgage arrears would be cured by then. This action by HSBC suggests an intent to violate the confirmed plan's terms, leading the Trevinos to assert claims under the Fair Debt Collection Practices Act (FDCPA), specifically citing violations of 15 U.S.C. § 1692e(5) for threatening illegal actions and § 1692f(1) for attempting to collect a non-legal debt.
The Trevinos also allege violations of the Texas Debt Collection Act (TDCA), including misrepresentation of the debt's status and improper collection practices. They claim HSBC misfiled a 3002.1(c) notice and sent misleading correspondence, while U.S. Bank and Caliber are accused of failing to retract the notice and demanding payment for 2010 taxes. HSBC contends that the TDCA claims are preempted by the Bankruptcy Code's framework for addressing claim objections, as established under the supremacy clause of the U.S. Constitution, which may limit state law claims related to bankruptcy proceedings.
Congress has the authority to define the extent to which its laws preempt state law, as established in English v. GE Co. In situations lacking explicit statutory language, state law is preempted if it regulates an area that Congress intended to occupy exclusively or if it conflicts with federal law. Congressional intent is central to determining preemption, as noted in California Fed. Sav. Loan v. Guerra.
The Bankruptcy Code does not explicitly preempt state law actions related to debt collection, nor does the Texas Debt Collection Act (TDCA) appear to conflict with it. However, Congress has established a comprehensive regulatory framework for bankruptcy proceedings, thereby preempting state law remedies for abuses of bankruptcy provisions, as indicated in U.S. Const. art. I. 8, cl. 4. Most courts have concluded that the Bankruptcy Code preempts state law claims arising from abusive filings or misconduct during bankruptcy, as seen in Pariseau v. Asset Acceptance, LLC.
The Ninth Circuit, in MSR Exploration, Ltd. v. Meridian Oil, Inc., emphasized Congress’s intent to create a unified federal system governing the rights and duties of creditors and debtors. Federal courts have exclusive jurisdiction over bankruptcy matters, per 28 U.S.C. 1334(a), and allowing state courts to question federal claims could disrupt bankruptcy proceedings. Federal law must underpin claims related to federal statutes, preventing state courts from establishing standards for federal relief.
Congress's intent to maintain a federal system is further reflected in the variety of remedies available to debtors against erroneous claims in federal courts, including processes outlined in 11 U.S.C. 502(b) and the possibility of sanctions under Rule 9011 or the Fair Debt Collection Practices Act (FDCPA). The existence of multiple federal remedies indicates a legislative intent to deter misuse of the bankruptcy process.
In the case MSR Exploration, the court emphasizes that allowing state law remedies for ERISA plan participants would undermine the federal framework established by ERISA, which intentionally excludes certain remedies. The need for uniformity in bankruptcy laws is reinforced by the Constitution, which grants Congress the authority to create uniform bankruptcy laws across the U.S. Discrepancies arising from state laws or court decisions could jeopardize this uniformity. The court distinguishes between field preemption and conflict preemption, noting that the Trevinos' claims under the Texas Debt Collection Act (TDCA) regarding a specific notice are preempted by the Bankruptcy Code due to Congress's intent to occupy the field, thus requiring dismissal of those claims.
Conversely, the Trevinos assert a valid claim against HSBC for a letter sent on March 20, 2013, alleging violations of specific TDCA provisions. Since the letter was sent independently of the bankruptcy proceedings, preemption does not apply. HSBC contends that the Trevinos have not demonstrated any damages resulting from the letter. However, as this is a motion to dismiss under Rule 12(b)(6), the Trevinos are not required to prove actual damages at this stage; they merely need to state a claim. The court finds that the Trevinos have sufficiently alleged actual damages related to the letter, meeting the pleading requirements.
In Realty Trust, Inc. v. Matisse Capital Partners, LLC, the court ruled that general damages do not require specific pleading but dismissed the Trevinos' claims under Texas Finance Code sections 392.304(a)(8) and 392.304(a)(19) due to a lack of misrepresentation by HSBC regarding the debt, as the property taxes were indeed in default. The Trevinos also alleged violations of section 392.303(a)(2) of the Texas Debt Collection Act (TDCA), which prohibits debt collectors from collecting unauthorized fees. However, the court found that HSBC's actions did not constitute an attempt to collect unauthorized fees, as the letter only indicated a potential future charge contingent upon proof of payment and did not request immediate payment.
Furthermore, the Trevinos claimed that HSBC violated the automatic stay provisions of the Bankruptcy Code by sending multiple letters during bankruptcy proceedings. The court examined 11 U.S.C. § 362(a)(3) and § 362(a)(6), which prevent acts to possess or collect on prepetition claims against the debtor. HSBC's defenses included the argument that the letters did not physically seize property and that the delinquent taxes were not a prepetition claim. The court recognized § 362(a)(3) as an "anti-grab" statute aimed at protecting the estate from creditors' attempts to exert control over estate property, affirming that the Trevinos' claims regarding the automatic stay were also dismissed based on HSBC's arguments.
Section 362(a)(3) of the Bankruptcy Code aims to prevent the "dismemberment" of the bankruptcy estate until a debtor's financial reorganization or asset liquidation can occur. The automatic stay it enforces prohibits actions that would disrupt the estate's integrity. A key case, Allentown Ambassadors, Inc. v. N.E. Am. Baseball, illustrates this principle. The Trevinos submitted five letters, the July 13 letter being representative, which demanded proof of tax payments related to a property securing a loan. The letter warned that failure to provide proof could lead to HSBC making payments on the Trevinos' behalf, which would increase their loan balance post-bankruptcy discharge.
For the Trevinos to claim relief under 362(a)(3), they must demonstrate that HSBC exercised control over the estate's property. Initially, 362(a)(3) focused only on obtaining property, but an amendment in 1984 broadened its scope to encompass any act of exercising control, though the term "control" is not explicitly defined in the Code, leading to varying judicial interpretations. Control has been understood to mean influencing or regulating property, distinct from mere possession. An example of control without possession was seen in Beker Industries, where a regulatory agency halted a debtor's operations, demonstrating that control can manifest in regulatory actions affecting estate property. Additionally, the right to cancel a debtor's insurance policy is also considered an act of control under 362(a)(3).
An insurance company that canceled a policy did not take possession of it but exerted influence by directing the Trevinos to pay $1,204.14 to Edinburg City and Hidalgo County. At the time of these letters, the payments were being made orderly from the bankruptcy estate, and HSBC's actions could have jeopardized the Trevinos' reorganization efforts. This behavior potentially violated 11 U.S.C. § 362(a)(3), designed to prevent control over estate property.
HSBC contends that its actions could not violate 11 U.S.C. § 362(a)(6) since the claims arose post-petition, as the Trevinos filed for bankruptcy on August 25, 2010, and HSBC did not pay the property taxes until June 2011. However, the Trevinos argue that the obligation for 2010 property taxes originated on January 1, 2010, making HSBC’s claim pre-petition. Under Texas law, property tax liability arises on January 1 of the tax year, regardless of assessment timing, which supports the Trevinos' position.
The court determined that although the Trevinos’ argument about the claim accruing at the tax lien’s creation on January 1, 2010, was incorrect, the claim did arise pre-petition. The Bankruptcy Code broadly defines a claim as a right to payment, encompassing various conditions. The definition’s breadth leads to complexities regarding unaccrued claims, with courts using different tests to ascertain when claims accrue under the Bankruptcy Code. The “accrual test” states that a claim does not exist until it accrues under state law, a view that has faced rejection due to inequitable results for indemnification claims.
The ‘conduct test’ establishes that a bankruptcy claim arises when the debtor’s actions that lead to liability occur. This approach has faced criticism for being overly broad, as it may allow claimants without prior interaction with the debtor to be impacted by bankruptcy discharge before any injury occurs. In contrast, the Fifth Circuit's ‘pre-petition relationship’ test aims to balance the accrual and conduct tests by requiring some form of pre-petition relationship—such as contact, exposure, or privity—between the debtor's conduct and the claimant. For a claim to be valid under the Code, it must have been within the “fair contemplation of the parties” at the bankruptcy’s onset.
Court rulings applying the pre-petition relationship test indicate that the date a bankruptcy claim arises is when an agreement is made, not when the actual liability occurs. For instance, in Colonial Sur. Co. v. Weizman, the court determined that a claim based on an indemnification agreement executed in 1998 could be discharged in bankruptcy, even if the related project began after the debtor received a discharge in 2006. Similarly, in Superior Air Parts, despite post-petition conduct leading to an indemnification claim, the court ruled that the claim was pre-petition because the indemnification agreement was signed before bankruptcy.
In the current case involving the Trevinos and HSBC, a contract was established on February 21, 2005, which is pivotal for assessing the claims in relation to the bankruptcy proceedings.
Borrower must repay any unpaid Escrow Items if Lender pays them due to Borrower's failure, as specified in the contract. The relationship between the parties existed pre-petition, and a breach was foreseeable given the contract’s provisions regarding remedies for unpaid property taxes. Consequently, HSBC's claim against the Trevinos is classified as pre-petition. For the claim to violate the automatic stay under 11 U.S.C. § 362(a)(6), HSBC's actions must be seen as attempts to collect a pre-petition debt. The broad language of § 362(a)(6) includes any act to collect from a debtor, and the Trevinos alleged that HSBC threatened to bill them post-bankruptcy discharge for a pre-petition claim, establishing a claim for a stay violation.
HSBC argues the Trevinos did not suffer actual injury, as they did not pay based on HSBC's letters. However, under 11 U.S.C. § 362(k), an individual injured by a willful stay violation can recover actual damages, including attorney’s fees. The Trevinos assert they incurred legal fees due to HSBC’s actions, which are considered actual damages, as Congress intended attorney’s fees to be recoverable. The Trevinos have adequately claimed injury through incurred court costs and attorney’s fees, fulfilling the requirements for damages under the statute. Additionally, the Trevinos' negligence claims are properly categorized as negligent misrepresentation, alleging that HSBC breached a duty by demanding payment of amounts not owed.
HSBC is accused of gross negligence due to its alleged conduct posing an extreme risk of substantial harm to the Trevinos, particularly linked to a notice filing that might have severely prejudiced them. The Trevinos argue that HSBC was aware or should have been aware of prior property tax refunds, making the filing foreseeable. HSBC counters that the negligence claims fail because the Trevinos cannot demonstrate that HSBC owed them a legal duty, a necessary element under Texas law for such claims. A negligence claim requires proof of a legal duty, a breach, and damages caused by that breach, as established in D. Houston, Inc. v. Love. For gross negligence, plaintiffs must additionally show that the act involved extreme risk and that the actor was consciously indifferent to that risk, according to Lee Lewis Constr. Inc. v. Harrison.
Texas courts typically do not impose a duty in mortgagor-mortgagee relationships unless a special relationship exists. In cases where no clear duty is established, courts evaluate surrounding facts, considering factors like risk, foreseeability, and social utility of conduct. However, there is a recognized duty to rectify one’s own misleading statements, irrespective of a special relationship, reaffirmed by multiple Texas court rulings.
In the case of Welfare Trust Fund v. Burzynski, 27 F.3d 153 (5th Cir. 1994) and Nazareth Int’l, Inc. v. J.C. Penney Corp., 2005 WL 1704793 (N.D. Tex. July 19, 2005), the Restatement (Second) of Torts imposes a duty to correct false statements made during business transactions. Specifically, under Restatement § 551, one party must disclose information that could render earlier representations misleading. The Trevinos allege that HSBC made a false statement it knew or should have known was incorrect and had a duty to correct the related notice. However, prior cases have recognized an affirmative duty to correct only in negligent misrepresentation claims, distinct from ordinary negligence, as noted in Fed. Land Bank Ass’n of Tyler v. Sloane, 825 S.W.2d 439 (Tex. 1991). Negligent misrepresentation requires four elements: a misrepresentation made in business, provision of false information, lack of reasonable care in communication, and resulting pecuniary loss from justified reliance.
HSBC contends that the Trevinos’ claims fail because they have not alleged non-economic damages. Texas law limits recovery for purely economic damages in negligence actions, as highlighted in LAN/STV v. Martin K. Eby Constr. Co., 435 S.W.3d 234 (Tex. 2014), due to the potentially unlimited economic consequences of negligence. The Restatement (Third) of Torts states that there is no tort liability for economic loss stemming from negligence in contractual contexts. The Texas Supreme Court has restricted the application of the economic loss rule to defective products or contract performance failures, as seen in Sharyland Water Supply Corp. v. City of Alton, 354 S.W.3d 407 (Tex. 2011). If a negligent misrepresentation claim is fundamentally contractual, the economic loss rule will apply, preventing recovery of economic damages, according to D.S.A. Inc. v. Hillsboro Indep. School Dist., 973 S.W.2d 662 (Tex. 1998).
A court assessing whether a tort claim is simply a repackaged breach of contract claim must evaluate: (1) if the claim arises from a duty established by the contract or a duty imposed by law, and (2) whether the injury is limited to economic loss related to the contract itself. In Hurd v. BAC Loans Servicing, LP, the court found that a duty to correct a false statement, imposed by common law, is independent of any contractual obligations. The Trevinos' claim for damages related to expenses incurred during their bankruptcy proceedings, stemming from a misleading notice, is distinct from contractual damages and therefore not subject to the economic loss doctrine.
HSBC contends that the Trevinos' negligent misrepresentation claim must be dismissed due to their failure to plead justifiable reliance, a necessary element of such claims. The Trevinos did not allege reliance on HSBC’s erroneous statement and have not established standing based on third-party reliance. While a defendant can be held liable for fraud if they intend for a representation to be communicated to the plaintiff, this case does not apply. Consequently, the negligent misrepresentation claim is dismissed with prejudice.
The Trevinos also claim that the defendants engaged in unreasonable debt collection under Texas law. Texas recognizes this tort, but there is ambiguity regarding the standard. They advocate for adopting the standard from EMC Mortgage, which questions whether the defendant made unreasonable efforts to collect the loan. Although the EMC court upheld a jury instruction on this standard, it expressed reservations. A more precise standard involves actions that constitute willful, wanton, and malicious harassment intended to cause mental anguish or bodily harm. The court adopts this Montgomery Ward standard for evaluating unreasonable debt collection claims.
The Trevinos have not sufficiently demonstrated the willful, wanton, and malicious intent required to support their unreasonable debt collection claims against the defendants. HSBC is found not to have acted in bad faith, as the allegations against U.S. Bank and Caliber only involve filing transfers of claim and accepting payments from the trustee, which do not meet the necessary legal threshold. Consequently, the unreasonable debt collection claims are to be dismissed for all defendants.
In relation to Count 12 of the Second Amended Complaint, which asserts a breach of contract by HSBC and U.S. Bank, the Trevinos did not specify which provisions of the note and deed of trust were violated. They claimed that the defendants demanded payments that were not due and accepted payments improperly. The defendants argue for dismissal based on the lack of specificity and the Trevinos' default under the contract.
Texas law outlines the elements needed to establish a breach of contract, including the existence of a valid contract, performance by the plaintiff, breach by the defendant, and damages incurred. Federal courts in Texas require plaintiffs to identify specific contract provisions allegedly breached to avoid vague allegations that do not provide the defendant with fair notice. Although the Trevinos acknowledge their failure to comply with this requirement, they argue that it is a minor oversight due to the clarity of their claims.
The Court agrees that while the allegations were somewhat vague, the Trevinos adequately identified the breaches concerning the note and deed of trust executed on February 21, 2005, which were attached to the complaint. The Court notes that the purpose of requiring specificity is to prevent vague allegations, but finds that the defendants had fair notice of the claims. HSBC contends that the deed of trust required the Trevinos to pay property taxes, and failure to do so would justify HSBC’s actions under Section 9 of the agreement.
The Trevinos contend that the contractual provision does not permit HSBC to seek repayment after being reimbursed for property taxes. Section 9 of the agreement authorizes the lender to take reasonable actions to protect its interests. The Trevinos argue that seeking a second reimbursement constitutes a breach of contract. The court finds that granting a motion to dismiss due to minor defects is inappropriate, as the contractual terms are clear.
The defendants also argue for dismissal based on the Trevinos' default under the deed of trust. Established Texas law states that a party in default cannot claim breach of contract. However, a material breach by one party may excuse the other from performance obligations. Several factors determine if a breach is material, including the extent of deprivation of expected benefits and the likelihood of cure.
The Trevinos have demonstrated a plausible claim that their breach was non-material despite being in arrears of $18,249.14 before filing for bankruptcy. HSBC's claim indicated arrearages of $19,685.50, which the Trevinos planned to cure through a confirmed Chapter 13 bankruptcy plan involving pro rata payments over 55 months. The defendants do not dispute that the Trevinos have continued making payments under this plan for over four years post-confirmation.
The Trevinos have overpaid due to an incorrect 3002.1(c) notice, totaling $14,772.12 in arrearage payments and $34,192.20 on their mortgage by October 2014. The non-breaching parties are receiving payments under the bankruptcy plan and have not been deprived of expected benefits, as the Trevinos are likely to cure all defaults before the end of their 60-month bankruptcy plan. Their actions reflect good faith, as they filed for bankruptcy to save their home and continued making payments despite challenges from the Defendants. Consequently, the Trevinos are not in material breach and can pursue a breach of contract claim against the Defendants. The Court will issue an order in line with this opinion. The document acknowledges service to HSBC and discusses tax payments made, noting that HSBC's claims regarding the default and the validity of the 3002.1(c) notice do not alter the analysis. It further clarifies that a 3002.1(c) notice does not have the prima facie validity of a proof of claim and cites multiple cases where proofs of claim can incur liability under the Fair Debt Collection Practices Act (FDCPA). The excerpt also addresses the relationship between the Bankruptcy Code and the Real Estate Settlement Procedures Act (RESPA), referencing a case that wrongly concluded that the Bankruptcy Code preempts RESPA. The Supremacy Clause and its implications for conflicting federal statutes are discussed, along with references to relevant case law.
The Trevinos argue that the Texas Debt Collection Act (TDCA) is not preempted by the Bankruptcy Code, citing the Fifth Circuit's decision in Barzelis v. Flagstar Bank, which found the TDCA not preempted by the Home Owners’ Loan Act of 1933 due to its minimal impact on lending. However, the court notes that applying state consumer protection laws to bankruptcy filings would significantly disrupt bankruptcy proceedings, rendering the Trevinos' reliance on Barzelis inappropriate. Further, the federal pleading rules do not support dismissing a complaint for an imperfect legal theory. HSBC's intention to bill the Trevinos post-dismissal of their Chapter 13 case does not constitute an attempt to obtain estate property, as the threat of action came only after the case's conclusion. The court adheres to a 'reconciliation approach' where the bankruptcy estate continues to accrue property until the case is fully closed. Although HSBC did not instruct that payments be taken from estate property, the Trevinos' bankruptcy schedules indicate their income was entirely from wages, which are considered property of the estate post-petition. Thus, any attempt to collect payments post-petition would effectively be an attempt to take funds from the estate. Additionally, the court referenced a precedent where an indemnification claim was ruled as post-petition and thus not subject to the automatic stay. The defendants argue that any state law breach of contract claim related to an erroneous bankruptcy court filing is also preempted by the Bankruptcy Code. Although the court previously found the Trevinos’ TDCA claims preempted, it notes that the breach of contract claim is distinct, as allowing such claims could undermine federal bankruptcy law.
The Trevinos are contesting the method by which Defendants collected payments, asserting it was unauthorized by their contract, rather than challenging the bankruptcy proceedings themselves. A federal bankruptcy court is obligated to ensure mortgagees receive protections equivalent to state law outside of bankruptcy, as established in Butner v. United States. In instances where there is no conflict with the Bankruptcy Code, state law governs mortgage contract interpretation. The Trevinos allege that Defendants improperly received repayments beyond what the contract allowed, constituting a breach of contract claim, despite no specific contractual provisions being cited as violated. Citing Nance v. Resolution Trust Corp., the court emphasized the necessity of evidence to demonstrate that the Defendants’ actions were unauthorized by the loan agreement. As of October 1, 2014, the chapter 13 trustee reported that the Trevinos had made a payment of $765.11 under a 3002.1(c) notice, though the exact nature of this payment remains unclear.
