Opinion
Case No. 12-32578 Adv. No. 14-3027
10-02-2014
In re: CHARLES D. MCNAMEE CHRISTINA M. MCNAMEE, Debtors CHARLES D. MCNAMEE, Plaintiff, v. NATIONSTAR MORTGAGE, LLC, Defendant.
Chapter 7
DECISION AND ORDER OF THE COURT:
1) DISMISSING PLAINTIFF-DEBTOR'S NATIONWIDE CLASS ACTION ALLEGATIONS - AND -
2) DENYING REMAINDER OF DEFENDANT NATIONSTAR'S MOTION TO DISMISS [Adv. Doc. 8]
This matter is before the court on the Motion to Dismiss Class Action Complaint Pursuant to Rule 12(b)(6) filed by Defendant Nationstar Mortgage LLC ("Nationstar") [Adv. Doc. 8]. A response was filed by Plaintiff-Debtor Charles D. McNamee ("Debtor") [Adv. Doc. 9]; and Nationstar filed a reply [Adv. Doc. 10].
Nationstar makes several arguments urging the court to dismiss the complaint for violations of the discharge injunction or, alternatively, dismiss the class action allegations. After careful research and review of the parties' memoranda, the court concludes that Nationstar is correct with respect to one of its arguments. As Nationstar points out, Debtor desires certification of a nationwide class of debtors and such a class cannot be maintained in this court because the underlying action is a contempt proceeding based on an alleged violation of this court's discharge order.
The remainder of Nationstar's motion to dismiss is denied. While a nationwide class is not permitted, a districtwide class is possible if the class action requirements for certification are met. At this time, however, the court is not in a position to determine whether Debtor will meet the numerosity requirement, as well as the other class certification requirements, because no motion requesting certification has yet been filed. Consequently, Nationstar's request to dismiss the complaint for failure to meet the certification requirements is denied as premature. Finally, the court concludes that the complaint contains sufficient facts to establish an alleged violation of the discharge order and, consequently, the complaint withstands dismissal under Rule 12(b)(6).
FACTUAL AND PROCEDURAL BACKGROUND
For purposes of determining whether the complaint should be dismissed, the facts in the complaint are deemed true. In June of 2009, Debtor executed a note and mortgage on his real property at 8641 Ross Dr., Mechanicsburg, Ohio 43044 ("the Property") in favor of the lender, American Eagle Mortgage Company [Adv. Doc. 1, ¶ 4]. The note was endorsed to another entity and subsequently endorsed, without recourse, to Bank of America, N.A. ("Bank of America") [Id., ¶ 5].
On May 29, 2012, Debtor and his wife Christina filed their joint chapter 7 bankruptcy petition and duly scheduled Bank of America as a secured creditor [Id., ¶¶ 6, 10]. Consequently, Bank of America received proper notice of Debtor's bankruptcy case [Id., ¶ 10].
On the same date that the joint bankruptcy petition was filed, Debtor filed a Statement of Intention informing interested parties of his intent to surrender the Property [Id., ¶ 8]. By the end of June, 2012, Debtor and his spouse had vacated the Property [Id., ¶ 9]. Debtor received a chapter 7 discharge on September 25, 2012, and a few days later, upon request of Bank of America, the chapter 7 trustee formally abandoned the estate's interest in the Property [Id., ¶¶ 12-13].
Around December 17, 2012, Bank of America executed an assignment of the mortgage on the Property to Nationstar that was recorded in Champaign County, Ohio on January 28, 2013 [Id., ¶ 14]. Subsequently, Nationstar began in rem foreclosure proceedings to dispose of the Property and ultimately obtained a "Final Judgment Entry In Rem" on October 8, 2013 [Id., ¶¶ 15-16 ].
Beginning as early as January of 2013, Nationstar sent Debtor monthly mortgage loan statements allegedly demanding payment of the monetary obligation discharged in the chapter 7 bankruptcy case [Id., ¶ 17]. Each statement sent to Debtor contained an attached payment coupon, a return payment envelope, and had these characteristics:
a. Provided a breakdown of "Amounts Payable";[Id., ¶¶ 17-18].
b. Informed the recipient about "Unpaid Monthly Payments";
c. Informed the recipient about "Unpaid Late Charges";
d. Expressed an "Amount Due" with a caveat that the "amount does not include any payments made, or fees and charges that may have been incurred and/or added to your account after the date of this statement";
e. Provided a "Payment Due Date";
f. Provided a "Lender Paid Expense Summary" that includes legal fees, property inspections and maintenance charges;
g. Provided a detachable payment coupon that further stated a "Total Amount Due"; an increased amount for a "Payment Due If Received On Or After" another date; and a fill-in box to disclose the "Total Amount Of Your Check";
h. Provided a return payment envelope;
i. Provided on the reverse side of the statement a[n] entire section labeled "Important Payment Information" with a capitalized statement "DO NOT DELAY PAYMENT";
j. Provided on the reverse side of the statement a warning that "late payments, missed payments or other defaults may be reflected on your credit report"; and "we may report information about your account to credit bureaus";
k. Provided on the reverse side of the statement another entire section labeled "Payment Options" to describe how payments may be made by mail, auto-pay, online, speed pay by phone, Moneygram, and Western Union.
In addition to mailing the mortgage loan statements, Nationstar engaged Debtor in telephone calls and other written communications allegedly seeking payment of the discharged debt [Id., ¶¶ 19-20]. During at least one telephone discussion, Debtor asked Nationstar to cease its communications [Id., ¶ 21]. This request was not honored by Nationstar which continued to send mortgage loan statements and/or engage in other forms of verbal and written communication until Debtor filed a Motion for Order Finding Contempt and Imposing Sanctions in his bankruptcy case [Id., ¶¶ 21-22].
Following a telephone conference during which the court suggested that it would prefer an adversary proceeding as the vehicle for a class action, Debtor withdrew the contempt motion and filed his class action adversary complaint. In the complaint, Debtor asserts that Nationstar's post-discharge communications represent attempts to collect a discharged debt in violation of the discharge injunction. Debtor further asserts that Nationstar engaged in similar collection communications with other chapter 7 debtors post-discharge. Consequently, Debtor requests certification of a nationwide class of debtors who received post-discharge collection communications from Nationstar, designation of Debtor as class representative, and designation of Debtor's attorney as class counsel.
While the court emphasized during the telephone conference that it had neither researched nor decided the issue of whether a class action should proceed as an adversary proceeding rather than a contested matter, it is clear that Debtor's counsel felt compelled to file a complaint in light of the court's comments.
For these alleged violations of the discharge injunction, Debtor requests judgment and or a finding of contempt against Nationstar with a determination that its acts constitute a violation of the discharge injunction. Debtor further requests sanctions including costs, attorney fees, damages, and an amount payable to the class members necessary to deter Nationstar from such conduct in the future.
On April 16, 2014, Nationstar filed its motion to dismiss requesting that the entire complaint be dismissed or, alternatively, the class action allegations.
STANDARD FOR DISMISSAL
Nationstar requests dismissal of Debtor's complaint under Fed. R. Civ. P. 12(b)(6), incorporated in bankruptcy adversary proceedings by Fed. R. Bankr. P. 7012 for failure of Debtor to state a claim upon which relief can be granted. To survive a Rule 12(b)(6) attack, Debtor's complaint "must contain sufficient factual matter, accepted [by the court] as true, to 'state a claim to relief that is plausible on its face.'" Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (further citation omitted). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. 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.
The factual allegations provided in the complaint need not be detailed. Id.; Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007). Instead, a complaint requires only "a short and plain statement of the claim showing that the pleader is entitled to relief" in order to give the defendant fair notice of what the claim is and the grounds upon which it rests. Fed. R. Civ. P. 8(a)(2) (incorporated in bankruptcy by Fed. R. Bankr. P. 7008); Twombly, 550 U.S. at 555. Nonetheless, the facts provided must be sufficient to raise a right to relief "above the speculative level" and the plaintiff has the obligation to provide more than just "labels and conclusions" or a "formulaic recitation of the elements of a cause of action." Twombly, 550 U.S. at 555. See also Iqbal, 556 U.S. 678 (noting that "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice").
In assessing the complaint, the court must keep in mind that the purpose of a Rule 12(b)(6) motion to dismiss is to test the legal sufficiency of the plaintiff's claims for relief and not to weigh the evidence. Perry v. United Parcel Service, 90 Fed. Appx. 860, 2004 WL 193203, at *1 (6th Cir. Jan. 30, 2004); Armengau v. Cline, 7 Fed. Appx. 336, 2001 WL 223857, at *5 (6th Cir. March 1, 2001). "Therefore, when deciding a motion to dismiss a court may consider only matters properly a part of the complaint or pleadings." Armengau, 2001 WL 223857, at *5. See also Kostrzewa v. City of Troy, 247 F.3d 633, 643-44 (6th Cir. 2001) (noting that if matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Fed. R. Civ. P. 56 and the parties must be provided additional notice and an opportunity to supplement the record).
LEGAL ANALYSIS
A. Appropriate Proceeding for Violation of the Discharge Injunction
Nationstar argues that Debtor's complaint must be dismissed for various reasons including that Debtor cannot maintain a private cause of action for Nationstar's alleged violation of Debtor's discharge injunction under 11 U.S.C. § 524 and this court's discharge order. Instead, Nationstar argues that the only remedy available to Debtor is a contempt proceeding that must be brought by motion rather than this adversary proceeding.
Upon an individual chapter 7 debtor meeting certain statutory requirements found in 11 U.S.C. § 727, the debtor is to receive a discharge the effect of which is described in 11 U.S.C. § 524. Once the discharge order is entered, it acts much like the automatic stay by enjoining all collection actions to recover against the debtor personally for his discharged debts. Compare 11 U.S.C. § 524(a) to 11 U.S.C. § 362(a). See also In re Perviz, 302 B.R. 357, 369 (Bankr. N.D. Ohio 2003) (noting that § 524(a)(2) simply makes permanent what had previously been temporary under § 362(a)(6)).
However, unlike § 362 which includes a provision specifically authorizing an award of damages to a debtor upon a creditor's willful violation of the automatic stay, no comparable provision is found in § 524 for violations of the discharge injunction. Perviz, 302 B.R. at 369. The omission is significant. In Pertuso v. Ford Motor Credit Co., the Sixth Circuit concluded that the lack of similar language in § 524 represents a decision by Congress to include no private right of action in § 524 nor can such a private cause of action be implied. 233 F.3d 417, 422-23 (6th Cir. 2000). Accordingly, "the rule in the Sixth Circuit is that a debtor injured by a violation of the discharge injunction has no right to statutory damages." Perviz, 302 B.R. at 370. Furthermore, a Debtor cannot invoke 11 U.S.C. § 105 to create a private cause of action under § 524. Pertuso, 233 F.3d at 423; Marshall v. PNC Bank, N.A. (In re Marshall), 491 B.R. 217, 225 (Bankr. S. D. Ohio 2012). When a violation of the discharge injunction does occur, the debtor's only avenue for recourse is to bring an action for contempt against the creditor. Perviz, 302 B.R. at 370. If contempt is found, the court may sanction the creditor by awarding damages including attorney fees to the debtor. Id.; Gunter v. Kevin O'Brien and Assocs. Co., LPA (In re Gunter), 389 B.R. 67, 71-72 (Bankr. S.D. Ohio 2008).
In Pertuso, the Sixth Circuit concluded that § 105(a), which authorizes a court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title" vests bankruptcy courts with statutory contempt powers, but does not allow a court to create substantive rights that are otherwise unavailable under applicable law. 233 F.3d at 423 n.1.
In the motion to dismiss, Nationstar asserts that the sole count in Debtor's complaint for a violation of the discharge injunction is an attempt to bring a private cause of action for damages which is prohibited pursuant to the Sixth Circuit's determination in Pertuso. Nationstar's argument mischaracterizes the nature of Debtor's complaint. While the complaint alleges that Nationstar violated the discharge injunction in § 524, Debtor relies solely on the court's contempt powers for his remedy, not a private cause of action. For example, while Debtor cites 11 U.S.C. § 105(a), he does not cite it as a basis for creating a private cause of action, but as a source of the court's contempt powers [see Adv. Doc. 1, ¶ 39]. Indeed, many courts have raised § 105(a) as a basis for sanctioning contemptuous conduct including violations of a discharge order. See, e.g., Motichko v. Premium Asset Recovery Corp. (In re Motichko), 395 B.R. 25, 30 (Bankr. N.D. Ohio 2008); Perviz, 302 B.R. at 370 (noting bankruptcy courts' inherent and statutory power under § 105(a) to hold parties in contempt). Furthermore, the fact that Debtor requests damages in addition to sanctions does not convert the suit to a private action because damages are recoverable as a sanction for contempt. Motichko, 395 B.R. at 30. The court concludes that Debtor's complaint is properly limited to a request to hold Nationstar in contempt and Nationstar's argument for dismissal is without merit.
Even if the matter is limited to an action for contempt, Nationstar asserts that such an action must be brought by motion and not by a complaint in an adversary proceeding. There is much disagreement among the courts about the appropriateness of bringing an action for contempt by adversary proceeding. Fed. R. Bankr. P. 9020 specifically provides that contempt proceedings are governed by Fed. R. Bankr. P. 9014, the rule concerning contested matters. Rule 9014 states that contested matters must be brought by motion unless specific rules provide otherwise. Fed. R. Bankr. P. 9014(a). See also Pertuso, 233 F.3d at 421 (noting that the traditional remedy for violation of an injunction lies in contempt proceedings and not a lawsuit). Accordingly, some courts have determined that raising contempt in an adversary proceeding subjects the matter to dismissal. See Biery v. Beneficial Kentucky, Inc., 2013 WL 4602698, at *2-3 (Bankr. E.D. Ky. Aug. 29, 2013); Marshall, 491 B.R. at 234-35. However, other courts have concluded that dismissing a contempt action brought by adversary proceeding elevates form over substance and would subject the parties to unnecessary hoop jumping. Kilbourne v. CitiMortgage, Inc. (In re Kilbourne), 507 B.R. 219, 223-24 (Bankr. S.D. Ohio 2014); Motichko, 395 B.R. at 33.
Now, with the benefit of research and careful consideration, the court agrees with Nationstar that in most instances contempt proceedings should be initiated by motion in accordance with Fed. R. Bankr. P. 9020 and 9014. However, this situation is unique. Debtor first requested relief by filing a motion for contempt against Nationstar. During a subsequent telephone conference, the court became concerned with the potential for the matter to become a class action and noted its preference for an adversary complaint in order to provide Nationstar with the additional discovery and due process protections that the adversary rules provide. Noting the court's concerns, Debtor withdrew his motion and filed an adversary complaint. At this point, the court is disinclined to require additional "hoop jumping" for Debtor by dismissing the adversary proceeding and forcing him to refile his motion.
Nationstar argues, however, that allowing the matter to proceed within an adversary proceeding is more than a procedural error and impacts its substantive rights. Nationstar notes that the class action rules, found in Fed. R. Civ. P. 23 and applicable to bankruptcy adversary proceedings through incorporation, apply automatically in an adversary proceeding while in a contested matter their application is discretionary. See Fed. R. Bankr. P. 9014(c). Consequently, if Debtor had filed a motion instead of a complaint, Nationstar posits that Debtor would have to ask the court to apply the class action rules, Nationstar could then object, and the court would have the discretion to deny Debtor's request. By allowing the matter to proceed via adversary complaint, Nationstar argues that the court eliminated Nationstar's opportunity to object to the applicability of the class action procedures.
While technically correct, Nationstar overstates the minimal threshold to apply the class action rules to a contempt motion. Rule 9014(c) confers broad discretion on a bankruptcy judge to apply adversary rules not already enumerated in Rule 9014 to contested matters, including the application of class action procedures. In re Biery, 2014 WL 1431947, at *4 (Bankr. E.D. Ky. April 14, 2014) (aside from requiring notice of its order directing that an adversary rule apply, there are no stated limitations to a bankruptcy court's discretion to apply adversary rules in contested matters); Motichko, 395 B.R. at 33 (noting that a contempt proceeding brought by motion can be handled in the same procedural manner as an adversary proceeding).
With that in mind, deciding to apply Rule 23 class action procedures to a contested matter simply requires a determination that class action procedures would be superior to non-class procedures with respect to the matter at issue. Biery, 2014 WL 1431947, at *6. Class action procedures are appropriate in contempt proceedings involving alleged systemic violations of court orders that harm the integrity of the court. Id. at *5. Such procedures are also superior in circumstances when it is unlikely that large numbers of the class would possess the ability or initiative to litigate the violations individually. Id. at *6. Another point to consider is whether class action procedures would aid in avoiding the risk of inconsistent adjudications of individual motions. Id. at *7.
In this case, if Debtor had pursued his motion for contempt, the court would have applied the Rule 23 class action procedures to the motion. First, the allegations against Nationstar include that it systematically violated discharge orders by sending mortgage statements and calling debtors to collect payment on discharged debts [Adv. Doc. 1, ¶¶ 25-28]. As noted in Biery, discharge orders are "the cornerstone of the Court's work, essential to providing debtors a fresh start." 2014 WL 1431947 at *7. Consequently, the allegations that debtors' discharge orders were systemically violated by Nationstar implicates the integrity of the court and the bankruptcy system. Second, individual pursuit of sanctions against Nationstar for violating the discharge injunction may be difficult given that the prohibited communications likely occurred after the bankruptcy cases closed and the debtors' relationship with bankruptcy counsel terminated. Id. at *6. Lacking counsel, these debtors may not have realized that such collection efforts violate the discharge order. Id. Third, while the amount and type of damages suffered by these individual debtors may be different, the allegations that Nationstar sent the same or similar collection letters and made phone calls to discharged debtors are not unique and could be handled in a class action to avoid inconsistent decisions regarding liability. Id. at *7. All of these reasons support the application of class action procedures to the contempt proceedings in this case had the action been brought as a contested matter.
The court notes that this analysis is not a determination that the Debtor meets the requirements to certify a class pursuant to Rule 23; instead, the court concludes only that the Debtor should have the opportunity to attempt to certify a class under Rule 23.
For these reasons, the court concludes that allowing this matter to continue within an adversary proceeding will not cause any procedural or substantive harm to Nationstar. The matter is limited to what Debtor could have sought by motion: an action for contempt. Consequently, the elements and burden of proof will be the same as they would have been if the matter had been filed by motion. In addition, the court would apply Rule 23 class action procedures to the matter regardless of whether Debtor brought it by motion or adversary proceeding. Nationstar's motion to dismiss is, therefore, denied on these grounds.
B. Scope of the Court's Jurisdiction is Limited in Contempt Proceedings
Nationstar next argues that Debtor lacks standing to bring a nationwide class action contempt proceeding. However, the issue is more properly framed as the scope of the court's jurisdiction over such a proceeding. Debtor argues that the court may exercise nationwide jurisdiction over in personam class actions for damages involving Bankruptcy Code violations citing Harker v. Wells Fargo Bank, N.A. (In re Krause), 414 B.R. 243, 255-256 (Bankr. S.D. Ohio 2009) (noting the dichotomy between jurisdiction over in rem and in personam matters). While true, Debtor fails to take into account that his claim does not involve a private cause of action for damages based on a Bankruptcy Code violation. Instead, Debtor brings an action for contempt involving the violation of an injunction arising from this court's discharge order which by its very nature limits the court's jurisdiction to entertain a class action.
Violations of the discharge injunction "arise under title 11" and implicate core bankruptcy matters. 28 U.S.C. § 157(b); Williams v. Sears, Roebuck and Co., (In re Williams), 244 B.R. 858, 865 (Bankr. S.D. Ga. 2000). Therefore, the bankruptcy court issuing the discharge order has jurisdiction over an alleged violation. Williams, 244 B.R. at 865. Because the sole remedy for a violation of the discharge order is a contempt proceeding, however, only the court whose order has been defied has jurisdiction to entertain the contempt action. Kilbourne, 507 B.R. at 222-23 (noting that a contempt proceeding must be initiated in the bankruptcy court which issued the discharge); Motichko, 395 B.R. at 30; Beck v. Gold Key Lease, Inc. (In re Beck), 283 B.R. 163, 167 (Bankr. E.D. Penn. 2002). Although not in the context of a bankruptcy discharge order, the Sixth Circuit affirms the general principal that "[e]nforcement of [an] injunction through a contempt proceeding must occur in the issuing jurisdiction because contempt is an affront to the court issuing the order." Bedel v. Thompson, 956 F.2d 1164, 1992 WL 44883, at *4 (6th Cir. March 4, 1992). As such, a nationwide class cannot be maintained by Debtor in this case "because that would require the bankruptcy court to rule upon violations of injunctions issued by other courts." Motichko, 395 B.R. at 30.
Debtor attempts to distinguish a discharge order from other types of orders and injunctions which, according to Debtor, make the matter more amenable to a nationwide class. Debtor notes that unlike other court orders, a discharge order is not individualized and has the same effect in every bankruptcy case nationwide. Consequently, Nationstar's alleged actions violate § 524 and the discharge order in exactly the same way across the country. However, as noted in Beck, the policy behind requiring the issuing court to enforce its own orders through a contempt proceeding is to preserve the integrity of its own processes. Beck, 283 B.R. at 171. The fact that the order is not individually crafted "does not detract from the court's responsibility to insure that it has been obeyed and does not provide a basis to allow its enforcement powers to be delegated to other courts." Id. While that may mean that class action relief is limited in these types of circumstances where a plaintiff's sole remedy is in contempt, that deficiency is properly addressed by Congress and not this court. Id. at 171-72.
For these reasons, the court lacks jurisdiction over a nationwide class. That does not mean, however, that Debtor's ability to maintain a class action is eliminated. While, generally, only the court that issues the injunction may enforce it, the injunction is not personal to a specific judge of that court. Beck, 283 B.R. at 175 (citing United States v. Corn, 836 F.2d 889 (5th Cir. 1988)). Each judge of a multi-judge district has the same power and authority as every other judge to enforce the court's orders and injunctions. Id. Therefore, this court has jurisdiction over a putative class involving debtors who received their discharge in the Southern District of Ohio. See, e.g., Barrett v. Avco Fin. Servs. Mgmt. Co., 292 B.R. 1, 8 (D. Mass. 2003); Beck, 283 B.R. at 176; Williams, 244 B.R. at 867. To the extent that Debtor's complaint alleges a nationwide class with putative members who received a discharge outside this district, those allegations are dismissed.
This assumes that the Debtor can meet the Rule 23(a) requirements. See Fed. R. Civ. P. 23(a).
In its motion to dismiss, Nationstar states that a similar complaint with class action allegations has been filed in the Southern District of Ohio, Eastern Division. Nationstar believes that if the matters proceed as class actions, they will be duplicative and have the same putative members. Accordingly, Nationstar intends to seek dismissal of the Eastern Division action because it was filed subsequent to the filing of the complaint in this case. Although the issue of duplicative proceedings is raised in the motion to dismiss, Nationstar does not ask for any direct relief from this court with respect to this issue nor does the court take a position on it at this time.
C. Premature to Determine Rule 23 Certification Requirements
Nationstar next argues that the court should strike Debtor's class action allegations pursuant to Rule 23 and Fed. R. Civ. P. 12(f) because they do not meet Rule 23 requirements. More specifically, Nationstar asserts that individual questions of law and fact predominate and that the class is not ascertainable or is overbroad. Debtor disagrees with Nationstar arguing that it is premature to determine whether Debtor can meet Rule 23 requirements before a motion to certify a class is filed and discovery is conducted. At this early stage of the litigation, the court agrees with Debtor.
"The class action 'is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.'" Wal-Mart Stores v. Dukes, 131 S.Ct. 2541, 2550 (2011) (further citation omitted). A plaintiff seeking to invoke this exception and certify a class carries the burden of establishing four prerequisites to certification found in Rule 23(a):
(1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.Fed. R. Civ. P. 23(a). If the Rule 23(a) prerequisites are satisfied, the plaintiff must further demonstrate that the class falls within one of the subcategories found in Rule 23(b) including that questions of law or fact common to the class predominate over questions affecting only individual members and that a class action is superior to other available methods for fairly adjudicating the controversy. Fed. R. Civ. P. 23(b)(3); Bent v. ABMD Ltd. (In re ABMD Ltd.), 439 B.R. 475, 481-82 (Bankr. S.D. Ohio 2010). Courts are to conduct a "rigorous analysis" into whether these Rule 23 requirements are met before certifying a class. In re Am. Med. Sys., Inc., 75 F.3d 1069, 1078-79 (6th Cir. 1996).
Rule 23 provides that a court must rule on class certification "at an early practicable time." See Fed. R. Civ. P. 23(c)(1)(A). However, the Sixth Circuit has stated that a court should defer decision on class certification issues and allow discovery if the "existing record is inadequate for resolving the relevant issues." Am. Med. Sys., Inc., 75 F.3d at1086; Bearden v. Honeywell Int'l Inc., 720 F.Supp.2d 932, 942 (M.D. Tenn. 2010). Consequently, motions to strike filed before class discovery are granted in only rare cases where the complaint itself demonstrates that the requirements for maintaining a class action cannot be met. Trunzo v. CitiMortgage, 2014 WL 1317577, at *5 (W.D. Penn. March 31, 2014); Bearden, 720 F.Supp.2d at 942 (noting that at the dismissal stage, it is appropriate to defer decision on reasonably contested class issues unless it is clear from the face of the complaint that a proposed class cannot satisfy the requirements of Rule 23); Wilson v. Consolidated Rail Corp. (In re Paulsboro Derailment Cases), 2014 WL 1371712, at *3 (D. N.J. April 8, 2014) (noting that a court "should grant a motion to strike class allegations only if the inappropriateness of class treatment is evident from the face of the complaint and from incontrovertible facts").
In its motion, Nationstar argues that the class action cannot be maintained because individualized issues specific to each class member predominate over questions of law and fact common to the group. See Fed. R. Civ. P. 23(b)(3). Nationstar focuses on the fact that, if a nationwide class is certified, the court may need to analyze discharge orders from other jurisdictions and property rights which could vary from state to state. However, this court has already determined that a nationwide class cannot be maintained and that class membership will be limited to those debtors receiving a discharge in this district. Consequently, varying state laws governing property rights will not be an impediment to a class action nor does this form a basis for striking class action allegations.
Rule 23(b)(3) is one of three alternative grounds for maintaining a class action. Although the Debtor has not filed a motion to certify and formally chosen which alternative is the basis for maintaining a class action in this case, it does appear from the Debtor's complaint that the Debtor plans to choose Rule 23(b)(3) [See Adv. Doc. 1, ¶¶ 28-32].
Next, Nationstar argues that the court should strike class allegations because the class is not ascertainable or is overbroad. Prior to review of the Rule 23(a) requirements, a court must first consider whether a precisely defined class exists and whether the named plaintiff is a member of the class. ABMD, 439 B.R. at 482. Key elements to defining a class include: 1) specifying that a particular group was harmed during a particular time frame, in a particular location, in a particular way; and 2) facilitating a court's ability to ascertain its membership in some objective manner. Id. The class definition is significant because it "'identifies the persons who are entitled to relief, bound by the final judgment, and entitled to notice under Rule 23(b)(3).'" Id. (further citation omitted).
Nationstar again raises the vagaries associated with a nationwide class and asserts that they make the class unascertainable. Nationstar repeats that reviewing discharge orders from other jurisdictions and what facts allegedly violate them would create highly fact-specific and case-specific issues pertaining to who is a member of the putative class. Again, the court's decision to limit the class to individuals receiving a discharge in this district renders Nationstar's argument moot. Furthermore, the possibility that there might be some fact-finding necessary to determine class membership, such as determining which debtors received similar communications from Nationstar, does not mean that a class cannot be certified; it is only when class members cannot be identified without extensive fact finding or mini-trials that a class is not ascertainable. Paulsboro, 2014, WL 131712, at *5.
It may turn out that Debtor cannot meet the numerosity requirement now that the class is limited to this district or he may be unable to meet one or more of the other requirements for class certification. However, until discovery is taken and the class certification requirements are fully briefed, a determination is premature. Consequently, Nationstar's motion to strike class allegations is denied.
D. Debtor's Complaint States a Claim for Contempt
Nationstar's remaining arguments are broadly aimed at whether Debtor states a claim for contempt for Nationstar's alleged violation of the discharge order. As noted before, a discharge order acts much like the automatic stay by enjoining all collection actions to recover against the debtor on his personal liability for discharged debts. 11 U.S.C. § 524(a)(2); Pertuso, 233 F.3d at 421. The purpose of the discharge injunction "is to afford a debtor a 'fresh start' by ensuring that a debtor will not be pressured in any way to repay a debt after it has been discharged." In re Martin, 474 B.R. 789, 2012 WL 907090, at *5 (B.A.P. 6th Cir. March 7, 2012); In re Bruce, 2000 WL 33673773, at *3 (Bankr. M.D. N.C. 2000). Consequently, a creditor may be held in contempt for violating the discharge order by attempting to collect payment on a discharged debt. Pertuso, 233 F.3d at 421. If contempt is present, the court may sanction the creditor by awarding damages including reasonable attorney fees. McCool v. Beneficial (In re McCool), 446 B.R. 819, 823 (Bankr. N.D. Ohio 2010); Gunter, 389 B.R. at 71.
In its motion to dismiss, Nationstar raises three arguments as to why Debtor's contempt claim should fail: 1) Nationstar sent only informational statements that did not violate the discharge order because they were not an attempt to collect money from Debtor; 2) the statements were required under certain non-bankruptcy reporting regulations; and 3) Debtor failed to allege actual damages. The court will address each argument separately.
1. Informational Statements or an Attempt to Collect on a Debt
Nationstar begins by asserting that the statements sent to Debtor were only informational in nature rather than an attempt to collect money on a discharged debt. Nationstar notes that while Debtor's personal obligation to pay Nationstar for the loan was discharged in bankruptcy, Nationstar's in rem rights in the collateral continue post-discharge allowing Nationstar to foreclose on the Property. As part of the foreclosure process, Nationstar asserts that Debtor retained the equitable right of redemption under Ohio law and Nationstar was within its rights to send "informational statements" broadly explaining Debtor's rights and payoff amount. Although no copies of the statements sent by Nationstar are attached to the complaint, Nationstar attaches one to its motion to dismiss [Adv. Doc. 8, Ex. A] and Debtor does not dispute the authenticity or admissibility of the document in his response. After review of the contents of the statement, the court concludes that Nationstar's argument is without merit. The statement is not merely informational and is not explanatory of Debtor's redemption rights; instead, the statement is a clear demand for payment on the mortgage debt.
In general, documents outside the pleadings are not to be considered by a court in ruling on a Rule 12(b)(6) motion to dismiss. Weiner v. Klais and Co., Inc., 108 F.3d 86, 88 (6th Cir. 1997). However, a defendant may introduce certain pertinent documents if the plaintiff fails to do so; otherwise, "a plaintiff with a legally deficient claim could survive a motion to dismiss simply by failing to attach a dispositive document." Id. at 89. Hence, the Sixth Circuit follows the Seventh Circuit's holding that "'documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to [the plaintiff's] claim.'" Id. (quoting Venture Assocs. Corp. v. Zenith Data Sys. Corp., 987 F.2d 429, 431 (7th Cir. 1993)). In this case, the statements sent by Nationstar to Debtor are central to Debtor's claim that they represent an attempt to collect a debt in violation of the discharge order. Furthermore, Debtor raises no concerns about the authenticity or admissibility of the statement attached to Nationstar's motion to dismiss. As such, the court considers the attached statement in making its ruling.
The statement attached to Nationstar's motion to dismiss is labeled a "Mortgage Loan Statement" dated October 18, 2013 and is addressed to Debtor [Id.]. The top section of the statement includes explanatory items such as the interest rate, escrow balance, and principal balance on the mortgage loan which was $174,664.03 as of October 18, 2013 [Id.]. The top section also provides an "Explanation of Amounts Payable" with an itemization of principal, interest, and escrow due, unpaid monthly payments, unpaid late charges, and lender paid expenses [Id.]. These amounts are then added together to provide an "amount due" of $46,043.09 and a due date of November 1, 2013 [Id.].
The payment information is duplicated in a payment coupon at the bottom of the statement [Id.]. The payment coupon has prominent boxes providing Debtor's account number, an amount due of $46,043.09, and the payment due date of November 1, 2013 [Id.]. The payment coupon provides the address of the creditor and a place for Debtor to write in the amount of the payment he is sending [Id.]. According to allegations in the complaint, an envelope for payment was provided along with the statement [Adv. Doc. 1, ¶ 17]. All of these items: a payment coupon, an amount due, a due date, and a return envelope for sending payment add up to an attempt to collect payment on a debt. See, e.g., Cousins v. CitiFinancial Mortg. Co. (In re Cousins), 404 B.R. 281, 287 (Bankr. S.D. Ohio 2009) (the creditor's sending of a payment coupon with a place to write in the amount enclosed and an address for sending payments "has no other purpose that the court can conceive except to collect the debt . . . ."); Harris v. Mem'l Hosp. (In re Harris), 374 B.R. 611, 614 (Bankr. N.D. Ohio 2007) (noting that a creditor's act of sending account statements with a request to remit payment as well as other repeated references to payment and payment method was an act to collect a debt). Such collection actions on a debt discharged in bankruptcy are prohibited by 11 U.S.C. § 524 and the discharge order. See Brown v. Bank of Am. (In re Brown), 481 B.R. 351, 358 (Bankr. W.D. Penn. 2012) (noting that while a bank may enforce its mortgage against the real property after discharge, it has no right to demand payment from the debtor on the discharged debt).
Nonetheless, Nationstar asserts that the statements were actually sent because Debtor retained the right of redemption in the Property and Nationstar was within its rights to send informational statements which, according to Nationstar, "broadly informed the [Debtor] of loan and payoff information" [Adv. Doc. 8, p. 17]. Under Ohio law, Debtor has the right to redeem the Property and regain title by paying off the balance owed on the mortgage, as well as certain expenses and interest, prior to confirmation of the sale of the Property. Hausman v. City of Dayton, 653 N.E.2d 1190, 1194 (Ohio 1995) (describing the right of redemption); Women's Fed. Savings Bank v. Pappadakes, 527 N.E.2d 792, 795 (Ohio 1988). However, the statement sent to Debtor fails to explain these rights nor do the words "redeem" or "redemption" even appear in the statement. In fact, the statement does not even provide reliable payoff information for redemption purposes. Instead, the statement and attached payment coupon state an "amount due" from Debtor of $46,043.09, an amount significantly less than the balance owed and what would be necessary to redeem the property [Adv. Doc. 8, Ex. A]. Although a larger "Principal Balance" of $174,664.03 is listed in the top section of the statement, right underneath is boiler plate language stating that "The Principal Balance does not represent the payoff amount of your account and is not to be used for payoff purposes" [Id.]. The court could find no number in the statement which could be relied on as the amount necessary to redeem the Property. The court concludes that Nationstar's statement is not informative of Debtor's redemption rights nor does it provide reliable payoff information.
The right of redemption, arising from both equity and statute in Ohio, is the right of the mortgagor, upon payment of the mortgage debt, to regain the legal interest which has passed to the mortgagee as a forfeiture for failure to comply with the terms under which the mortgage was granted. Hausman v. City of Dayton, 653 N.E.2d 1190, 1194 (Ohio 1995); Women's Fed. Savings Bank v. Pappadakes, 527 N.E.2d 792, 795 (Ohio 1988). The "equity of redemption" is generally a three day grace period granted by a common pleas court which allows the mortgagor to pay off the mortgage debt, interest and court costs to prevent the sale of the property. Hausman, 653 N.E.2d at 1194. The mortgagor's statutory right of redemption, emanating from Ohio Rev. Code § 2329.33, continues the mortgagor's ability to exercise the right of redemption through to the time of the confirmation of sale. Id.; Pappadakes, 527 N.E.2d at 795. In general terms, to exercise the statutory right of redemption, the mortgagor must come forth with sufficient funds to pay the balance of the mortgage and, depending on where the parties are in the legal process of foreclosure, certain costs and expenses owed to the creditor and others. See Pappadakes, 527 N.E.2d at 795 (noting that under Ohio Rev. Code § 2329.33, the mortgagor may also have to deposit with the clerk's office sufficient funds to pay out court costs, poundage to the sheriff and interest to the purchaser).
Nationstar also argues that a disclaimer within the statement clarifies that the statement is not for collection purposes. The disclaimer, found on the payment coupon, states:
The statement is sent for informational purposes only and is not intended as an attempt to collect, assess, or recover a discharged debt from you, or as a [sic], or demand for payment from, any individual protected by the United States Bankruptcy Code. If this account is active [sic] or has been discharged in a[Adv. Doc. 8, Ex. A]. The disclaimer is in small type and set off from the boxes on the payment coupon providing Debtor's account number, amount due, and payment due date. It also contains several errors or ambiguities making its message unclear. More importantly, the disclaimer's suggestion that the statement has an informative rather than collection purpose is utterly inconsistent with the inclusion of a payment coupon with an amount due, payment due date, and a return envelope. In accordance with its prior holding, this court concludes that the payment demand overshadows the inconsistent disclaimer found on the payment coupon. See Cousins, 404 B.R. at 288 (holding that inclusion of a self-serving and inconsistent disclaimer does not obviate the fact that the invoice seeks payment from the debtor); Bruce, 2000 WL 33673773, at *3-4 (mortgage loan statements sent to the debtor post-discharge containing a payment coupon with current balance due and due date were not merely informational even though they acknowledged the debtor's bankruptcy and indicated that they were not demands for payment). Nationstar's argument that the statements sent to Debtor were not demands for payment or that the demands were somehow negated by the inconsistent disclaimer is without merit and does not form a basis for dismissal of the complaint.
bankruptcy proceeding, be advised this communication is for informational purposes only and is not an attempt to collect a debt. Please note, however Nationstar reserves the right to exercise its legal rights, including but not limited to foreclosure of its lien interest, only against the property securing the original obligation.
2. Reliance on TILA Reporting Regulations
Next, Nationstar argues that any violation of the discharge order was not "willful" because Nationstar intended to comply with the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601, et seq. and what Nationstar terms TILA "Reporting Regulations" when it sent the mortgage loan statements to Debtor. Nationstar refers to the Reporting Regulations effective January 10, 2014 found in 12 C.F.R. § 1026.41 that require servicers of mortgage loans to provide borrowers with a periodic statement each billing cycle on a residential mortgage loan. 12 C.F.R. § 1026.41(a). Such periodic statements must provide the payment due date, amount due, late payment fees, past payment breakdowns, servicer contact information and other information. See 12 C.F.R. § 1026.41(d). Nationstar notes that a servicer is exempt from these requirements while a consumer is a debtor in bankruptcy. See 12 C.F.R. § 1026.41(e)(5). However, Nationstar argues that mortgage servicers are required to resume sending periodic statements after the debtor receives his or her discharge on any portion of the mortgage debt that is not discharged.
There are several problems with Nationstar's argument. First, the requirements relied on by Nationstar found in 12 C.F.R. § 1026.41 have an effective date of January 10, 2014, but the Complaint alleges that Nationstar began sending statements violating the discharge order as early as January of 2013 [Adv. Doc. 1, ¶ 17]. Indeed, the Mortgage Loan Statement Nationstar admits sending is dated October 18, 2013, a date prior to the effective date of the Reporting Regulations and their requirements [Adv. Doc. 8, Ex. A]. Also misplaced is Nationstar's reliance on the requirement that servicers resume sending post-discharge periodic statements on the portion of the mortgage debt that is not discharged in bankruptcy. In this case, Debtor's entire personal obligation to pay money on the mortgage debt was discharged and the only right Nationstar retained was to take action against the collateral. The fact that a bankruptcy discharge may change a servicer's requirement to send periodic statements is discussed in the Bureau of Consumer Financial Protection's Official Comments supplementing 12 C.F.R. § 1026:
Prior to January 10, 2014, 12 C.F.R. § 1026.41 was "Reserved."
1. Commencing a case. The requirements of § 1026.41 do not apply once a petition is filed under Title 11 of the United States Code, commencing a case in which the consumer is a debtor.12 C.F.R. § 1026, Supp. I, Part 3, Comment 41(e)(5) (effective Jan. 18, 2014) (emphasis added). This Official Comment clarifies that a mortgage servicer is only required to resume sending periodic statements on that portion of a mortgage debt that is not discharged and further clarifies that the servicer is not required to resume communications with a consumer that would be inconsistent with applicable bankruptcy law. The court concludes that 12 C.F.R. § 1026.41 does not require Nationstar to send post-discharge mortgage loan statements that continue to request payment from Debtor on a discharged mortgage debt.
2. Obligation to resume sending periodic statements. i. With respect to any portion of the mortgage debt that is not discharged, a servicer must resume
sending periodic statements in compliance with § 1026.41 within a reasonably prompt time after the next payment due date that follows the earliest of any of three potential outcomes in the consumer's bankruptcy case: the case is dismissed, the case is closed, or the consumer receives a discharge under 11 U.S.C. 727, 1141, 1228, or 1328. However, this requirement to resume sending periodic statements does not require a servicer to communicate with a consumer in a manner that would be inconsistent with applicable bankruptcy law or a court order in a bankruptcy case. To the extent permitted by such law or court order, a servicer may adapt the requirements of § 1026.41 in any manner believed necessary.
ii. The periodic statement is not required for any portion of the mortgage debt that is discharged under applicable provisions of the U.S. Bankruptcy Code.
Finally, Nationstar argues that its desire to comply with the Reporting Regulations negates the "willfulness" of its violation of the discharge order. This argument is also without merit. It is true that a debtor may recover damages and attorney fees when a creditor's collection activities constitute a willful violation of the discharge order. Martin,2012 WL 907090, at *6; McCool, 446 B.R. at 823. For these purposes, however, a "willful" violation does not require any specific intent. Martin, 2012 WL 907090, at *6; McCool, 446 B.R. at 823. Rather, the question is simply whether the defendant's violating acts were done with knowledge of the discharge order. Martin, 2012 WL 907090, at *6; McCool, 446 B.R. at 823; Gunter, 389 B.R. at 72 (to hold a defendant in contempt for violating the discharge injunction, the plaintiff need only prove two elements, violation and knowledge, by clear and convincing evidence). Consequently, "[a] creditor's mistaken belief that its actions were lawful or did not violate § 524(a) is not a defense to a contempt action." Martin, 2012 WL 907090, at *6. Accord McCool, 446 B.R. at 823.
In the complaint, Debtor alleges that Nationstar sent mortgage loan statements and made telephone calls to Debtor requesting payment with knowledge of Debtor's discharge [Adv. Doc. 1, ¶¶ 36-37]. These allegations are sufficient to establish a willful violation of the discharge order regardless of Nationstar's purported desire to comply with 12 C.F.R. § 1026.41.
3. Sufficiency of Damages
Lastly, Nationstar argues that Debtor's complaint must be dismissed because Debtor failed to allege actual damages beyond attorney fees. Broad discretion is given to a bankruptcy court in selecting appropriate sanctions for violations of the discharge order. Badovick v. Greenspan (In re Greenspan), 464 B.R. 61, 2011 WL 310703, at *5 (B.A.P. 6th Cir. Feb. 2, 2011). A bankruptcy court may award a debtor actual damages for an injury caused by a willful violation. Perviz, 302 B.R. at 370. Reasonable attorney fees, often viewed as a component of actual damages, are another valid sanction for a violation of the discharge injunction and may be granted, in appropriate circumstances, even when other pecuniary injury is nominal or nonexistent. Greenspan, 2011 WL 310703, at *5 (concluding that the bankruptcy court did not abuse its discretion by awarding actual attorney fees as a sanction for violation of the discharge injunction); McCool, 446 B.R. at 824 (awarding attorney fees and nominal damages when the defendant engaged in a significant violation of the discharge injunction). However, the attorney fees must be reasonable and courts do not have a favorable view of debtors commencing litigation for inadvertent violations that could be resolved in a non-litigious fashion. Id. at 825. See also Cousins, 404 B.R. at 290 n.9 (analyzing the reasonableness of attorney fees in the context of a violation of the automatic stay).
In the case at hand, Debtor has alleged damages in the form of attorney fees and costs associated with the action [Adv. Doc. 1, p. 13]. Furthermore, Debtor alleges at least one attempt to resolve the violations prior to litigation during a telephone call with Nationstar [Id., ¶ 21]. Debtor's request that Nationstar cease the communications, according to the complaint, was not honored and they continued until Debtor filed a motion for contempt [Id., ¶¶ 21-22]. These allegations are sufficient and survive dismissal.
CONCLUSION
To the extent that Debtor's complaint alleges a nationwide class with putative members who received a bankruptcy discharge outside of this district, those allegations are DISMISSED. If a class is certified, it will be limited to debtors who received a discharge in the Southern District of Ohio. Nationstar's remaining arguments in the motion to dismiss [Adv. Doc. 8] are without merit and its request for dismissal of the complaint is DENIED.
SO ORDERED.
cc: James E Nobile
Nobile & Thompson Co., L.P.A.
4876 Cemetery Road
Hilliard, OH 43026
Email: lahennessy@ntlegal.com
jenobile@ntlegal.com
Robert C Folland
Barnes & Thornburg LLP
41 South High Street
Suite 3300
Columbus, OH 43215
Email: Rob.Folland@btlaw.com
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: October 2, 2014
/s/_________
Lawrence S. Walter
United States Bankruptcy Judge