Thomas v. Seterus Inc. (In re Thomas)Thomas v. Seterus Inc. (In re Thomas)
MEMORANDUM OPINION
This adversary proceeding is before the Court on the motion to dismiss filed by Defendant JPMorgan Chase (“Chase”). (Doc. 12). Plaintiffs Jack and Angela Thomas (“Plaintiffs”) allege that Chase willfully violated the automatic stay by sending them monthly mortgage statements and letters threatening to charge them for force-placed hazard insurance on the mortgaged property. (Doc. 1). They also argue that Chase is responsible for the actions of its mortgage servicer, Defendant Seterus, Inc. (“Seterus”). Plaintiffs have filed a response to Chase’s motion to dismiss, to which Chase filed a reply, and the Court heard oral argument from counsel for both parties at a hearing on July 19, 2016. (Docs. 14 and 16). For the reasons set forth below, Chase’s motion to dismiss is GRANTED.
I. FACTS & PROCEDURAL HISTORY
A. Bankruptcy
Plaintiffs filed Chapter 7 bankruptcy on February 16, 2016. (Case No. 16-30401). At the time of their filing, Plaintiffs owed Chase $134,489 on a note that was secured by a mortgage on real property in Pratt-ville, Alabama (“the Property”), and their schedules indicated their intent to surrender the Property. (Case No. 15-30401, Doc. 1), Chase moved for relief form the automatic stay with respect to the Property on April 8, 2015, and the Court granted the motion on May 5, 2015. (Case No. 15-30401, Docs. 15 and 21). Plaintiffs obtained a Chapter 7 discharge on July 2, 2015 without reaffirming their debt to Chase. (Case No. 15-30401, Doc. 37).
B. Monthly Mortgage Statements
Starting on April 1, 2015, Chase began mailing monthly mortgage statements to Plaintiffs, examples of which are attached as exhibits to Chase’s motion and to Plaintiffs’ response brief. (Doc. 12, Ex, B; Doc. 14, Ex. A). Each of the statements are two pages long. The front of the first page recites the original and unpaid principal balances and the monthly payment. Separated from this information and prominently featured at the bottom of the first page is the following disclaimer:
To the extent your original obligation was discharged, or is subject to an automatic stay of bankruptcy under Title 11 of the United States Code, this statement is for. compliance and/or informational purposes only and does not constitute an attempt to collect a debt or to impose personal liability for such obligation. However, a secured party retains rights under its security instrument, including the right to foreclose its lien.
The second page has the heading “Bankruptcy Information” and notes at the top of the body of the statement that “ACCOUNT STATEMENT IS FOR INFORMATIONAL PURPOSES ONLY.” It lists the bankruptcy chapter filed, the interest rate, and the principal balance, and provides a phone number to contact “Bankruptcy Customer Service.” Below that information on the second page is a bold-type disclaimer identical to the one found on the front of the first page, and below that is a payment stub. The back side of the second page is blank except for the payment stub, which requests that any change in address or phone number be noted. (Doc. 12, Ex. B; Doc. 14, Ex. A).
C. Hazard Insurance Letters
Chase also mailed Plaintiffs “several” letters requesting information of hazard insurance on the Property, an example of which is attached as an exhibit to Chase’s motion. (Doc. 12, Ex. D). Seven pages long, the letter warns that if Plaintiffs do not provide proof of insurance on the Property, Chase would purchase insurance and hold Plaintiffs liable for it. The first paragraph of the first page includes the following statement:
Because hazard insurance is required on your property, we plan to buy insurance for your property. You must pay us for any period during which the insurance we buy is in effect but you do not have insurance.
(Doc. 12, Ex. D) (bold type in original). The letter includes charts comparing the benefits to Plaintiffs of purchasing their own insurance versus the consequences of force-placed insurance. It also includes two pages of answers to “frequently asked questions,” as well as a page detailing the required coverage of the hazard insurance. On the last page, under the heading “IMPORTANT BANKRUPTCY INFORMATION,” the letter suggests that Plaintiffs refer the letter to their bankruptcy attorney and includes the following disclaimer:
To the extent your original obligation was discharged, or is subject to an automatic stay of bankruptcy under Title 11 of the United States Code, this notice is for compliance and/or informational purposes only and does not constitute an attempt to collect a debt or to impose personal liability for such obligation.
(Doc. 12, Ex. D) (bold type in original).
D. Seterus’s Conduct
On August 1, 2015, Chase transferred Plaintiffs’ mortgage loan to Seterus, who “began making multiple harassing phone calls to Plaintiffs to collect on the debt[,]” notwithstanding Plaintiffs informing Seter-us that they had filed bankruptcy. (Doc. 1). Seterus likewise mailed monthly mortgage statements and letters threatening to purchase force-placed hazard insurance on the Property at Plaintiffs’ expense. On January 14, 2016, Seterus notified Plaintiffs that it had purchased hazard insurance on the Property at a monthly premi
E. Adversary Proceeding
Plaintiffs initiated this adversary proceeding on May 16, 2016 against Chase and Seterus, alleging that their activity willfully violated the automatic stay. (Doc. 1). Seterus answered with a general denial. (Doc. 6). Chase filed a motion to dismiss, arguing that the monthly mortgage statements did not violate the automatic stay because they were not attempts to collect the debt from Plaintiffs personally. (Doc. 12). Chase also asserts that its letters regarding hazard insurance did not violate the automatic stay because the letters were necessary for Chase to comply with the Real Estate Settlement Procedures Act (“RESPA”). (Doc. 12).
Plaintiffs respond that the communication of a debt to the debtor or to a third party is an “act to collect” the debt in violation of the automatic stay. (Doc. 14). They argue that, given the circumstances in which Chase sent its mortgage statements, the statements would be objectively understood as pressuring them to pay Chase. They further argue that the disclaimers are too equivocal to shield Chase from liability, and that providing information is not a legitimate basis for sending the statements. (Doc. 14). Plaintiffs assert that Chase’s letters threatening to hold them responsible for hazard insurance also violate the automatic stay because they had no continuing duty to maintain insurance once they surrendered the Property and vacated it. They argue the obligation to maintain insurance was a pre-petition in personam obligation arising out of their mortgage contract that they discharged along with the rest of their mortgage debt. (Doc. 14). Finally, Plaintiffs argue that they are entitled, at this procedural posture, to a presumption that Chase is responsible for Seterus’s actions on the grounds that they have an agency relationship and that Chase failed to notify Seter-us of the bankruptcy. (Doe. 14).
In its reply, Chase reiterates that the monthly mortgage statements did not violate the automatic stay, and argues it cannot violate the automatic stay by complying with RESPA. (Doc. 16). Chase also argues that Plaintiffs are still contractually obligated to provide insurance on the Property so long as it remains in their name. (Doc. 16). Finally, Chase argues that Plaintiffs must plead facts demonstrating that it has an agency relationship with Seterus, and that Plaintiffs are not entitled to a presumption on that point.
II. LAW
The Court has jurisdiction pursuant to 28 U.S.C. §§ 1384(b) and 167(a), and the District Court’s General Order of Reference dated April 26, 1985. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). This is a final order.
A. Standard of Review
Rule 12(b)(6), as incorporated by FED. R. BANKR. P. 7012(b), authorizes a court to dismiss complaints that fail to “state a claim upon which relief can be granted.” FED. R. CIV. P. 12(b)(6). A court’s analysis of a complaint in the context of a motion to dismiss is a two-step process. First, the court must identify, and cull, pleadings that are mere legal conclusions or “[t]hreadbare recitals of the elements of a cause of action,” for such pleadings “are not entitled to the assumption of truth.” Ashcroft v. Iqbal,
B. Consideration of Exhibits Attached to a Motion to Dismiss
“[T]he analysis of a [Rule] 12(b)(6) motion is limited primarily to the face of the complaint and attachments thereto.” Brooks v. Blue Cross & Blue Shield of Fla.,
Chase attached four exhibits to its motion to dismiss: (A) a February 27, 2015 letter to Plaintiffs’ bankruptcy attorney that acknowledged Plaintiffs’ bankruptcy case and informed him that they would continue to provide Plaintiffs with monthly statements for informational purposes; (B) a monthly mortgage statement dated March 2, 2015; (C) a notice of acceleration and intent to foreclose dated May 27, 2015
C. Willful Violation of the Automatic Stay
The filing of a bankruptcy petition “operates as a stay, applicable to all
D. Defining “Act to Collect”
Before analyzing the specifics of Chase’s communications, the' Court must consider what the “act to collect” language in § 362(a)(6) means. Plaintiffs argue that mere communication of a debt to the debt- or or a third party is an “act to collect.” (Doc. 14) (citing Mann v. Chase Manhattan Mortg. Corp.,
A Chapter 7 debtor must decide whether to redeem secured property, reaffirm the debt, or surrender the property. 11 U.S.C. § 521(a)(2)(A). When the debtor decides to redeem or reaffirm, he or she "will need information regarding the amount owed, the interest rate, and other specifics of the debt. If the debtor chooses to surrender, however, the choice does not become effective until discharge enters; until then, the debtor may change his or her mind about surrendering the property, and there is a valid purpose in sending the debtor information toward that choice. Also, it is possible that the debtor could choose to surrender the property but still make payments on the indebtedness; Congress has recognized that there would be a valid purpose in communicating information about the debt in that scenario. See 11 U.S.C. § 524(j). Even if the debtor surrenders the property and stops making payments, he or she has a right to redeem the property until foreclosure and, in Alabama, up to a year after foreclosure. See ALA. CODE § 6-5~248(b).
Even if a communication has a valid informational purpose, it must be limited to that purpose to avoid violating the automatic stay. This generally requires that the communication have at least one prominent and unambiguous disclaimer to that effect, and a lengthy communication should have multiple disclaimers. Moreover, the body of the communication should be limited to providing information; it should not demand payment, nor have the overall effect of inviting or coercing payment.
In sum, communication of the existence of a debt is an “act- to collect” under § 362(a)(6) if it overtly demands payment, coerces its recipient to provide payment, or lacks a valid informational purpose. With that in mind, the Court turns to the merits of Chase’s motion.
III. ANALYSIS
Chase does not attack the willfulness of its conduct or Plaintiffs’ injury in its motion to dismiss. Instead, Chase argues that its conduct did not violate the automatic stay at all. Therefore, the issues are (1) whether Chase’s monthly mortgage statements are an attempt to collect an in personam debt against Plaintiffs, (2) whether Chase may hold Plaintiffs responsible for force-placed hazard insurance on the Property after Plaintiffs have surrendered the Property and, to the extent Chase may not, whether its insurance letters are an attempt to collect from Plaintiffs personally, and (3) whether Chase may be held liable for the conduct of its servicer, Seterus.
A. Monthly Mortgage Statements
Plaintiffs indicated in their schedules their intent to surrender the Property. However, nothing in their complaint suggests that they offered Chase a deed to the Property in lieu of foreclosure, or that they asked Chase to stop sending them monthly statements. Therefore, Chase had a valid purpose to provide information to Plaintiffs regarding the mortgage in the event they changed their minds later or subsequently decided to resume payments on the mortgage. The fact that Chase communicated the existence of the debt to Plaintiffs is not by itself an act to collect the debt.
Nor do the statements overtly demand or coerce payment. They provide a helpful itemization of the original principal balance, unpaid principal balance, the escrow
B. Hazard Insurance Letters
Plaintiffs argue in their response brief that their contractual obligation to maintain hazard insurance on the Property was an in personam obligation that arose pre-petition, that the enforcement of the obligation was stayed by § 362(a), and that the obligation was discharged in their bankruptcy. They are correct. However, it was also an in rem obligation that continued to run with the Property in spite of Plaintiffs’ bankruptcy. A mortgagee’s “in rem rights still exist after a debtor obtains a discharge.” Henriquez v. Green Tree Servicing, LLC (In re Henriquez),
Forces remain[] at work that c[an] make ... continued ownership of the real estate uncomfortable — forces like accruing real estate taxes and the desirability of maintaining liability insurance for the premises. But those forces are incidents of ownership. Though the [Bankruptcy] Code provides debtors with a surrender option, it does not force creditors to assume ownership or take possession of collateral. And although the Code provides a discharge of personal liability for debt, it does not discharge the ongoing burdens of owning property.
Canning v. Beneficial Maine, Inc. (In re Canning),
Having clarified the extent to which Chase can enforce the obligation to maintain hazard insurance on the Property, the question becomes whether the insurance letter Chase mailed to Plaintiffs was an “act to collect” against them personally. At first blush, the letter has a coercive aspect to it. In the first paragraph on the first page, the letter explicitly states that
Chase argues that the insurance letters and the content within them were necessary to comply with RESPA, 12 U.S.C. §§ 2601 et seq., and with Regulation X of the Bureau of Consumer Financial Protection (“Regulation X”), 12 C.F.R. §§ 1024.1 et seq. As relevant to this case, RESPA provides that “[a] servicer may not impose any charge on any borrower for force-placed insurance with respect to any property securing a federally related mortgage unless” the servicer sends two written notices to the borrower containing the following information: 12 U.S.C. § 2605(i )(1)(A)-(B) (emphasis added); see also 12 C.F.R. § 1024.37(c)(2)(vi) (requiring notice to include “[a] statement that hazard insurance is required on the borrower’s property, and that the servicer has purchased or will purchase ... such insurance at the borrower’s expense”). The only way Chase could obtain hazard insurance on the Property and charge' the cost of the insurance against Plaintiffs’ equity in the Property was to comply with RESPA and Regulation X, which meant that Chase was required to include the language warning Plaintiffs that they would be charged for Chase’s force-placed insurance. See Hen-riquez,
(i) a reminder of the borrower’s obligation to maintain hazard insurance on the property securing the federally related mortgage;
(ii) a statement that the servicer does not have evidence of insurance coverage of such property;
(iii) a clear and conspicuous statement of the procedures by which the borrower may demonstrate that the borrower already has insurance coverage; and
(iv) a statement that the servicer may obtain such coverage at the borrower’s expense if the borrower does not provide such demonstration of the borrower’s existing coverage in a timely manner[.]
Citing Regulation X, Plaintiffs respond that Chase cannot charge them for force-placed insurance because “[t]he foundation of Chase’s right to assess and collect from [them the] charge for the insurance is the now discharged obligations pursuant to the ‘mortgage loan contract.’ ” (Doc. 14, p. 15) (citing 12 C.F.R. § 1024.37(b)).
Of course, due to the coercive nature of the language RESPA and Regulation X requires in these situations, inclusion of a prominent, unambiguous, and explanatory bankruptcy disclaimer within these letters is necessary to prevent the letters from running afoul of the automatic stay. A superb example of such a disclaimer is found in Henriquez:
THIS INFORMATIONAL NOTICE IS NOT AN ATTEMPT TO COLLECT A DEBT. INSTEAD, IT IS A LEGALLY REQUIRED NOTICE OF THE CREDITOR’S RIGHT TO PLACE INSURANCE ON THE COLLATERAL TO PROTECT ITS SECURITY INTEREST AGAINST UNINSURED LOSS. THE CREDITOR IS ONLY EXERCISING ITS RIGHTS UNDER THE SECURITY AGREEMENT AS ALLOWED BY LAW. IF YOUR ACCOUNT WAS DISCHARGED IN BANKRUPTCY WITHOUT A REAFFIRMATION, THE CREDITOR IS NOT ATTEMPTING TO COLLECT OR RECOVER THE DISCHARGED DEBT AS YOUR PERSONAL LIABILITY.
Henriquez,
Chase’s bankruptcy disclaimer on the insurance letter it sent them is underwhelming, particularly when compared to the Henriquez disclaimer, but it is effective enough to shield Chase from liability in this case. It is reasonably prominent, its qualification is met, and it states the letter is for compliance purposes only and is not an attempt to impose personal liability.
A debtor’s mortgage-based obligation to provide hazard insurance on the mortgaged property includes an in rem component of the obligation that is not discharge-able in bankruptcy and that is enforceable against the debtor’s equity in the property. When a mortgagee is forced to buy insurance to protect its collateral, the Bankruptcy Code’s automatic stay and discharge injunction do not prohibit it from charging the cost of the insurance against the debtor’s equity in the property. For the mortgagee to offset its cost in this manner, RESPA requires the mortgagee to provide the debtor with notices warning the debtor of what it is about to do. So long as that notice has an adequate bankruptcy disclaimer, it is not an “act to collect” a debt against the debtor personally within the meaning of § 362(a)(6).
Plaintiffs argue in their response brief that they “are entitled to a presumption” that Chase “remains responsible” for Set-erus’s conduct on the grounds that Seterus acted as the agent of Chase. At the motion to dismiss stage, however, the only presumption Plaintiffs are entitled to is that the well-pled factual allegations in their complaint are true. Iqbal,
“Agency is the fiduciary relation which results from the manifestation of consent by one person to another that the other act on his behalf and subject to his control, and consent by the other to so act.” RESTATEMENT (SECOND) OF AGENCY § 1(1) (1958); see also Ware v. Timmons,
“[t]he relation of agency is created as a result of conduct by two parties manifesting that one of them is willing for the other to act for him subject to his control, and that the other consents so to act. The principal must in some manner indicate that the agent is to act for him, and the agent must act or agree to act on the principal’s behalf and subject to his control.”
Ware,
Alternatively, Plaintiffs argue that Chase is liable for Seterus’s conduct because it failed to notify Seterus of, their bankruptcy and discharge.
Plaintiffs allege that shortly after Chase transferred their mortgage, Seterus began “sending bill invoices” and “making multiple harassing phone calls” to Plaintiffs “notwithstanding the Plaintiffs telling the callers that they had filed for bankruptcy on the debt.” (Doc. 1). The complaint does not allege that Chase failed to notify Seterus of Plaintiffs’ bankruptcy. It offers no specific facts regarding the “bill
IY. CONCLUSION
The communication of the existence of a debt is an “act to collect” within the meaning of 11 U.S.C. § 362(a)(6) only if it overtly demands payment, has the effect of coercing payment, or lacks a valid informational purpose. Chase’s monthly mortgage statements had a valid informational purpose and did not demand or coerce payment. Chase’s insurance letters were no more coercive than was necessary under RESPA to offset the cost of force-placed insurance against Plaintiffs’ equity in the Property, which Chase has a right to do. Finally, Plaintiffs have not alleged sufficient facts to impute Seterus’s conduct against Chase. Therefore, Plaintiffs have failed to state a claim against Chase, and Chase’s motion to dismiss is GRANTED.
Notes
. Plaintiffs referred to this letter in their complaint as part of the basis for their suit. However, they concede in their response brief that this letter does not violate the automatic stay, so the Court will not discuss it further. (Doc. 14). '
. "A servicer may not assess on a borrower a premium charge or fee related to force-placed insurance unless the servicer has a reasonable basis to believe that the borrower has failed to comply with the mortgage loan contract’s requirement to maintain hazard insurance.” 12 C.F.R. § 1024.37(b).
. Plaintiffs suggest in their response brief that Chase sold its mortgage interest to Seterus, and cite cases for the proposition that “[t]he selling of accounts is a deliberate act to collect on a discharged debt.” (Doc. 14, p. 17) (quoting In re Nassoko,