Opinion
Civil Action No. 02-CV-1179.
October 13, 2004
MEMORANDUM AND ORDER
Before the Court is Defendants' Motion for Summary Judgment on All Federal Claims and Dismissal of State Law Claims. For the reasons that follow, the motion will be granted.
I. BACKGROUND
A. The Zlupko Bankruptcies
This case arises from a bankruptcy dispute that can be traced back to 1987, when Plaintiffs Erick and Nenita Zlupko mortgaged their home in Horsham, Pennsylvania as security for a loan. Deposition of Eric Zlupko ("E. Zlupko Dep.") at 111:3-112:13. Several years later, PNC Mortgage ("PNC") acquired Plaintiffs' loan. PNC continued to service the loan until the company was acquired by Defendant Washington Mutual Home Loans, Inc., a subsidiary of Defendant Washington Mutual Bank, which now services Plaintiffs' loan. Id. at 115:9-116:9.
For the remainder of this memorandum, the Court will refer to PNC, Washington Mutual Loans, Inc. and Washington Mutual Bank collectively as "Defendant."
Plaintiffs began to fall behind in their mortgage payments, and in 1998, Defendant initiated proceedings to foreclose on Plaintiffs' house. Those proceedings, however, were stayed when Plaintiffs filed for bankruptcy under 11 U.S.C. Chapter 13 on August 10, 1998. E. Zlupko Dep. at 120:3-121:18; Complaint at ¶ 12(b)(4).
Plaintiffs' bankruptcy did not relieve them of their obligation to continue to make mortgage payments. E. Zlupko Dep. at 137:10-20. However, soon after their bankruptcy began, Plaintiffs once again fell behind in their mortgage payments. Id. As a result, Defendant filed for relief from the automatic stay in order to pursue foreclosure. Complaint at ¶ 12(b)(7). Thereafter, Plaintiffs' bankruptcy was dismissed, allowing Defendant to recommence foreclosure proceedings. Soon after that action began, it was stayed by the filing of a second Chapter 13 bankruptcy. Defendant's Memorandum in Support of Summary Judgment ("Defendant's Summary Judgment Memo") at 4. Plaintiffs' second bankruptcy followed the same pattern as the first: Plaintiffs once again fell behind in their post-petition payments, and the second bankruptcy was also dismissed. E. Zlupko Dep. at 178:2-178:10. On March 29, 2002, Plaintiffs filed a third bankruptcy, which remains pending. Defendant's Summary Judgment Memo at 5.
B. Defendant's Legal Fees
In the course of protecting its security interest in Plaintiffs' home, Defendant incurred certain legal costs. The parties agree that Defendant sought reimbursement for those costs. They differ over the manner in which reimbursement was pursued. Plaintiffs contend that Defendant applied some portion of the mortgage payments they made post-petition to legal fees Defendant incurred pre-petition. Complaint at ¶ 12(b)(11). Defendant denies this. Plaintiffs further aver that Defendant assessed post-petition fees without disclosing them or seeking leave from the bankruptcy court. Complaint at ¶¶ 12(b)(24)-12(b)(26).
C. Plaintiffs' Class Action Complaint
In their Complaint, Plaintiffs allege that Defendant's efforts to recover its pre and post-petition legal costs violated both state and federal law. Thus, Counts One and Two allege violations of the Fair Debt Collection Practices Act ("FDCPA"); Count Three alleges that Defendant has violated the automatic stay provisions of 11 U.S.C. § 362 ("§ 362"); and Counts Four through Eight set out various state law causes of action. In a later brief, Plaintiffs suggested that they have an additional cause of action under 11 U.S.C. § 105(a), although they did not formally delineate § 105(a) as a count in their Complaint. See Plaintiffs' Reply Brief to Defendant's Opposition Brief to Plaintiffs' Motion for Class Certification at 11-12.
II. LEGAL STANDARD
In deciding a motion for summary judgment pursuant to Fed.R.Civ.P. 56, the test is "whether there is a genuine issue of material fact and, if not, whether the moving party is entitled to judgment as a matter of law." Med. Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir. 1999) (quoting Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir. 1994)). "[S]ummary judgment will not lie if the dispute about a material fact is `genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The Court must examine the evidence in the light most favorable to the non-moving party and resolve all reasonable inferences in that party's favor. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). However, "there can be `no genuine issue as to any material fact' . . . [where the non-moving party's] complete failure of proof concerning an essential element of [its] case necessarily renders all other facts immaterial." Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986).
III. DEFENDANT'S MOTION FOR SUMMARY JUDGMENT
Defendant's Summary Judgment Motion makes three arguments: (1) two of Plaintiffs' federal claims (the FDCPA claims and the claim based on § 105) are not viable as a matter of law; (2) the remaining claim under 11 U.S.C. § 362 has no basis in fact; and, (3) since no other federal claims remain, the case should be dismissed for lack of subject matter jurisdiction. See Defendant's Opposition to Plaintiffs' Amended Brief on Standing at 2; Defendant's Summary Judgment Memorandum at 15-18.
A. Plaintiffs' FDCPA Claims
Plaintiffs have conceded that their FDCPA claims (set out in Counts One and Two of the Complaint) fail as a matter of law and should be dismissed. See Memorandum in Support of Plaintiffs' Answer to Defendant's Motion for Summary Judgment ("Plaintiffs' Summary Judgment Memorandum") at 9. Accordingly, the Court will grant summary judgment in favor of Defendant on Counts One and Two.
Mortgage lenders and servicers such as Defendant are generally exempt from the FDCPA.
B. Plaintiffs' Claim Under 11 U.S.C. § 105(a)
Defendant argues that Plaintiffs' § 105 claim also fails as a matter of law. Title 11 U.S.C. § 105(a) provides that "the court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title." 11 U.S.C. § 105 (2004). The provision thus "authorizes the bankruptcy court, or the district court sitting in bankruptcy, to fashion such orders as are required to further the substantive provisions of the code." In re Morristown Eerie R.R. Co., 885 F.2d 98, 100 (3d Cir. 1989) (emphasis added). Plaintiffs claim that the "substantive provision" of the code implicated in this case is 11 U.S.C. § 506(b). Their argument, in other words, is that they have a cause of action under § 105, because Defendant has acted inconsistently with § 506(b).
It is not clear that Plaintiffs are asserting a § 105 claim. In their latest brief, Plaintiffs concede that they lack a private right of action under § 105(a), but then go on to assert that they are nevertheless entitled to have this Court intervene on their behalf. Plaintiffs' Amended Brief on Standing at 37 n. 20.
While § 105(a) does confer on the courts certain powers which they can use to enforce the bankruptcy code, those powers are limited. See In re Continental Airlines, 203 F.3d 203, 211 (3d Cir. 2000) ("However, § 105(a) has a limited scope."); In re Morristown Eerie R.R. Co., 885 F.2d at 100. One such limitation is that the provision "does not `create substantive rights that would otherwise be unavailable under the Bankruptcy Code.'" In re Continental Airlines, 203 F.3d at 211, quoting United States v. Pepperman, 976 F.2d 123, 131 (3d Cir. 1992). As a result, Plaintiffs' ability to bring an action under § 105(a) depends directly on whether a cause of action is available under § 506(b). Absent such a cause of action, there can be no derivative claim through § 105(a). See In re Henthorn, 299 B.R. 351, 356 (E.D. Pa. 2003) ("Since § 105(a) clearly does not authorize the bankruptcy court to create rights not otherwise available under applicable law, a derivative claim would not lie either.").
Accordingly, the operative question is whether § 506(b) creates a private right of action. The courts in this District that have considered the question have consistently held that it does not. See In re Henthorn, 299 B.R. 351, 356 (E.D. Pa. 2003);Willis v. Chase Manhattan Mortgage Corp., 2001 WL 1079547, at *2-3 (E.D. Pa. 2001), citing Cort v. Ash, 422 U.S. 66 (1979). The Court agrees and accordingly concludes that § 506(b) does not create a private cause of action.
Section 506(b) provides that "to the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement under which such claim arose."
Plaintiffs argue that even if they lack a cause of action under § 105(a), they are nevertheless entitled to relief under the Court's "inherent powers." See Plaintiffs' Amended Brief on Standing at 34. They further suggest that these inherent powers arise out of § 105(a). Id. at 37 n. 20. However, the authority in this District clearly weighs against exercising such inherent power. Two recent cases have dealt with virtually identical questions. See In re Henthorn, 299 B.R. 351 (E.D. Pa. 2003);Willis v. Chase Manhattan Mortgage Corp., 2001 WL 1079547 (E.D. Pa. 2001); see also Sullivan v. First Horizon Mortgage Corp., Adv. No. 03-673, slip op. (E.D. Pa. Nov. 21, 2003) (Raslavich, J.). In both cases, the plaintiffs sought relief under §§ 105(a) and 506(b) from a secured creditor that had attempted to pass on its attorney fees. Both courts found: (1) that the plaintiffs had no cause of action and (2) that absent a cause of action, the plaintiffs' cases should be dismissed.
The same analysis applies here. Accordingly, the Court finds that Defendant is entitled to summary judgment on all claims arising out of 11 U.S.C. § 105(a) and 11 U.S.C. § 506(b).
B. Plaintiffs' Claims under 11 U.S.C. § 362
Defendant argues that summary judgment is also the appropriate disposition for Plaintiffs' § 362 claim. The crux of that claim is that Defendant used Plaintiffs' post-petition mortgage payments to pay for its pre-petition legal costs. By doing so, Plaintiffs contend, Defendant violated § 362. Defendant responds that Plaintiffs' allegation has no basis in fact. See Defendant's Summary Judgment Memorandum at 15.
The question thus before the Court is whether there is a genuine issue of fact as to whether Defendant used Plaintiffs' post-petition mortgage payments to pay for its pre-petition legal costs. Plaintiffs base their allegation on two documents produced by Defendant: the first document is entitled "Recoverable Corp. Advances," attached as Exhibit E to the Complaint (hereafter "Exhibit E"), and the second is labeled "Loan Payment Transaction History," attached as Exhibit F to the Complaint (hereafter "Exhibit F").
Defendant makes two arguments as to why Plaintiffs' reliance on Exhibits E and F is misplaced, each of which it supports with the testimony of Wanda Montgomery, the Washington Mutual manager who was directly responsible for servicing Plaintiffs' loans. See Affidavit of Wanda Montgomery ("Aff. Wanda Mont.") at ¶¶ 2-5.
First, Defendant argues that Plaintiffs have misinterpreted Exhibits E and F, and that, in fact, neither document reflects "how post-petition customer payments were actually applied in the special situation of bankruptcy." Defendant's Reply Brief at 5,quoting Aff. Wanda Mont. at ¶ 13. Even after drawing all inferences in favor of Plaintiffs, the evidentiary record reveals that Defendant is correct.
While Exhibits E and F do indicate that Defendant applied certain funds to pay for its prepetition foreclosure costs, they do not explain from where the funds came. See, e.g., Deposition of Wanda Montgomery at 66:5-66:18. The appropriate reference for determining which funds were used to pay for the pre-petition attorney's fees is the "Bankruptcy Servicing History." Aff. Wanda Mont. at ¶ 13. Significantly, the "Bankruptcy Servicing History" shows that Defendant did not take "post-petition customer payments and apply them to pre-petition arrears." Id. It is therefore clear from the record that Exhibits E and F do not support Plaintiffs' claim that Defendant misapplied post-petition mortgage payments.
Ms. Montgomery explains that Exhibits E and F merely reflect the "contractual status of the loan, easily showing to the customer a total of how many payments need to be made up (plus fees and other items due on the loan)." Aff. Wanda Mont. at ¶ 13.
Second, Defendant argues that a review of the record shows that the company did not use Plaintiffs' post-petition mortgage payments to pay for pre-petition legal fees. During the course of her deposition, Ms. Montgomery addressed each payment that Plaintiffs characterized as an application of post-petition payments to pre-petition arrears. In each case, Ms. Montgomery explained that, in fact, the money Defendant used to make the payments in question came from some other source.
Among those other sources were payments from the trustee and credits from legal work that was overcharged. See, e.g., Defendant's Reply Brief at 7-8.
In a motion for summary judgment, the moving party has "the initial burden of identifying evidence which it believes demonstrates the absence of a genuine issue of material fact."Childers v. Joseph, 842 F.2d 689, 694, citing Celotex Corp. v. Catrett, 477 U.S. 317 (1986). If the moving party makes this initial showing, and the nonmoving party has the burden of persuasion (as Plaintiffs do in this case), the onus then shifts to the nonmoving party "to identify those facts of record which would contradict the facts identified by the movant." Id. at 694-95, citing First Nat'l Bank of Pa. v. Lincoln Nat'l Life Ins. Co., 824 F.2d 277, 282 (3d Cir. 1987). If the nonmoving party fails to meet this burden — if, in other words, it fails to point to evidence contradicting the moving party's evidence — then no genuine issue of fact exists and summary judgment is appropriate. Id.
Defendant clearly has met its "initial burden." In short, Ms. Montgomery has testified that the documents on which Plaintiffs base their § 362 argument do not support their claim; other documents establish that Defendant never applied Plaintiffs' post-petition mortgage payments to its pre-petition foreclosure costs. Under the Childers test, therefore, the burden shifts to Plaintiffs, who must point to evidence in the record that challenges Defendant's evidence. It is a burden Plaintiffs have failed to meet. Accordingly, the Court finds that no genuine issue of fact exists as to Plaintiffs' § 362 claim and that summary judgment is appropriate.
IV. CONCLUSION
For the reasons stated above, the Court will grant summary judgment for Defendant on Counts One, Two, and Three. The Court will also grant summary judgment for Defendant on Plaintiffs' § 105(a) claim. Plaintiffs' remaining claims, all of which are based on state law and before this Court only under supplemental jurisdiction, will be dismissed pursuant to 28 U.S.C. § 1367(c)(3). See Borough of West Mifflin v. Lancaster, 45 F.3d 780, 788 (3d Cir. 1995) (holding that a district court should decline to exercise supplemental jurisdiction when all federal claims have been dismissed unless considerations of judicial economy and fairness counsel otherwise).