Docket: Case No. 1:14-BK-13504-SDR; Adversary Proceeding Case No. 1:15-AP-1116-SDR
Court: United States Bankruptcy Court, E.D. Tennessee; September 29, 2017; Us Bankruptcy; United States Bankruptcy Court
On August 11, 2015, Joseph C. Cawood initiated an adversary proceeding against several defendants, including Seterus, Inc., SunTrust Mortgage, Inc., RCO Legal P.C., Priority Trustee Services of TN, LLC, and the Federal National Mortgage Association (FNMA). On June 10, 2016, he amended his complaint to seek class action relief against Seterus and FNMA, alleging systematic failures in accounting practices for Chapter 13 debtors with mortgages serviced by Seterus. The amended complaint presents six claims: 1) objection to Seterus's claim of $72,455.06 and a request for lien determination; 2) breach of contract; 3) intentional/negligent misrepresentation; 4) negligence; 5) violation of 15 U.S.C. 1639f regarding payment crediting; and 6) violation of the Fair Debt Collections Practices Act (FDCPA). Cawood seeks a court order for FNMA to amend its claim to reflect accurate accounting and demands actual, statutory, and punitive damages, along with attorney's fees.
On July 8, 2016, Seterus and FNMA filed motions to dismiss. Seterus argues that the court lacks subject matter jurisdiction over Cawood's claims, asserting that they attempt to enforce a discharge injunction from another court. Additionally, Seterus contends that if the court has jurisdiction, the complaint fails to state valid claims, with specific issues cited for each count. FNMA supports Seterus's motion, claiming a lack of factual allegations regarding its misconduct.
In 2004, Mr. Cawood and his then-wife purchased a home in Cleveland, Tennessee, financing it with an $86,000 loan from SunTrust, secured by a Deed of Trust recorded in Bradley County. After moving to Texas, Mr. Cawood defaulted on the loan in 2008, prompting the couple to file for Chapter 13 bankruptcy on May 12, 2008, in the Southern District of Texas, which they completed on May 31, 2013. On June 4, 2013, the bankruptcy trustee filed a motion which was granted, allowing Mr. Cawood to resume mortgage payments after receiving a discharge on July 8, 2013. He made several payments to SunTrust from June to September 2013. In October 2013, SunTrust transferred the mortgage to Seterus, which was documented in Bradley County on November 4, 2013. Seterus informed Mr. Cawood of this transfer on October 14, 2013, detailing his loan balance and returning a September payment. Despite this, Mr. Cawood continued making payments to Seterus. In November 2013, following the retention of legal counsel, he sent additional payments and documentation regarding his loan status. Seterus acknowledged his participation in a modification program but later claimed his loan was in default and outlined overdue payments required by January 7, 2014. Additionally, Seterus communicated an escrow shortage and proposed a new payment arrangement for the deficiency.
In December 2013, Seterus requested documentation from Mr. Cawood to review foreclosure proceedings and acknowledged receipt of his December payment, but stated his loan remained in default. By January 2, 2014, Mr. Cawood's loan principal had increased to $73,901.98. Despite sending several payments in January, February, March, and April 2014, Seterus continued to regard the loan as in default. On March 1, 2014, Seterus demanded a payment of $4,030.03 by March 30. Following this, Mr. Cawood made additional payments, which Seterus acknowledged but still classified the loan as in default.
On April 29, 2014, Seterus notified Mr. Cawood that his loan had been referred to RCO Legal for foreclosure and warned that unless he disputed the debt within 30 days, it would be assumed valid. Mr. Cawood's attorney disputed the mortgage amount and warned that foreclosure would violate orders from a Texas case. From May to August 2014, there were numerous exchanges of payments between Mr. Cawood and Seterus, with Seterus stating the issue was under investigation.
On July 11, 2014, a foreclosure was scheduled for August 14, 2014. Seterus later explained that while Bankruptcy payment plan payments were on time, they were insufficient to bring the loan to current status. Unable to halt the foreclosure, Mr. Cawood refiled for Chapter 13 bankruptcy on August 12, 2014. A letter on September 9 indicated the foreclosure was postponed as Seterus was adjusting the loan per bankruptcy court orders. After the bankruptcy filing, Seterus objected to the confirmation of Mr. Cawood's plan, citing arrears exceeding $7,000. By November 2014, Mr. Cawood experienced significant stress, losing 20 pounds due to the situation surrounding his home.
Jurisdiction for this case is established under 28 U.S.C. 157(a) and the Standing Order of the U.S. District Court for the Eastern District of Tennessee. The objection to claim in this adversary proceeding is allowed under Federal Rule of Bankruptcy Procedure 3007(b), with venue proper under 28 U.S.C. 1408 and 1409. Seterus and FNMA question the court's subject matter jurisdiction, arguing that the Plaintiffs' claims may be an attempt to enforce a discharge injunction from a Texas case rather than seeking compensation for damages from violations of state and federal nonbankruptcy laws. While Seterus acknowledges personal jurisdiction due to its involvement in the chapter 13 case, it maintains that the court cannot enforce the discharge injunction, which is under the jurisdiction of the court that issued it. The court concurs but must first assess whether the debt Seterus pursued for FNMA falls under the discharged debts covered by the discharge injunction in 11 U.S.C. 524. This statute prevents actions to collect discharged debts, reinforcing the "fresh start" concept of the Bankruptcy Code. Seterus argues that all Plaintiffs' claims relate to violations of the Texas discharge injunction, citing case law that prohibits one bankruptcy court from enforcing another's discharge injunction. In contrast, the Plaintiff asserts that his claims are independent of the Texas injunction and highlight that the long-term debt owed to SunTrust was not discharged, framing his allegations as distinct state and federal law claims.
Alleged violations of a discharge injunction due to post-discharge collection actions by a mortgage holder were examined in Perry v. EMC Mortgage Corporation. In this case, the mortgage defaults were remedied through a Chapter 13 plan, but the creditor initiated foreclosure shortly after the discharge was granted. The court determined that the discharge injunction only applies to actions aimed at collecting discharged debts. Since the long-term mortgage was excluded from discharge under 11 U.S.C. § 1328, the discharge injunction did not apply. Consequently, the court found it lacked subject matter jurisdiction over post-discharge disputes regarding the debtor’s mortgage obligations, as these did not arise under title 11 or relate to the bankruptcy case. The debtor had fulfilled her plan and received a discharge that specifically excluded ongoing mortgage obligations, meaning the discharge injunction was inapplicable.
The defendants argued that only the Texas court had jurisdiction to hear the case, limiting any claims to contempt related to that court's orders. However, the court disagreed, believing that a Texas bankruptcy court would likely reach a similar conclusion regarding discharge injunction violations. A similar case, Rodriguez v. Countrywide Home Loans, also indicated that mortgage loans brought current through a Chapter 13 plan remained non-dischargeable, including any associated fees and costs.
In Rodriguez v. Countrywide Home Loans, Inc., the court initially deferred a ruling on jurisdiction but noted a lack of clarity on how the allegations related to the discharge injunction. In a later opinion, the court granted Countrywide's summary judgment motion, determining that its collection actions did not violate the discharge injunction. The court analyzed the treatment of mortgages under chapter 13, highlighting that sections 1322(a)(2), 1322(b)(5), and 1328(a)(1) prevent the discharge of home mortgage debts. Section 1322(a)(5) allows debtors to retain their homes by remedying arrears and maintaining payments, while section 1328(a)(1) explicitly states that arrears are not discharged. Moreover, section 1322(a)(2) restricts modifications to the mortgage contract, allowing debtors only to cure arrears and maintain payments. Consequently, if the mortgage debt is not fully paid under the plan, the debtor must continue monthly payments post-plan completion. Mr. Rodriguez sought relief from foreclosure, claiming he had cured his mortgage, but the court found he lacked a cause of action under 11 U.S.C. § 524, concluding there was no discharge injunction violation since the mortgage loan was not discharged in his prior bankruptcy. The court dismissed the relevance of case law cited by the Defendants regarding the discharge injunction enforcement, ruling that any claims by the Plaintiff did not pertain to violations under section 524(a)(2), rendering FNMA’s and Seterus’ jurisdictional objections meritless.
Regarding jurisdiction over the Plaintiff's claims, the court referenced 28 U.S.C. § 1334, which grants district courts original jurisdiction over civil proceedings related to title 11. These cases can be referred to bankruptcy courts that are authorized to hear core proceedings, which are defined as those invoking substantive rights created by federal bankruptcy law or existing solely within bankruptcy contexts. Although "core proceedings" are not explicitly defined, § 157(b)(2) provides a non-exhaustive list. Bankruptcy courts can issue orders in core proceedings, while non-core matters require submission of proposed findings to the district court unless all parties consent to the bankruptcy judge's jurisdiction.
Only one of the six causes of action brought by the Plaintiff is based on federal bankruptcy law, while the others stem from events prior to the bankruptcy petition under state law or federal nonbankruptcy law. Despite this, recoveries from all causes of action are considered assets of the Plaintiff's bankruptcy estate, as defined by 11 U.S.C. § 541(a)(1). The estate encompasses all legal and equitable interests in property held by the debtor at the case's commencement, including property acquired after the case begins.
The first cause of action involves an objection to a proof of claim filed by Seterus on behalf of FNMA and a request for a determination regarding FNMA's lien validity, extent, or priority. This objection and determination are core proceedings that the court can adjudicate under 28 U.S.C. § 1334(b) and § 157(b)(2)(B) and (E). Although Seterus acknowledges the court's jurisdiction over the claim objection, it disputes the Plaintiff's ability to prove the lien's validity or priority, noting the absence of a request to avoid or subordinate FNMA's lien. However, the Plaintiff asserts that the claim amount is directly linked to the lien’s extent, which the court supports, affirming its jurisdiction to determine both the claim amount and lien extent.
Counts 2 through 6, which do not arise under Title 11, are based on violations of state contract and tort law and federal nonbankruptcy law, seeking damages and injunctive relief. The court must assess whether these claims are "related to" the Plaintiff's bankruptcy case, as established by the Sixth Circuit, which defines "related to" jurisdiction as claims that could affect the estate's administration. The Plaintiff’s disallowance claims challenge debts sought by Waldman, and any damages awarded would enhance the bankruptcy estate, benefiting other creditors. Claims owned by the debtor that become estate property fall under federal jurisdiction, regardless of their state law origin. Therefore, the Plaintiff's claims could influence the payment obligations on Seterus' claim and may increase his bankruptcy estate, affecting his bankruptcy rights. The Defendants argue that an award wouldn't impact the estate's administration due to the limited number of creditors, but they provide no legal basis for requiring a minimum number of debts for "related to" jurisdiction.
Plaintiff's potential primary benefit from an award does not preclude the impact on his bankruptcy estate by a 100% payment to another creditor and a reduction in his mortgage debt. Under the Sixth Circuit's test, any effect on the administration of the estate suffices for jurisdiction. The court determines that Counts 2 through 6 are related to Plaintiff's bankruptcy case, granting it subject matter jurisdiction.
Regarding jurisdiction to issue final determinations, if a bankruptcy court hears a case under "related to" jurisdiction, it typically submits proposed findings and conclusions to the district court unless all parties consent to the bankruptcy court's authority. In this case, Plaintiff and SunTrust consented, while RCO Legal and Priority Trustee Services implied consent by admitting jurisdictional allegations, though not explicitly as required by Rule 7012(b). Conversely, Seterus and FNMA have not complied with this rule, creating uncertainty about their consent for a final order despite previous admissions of jurisdiction. The court possesses "arising in" jurisdiction over Count 1 and "related to" jurisdiction over Counts 2-6 but requires Seterus and FNMA to clarify their consent status within fourteen days due to the ambiguity surrounding their motions to dismiss.
If the Defendants consent to a final order from the court, it will become final fourteen days post-entry unless an appeal or motion for reconsideration is filed within that period, as outlined in Federal Rules of Bankruptcy Procedure (Fed. R. Bankr. P.) 8002(a) and 9023. If consent is not given, the opinion will function as proposed findings of fact and conclusions of law under 28 U.S.C. § 157(c)(1), and will be processed according to Fed. R. Bankr. P. 9033, with the deadline in Rule 9033(b) extended by fourteen days for filing Rule 7012(b) statements and potential objections (Fed. R. Bankr. P. 9033(c)).
Under the standard of review, Federal Rule of Bankruptcy Procedure 7012(b) incorporates Federal Rule of Civil Procedure 12(b), allowing dismissal of a complaint for failure to state a claim. When evaluating such a motion, the court must accept the well-pleaded allegations as true and interpret them favorably towards the plaintiff. The Supreme Court has established that a complaint must adequately state a claim supported by factual allegations that raise a right to relief above mere speculation (Bell Atlantic Corp. v. Twombly). Legal conclusions disguised as factual allegations are not accepted as true (Papasan v. Allain). Following a request for additional briefing, the Plaintiff submitted a supplemental memorandum with documents related to the Texas Case, but the court will not consider these documents in the dismissal analysis, adhering to Sixth Circuit guidance against considering materials outside the complaint (Winget v. JP Morgan Chase Bank, N.A.).
Defendants seek dismissal of specific causes of action in the Amended Complaint for failure to state a claim. The court evaluates each cause individually. Count 1 involves the Plaintiff's Objection to Claim No. 2 filed by Seterus, which includes a challenge to late charges, post-petition attorney fees, and the total claim amount of $72,455.06. Plaintiff requests the court to determine the lien's validity and amount under Federal Rule of Bankruptcy Procedure 7001(2), alleging improper payment application and lack of accurate loan accounting by Defendants.
Seterus counters that Count 1 does not present a valid legal claim, asserting that the Amended Complaint does not contest the lien's secured status but merely seeks to ascertain the lien amount. Seterus claims this focus excludes the matter from Rule 7001(2). However, the court notes that the term "extent" in the rule relates to the claim amount, supporting Plaintiff's claim. Additionally, Seterus argues that the allegation regarding inadequate accounting is a state law claim preempted by the Bankruptcy Code, referencing the case Pereira v. First North American National Bank, which involved violations of the discharge injunction. The court distinguishes the current case from Pereira, finding that the Plaintiff's claims, including the request for an accounting, originated prepetition and are part of the estate. Therefore, pursuing an accounting as a state court remedy is allowed, and the preemption analysis from Pereira does not apply.
The Defendants’ motion to dismiss the accounting claim based on preemption is denied. FNMA's motion to dismiss Count 1 argues that the Amended Complaint lacks factual allegations of unlawful conduct by FNMA, asserting it only involves actions by Seterus. The Plaintiff counters that FNMA is liable for Seterus's actions as its agent. The complaint alleges FNMA is the current owner of the property and that Seterus serves as its agent, which Tennessee law states can lead to vicarious liability for actions within the agent's authority. The court finds that the Plaintiff has sufficiently alleged an agency relationship, suggesting FNMA could be held liable for Seterus's actions, and thus denies FNMA’s motion to dismiss.
For Counts 2, 4, and 8, Seterus claims these are preempted by the Bankruptcy Code as they arise from a violation of a discharge order in a related Texas case. Seterus cites relevant case law to support its position that these claims should be dismissed.
The plaintiff in this case seeks recovery under state law for unjust enrichment related to funds collected by a creditor based on an invalid reaffirmation agreement regarding an automobile loan. Additionally, the plaintiff requests an accounting and seeks relief under section 524 for violation of the discharge injunction. The Sixth Circuit ruled that there is no private cause of action for such violations, and the state law claims inherently depend on a violation of the Bankruptcy Code, as established in Pertuso. However, the current case is distinguished from Pertuso because it involves long-term debts secured by a mortgage on the debtor’s primary residence, which cannot be altered or discharged in bankruptcy under 11 U.S.C. 1328(a)(1). The court asserts that Congress did not intend to preempt claims arising from torts or contract violations that occur post-bankruptcy case closure when obligations remain undischarged.
The court also distinguishes this matter from Helman, where the debtor claimed personal liability was discharged. In contrast, here, the plaintiff is not seeking relief for a discharge injunction violation, thus, state law claims such as breach of contract and misrepresentation are not preempted by the Bankruptcy Code and may proceed.
Regarding the claims against FNMA, the court finds that the plaintiff has sufficiently alleged that Seterus acted as FNMA's agent, meaning that actions taken by Seterus can be attributed to FNMA. FNMA's motion to dismiss the breach of contract and misrepresentation claims is denied. On Count 5, addressing the failure to credit payments, Seterus argues for dismissal due to the lack of factual allegations concerning improperly credited payments.
Plaintiffs allege a violation of the Truth in Lending Act (TILA), specifically 15 U.S.C. § 1639f, which mandates that servicers credit home loan payments as of the date received unless a delay does not incur a charge to the consumer. The court clarifies that the dispute is not about whether Seterus credited payments unlawfully but rather that Seterus and FNMA failed to credit payments that were made in accordance with the law. Seterus contends that Count 5 lacks factual allegations, but the court notes that Count 5 incorporates prior allegations detailing multiple payments that were not applied due to Seterus's claims of default.
Plaintiffs assert that their loan was current as per a bankruptcy court ruling, and subsequent payments were not acknowledged by Seterus, which resulted in additional late charges. Seterus's demands to cure alleged defaults varied significantly over time, indicating potential additional charges to the account. The court finds these allegations sufficient to support a claim under TILA and denies Seterus's motion to dismiss.
Regarding FNMA, the court notes that Count 5 primarily names Seterus and SunTrust but acknowledges that the term "Defendants" includes FNMA. The Plaintiff intends to assert a TILA claim against FNMA and is granted leave to amend the complaint for clarification within fourteen days. FNMA will then have fourteen days to respond, and Plaintiffs can file a reply if necessary. Additionally, Count 6 pertains to the Fair Debt Collections Practices Act (FDCPA), but Seterus raises only jurisdictional issues related to this claim.
Seterus contends that the Plaintiff's Fair Debt Collection Practices Act (FDCPA) claim relies on the same factual basis as his claim of a discharge injunction violation, arguing that this does not establish jurisdiction. Seterus asserts that the court must determine if the FDCPA claim could affect the bankruptcy estate before exercising “related to” jurisdiction. They argue that since Seterus is the only secured creditor, any recovery would benefit the debtor rather than the bankruptcy estate. The court has previously ruled that there is no violation of the discharge injunction in this case, distinguishing it from In re Marshall, where the court did not exercise “related to” jurisdiction over FDCPA claims. However, the court found it does have “related to” jurisdiction over the Plaintiff's FDCPA claim, determining it could impact the bankruptcy estate based on the standard set in Waldman v. Stone. Consequently, Count 6 against Seterus will proceed, as no other grounds for dismissal were raised.
Regarding FNMA, the court grants its motion to dismiss Count 6 since the Amended Complaint lacks allegations of unlawful conduct by FNMA, and the Plaintiff concedes that Count 6 is not brought against FNMA.
Additionally, Mr. Cawood seeks certification for two nationwide classes under Federal Rule of Bankruptcy Procedure 7023(b)(2) and (b)(3). The first class includes individuals who completed a Chapter 13 bankruptcy from October 17, 2005, until the date of certification, had a mortgage with FNMA serviced by Seterus, and faced non-compliance with Chapter 13 trustee accounting upon completion of their plans. The second class seeks to enjoin the Defendants from failing to recognize these accounting practices. No geographic limitations are imposed on the former debtors included in this class action.
The court must determine its jurisdiction over claims made by both the individual debtor, Mr. Cawood, and a nationwide class of former debtors. Seterus contends that Mr. Cawood cannot represent a nationwide class due to a lack of a personal claim. However, the court has established that Mr. Cawood has indeed stated a claim for relief in his Amended Complaint, thereby refuting Seterus's argument for dismissal of the class. Seterus further argues that Mr. Cawood cannot pursue claims regarding violations of the discharge injunction on behalf of the class since he lacks a private cause of action under section 524. Citing cases In re Forson and In re Beck, Seterus maintains that the court lacks jurisdiction over a nationwide class action for enforcing the discharge injunction.
The court finds Seterus's reliance on these cases inappropriate, as they concern violations of the discharge injunction and involve different factual and legal contexts. In re Forson involved a debtor attempting to enforce a contempt claim for discharged fees, whereas Mr. Cawood's claims arise from a second bankruptcy proceeding related to amounts owed on a first mortgage, where the discharge injunction does not apply. The Forson court had not discussed the applicability of section 524(a)(2), and its findings only limited the class scope. The case of In re Beck involved a chapter 7 discharge and a creditor's post-discharge collection attempts, which are not analogous to Mr. Cawood's situation. Overall, the court concludes that it has jurisdiction to hear Mr. Cawood's claims while distinguishing them from the cited cases.
The court addressed whether it had the authority to hold a creditor in contempt for violating section 524(a) discharge injunctions issued by bankruptcy courts, including those outside its jurisdiction. It concluded that the plaintiffs' remedy was limited to contempt proceedings for enforcing the discharge order. The debtor's argument that a statutory discharge order should be treated differently was rejected. The court affirmed it could not enforce discharge injunctions from other courts and deferred its decision on enforcing discharge orders within its district. The applicability of section 524 was not contested, and the debtor did not present any claims beyond those related to the discharge injunction. Consequently, the court found that the cited cases did not resolve whether it could hear a nationwide class action, as those cases involved class certifications limited to the respective districts of the bankruptcy filings. The court noted that the plaintiff's counsel argued for a nationwide solution based on the case of Sims, which involved a substantive bankruptcy right, but the court emphasized that further examination of whether the issues in this case reflect a nationwide problem would be necessary during a future class certification motion. The court also highlighted that determining the propriety of certifying a class would depend on the plaintiff meeting additional class certification requirements. Ultimately, the court denied the motion to dismiss filed by Set-eras and granted in part, denied in part the motion to dismiss from FNMA, specifically dismissing Count 6 of the Amended Complaint against FNMA.
The court grants the Plaintiff permission to amend Count 5 of his complaint to clarify whether he intends to assert that claim against FNMA, requiring the amended complaint to be filed within fourteen days. FNMA will have fourteen days to respond by supplementing its motion to dismiss, and Plaintiff may file a reply within fourteen days if necessary. The court orders both Seterus and FNMA to file a statement regarding their consent to a final order within fourteen days. If they consent, the court's order will become final fourteen days after entry unless an appeal or motion to reconsider is filed. If they do not consent, the opinion may be treated as proposed findings and conclusions under 28 U.S.C. § 157(c)(1).
The court extends the deadline for objections under Federal Rule of Bankruptcy Procedure 9033(b) by fourteen days to account for the filing of consent statements. The Amended Complaint references an order deeming the mortgage current and alleges a violation of Bankruptcy Court orders, leading the court to infer that the order was entered. The court emphasizes that when considering a motion to dismiss, all allegations must be viewed in the light most favorable to the Plaintiff. The court finds that the Plaintiff's claims do not involve violations of the discharge injunction, as there are no allegations that Defendants failed to credit payments made under the confirmed plan. Additionally, neither Seterus nor FNMA has invoked 11 U.S.C. § 524(i), which addresses creditor actions post-discharge regarding failure to credit payments. The court suggests that the parties may not have raised this section due to a lack of sufficient information or strategic considerations.
Plaintiff contends that if the allegations in Counts 2 through 6 are demonstrated to be a nationwide practice, it may suggest an abuse of the bankruptcy process. The court refrains from deciding whether such a demonstration would raise issues under Title 11 at this stage. The court notes the ambiguity in referring to “both” parties involved, specifically Seterus and FNMA, who have already responded to the Amended Complaint, participated in a scheduling conference on April 25, 2016, and were included in the scheduling order. FNMA has not specifically briefed the issue of the Plaintiff's ability to pursue a nationwide class action. However, FNMA's motion to dismiss indicates that it incorporates relevant arguments from Seterus’ motion to dismiss and has also adopted Seterus’ reply. The court recognizes that claims against FNMA have been adequately alleged and will therefore consider FNMA as aligning with Seterus' arguments.
