Opinion
Case No. 05-34522 Adv. No. 16-3027
01-10-2017
In re: LUZ G. MUNOZ, Debtor LUZ G. MUNOZ Plaintiff v. RUSHMORE MANAGEMENT LOAN SERVICES, LLC, ET AL. Defendants
Chapter 13
DECISION OF THE COURT GRANTING DEFENDANTS RUSHMORE MANAGEMENT LOAN SERVICES AND BANC OF CALIFORNIA, INC.'S MOTION TO DISMISS AMENDED COMPLAINT [Adv. Doc. 22]
This matter is before the court on the Motion to Dismiss Amended Complaint filed by Defendants Rushmore Management Loan Services and Banc of California, Inc. [Adv. Doc. 22]; Plaintiff-Debtor Luz Munoz's Response to Defendant Rushmore and Banc of California's Motion to Dismiss [Adv. Doc. 32]; and Defendants' Reply in Support of Defendant's Motion to Dismiss Amended Complaint [Adv. Doc. 33].
In the motion to dismiss, Defendants Rushmore Management Loan Services ("Rushmore") and Banc of California, Inc. ("BCI") (collectively "Defendants") assert that the court lacks subject matter jurisdiction to determine Plaintiff-Debtor Luz Munoz ("Plaintiff")'s claims filed against them because the claims are based on Defendants' post-discharge acts and are not owned by the bankruptcy estate nor do the claims benefit the estate in any way. Furthermore, to the extent that Plaintiff states a claim for violation of the discharge injunction, that claim must be brought as a contempt action via a contested matter rather than an adversary complaint.
After careful review of the facts alleged in the Amended Complaint, the court agrees with the Defendants. The Plaintiff's claims alleging violations of a post-discharge settlement agreement and loan modification agreement are not claims of the estate nor do they impact the administration of the estate or inure to the benefit of the estate. Consequently, this court lacks even "related to" subject matter jurisdiction over those claims. Furthermore, to the extent that the Plaintiff could state a claim against the Defendants for violation of the discharge injunction, that claim does not exist as a private cause of action and must be brought as a contested matter. As such, the court grants the Defendants' motion to dismiss.
BACKGROUND
A. Procedural Background
After reopening her bankruptcy case for the second time in February of 2016, Plaintiff filed an adversary complaint and, subsequently, the instant amended adversary complaint ("Amended Complaint") on July 20, 2016 [Adv. Doc. 16]. In the Amended Complaint, Plaintiff sets forth the following claims against the Defendants: 1) violation of the discharge injunction pursuant to 11 U.S.C. § 524(i) and request for contempt sanctions [Id., ¶¶ 85-93]; 2) defamation [Id., ¶¶ 94-103]; 3) breach of contract / settlement agreement [Id., ¶¶ 104 - 112]; 4) breach of the implied covenant of good faith and fair dealing [Id., ¶¶ 113-121]; 5) violation of the Fair Debt Collection Practices Act (Rushmore) [Id., ¶¶ 122-124]; 6) violation of RESPA (Rushmore) [Id., ¶¶ 125-133]; 7) violation of the Truth in Lending Act (Rushmore) [Id., ¶¶ 134-140]; and 8) equitable relief pursuant to 11 U.S.C. § 105(a) [Id., ¶¶ 141-146]. Plaintiff requests relief in the form of declaratory judgments that her mortgage loan payments are current and that Rushmore was negligent in its accounting and reporting requirements and further requests sanctions, actual damages, punitive damages, attorney fees, costs and other unspecified equitable relief under 11 U.S.C. § 105(a).
The Amended Complaint named two other defendants, U.S. Bank National Association, as Trustee for TOWD Point Master Funding Trust 2015-LM8 and Select Portfolio Servicing, Inc. which are not parties to the current motion to dismiss. The Plaintiff has settled with these two defendants [Adv. Doc. 42].
The Defendants filed their motion to dismiss [Adv. Docs. 22] on August 3, 2016 and the matter is now ripe for determination.
B. Factual Background
The following facts form the basis for the claims in the Plaintiff's Amended Complaint [Adv. Doc. 16]. The Plaintiff received her discharge in the underlying Chapter 13 case on August 27, 2010 [Id., ¶ 14]. Subsequent to the discharge but prior to the current adversary proceeding, the Plaintiff reopened her bankruptcy case and, on March 15, 2012, filed her first adversary complaint against Quantum Mortgage Servicing ("Quantum") and Arch Bay Holdings LLC ("Arch Bay"), the servicer and owner of the mortgage loan on Plaintiff's residential property at 3955 Klepinger Road, Dayton, OH 45416 ("2012 Adversary Proceeding") [Id., ¶¶ 1, 12-13]. The 2012 Adversary Proceeding was filed by Plaintiff because Quantum pursued collection of alleged delinquent mortgage loan payments that, by the Court's order in the bankruptcy case, were deemed current at the time of the Debtor's bankruptcy discharge. [Id. at ¶ 13]. On April 1, 2012, Plaintiff entered a settlement agreement with Quantum and Arch Bay ("2012 Settlement Agreement") [Id. at ¶ 15]. On May 1, 2012, the court entered an Agreed Order of Compromise, Settlement and Dismissal ("2012 Agreed Order") noting that the parties had entered into a settlement agreement resolving the adversary proceeding and dismissing the complaint with prejudice "subject to the Court retaining jurisdiction to enforce the terms of the settlement agreement." [Id., at ¶¶ 15- 16 (citing to the 2012 Agreed Order at Adv. Doc. 6 in the 2012 Adversary Proceeding, Adv. No. 12-3084)].
The 2012 Settlement Agreement required, among other things, that the "Claimant" (defined in the agreement as the Plaintiff) dismiss the adversary proceeding and execute a loan modification as follows:
Claimant shall execute a certain Loan Modification Agreement dated March 2, 2012, reducing the unpaid balance to $66,150.00, fixing the interest rate at 5.5%, and extending the maturity date to March 1, 2022 (the "Loan Modification Agreement"): and shall return the executed Loan Modification Agreement to Servicer through its counsel . . . ."[Id., at ¶¶ 17-20 and attached Ex. C (2012 Settlement Agreement), ¶ 3(A)]. The terms of the 2012 Settlement Agreement were to inure to the benefit of the parties as well as their heirs and assigns and any prevailing party having to enforce the settlement is to collect costs related to same [Id., attached Ex. C, ¶ 3(P) and (W)].
In paragraph 18 of the Amended Complaint, Plaintiff vaguely refers to certain language beginning "As of March 1, 2012, the amount payable under the Note . . ." as being a provision in the 2012 Settlement Agreement. This is misleading as the language does not appear in the 2012 Settlement Agreement but, apparently, is a provision in the Loan Modification Agreement. Significantly, the terms of the Loan Modification Agreement are not incorporated into the Amended Complaint nor is the Loan Modification Agreement attached as an exhibit.
In August of 2012, Quantum transferred the servicing of the modified mortgage loan to Rushmore with ownership of the loan going to BCI. [Id., ¶ 21]. Rushmore began providing notices to Plaintiff in late 2012 revealing that Rushmore considered Plaintiff's loan to be delinquent [Id., ¶ 23]. In December of 2012, Rushmore was contacted by Plaintiff's attorney regarding incorrect information Rushmore was providing to Plaintiff about the balance owed on the modified mortgage loan, inaccurate reporting of late payments by Plaintiff after transfer of the account to Rushmore for servicing, and an incorrect reporting of a delinquent escrow account balance and alleged corporate advance amounts still owed on the loan [Id., ¶ 22].
On January 17, 2013, Rushmore responded to the attorney with loan account information indicating no escrow balance or corporate advances owed and a principal balance of $66,150 [Id., ¶ 24 and Ex. A]. Despite this clarification, Rushmore, in a letter dated June 18, 2013, determined that the loan was in default and required Plaintiff to pay funds to bring it current [Id., ¶ 25]. After this and other problems, Plaintiff requested payoff information from Rushmore and a payoff statement sent to the Plaintiff in October of 2015 indicated an escrow overdraft of $2,200.69, late charges of $573.03 and corporate advances of $8,475.24 [Id., ¶¶ 30-31].
Plaintiff, through her attorney, sent Rushmore a Notice of Error letter noting, among other errors, that the payoff statement was incorrect as to the amounts owed as there should be no escrow overdrafts and no corporate advances based on the terms of the modified mortgage loan [Id., ¶ 32 and Ex. B]. Rushmore did not meaningfully respond until a January 19, 2016 letter in which it failed to acknowledge or correct any errors [Id., ¶¶ 35-36, 41]. In the meantime, Rushmore sent Plaintiff letters in November of 2015 stating that the loan was delinquent and threatening foreclosure if the delinquency was not cured [Id., ¶¶ 38-40]. Plaintiff also believes that her August and September 2015 payments by check were never cashed or returned [Id., ¶ 44] nor were her replacement checks cashed, credited to her loan, or forwarded to the new loan servicer when loan servicing was transferred [Id., ¶¶ 42, 45-46].
Rushmore transferred servicing of the loan to Select Portfolio Servicing Inc. ("SPS") on January 29, 2016 [Id., ¶ 42]. As of March of 2016, SPS showed a negative escrow account and amounts due for late charges, inspection fees and corporate advances [Id., ¶ 47 and Ex. D]. At some point after March, SPS did remove the corporate advance charges [Id., ¶ 48]. However, SPS had not adequately responded to notices of error made as late as April 20, 2016 and Plaintiff believes, following a letter from SPS in June of 2016, that SPS continues to carry the loan as delinquent and continues reporting the loan account as having escrow arrearages, late payments and other charged fees [Id., ¶¶ 72-75].
Plaintiff believes that she made all required loan payments under the Loan Modification Agreement and is current with the exception of a possible $700 escrow account shortage due to Rushmore paying property taxes in 2013 which Plaintiff was supposed to pay directly under the settlement agreement terms [Id., ¶¶ 49-50]. Plaintiff believes that the alleged missing monthly payments, late fee charges and negative escrow balances were caused by "Rushmore['s] failure to correctly account for the terms of the Loan Mod and negligent accounting for the Loan from December 2012 until January 2016." [Id., ¶ 52]. Plaintiff further believes that Rushmore has been reporting the loan as delinquent or late to credit bureaus since August of 2012 [Id., ¶ 66].
Because of Rushmore's failure to account for errors, Plaintiff has had extreme anxiety and worry about losing her home to foreclosure and has had to seek medical treatment for high blood pressure in addition to incurring costs relating to her attempts to contact both Rushmore and SPS to correct the errors in how they are treating her loan [Id., ¶¶ 81-84].
LEGAL ANALYSIS
A. Standard of Review
The Defendants move for dismissal of Plaintiff's Amended Complaint pursuant to Fed. R. Civ. P. ("Rule") 12(b)(1) for lack of subject matter jurisdiction and pursuant to Rule 12(b)(6) for failure to state a claim. These provisions of Rule 12 are made applicable to bankruptcy adversary proceedings via Fed. R. Bankr. P. 7012.
Dismissal for lack of subject matter jurisdiction is an issue that may be raised at any point in a proceeding. Rhiel v. Central Mortg. Co. (In re Kebe), 444 B.R. 871, 875 (Bankr. S.D. Ohio 2011). When jurisdictional facts are challenged, the party claiming jurisdiction bears the burden of demonstrating that the court has jurisdiction over the subject matter. Ohio Nat'l Life Ins. Co. v. United States, 922 F.2d 320, 324 (6th Cir. 1990); Kebe, 444 B.R. at 875. Consequently, the Plaintiff in this case bears the burden of demonstrating that her federal and state law claims against Defendants fall within the subject matter jurisdiction of this bankruptcy court.
To survive a Rule 12(b)(6) attack for failure to state a claim, the Plaintiff's Amended Complaint must "contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.' " Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (further citation omitted). The factual allegations provided in the complaint need not be detailed. Id.; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Instead, a complaint 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. Fed. R. Civ. P. 8(a)(2) (incorporated in bankruptcy by Fed. R. Bankr. P. 7008); Twombly, 550 U.S. at 555. Nonetheless, the facts provided must be sufficient to raise a right to relief "above the speculative level" and the plaintiff has the obligation to provide more than just "labels and conclusions" or a "formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. See also Iqbal, 556 U.S. at 678 (noting that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice").
B. Lack of Subject Matter Jurisdiction Over Post-Discharge Claims
To determine whether the court has subject matter jurisdiction over the Plaintiff's federal and state law claims based on Defendants' alleged violations of the post-discharge 2012 Settlement Agreement and Loan Modification Agreement, an overview of a bankruptcy court's limited jurisdiction is helpful. Under 28 U.S.C. § 1334(b), the district court has original jurisdiction over all civil proceedings "arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). The Sixth Circuit has explained that it does not explicitly distinguish among the three categories because they "operate together to define the scope of bankruptcy jurisdiction." Stewart v. Henry (In re Stewart), 62 Fed. Appx. 610, 613 (6th Cir. Apr. 7, 2003); Michigan Emp't Sec. Comm'n v. Wolverine Radio Co., Inc. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir. 1991). Accordingly, to determine whether a matter is within § 1334(b) jurisdiction, the Sixth Circuit only requires a determination that the matter is at least "related to" the bankruptcy. Stewart, 62 Fed. Appx. at 613.
As noted in the procedural background, the Plaintiff includes claims against one or both Defendants for defamation, breach of contract / settlement agreement, breach of the implied covenant of good faith and fair dealing, violation of the Fair Debt Collection Practices Act, violation of RESPA, violation of the Truth in Lending Act and equitable relief pursuant to 11 U.S.C. § 105(a). The Plaintiff also includes a claim for violation of the discharge injunction.
Within these confines, "'the test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy.'" Wolverine, 930 F.2d at 1142 (further citation omitted); Terlecky v. Baruch (In re Baruch), 446 B.R. 844, 847 (Bankr. S.D. Ohio 2011). In addition, an action "'is related to bankruptcy if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts on the handling and administration of the estate.'" Wolverine, 930 F.2d at 1142 (further citation omitted); Baruch, 446 B.R. at 847-48.
In the case at hand, the Plaintiff brings federal and state law claims of defamation, breach of contract / settlement agreement, breach of the implied covenant of good faith and fair dealing, and violations of the Fair Debt Collection Practices Act, RESPA, and the Truth in Lending Act. The factual premise for these claims is Defendants' alleged mortgage loan collection activities in violation of the 2012 Settlement Agreement and Loan Modification Agreement both of which were entered more than a year after the Plaintiff received her August 27, 2010 discharge in the underlying bankruptcy case. "'Claims arising from post-petition actions are not property of the estate.'" Marshall v. PNC Bank, N.A. (In re Marshall), 491 B.R. 217, 230 (Bankr. S.D. Ohio 2012). As such, any recovery based on these federal and state law claims will inure to the benefit of the Plaintiff-Debtor rather than the estate. Id. Nor, for that matter, has the Plaintiff asserted that the claims impact the administration of the estate. For these reasons, the court determines that it lacks "related to" jurisdiction over the Plaintiff's federal and state law claims which, as noted in the Marshall case, is the conclusion reached by a vast majority of courts directly addressing this jurisdictional issue under similar facts. Id. at 230 n.12 (collecting cases finding no bankruptcy court subject matter jurisdiction over FDCPA and similar claims in discharged cases because the claims inure to the benefit of the plaintiff and not to the bankruptcy estate).
This court's determination does not address whether the Plaintiff's federal and state law claims for allegedly improper mortgage loan collection activities have merit; instead, this court's determination is merely a recognition of the limited jurisdiction of the bankruptcy court. As astutely noted in a recent decision by Judge Humphrey:
. . . once the mortgagee deems a mortgage current, the bankruptcy court loses jurisdiction over that mortgage loan and all disputes concerning the application or misapplication of payments to that loan. Thus, once the mortgage is deemed and treated current [in the bankruptcy case], this court lacks jurisdiction over a mortgagee's subsequent breach of the terms of the mortgage loan. Any such claims must be pursued under applicable non-bankruptcy law in a forum other than the bankruptcy court.Folden v. Green Tree Servicing, LLC (In re Folden), Adv. No. 12-3117, Doc. No. 58, pp.6-7, n.4 (Bankr. S.D. Ohio March 24, 2014) (Decision Granting Defendants' Joint Motion for Judgment on the Pleadings, Without Prejudice).
Nonetheless, the Plaintiff argues that this court retains jurisdiction to enforce the terms of the post-discharge 2012 Settlement Agreement because it was "approved" by this court [Adv. Doc. 32, p. 4]. This allegation is both factually and legally incorrect. In the 2012 Adversary Proceeding filed after the discharge in the underlying bankruptcy case, the parties reached a settlement and uploaded the Agreed Order of Compromise, Settlement and Dismissal ("2012 Agreed Order") signed by the court on May 1, 2012 [Adv. No. 12-3084, Adv. Doc. 6]. While the 2012 Agreed Order references a settlement agreement entered between the parties, the order does not contain language approving the settlement agreement nor, for that matter, was the settlement agreement made a part of the record for the court's review. Second, while the 2012 Agreed Order produced by the parties states that the Court retains jurisdiction to enforce the terms of the post-discharge settlement agreement, the reality is that the court cannot, through its orders or its § 105(a) powers to enforce its orders, expand on the limited subject matter jurisdiction granted to the bankruptcy court by Congress. Wasserman v. Immormino (In re Granger Garage, Inc.), 921 F.2d 74, 77 (6th Cir. 1990) (noting that the subject matter jurisdiction of the bankruptcy court is limited to that which Congress specifically grants and may not be extended under the guise of using the court's equitable powers).
The court notes that the Plaintiff's Amended Complaint includes a separate claim pursuant to 11 U.S.C. § 105(a) requesting the court use its equitable powers under this provision to enforce its orders and require the Defendants to comply with the terms of the 2012 Settlement Agreement and Loan Modification Agreement [Adv. Doc. 16, Eighth Claim]. However, neither the 2012 Settlement Agreement nor the Loan Modification Agreement themselves are court orders nor has the court used its orders to "approve" the terms of the 2012 Settlement Agreement or Loan Modification Agreement although the Plaintiff suggests otherwise. Consequently, the court cannot use its § 105(a) powers to enforce either document. Furthermore, even if the Plaintiff could point to a specific court order that was violated, the debtor must pursue an action for contempt by motion rather than by adversary proceeding as discussed in the next section of this decision.
The bankruptcy court simply lacks even "related to" jurisdiction over the Plaintiff's non-bankruptcy federal and state law claims arising from allegedly improper collection activities in violation of the 2012 Settlement Agreement and Loan Modification Agreement entered after the Plaintiff's bankruptcy discharge.
C. Contempt Action for Violation of the Discharge Injunction Must Be Pursued as a Contested Matter
In addition to the federal and state claims, the Plaintiff's Amended Complaint includes a claim for violation of the discharge injunction pursuant to 11 U.S.C. § 524(i). Violations of the discharge injunction "arise under title 11" and implicate core bankruptcy matters. 28 U.S.C. § 157(b); Williams v. Sears, Roebuck and Co., (In re Williams), 244 B.R. 858, 865 (Bankr. S.D. Ga. 2000). Therefore, the bankruptcy court issuing the discharge order has jurisdiction over an alleged violation. Williams, 244 B.R. at 865. However, the Sixth Circuit has concluded that that § 524 provides no private cause of action. Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 422-23 (6th Cir. 2000). Consequently, when a violation of the discharge injunction does occur, a debtor's only avenue for recourse is to bring an action for contempt against the creditor. In re Perviz, 302 B.R. 357, 370 (Bankr. N.D. Ohio 2003).
The Defendants in this case argue that the method by which the Plaintiff must pursue a contempt action for violation of the discharge injunction is through the filing of a contempt motion in the main bankruptcy case. The court agrees with Defendants. Federal Rule of Bankruptcy Procedure ("Bankruptcy Rule") 9020 specifically provides that contempt proceedings are governed by Bankruptcy Rule 9014, the rule concerning contested matters. Bankruptcy Rule 9014 states that contested matters must be brought by motion unless specific rules provide otherwise. Fed. R. Bankr. P. 9014(a). As such, a claim for relief under a contempt theory for violation of the discharge injunction must be pursed as a contested matter. See Pertuso, 233 F.3d at 421 (noting that the traditional remedy for violation of an injunction lies in contempt proceedings and not a lawsuit); Marshall, 491 B.R. at 234-35 (requiring that a contempt proceeding for violation of the discharge injunction be brought as a contested matter rather than asserted in an adversary proceeding).
CONCLUSION
For the reasons stated above, the Motion to Dismiss Amended Complaint filed by Defendants Rushmore Management Loan Services and Banc of California, Inc. [Adv. Doc. 22] is GRANTED. The Plaintiff's Amended Complaint [Adv. Doc. 16] is DISMISSED.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Lawrence S. Walter
United States Bankruptcy Judge
Dated: January 10, 2017
cc: Charles J Roedersheimer
Kennel Zeigler 1340 Woodman Drive
Dayton, OH 45432
Email: charles@thompsonanddeveny.com Jonathan S Hawkins
THOMPSON HINE LLP
Austin Landing I
10050 Innovation Drive
Suite 400
Dayton, OH 45342-4934
Email: jonathan.hawkins@thompsonhine.com