Opinion
Case No. 00-60886, Chapter 13, Adv. Pro. No. 00-80157A
July 8, 2002 Amended July 10, 2002
WAYNE R. BODOW, ESQ., Syracuse, New York, Attorney for Plaintiffs.
RICHARD J. SPATARI, ESQ., Liverpool, New York, Attorney for Defendant Fleet National Bank.
EILEEN M. HAYNES, ESQ., BARTLETT, PONTIFF, STEWART RHODES, P.C., Glens Falls, New York, Attorneys for Defendant First Union Home Equity Bank.
MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER
Presently before the Court for consideration is a motion filed by Richard Hall and Marybeth Hall ("M. Hall") (hereinafter jointly referred to as "Debtors" or "Plaintiffs") on April 4, 2002, following a trial conducted on March 7, 2002, in the adversary proceeding commenced by the Debtors on July 31, 2000. Debtors seek to amend their complaint to conform to the evidence presented at trial pursuant to Rule 15(b) of the Federal Rules of Civil Procedure ("Fed.R.Civ.P."), incorporated by reference in Rule 7015 of the Federal Rules of Bankruptcy Procedure ("F.R.Bankr.P."). Opposition to the Debtors' motion was filed on behalf of defendant Fleet National Bank, f/k/a Fleet Bank of New York ("Fleet") and defendant First Union Home Equity Bank ("First Union") on April 19, 2002 and April 22, 2002, respectively.
Pursuant to the Court's ruling following the trial, the parties were to delay their submission of memoranda of law in connection with the trial until the Court had the opportunity to rule on the Debtors' motion pursuant to F.R.Bankr.P. 7015.
JURISDICTIONAL STATEMENT
The Court has core jurisdiction over the parties and subject matter of this adversary proceeding pursuant to 28 U.S.C. § 1334(b), 157(a), (b)(1) and (b)(2)(A), (K) and (O).
FACTS
The Debtors filed a voluntary petition ("Petition") pursuant to chapter 13 of the Bankruptcy Code, 11 U.S.C. § 101-1330 ("Code"), on March 2, 2000. According to the Debtors' Schedules, First Union was listed as a secured creditor with a claim of $87,200 based on a second mortgage on the Debtors' residence at 111 Beechwood Drive, Groton, New York ("Residence"), and Fleet was listed as a secured creditor with a claim of $63,945.06 with respect to a first mortgage on the Residence. The Debtors estimated the value of the Residence to be $74,000. Under the terms of the Debtors' Plan, Fleet was to be paid $550 per month at an interest rate of 10.50% over the term of the Plan (40 months) on its claim. According to the Plan, the Debtors indicated that "First Union has a second mortgage lien on debtor's residence. This mortgage is treated as unsecured in this plan." The Debtors allege in their Plan that "First Union in this transaction practiced unscrupulous lending in that they relied on a bank appraisal rather than a professional appraisal. A recent professional appraisal indicates the fair market value is $74,000.00. The First Union new mortgage was intended to pay off a higher rate mortgage. . . . unfortunately this Fleet Mortgage was not discharged and remains as the first mortgage of record. * * * The debtor's [sic] herein offer the following solution to settle First Unions' [sic] secured claim: this plan will be amended upon request to pay First Union $9000.00 as a secured claim [at] 8% interest. . . ." The Plan was signed by the Debtors on February 29, 2000.
On May 4, 2000, First Union filed an objection to the Plan's confirmation. On May 5, 2000, First Union filed a proof of claim in the amount of $92,220.81 in which it included $6,331 in arrears on its mortgage for the period from September 1999 through February 2000.
On July 31, 2000, the Debtors commenced an adversary proceeding naming both Fleet and First Union as defendants. On July 6, 2001, the Debtors filed a motion to amend their complaint to add certain new causes of action and to effect proper service on both defendants. By Order dated September 13, 2001, the Court granted the Debtors' motion. The Amended Complaint was filed on September 27, 2001, and the Summons and Complaint were served on both Defendants on October 2, 2001. First Union filed an Answer to the Amended Complaint on October 30, 2001, and asserted a cross-claim against Fleet, seeking a declaration that First Union held a valid first lien on the Residence. On November 13, 2001, an Answer was filed to the Amended Complaint on behalf of Fleet and a cross-claim was asserted against First Union also requesting a determination that its mortgage lien had first priority with respect to the Debtors' Residence.
Fleet had been apprized by Debtors' counsel that it had decided not to name Fleet as a defendant. However, the summons and complaint served on First Union named both entities as defendants and First Union crossclaimed against Fleet.
As noted previously, a trial of the adversary proceeding was conducted on March 7, 2002, in Utica, New York. The following facts were elicited by way of testimony and exhibits:
According to M. Hall, she and her husband purchased the Residence in 1988. On October 28, 1988, they entered into a Homeloan Line of Credit Agreement with Fleet in the amount of $39,000, payable in full in 15 years and secured by the Debtors' Residence. See Debtors' Exhibit 1. The monies were accessed by the Debtors writing checks provided by Fleet. M. Hall testified that on November 20, 1992, she and her husband entered into another credit line agreement with Fleet in the amount of $71,200 using a portion of the funds to pay off the earlier line of credit. See Debtor's Exhibit 2.
On January 16, 1996, the Debtors executed a mortgage to secure a loan with First Union in the amount of $89,600 based on an estimated market value for the Residence of $112,000. See Defendant's Exhibits E and F. According to M. Hall, the proceeds of the loan were to be used to pay off the loan with Fleet, as well as certain other credit card accounts. Mary Hendel ("Hendel"), an employee of the law firm of Granito Sondej who handled the mortgage closing for First Union, testified that with respect to the Debtors' loan, First Union had forwarded an initial packet of documents to her on or about January 10, 1996, which included a deed, as well as the Debtors' application. See Debtors' Exhibit 14. Listed on the application was a mortgage held by Fleet against the Debtors' Residence in the approximate amount of $70,000, as well as several other obligations. According to the First Union Settlement Statement, signed by the Debtors on or about January 16, 1996, disbursements of $85,072.70, including $71,224.73 to Fleet Bank, were to be made. See Defendants' Exhibit D. It was Hendel's testimony that First Union did not have a representative present at the closing, other than herself. According to the closing instruction letter from First Union, dated January 11, 1996, and addressed to Granito Sondej, $87,474.20 was to be deposited into Granito Sondej's escrow account "with disbursement to be made after the expiration of any rescission period." See Debtors' Exhibit 18. First Union instructed Granito Sondej to obtain execution of a first mortgage. By check dated January 22, 1996, written on the account of Granito and Sondej, Fleet was paid $71,224.73 from the closing proceeds. See Defendants' Exhibit A.
Hendel testified that it was the practice of the law firm handling the closing for such entities as First Union to forward a cover letter to each creditor to whom payment was being made with reference to the account for which payment was being made, a copy of the statement, along with the check paying off the account. See Plaintiffs' Exhibit 19 and 20 In this case, the letter, dated January 22, 1996, was addressed to "Fleet Services Corporation, P.O. Box 5058, Hartford, CT 06102-5058" and referenced the account of Richard H. Hall and Marybeth Hall, #7767999915416000443. See id. The letter requests that the account be closed and references an authorization signed by the Debtors. Id. It also requested that a satisfaction of the Fleet mortgage be sent to the office of Granito Sondej. Id. Hendel testified that a copy of a statement of the account to be closed normally would have been stapled to the letter, along with the signed authorization. It was the procedure to paperclip the check to the cover letter. She further testified that their office never received or recorded a satisfaction of the Fleet mortgage securing the 1992 credit line with Fleet. She admitted that she had made no further inquiry or follow-up with regard to the satisfaction and explained that the file simply remains in their office until a discharge or satisfaction is received.
Hendel testified that she received a Discharge of Mortgage from Fleet, dated January 25, 1996, with respect to the prior credit line obtained by the Debtors in 1988, which allegedly had been closed by Fleet in February 1993 using the monies from the credit line obtained in November 1992. See Debtors' Exhibit 11.
According to the testimony of James Spalone, Manager of Consumer Loans for Fleet, he reviewed the records of the Debtors' transactions with Fleet and found that Fleet had received and cashed the check from Granito Sondej in the amount of $71,224.73. He testified that the post office box in Hartford, Connecticut, was a lockbox location for payments. He had no knowledge whether the people in Hartford had complied with Fleet's procedures in connection with the Fleet Line Paid Loan Processing Procedures, which required that documentation received be sent to the Paid Loan Department if notification to close was included with the payment. See Plaintiffs' Exhibit 26. His review of Fleet's records in connection with the Debtors' account did not reveal a copy of the letter from Granito Sondej or the authorization to close the account signed by the Debtors. Spalone testified that Fleet's records did not reflect any request for a payoff or for a discharge or satisfaction of the mortgage. According to Fleet's processing procedures, without notification accompanying the payment, the people in Hartford were simply to process the payment. See id.
M. Hall testified that she was surprised when she received a statement from Fleet subsequent to the closing with First Union indicating that she owed a balance of $82.51. See Debtors' Exhibit 4. She acknowledged that the statement for the period from January 27, 1996 to February 26, 1996 still showed available credit of $71,200. It was her understanding that the account could not be closed out until the balance of $82.51 was paid. She testified that when she called and spoke to a representative of Fleet, she was told that the $82.51 represented interest from a late payment. She sent Fleet a check in the amount of $82.51, along with the payment stub from the statement. See Debtors' Exhibit 6.
The check does not contain any notation or reference in the "Memo" portion.
According to a "Speed Memo" completed by an employee of Fleet on February 16, 1996, a call had been received from M. Hall. See Plaintiffs' Exhibit 22. The box indicating whether the account was open or closed, was checked "Open." The employee noted that "Customer feels she should not owe a balance of $82.51. Cust. was very persistent. Please send to the cust. a breakdown showing this (CMNT does not show payoff)."
Spalone testified that "CMNT" refers to the comment screen on the computer accessed by the representative in checking the account.
By letter dated February 27, 1996, Fleet provided a response to M. Hall's telephone inquiry explaining the "paydown as of 1/26/96," indicating an ending balance of $70,730.65 on the 12/28/95 statement and a finance charge of $576.59 for the period 12/29/95 — 1/25/96. See Debtors' Exhibit 7. The letter indicated the receipt of $71,224.73 and a balance due of $82.51 as of 1/26/96. See id. The statement sent to the Debtors the following month for the period February 27, 1996 through March 28, 1996, showed a new balance of $0.00 and available credit of $71,200. See Debtors' Exhibit 8.
Hendel testified that the Debtors had not contacted her after the closing about the additional $82.51 owed on the account. It was also her testimony that no correspondence was received from Fleet indicating a shortfall, despite the fact that it had cashed the check.
According to Fleet's records, the Debtors' account was paid down to zero on March 5, 1996. See Debtors' Exhibit 24. On May 7, 1996, there was a draw of $34,000 made and on September 23, 1996, another was made in the amount of $2,500. See id. On October 23, 1997, there was an additional draw of $21,000 made by the Debtors.
According to the terms of the Fleet Line Note and Agreement executed by the Debtors on November 20, 1992, "This Note and Mortgage securing it will remain in full force and effect even though your loan balance may be reduced to zero from time to time." See Debtors' Exhibit 2, Fleet Line Note and Agreement at ¶ 2.
M. Hall testified that sometime in May 1996 her daughter had encountered financial difficulties and M. Hall contacted Fleet to see about the possibility of borrowing additional funds. She was told that she could borrow additional monies, and she did so by using the checks which she had previously used when accessing the 1992 credit line. She testified that she knew it was a loan, but believed it to be a new loan and "not from those funds [meaning the 1992 credit line]." At the same time, she acknowledged that on the previous occasions when they had obtained loans from Fleet, they had had to execute separate documents in connection with each line of credit and had been given different checks each time. She admitted that in May 1996 they had not executed any new documents and had not been provided with new checks. When questioned by the Court about the need for some type of security when Fleet loaned the Debtors additional monies in May 1996, she acknowledged that prior lines of credit had always required that there be some form of security for the loans. However, she testified that in May 1996 she understood that the monies were being made available on an unsecured basis based on their past payment history with Fleet. That it appeared to be a new loan was given further credence, according to M. Hall, when they were sent different statement forms than they had received prior to the closing in 1996 with respect to the 1992 line of credit. See Debtors' Exhibit 9. When asked to examine the Fleet statement with a closing date of June 27, 1996, she acknowledged that the credit line listed was the same as that for the 1992 credit line, namely, $71,200. See id. When asked whether that raised any questions in her mind about the source of the loan, she explained that she had not examined the statements that had been sent to her and her husband at that time and had simply turned them over to her daughter for payment. Later when the advances were made by her and her husband, she testified that she had not made any inquiry about the account despite the fact that the credit line was in the same amount and was identified by the same account number as that account which she believed had been closed in early 1996.
According to the terms of the Fleet Line Note and Agreement, the Debtors could cancel their account at any time "by notifying us in writing. If you do, you must return all unused checks to us." See Debtors' Exhibit 2, Fleet Line Note and Agreement, at ¶ 2.
She could not recall whether the statement format had changed between 1992 and 1996 when she previously accessed the credit line. She admitted that if it had changed, it had not caused her to believe that the account had changed and that it was for a different loan.
On April 4, 2002, the Debtors filed a motion seeking to amend their Amended Complaint to conform it to the evidence received at trial pursuant to F.R.Bankr.P. 7015. The "Conformed Complaint," filed with the motion, supplements the factual allegations in the Amended Complaint with reference to some of the exhibits admitted into evidence at the trial. The Conformed Complaint proposes to add four new causes of action. The first cause of action asserts a right of recoupment under New York State law "for material breach of contract by Defendant First Union in failing to supply a first mortgage as contracted for." Debtors request damages
in the form of rescission by recoupment of the mortgage obligation now existing to the defendant, First Union, for breach of contract and return of all moneys or other valuable consideration given by plaintiff as conditions precedent to defendant's performance and all monies paid to the defendant during the life of the mortgage.
Plaintiffs' second cause of action is new and is based on an assertion that First Union breached New York General Business Law Article 22-A, §§ 349 and 350 "in failing to disclose a material term of the mortgage as accepted by plaintiffs." Plaintiffs allege that "had the plaintiffs known prior to or at the time of contracting for a first mortgage with defendant First Union that the mortgage was not as represented by the defendant in all communications, papers and closing documents, the plaintiffs would not have accepted the mortgage or the terms." Plaintiffs allege that the "affirmative representations" by First Union were false or deceptive acts or practices and Plaintiffs seek recoupment and/or actual damages and treble actual damages, as well as reasonable attorney's fees and costs.
The fifth cause of action, as identified in the Conformed Complaint, is also new. In it the Debtors assert a right of recoupment against Fleet under New York State law "as an equitable defense against foreclosure proceedings." Debtors rely on § 1635(g) of the Truth in Lending Act, 15 U.S.C. § 1601 et seq., which according to the Conformed Complaint, "allows a consumer relief other than the right to rescind if the 3 year statute of limitations in the Truth in Lending Act has expired by reference to § 1640(e) wherein the Act allows the right of recoupment under State Law." See ¶ 114 of Conformed Complaint. In this regard, the Debtors request
[d]amages in the form of rescission by recoupment of the mortgage obligation now existing to the defendant, Fleet, for breach of fiduciary duty and return of all moneys or other valuable consideration given by plaintiffs to defendant Fleet as well as all monies paid to the defendant during the life of the mortgage.
Debtors have withdrawn the third and sixth causes of action identified in the original Amended Complaint. It would appear that the fourth and fifth causes of action, as well as the seventh and eighth causes of action in the Amended Complaint are now asserted as single causes of action set forth in the fourth and seventh causes of action in the Conformed Complaint, respectively."
DISCUSSION
Initially, the Court notes that for the most part the factual allegations which Debtors have added to the Conformed Complaint were known to them prior to trial. See, e.g., ¶¶ 1-3, 21, 28, 30, 39-40. The only new allegations included in the Conformed Complaint are based on the evidence received at the time of trial and are found at ¶¶ 9-16. Those paragraphs set forth the process followed by Hendel in connection with the closing on the First Union mortgage. The Debtors conclude in their preliminary statement that "wherein the plaintiffs sought and paid fees to procure a first mortgage through defendant First Union and payoff and closure of a pre-existing first mortgage open end line of credit mortgage and lien held by the defendant Fleet. . . . the facts in this case will show that the right of rescission by recoupment is applicable in this case as the plaintiff's [sic] did not receive the intended first mortgage with defendant First Union through the negligence of both defendant First Union and defendant Fleet."
Fed.R.Civ.P. 15(b) provides in pertinent part: "When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects as if they had been raised in the pleadings." In determining whether to permit an amendment, the Court must consider
whether the new issues were tried by the parties' express or implied consent and whether the defendant `would be prejudiced by the implied amendment, i.e., whether he had a fair opportunity to defend and whether he could offer any additional evidence if the case were to be retried on a different theory.'"
Royal American Managers, Inc. v. IRC Holding Corp., 885 F.2d 1011, 1017 (2d Cir. 1989) (quoting Browning Debenture Holders' Committee v. DASA Corp., 560 F.2d 1078, 1086 (2d Cir. 1977)). Critical to the Court's consideration is a determination of whether the Defendants were aware during the course of the trial that the issues had been introduced by the Plaintiffs. See United States. v. Certain Real Property and Premises, Known as 890 Noyac Road, Noyac, N.Y., 945 F.2d 1252, 1259 (2d Cir. 1991). "Where a party seeks to apply evidence presented on a separate issue already in the case to a new claim added after conclusion of the trial, the opponent may be unfairly prejudiced." Grand Light Supply Co., Inc. v. Honeywell, Inc., 771 F.2d 672, 680 (2d Cir. 1985).
In their first cause of action in the Conformed Complaint, the Debtors assert a right to recoupment under New York State law, alleging that First Union breached a contract with the Debtors by failing to supply them with a first mortgage. The Debtors do not specify what "New York State law" they are relying on to support their position.10
Recoupment is defined as
1. The recovery or regaining of something, esp. expenses.
2. The withholding for equitable reasons, of all or part of something that is due. . . .
3. Reduction of a plaintiff's damages because of a demand by the defendant arising out of the same transaction. . . .
4. The right of a defendant to have the plaintiff's claim reduced or eliminated because of the plaintiff's breach of contract or duty in the same transaction.
5. An affirmative defense alleging such a breach.
BLACK'S LAW DICTIONARY 1280 (7th ed. 1999).
The Plaintiffs did not introduce into evidence a copy of the contract alleged to be dated January 19, 1996, by which First Union was to provide them with a first mortgage. The mortgage dated January 16, 1996, and signed by the Debtors indicates an obligation on the Debtors' part to see that any lien superior to that of First Union is satisfied and promptly paid by them. See Defendants' Exhibit F at ¶ 3 of "Uniform Promises." The Debtors' Affidavit, also signed January 16, 1996, states that they will not increase or refinance the balance of any prior mortgage. See Defendants' Exhibit B. The Court is at a loss to discern the legal basis for the relief sought in the Debtors' proposed first cause of action and, therefore, will deny the Debtors' request in that regard.
Debtors' proposed second cause of action against First Union is based on §§ 349 and 350 of the New York General Business Law ("NYGBL"). Nothing in the record would indicate that First Union was made aware of any such claim prior to or during the trial. Furthermore, based on the evidence adduced at trial the second cause of action would have to be dismissed for failure to state a claim.
In order to succeed on a claim based on NYGBL § 349 and 350, the Plaintiffs must have alleged that First Union's conduct or practices have a broad impact on consumers at large. See Oswego Laborers' Local 214 Pension Fund v. Marine Midland Bank, N.A., 85 N.Y.2d 20, 25, 647 N.E.2d 741, 623 N.Y.S.2d 529 (N.Y. 1995). "Private contract disputes, unique to the parties, for example, would not fall within the ambit of the statute." Id. (citation omitted); see also Dimovich v. OnBank Trust Co., 242 A.D.2d 922, 923 (N.Y.Sup.Ct. 1997) (noting that the plaintiff had failed to demonstrate "any facts to support a finding that the challenged conduct consisted of `acts or practices [that] have a broader impact on consumers at large, rather than a private contract dispute `unique to the parties.'"); Wall Street Transcript Corp. v. Cohn, 243 A.D.2d 341 (N.Y.Sup.Ct. 1997) (indicating that § 349 "is directed at wrongs that have an impact upon consumers at large and does not encompass private contract disputes . . .").
In this case, the evidence does not establish that the matter was anything but a private dispute. Accordingly, because amendment of the complaint with respect to the second cause of action fails to state a claim upon which relief could be granted, the Court will deny the Debtors' request to add that particular cause of action. See generally id. at *5.
The proposed fifth cause of action is based on § 1635(g) of the Truth in Lending Act. Debtors assert a right of recoupment against Fleet "as an equitable defense against foreclosure proceedings." The matter of Fleet's foreclosure of its mortgage is a tangential matter for which the Court has no jurisdiction. Any rights to recoupment pursuant to 11 U.S.C. § 1640 the Debtors might have in that regard would more appropriately be asserted against Fleet in an action seeking to foreclose on the Debtors' Residence in the event that the Court were to grant relief from the stay. To the extent that the Debtors seek to rescind the mortgage they have with Fleet, the Court concludes that they are, indeed, barred by the three year statute of limitations set forth in 15 U.S.C § 1635. See Beach v. Ocwen Federal Bank, 523 U.S. 410, 118 S.Ct. 1408, 1410-1411, 140 L.Ed. 566 (1998) (addressing whether under federal law the statutory right of rescission provided by § 1635 may be revived as an affirmative defense after its expiration under § 1635(f) and concluding that there is no such federal right to rescind, defensively or otherwise, after the 3-year period of § 1635(f) has run."). Furthermore, the case law indicates that any attempt to seek to void the mortgagee's security interest and to recover finance charges and attorney fees is conditioned on the tender of payment of whatever principal remains on the outstanding indebtedness. See In re Lynch, 170 B.R. 26, 30 (Bankr.D.N.H. 1994); In re Cox, 162 B.R. 191, 195 (Bankr.C.D.Ill. 1993) (noting that the purpose of 15 U.S.C. § 1635(b) is to restore the parties as much as possible to the status quo ante."). It does not appear that the Debtors are prepared to pay the full amount of Fleet's mortgage in exchange for rescission of the secured obligation as the case law interpreting the statute requires.
The Court concludes that the fifth cause of action would prove futile and will deny the Debtors' motion to include it in their Conformed Complaint.
Based on the foregoing, it is hereby
ORDERED that the Debtors' motion seeking to amend their Amended Complaint to add the first, second and fifth causes of action as set forth in their Conformed Complaint is denied; and it is further
ORDERED that the Debtors' third and sixth causes of action identified in the Amended Complaint are withdrawn . . ."
ORDERED that the Debtors file and serve a Second Amended Complaint within fifteen (15) days of the date of this Order consistent with the Decision herein; and it is finally
ORDERED that the parties file and serve their post-trial memoranda of law within forty-five (45) days of the date of this Order.