FYI: 4th Cir Upholds Jury Trial Defense Verdict in RESPA Section 8 Class Action Involving Lender/Real Estate Broker Joint Venture

The US. Court of Appeals for the Fourth Circuit recently affirmed a district court’s denial of the borrowers’ motion for a new trial. 

 

In their appeal, the borrowers argued that 1) a statement made by defense counsel during closing argument was a judicial admission, thereby conclusively resolving whether a “referral” had occurred under Section 8 of the RESPA, 2) the jury’s verdict was against the clear weight of the evidence, 3) the district court erred in permitting evidence and testimony as to the borrowers' economic harm, or lack thereof, and 4) that defense counsel's improper statements during closing argument mandated a new trial. 

 

However, the Fourth Circuit disagreed, pointing out that borrowers' counsel's failure to move the district court to determine whether defense counsel's statement was a judicial admission was an insurmountable hurdle to their appeal. 

 

The Fourth Circuit also held that the borrowers' counsel's failure to move for judgment as a matter of law at the close of trial and the resultant standard of review required it to affirm the judgment below, even though the evidence would have supported a verdict the other way. 

 

Finally, the Fourth Circuit held that the district court did not abuse its discretion when it allowed evidence and testimony as to the borrowers economic harm, or lack thereof, given the relevance of this evidence to the issues at bar, and further declined to remand for a new trial due to certain improper statements made by defense counsel during closing argument.

 

A copy of the opinion is available at:  http://www.ca4.uscourts.gov/Opinions/Published/132131.P.pdf

 

In this class action lawsuit, the plaintiff borrowers originally brought suit on behalf of a group of consumers alleging that a real estate brokerage and mortgage lender violated Section 8 of the federal Real Estate Settlement Procedures Act (“RESPA”). 

 

Specifically, the borrowers alleged that the defendants created another lender as a joint venture for the purpose of skirting the RESPA’s prohibition on kickbacks, that the real estate broker referred mortgage clients to the lender through the joint venture in exchange for kickbacks, and that the relationship between the two companies was never communicated to the borrowers.  They further alleged that the joint venture performed all but no work on the subject mortgage transactions and that the lender was the actual lender.

 

As you may recall, Section 8 of the RESPA prohibits the provision or acceptance of referral fees or kickbacks in exchange for real estate settlement services in transactions that involve federally related mortgage loans, subject to certain enumerated exceptions.  Section 8(a) of RESPA provides the anti-kickback prohibitions, and Section 8(c) enumerates certain exceptions as well as certain conditions to the exceptions. 12 U.S.C. § 2607.

 

The borrowers’ asserted three RESPA violations in their action:

 

1) a Section 8(a) claim alleging that the lender paid the real estate broker kickbacks in exchange for settlement services;

2) a Section 8(c) claim alleging that the lender and the real estate broker operated the joint venture as a so-called “sham” lender, funneling the real estate broker’s customers to the lender; and

3) a Section 8(c)(4) claim alleging that defendants were members of an “affiliated business arrangement” and failed to comply with their obligation under RESPA to provide the borrowers with required disclosures.

 

Originally, the borrowers moved the district court to certify a class for all three of their claims.  Ultimately the Court certified a class as to the borrowers’ Section 8(c) and 8(c)(4) claims.  However, the district court refused to certify the 8(a) claim given that its members were a further sub-set of the 8(c) and 8(c)(4) classes and could unnecessarily complicate its inquiry into the central issue in the case, namely whether the joint venture was a legitimate lender.

 

Prior to trial, the district court refined the certified classes by limiting them to class members who were referred to the joint venture by the real estate broker and further excluding any class members whose loans were not transferred to the lender and were otherwise sold on elsewhere.  The Court also ruled that “following the upcoming trial, the Court will solicit proposals … related to scheduling a trial of [the borrowers] individual § 8(a) claims.”

 

In addition, and still prior to trial, the borrowers moved to exclude evidence as to whether they had suffered economic harm.  The district court initially agreed, ruling that such evidence was minimally relevant and that its probative value “was substantially outweighed by a danger of unfair prejudice, confusion, misleading the jury, or delay.”  However, the district court stated that should the borrowers open the door to such testimony in their case in chief, it would revisit its ruling.  The district court ultimately did allow Defendants to ask about whether the borrowers “shopped around” and whether they chose to go with the joint venture due to “better rates, lower costs, or better service.”

 

During trial on the Section 8(c) and 8(c)(4) claims, certain matters arose which formed the basis of the borrowers’ motion for a new trial, as well as their subsequent appeal.  First, the borrowers objected throughout trial to Defendants’ questioning as to whether the borrowers had suffered economic harm by choosing to use the joint venture.  Second, during closing argument, the real estate broker’s counsel stated that “I think the only thing I agree [with] for sure is that [the real estate broker] did refer the named plaintiffs to [the joint venture]. There’s not dispute about that.” Third, that Defendants’ counsel stated that the borrowers received good deals on their loans. Finally, the lender’s counsel apparently implied during his closing argument that the borrowers’ counsel had a financial interest in the case and that the lawsuit was a “sham.”

 

In the end, the jury returned a verdict for the Defendants, finding that the borrowers failed to adequately establish that the joint venture was not a bona fide provider of settlement services.  The jury also decided that the borrowers did not prove that the real estate broker referred or otherwise influenced the borrowers to use the lender for settlement services. 

 

As a result of these verdicts, the district court entered judgment in favor of Defendants on all of the borrowers’ Section 8 claims, which notably included the borrowers Section 8(a) claim, as to which the trial court refused to certify a class prior to trial and, as a result, was left untried.  The borrowers then moved for new trial pursuant to Federal Rule of Civil Procedure 59(a), arguing, inter alia,  that 1) the statement made by counsel for the real estate broker during closing argument was a judicial admission, thereby conclusively resolving the referral issue, 2) the jury’s verdict was against the clear weight of the evidence, 3) that the district court erred in permitting evidence and testimony as to the borrowers' economic harm, or lack thereof, and 4) that defense counsel's improper statements during closing argument mandated a new trial.  The borrowers’ motion was denied and the borrowers timely appealed.

 

In its opinion affirming the district court's denial of the borrowers' motion for new trial, the Fourth Circuit set forth four primary bases for its decision.

 

First, it disposed of the borrowers’ argument that the real estate broker’s counsel's statement was a judicial admission by reminding the borrowers that they had ample opportunity to raise the issue of the alleged admission prior to the close of trial, but had failed to do so. 

 

Although an attorney's statements may in some instances constitute a “binding admission of a party”, such statements must be “deliberate, clear and unambiguous.”  Fraternal Order of Police Lodge No. 89 v. Prince George's Cnty., Md., 608 F.3d 183, 190 (4th Cir. 2010).  Here, although the real estate broker's counsel had undoubtedly made a statement that could have been construed as an admission that it referred clients to the joint venture (and thereby to the lender), the borrowers failed to raise any objection or move for any form of relief after the purported admission was made.  As a result, the Fourth Circuit held that “the fact that it [did not occur to the borrowers] that this isolated remark constituted a binding admission undercuts the notion that the statement was sufficiently deliberate and clear as to have preclusive effect.”  Given the borrowers' failure to take any affirmative steps to have the statement deemed an admission during trial, the Fourth Circuit concluded that it could not be said that “an error occurred in the conduct of the trial that was so grievous as to have rendered the trial unfair.”  Bristol Steel & Iron Works v. Bethlehem Steel Corp., 41 F.3d 182, 186 (4th Cir. 1994) (“Bristol Steel”).  As such, it held that “the district court did not abuse its discretion on this issue.”

 

Second, and as to the borrowers' contention that the jury's verdict at trial was against the clear weight of the evidence, the Fourth Circuit pointed out that the borrowers failed to move for judgment as a matter of law prior to moving for a new trial. 

 

In so doing, the borrower’s counsel restricted the Fourth Circuit's standard of review, limiting it to the issue of whether “there was any evidence to support the jury's verdict.”  Bristol Steel at 187.  As such, the Court made clear that it was bound to affirm the district court's decision unless there was “an absolute absence of evidence supporting the jury's finding that [the borrowers] did not prove by a preponderance of the evidence that [the real estate broker] referred or influenced them to use [the joint venture].”  However, the Fourth Circuit stated that while the evidence could certainly have supported a verdict going the other way, it could not conclude that there was an absolute absence of evidence supporting the jury's verdict, and that the “ensuing high bar” resulting from borrowers' failure to move for judgment as a matter of law at the close of trial mandated that the Court affirm the district court's denial of the borrowers' motion for new trial.

 

Third, the borrowers also challenged the district court's decision to ultimately admit testimony regarding the economic harm, or lack thereof, suffered due to using the joint venture. 

 

As explained above, prior to trial, the district court had originally decided to exclude evidence as to economic harm pursuant to Federal Rule of Evidence 403.  Notably, under this rule, “whether the probative value of evidence is substantially outweighed by the danger of unfair prejudice, misleading the jury, or confusion of the issues is within the district court's broad discretion.”  United States v. Love, 134 F.3d 595, 603 (4th Cir. 1998).  Accordingly, the Fourth Circuit would need to determine that the district court “plainly abused [its discretion].”  Id. 

 

In refusing to do so, the Fourth Circuit highlighted that questioning as to whether the borrowers “shopped around for their mortgages and whether they chose [the joint venture] because it offered “better rates, lower costs, or better service” was relevant to “determining whether [the joint venture] was a sham business and whether [the joint venture]  independently priced its loans to be competitive in the marketplace.” 

 

Moreover, the Fourth Circuit believed that any potential prejudicial impact was mitigated by the district court's instructions to the jury that the borrowers “are not required to prove they were overcharged by any of the defendants in connection with their loans, or that they incurred any financial detriment, or that they've suffered any poor service.”  Rather, the borrowers were only required to prove that “[the joint venture] was a sham because it was not a bona fide provider of settlement services.”  Having ruled that Defendants' questioning was relevant and that the district court's mitigating instructions were satisfactory, the Fourth Circuit affirmed the district court's evidentiary rulings on these points.

 

Finally, as to the borrowers contention that the district court improperly failed to strike or otherwise instruct the jury to disregard the lender's counsel's alleged improper statements during closing arguments, the Fourth Circuit ruled that while statements that the borrowers' lawsuit was a “sham” and that borrowers' counsel had an “interest in the outcome of the case” were inappropriate, the Court ultimately concluded that the district court did not abuse its discretion in refusing to strike or instruct the jury to disregard the statements. 

 

The Fourth Circuit explained that even though the statements were not appropriate and mildly distasteful, they were made during closing argument only, and the district court had instructed the jury that the argument of counsel was not evidence.  Because of this, the Fourth Circuit did not believe that these statements influenced the outcome of the case.  As such, the Court refused to set aside the ruling of the district court on this issue.

 

Accordingly, the Fourth Circuit affirmed the judgment of the district court.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

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FYI: Cal App Ct Reverses Dismissal of HAMP TPP Challenge, Declines to Follow Nungaray v. Litton Loan Servicing, LP

The California Court of Appeal, First District, recently reversed the dismissal of a borrower’s allegations that a loan servicer supposedly refused to modify the borrower’s loan after the borrower allegedly complied with all conditions of a HAMP Trial Period Plan. 

 

The First District held that a lender must offer a permanent HAMP loan modification if the borrower timely makes all trial period payments, if the borrower complies with the Trial Period Plan terms, and if the borrower’s representations on which the loan modification is based remain correct.  In so ruling, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 and followed a line of cases beginning with Barroso v. Ocwen Loan Servicing, LLC (2012) 208 Cal.App.4th 1001.

 

A copy of this opinion is available at:  http://www.courts.ca.gov/opinions/documents/A138480.PDF

 

In 2009, the borrower (“Borrower”) applied for a loan modification.  Borrower’s loan servicer (“Servicer”) allegedly approved Borrower for the loan modification and told Borrower that he would receive a permanent modification after making timely trial payments.

 

Allegedly, Borrower timely made the trial payments, and Servicer allegedly informed him in January 2010 that the permanent loan modification would be ready in three days.  Three months later, with still no written agreement, Borrower leased his home to a third party.  In August 2010, Servicer allegedly informed Borrower that it was denying his home loan modification “because the home was not owner-occupied.”

 

Thereafter, Borrower allegedly obtained Servicer’s agreement to postpone the foreclosure sale several times in order to pursue the loan modification.  In February 2011, supposedly without Borrower’s knowledge, Servicer transferred servicing of the loan to another servicer.  In May 2011, the house was sold at auction.  According to Borrower’s complaint, Servicer “‘knowingly planned and schemed … to transfer plaintiff’s loan to [the other servicer] and foreclose on [Borrower] behind his back in violation of dual tracking,’ all while lulling [Borrower] into complacency by pretending to pursue the permanent loan modification.”

 

Borrower’s complaint sought equitable relief and damages for an illegal trustee’s sale, breach of contract-promissory estoppel, breach of fiduciary duty, breach of the implied covenant of good faith and fair dealing, unfair business practices, negligence, negligent misrepresentation, and an accounting.  The trial court found the complaint failed to state a viable cause of action and sustained Servicer’s demurrers without leave to amend.

 

On appeal, the First District reversed the trial court with respect to Borrower’s breach of contract, breach of the implied covenant of good faith and fair dealing, wrongful foreclosure, and negligent misrepresentation causes of action.  The First District determined that “if the borrower has made all required trial payments and complied with all of the TPP’s other terms, and if the borrower’s representations on which the modification is based remain correct, the lender must offer the borrower a permanent loan modification.” 

 

In so holding, the First District declined to follow Nungaray v. Litton Loan Servicing, LP (2011) 200 Cal.App.4th 1499 which Servicer had cited for the proposition that “a borrower’s compliance with a TPP does not give rise to a contract to permanently modify the original loan.”

 

In support of the trial court’s dismissal, Servicer argued that Borrower was not eligible for a modification because he was not living in the home.  The First District disagreed and held that “HAMP Directive 09-01, requires only that the home must be the borrower’s primary residence, as evidenced by tax returns, credit reports and other ‘reasonable evidence … such as utility bills in the borrower’s name’ … [Borrower’s] allegation that he was temporarily renting out his home does not bar him from showing it was nonetheless his primary residence.”

 

Servicer also argued that “[Borrower could not] maintain a breach of contract or, indeed, any cause of action arising from the allegedly wrongful foreclosure, because he failed to allege he was willing and able to tender the full amount of the loan.”  Again, the First District disagreed and held that “since [Borrower] did not default under the terms of the modified agreement, he was not required to tender his indebtedness to avoid foreclosure.”

 

With respect to Borrower’s claim for wrongful foreclosure, the First District held that the claim was also wrongfully dismissed “because its legal viability was dependent upon whether [Borrower could] allege … that [Servicer] foreclosed despite an enforceable agreement to permanently modify his loan.”

 

The First District also reversed the trial court’s dismissal of Borrower’s negligent misrepresentation cause of action.  As you may recall, the elements of negligent misrepresentation are (1) the defendant made a false representation; (2) without reasonable grounds for believing it to be true; (3) with the intent to deceive the plaintiff; (4) justifiable reliance on the representation; and (5) resulting harm.  (West v. J.P. Morgan Chase Bank, N.A. (2013) 214 Cal.App.4th 780, 792.)

 

In support of the trial court’s dismissal of Borrower’s negligent misrepresentation claim, Servicer argued that “banks owe their borrowers no duty not to misrepresent the truth ‘in the context of the loan modification allegations/discussions.’”  The First District rejected Servicer’s argument.

 

The First District also reversed the trial court’s dismissal of Borrower’s cause of action for violation of Business and Professions Code Section 17200.  As you may recall, Section 17200 permits civil recovery for “any unlawful, unfair or fraudulent business act or practice.”

 

In support of the trial court’s dismissal, Servicer argued that “the trial court properly sustained the demurrer to this cause of action because [Borrower] failed to allege a ‘predicate act involving a violation of some other statute.’”  The First District disagreed and held that “because Business and Professions Code section 17200 is written in the disjunctive, it establishes three varieties of unfair competition – acts or practices which are unlawful, or unfair, or fraudulent … In other words, a practice is prohibited as ‘unfair’ or ‘deceptive’ even if not ‘unlawful’ and vice versa.”  (citing Cel-Tech Communications, Inc. v. Los Angeles Cellular Telephone Co. (1999) 20 Cal.4th 163, 180.)

 

Alternatively, Servicer argued that “[Borrower] lack[ed] standing to bring an unfair competition claim because he [could not] allege he “lost money or property as a result of the unfair competition.”  The First District disagreed and found that “the complaint also alleges that [Servicer’s] unfair and deceptive practices deprived [Borrower] of the opportunity to pursue other means of avoiding foreclosure, leading to the loss of his home and the equity he had in it.  He sufficiently alleged standing under section 17200.”

 

Finally, Servicer relied on Mangini v. Aerojet-General Corp. (1991) 230 Cal.App.3d 1125, 1155–1156 for the proposition that “the unfair competition law applies only to ongoing conduct.”  The First District dismissed Servicer’s argument and explained, “That was the state of the law when Mangini was decided, but the following year the Legislature amended section 17200 to state that it applies to any unlawful “‘act or practice,’ presumably permitting invocation of the UCA based on a single instance of unfair conduct.”  (citing Podolsky v. First Healthcare Corp. (1996) 50 Cal.App.4th 632, 653.)

 

However, the First District affirmed the trial court’s dismissal of Borrower’s negligence claim and his breach of fiduciary duty claim. 

 

With respect to the negligence claim, the First District noted that “[C]ourts will generally enforce the breach of a contractual promise through contract law, except when the actions that constitute the breach violate a social policy that merits the imposition of tort remedies.”  (citing Erlich v. Menezes (1999) 21 Cal.4th 543, 552, 553–554.)  The First District held that because Borrower’s complaint was based upon the alleged breach of a written agreement, tort remedies were unavailable.

 

With respect to the breach of fiduciary duty claim, the First District held that the claim runs “afoul of the principle that ‘[n]o fiduciary duty exists between a borrower and lender in an arm's length transaction.’  [A]s a general rule, a financial institution owes no duty of care to a borrower when the institution’s involvement in the loan transaction does not exceed the scope of its conventional role as a mere lender of money.”  (citing Ragland v. U.S. Bank Nat. Assn., supra, 209 Cal.App.4th at p. 206; Nymark v. Heart Fed. Savings & Loan Assn. (1991) 231 Cal.App.3d 1089, 1096.)  Accordingly, the First District affirmed the trial court’s dismissal of Borrower’s claim for breach of fiduciary duty.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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FYI: SDNY Bankr Ct Refuses to Dismiss Claim That Assignor Must Report Post-Sale Discharges on Sold Debts, Allows Putative Nationwide Class Action to Proceed

The U.S. Bankruptcy Court for the Southern District of New York recently denied a lender’s motion to dismiss concerning the Court’s power to issue an order over a nationwide class action to remedy alleged widespread violation of the discharge injunction under section 524(a) of the Bankruptcy Code.

 

This action was premised upon the alleged violation of the debtor’s (“Debtor”) and the putative class members’ bankruptcy discharges for alleged failure by the lender – which had sold and assigned most but not all of its rights in the debts -- to update their credit reports that list their debts post-discharge under Section 727 of the Bankruptcy Code as being “charged off,” rather than being “discharged in bankruptcy.”

 

A copy of the opinion is available at: http://www.nysb.uscourts.gov/sites/default/files/opinions/245564_63_opinion.pdf

 

As you may recall, “[t]he failure to update a credit report to show that a debt has been discharged is also a violation of the discharge injunction if shown to be an attempt to collect a debt.”  4 Collier on Bankruptcy, paragraph 524.02(2)(B) (16th Ed. 2013), at page 524-23.

 

The creditor (“Creditor”) argued that it had no obligation to revise or correct the credit reporting because it sold its debt pre-bankruptcy and pre-discharge to a third party.  Therefore, Creditor argued, it neither had an obligation with respect to credit reporting under the federal Fair Credit Reporting Act, 15 U.S.C. § 1681 et seq. (“FCRA”), nor under Section 524(a) of the Bankruptcy Code, because it no longer has a debt to enforce.  Creditor also argued that it has no other duties under Section 524(a) of the Bankruptcy Code after the sale of the debt.

 

In denying Creditor’s motion to dismiss, the Court rejected Creditor’s contention that its credit reporting obligations are determined by the FCRA because the complaint does not assert a FCRA claim.  Instead, it asserts a claim specifically under Sections 105(a) and 524(a) of the Bankruptcy Code for violation of the discharge under Section 727 of the Code. 

 

Because the FCRA did not expressly repeal or curtail Creditor’s obligations under Section 524(a), the Court concluded that even if Creditor did not have any ongoing duty under the FCRA to correct Debtor’s credit reports, the Complaint’s Section 524(a)/105(a) claim was not preempted.

 

As you may recall, Section 524 of the Bankruptcy Code “operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt has been waived.”  11 U.S.C. Section 524(a).  See also In re Torres, 367 B.R. 478, 489-90 (Bankr. S.D. N.Y. 2007).

 

The Court turned to Creditor’s next argument that it cannot be liable under Section 524 having sold its debt pre-discharge, and thus having no plausible interest in continuing to enforce the discharged debt.  Unfortunately the Court was not persuaded by the Creditor’s argument for two reasons. 

 

First, the complaint alleged that after the debt was discharged post-sale, Debtor called Creditor to request removal of the “charged-off” notation on his account.  Creditor allegedly refused to remove the notation initially, and only did so after the Court issued an opinion involving another matter (In re Odenthal). 

 

Second, the complaint alleged that Creditor chose not to update the credit reporting because it had not sold and assigned all of its interest in the debts, and continued to receive payments either directly or indirectly on discharged debts.  More specifically, Debtor alleged that Creditor adopted a practice of refusing to update credit information with regard to debts discharged in bankruptcy because it sells those debts and profits by the sale and subsequent debt collection efforts by the purchaser.  According to Debtor, Creditor allegedly knew that if credit information is not updated, many class members will feel compelled to pay off the debt even though it is discharged in bankruptcy.  Therefore, according to Debtor, the buyers of Creditor’s debt knew and were willing to pay more for the fact that they will be able to collect portions of the debt, despite the discharge of that debt in bankruptcy.

 

Accepting the allegations as true, the Court found that the complaint stated a cause of action for breach of the discharge under Sections 727 and 524(a)(2) of the Bankruptcy Code, for intentionally assisting in the collection of discharged debt by not correcting the debtors’ credit reports.

 

In addition, the Court reached its conclusion, in part, on the fact that the credit reports list the debt as “sold,” but did not identify the purchaser.  Therefore, as for as the Debtor is concerned, the only creditor to approach to correct the credit report is the Creditor. 

 

The Court then turn to Creditor’s argument that the Bankruptcy Court lacked subject matter jurisdiction.  More specifically, the power to enforce the discharge injunction of any debtor with the exception of debtors who received a discharge in the Southern District of New York.  There are three theories upon which courts have refused to entertain nationwide debtor class actions to remedy discharge violations or have circumscribed them on a district-by-district basis. 

 

The first is premised upon the notion that the Court lacks jurisdiction over debts other than the debtor before it because under 28 U.S.C. Section 1334(b), any determination affecting the lead plaintiff’s bankruptcy estate has no relation to the claims of the other debtor class members.  See, e.g., In re Knox, 237 B.R. 687, 693-94 (Bankr. N.D. Ill. 1999).  The Court rejected this theory because jurisdiction under 28 U.S.C. Section 1334(b) extends to “all civil proceedings arising under title 11,” including 11 U.S.C. Section 524 and 727.  These provisions prohibit the collection of in personam debts that have nothing to do with the debtor’s estate or in rem jurisdiction.

 

The second is theory is based on 28 U.S.C. Section 1334(e), which states, “[o]nly the district court in which a case under title 11 is commenced or is pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate and overall claims or cause of action that involve construction of section 327 of title 11 [pertaining to retention and compensation of professionals].”  See Williams v. Sears Roebuck & Co., 244 B.R. 858, 866 (Bankr. S.D. Ga. 2000).  The Court rejected this theory because this action did not involve a debtor’s interest in property of the estate and is not related to Section 327 of the Bankruptcy Code.  Again, the Court explained that this was an action to enforce the discharge injunction prohibiting collection of in personam claims against members of the debtor class that arose pre-bankruptcy.

 

The third theory is premised on 28 U.S.C. 1334(b).  As you may recall, 28 U.S.C. 1334(a) states, “[e]xcept as provided in Subsection (b) of this section, the district courts shall have original and exclusive jurisdiction of all cases under title 11.”  That provision thus gives the district courts exclusive jurisdiction of the bankruptcy case generally, that is, the Chapter 7 case at hand.  Subsection (b) states, “except as provided in Subsection (a)(2) [which is irrelevant], 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.”  11 U.S.C. Section 1334(b).  Therefore, the Court held it has original jurisdiction to issue any order relating to the cause of action at hand arising from Sections 727, 524(a)(2) and 105(a) under title 11.

 

In reaching its conclusion that the Court has the statutory power and subject matter jurisdiction to decide this nationwide class action, the Court noted that it relied largely on the First Circuit’s analysis of 28 U.S.C. 1334 and Section 105(a) in Bessette v. Avco Financial Services, Inc., 230 F.3d 439 (1st Cir. 2000), and Judge Isgur’s opinion in In re Cano, 410 B.R. 506 (Bankr. S.D. Tex. 2009).  The issue of whether class certification was appropriate was not addressed in this opinion.

 

Accordingly, the Court denied Creditor’s Motion to Dismiss.

 

 

 

 

 

Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mwbllp.com

 

Admitted to practice law in Illinois

 

 

          McGinnis Wutscher Beiramee LLP

CALIFORNIA    |  FLORIDA   |   ILLINOIS   |   INDIANA   |   WASHINGTON, D. C.

                                www.mwbllp.com

 

 

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