TRACEY N. WISE, Bankruptcy Judge.
When the Defendants Ocwen Federal Bank, FSB ("Ocwen") and Bank of America, NA ("BOA") filed a Proof of Claim for a secured mortgage loan in the principal amount of $836.24 and $4,716.94 in outstanding fees and costs, the Plaintiff Debtor responded by filing an adversary proceeding objecting to the claim and asserting multiple counterclaims for violations of state and federal law based on an allegation that the Defendants improperly assessed thousands of dollars to the Plaintiff's account for fees and costs contrary to the terms of their agreement, which allegedly resulted in an artificially inflated balance that forced her into default and caused her to pay more than she actually owed on the account. The parties moved for summary judgment on the Plaintiff's claims and during the interim, the United States Supreme Court decided Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), which called into question how this Court, being a court of limited jurisdiction, may proceed with the Plaintiff's state law counterclaims.
The Court, having reviewed the parties' briefs and hearing oral arguments, and having considered the parties' supplemental briefs on the effect of Stern on this proceeding, finds that this Court may enter final judgment on the Plaintiff's Objection to Claim and fraud/intentional misrepresentation claim (Count III), conversion claim (Count IV), breach of implied covenant of good faith claim (Count V), negligent
Acting pursuant to that authority, the Court shall recommend to the District Court following trial that it accept its proposed findings of fact and conclusions of law as to the Plaintiff's claim for violations of the Kentucky Consumer Protection Act (Count II) and grant summary judgment to the Defendant as a matter of law. The Court shall deny both the Plaintiff and the Defendants' cross-motions for summary judgment on the remaining claims, as there remain genuine issues of material fact to be resolved at trial, and following trial, will recommend the District Court accept its proposed findings of fact and conclusions of law as to the state law counterclaims that are related to this proceeding but upon which this Court may not enter final orders pursuant to 28 U.S.C. § 157 and Stern.
The Plaintiff and her former husband, Richard Mulligan (now deceased), executed a note in the principal amount of $21,950.00 payable to Monmouth Federal Savings and Loan Association of Newport ("Monmouth") on January 28, 1981 (the "Note"). The Note has a fixed interest rate of 10.875% and is scheduled to be paid in three hundred monthly installments of $213.17. The Note was endorsed and assigned that same day to Kentucky Housing Corporation (the "First Assignment").
Also on January 28, 1981, the Plaintiff executed and delivered to Monmouth a mortgage on real property in Campbell County, Kentucky (the "Mortgage"), to secure repayment of the Note. Like the Note, the Mortgage was assigned to Kentucky Housing Corporation.
The Plaintiff's Mortgage provides that the Plaintiff's monthly Note payments shall be applied in the following order: (1) premium charges under the contract of insurance with the Secretary of Housing and Urban Development, or monthly charge (in lieu of mortgage insurance premium), as the case may be; (2) ground rents, taxes, special assessments, fire, and other hazard insurance premiums; (3) interest; and (4) principal. The Note allows charges for late payments, but does not allow for recovery by the lender or holder of any costs or fees associated with default and foreclosure. The Note and Mortgage are collectively referred to as the "Loan."
Kentucky Housing Corporation assigned (the "Second Assignment") the Plaintiff's Loan to the Department of Housing and Urban Development ("HUD"). The Second Assignment of the Mortgage, dated February 28, 1995, states "the sum of $16,867.86, together with interest thereon from May 1, 1994 at the rate of 10.875% per annum, computed as provided for in the credit instrument, is actually due and owing under said credit instrument."
Ocwen Federal Bank, FSB ("Ocwen Federal Bank") and Blackrock Capital Finance, LLC, purchased the Loan sometime in 1997. HUD assigned the Loan to Ocwen Federal Bank (the "Third Assignment"). The Third Assignment of the Mortgage, dated March 7, 1997, states that "any changes in the payment obligations under the Note by virtue of any forbearance or assistance agreement, payment
The parties do not dispute that the Defendant Bank of America, NA, as successor by merger to LaSalle Bank NA, as Trustee for the Certificateholders of the Mortgage Passthrough Certificates 1997-R3 ("BOA"), is the current holder of the Note and Mortgage. Ocwen Loan Servicing, LLC ("Ocwen"), as successor in interest to Ocwen Federal Bank, is the servicing agent for BOA.
Over the life of the Loan, the Plaintiff entered into a series of forbearance agreements that have become an issue in this litigation. The Defendants contend that the Plaintiff entered into her first forbearance agreement with HUD on March 26, 1996 (the "1996 Forbearance Agreement"). The Plaintiff admits she entered into a forbearance agreement with HUD in 1993 or 1994, but disputes that she entered into the 1996 Forbearance Agreement. A copy of the 1996 Forbearance Agreement has been produced as evidence, but it does not bear the Plaintiff's signature.
Whether the Plaintiff entered into the 1996 Forbearance Agreement is factually material because the parties dispute whether the Plaintiff was current on her Loan at the time Ocwen began servicing her loan, a fact that shall determine the applicability of one of the Plaintiff's claims at issue herein. Ocwen's records show that when it began servicing the loan on January 1, 1997, the Plaintiff was in default and Ocwen did not receive the first payment on the Loan until June 9, 1997. But testimony by Ocwen's representative, Gina Johnson, reflects that the Plaintiff was paying or performing under a payment plan with HUD, or the 1996 Forbearance Agreement.
While the 1996 Forbearance Agreement and the status of the Plaintiff's Loan in 1997 is disputed, the parties do not dispute that the Plaintiff entered into a series of three additional forbearance agreements with the Defendants after BOA purchased the loan and Ocwen began servicing it. The Plaintiff entered into her first forbearance agreement with Ocwen on or about July 24, 2003 (the "2003 Forbearance Agreement") based on an alleged delinquency in her account of $2,013.76. The 2003 Forbearance Agreement does not authorize any additional charges beyond the terms of the original Note and Mortgage.
In October of 2004, the Defendants filed a foreclosure suit against the Plaintiff in Campbell Circuit Court based on the Plaintiff's alleged failure to pay a delinquency on the account. The Plaintiff testified in her deposition that, at that time, she was paying her regular monthly mortgage payment, but she was not paying additional fees and costs assessed to her account because she believed them to be incorrect. The Plaintiff entered into a second forbearance agreement on November 9, 2004 (the "2004 Forbearance Agreement") with the Defendants to stop the foreclosure. According to the Defendants, as consideration for the 2004 Forbearance Agreement, the Plaintiff accepted the following revised conditions to her Note and Mortgage as set forth in an addendum to the Agreement, which she signed:
The 2004 Forbearance Agreement also contains an agreement to release Ocwen for "any and all claims, to the extent that any claims may exist now, that are related or connected in any manner, directly or indirectly, to the Note, Mortgage, or aforementioned parties."
According to the Defendants, the Plaintiff failed to cure the delinquency on her account as required by the 2004 Forbearance Agreement; as a result, the Plaintiff entered into a third forbearance agreement on December 5, 2005 (the "2005 Forbearance Agreement"). The 2005 Forbearance Agreement identifies a default in the amount of $4,971.75 and contains the following provision:
The 2005 Forbearance Agreement, unlike its predecessor 2004 Forbearance Agreement, did not contain a clause regarding the recovery of fees and costs. The 2005 Forbearance Agreement does contain the following provision:
The "Agreement" is defined as the 2005 Forbearance Agreement.
The Defendants instituted foreclosure proceedings for a third time on June 19, 2009 in Campbell Circuit Court based on an alleged default of $836.24. The Plaintiff then filed for Chapter 13 bankruptcy.
The Plaintiff filed for Chapter 13 bankruptcy on July 15, 2009. The Defendants subsequently filed a proof of claim for a secured debt demanding $836.24 in outstanding principal, as well as $19.11 in interest, and $4,697.83 in outstanding fees and costs. The Plaintiff objected to the proof of claim and then filed the present adversary proceeding.
The Plaintiff brought the underlying adversary proceeding on December 7, 2009, objecting to the Defendants' secured claim and asserting counterclaims for offset or
The Plaintiff alleges that the Defendants have improperly assessed thousands of dollars to the Plaintiff's account for additional late fees, property valuation expenses, certified mail costs, foreclosure expenses and costs (including attorney's fees), bankruptcy fees and expenses, property inspection fees, title report fees, optional products, and returned check fees. The Plaintiff also asserts that the Defendants charged her fees that were duplicative, excessive, or for services not actually rendered. The Plaintiff claims that because of these unauthorized and duplicative charges, her account was artificially forced into default when the Defendants diverted her payments towards these unauthorized and illegitimate fees instead of applying her payments to reduce her principal, interest, and escrow, as the Defendants were required to do under the terms of the Note and Mortgage. The Plaintiff claims that she has paid additional interest beyond that allowed under or required by the Note and Mortgage. The Plaintiff concludes that the Defendants have collected more from her than she was obligated to pay.
The Defendants defend their actions on the grounds that the Plaintiff entered into a 2004 Forbearance Agreement that specifically authorized the Defendants to charge and add to her Loan balance the following costs: (1) appraisals; (2) broker price opinions; (3) inspections; (4) any advances for taxes and/or insurance; (5) foreclosure attorneys' fees and expenses; and (6) collection fees. According to the Defendants, there was a delinquency in the account prior to the 2004 Foreclosure that the Plaintiff never attempted to cure, leaving the previous fees and costs assessed prior to the foreclosure unpaid. Despite the 2004 foreclosure and subsequent forbearance agreement, the Defendants contend the Plaintiff still did not cure the delinquency, resulting in the 2005 Forbearance Agreement, which included a waiver of all claims against the Defendants arising out of the Note, Mortgage or the default.
On June 17, 2010, the Defendants moved for partial summary judgment on several of the Plaintiff's counts. In support of their Motion for Summary Judgment, the Defendants argue:
The Plaintiff also moved for summary judgment on all her claims based on spoliation of certain documents sought in discovery. This includes: (1) documentation and information confirming the amounts due and owing at the time the Defendants' acquired the Loan, such as the Loan Sale Agreement between HUD and Ocwen, payment history or any prior servicing history from HUD, and the Pooling and Servicing Agreement's Schedule 1, Mortgage Loan Schedule; (2) documentation that would explain the basis of the fees charged after the Defendants acquired the Loan, including the invoices explaining the purpose and amount of the fees, as well as underlying records showing that payment was actually made by Defendants for fees assessed against Plaintiff; and (3) documentation and information regarding the servicing software used by Defendants to service Plaintiff's account, including any software used to send out billing notices or other collection notices to Plaintiff, credit Plaintiff's payments, and used to schedule, assess, and collect fees. The Defendants' position is that they no longer have the documentation and thus cannot produce such in response to the Plaintiff's discovery requests. The Plaintiff contends that this amounts to spoliation and she is therefore entitled to summary judgment on all claims.
In addition, the Plaintiff alternatively moved for summary judgment on her Kentucky Consumer Protection Act claim (Count II), as well as her breach of implied covenant of good faith claim (Count V), her breach of contract claim (Count VII) and the Defendants' affirmative defense that the Plaintiff's claims are preempted by the Depository Institutions and Monetary Control Act of 1980 ("DIDA")
Following the filing of these cross-motions, the Court entered an order granting the Defendants' request to amend their answer to include the following affirmative defenses argued in their Motion for Summary Judgment: (1) the Defendants are not subject to the FDCPA because they are not "debt collectors" and (2) the Plaintiff's claim pursuant to K.R.S. § 360.010 is preempted by 12 U.S.C. § 1461, et seq., or the Home Owner's Loan Act ("HOLA"). The Court also allowed the Plaintiff time to serve additional discovery relating to the new defenses. The Plaintiff also asked and received additional time to file dispositive motions on these newly asserted defenses.
On July 8, 2010, the Plaintiff filed a second motion seeking summary judgment on the new affirmative defenses raised by the Defendants regarding the FDCPA and K.R.S. § 360.010. The Plaintiff argued that
Following extensive briefing by both sides, the Court issued an order limiting oral arguments on the cross-motions for summary judgment to the preliminary issue of whether the Plaintiff has waived any claim arising prior to December 5, 2005, based on the language of the 2005 Forbearance Agreement. After a long period of attempted mediation, which failed to resolve the issues between the parties, the Court issued an order denying the parties' cross-motions for partial summary judgment on the basis that there remain genuine issues of material fact regarding the enforceability of the 2005 Forbearance Agreement.
The parties were subsequently ordered to file supplemental briefs based on the Supreme Court's recent decision in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The parties have since filed supplemental briefs and the Court has heard oral arguments on the remaining issues, including the applicability of Stern on this proceeding. The matter is now ripe for the Court's determination.
Before the Court may rule on the parties' cross-motions for summary judgment, the Court must first satisfy the requirement that it has subject matter jurisdiction over this proceeding and determine to what it extent it may enter a final judgment. While the cross-motions for summary judgment were pending, the United States Supreme Court issued its opinion in Stern v. Marshall, ___ U.S. ___, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), holding that a bankruptcy court lacks constitutional authority to enter a final judgment on state law counterclaims that are not necessarily resolved by a ruling on a creditor's proof of claim. Id. at 2618. In light of the Plaintiff's objection to Defendants' Proof of Claim and the Plaintiff's counterclaims, most of which are based on state law, the Court ordered the parties to file supplemental briefs on the effect of Stern on this adversary proceeding.
To understand Stern's impact on this proceeding, the analysis must begin with the Court's subject matter jurisdiction. The Court's subject matter jurisdiction is governed by the grant of subject matter jurisdiction to the District Court pursuant to 28 U.S.C. § 1334. Section 1334 provides that "district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." 28 U.S.C. § 1334(b). To determine whether the District Court has subject matter jurisdiction, the question is to whether the matter is at least "related to" the bankruptcy. See Michigan Empl't Sec. Comm'n v. Wolverine Radio Co. (In re Wolverine Radio Co.), 930 F.2d 1132, 1141 (6th Cir.1991). A matter is "related to" the bankruptcy if "the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy" except in situations where there is only "an extremely tenuous connection to the estate." Id. at 1141-42 (adopting the test as cited in Pacor, Inc. v. Higgins (In re Pacor, Inc.), 743 F.2d 984, 994 (3d Cir.1984)).
There is no question here that the District Court has subject matter jurisdiction.
This adversary proceeding comes before this Court by referral from the District Court pursuant to 28 U.S.C. § 157(a), which states that "each district court may provide that any or all cases under title 11 and any or all proceedings arising under title 11 or arising in or related to a case under title 11 shall be referred to the bankruptcy judges for the district." 28 U.S.C. § 157(a). The Eastern District of Kentucky, pursuant to its statutory authority to do so, has referred such proceedings to this Court via Local Rule 83.12. Until Stern, the only limitation on this referral power was that "personal injury tort and wrongful death claims" were required to be tried by the District Courts. 28 U.S.C. § 157(b)(5).
Having established that the Court has subject matter jurisdiction over this proceeding, the Court must determine the extent of its authority to enter final judgment in light of the Supreme Court's decision in Stern. First, the parties do not dispute that this Court may issue a final judgment on the Plaintiff's objection to the Defendants' proof of claim. The Court agrees. The Supreme Court has expressly authorized the bankruptcy court to enter final judgment in the claims resolution process. Stern, 131 S.Ct. at 2620.
Second, while the parties agree that the Supreme Court's holding in Stern impacts this Court's authority over the Plaintiff's counterclaims, they disagree as to the extent of that impact. Starting with the most expansive interpretation first, the Defendants argue "the bankruptcy court does not have jurisdiction to reach a final decision on the [Plaintiff's counterclaims] under the constitution." See Defendants' Supplemental Brief (Doc. 111). The Defendants read Stern too broadly. Stern's holding is a narrow one:
In re Safety Harbor Resort & Spa, 456 B.R. 703, 715 (Bankr.M.D.Fla.2011); see also In re Olde Prairie Block Owner, LLC, 457 B.R. 692 (Bankr.N.D.Ill.2011). Stern does not deprive the Court of its jurisdiction over all of the Plaintiff's counterclaims—it merely limits the Court's ability to enter final judgment on those state law counterclaims that do not "stem[ ] from the bankruptcy itself" or that will not be necessarily resolved in the claims objection process. In re Safety Harbor Resort & Spa, 456 B.R. at 716 (citing Stern, 131 S.Ct. at 2616).
In contrast, the Plaintiff's position is narrower. She argues that based on the holding in Stern, the Court may only enter final judgment on two of her counterclaims—the breach of contract claim (Count VII) and the fraud/intentional misrepresentation claim (Count III). The Plaintiff takes the position that Stern prevents this Court from entering a final judgment on her remaining counterclaims and asks this Court to abstain from hearing those claims.
The Plaintiff, when asked if she consents to the entry of final judgment on these state law counterclaims, stated that it was "too risky" without more. The Defendants, on the other hand, made a clear statement of consent during the oral argument on the Motions for Summary Judgment. The Court finds no prohibition or limitation in Stern regarding the parties' ability to consent to the entry of final orders by the bankruptcy court pursuant to 28 U.S.C. § 157(c). Other courts have agreed. See e.g., In re Safety Harbor Resort & Spa, 456 B.R. at 718 ("Parties may, even after Stern, consent to bankruptcy courts entering final judgments in non-core matters. In fact, section 157(c)(2) expressly authorizes bankruptcy courts to enter final judgment in non-core proceedings if the parties consent."). However, notwithstanding the Defendants' clear consent, the Court is reluctant to imply the Plaintiff's consent
Turning to the Plaintiff's state and federal law counterclaims, it is important to note that the adjudication of each of the Plaintiff's counterclaims necessarily begins with an adjudication of the enforceability of the Loan documents, a determination of what charges were authorized by the Loan documents and the extent of the Debtor's performance thereunder. In its simplest form, this proceeding is about an accounting of the Debtor's payments and the application of those payments by the Defendant. These types of commercial contractual analyses, everyday occurrences for bankruptcy courts, are a far cry from the debtor's counterclaim of tortious interference at issue in Stern. Thus, at first blush, the Court observes generally that the instant case does not present the "one isolated respect" discussed in Stern. However, the cautionary admonition from the Supreme Court that Stern is to be interpreted narrowly does not relieve the Court of the obligation to determine whether each of Plaintiff's counterclaims may be "necessarily resolved" in the claims objection process. The Court looks to the Supreme Court for guidance in how to make this determination— should the Court (a) examine the factual overlap of the claim resolution and the counterclaim? or (b) compare the legal elements which must be determined to resolve the claim and the counterclaim? or (c) compare the remedies sought by the counterclaim and the impact of same on the claims allowance process? or (d) some combination of the above?
The Supreme Court's determination of whether the counterclaim at issue therein was "necessarily resolved" by the claim resolution process is based on the following analysis:
Stern, 131 S.Ct. at 2617-18. In making this analysis, it appears to this Court that the Supreme Court looked not only to the factual overlap of the claim resolution and the counterclaim, but also the legal elements which must be determined to resolve the claim and the counterclaim and the remedies sought by the counterclaim and the impact on the claims allowance process. But it is not apparent from this analysis that any one of these issues is dispositive or that one issue is more important than another in comparing the factual overlap, the legal elements and the remedies. Because of this, this Court is left to conclude that while it should consider all these issues in making its case-by-case analysis, none are dispositive or carry more weight than the other.
Against this background, the Court shall proceed by addressing whether each of the counterclaims alleged are necessarily resolved in the claims objection process. If not, then they shall be treated as proceedings which the Court may hear, but not finally adjudicate absent the parties' consent. Stern, 131 S.Ct. at 2620; 28 U.S.C. § 157(c); In re Olde Prairie Block Owner, LLC, 457 B.R. at 700 (explaining that § 157 allocates authority to enter final judgment and is not jurisdictional). Finally, once the Court has established the parameters within which it may proceed, the Court shall then determine whether the moving party is entitled to summary judgment on any of the Plaintiff's claims.
K.R.S. § 360.010 states,
If the Defendants imposed improper fees and charges that resulted in an artificially inflated principal balance therefore allowing the Defendants to consequently collect more interest than actually due, the Plaintiff may be entitled to civil penalties. K.R.S. § 360.020(1) sets forth the civil penalty for charging an excessive interest rate and provides:
Thus, if the Defendants' "knowingly" charged interest in violation of K.R.S. § 360.010, then K.R.S. § 360.020 requires a forfeiture of the interest and the Plaintiff may recover twice the amount of such interest paid to the Defendants.
This cause of action depends on whether the Defendants actually collected
Regarding that recommendation, the Defendants contend that the Plaintiff's reliance on K.R.S. § 360.010 is expressly preempted by HOLA pursuant to 12 C.F.R. § 560.2. HOLA authorized the Office of Thrift Supervision ("OTS") to promulgate regulations providing "for the organization, incorporation, examination, operation, and regulation" of federal savings associations and federal savings banks. 12 U.S.C. § 1464(a). The OTS received broad rulemaking authority to preempt state laws that would otherwise govern the banking activities of federal savings associations and banks. Id. at § 1465. The OTS promulgated a regulation, 12 C.F.R. § 560.2, occupying the field in connection with the lending operations of federal savings associations and banks and this regulation expressly preempts state laws such as state usury laws. See Molosky v. Washington Mutual, Inc., 664 F.3d 109 (6th Cir.2011) (holding that the Michigan Usury Act, M.C.L.A. § 438.31, a statute setting forth the legal interest rate in Michigan, is preempted according to the explicit terms of HOLA).
But the Plaintiff contends that the Defendants are not federally chartered savings associations as defined under HOLA and HOLA does not apply. The Defendants do not dispute that they are not federally chartered savings associations but argue that the Loan was originated by Monmouth, which was a federally chartered savings association within the definition of HOLA; and thus, as an assignee of the loan originator, the Defendants may avail themselves of HOLA.
It is undisputed that the original Note is payable to Monmouth Federal Savings and Loan Association. The Certificate of Succession, produced by the Defendants as evidence of Monmouth's status, shows that Monmouth Federal Savings and Loan Association was chartered to transact the business of a federal savings association. There is no doubt that Monmouth originated the Loan or that it was a federal savings association governed by HOLA. Thus there is no dispute of any material fact.
However, as a matter of law, the Defendants are incorrect that as assignees they may avail themselves of the defense of preemption offered by HOLA. The case law is scarce on an assignee's ability to cloak itself in the originating federal savings association's preemption defense. The only case interpreting this issue is cited by the Defendants in support of their position. In Bliss v. Intervale Mortg. Corp., Case No. 051137C, 2006 WL 6211986 (Mass.Super. June 23, 2006), a
While the Court does not dispute the conclusion reached by the OTS or the state court in Bliss, the Defendants' reliance on this conclusion is misplaced. The OTS determined that an assignee may step into the shoes of a federal savings association that originated the loan and use the same claims and defenses. But here, there are no allegations against Monmouth, the federal savings association that originated the Loan, in the Plaintiff's Complaint. The only allegations by the Plaintiff are regarding the alleged bad acts of the Defendants. Therefore, with no claims against it, Monmouth has no need of any defenses and thus the Defendants have no shoes to fill.
Other courts have concluded that where a federal savings association as an assignee seeks to invoke the preemption defense for allegations made regarding bad acts of the originating lender, which is not a federal savings association, the assignee may not invoke such a defense because to do so would allow an originating bank to cleanse its otherwise illegal activity merely by assigning it to a federal savings association. See e.g., Thomas v. CitiMortgage, Inc. (In re Thomas), 447 B.R. 402, 407 (Bankr. D.Mass.2011). The Court finds the same reasoning applies here. The Defendants should not be allowed to hide behind a defense created solely for Monmouth, a non-party, in order to defeat allegations made against the Defendants that are unrelated to any acts of that non-party. For this reason, HOLA is not applicable to the Defendants.
As an alternative, the Defendants take the position that the statute of limitations pursuant to K.R.S. § 413.140(1)(h) precludes the Plaintiff's potential recovery under K.R.S. § 360.020. This argument is unpersuasive. K.R.S. § 413.140(1)(h) is not applicable because K.R.S. § 360.020, the statute that the Plaintiff cites in Count I for her recovery, contains its own statute of limitations that requires an action be commenced within two years from the time the usurious transaction took place. See K.R.S. § 360.020(1). The Plaintiff made her final payment of $798.11 on December 3, 2008 and the Plaintiff's Complaint was filed on December 7, 2009; the Plaintiff was within her two year limitations time period. Furthermore, to the extent that the Plaintiff has asserted a counterclaim pursuant to K.R.S. § 360.010 and § 360.020 in order to offset the claim made by the Defendants as a mere defense, the statute of limitations does not apply. See Empire Fin. Co. of Louisville, Inc. v. Ewing, 558 S.W.2d 619 (Ky.App.1977).
Based on the foregoing, the Defendants' Motion for Summary Judgment on Count I shall be denied.
Furthermore, resolution of the Plaintiff's Kentucky Consumer Protection Act claim may require a determination of whether an award of punitive damages as requested by Plaintiff is appropriate. See K.R.S. § 367.220. Plaintiff's possible entitlement to punitive damages will require a finding that the Plaintiff has shown by clear and convincing evidence that the Defendant acted with fraud, oppression, malice and/or gross negligence,
With that in mind, this Court has previously ruled, based on Craig v. Keene, 32 S.W.3d 90 (Ky.App.2000), GMAC Mortg., LLC v. McKeever, Case No. 08-459-JBC, 2010 WL 3470312 (E.D.Ky. Aug. 31, 2010), and Todd v. Ky. Heartland Mortg., Inc., Case No.2002-CA-002038-MR, 2003 WL 21770805 (Ky.App. Aug. 1, 2003), that the Kentucky Consumer Protection Act does not apply to real estate transactions such as this one. See Mattox v. Wells Fargo, NA (In re Mattox), Bankr. No. 07-51925, Adv. No. 10-5041, 2011 WL 3626762 (Bankr.E.D.Ky. Aug. 17, 2011). In so ruling, this Court rejected any attempt to distinguish Kentucky case law on the basis that none of the cases address a situation involving a securitized loan with multiple transfers of interest or a transfer of a note and assignment of a mortgage. The allegations here are similar and the Court finds nothing to support a deviation from its prior ruling. For this reason, the Court shall recommend to the District
The Defendants argue that the Plaintiff cannot have relied on their alleged misrepresentations. According to the Defendants, the Plaintiff testified that she has disputed all charges assessed by the Defendants since 2003. The Defendants further contend that the Plaintiff testified she was aware of Ocwen's alleged tactics of intentionally losing paperwork in order to accrue more fees. The Defendants argue that continuously objecting to the alleged misrepresentations, accusing the Defendants of inflating charges, and disputing her bills is not evidence of reliance on their alleged misrepresentations.
In addressing the Court's ability to enter a final judgment on Count III of the Plaintiff's Complaint, the Plaintiff takes the position that her fraud/intentional misrepresentation claim must be resolved in the claims allowance process because these misrepresentations induced her to enter into the 2004 and 2005 Forbearance Agreements, upon which the Defendants' rely as a defense to the Plaintiff's allegations. A forbearance agreement is unenforceable if it is induced by fraud or bad faith. See Cook v. Cook, 299 S.W.2d 261, 264 (Ky.1957) (holding "forbearance to sue is a good consideration for a promise founded thereon" and "[i]t is only essential that the claim be asserted in good faith."); see also Ruckel v. Baston, 252 S.W.2d 432 (Ky.1952) (holding forbearance to prosecute a doubtful claim asserted in good faith will constitute adequate consideration). If the 2004 and 2005 Forbearance Agreements are enforceable, then the terms of the Forbearance Agreements will define the parties' contractual arrangement and have a direct effect on the Plaintiff's objection to the Defendants' claim. If the Forbearance Agreements are unenforceable due to fraud or bad faith, then the Note and Mortgage will solely define the contract between the parties. Therefore, the Plaintiff's claim for fraud/intentional misrepresentation as it relates to the 2004 and 2005 Forbearance Agreements must necessarily be resolved in the claims allowance process and the Court may, therefore, enter final judgment on Count III. The enforceability of the Forbearance Agreements is so integral to defining the parties' agreement and the resulting allowance/disallowance of Defendants' claims that the fact that Plaintiff may recover punitive damages in the event she prevails on Count III does not require a different result.
As for the Defendants' Motion for Summary Judgment on the Plaintiff's
The Plaintiff alleges that the Defendants converted her property by wrongfully and intentionally misapplying her payments and diverting them to unauthorized fees and costs. If the Court determines that the Defendants took payments from the Plaintiff that she did not owe because the Defendants did not have the authority to charge the Plaintiff the fees and costs of which she complains, and the Defendants did so with knowledge that they were not entitled to these payments, then the Court will necessarily resolve whether the Plaintiff's money has been converted. Therefore, the Court shall enter a final judgment at the conclusion of trial on the disposition of Count IV.
If the Defendants breached an implied covenant of good faith arising from the parties' contractual relationship, then the Plaintiff may be entitled to an equitable remedy in which the payments made by the Plaintiff and applied to unauthorized fees are appropriately credited to the Plaintiff's account, See Ranier, 812 S.W.2d at 157 ("Basic fundamental fairness and equity both require the Bank to apply the $95,269.04 to the principal and interest on the original $125,000 secured note."). In determining whether the contract was breached, and whether the Forbearance Agreements are enforceable due to bad faith or fraud, the Court will necessarily determine whether the Defendants acted in good faith and if not, whether the Plaintiff is entitled to equitable relief. Thus, as part of the allowing/disallowing of the Defendants' claim, the Court will "necessarily resolve" whether the Defendants breached an implied covenant of good faith which is part of the contract itself. Therefore, the Court shall enter a final judgment on Count V at the conclusion of trial.
Kentucky has adopted the Restatement (Second) of Torts § 552, which defines negligent misrepresentation as follows:
Presnell Const. Managers, Inc. v. EH Const., LLC, 134 S.W.3d 575, 581 (Ky. 2004) (adopting the RESTATEMENT (SECOND) OF TORTS § 552 (1977)). The tort of negligent misrepresentation in Kentucky does not require privity of contract. Rather, negligent misrepresentation arises from an independent duty for which recovery in tort for economic loss is available. Id. at 582.
The Plaintiff alleges that the Defendants acted negligently in supplying "false information and/or fail[ing] to disclose information and fail[ing] to use reasonable care in communicating information to Plaintiff regarding the servicing of her account." She avers that she reasonably relied on these negligent misrepresentations and they caused her to "overpay her obligation under the Note and Mortgage." The Plaintiff seeks damages in the amounts that she overpaid on her Note and any consequential damages that arise out of the Defendants' alleged wrongdoing.
Because the Plaintiff's claim for negligent misrepresentation appears to be so closely related to the Court's determination of the parties' contractual arrangement, which includes the Plaintiff's fraud/intentional misrepresentation claim (Count III) based on the 2004 and 2005 Forbearance Agreements, the Court shall, at this time, treat the Plaintiff's negligent misrepresentation claim (Count VI) as a claim on which it may enter final judgment subject to the proof actually offered at trial to prove this cause of action.
In making a determination as to whether this Court may enter a final judgment on this claim, the Plaintiff argues that the breach of contract claim (Count VII) must be resolved for the Court to determine whether the Defendants' claim shall be allowed. The Court agrees. The Defendants have attached the Note and Mortgage to their Proof of Claim and rely upon it for their claim. These documents define the parties' contractual relationship and the extent of the Defendants' claim. A breach of contract, particularly of the magnitude as alleged by the Plaintiff, will determine to what extent the Defendants' claim shall be allowed, if at all.
While the Court may enter a final judgment on the Plaintiff's breach of contract claim, it will not do so at the summary judgment stage. As previously addressed, there remain genuine issues of material fact as to the enforceability of the 2004 and 2005 Forbearance Agreements, which if enforceable shall play a pivotal role in defining the parties' contractual arrangement and the extent to which the charges assessed by the Defendants were authorized and/or the extent to which the Plaintiff has waived her claims. Thus, the Court shall not grant summary judgment as to Count VII.
Unlike the other counterclaims pled by the Plaintiff, this counterclaim arises in federal rather than state law. See 15 U.S.C. § 1692 et seq. Stern addressed the Court's ability to enter final judgments on state law counterclaims; it makes no mention of a bankruptcy court's ability to enter final judgments on federal counterclaims properly referred to it by the District Court such as this one. Because the Supreme Court did not address federal law counterclaims, and Stern is to be narrowly applied, the Court finds that the limitations set forth in Stern do not apply to the Plaintiff's FDCPA claim (Count IX) and the Court has the authority to enter a final judgment on this cause of action pursuant to 28 U.S.C. § 157(b)(2)(C).
As for the parties' Motions for Summary Judgment, there is no dispute that the Plaintiff is a "consumer" in accordance with 15 U.S.C. § 1692a(3). Based on Ocwen's amended answer wherein it admits that Ocwen "oversee[s] collection of monthly payments from Plaintiff, passing on required cash flows to Successor Trustee Bank of America," it is apparent that Ocwen is a "debt collector"
Ocwen argues they are exempt from coverage under the FDCPA as a "debt collector" pursuant to 15 U.S.C. § 1692a(6)(F)(i) and (ii). According to these provisions, "any person collecting or attempting to collect any debt owed or due or asserted to be owed or due another" is not a "debt collector" if such activity is "(i) incidental to a bona fide fiduciary obligation or a bona fide escrow arrangement" or for any such activity that "(ii) concerns a debt which was originated by such person." The Court will address each exception separately.
Ocwen argues that the Plaintiff was current under a forbearance agreement with HUD when it assumed the Loan, thus it can avail itself of the exception under § 1692a(6)(F)(ii). A "debt collector" does not include those who had responsibility for collecting the debt prior to the time it went into default. See Mattox, 2011 WL 3626762, at *8 (citing Alexander v. Omega Management, Inc., 67 F.Supp.2d 1052,
The record reflects Ocwen assumed servicing the loan on January 1, 1997. The payment ledger relied on by the Defendants shows that the Plaintiff was in default as of January 1, 1997, and Ocwen received its first payment after assuming the loan on June 9, 1997. Furthermore, Gina Johnson, Ocwen's representative, has confirmed in her deposition testimony that the payment which came due in June 1996 was still due when they assumed the loan. But she also testified that when Ocwen assumed servicing, the Plaintiff was paying or performing under a payment plan with HUD, which Ocwen supports by reference to a documented payment plan dated March 26, 1996, signed by an officer of HUD but not signed by the Plaintiff. Again, the Plaintiff disputes that she ever entered into this payment plan, or forbearance agreement, in 1996, but admits that she entered into such a plan in 1993 or 1994.
If a borrower is "current" in a payment plan when servicing is transferred to a subsequent servicer, that subsequent servicer would not be a "debt collector" subject to the FDCPA. But if the borrower is not "current" on the forbearance agreement or payment plan, then the FDCPA does apply. See Bailey v. Sec. Nat'l Servicing Corp., 154 F.3d 384, 387-88 (7th Cir.1998). The parties dispute whether the Plaintiff was current and the evidence in the record is not conclusive where the document showing the payment plan is not signed by the Plaintiff, nor does Ocwen's own ledger show that the Plaintiff is current. Summary judgment is not appropriate based on this exception.
Ocwen also argues that it is not a "debt collector" within the meaning of the FDCPA because its collection efforts are "incidental to a bona fide fiduciary obligation." 15 U.S.C. § 1692a(6)(F)(i). To prevail in this defense, Ocwen must establish not only that it is a "bona fide fiduciary" but also that its collection efforts are merely "incidental" to its fiduciary obligations. See Rowe v. Educ. Credit Mgmt. Corp., 559 F.3d 1028, 1032 (9th Cir.2009).
Fiduciary is defined as "`[o]ne who must exercise a high standard of care in managing another's money or property.'" Id. at 1033 (citing BLACK'S LAW DICTIONARY (8th ed. 2004)). "Fiduciary duty" is defined as "`a duty of utmost good faith, trust, confidence, and candor owed by a fiduciary (such as a lawyer or corporate officer) to the beneficiary (such as a lawyer's client or a shareholder); a duty to act with the highest degree of honesty and loyalty toward another person and in the best interests of the other person (such as the duty that one partner owes to another).'" Id.
Assuming that Ocwen can establish that it is bona fide fiduciary, Ocwen must also establish that its actions in collecting the debt are "incidental" to its bona fide fiduciary obligation:
Id. at 1034.
Ocwen has put forth little evidence to support its argument that it is a "bona fide fiduciary" or that the collection of the Plaintiff's debt is merely "incidental" to its collection efforts. Ocwen has merely argued that because it is a servicer of the debt then it is necessarily a fiduciary. There remain genuine issues of material fact as to Ocwen's relationship with BOA and its role in servicing the debt. Based on the evidence before it, it is unclear to this Court that Ocwen is truly a "bona fide fiduciary" or that the collection of the Plaintiff's debt is merely "incidental" to those duties if it is. Therefore, summary judgment is not appropriate based on § 1692a(6)(F)(i).
To satisfy the culpable state of mind requirement for spoliation, the plaintiff must show that the Defendants lost or destroyed evidence in bad faith. In re Global Technovations, Inc. 431 B.R. at 782. A sanction should only be imposed after a "`fact-intensive inquiry into a party's degree of fault' under the circumstances including the recognition that a party's degree of fault may `rang[e] from innocence through degrees of negligence to intentionality.'" Beaven, 622 F.3d at 554 (quoting Welsh v. United States, 844 F.2d 1239, 1246 (6th Cir.1988), overruled on other grounds by Adkins v. Wolever, 554 F.3d 650 (6th Cir.2009)). The veracity of the Defendants' stated reasons for the loss of such evidence or its destruction is an issue of credibility. Id.
The Plaintiff must show that the Defendants intentionally destroyed key documents in order for this Court to consider invoking its broad discretion to sanction the Defendants with a presumption that the absence of those documents warrants an adverse inference against them. Thus, there are genuine issues of material fact that will depend on the credibility of the representatives of the Defendants in explaining the absence of these documents. For this reason, summary judgment based on spoliation shall be denied.
For the foregoing reasons, the Court shall (a) recommend that the District
