The U.S. Court of Appeals for the Fourth Circuit recently reversed the dismissal of a Chapter 13 bankruptcy debtor’s complaint filed in federal district court alleging that defendants foreclosed on and sold the debtor’s home in violation of the automatic stay, holding that the federal district court had subject matter jurisdiction and the complaint adequately stated a plausible claim for relief under 11 U.S.C. § 362(k).
In so ruling, the Court held that 11 U.S.C. § 362(k), which created a private right of action for damages for willful violation of the stay, may be filed in federal district court because such a claim is a cause of action arising under Title 11 of the United States Code.
In addition, the Court held that § 362(k) does not require any particular form of notice, and the debtor’s mere allegation of actual notice of the pending bankruptcy was enough to meet the willfulness requirement and survive a motion to dismiss.
A copy of the opinion is available at: http://www.ca4.uscourts.gov/Opinions/Published/132326.P.pdf
The debtor’s father conveyed to her part of the family farm. The debtor took out a loan and placed a mobile home on her part of the farm.
Some years later, the debtor refinanced the loan in order to remodel the family farmhouse, but lost her job less than one year later. She asked for a loan modification, but was denied because of her unemployment.
The mortgagee’s law firm commenced foreclosure proceedings, and in response the debtor filed a petition under Chapter 13 of the U.S. Bankruptcy Code. However, the bankruptcy case was dismissed a few weeks later because the debtor failed to file the required schedules and other papers required by the bankruptcy rules.
Less than 6 months later, the debtor filed a second Chapter 13 case in an attempt to stop the foreclosure proceedings. That same day, the debtor’s husband gave oral notice of the bankruptcy filing through phone calls to the mortgagee and its lawyers.
Two days after she filed the second case, the bankruptcy court ordered the debtor to show cause why the petition should not be dismissed. Two days after this order, the mortgagee sold the farm at a foreclosure sale, and the following day the bankruptcy court dismissed the second case.
The debtor sued the mortgagee, its foreclosure firm, and the loan servicer in federal district court for allegedly violating the automatic stay under 11 U.S.C. § 362(k) and also asserted various state law claims.
The servicer moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6) because the debtor failed to allege that the servicer had any knowledge of the second bankruptcy case when the foreclosure sale took place and, thus, any violation was not willful or deliberate. The district court granted the servicer’s motion, and dismissed the federal and related state law claims. The debtor appealed the order of dismissal.
The remaining defendants moved to dismiss and for summary judgment. One of the motions argued that the district court lacked subject matter jurisdiction over the debtor’s § 362(k) claim because that section provided a private right of action that could only be enforced by the bankruptcy court. The district court agreed and dismissed the complaint against the remaining defendants.
The Fourth Circuit then dismissed, sua sponte, the debtor’s appeal from the first order of dismissal because it was an interlocutory or non-final order. The debtor moved for reconsideration of the second order of dismissal, which was denied by the district court.
The debtor then filed an unopposed motion for clarification in the Fourth Circuit because on the one hand, the district court found that the second order of dismissal was final, but, on the other hand, the Fourth Circuit had just recently dismissed the debtor’s appeal on the basis that the first order of dismissal was not a final order. The Fourth Circuit recalled its mandate, reopening the debtor’s appeal for rehearing on the merits.
In the re-opened appeal, the Fourth Circuit first addressed whether it had jurisdiction to hear the case, concluding that the trial court’s second order of dismissal was a final judgment, because an order dismissing a claim for lack of subject matter jurisdiction necessarily dismisses the claim as to all defendants and, thus the second order of dismissal disposed of the entire case.
The Appellate Court reasoned that, because the district court could have certified its first order of dismissal as a final judgment for purposes of appeal under Rule 54(b) and the district court entered the second order of dismissal as to the remaining defendants before the Court of Appeals considered the debtor’s appeal from the first and non-final interlocutory order of dismissal, it had jurisdiction to hear the case.
The Fourth Circuit then turned to address whether the district court erred by ruling that it lacked subject matter jurisdiction to adjudicate the debtor’s § 362(k) claim.
It began its analysis by pointing out that prior to 1984, no private right of action for damages existed for violating the automatic stay contained in 11 U.S.C. § 362(a). However, in 1984 Congress added 11 U.S.C. § 362(k), which created a private right of action for damages for willful violation of the stay. Congress did not, however clarify which courts have jurisdiction over a § 362(k) claim.
After reviewing the relevant provisions of the 1984 amendments, the Fourth Circuit concluded that district courts have original, but not exclusive jurisdiction over a claim for willful violation of the automatic stay under § 362(k) because such a claim is a cause of action arising under Title 11 of the United States Code.
Even though under 11 U.S.C. § 157(a), the district court can refer a § 362(k) claim to the bankruptcy court for recommended findings of fact and conclusions of law or to adjudicate the claim to final judgment, the Fourth Circuit held this does not deprive the district court of jurisdiction.
The Appellate Court reasoned that § 157 is not jurisdictional in nature but is instead a “procedural mechanism” authorizing a bankruptcy court “(1) to hear constitutionally core claims to final judgment, subject to appeal in the district court, and (2) to recommend findings of fact and conclusions of law to the district court in constitutionally no-core matter for de novo review and final judgment by the district court.”
The Fourth Circuit rejected the argument that the district court’s procedural standing order of referral of “all bankruptcy matters” to the bankruptcy court deprived the district court of subject matter jurisdiction because the district court at all times retained original jurisdiction over any bankruptcy matter, core and non-core.
In addition, the Appellate Court held that, because none of the parties objected to the district court’s failure to refer the case to the bankruptcy court, they waived the argument that only the bankruptcy court could hear the case.
Turning to the merits, the debtor argued that the district court erred by dismissing her § 362(k) claim against the servicer because it applied the wrong legal standard when it concluded that the complaint failed to allege sufficient facts to state a plausible claim for relief.
The Fourth Circuit agreed that the district court applied the wrong legal standard by finding that if, after accepting the complaint’s well-pleaded allegations as true, “a lawful alternative explanation appears a more likely cause of the complained of behavior, the claim for relief is not plausible.”
The Appellate Court pointed out that a motion under Rule 12(b)(6) challenges the legal sufficiency of a complaint, which “is determined by assessing whether the complaint contains sufficient facts, when accepted as true, to state a claim to relief that is plausible on its face,” and “[t]his plausibility standard requires only that the complaint’s factual allegations be enough to raise a right to relief above the speculative level.” A plaintiff does not have to show “that her right to relief is probable or that alternative explanations are less likely; rather, she must merely advance her claim across the line from conceivable to plausible.” If the explanation is plausible, the complaint states a claim, “regardless of whether there is a more plausible alternative explanation.”
Turning to the complaint, the Fourth Circuit concluded that the complaint contained sufficient factual allegations to show that the servicer had notice of the debtor’s second bankruptcy petition and that she sustained injury as a result of the violation.
The Appellate Court rejected the servicer’s argument that, because the complaint failed to allege that the debtor provided it with written notice of the second bankruptcy petition, it could not have willfully violated the automatic stay.
The Fourth Circuit held that § 362(k) does not require any particular form of notice and instead creates liability for a willful violation of the automatic stay. The Appellate Court held that the complaint alleged that the servicer had actual notice of the second bankruptcy petition when the home was sold, and therefore it sufficiently alleged the element of willfulness and stated a plausible claim for relief under § 362(k).
Finally, the Appellate Court rejected the servicer’s argument that the filing of the second bankruptcy petition less than 180 days after her first petition was dismissed did not trigger the automatic stay because the debtor was not an “eligible debtor.”
Although the Fourth Circuit agreed that certain filings, like a Chapter 13 petition, do not operate as a stay “of any act to enforce any lien against or security interest in real property … if the debtor is ineligible under 11 U.S.C. § 109(g) to be a debtor in a case under Title 11,” there was no showing that the debtor willfully failed to comply with the bankruptcy court’s orders or to appear before the court to prosecute the case properly.
Instead, the Appellate Court noted that the record showed that the first bankruptcy case was dismissed for failure to file certain schedules or other documents, with no mention that the failure was willful or knowing and deliberate. In addition, the Appellate Court also noted that the bankruptcy court did not dismiss the debtor’s first bankruptcy case for 180 days with prejudice, which bankruptcy courts frequently do when imposing the filing ban authorized by § 109(g). Likewise, the second bankruptcy petition was dismissed because the debtor failed to satisfy § 109(h)(1)’s credit counseling requirement, not because she was not an eligible debtor under 109(g)(1).
Thus, because the issue of whether the debtor was “eligible” when she filed the second petition is a fact-intensive inquiry, and no evidence was presented on this question, the Fourth Circuit rejected the servicer’s alternative basis for dismissal.
Because the district court’s dismissal of the state law claims was based on its ruling that the complaint failed to state a claim under § 362(k), which the Court of Appeals reversed, the Court vacated the dismissal of the state law claims as well.
The judgment of the district court was vacated, the district court’s dismissal of debtor’s § 362(k) claim against the servicer was reversed, and the case remanded for further proceedings.
Ralph T. Wutscher
Maurice Wutscher LLP
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Chicago, Illinois 60602
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