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Hutchinson v. Delaware Savings Bank FSB

January 25, 2006

JAMES AND SHARON HUTCHINSON, PLAINTIFFS,
v.
DELAWARE SAVINGS BANK FSB, ET AL., DEFENDANTS.



The opinion of the court was delivered by: Irenas, Senior District Judge

OPINION

Plaintiffs James and Sharon Hutchinson, husband and wife, bring the present suit against the Defendants, a lender and two loan servicing companies, asserting claims under federal and New Jersey law arising out of the refinancing of the Hutchinson's home mortgage. The Defendants move to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn1

I.

In 1998, Plaintiffs lived at 6987 Harding Highway, Mays Landing, New Jersey. The property was subject to a primary mortgage under which Plaintiffs owed $74,500 to Norwest Mortgage at an interest rate of 9.9%. Because the Hutchinsons carried over $41,500 in additional debt (primarily credit card debt), they responded to an advertisement offering to refinance their existing mortgage to consolidate their debt "into one low monthly payment with a 'low' interest rate." (Amend. Compl. ¶ 16)

Plaintiffs and Defendant Delaware Savings Bank ("DSB") closed new mortgage loans on September 30, 1998. The parties executed two separate notes and mortgages, one loan in the principal amount of $76,000 ("Loan One") and the other in the principal amount of $42,750 ("Loan Two"). The interest rates on the loans were 9.55% and 14.5% respectively. In connection with the two loan transactions, DSB collected fees totaling $6,356.50, which were financed into the loans.

Plaintiffs allege that DSB engaged in predatory lending by misrepresenting the "benefits, qualities, characteristics, risks and costs" associated with the loans. (Pls.' Opp. Br. at 2) In particular, Plaintiffs assert that they requested and were promised one loan, not two, and that DSB deceptively split the loan so that they could charge double fees. They also allege that DSB created and used a false Loan Two HUD-1 statement which reported that Plaintiffs received $29,171.21 cash at closing when they actually only received $478.21.

Allegedly as a direct result of the "onerous and unconscionable" terms of the loans (id.), Plaintiffs filed Chapter 13 bankruptcy on November 9, 2001. While the Chapter 13 Plan provided for the cram-down of a third mortgage to zero, it left the Loan One and Two obligations of the parties unaffected. Plaintiffs had no pre-petition arrearages with respect to either Loan One or Two at the time they filed bankruptcy. Subsequently, their Chapter 13 case was converted to a Chapter 7 bankruptcy and Plaintiffs were forced to surrender their home.

Plaintiffs assert three state law claims against DSB (the "origination claims"): (1) fraud; (2) breach of contract; and (3) violation of New Jersey's Consumer Fraud Act. With respect to all three claims DSB moves to dismiss asserting that: (a) the claims are precluded by the Plaintiffs' Chapter 13 reorganization plan pursuant to 11 U.S.C. § 1327(a); (b) Section 348(f) of the Bankruptcy Code precludes the claims; and (c) the Plaintiffs lack standing to assert claims belonging to the bankruptcy trustee. DSB also challenges the fraud counts as insufficient under Fed. R. Civ. P. 9(b)'s heightened pleading requirement.

Plaintiffs' troubles continued after they received a Chapter 7 discharge of their personal obligations under the loans. According to Plaintiffs, the loan servicing companies, Defendants Aurora Loan Services ("Aurora") and Mortgage Electronic Registration Systems ("MERS")*fn2 unlawfully continued their attempts to collect on Loan Two.*fn3

Aurora and MERS continued to send Plaintiffs collection notices and reported to credit bureaus that Plaintiffs' mortgage payments were late even though the debt was discharged. Plaintiffs assert that Aurora and MERS acted in bad faith by misrepresenting to Plaintiffs that they still owed loan payments and attempting to assess various late fees.

Plaintiffs and their bankruptcy counsel asked Aurora through "qualified written requests" pursuant to the Real Estate Settlement Procedures Act ("RESPA"), to cease sending mortgage statements. Allegedly, Aurora failed to respond or take appropriate action to investigate and / or correct the problem and continued to report late mortgage payments to credit reporting bureaus in violation of RESPA.

Plaintiffs assert three claims against both Aurora and MERS and an additional claim against Aurora only (the "servicing claims"). Against both Aurora and MERS they assert: (1) negligent servicing of Loan Two; (2) breach of contract; and (3) violation of New Jersey's Consumer Fraud Act ("NJ CFA"). Against Aurora only, Plaintiffs assert a RESPA claim. Aurora and MERS move to dismiss, asserting that: (a) Plaintiffs have failed to state claims with respect to all counts, and (b) the state law claims are preempted by the Fair Credit Reporting Act ("FCRA").*fn4

II.

Federal Rule of Civil Procedure 12(b)(6) provides that a court may dismiss a complaint "for failure to state a claim upon which relief can be granted." In considering a Rule 12(b)(6) motion, the court will accept as true all of the factual allegations contained in the complaint and any reasonable inferences that can be drawn therefrom. Nami v. Fauver, 82 F.3d 63, 65 (3d Cir. 1996). Dismissal of claims under Rule 12(b)(6) should be granted only if "it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46 (1957). Although the court must assume as true all facts alleged, "[i]t is not . . . proper to assume that the [plaintiff] can prove any facts that [are] not alleged." Assoc. Gen. Contractors of Cal., Inc. v. Cal. State Council of Carpenters, 459 U.S. 519, 526 (1983). Finally, when "confronted with a [12(b)(6)] motion, the court must review the allegations of fact contained in the complaint; for this purpose the court does not consider conclusory recitations of law." Pennsylvania v. PepsiCo., Inc., 836 F.2d 173, 179 (3d Cir. 1988) (emphasis added).

III.

A.

First, we address DSB's contention that Plaintiffs' origination claims against DSB are precluded by 11 U.S.C. § 1327(a). The issue is whether Plaintiffs' voluntary conversion of their Chapter 13 bankruptcy to a Chapter 7 bankruptcy obviates the res judicata effect of the confirmed Chapter 13 plan. We hold that it does.

Section 1327(a) provides that "[t]he provisions of a confirmed [chapter 13] plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan." Section 1327(a) generally codifies the doctrine of res judicata with respect to confirmed Chapter 13 plans. See In re Szostek, 886 F.2d 1405, 1408 (3d Cir. 1989)("Under § 1327 a confirmation order is res judicata as to all issues decided or which could have been decided at the hearing on confirmation.").*fn5 "Both New Jersey and federal law apply res judicata or claim preclusion when three circumstances are present: (1) the judgment in the prior action must be valid, final, and on the merits; (2) the parties in the later action must be identical to or in privity with those in the prior action; and (3) the claim in the later action must grow out of the same transaction or occurrence as the claim in the earlier one." Mattson v. Hawkins (In re Hawkins), 231 B.R. 222, 229 (D.N.J. 1999).

Plaintiffs concede that they did not list their origination claims (or any disputes regarding Loan Two) in their Chapter 13 schedules but they assert that the omission is inconsequential because the causes of action they now pursue are listed on their Chapter 7 schedules.*fn6 They reason that the order confirming the Chapter 13 plan was not a final judgment because the plan was converted to a Chapter 7 case. DSB steadfastly asserts that because the Chapter 13 plan was confirmed, res judicata bars the origination claims, regardless of the Chapter 7 conversion.

The case law on this issue is sparse. However, Plaintiffs' analysis is supported by the small amount of ...


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