ROBERT D. DRAIN

B E F O R E:

HON.

U.S. BANKRUPTCY JUDGE

MODIFIED BENCH RULING ON MOTION TO DISMISS+

Transcribed by: Esther Accardi

A P P E A R A N C E S:

BLEICHMAN AND KLEIN

Attorneys for Richard and Desmarie Griffin

BY: JOSHUA N. BLEICHMAN, ESQ.

AKERMAN SENTERFITT LLP

Attorneys for American Home Mortgage Servicing, Inc.

BY: JORDAN M. SMITH, ESQ.

BENCH RULING

THE COURT: The Court has before it a motion to dismiss under Bankruptcy Rule 7012 by the sole defendant in this adversary proceeding, American Home Mortgage Servicing, Inc., or AHMSI, for failure to state a claim.

The plaintiffs in their complaint have asserted three causes of action.

The first is for breach of the Real Estate Settlement Procedures Act, 28 U.S.C. Section 2601 et seq., or RESPA. The second is for breach of contract. And the third is for negligence.

The RESPA violation is premised upon two different theories, which would independently if, in fact, true, constitute breaches or violations of RESPA.

First, the plaintiffs allege, although they did not allege it in the paragraphs actually stating a cause of action, but they allege it in their complaint, that they provided a proper qualified written request under Section 2605(e) of RESPA, and that, while AHMSI, the servicer of their loan, complied in part with that request, it did not comply in full with it, and, therefore, it breached its obligation to do so under Section 2605.

Secondly, the complaint alleges that the servicer misapplied certain payments, unspecified, to incorrect amounts allegedly due under the loan and that, therefore, because the lender or the servicer had not corrected such misapplications, it had also violated Section 2605(e).

The breach of contract claim is premised on the latter set of allegations, i.e. the alleged misapplications, as is the negligence claim. And, in addition, it's also premised on a failure to allegedly respond fully to the qualified written request.

When considering a motion under Federal Rule of Civil Procedure 12(b)(6), which is incorporated in Bankruptcy Rule 7012, the Court must assess the legal feasibility of the complaint, not weigh the evidence that might be proffered in its support. Koppel v. 4987 Corp., 167 F.3d 125, 133 (2d Cir. 1999). The Court's consideration is "limited to facts stated on the face of the complaint and where the documents appended to the complaint are incorporated in the complaint by reference, as well as to matters of which judicial notice may be taken." Hertz Corp. v. City of New York, 1 F.3d 121, 125 (2d Cir. 1993), cert. denied 510 U.S. 1111 (1993).

The Court accepts the complaint's factual allegations as true and must draw reasonable inferences in favor of the plaintiff. Tellabs Inc. v. Makor Issues & Rights Ltd., 551 U.S. 308, 323 (2007). Federal Rule of Civil Procedure 8(a), incorporated in Bankruptcy Rule 7008, does not, moreover, require a claimant to set forth any legal theory justifying the relief sought, only sufficient factual reference to show that the claimant may be entitled to some form of relief. Newman v. Silver, 713 F.2d 14, 15 (2d Cir. 1983), and Tolle v. Caroll Touch Inc. 997 F.2d 1129, 1134 (7th Cir. 1992).

However, if a complaint's allegations are clearly contradicted by documents incorporated into the pleadings by reference, the Court need not accept them. Labajo v. Best Buy Stores, L.P., 478 F. Supp.2d 523, 528 (S.D.N.Y. 2007).

Moreover, the court is "not bound to accept as true a legal conclusion couched as a factual allegation." Papasan v. Allain, 478 U.S. 265, 286 (1986). Instead, the complaint must state more than labels and conclusions and a formulaic recitation of the elements of a cause of action will not do. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). That is, as set forth in Twombly, Rule 8 requires not detailed factual allegations, but demands more than an unadorned "The defendant unlawfully harmed me accusation," Ashcroft v. Iqbal, 1291 S. Ct. 1937, at 1949 (2009).

Relatedly, while the Supreme Court has confirmed in the light of the notice pleading standard under Rule 8(a) that a complaint does not need detailed factual allegations to survive the Rule 12(b)(6) motion, see Erickson v. Pardus, 127 S. Ct. 2197, 2200 (2007), the complaint's "factual allegations must be enough to raise a right to relief above the speculative level." Bell Atlantic v. Twombly, 550 U.S. 555. The complaint must contain sufficient facts accepted as true to state a claim that is "plausible on its face." Id. at 570." In other words, if the claim would not otherwise be plausible on its face, the plaintiff must allege sufficient facts to "nudge the claim across the line from conceivable to plausible." Id. Otherwise, the defendant should not be subject to the burdens of discovery and the worry of overhanging litigation.

Evaluating plausibility is a "context specific task that requires the reviewing court to draw on its judicial experience and common sense. But where the well pleaded facts do not permit the court to infer more than mere possibility of misconduct the claimant has alleged, but it has not shown, that the pleader is entitled to relief." Ashcroft v. Iqbal, 1291 S. Ct. at 1950 (internal citations omitted).

Where there are well pleaded factual allegations the Court should assume their veracity and then determine whether they plausibly give rise to entitlement to relief. "The plausibility standard is not akin to a probability requirement, but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. at 1949. In sum, therefore, in dismissing Twombly the Supreme Court has observed that "The pleading standard Rule 8 analysis does not require detailed factual allegations, but it demands more than an unadorned "the-defendant-unlawfully-harmed-me accusation."

Therefore, in determining whether a claim should survive a motion to dismiss, the court must first identify each element of the cause of action." Id. at 1947. Next the court must identify the allegations that are not entitled to the assumption of truth because they are legal conclusions, not factual allegations. Id. at 1951. Finally, the court must assess the factual allegations in the context of the elements of the claim to determine whether they plausibly suggested entitlement to relief. Id.

Here, one of the causes of action, breach of contract, is easily dealt with on the face of the complaint. That is because the complaint is solely against the servicer of the loan, AHMSI, and AHMSI is not in contractual privity with the debtors. Certainly there's no allegation of such privity in the complaint. Therefore, AHMSI cannot be liable for breach of contract absent such an allegation or an allegation that it was acting as the agent for someone who was in privity and that privity can be imputed to it, which, again, is not alleged. See Diamond v. OneWest Bank, 210 WL 1742536 at page 3, (D. Ariz. April 29, 2010), and Conder v. Home Savings of America, 680 F. Supp. 2d 1168, 1174 (C.D. Cal. 2010), as well as the authorities cited therein.

So AHMSI's motion with regard to the breach of contract claim is granted.

The second cause of action for negligence is also easily dealt with on the face of the complaint. That is because the plaintiffs, to sustain a tort action for negligence, must assert more than a simple breach of contract: they must assert a legal duty that is independent of the contract that has been breached. See In re Jacques, 416 B.R. 63, 81 (Bankr. E.D.N.Y. 2009), and the cases cited therein, including Hamilton v. Beretta U.S.A. Corp., 96 N.Y.2d, 222, 232 (2001), and In re Johns Insulation, Inc., 221 B.R. 683, 691 (Bankr. E.D.N.Y. 1998).

I do not believe that the complaint sets forth a specific duty owed to the plaintiffs by AHMSI other than AHMSI's responsibilities under RESPA, and, as I'll discuss in a moment, I conclude that the complaint and the record before me, which includes all of the documents referred to and incorporated into the complaint, with the exception of the purported qualified written request of the plaintiffs, does not state a claim for violation of RESPA. Therefore, the complaint also would not state a claim for negligence against AHMSI. See In re Jacques, 416 B.R. at 82.

The RESPA statute sets forth two separate duties that, as I've noted, allegedly have been breached by AHMSI.

First, under Section 2605(e)(1), the servicer or lender in respect of a qualified loan--and there is no dispute here that this is a qualified loan for purposes of this motion to dismiss--must respond to a qualified written request from the borrower or its agent for information relating to the servicing of the loan with a written response acknowledging receipt of the correspondence within twenty days. And then, as set forth in (e)(2), not later than sixty days after receipt from any borrower of a qualified written request under paragraph 1, the servicer shall (A) make appropriate corrections in the account of the borrower, including the crediting of any late charges or penalties, and transmit to the borrower a written notification of such correction, and (B), after conducting an investigation, provide the borrower with a written explanation or clarification that includes, to the extent applicable, a statement of the reasons for which the servicer believes the account of the borrower is correct as determined by the servicer.

As is evident from the definitional provisions that I've quoted as well as the definition of "servicing" that appears in subsection (i)(3) of Section 2605, a qualified written request for purposes of 2605(e)(1) is for information relating to the servicing of such loan. And the qualified written request must include a statement of the reasons for the belief of the borrower, to the extent applicable, that the account is in error, or provide sufficient detail to the servicer regarding other information sought by the borrower. See 2605(e)(1)(B)(ii).

The definition of servicing that appears in 2605(i)(3) states "The term servicing means receiving any scheduled periodic payments from a borrower pursuant to the terms of any loan, including amounts for escrow accounts described in Section 2609 of this title, and making the payments of principal and interest and such other payments with respect to the amount received from the borrower as may be required pursuant to the terms of the loan."

All of this is consistent with the stated purpose of RESPA, which is to help borrowers engaged in a dispute with a lender or servicer of the loan to overcome the difficult task of obtaining account information or getting an actual person to take their complaint seriously, which the Seventh Circuit described as "vexing and protracted undertaking." Miller v. McCalla, Raymer, Padrick, Cobb, Nichols & Clark, L.L.C., 214 F.3d 872 (7th Circuit 2000).

To have a viable cause of action under RESPA, however, individuals must show not only the failure to comply with the provisions of Section 2605, but also actual damages to the borrower as a result of the failure, as set forth in 2605(f)(1)(A), as well as any additional damages that the court may allow in the case of a pattern or practice of noncompliance with the requirements of Section 2605, in an amount not to exceed 1, 000 dollars.

Thus, the courts have consistently dismissed complaints under RESPA if they do not allege actual damages or state merely that in a conclusory fashion the defendant caused damages to the plaintiff. See, for example, Gorham v. Bank of

America, N.A., 2010 U.S. Dist. LEXIS 41797 (N.D.N.Y Apr. 28, 2010) at page 10, and Jones v. Select Portfolio Servicing, Inc., 2008 U.S. Dist. LEXIS 33284 at 9-10 (E.D. Pa. Apr. 22, 2008), as well as Gorham-DiMaggio v. Countrywide Home Loans, 2009 U.S. Dist. LEXIS 52078 at page 31 (N.D.N.Y. June 19, 2009).

Here, as I noted during oral argument, although the alleged qualified written request sent by the Griffins is referred to and incorporated in the complaint, I've not been provided with a copy of it. And I do not know whether as a whole it complies with the definitional requirements of Section 2605(e). However, it appears clear to me from the record of oral argument that the request did not state the reasons for the borrowers' belief that the account was in error or provide in sufficient detail to the servicer, the rationale for the other information sought and how it relates to the servicing of the loan, as such term is defined in Section 2605(i), which relates to the allocation of payments in respect of the loan.

As detailed in the complaint, the alleged deficiencies in the response to the QWR all go only, at best, obliquely, to servicing of the loan. Instead, they QWRsought such information as inspection reports and appraisals, a copy of the mortgage pooling and servicing agreement, a copy of the prospectus offered to investors and any underlying trust, all written loss mitigation rules and the workout procedures related to any defaults regarding the loan and similar loans, copies of all servicing, master servicing, subservicing, contingency servicing, special servicing, or backup servicing agreements with respect to the account and whether the loan is subject to any electronic tracking agreement, and whether the servicing of loans is provided pursuant to any type of mortgage electronic registration system, and, if so, providing a copy of that system's procedures manual, whether this is a MERS designated mortgage loan and if the answer iss yes, to identify the electronic agent and the type of mortgage electronic servicing system, identifying whether the mortgage is part of a mortgage warehouse loan, and, if so, stating the full name and address of the lender and attaching a copy of warehouse loan agreement, and if whether upon a notice of a default or not the mortgage warehouse lender has the right to override any servicers or subservicers and provide instructions directly to the electronic agent, and whether the mortgage is part of a whole loan sale agreement, and, if the answer is yes, then asking the recipients to state the name and address of the purchaser, the custodian, the trustee, the electronic agent, and the servicer or subservicer.

Other information that, arguably, goes closer to the purposes of a QWR under the statute are as follows: identify the provisions under the deed of trust and/or note that authorizes charging each and every fee against the loan, summary of all fixed or standard legal fees approved for any form of legal services rendered in connection with this account, and a copy of the LSAMS transaction history report for the debtors' mortgage loan account with a detailed description of all fee codes.

The latter three categories arguably fall within the definition of information that should be responded to in the QWR. However, the former requests, to my mind, without further explanation of why they were sought, or why they should have been in the QWR, go beyond the request of information relating to loan servicing. Instead, it appears to me it was sought to assist the debtors, perhaps, in the potential negotiation of the loan and/or challenging the bona fides of the loan as it was originated. See Williams v. Wells Fargo Bank N.A., 2010 WL 146, 3521 (N.D. Cal. Apr. 13, 2010) at page 3-5.

It's also alleged by the plaintiff that the failure to correct alleged misapplications of funds by the servicer and--by the servicer constitutes a violation of RESPA Section 2605(e)(2)(A). The motion to dismiss makes two points in response.

First, it alleges, citing In re Jacques, 416 B.R. at 63, that the complaint does not allege actual damages and proximate cause thereof with a sufficient amount of plausibility to assert a claim under RESPA. Relatedly, the motion to dismiss states that the complaint is wholly conclusory as to the payments that were unapplied and, in fact, does not state more, in effect, than that the debtors believed, or believe certain payments were unapplied, and, therefore, that the damages, as asserted in the complaint, are wholly speculative, and, therefore, would not pass muster under Twombly or Iqbal.

It seems to me that if a complaint in a nonspeculative fashion asserted that a servicer or a lender had misapplied the borrowers' payments on the loan, it would clearly assert damages. And the failure to correct those damages, to my mind, would constitute proximate cause of actual damages in that the defendant would still be improperly billed for its loan, which seems to fit, to my mind, exactly within the language and purpose of RESPA. That is different--or that would be a different scenario than simply saying that, for example, the servicer's failure to respond to a QWR caused damages without specifying how those damages were caused. See Hutchinson v. Delaware Savings Bank FSB, 410 F. Supp. 2d 374 (D.N.J. 2006). And Cortez v. Keystone Bank, 2000 U.S. Dist. LEXIS 5705 at 39-40 (E.D. Pa. May 2, 2000).

The problem with the complaint, however, is that the damages, as pled here, particularly when tied into the requirements of a qualified written request under Section 2605(e)(2)(A), or rather the failure to allege a request that ties into a duty under Section 2605(e)(2)(A) means that the alleged damages are, in fact, speculative under RESPA and fall afoul of Twombly and Iqbal.

There's nothing in the complaint that suggests that the alleged QWR included a statement of the reasons for the borrowers' belief that the account was in error. Given that, and given the failure to identify errors that are, at least, plausible, as opposed to grounds for additional questions that the debtors may have of the defendant, I believe that the complaint does not set forth a cause of action for failure to make appropriate corrections. I don't believe the statute puts the onus on the lender to prove a negative.

Some error or potential error must be identified in the QWR and/or identified in the complaint. And that isn't the case here beyond the nebulous assertion that the debtors believe that the payments were misapplied.

So, while misapplication would constitute proximate cause of damages, the complaint here does not, except in an entirely speculative way, assert such misapplication. And, therefore, I believe it fails the tests of Iqbal and Twombly. See In re Jacques, 416 B.R. at 74.

So the defendant can submit an order consistent with my ruling.

As I stated during oral argument, it seems to me that AHMSI continues to owe an ongoing obligation to the Griffins under RESPA and that if the Griffins want to better understand their payment history and how the servicer has applied the monies that have been paid, they can make a new RESPA request that pinpoints their concerns based on the information that they have and that has been previously provided to them. And if that request is not properly responded to, (then, of course, more detail would be required in the response based upon how much detail is put in the inquiry) then the debtors may have a cause of action that they can commence a lawsuit over.

But based upon the rationale of my analysis of the problems with the complaint under RESPA, I conclude that the present complaint does not state a claim under RESPA. It, accordingly, doesn't state a claim under New York law for negligence given that there's no other duty that the servicer owes the Griffins other than compliance with RESPA. And it clearly does not support the breach of contract claim given the lack of privity between the servicer and the Griffins.