Opinion
CASE NUMBER 17-41441 ADVERSARY NUMBER 17-04043
05-11-2018
IN RE: Jill C. PETERSON, Debtor. Jill C. Peterson, Plaintiff, v. Cynthia Phares and Wilson Phares, Defendants.
Patrick B. Duricy, Philip D. Zuzolo, Zuzolo Law Office, Jason M. Rebraca, Rebraca Law, LLC, Niles, OH, for Plaintiff. Robert J. Rohrbaugh, Attorney Robert J. Rohrbaugh II, Youngstown, OH, for Defendant.
Patrick B. Duricy, Philip D. Zuzolo, Zuzolo Law Office, Jason M. Rebraca, Rebraca Law, LLC, Niles, OH, for Plaintiff.
Robert J. Rohrbaugh, Attorney Robert J. Rohrbaugh II, Youngstown, OH, for Defendant.
MEMORANDUM OPINION REGARDING (i) PLAINTIFF's MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS; AND (ii) JURISDICTION OF THIS COURT
Kay Woods, United States Bankruptcy Judge.
Before the Court is Plaintiff's Motion for Partial Judgment on the Pleadings ("Motion") (Doc. 21) filed by Debtor/Plaintiff Jill C. Peterson on April 4, 2018. Defendants Cynthia Phares and Wilson Phares filed Defendants [sic] Response to Summary Judgment ("Response") (Doc. 25) on May 1, 2018. The Plaintiff filed Plaintiff's Reply to Defendants' Response to Summary Judgment (Doc. 26) on May 8, 2018.
For the reasons set forth herein, the Court will (i) grant the Motion to the extent it requests that Claim 1 be deemed a general unsecured claim; (ii) deny the Motion to the extent it requests a determination that the Plaintiff is not required to repay the Note, as defined infra at 3, due to the Defendants' alleged material breach of the Note; and (iii) deny the Motion to the extent it seeks to disallow Claim 1. The Court will dismiss Counts III, IV, and V of the Amended Complaint without prejudice for lack of statutory jurisdiction.
This Court has jurisdiction over Counts I and II of the Amended Complaint pursuant to 28 U.S.C. § 1334 and General Order No. 2012-7 entered in this district pursuant to 28 U.S.C. § 157(a). Venue in this Court is proper pursuant to 28 U.S.C. §§ 1391(b), 1408, and 1409. Counts I and II of the Amended Complaint are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B). The following constitutes the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
I. BACKGROUND
The Defendants granted the Plaintiff a personal loan in the amount of $30,000.00 in February 2013. (Am. Compl. ¶ 7, Ans. ¶ 1.) The parties memorialized the loan agreement in an untitled document dated February 8, 2013, which is attached to the Response as Exhibit A ("Note"). The entirety of the Note, which was executed by all parties to this proceeding, states:
Loan made to Jill Peterson (Bean) to pay off mortgage: $30,000
Monthly payments will be: $250.00
Payments will be tracked by Cindy, with copy sent to Bean.
When Bean sells the house, balance of this loan will be paid in full.
(Note at 1.) The Note does not contain an acceleration clause. (Am. Compl. ¶ 15, Ans. ¶ 1.) The Plaintiff paid the required $250.00 monthly installments through August 2014. (Am. Compl. ¶ 8, Ans. ¶ 1.)
Although the Defendants admit this allegation in the Answer, they state in the Response that the Plaintiff last made a monthly installment payment in June 2014. (Resp. at 3.) Resolution of this issue is not necessary for the Court to decide this Motion.
On September 12, 2014, the Defendants filed suit against the Plaintiff in the Trumbull County, Ohio, Court of Common Pleas ("State Court"), which was denominated Case No. 2014 CV 1734 ("2014 Suit"). The Defendants alleged that the Plaintiff had breached the Note by failing to pay the required monthly installments and sought judgment in the amount of $26,200.00. (Reply, Ex. C ¶¶ 3-4.) The 2014 Suit was voluntarily dismissed on September 19, 2016. (Am. Compl. ¶ 29, Ans. ¶ 1.)
The Defendants deny this fact in the Answer. (Am. Compl. ¶ 14, Ans. ¶ 3.) However, the Court takes judicial notice of the complaint filed in the 2014 Suit, which is attached to the Reply as Exhibit C.
On November 23, 2016, Ms. Phares filed suit against the Plaintiff in the State Court, which was denominated Case No. 2016 CV 2157 ("2016 Suit"). (Am. Compl. ¶ 30, Ans. ¶ 4.) The complaint filed in the 2016 Suit is attached to the Response as Exhibit B. Ms. Phares again alleged that the Plaintiff had breached the Note by failing to pay the required monthly installments and sought judgment in an amount in excess of $25,000.00. (Resp., Ex. B at 1-2.)
The Plaintiff filed her voluntary chapter 13 bankruptcy petition on July 25, 2017, which was denominated Case No. 17-41441 ("Main Case"). She listed on Schedule A/B, line 34, "Affirmative Claims against Cynthia Phares for Breach of Contract, Fraudlent [sic] Misrepresentation, Unjust Enrichment, Promissory Estoppel" in response to the directive to list "other contingent and unliquidated claims of every nature, including counterclaims of the debtor and rights to set off claims." (Main Case, Doc. 1 at 14.) On Schedule E/F, the Plaintiff listed the Defendants as having an unsecured claim in the amount of $25,950.00. (Id. at 20.)
On August 16, 2017, the Defendants filed a proof of claim, which was denominated Claim No. 1-1 ("Claim 1"). The Defendants set forth a claim in the amount of $25,950.00, of which they assert $2,775.00 is entitled to priority pursuant to 11 U.S.C. § 507(a)(7). The basis for Claim 1 is "personal loan to Debtor for a home now owned by Debtor." (Claim 1 at 1.)
On January 10, 2018, the Plaintiff filed Amended Complaint (Doc. 9). Count I of the Amended Complaint objects to Claim 1 on the bases that: (i) the Plaintiff does not owe the debt in Claim 1 because the Defendants materially breached the Note by (a) failing to provide the Plaintiff with a good address for mailing installment payments after the Defendants moved to Alaska, and (b) filing the 2014 Suit and the 2016 Suit seeking the entire unpaid balance of the Note when the Defendants had no right to accelerate the Note; and (ii) no part of Claim 1 is entitled to priority. Count II alleges the same breaches of contract and seeks actual damages as a result. Counts III, IV, and V of the Amended Complaint assert claims for fraudulent misrepresentation, unjust enrichment, and promissory estoppel, respectively.
In the Motion, the Plaintiff seeks summary judgment with respect to Counts I and II of the Amended Complaint. First, the Plaintiff asserts that there is no dispute that the Defendants improperly accelerated the Note by seeking full payment of the Note in both the 2014 Suit and the 2016 Suit. The Plaintiff asserts that Claim 1 should be disallowed in its entirety because both instances of improper acceleration of the Note "not only prevented Plaintiff from making payments, but should stand to excuse Plaintiff's performance under the contract." (Mot. at 6.) Second, the Plaintiff argues that Claim 1 should be disallowed because it "consists of installments that are not yet due, along with amounts that arguably Plaintiff is excused from making [sic] due to Defendants [sic] conduct." (Id. at 7.) Finally, the Plaintiff argues that no portion of Claim 1 is entitled to priority because the Note did not constitute a deposit.
In the Response, the Defendants summarily state that they seek only to recover amounts due under the Note that have not yet been paid. The Defendants dispute that they are in breach of the Note and that they have demanded the balance of the Note in full.
II. STANDARD FOR REVIEW
Federal Rule of Civil Procedure 12(c), which is incorporated by Federal Rule of Bankruptcy Procedure 7012(b), states, "After the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings." FED. R. CIV. P. 12(c) (2018). A motion for judgment on the pleadings is reviewed under the same standard used to review a Rule 12(b)(6) motion to dismiss. Fritz v. Charter Twp. of Comstock , 592 F.3d 718, 722 (6th Cir. 2010) (citing Ziegler v. IBP Hog Mkt., Inc. , 249 F.3d 509, 511-12 (6th Cir. 2001) ). A court should grant judgment on the pleadings "when no material issue of fact exists and the party making the motion is entitled to judgment as a matter of law." JPMorgan Chase Bank, N.A. v. Winget , 510 F.3d 577, 582 (6th Cir. 2007) (quoting Paskvan v. Cleveland Civil Serv. Comm'n , 946 F.2d 1233, 1235 (6th Cir. 1991) ).
"For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment." Johnson v. Bredesen , 624 F.3d 742, 746 (6th Cir. 2010) (quoting Tucker v. Middleburg-Legacy Place, LLC , 539 F.3d 545, 549 (6th Cir. 2008) ). However, a court need not accept as true "a legal conclusion couched as a factual allegation." Hensley Mfg., Inc. v. ProPride, Inc. , 579 F.3d 603, 609 (6th Cir. 2009) (citations and quotation marks omitted).
III. MOTION FOR SUMMARY JUDGMENT
A. Improper Acceleration of the Note Does Not Excuse Performance
The Motion is largely based upon the Plaintiff's contention that the Defendants' alleged improper acceleration of the Note constitutes a material breach that excuses further performance by the Plaintiff. As a result, the Plaintiff argues that the Defendants do not possess a claim against the bankruptcy estate. As set forth below, this argument fails.
The Court first notes that the Plaintiff has cited no case directly supporting her argument that improper acceleration of a loan excuses future performance by the borrower. The Plaintiff cites Wells Fargo Bank, NA v. Cook , Case No. 2014 CV 46 (Ohio Comm. Pl. June 17, 2014) (unpublished), for the pronouncement, "[A] creditor breaches a contract when it demands full payment without legal excuse to do so." Id. at 6 (citation omitted). However, in Cook , the borrowers brought a breach of contract counterclaim against their lender in a foreclosure action. Summarizing the borrowers' counterclaim, the court stated, "By alleging that Wells Fargo failed to comply with all conditions precedent to foreclosure, the Cooks claim that Wells Fargo breached the contract by demanding full payment without legal right to do so." Id. In denying the lender's motion to dismiss the counterclaim, the court concluded that it could not find that the borrowers had failed to state a claim for relief. While the court did state that improper acceleration of a loan constitutes breach of contract, the court in no way found that improper acceleration of a loan excuses the borrower from repaying all future amounts due pursuant to the loan.
The Plaintiff cites Marion Family YMCA v. Hensel , 178 Ohio App.3d 140, 897 N.E.2d 184 (2008), for the black letter law proposition that a material breach of contract excuses performance by the non-breaching party. The Plaintiff then summarily states, "Defendants' conduct is a material breach of the agreement, as their conduct prevented the Plaintiff from continuing to make installment payments." (Mot. at 5.) However, Hensel concerned whether a real estate purchase agreement was materially breached because fixtures had been removed from the property. Again, this case does not support the Plaintiff's argument that she is excused from repaying the Note.
In fact, each case that the Court has found addressing this issue has concluded that improper acceleration of a loan does not excuse future performance by the borrower.
Although not interpreting Ohio law, this issue was addressed in Fleet National Bank v. Liuzzo , 766 F. Supp. 61 (D.R.I. 1991). In Liuzzo , the borrower argued that the lender materially breached the parties' loan agreement by prematurely accelerating the balance due on the loan. Even assuming that the loan was prematurely accelerated for purposes of the lender's motion for summary judgment, the court rejected the borrower's argument. Discussing lending agreements, the court characterized the fundamental promises as the promise to advance a certain sum of money and the corresponding promise to repay that money. The court explained its ruling as follows:
[I]t is clear that Fleet had already loaned Liuzzo $17,500,000 at the time of the dispute, just short of the agreement's $18 million maximum.... Here, even if Fleet's September 29 deadline is characterized as an improper acceleration and thus a breach of contract, Liuzzo's duties remain unchanged. He still owes Fleet $17,500,000, plus, interest, which he must repay in installments at specified times.
Id. at 65 ; see also United States v. 1300 Lafayette East , 455 F. Supp. 988, 993 (E.D. Mich. 1978) ("Even assuming, arguendo , that plaintiff's actions were wrongful [in accelerating a loan], defendant still owes a debt which it voluntarily incurred."); Sardius Grp. LLC v. Apt. 4891 LLC , Case No. 2013-054936, 2014 Ariz. Super. LEXIS 924, *6 (Az. Sup. Ct. Jan 22, 2014) ("Courts that have addressed this issue have held that even an improper acceleration of a loan does not allow a borrower to stop making the required monthly payments.").
It is not disputed that the Defendants loaned the Plaintiff $30,000.00 pursuant to the terms of the Note. The Defendants fulfilled their primary obligation pursuant to the Note. In fact, the Defendants' only other obligations pursuant to the Note were to maintain a payment history and provide such payment history to the Plaintiff. The Court finds that any subsequent improper acceleration of the Note is not a material breach that excuses the Plaintiff from repaying the balance of the Note. The Court will deny the Motion to the extent it seeks to disallow Claim 1 on this basis.
Whether the Plaintiff has any cause of action for damages based upon the Defendants' alleged breach is not before the Court in the Motion.
B. Claim 1 Properly Includes Future Installment Payments
The Plaintiff next argues that Claim 1 should be disallowed because $25,950.00 is not the amount presently due under the Note. Rather, the Plaintiff contends that the proper amount due, if any, is the monthly installment payments that are presently due. Again, the Plaintiff's argument fails.
The Bankruptcy Code defines claim as:
(A) right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or
(B) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, or unsecured.
11 U.S.C. § 101(5) (2018) (emphasis added). The leading treatise on bankruptcy law, Collier on Bankruptcy , explains § 101(5) as follows:
By fashioning a single definition of "claim" in the Code, Congress intended to adopt the broadest available definition of that term. The Supreme Court has repeatedly reiterated this principle and has declined all invitations to exclude rights to payment from the definition of claim....
"Claim" may also include a cause of action or right to payment that has not yet accrued or become cognizable. Neither the contingency of the debt nor the immaturity of the obligation affects whether a right to payment is a claim.
2 Collier on Bankruptcy P 101.05 (16th 2018) (n.10-13 omitted).
It is fundamental to bankruptcy practice that a claim filed based upon an installment contract includes unmatured amounts not yet due. Accordingly, the Court finds that the Defendants have a claim with respect to the outstanding balance of the Note, which the Plaintiff concedes is $25,950.00. (Main Case, Doc. 1 at 20.) The Court will deny the Motion to the extent it seeks to reduce the amount of Claim 1.
Whether the Plaintiff has any right to setoff based upon her breach of contract cause of action is not before the Court in the Motion.
C. Claim 1 Is Not Entitled to Priority
The Plaintiffs' final argument is that Claim 1 does not include a priority claim in the amount of $2,775.00 pursuant to 11 U.S.C. § 507(a)(7). Section 507(a)(7) grants priority to claims of the following type:
[A]llowed unsecured claims of individuals, to the extent of $2,850 for each such individual, arising from the deposit, before the commencement of the case, of money in connection with the purchase, lease, or rental of property, or the purchase of services, for the personal, family, or household use of such individuals, that were not delivered or provided.
11 U.S.C. § 507(a)(7) (2018).
The Note was a "[l]oan made to Jill Peterson (Bean) to pay off mortgage." (Note at 1.) It is apparent from the face of the Note that it was a loan, rather than a deposit as required by § 507(a)(7). The Court will grant the Motion to the extent it requests Claim 1 be deemed a general unsecured claim in its entirety. IV. JURISDICTION
Courts have "an independent obligation to confirm [their] jurisdiction." Ala. Legis. Black Caucus v. Alabama , 575 U.S. 254, 135 S. Ct. 1257, 1269, 191 L.Ed.2d 314 (2015).
Count I of the Amended Complaint, which objects to Claim 1, falls squarely within the jurisdiction of this Court because it arises under title 11 — i.e. , the Bankruptcy Code — and is a core proceeding as set forth in 28 U.S.C. § 157(b)(2)(B). Count II alleges breach of the Note upon which Claim 1 is based and asserts damages as a result of such breach. If the Plaintiff can establish damages as a result of the alleged breach of the Note, such damages could be set off against the allowed amount of Claim 1. Accordingly, this Court has jurisdiction over Counts I and II.
In contrast, Counts III, IV, and V of the Amended Complaint are based upon a transaction that is entirely different and separate from the contract upon which Claim 1 is based. (Am. Compl. ¶ 16 ("In addition to the transaction between the parties that has been brought into issue in this action regarding the $30,000 loan to Jill Peterson, the Plaintiffs [sic], Cindy and Wilson Phares and Jill Peterson also had dealings with regard to a commercial pizza business ....").)
28 U.S.C. § 1334(b) states:
(b) Except as provided in subsection (e)(2), and notwithstanding any Act of Congress that confers exclusive jurisdiction on a court or courts other than the district courts, the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11.
28 U.S.C. § 1334(b) (2018).
28 U.S.C. § 1334(e)(2) has no applicability in this proceeding.
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Counts III, IV, and V do not fall within this Court's jurisdiction, as set forth in 28 U.S.C. § 1334(b), because they do not arise under title 11, or arise in or relate to the Plaintiff's bankruptcy case. Instead, Counts III, IV, and V are based solely on state law and seek damages that would not affect administration of the bankruptcy estate.
In Stern v. Marshall , 564 U.S. 462, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), and Executive Benefits Ins. Agency v. Arkison , 573 U.S. 25, 134 S. Ct. 2165, 189 L.Ed.2d 83 (2014), the bankruptcy courts had statutory jurisdiction, but not authority under the United States Constitution to enter final orders on the claims before the courts. In this proceeding, the Court does not have statutory jurisdiction to hear Counts III, IV, and V.
Even if both parties voluntarily consented to entry of a final order by this Court, jurisdiction would not be proper. As set forth in Wellness International Network, Limited v. Sharif, 575 U.S. 665, 135 S. Ct. 1932, 191 L.Ed.2d 911 (2015), Article III of the Constitution permits bankruptcy judges to adjudicate Stern claims with the parties' knowing and voluntary consent. However, the first prerequisite is that the claims be Stern claims, which requires that the court have statutory jurisdiction because the claims arise under, arise in, or relate to title 11. Counts III, IV, and V do not.
Because this Court does not have statutory jurisdiction to hear Counts III, IV, and V of the Amended Complaint, the Court will dismiss such counts without prejudice. V. CONCLUSION
The Court resolves Count I as follows. The Defendants have a claim with respect to the outstanding balance of the Note, including unmatured amounts. In addition, the Defendants' alleged improper acceleration of the Note does not excuse the Plaintiff from repaying the balance of the Note. The Court will deny the Motion to the extent it seeks to disallow or reduce Claim 1. Because the Note constitutes a loan, rather than a deposit, the Court will grant the Motion to the extent it requests that Claim 1 be deemed a general unsecured claim.
Count II is not properly before the Court for judgment on the pleadings and remains pending.
This Court does not have statutory jurisdiction to hear Counts III, IV, and V of the Amended Complaint. The Court will dismiss those causes of action without prejudice.
An appropriate order will follow.
ORDER (i) GRANTING, IN PART, AND DENYING, IN PART, PLAINTIFF's MOTION FOR PARTIAL JUDGMENT ON THE PLEADINGS; AND (ii) DISMISSING, WITHOUT PREJUDICE, COUNTS III, IV, AND V OF THE AMENDED COMPLAINT FOR LACK OF JURISDICTION
Before the Court is Plaintiff's Motion for Partial Judgment on the Pleadings ("Motion") (Doc. 21) filed by Debtor/Plaintiff Jill C. Peterson on April 4, 2018. Defendants Cynthia Phares and Wilson Phares filed Defendants [sic] Response to Summary Judgment (Doc. 25) on May 1, 2018. The Plaintiff filed Plaintiff's Reply to Defendants' Response to Summary Judgment (Doc. 26) on May 8, 2018.
For the reasons set forth in the Court's Memorandum Opinion Regarding (i) Plaintiff's Motion for Partial Judgment on the Pleadings; and (ii) Jurisdiction of this Court, which was entered on this date, the Court hereby:
1. Finds that the Defendants' alleged improper acceleration of the Note does not excuse the Plaintiff from repaying the balance of the Note;
2. Finds that the Defendants have a claim with respect to the outstanding balance of the Note, including unmatured amounts;
3. Finds that the Note constitutes a loan, rather than a deposit;
4. Finds that the Court does not have statutory jurisdiction to hear Counts III, IV, and V of the Amended Complaint;
5. Denies the Motion, in part, to the extent it seeks to disallow or reduce Claim 1;
6. Grants the Motion, in part, to the extent it requests Claim 1 be deemed a general unsecured claim;
7. Deems Claim 1 a general unsecured claim; and
8. Dismisses Counts III, IV, and V of the Amended Complaint, without prejudice, for lack of jurisdiction.