ERIC L. FRANK, U.S. BANKRUPTCY JUDGE.
Mattie Mae Faulkner ("the Debtor") filed this chapter 13 bankruptcy on January 30, 2017. On March 27, 2017, M & T Bank ("M & T") filed a proof of claim in the amount of $126,523.43, secured by a mortgage on the Debtor's residential real property, 5432 North Fairhill Street, Philadelphia, PA ("the Property").
On September 12, 2017, the Debtor filed a Complaint commencing this adversary
This adversary proceeding is the latest legal skirmish involving the Property, going back to 2002. Prior to the commencement of this adversary proceeding, the Property was the subject of four (4) mortgage foreclosure lawsuits in state court and three (3) prior bankruptcy cases.
The Amended Complaint raises eight (8) causes of action, invoking a broad range of legal theories, including lack of standing to enforce the secured debt, the
On January 19, 2018, M & T filed a motion to dismiss ("the Motion") the Amended Complaint under Fed. R. Bankr. P. 7012 (incorporating Fed. R. Civ. P. 12(b)(6)), asserting that it has an enforceable right to collect the debt embodied in its secured proof of claim and that the Debtor's claims lack merit as a matter of law. The Debtor filed her response to the Motion on February 19, 2018.
Some of the issues presented by the parties are so clear cut that I wonder why they bothered to press them. Others are more problematic, sometimes involving difficult, unsettled issues of state law.
The task of working through the claims and M & T's asserted grounds for dismissal was made more arduous because the Debtor's forty (40) page, more than 200 paragraph Amended Complaint is unnecessarily prolix and filled with legal conclusions interspersed in the statement of facts and factual allegations interspersed in the statement of claims.
The Motion will be granted in small part and denied in large part.
For the reasons set out below, I will:
The Defendant has moved to dismiss the Amended Complaint for failure to state a claim under Fed. R. Civ. P. 12(b)(6) (made applicable in adversary proceedings by Fed. R. Bankr. P. 7012).
A motion to dismiss under Fed. R. Civ. P. 12(b)(6) tests the legal sufficiency of the factual allegations of a complaint,
In evaluating the plausibility of the plaintiff's claims, the court conducts a context-specific evaluation of the complaint, drawing from its judicial experience and common sense.
In the Motion and the Debtor's response, each party refers to various documents that were docketed in the prior state court and bankruptcy proceedings. Consequently, Fed. R. Civ. P. 12(d) also is relevant. It provides:
In
The following facts are based on the Amended Complaint and the court records of the Court of Common Pleas of Philadelphia County and this court.
In 1994, the Property was solely owned by Kevin Faulkner, then the Debtor's spouse. At that time, Kevin Faulkner entered into a loan transaction with Provident Mortgage Corporation, secured by a mortgage ("the Mortgage") on the Property in the amount of $53,900.00. Kevin Faulkner was the sole obligor on the associated note ("the Note"). Later, the Mortgage was assigned to Provident Bank of Maryland.
In 2002, Provident Bank of Maryland filed a mortgage foreclosure action against the Property, naming Kevin Faulkner as the sole defendant ("the 2002 First Foreclosure"). On February 24, 2003, Provident Bank of Maryland obtained a default judgment in foreclosure for $59,830.40 ("the 2003 Judgment").
Soon after the 2003 Judgment was entered, the Debtor finalized her divorce from Kevin Faulkner. On June 26, 2003, pursuant to a court order, the Prothonotary of the Court of Common Pleas executed a deed, transferring the Property to the Debtor. The deed was recorded on July 14, 2003.
On February 27, 2003, (three (3) days after the entry of the 2003 Judgment, but prior to the execution and recording of the Prothonotary's deed to the Property), the Debtor filed her first chapter 13 bankruptcy case, docketed at Bky. No. 03-12945. In the course of that case, she filed an adversary proceeding against Provident Mortgage Corporation, Adv. No. 04-058, that was settled on terms not apparent on the record. The Debtor's chapter 13 plan was confirmed on September 9, 2003, but the case was dismissed on September 14, 2004 for failure to make plan payments.
On November 29, 2004, the Debtor filed her second chapter 13 bankruptcy case, docketed as Bky. No. 04-35789. The Debtor's chapter 13 plan, which was confirmed on June 28, 2005, was designed to cure the default on the Mortgage. The case was dismissed on motion of the chapter 13 trustee, by order dated December 20, 2005.
On April 11, 2006, the Debtor filed her third chapter 13 bankruptcy case, docketed as Bky. No. 06-11509. Her chapter 13 plan was confirmed on February 27, 2007. Again, the plan was designed to cure the default on the Mortgage. The case was dismissed on April 29, 2008 for failure to make the required plan payments.
On October 16, 2008, Provident Bank filed its second mortgage foreclosure action ("the 2008 Second Foreclosure") against the Debtor and Kevin Faulkner. On November 11, 2008, while the action was pending, Provident Bank of Maryland assigned the Mortgage to Provident Bank. On February 17, 2009, the state court entered an order ("the February 2009 Order"), sustaining the Debtor's preliminary objection to the complaint and dismissing the 2008 Second Foreclosure. The February 2009 Order was entered because the "Complaint [was] not properly verified."
On January 27, 2010, the same attorney who was representing Provident Bank in the 2009 Third Foreclosure filed a praecipe on behalf of Provident Bank of Maryland in the 2002 First Foreclosure ("the 2010 Praecipe") that purported to vacate the 2003 Judgment and discontinue the action.
Provident Bank discontinued the 2009 Third Foreclosure on March 19, 2012.
Later in 2012, M & T began its collection efforts on the Note and Mortgage. M & T filed a fourth foreclosure action against the Debtor and Kevin Faulkner on September 29, 2012 ("the 2012 Fourth Foreclosure").
The Debtor filed an answer and new matter in the 2012 Fourth Foreclosure, raising counterclaims for affirmative damages that are similar to the affirmative counts in the instant Complaint. The state court dismissed the counterclaims, with prejudice, on July 19, 2016.
During the 2012 Fourth Foreclosure, M & T requested leave of the state court to reissue the pre-foreclosure notices required by Pennsylvania's Loan Interest and Protection Law, Act 6 of 1984, 41 P.S. §§ 101, 403(a) ("Act 6"), alleging that the notices should have been sent to the Debtor. The state court granted this request on November 15, 2016. M & T sent the Debtor an Act 6 notice on December 1, 2016.
In 2014, the Property suffered damage that was covered by insurance. The insurance company sent the Debtor a check for $6,000.00. The Debtor forwarded this check to the entity claiming to be the holder of the Note and Mortgage. The Debtor then paid for the repairs herself. In the Amended Complaint, the Debtor alleges that she has not received credit for the insurance proceeds she paid to the alleged Note holder.
The Debtor filed the instant bankruptcy on January 30, 2017.
On March 27, 2017, M & T filed proof of claim 2-1 ("the Proof of Claim") alleging a debt of $126,523.43 secured by the Property. The Debtor commenced this adversary proceeding on September 12, 2017.
In Count I, the Debtor argues that, under applicable nonbankruptcy law, M & T lacks authority to enforce the debt that is secured by the Mortgage.
Specifically, the Debtor asserts that the Proof of Claim lacks evidence that M & T "is in possession of the Note and Mortgage which forms the basis for its proof of claim." (Am. Compl. ¶ 105). In her Memorandum in opposition to the Motion, the Debtor argues that her position is bolstered by M & T's failure to assert that it is the holder of the Note and Mortgage. (Debtor's Mem. at 5).
As explained below, the Motion to dismiss this Count will be denied.
In essence, Count I amounts to an objection to the allowance of M & T's Proof of Claim, a request for relief that ordinarily arises as a contested matter. Its assertion as part of an adversary proceeding is permitted by the rules of court.
The existence of an allowable claim starts with the requirement that the claimant has a bankruptcy "claim," which is defined as "right to payment" under applicable law.
Here, the Debtor agrees that the source of M & T's asserted right to payment is the Note and that the Note is a negotiable instrument under the Uniform Commercial Code. (Debtor's Mem. at 6 n.1.). The Debtor the attacks M & T's authority to enforce the note.
In the Amended Complaint, the Debtor alleges that M & T "is neither in possession of the note ... upon which it bases its claim nor is it the holder of the note ... with a right to enforce." (Am. Compl. ¶ 107). This allegation, which I must accept as true at this stage of the adversary proceeding, states a claim for disallowance of M & T's proof of claim.
M & T seeks to avoid this outcome by referring to the copy of the Note that it attached to its Proof of Claim and states that the rules of court do not require that a proof of claim include an averment that the claimant has possession of an underlying note. As a result, M & T posits that its Proof of Claim complies with the procedural requirement of Fed. R. Bankr. P. 3001(c) and is
M & T also argues that the allegation that it lacks possession is disproven by the content of the Note it attached to the Proof of Claim. The Note, which is initially payable to Provident Mortgage Corp. t/a Consolidated Mort. Corp., is endorsed by Provident Mortgage Corp. to the order of Provident Bank of Maryland and then endorsed in blank by Provident Bank of Maryland. In addition, M & T avers in the Proof of Claim that it is the successor by merger to Provident Bank of Maryland. Taking into account its attachment of the endorsed-in-blank note and M & T's status as the successor to Provident Bank of Maryland,
While the circumstances strongly suggest that M & T has possession and is the holder of the Note, I am not persuaded that dismissal at the pleading stage is appropriate.
The
The fact that M & T attached
Analysis of the merits of the motion to dismiss Count I requires one more step.
While the Note is the basis for the debt that is secured by the Mortgage, the Debtor did not sign the Note and has no personal liability on it. Kevin Faulkner signed the Note when he owned the Property and only later did the Debtor take title. When she did so, the Property was subject to the Mortgage.
Because the Debtor's property is subject to a mortgage that secures an outstanding liability (
In the end, the allowability of the Proof of Claim turns on the question: may M & T foreclose on the Property under Pennsylvania law? Because the Debtor has adequately alleged that M & T does not hold and cannot enforce the Note, an allegation that I accept as true for present purposes, the answer is "no."
The Debtor adequately pled that M & T does not possess the Note. If proven, M & T would not have grounds to obtain a judgment in foreclosure to enforce the liability on the Note. If M & T cannot foreclose against the Property, it does not have an allowable non-recourse bankruptcy claim.
For these reasons, the Debtor has adequately pled that M & T's claim should be disallowed.
In Count II, the Debtor seeks disallowance of M & T's claim based on application of the
Earlier this year, I summarized that doctrine as follows:
The Debtor here bases her request for disallowance of the Proof of Claim on the
M & T asserts that Count II lacks merit as a matter of law. I agree. This claim for relief is borderline frivolous and will be dismissed. This is so for three (3) reasons
First, the February 2009 Order, dismissing the state court complaint because it was not properly verified, was not a dismissal of the 2008 Second Foreclosure on the merits.
Second, the assertion of the Proof of Claim against the Debtor is a request for relief based on events that preceded the entry of the state court order. It does not constitute a complaint regarding injuries caused by the state court order, as required by the second prong of the
Third, in the absence of any indication that the dismissal of a mortgage foreclosure action was intended as a determination that the Note and Mortgage were absolutely invalid and unenforceable, the maximum effect the dismissal could have would be to bar the mortgagee from seeking foreclosure and payment based on the particular default alleged in the complaint. That is, the dismissal would not bar the mortgagee from filing a subsequent foreclosure action based on default of the note and mortgage occurring after the dismissal.
In
In bankruptcy terms, even if the February 2009 Order dismissed the 2008 Second Foreclosure with prejudice, M & T still has an allowable bankruptcy claim for amounts still due on the Note and Mortgage after the dismissal of the 2008 Second Foreclosure. Further, the Amended Complaint acknowledges that the Debtor missed several years of monthly installments after February 2009, which provides grounds for M & T to file a subsequent foreclosure action.
In short, even if the February 2009 Order dismissed the 2008 Second Foreclosure with prejudice, its maximum effect would be to reduce the amount of M & T's Proof of Claim; it would not require disallowance of the entire Proof of Claim. Because total
In Count III, the Debtor advances a similar theory to that in Count II. Based on the February 2009 Order dismissing the 2008 Second Foreclosure, the Debtor asserts that the doctrine of
The doctrine of
Count III, like Count II, rests on the premises that the dismissal of the mortgage foreclosure action was on the merits and with prejudice, forever cutting off a mortgagee's right to foreclose. None of these assumptions are true. M & T may foreclose on any of the post-dismissal defaults alleged in the complaint and therefore, has a right to payment that is enforceable against the Property.
Count III will be dismissed with prejudice.
If the Proof of Claim is not wholly disallowed, the Debtor asserts that the claim should be disallowed in part because M & T is bound by the 2003 Judgment through the doctrine of
When a foreclosure judgment is entered, the mortgage contract merges into the judgment.
In order for the merger doctrine to apply, there must be a judgment upon the mortgage. The Debtor points to the 2003 Judgment entered in the 2002 First Foreclosure, alleging that it controls. She argues that M & T's rights must be determined with the 2003 Judgment as the starting point, and any post-judgment charges that did not survive the merger must be disallowed. M & T's predecessors purportedly vacated the 2003 Judgment by filing the 2010 Praecipe. The Debtor contends that the 2010 Praecipe was ineffective
M & T's core contention is that Count IV should be dismissed because the 2003 Judgment no longer exists; it was vacated by the 2010 Praecipe. Before making that argument, however, M & T offers several preliminary reasons why Count IV should be dismissed that are not dependent on the continuing vitality of the 2003 Judgment. None of these arguments is persuasive.
Initially, M & T disputes the Debtor's right to invoke the doctrine of
To apply the doctrine, three (3) elements must be present:
M & T contends that the Debtor may not invoke
M & T is on solid ground at the start of its analysis when it calls privity a "legal conclusion that the relationship between a party and a nonparty is sufficiently close to require the application of
M & T then reasons that the Debtor's interest cannot be considered to have been represented in the 2002 Foreclosure because, at the time of that litigation and the entry of the 2003 Judgment, she was neither a borrower, mortgagor nor real owner.
Respectfully, I disagree.
M & T's position is refuted by a case that it itself cites:
From June 2003 (when the Debtor obtained title to the Property) to January 2010 (when Provident Bank filed the 2010 Praecipe), the Debtor owned the Property subject to the 2003 Judgment and was bound by that judgment. If it had chosen to do so, M & T could have executed upon the 2003 Judgment and the Debtor would have been bound by the result of the 2003 Judgment.
Moreover, Kevin Faulkner's interest in the foreclosure litigation was identical to the Debtor's interest,
Having taken Kevin Faulkner's position with the same interests, the Debtor is sufficiently in privity with M & T to invoke the doctrine of
M & T next argues that it was within its rights to institute a second foreclosure upon the Mortgage, even if the 2003 Judgment was still in effect because there were subsequent defaults. This, too, is incorrect.
M & T's argument runs afoul of the merger doctrine. The entry of a foreclosure judgment fixes the positions of the parties: the mortgage merges into the judgment and no further monthly installments fall due as long as the judgment remained in effect. The debt secured by the mortgage is accelerated and is immediately due and payable in its entirety as set forth in the judgment. In short, there is no mortgage that could be in default or give rise to a new cause of action in mortgage foreclosure.
Finally, citing Pa. R. Civ. P. 1028(a)(6) in support of its position, M & T argues that the Debtor waived the affirmative defense of
Rule 1028(a)(6) provides, in pertinent part:
This argument is without merit for two (2) independent reasons.
First, it is not mandatory that a defendant raise every available defense in a preliminary objection, rather than in an answer and new matter. Rule 1028 states that preliminary objections "may" be raised, not that they must be raised. As a general proposition,
3 Goodrich Amram 2d § 1028(b):6 (West 2018).
Second, Rule 1028(a)(6) refers to pending matters that are in active litigation (
I also observe that no final judgments were entered in either of the foreclosure actions cited by M & T. Thus, under the state court rules, the Debtor could have sought leave to amend her pleading during the pendency of those actions.
Having rejected M & T's preliminary arguments, I must resolve the main legal issue presented by the Motion with respect to Count IV.
The sufficiency of Count IV comes down to an issue which is simply stated but difficult to resolve: may the holder of a default judgment in mortgage foreclosure vacate that judgment by filing a praecipe with the prothonotary?
Both sides have marshaled cogent arguments in support of their positions.
For the reasons that follow, I agree with the Debtor and conclude that the mortgagee's attempt to vacate the default judgment by praecipe was not ineffective.
M & T's primary argument, that its unilateral filing of the 2002 Praecipe served to vacate the 2003 Judgment has some intuitive appeal:
(M & T Mem. at 21).
M & T supports its core contention by reference to the Pennsylvania Rules of Civil Procedure, which authorize the entry of a default judgment for a sum certain through the filing of a praecipe by a plaintiff and the ministerial action of the prothonotary.
M & T acknowledges the general proposition that a party may not unilaterally alter a judgment entered after a judicial determination of the rights of the parties. (M & T Mem. at 21). M & T suggests, however, that, at least for certain purposes, a default judgment is different than a judgment entered after a contest: it is entered without any judicial involvement; it is not a "judicial order;"
M & T also acknowledges that Pennsylvania rules of court include no express authorization for a party to effect vacatur
The Debtor counters primarily with a textual argument based on the Pennsylvania Rules of Civil Procedure, in particular, Pa. R. Civ. P. 206.1-206.7 and 208.1-208.4.
Rules 206.1-206.7 require that a "petition" be filed for striking or opening a default judgment and set out the procedure to be followed after the petition is filed. Rules 208.1-208.4, more generally, provide that an application to the court for an order (with certain exceptions, including petitions under Rule 206.1) are requested by filing a "motion" and then set out the procedure to be followed after a motion is filed. Both sets of rules provide for notice to the opposing party and the opportunity to file a response.
The Debtor's essential argument is that the vacating of a judgment is the modification of a court order and therefore, regardless whether the proper procedure is found in Rules 206.1-206.7 or 208.1-208.4, it cannot be effected by praecipe.
Also, the Debtor emphasizes that, under Pennsylvania law, a default judgment is just as conclusive for
While not fully fleshed out, the Debtor's position appears to be that her textual argument based on the court rules is reinforced by two (2) underlying legal principles: (1) the modification of a judgment without prior notice and opportunity to be heard is inconsistent with fundamental notions of due process that are embodied in the Pennsylvania court rules;
No clear answer to the issue presented by the parties may be found in the Pennsylvania rules of court or case law. Nevertheless, I find it necessary to decide the issue and predict how the Pennsylvania Supreme Court would rule.
I conclude that vacatur of a default judgment in mortgage foreclosure by praecipe, without the consent of the defendant and without notice and opportunity to be heard, is not authorized by the Pennsylvania Rules of Civil Procedure and is legally ineffective. Consequently, if M & T is the successor by merger to Provident Bank of Maryland,
At the risk of oversimplification, my conclusion is based on the view that in the absence of textual support in the rules for the practice of vacating default judgments by praecipe, the due process requirements of notice and opportunity to be heard included in the existing court rules, along with the principles of finality and mutuality embedded in the doctrine of
To be sure, M & T's arguments that there is no statute or rule that explicitly prohibits vacatur-by-praecipe and that there is reason to believe that the procedure historically has been countenanced have some force. If a creditor holds a valid and enforceable default judgment obtained by the ministerial act of the prothonotary, it is not obvious why it should be prohibited from giving up the benefits of its judgment — usually (but not always) to its own detriment — and restarting merits litigation.
Further, there may be a policy reason why a summary process for vacating a default judgment in mortgage foreclosure may be desirable. For example, if a defendant-mortgagor has cured a default after the entry of a foreclosure judgment but prior to sheriff's sale (a right that many
Nevertheless, while the issue is not free from doubt, I find the counterarguments more persuasive.
Although the rules of court allow a judgment to be entered by default through the ministerial act of the prothonotary, once that default judgment has been entered, a court order is in place that has determined the rights of the parties. In a sense, once entered, the judgment entered by the ministerial action of the prothonotary is transformed into something greater than a docket notation. This is clear from the preclusive effect given to the default judgment, which is treated as the final, judicial determination of the rights of the parties —
In essence, a judgment is not a unilateral right held by the winning party, but a determination under the control of the court. This is even true for a default judgment, "which remains within the control of the court indefinitely and may be opened or vacated at any time upon proper cause shown."
The principles discussed above suggest that at least two (2) problems exist with the praecipe procedure used to vacate the 2003 Judgment in this case.
First, while a praecipe to vacate must be served on every other party under Pa. R. Civ. P. 440,
Second, the purpose of Rule 440 is to give parties the opportunity to be heard if
In this case, the Debtor had no notice of the vacatur of the 2003 Judgment, no opportunity to contest it and no judicial officer signed an order vacating the judgment. In these circumstances, I conclude that M & T's predecessors in interest did not validly vacate the 2003 Judgment, the Debtor may invoke
With respect to "residential mortgages" covered by Act 6, the statute provides that
41 P.S. § 403(a).
41 P.S. § 403(c) then prescribes, in detail, the information that must be included in the notice.
Act 6 also provides that:
41 P.S. § 406 (emphasis added).
In Count V, the Debtor seeks the disallowance of the legal expenses M & T asserted
M & T argues that Act 6 is inapplicable because the subject Mortgage is not a "residential mortgage" within the meaning of the statute and, therefore, not subject to the statutory pre-foreclosure notice requirements.
The protective provisions of 41 P.S. §§ 403 and 406 are limited to statutorily defined "residential mortgages."
The original parties to the underlying loan transaction entered into the Mortgage in 1994. The original principal amount on the face of the Mortgage was $53,900.00. Thus, M & T argues that, in 1994, the Mortgage was not an Act 6 "residential mortgage."
In 2008, the Pennsylvania Legislature amended 41 P.S. § 101, increasing the statutory ceiling from $50,000.00 to $217,873.00.
M & T contends that Act 6 does not apply to the Mortgage because the increased threshold does not apply to mortgages entered into prior to the effective date of the 2008 amendment.
As explained below, I conclude otherwise. The pre-foreclosure notice provision of Act 6, 41 P.S. § 403, applies to the Mortgage. If M & T failed to comply with § 403, its right to collect from the Debtor
Consequently, the Motion will be denied as to Count V.
As stated earlier, Act 6 is also known as Pennsylvania's Loan Interest and Protection Law.
The interest rate limitation in Act 6 may be characterized as a substantive limitation on the rights of parties entering into a contract. By comparison, the notice provisions of Act 6 merely regulate the foreclosure process, by "postpon[ing] the exercise of [the mortgagee's] right to accelerate until after the mortgagor had received notice of and opportunity to cure a default."
Act 6 amendments may not retroactively regulate substantive conduct of the parties (
Since the effective date of the 2008 amendment raising the statutory ceiling from $50,000.00 to $217,873.00, (thereby increasing the scope of Act 6's coverage), there have been several reported decisions that have stated or held that the amendment and the increased Act 6 coverage do not apply to mortgage transactions entered into before the effective date of the amendment. These decisions must be understood in context and should not be read over broadly.
All of those cases involved claims for damages based on asserted violations of Act 6 provisions regulating substantive conduct:
In other words, in the cited cases, the claims were based on Act 6 substantive, regulatory provisions that were not applicable to the contracts at the time the parties entered into them. Here, the Debtor's claim is grounded in 41 P.S. § 403(a),
As far back as 1978, the Pennsylvania Superior Court held that the notice provisions of Act 6 apply to mortgages that were executed prior to the statute's effective date, but that later became subject to Act 6 based on the definition of "residential mortgage" under the statute.
On the strength of
The conclusion that 41 P.S. § 403(a) applies to M & T's foreclosure efforts after the effective date of the 2008 amendment to Act 6 does not end the inquiry.
The Debtor invokes 41 P.S. § 406 in order to translate the asserted violation of her notice rights into a monetary benefit and reduce M & T's allowed secured claim. As stated earlier, § 406 restricts the amount of attorney's fees that a mortgagor can charge, depending upon whether the mortgagor has sent the statutory notice of intent to foreclose or has actually commenced a foreclosure proceeding.
It is not clear whether § 406 may be applied to a mortgage that was not a "residential mortgage" under Act 6 when executed based on the enactment of the 2008 amendment to Act 6. Unlike § 403(a), which merely adds a procedural step in the foreclosure process and does not affect a mortgagor's substantive rights, § 406(a) potentially alters the substantive terms of a residential mortgage that includes a fee-shifting provision.
Paragraph 17 of the Mortgage provides:
(emphasis added).
Under Pennsylvania common law, M & T is entitled only to "reasonable" attorney's fees incurred in pursuing its foreclosure remedy. In other words, the "reasonable and actually incurred" requirement for shifting legal fees in mortgage foreclosure cases has been a part of Pennsylvania jurisprudence even before the enactment of Act 6.
Thus, the Debtor may be able to prevail in reducing M & T's allowed claim on the theory that the Mortgage itself does not authorize the attorney's fees included in the proof of claim because the fees are not reasonable; and the fees were not reasonable because they were incurred in connection with legal proceedings that were deficient from the beginning due to M & T's failure to comply with the notice provisions of Act 6.
Consequently, if M & T did not comply with the notice requirements of 41 P.S. § 403(a), Count V states a plausible claim for disallowance of at least some of the attorney's fees component of M & T's proof of claim.
In Count VI, based on Paragraph 9(d) of the Mortgage, which she claims incorporates into the contract certain regulations of the U.S. Department of Housing and Urban Development ("HUD"), the Debtor asserts a claim against M & T for breach of contract.
Paragraph 9 the Mortgage provides:
In the Amended Complaint, the Debtor cites the following regulations as having been violated: 24 C.F.R. § 203.556(b), (d), (e); § 203.604(b); and § 203.606(a).
Without citing any specific legal authority, the Debtor also asserts that she had been eligible for a loan modification under the Federal Housing Administration's Home Affordable Modification Program ("HAMP") and that she was eligible and entitled to a "Special Forbearance" under 24 C.F.R. § 203.614 (Am. Compl. ¶¶ 148-50). She seeks damages and partial disallowance of M & T's proof of claim.
M & T moves to dismiss Count VI on the ground that the claim is barred by the
As explained below, while I conclude that
In her Answer to M & T's complaint in the 2012 Fourth Foreclosure, the Debtor asserted a counterclaim for breach of contract, raising essentially the same claim as she sets out in Count VI. However, on July 19, 2016, the state court entered an order ("the July 19th Order") granting M & T's motion for partial judgment on the pleadings and dismissing the Debtor's breach of contract claim "with prejudice." (Ex. K to M & T's Mem.).
Respectfully, I disagree.
Initially, I observe that I agree with M & T that, on its face, the July 19th Order appears to be a dismissal of the Debtor's counterclaim for breach of contract on the merits. Unquestionably, M & T stated several non-merits, procedural grounds in requesting dismissal of the counterclaim. (
The state court had both non-merits and merits grounds to choose from in deciding M & T's motion for judgment on the pleadings. Had the state court concluded that the breach of contract claim was merely procedurally defective and impermissible in a mortgage foreclosure action, it is fair to conclude that it would have omitted the words "with prejudice" from the dismissal order. The only reasonable inference to be drawn from the text of the order was that the court concluded that the counterclaim was properly raised in the action, but lacked merit.
Consequently, it is not surprising that M & T seeks dismissal based on the state court's order. The Defendant litigated the validity of the contract claim on the merits in state court; it prevailed, and the Debtor is now raising the same issue in this adversary proceeding. At first blush, it appears possible that some kind of preclusion doctrine might apply. However,
M & T's
In Count VI, the Debtor asserts that she suffered damages caused by M & T's conduct, all of which pre-date the state court order dismissing her breach of contract claim. The Debtor is not complaining of harm caused by the state court dismissal order; she complains of harm caused by M & T's earlier conduct.
The thrust of the Debtor's contract claim is that certain provisions of the Mortgage incorporated federal regulations imposing certain limitations on M & T's right to foreclose and that M & T breached the mortgage contract by failing to perform those obligations before attempting to foreclose.
In their competing memoranda, the parties engage in a spirited debate as to whether the Debtor, as a transferee who took title to the Property subject to the Mortgage, may assert claims for breach of M & T's duties under the Mortgage.
M & T contends that as a transferee who is not a party to the Mortgage, who has not assumed it, but who is merely the owner of property that is subject to it, the Debtor does not step into the shoes of the original mortgagor and may not sue M & T for the purported contract violations.
The Debtor argues that her ownership of the Property and the legal effect of a federal regulation creates a sufficient relationship to the Mortgage to put her in contractual privity with M & T.
Neither side cites any cases directly on point regarding the issue; perhaps there are none. That may be so because the notion that a mortgagor has a right to sue a mortgagee for breach of the mortgagee's performance under the mortgage is more novel than the parties assume.
Both parties appear to assume that the limitations on M & T's right to foreclose on the Mortgage following a default that is expressed in the Mortgage (or incorporated by reference to federal regulations) constitutes an affirmative, contractual promise that, if not performed, may be the subject of an action for breach of contract. As explained below, I conclude, as a matter of law, that the Mortgage creates no such actionable promise.
Under basic principles of contract law, there is a critical distinction between a contractual condition and a contractual promise:
Applying those principles here, I fail to see how M & T (or its predecessor) made any contractual "promises" to the Debtor (or her predecessor).
The Note is a negotiable instrument, which is an unconditional promise to pay a fixed amount of money.
When properly viewed, these provisions of the Mortgage are not affirmative promises that the mortgagee will perform any duties. Rather, the Mortgage provides that the right to foreclose is
At bottom, the Debtor has alleged nothing more than that certain conditions to foreclosure did not occur before M & T commenced and pursued its foreclosure remedy. If true, the non-occurrence of those conditions establishes a defense to foreclosure, but does not support an affirmative claim for breach of contract.
For this reason, I will grant the Motion as to Count VI insofar as it states a claim for affirmative damages for breach of contract.
The determination that the Debtor may not seek affirmative contract damages for breach of contract does not conclude the matter. Throughout the Amended Complaint, the Debtor asserts that her claims constitute both affirmative damage claims and an objection to M & T's proof of claim. That is equally true with respect to Count VI.
The facts alleged in Count VI, if proven, support an objection to M & T's Proof of Claim on the ground that M & T engaged in foreclosure activity without first satisfying contractual preconditions and therefore, its claim for various legal expenses incurred during the foreclosure process should be disallowed. To the extent that the claimed reduction in the allowed secured claim does not overlap the Count IV remedy, the Debtor is entitled to pursue this remedy. To this extent, the Motion will be denied as to Count VI.
In Count VII, the Debtor asserts a claim for violation of the Pennsylvania Unfair Trade Practices and Consumer Protection Law ("the UTPCPL"), 73 P.S. §§ 201-1
The UTPCPL declares unlawful "unfair methods of competition and unfair or deceptive acts in the conduct of any trade or commerce." 73 P.S. § 201-3. The UTPCPL defines "unfair methods of competition and unfair or deceptive acts as any one (1) of
The UTPCPL creates a private right of action for recovery of actual damages, plus discretionary treble damages, for any person who "suffers any ascertainable loss of money or property, real or personal, as a result of the use or employment by any person of a method, act or practice declared unlawful" under the UTPCPL. 73 P.S. § 201-9.2.
To establish liability under the catch-all provision, a plaintiff must present evidence showing: (1) a deceptive act that is likely to deceive a consumer acting reasonably under similar circumstances, (2) justifiable reliance, and (3) an ascertainable loss of money or property caused by defendant's actions.
Initially, M & T argues that Count VII should be dismissed because the UTPCPL is preempted by the Bankruptcy Code. I reject this argument out of hand.
Federal preemption should not be inferred lightly, and only applies when Congress either makes preemption explicit in a statute, where federal law occupies the entire field or state law actually conflicts with federal law.
A UPTCPL claim is not preempted simply because it is included in an adversary proceeding.
Next, M & T argues that the Debtor has not stated a claim because the Amended Complaint lacks an allegation that M & T committed any unfair or deceptive practices or an allegation of an ascertainable loss of money. I disagree.
According to the Amended Complaint, M & T did not advise the Debtor of the availability of HAMP, partial claims, and other loss mitigation techniques. Instead, M & T demanded certain payments in order to qualify the Debtor for a special forbearance for which she was already eligible. (Am. Compl. ¶¶ 151, 192). Because the Debtor was qualified, the Debtor asserts that M & T had no right to make a demand for payments in order to make such a determination.
The Debtor did indeed make some payments in reliance upon M & T's special forbearance demands. (Am. Compl. ¶ 193).
If these facts are proven, the Debtor can satisfy all three (3) elements of her UTPCPL claim: a deceptive act, reliance on the representations made to her, and an ascertainable loss of money due to the misapplication of payments actually made. In reaching this conclusion, I join other courts in this jurisdiction holding that that deceptive conduct in servicing a mortgage that caused a borrower to make payments states a UTPCPL claim.
Count VII will not be dismissed.
The Debtor alleges that M & T violated the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692
In Count VIII, the Debtor alleges generally that "[a]s a result of [M & T's] unfair debt collection practices," the Debtor paid $21,000.00 to $22,000.00 "that were not properly applied to reduce her debt." (Am. Compl. ¶ 206). The only factual underpinning for the claim set forth in the pleading is in Paragraph 207, which suggests that, in light of the 2003 Judgment (and the dismissal of the 2008 Second Foreclosure), M & T has been attempting to collect a debt which it "knows" is not owed and is not subject to collection.
The FDCPA was enacted "in order to eliminate abusive debt collection practices, which contribute to the number of personal bankruptcies, marital instability, loss of employment, and invasions of privacy."
In 15 U.S.C. § 1692f, Congress has identified eight (8) types of conduct that constitute actionable, unfair means to collect or attempt to collect a debt, including, "[t]he collection of any amount (including any interest, fee, charge, or expense incidental to the principal obligation) unless such amount is expressly authorized by the agreement creating the debt or permitted by law." 15 U.S.C. § 1692f(1). 15 U.S.C. § 1692k creates a private right of action against a "debt collector" who violates a provision of the FDCPA for actual damages and "additional damage" up to $1,000.00.
The FDCPA defines "debt collector" as follows, in pertinent part:
15 U.S.C. § 1692a(6).
Under this definition, there are "two possible paths" to determine an entity is a debt collector: (1) if the principal purpose of the business is the collection of debts
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In this adversary proceeding the parties have focused exclusively on the second definitional path described above.
Relying on
For the reasons stated above, the Motion will granted in part and denied in part.
An appropriate order follows.
It is hereby
An objection to a proof of claim typically is handled in a more summary fashion than an adversary proceeding. The rules do not require a response to an objection, but rather after an objection is filed, a hearing is promptly scheduled. At the hearing, specialized rules, which have been discussed in a legion of reported decisions, establish a system of "shifting burdens" with respect to the burden of proof.
Simply put, Rule 3001(c) provides that if a claim is based on a writing, the claimant must attach the writing to the proof of claim. Rule 3001(f) provides that a proof of claim filed "in accordance" with the rules constitutes
If the claimant's proof of claim qualifies for
Presumably, these burden shifting rules apply at trial in an adversary proceeding. However, an adversary proceeding allows for an extra layer of pretrial process: a responsive pleading in the form of a motion to dismiss, which challenges the legal sufficiency of the complaint.
In this adversary proceeding, M & T's responsive pleading is a motion to dismiss under Fed. R. Bankr. P. 7012(b) (incorporating Fed. R. Civ. P. 12). As stated earlier, in the Rule 12(b)(6) context, the factual averments in the complaint are accepted as true in deciding a motion to dismiss under Rule 12(b)(6). If, as appears to be the case here, M & T's proof of claim is entitled to
"Provident Bank of Maryland" was incorporated in Maryland,
The Debtor asserts that M & T has not explained its connection with Provident Bank of Maryland. This is directly belied by the Proof of Claim, filed under oath, which includes a document stating that M & T is the successor by merger to Provident Bank of Maryland. In light of my denial of the Motion as to Count I on other grounds, I need not reach the issue at this time.
If the averment in the Proof of Claim regarding M & T's status as successor by merger is accepted, that fact also would refute one of the Debtor's Count IV arguments,
Technically, in order to rely on M & T's averments in the Proof of Claim regarding its status as successor by merger over the Debtor's denial, the Motion would have to be treated as a motion for summary judgment with respect to this issue.
Given the uncertainty, it would perhaps be preferable for the bankruptcy court to abstain and permit the state courts to resolve the issue.
There is a situation in which it may be theoretically and procedurally possible for a plaintiff to attempt to gain an improper benefit through vacatur-by-praecipe. Potentially, a plaintiff could vacate an existing foreclosure judgment by praecipe and then promptly re-enter a new default judgment in the same action, but in a higher amount. However, such a procedure would be an improper attempt to end-run the reassessment of damages, which requires the filing of a motion.
A petition to strike a default judgment demurs to the record. If something in the existing record undercuts the right to that default judgment, it must be stricken.
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41 P.S. § 403.
If the 2003 Judgment remains in effect, as I have concluded, the subsequent foreclosure actions have no legal consequence; any claim for legal expenses incurred after the entry of the 2003 Judgment that are included in M & T's proof of claim would have to derive from a provision of the Mortgage that survived merger into the judgment.
However, this adversary proceeding is still in the early stages. The Debtor is entitled to develop her case with respect to any valid, alternative legal theories for recovery. However, if multiple claims allow for the award of the same damages, the Debtor will be limited to a single recovery. These concerns may apply to other Counts in the Amended Complaint as well. When it is time to render a dispositive ruling, I will determine how many claims it is necessary to adjudicate.
68 Pa. C.S. § 2311(b)(2) will continue prior law in providing that "[n]o attorney fees may be charged for legal expenses incurred for a residential mortgage prior to or during the 30-day notice period provided under section 406 of the Loan Interest and Protection Law." However, after the expiration of that 30-day time period:
As the Debtor plausibly points out in her Memorandum, the $53,900 principal amount on the face of the Mortgage likely includes title and broker fees, points and other charges which cannot be part of the bona fide principal for purposes of applying the definition of "residential mortgage" in 41 P.S. § 101.
(emphasis added). By negative implication many courts construed this provision to mean that entities that purchase debts already in default and then collect them for their own benefit are "debt collectors."
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