DAVID M. WARREN, Bankruptcy Judge.
This matter comes before the court upon the Defendant's Motion to Dismiss ("Motion to Dismiss") filed by Panatte, LLC ("Defendant") on August 15, 2018 and the Plaintiffs' Objection to Defendant's Motion to Dismiss filed by Robert W. Batten and Donna L. Batten ("Plaintiffs") on September 24, 2018. The court conducted a hearing in Raleigh, North Carolina on November 8, 2018. Joseph J. Vonnegut, Esq. appeared for the Defendant, and J. M. Cook, Esq. appeared for the Plaintiffs. Based upon the pleadings and arguments of counsel made in memoranda and at the hearing, the court grants the Motion to Dismiss for the reasons set forth herein.
The Plaintiffs filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code on January 18, 2018 ("Petition Date"), and the court appointed John F. Logan, Esq. ("Trustee") to administer the case pursuant to 11 U.S.C. § 1302. In their Schedule E/F filed on February 19, 2018, the Plaintiffs listed the Defendant as having a nonpriority unsecured claim in the amount of $51,588.69 but noted this claim as disputed because of an alleged uncollectable promissory note ("Note").
On March 26, 2018, the Defendant filed a Proof of Claim ("Claim") for $52,034.35 due on the Petition Date under the Note executed by the Plaintiffs in favor of Dollar Mortgage Corporation on April 5, 2000 for the original principal amount of $20,000.00. The Note provides for the Plaintiffs to make monthly payments for a period of 25 years, with the Note maturing on April 10, 2025. The Defendant designated its Claim as secured, because repayment of the Note is secured by a deed of trust ("Deed of Trust") executed by the Plaintiffs on April 5, 2000 and recorded on April 25, 2000 with the Franklin County Register of Deeds in Book 1173, Pages 489-93. The Deed of Trust creates a lien on the Plaintiffs' real property ("Property") located at 663 Mallie Pearce Road, Zebulon, North Carolina. The Property serves as the Plaintiffs' residence. The Note and the Deed of Trust contain standard acceleration language which gives the holder an option of declaring the Note's entire balance due and payable upon default. The Defendant is the current holder of the Note and beneficiary under the Deed of Trust pursuant to a series of respective indorsements and assignments. The Plaintiffs do not challenge that the Defendant is the holder in due course of the Note.
On June 13, 2018, the Plaintiffs initiated this adversary proceeding by filing a Complaint against the Defendant which sets forth the following causes of action:
The Defendant responded to the Complaint by filing the Motion to Dismiss, defending that the Complaint fails to state a claim upon which relief can be granted and should be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.
The First and Second Causes of Action are core proceedings pursuant to 28 U.S.C. § 157(b)(2), and the court has the authority to hear and determine these matters pursuant to 28 U.S.C. § 157(b)(1). See L. Ardan Dev. Corp. v. Newell (In re Newell), 424 B.R. 730, 734 (Bankr. E.D.N.C. 2010) (recognizing that the allowance or disallowance of a claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B)); Atlas Fire Apparatus, Inc. v. Beaver (In re Atlas Fire Apparatus, Inc.), 56 B.R. 927, 934 (Bankr. E.D.N.C. 1986) (holding that an action to determine under state law the validity and priority of liens encumbering property of the estate is a core proceeding under 28 U.S.C. § 157(b)(2)(K)). The Third Cause of Action is a non-core proceeding rooted in state law but related to the Plaintiff's ongoing Chapter 13 case, because any recovery could possibly affect distribution to unsecured creditors. See Valley Historic Ltd. P'Ship v. Bank of N.Y., 486 F.3d 831, 836 (4th Cir. 2007) (citations omitted) (holding that a civil proceeding is related to a bankruptcy if the outcome could conceivably influence the bankruptcy estate being administered). The court has subject matter jurisdiction pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference entered on August 3, 1984 by the United States District Court for the Eastern District of North Carolina.
Rule 8 of the Federal Rules of Civil Procedure
When considering a Rule 12(b)(6) motion to dismiss, a court "must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice." Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007). To survive the Rule 12(b)(6) motion to dismiss, the complaint must contain sufficient factual allegations that, when accepted as true, "state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007). "Determining whether a complaint states a plausible claim will . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009).
The factual allegations set forth in the Complaint and accompanying exhibits are quite simple. The Plaintiffs executed the Note and Deed of Trust on or about April 5, 2000, and they last made a payment on the account on or about March 1, 2007. In a letter dated June 19, 2007 ("First Default Letter"), Homecomings Financial, the holder of the Note at that time, notified the Plaintiffs of their default and stated that "[u]nless we receive full payment of all past-due amounts, we will accelerate the maturity of the loan, declare the obligation due and payable without further demand, and begin foreclosure proceedings." Complaint, Ex. A, ECF No. 1.
After a series of assignments of the Note and Deed of Trust resulting in the Defendant becoming the beneficiary, the Defendant's agent contacted the Plaintiffs by a letter dated May 6, 2017 ("Second Default Letter") and titled "45-DAY NOTICE OF INTENT TO FORECLOSE; NOTICE OF RIGHTS." Complaint, Ex. B, ECF No. 1. In accordance with applicable state and federal law, the Second Default Letter notified the Plaintiffs of the Defendant's intent to commence foreclosure if the Plaintiffs' default under the Note was not cured within 45 days. Specifically, the Second Default Letter states that "[f]ailure to cure such default within the applicable time period may result in [the Defendant] declaring the entire principal balance, accrued interest and any other fees and charges, including reasonable attorney's fees and costs, due ("Acceleration"). . . . You may prevent Acceleration by paying all amounts currently in arrears. . . ." Id. The Second Default Letter included calculations showing that as of May 6, 2017, the amount in arrears necessary to prevent acceleration was $33,947.60, and the total balance due was $50,894.23.
The Defendant's foreclosure attorney sent the Plaintiffs a letter dated July 11, 2017 ("Third Default Letter") giving a second statutory notice of the Defendant's intent to foreclose the Property; however, the Third Default Letter provided that the Note was in default for only $8,181.06. This lesser amount from that amount stated in the Second Default Letter resulted from inaccurate information supplied by the Defendant to its attorney concerning the last activity on the account. In September 2017, the Plaintiffs notified the Defendant that they disputed the validity of the debt. On or about November 22, 2017, the Defendant initiated a foreclosure action against the Property. The Plaintiffs thereafter filed their Chapter 13 bankruptcy petition on January 18, 2018.
The Plaintiffs base the First Cause of Action upon North Carolina's ten-year statute of limitations on an action "[u]pon a sealed instrument or an instrument of conveyance of an interest in real property, against the principal thereto." N.C. Gen. Stat. § 1-47(2) (2004) (emphasis added). The Plaintiffs contend that this statute of limitations prevents the Defendant from collecting and enforcing the Note, and as a result, the lien on the Property created by the Deed of Trust is not supported by a valid debt, making the Deed of Trust ineffective and unenforceable against the Property.
At the time of the Plaintiffs' bankruptcy petition, over ten years had passed since they last made payment on the Note; therefore, the Defendant was time-barred from bringing a collection action against the Plaintiffs as principals to the Note. The Bankruptcy Code provides that—
11 U.S.C. § 558. The United States Supreme Court recently recognized that this section allows the debtor to assert a statute of limitations as an affirmative defense to a creditor's claim.
The Plaintiffs' assertion that N.C. Gen. Stat. § 1-47(2) invalidates the Defendant's lien on the Property is inaccurate. The court was recently presented with this precise issue in In re Merritt, No. 17-04884-5-DMW (Bankr. E.D.N.C. Sept. 21, 2018), appeal docketed, No. 5:18-cv-00471-BO (E.D.N.C. Sept. 28, 2018).
Demai, 221 N.C. at 109-10, 19 S.E.2d at 133 (citations omitted). Following, the court concluded that for a secured claim to be defeated, "the Debtor must attack the [deed of trust] and the lien it secured on the Property." Merritt, supra, at *6.
In considering the validity and enforceability of the deed of trust in Merritt, the court first noted that the North Carolina General Statutes provide that—
N.C. Gen. Stat. 45-36.24(b)(1) (2013). Applying this statute to the present case, the Defendant's lien on the Property has not expired, because fifteen years have not passed since the Note's stated maturity date of April 10, 2025.
The court in Merritt next considered North Carolina's statute of limitations for an in rem foreclosure, which the Defendant in this case correctly points out differs from that for an in personam collection on the underlying debt and imposes a separate ten-year limitation upon an action—
N.C. Gen. Stat. § 1-47(3) (2004). The court followed the North Carolina Court of Appeals' interpretation that this statute of limitations—
In re Foreclosure of Brown, 240 N.C. App. 518, 522, 771 S.E.2d 829, 831 (2015) (citing E.H. & J.A. Meadows Co. v. Bryan, 195 N.C. 398, 401-02, 142 S.E. 487, 489-90 (1928)). In Bryan, the North Carolina Supreme Court found that acceleration is not automatic upon default and requires a creditor's affirmative action; otherwise, the creditor is presumed to have waived its contractual option to accelerate, and the ten-year statute of limitations for foreclosure does not begin to run until a defaulted debt matures. Bryan, 195 N.C. at 401-02.
Citing Brown, the Defendant argues that the First Cause of Action should be dismissed, because at the time of the Plaintiffs' bankruptcy petition, ten years had not passed since it accelerated the Note and commenced foreclosure. The Plaintiffs counter that dismissal of the First Cause of Action is improper, because the First Default Letter sent over ten years prior to the petition suggests that the Note may have been accelerated when the Plaintiffs did not thereafter cure the default. If the Plaintiffs had alleged in the Complaint that the Defendant or a predecessor-in-interest accelerated the Note over ten years prior to the Petition Date, then the court would be required to accept that allegation as true and deny dismissal of the First Cause of Action. The Plaintiffs did not make such an allegation, and the court will not independently infer an allegation of acceleration from the First Default Letter, because the Second Default Letter which was sent well within ten years of the Plaintiffs' petition contradicts that inference with a continued threat of acceleration. The Plaintiffs base their claim for relief entirely upon the statute of limitations in N.C. Gen. Stat. § 1-47(2), rather than that in N.C. Gen. Stat. § 1-47(3), and N.C. Gen. Stat. § 1-47(2) provides no basis to sustain their objection to the Defendant's secured Claim.
Through the Second Cause of Action, the Plaintiffs seek avoidance of the Deed of Trust's lien on the Property under 11 U.S.C. § 544, which allows a trustee to avoid a transfer of property by the debtor or an obligation incurred by the debtor that is voidable under applicable law by hypothetical creditors and bona fide purchasers of real property as of the commencement of the case. If a transfer is avoided under this section, then the trustee may recover the property transferred or the value of such property from initial or subsequent transferees. 11 U.S.C. § 550(a). The Plaintiffs do not specify upon which applicable law they allege the Defendant's lien can be avoided through 11 U.S.C. § 544, although the court presumes they intend N.C. Gen. Stat. § 1-47(2) as a cited in the First Cause of Action. Regardless, the Second Cause of Action fails to state a claim upon which relief can be granted, because a Chapter 13 debtor does not have independent standing to assert a trustee's avoidance powers under Chapter 5 of the Bankruptcy Code. Robinson v. World Omni Financial Corp. (In re Robinson), No. 10-00151-8-SWH, 2011 WL 352433, at *2-3 (Bankr. E.D.N.C. Feb. 1, 2011).
Finally, the Plaintiffs allege that the Defendant's actions with respect to the Note and Deed of Trust violated Chapter 75 of the North Carolina General Statutes, titled "Monopolies, Trusts, and Consumer Protection." This chapter embodies a prohibition against unfair and deceptive trade practices, known as the Unfair and Deceptive Trade Practices Act ("UDTPA"), and an enumeration of acts prohibited by debt collectors, known as the North Carolina Debt Collection Act ("NCDCA"). These acts are interrelated, and the NCDCA is essentially an extension of the UDTPA to debt collection practices.
Unfair and deceptive acts in the context of debt collection are codified in the NCDCA, N.C. Gen. Stat. §§ 75-50 to 75-56, and "include the use of threats, coercion, harassment, unreasonable publications of the consumer's debt, deceptive representations, and unconscionable means." Davis Lake Cmty. Ass'n, Inc. v. Feldmann, 138 N.C. App. 292, 296, 530 S.E.2d 865, 868 (2000). A claim for unfair debt collection requires three threshold determinations: (1) the obligation owed must be a "debt," (2) the one owing the obligation must be a "consumer," and (3) the one trying to collect the obligation must be a "debt collector," as those three terms are defined in N.C. Gen. Stat. § 75-50(1)-(3). Reid v. Ayers, 138 N.C. App. 261, 263, 531 S.E.2d 231, 233 (2000). The Plaintiffs allege, and the Defendant does not dispute, the satisfaction of all three of these threshold elements, but satisfaction of the threshold requirements does not end the court's inquiry. Id. at 265, 531 S.E.2d at 235. If the threshold requirements are satisfied, then a plaintiff must further satisfy "the more generalized requirements of all unfair or deceptive trade practice claims, which are contained in [the UDTPA]." Id.
The UDTPA provides that "[u]nfair methods of competition in or affecting commerce, and unfair or deceptive acts of practices in or affecting commerce, are declared unlawful." N.C. Gen. Stat. § 75-1.1(a) (1977). "In order to establish a prima facie claim for unfair trade practices, a plaintiff must show: (1) defendant committed an unfair or deceptive act or practice, (2) the action in question was in or affecting commerce, and (3) the act proximately caused injury to the plaintiff." Dalton v. Camp, 353 N.C. 647, 656, 548 S.E.2d 704, 711 (2001) (citing Spartan Leasing Inc. v. Pollard, 101 N.C. App. 450, 461, 400 S.E.2d 476, 482 (1991)). These elements are listed in the conjunctive and must all be satisfied.
The Complaint alleges that the Defendant misled and gave false information to its attorney as to the collectability of the debt owed under the Note, and these actions constitute deception by deceptive representation and unconscionable means. The Defendant argues that the Plaintiff failed to plead that the Defendant's actions were "in or affecting commerce" and failed to allege any facts showing that they were deceived by the Defendant's actions. The court agrees that the Complaint is scarce in factual allegations supporting the first two elements for a prima facie case under the UDTPA, but even giving the Plaintiffs the benefit of the doubt, the Plaintiffs failed to plead damages which can be awarded by this court.
The Plaintiffs allege that the Defendant's actions forced them to file bankruptcy which has harmed their relationship with other creditors and damaged them "in the amount of the Defendant's claim against the estate." Complaint ¶¶ 37-38, ECF No. 1. The Plaintiffs pray that the court thus disallow the Defendant's Claim under N.C. Gen. Stat. § 75-56(b). This subsection of the NCDCA provides that—
N.C. Gen. Stat. § 75-56(b) (2009) (emphasis added). The Plaintiffs further pray that any damages awarded be trebled pursuant to N.C. Gen. Stat. § 75-16, which provides as follows:
N.C. Gen. Stat. § 75-16 (1977).
Disallowance of a claim does not equate to a recovery for actual damages and is not a statutory remedy for violation of the NCDCA and UDTPA. Even if the court determined disallowance of the Claim an appropriate award of damages, which it does not, it is perplexed as to how such "damages" can be trebled. The court cannot grant the relief requested by the Plaintiff in the Third Cause of Action.
The Plaintiffs initiated this adversary proceeding to prevent any recovery by the Defendant from the Property, either through disallowance of the Claim or avoidance of the Deed of Trust. Although the First Cause of Action makes a credible claim for disallowance of any in personam liability on the Note pursuant to N.C. Gen. Stat. § 1-47(2), this cause of action is insufficient to defeat the secured Claim. While dubious, the court recognizes that the Plaintiffs may have a viable defense to the enforceability of the Claim against the Property pursuant to N.C. Gen. Stat. § 1-47(3) and will, therefore, allow the Plaintiffs an opportunity to file an amended complaint to plea this statute of limitations. To the extent that this statute or other applicable law can be used by the Trustee to avoid the Defendant's lien on the Property using the strong-arm powers of 11 U.S.C. § 544 as alleged in the Second Cause of Action, the Plaintiffs may seek joinder of the Trustee in an amended complaint. The Plaintiffs seem to be using the UDTPA and NCDCA as inappropriate backdoor avenues for disallowance of the Claim and are cautioned against reasserting the Third Cause of Action unless they have sustained actual and proximate damages compensable under these acts; now therefore,
It is ORDERED, ADJUDGED, and DECREED as follows:
1. The Motion to Dismiss be, and hereby is, granted;
2. The Complaint be, and hereby is, dismissed;
3. The Plaintiffs be, and hereby are, granted leave to file an amended complaint within sixty days of the date of this Order; and
4. If the Plaintiffs do not file timely an amended complaint within sixty days of the date of this Order, then the Clerk shall close this adversary proceeding.
