Opinion
Case No. 17-21073-dob Adversary Proceeding Case No. 17-02109-dob
03-30-2018
IN RE: ERIC WALTER FUHRMAN, Debtor. ERIC WALTER FUHRMAN, Plaintiff, v. WILMINGTON SAVINGS FUND SOCIETY, FSB, D/B/A CHRISTIANA TRUST, AS TRUSTEE FOR PRETIUM MORTGAGE ACQUISITION TRUST, Defendant, and RUSHMORE LOAN MANAGEMENT SERVICES, Defendant.
Chapter 13 Proceeding
Opinion Denying Defendants' Joint Motion to Dismiss
Introduction
The Court has before it a joint motion brought by Defendants Wilmington Savings Fund Society and Rushmore Loan Management Services to dismiss this adversary proceeding for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6) made applicable to this bankruptcy proceeding by Federal Rule of Bankruptcy Procedure 7012. Plaintiff Eric Walter Fuhrman's amended complaint seeks avoidance of the mortgage and disallowance of the claim owed to Defendants and alleges violations of the Real Estate Settlement Procedures Act, 12 U.S.C. §§ 2601-17, ("RESPA") and the Fair Debt Collection Practices Act, 15 U.S.C. § 1692 ("FDCPA"). The Court heard oral arguments on Defendants' motion on February 8, 2018, and took this matter under advisement. For reasons discussed in the Opinion, the Court denies the motion to dismiss.
Facts
The following facts are not in dispute. In October of 2004, Plaintiff and his father, Walter W. Fuhrman, jointly owned a piece of real estate as joint tenants with full rights of survivorship. This property is commonly known as "8423 M-65, Posen, Michigan 49776" and is more fully described as:
Township 34 North Range 6 East Section 34 Parcel in the Southwest 1/4 of the Northwest 1/4 Commencing 200FT North of the Southwest Corner thence East 210FT, thence North 200FT, thence West 210FT, thence South 200FT to the Point of Beginning.On October 16, 2004, Walter Fuhrman sought financing from Homecomings Financial Network, Inc., and obtained a loan in the amount of $54,000. Walter Fuhrman executed a promissory note in that amount; Plaintiff is a not a party to that note and has no liability thereon. Walter Fuhrman and Plaintiff executed a document purporting to establish a mortgage in the property. The loan was recorded in the Presque Isle County Records. The mortgage was later assigned to Green Tree Servicing, LLC, and finally to Defendant Wilmington. The legal description of the property in the mortgage contains what Defendants consider a scrivener's error. Instead of stating "Range 6 East," the mortgage states "Range 6 West."
Defendants and their predecessors submitted billing statements to Walter Fuhrman and later to Plaintiff. These statements mentioned payments for escrowed property taxes and property insurance, property inspection fees, late fees, and other fees. Walter Fuhrman passed away in 2015. Plaintiff, believing the note and mortgage were enforceable, made payments to Defendants and their predecessors in interest; the payments were accepted.
Plaintiff also alleges the following facts. Plaintiff states that despite charging the account with escrow advances for taxes, Defendants failed to disburse payments to the Presque Isle County Treasurer for property taxes and failed to actually have property inspections performed. Instead, Plaintiff paid the property taxes directly, incurring fees in the process. In April of 2017, Defendants attempted to initiate foreclosure proceedings on the property by advertisement. In May of 2017, Plaintiff, through counsel, requested a full payment history relative to the mortgage and other information. However, Defendant Rushmore declined to provide any information, stating that Plaintiff was not a borrower under the note and not entitled to the information he had requested.
On May 24, 2017, Plaintiff filed a voluntary petition under Chapter 13 of the United States Bankruptcy Code. Defendant Rushmore filed a proof of claim on behalf of Defendant Wilmington on September 25, 2017. Plaintiff initiated this adversary proceeding on September 26, 2017, against Defendants Wilmington and Rushmore along with Defendant Ditech Financial. Plaintiff sought disallowance of the claim based on the incorrect description of the property in the mortgage as well as the alleged failure to obtain the consent of Walter Fuhrman's wife on the mortgage, along with allegations of violations of RESPA, FDCPA, and the Michigan Consumer Protection Act ("MCPA"). Defendant Ditech filed a motion to dismiss and the court granted that motion on December 27, 2017. Defendants Wilmington and Rushmore brought this joint motion to dismiss on January 4, 2018. In his response to the motion to dismiss, Plaintiff conceded that he could not prevail on the arguments based on the failure to obtain Walter Fuhrman's wife's consent and the MCPA violation. He filed an amended complaint on January 25, 2018, reflecting this. Under the amended complaint, Plaintiff sought avoidance of the mortgage due to the incorrect legal description and disallowance of the claim as a result. He also re-alleged violations of RESPA and FDCPA.
Jurisdiction
This Court has subject matter jurisdiction over this proceeding under 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1) and E. D. Mich. LR 83.50(a). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (K).
Standard of Review
Federal Rule of Civil Procedure 12(b) states:
Every defense to a claim for relief in any pleading must be asserted in a responsive pleading if one is required. But a party may assert the following defenses by motion: (1) lack of subject-matter jurisdiction, (2) lack of personal jurisdiction, (3) improper venue, (4) insufficient process, (5) insufficient service of process, (6) failure to state a claim upon which relief can be granted; and (7) failure to join a party under Rule 19. A motion asserting any of these defenses must be made before pleading if a responsive pleading is allowed.A motion brought under Rule 12(b)(6) tests the "sufficiency of [a] complaint." Conley v. Gibson, 355 U.S. 41, 45 (1957). A court is asked to examine the plaintiff's allegations and determine "whether, as a matter of law, the plaintiff is entitled to legal relief even if everything alleged in the complaint is true." Mayer v. Mylod, 988 F.2d 635,638 (6th Cir. 1993). "[A] court considering a motion to dismiss under Rule 12(b)(6) 'must accept all well-pleaded factual allegations of the complaint as true and construe the complaint in the light most favorable to the plaintiff.'" Benzon v. Morgan Stanley Distrib., 420 F.3d 598, 605 (6th Cir. 2005)(quoting Inge v. Rock Fin. Corp., 281 F.3d 613, 619 (6th Cir. 2002)(citing Turker v. Ohio Dep't of Rehab. & Corr., 157 3d 453, 456 (6th Cir. 1998))). If "an allegation is capable of more than one inference, it must be construed in the plaintiff's favor." Columbia Natural Res., Inc. v. Tatum, 58 F.3d 1101, 1109 (6th Cir. 1995). "While this standard is decidedly liberal, it requires more than a bare assertion of legal conclusions." Andrews v. State of Ohio, 104 F.3d 803, 806 (6th Cir. 1997)(quoting Allard v. Weitzman (In re Delorean Motor Co.), 991 F.2d 1236, 1240 (6th Cir. 1993)). Under the Federal Rules of Civil Procedure, a plaintiff is required to provide "'a short and plain statement of the claim' that will give the defendant fair notice of what the plaintiff's claim is and the grounds upon which it rests." Conley, 355 U.S. at 47. "In practice, a . . . complaint must contain either direct or inferential allegations respecting all the material elements to sustain a recovery under some viable legal theory." Andrews, 104 F.3d at 806 (quoting Delorean Motor Co., 991 F.2d at 1240)(emphasis in original).
In Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), the United States Supreme Court revisited the standards that govern Civil Rule 12(b)(6) dismissal motions. In doing so, the Supreme Court in Twombly reaffirmed the "notice pleading" standard of Rule 8(a)(2) but renounced "the accepted rule that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Twombly, 550 U.S. at 560-61 (quoting Conley, 355 U.S. at 45-46). As explained by the Court in Twombly,
Federal Rule of Civil Procedure 8(a)(2) requires only "a short and plain statement of the claim showing that the pleader is entitled to relief," in order to "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests[.]". . . While a complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, . . . a plaintiff's obligation to provide the "grounds" of his "entitle[ment] to relief" requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do[.] . . . Factual allegations must be enough to raise a right to relief above the speculative level . . . on the assumption that all the allegations in the complaint are true (even if doubtful in fact)[.]550 U.S. at 555 (citations omitted). The Twombly court went on to
hold that . . . a claim requires a complaint with enough factual matter (taken as true) to suggest [grounds for relief]. Asking for plausible grounds to infer [a right to relief] does not impose a probability requirement at the pleading stage; it simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence [of an entitlement to relief]. And, of course, a well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and "that a recovery is very remote and unlikely."Id. at 556 (citations omitted); see also Erickson v. Pardus, 551 U.S. 89, 93 (2007) (explaining that Fed. R. Civ. P. 8(a)(2) "requires only 'a short and plain statement of the claim showing that the pleader is entitled to relief.' Specific facts are not necessary[.]").
The Supreme Court later examined Twombly in the case of Ashcroft v. Iqbal, 556 U.S. 662 (2009). In Iqbal, the Supreme Court held that Twombly applies to all civil actions and is not limited to antitrust disputes only as was the case in Twombly. Iqbal, 556 U.S. at 684. The Iqbal Court further stated:
Two working principles underlie our decision in Twombly. First, the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice. . . . Rule 8 marks a notable and generous departure from the hyper-technical, code-pleading regime of a prior era, but it does not unlock the doors of discovery for a plaintiff armed with nothing more than conclusions. Second, only a complaint that states a plausible claim for relief survives a motion to dismiss. . . . Determining whether a complaint states a plausible claim for relief will, as the Court of Appeals observed, be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense. . . . But where the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged—but it has not "show[n]"—"that the pleader is entitled to relief."Iqbal, 556 U.S. at 678-79 (citations omitted).
Analysis
Avoidance of the Mortgage
Under 11 U.S.C. § 544(a)(3), also known as the "strong arm" clause of the Bankruptcy Code, a trustee "may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by . . . a bona fide purchaser of real property. . . ." Thus, the issue here is not whether the mortgage is valid, but whether a hypothetical bona fide purchaser would be able to avoid the mortgage. See Zaptocky v. Chase Manhattan Bank (In re Zaptocky), 250 F.3d 1020, 1024 (6th Cir. 2001). This issue is determined under state law. Id. "In Michigan, a bona fide purchaser of real property is put on constructive notice of a prior interest in property by the existence of a mortgage in the records of the appropriate county register of deeds." Tibble v. Well Fargo Bank (In re Hudson), 455 B.R. 648, 652 (W.D. Mich 2011) (citing Mich. Comp. Laws Ann. § 565.29). Recording acts are not subject to equitable construction "by means of which they may be made to give constructive notice of things the records do not show." Barnard v. Campau, 29 Mich. 162, 163-64 (1874). Therefore, if a mistake has been made in a recording, such as "a mortgage appears to be for a less sum than it was in fact given for, or a deed to cover less than was embraced by it, a subsequent purchaser has a right to rely on the record as showing the exact facts." Id. at 164.
The trustee has assigned his rights under 11 USC § 544 to the Plaintiff for the purpose of pursuing this action to avoid the mortgage on the property.
In Vandenbosch v. Edlund (In re Vandenbosch), 405 B.R. 253, 264-65 (W. D. Mich. 2009), the court held that a recorded mortgage on the wrong property did not provide a bona fide purchaser with constructive notice of the mortgage. In that case, the mortgage described the vacant lot adjacent to the property, rather than the property itself. Id. at 264. The court stated that even though there was a recorded land contract and an earlier mortgage that were properly recorded, "no amount of inquiry into the [p]roperty's chain of title would have revealed the . . . mortgage, because [it] had a different legal description." Id. The court therefore held that even though the mortgage may be valid, it could be avoided by the trustee. Id. at 265. In Hudson, the court reached a similar result. Hudson, 455 B.R. at 654. In that case, the debtor owned "Lot 5" but the mortgage's legal description referred to "Lot 6." Id. The court stated that the "mortgage on Lot 6, not being in the chain of title for Lot 5, provides no notice to a [bona fide purchaser] on Lot 5." Id. And even though the mortgage referenced the common address and the permanent parcel number of "Lot 5," the mortgage was avoidable by the trustee due to the incorrect legal description. Id. at 654-56.
Defendants argue that the Vandenbosch and Hudson cases do not apply to this case, because the property at issue is not platted but rather uses a metes and bounds description. To support their argument, Defendants point to the Hudson court's reliance on the Michigan Land Division Act, Mich. Comp. Laws Ann. § 560.101, which only applies to platted property. The distinction between platted property and metes and bounds property is important; however, this Court finds that it is not determinative of the issue of whether a bona fide purchaser has constructive notice of the lien when the mortgage has an incorrect legal description. In fact, while the Hudson court's analysis did take into account the Michigan Land Division Act and its intended policy, the Hudson court also considered whether the mortgage was in the chain of title for the property, whether the language of the mortgage and its presence in the grantor-grantee index would have given a bona fide purchaser constructive notice requiring further inquiries, and, if so, what type of inquiries would be required and what those inquiries would have revealed. Hudson, 455 B.R. at 654-56. While the Plaintiff ultimately may not be able to prevail on his avoidance of the mortgage and disallowance of the claim allegations in this case, the Court finds that the amended complaint alleges sufficient facts to survive a motion to dismiss as to those counts at this time.
Statutory Claims
Plaintiff alleges multiple RESPA, 12 U.S.C. §§ 2601-17, and FDCPA, 15 U.S.C. § 1692, violations. He bases the RESPA allegations on Defendants' alleged failure to pay property taxes to the country treasurer despite assessing payments for escrow of those taxes. He claims to have paid taxes to the treasurer directly himself, incurring fees in the process. Plaintiff also bases those allegations, along with the FDCPA allegations, on Defendants assessing charges and fees for inspections that were not performed due to the location of the property.
The Defendants urge this Court to dismiss the RESPA count because the statute does not give parties a private cause of relief. While it is true that not all RESPA violations give rise to a private cause of relief, to the extent the Plaintiff's allegations serve as an objection to the amount of the claim, they are properly before this Court. The Defendants also urge this Court to dismiss the FDCPA count because the behavior does not rise to the level of harassing, oppressive, or abusive behavior as a matter of law. However, the Court declines to do so. These issues are wrought with questions of fact that need to be further explored during discovery and trial if necessary. While these are not issues that normally arise during an adversary proceeding, Plaintiff filed his complaint due to his desire to avoid the mortgage and included these allegations as well. Moreover, judicial economy dictates that this Court hear these issues in the adversary proceeding so as to avoid unnecessary duplicative litigation and "to secure the just, speedy, and inexpensive determination" of these matters. See Federal Rule of Bankruptcy Procedure 1001. By considering these issues now, in this proceeding, all parties are given a faster tract to resolution but Defendants' rights are fully preserved by a full trial as opposed to the objection to claims process. This Court, therefore, finds that the amended complaint alleges sufficient facts to survive a motion to dismiss as to the statutory counts.
Conclusion
For the reasons discussed in this opinion, the Court denies Defendants' joint motion to dismiss. The Court directs Plaintiff, as the prevailing party, to prepare an order consistent with this Opinion and the entry of order procedures of this Court.
Signed on March 30, 2018
/s/ Daniel S. Opperman
Daniel S. Opperman
United States Bankruptcy Judge