Hopkins et al v. First NLC Financial Services, LLC et al

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re : Chapter 13
KELLYANN HOPKINS and :
ROBERT J. HOPKINS
Debtor : Bankruptcy No. 06-15503bif
KELLYANN HOPKINS and :
ROBERT J. HOPKINS
Plaintiff :
v. :
FIRST NLC FINANCIAL SERVICES, LLC;
LITTON LOAN SERVICING, LP, and
JP MORGAN CHASE BANK, N.A. :
Defendant : Adversary No. 07-0114
MEMORANDUM
The above-captioned adversary proceeding was filed by the debtors on
March 14, 2007, alleging one count under the Truth in Lending Act (TILA), 15 U.S.C. §§
1601, et seq.,, against defendants First NLC Financial Services, LLC and JP Morgan
Chase Bank, N.A. A second count under the Real Estate Settlement and Procedures Act
(RESPA), 12 U.S.C. §§ 2601, et seq.. was asserted against those two defendants as well
as defendant Litton Loan Servicing, LP.
Insofar as Count I is concerned, the plaintiffs allege that defendant First
NLC loaned them money on September 7, 2005, but did not provide them with certain
variable rate disclosures and booklets required by 12 C.F.R. § 226.19, which failure
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constitutes a material violation of TILA. Complaint, If 12. They also assert that First
NLC failed to provide them with accurate disclosures of "certain terms of the
transaction," including the correct "finance charge," which failure also gives rise to a
material violation of the TILA. Id^, 1f 13. These failures were purportedly "apparent on
the face of the loan documents" thereby rendering any assignee of First NLC also liable
for TILA violations. Id.. If 14. Finally, in Count I, the plaintiffs aver that they exercised
their right to rescind the loan transaction, but defendants First NLC and JP Morgan
wrongfully refused to rescind the loan. Id., If 15.
As for relief in Count I, the plaintiffs seek rescission of the September 2005
loan transaction, pursuant to 15 U.S.C. § 1635, as well as statutory damages under TILA,
plus costs and attorneys' fees.
In Count II, the plaintiffs allege that the defendants failed to adequately
respond to the plaintiffs' November 27, 2006 "qualified written request" for information
regarding the mortgage transaction, purportedly violating 12 U.S.C. § 2605(e), (f), and
allegedly rendering them liable for damages, as well as attorneys' fees and costs under
RESPA. Complaint, If 17.
On April 12, 2007, defendant First NLC filed an answer to the complaint,
plus affirmative defenses, which pleading it amended on April 17, 2007. Then on April
27, 2007, First NLC filed a motion for judgment on the pleadings. On April 12, 2007,
defendants JP Morgan and Litton jointly filed a motion to dismiss, asserting that the
plaintiffs failed to state any claims against them. These two motions from the three
defendants are presently before me.
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At oral argument held on those motions, the parties all agreed that First
NLC was the loan originator and original holder of the note and mortgage, JP Morgan is
the loan assignee from First NLC, and Litton is simply the loan servicer. Based upon that
understanding, the plaintiffs conceded that Count II should be dismissed against
defendants First NLC and JP Morgan, as their RESPA claim was applicable only to loan
servicers such as Litton.1
In addition to dismissal of Count II, First NLC contends that it is also
entitled to judgment on the pleadings as to Count I because Exhibit A to plaintiffs'
complaint, a loan document signed by them,2 identifies the loan as involving a variable
'Count I was not asserted against Litton, as, in general, TILA claims would not
yield any relief against loan servicers. See generally 15 U.S.C. § 1641(f)(l); Payton v. New
Century Mortgage Corp.. 2003 WL 22349118, at *5 (N.D. 111. 2003).
2The exhibit attached to the complaint is not signed but the defendants provided a
signed copy of this same document. Such a document, relied upon by the plaintiffs in their
complaint, may be considered for purposes of a motion to dismiss. See Prvor v. NCAA, 288
F.3d 548, 560 (3d Cir. 2002):
"[D]ocuments whose contents are alleged in the complaint and
whose authenticity no party questions, but which are not physically
attached to the pleading, may be considered. *** Documents that
the defendant attaches to the motion to dismiss are considered part
of the pleadings if they are referred to in the plaintiffs complaint
and are central to the claim; as such, they may be considered by the
court."
(quoting 62 Fed. Proc., L. Ed. § 62:508). See also Pension Benefit Guaranty Corp. v. White
Consolidated Industries. Inc.. 998 F.2d 1192, 1196-97 (3d Cir. 1993), cert, denied, 510 U.S. 1042
(1994):
We previously left open whether a court may properly consider a
concededly authentic document upon which the complaint is based
when the defendant attaches such a document to its motion to
dismiss. We now hold that a court may consider an undisputedly
authentic document that a defendant attaches as an exhibit to a
(continued...)
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interest rate, and this document has a box checked stating that "variable rate disclosures
have been provided at an earlier time." In addition, First NLC contends that the plaintiffs
failed to allege in their complaint that misdisclosure of the finance charge exceeded the
permissible tolerance amount; and this defendant asserts that the plaintiffs' rescission
election was untimely.
Defendant JP Morgan maintains that Count I should be dismissed for failure
to state a claim for the reasons articulated by First NLC, and because the loan documents
attached by the plaintiffs to their complaint reveal no error on the face of the documents
in the computation of the finance charge. In addition, to the extent that the plaintiffs
alleged that certain charges were excessive and/or should have been included in the
finance charge, JP Morgan argues that the complaint fails to state a cause of action by
failing to identify which charges were improperly excluded.
2(...continued)
motion to dismiss if the plaintiffs claims are based on the
document. Otherwise, a plaintiff with a legally deficient claim
could survive a motion to dismiss simply by failing to attach a
dispositive document on which it relied. Our decision will not
undermine the rationale underlying Rule 12(b)(6)'s requirement
that a motion to dismiss be converted to a summary judgment
motion if a court considers matters outside the pleadings. The
reason that a court must convert a motion to dismiss to a summary
judgment motion if it considers extraneous evidence submitted by
the defense is to afford the plaintiff an opportunity to respond.
When a complaint relies on a document, however, the plaintiff
obviously is on notice of the contents of the document, and the
need for a chance to refute evidence is greatly diminished.
(citations omitted); accord In re Rockefeller Center Properties. Inc. Securitites Litigation. 184
F.3d 280, 287 (3d Cir. 1999); In re Beck. 272 B.R. 112,114 n. 1 (Bankr. E.D. Pa. 2002).
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Finally, defendant Litton argues that dismissal of Count II is mandated
because its response to the plaintiffs' qualified written request was statutorily sufficient
under RESPA.
I.
The defendants' various contentions seeking dismissal of plaintiffs' two
causes of action should be evaluated against the following background.
A.
The defendants have proceeded under two different provisions of Federal
Rule of Civil Procedure 12 (incorporated into bankruptcy adversary proceedings by Fed.
R, Bankr. P. 7012(b)), although the application of these provisions is similar. Subsection
(c) of Rule 12 provides:
After the pleadings are closed but within such time as not to
delay the trial, any party may move for judgment on the
pleadings. If, on a motion for judgment on the pleadings,
matters outside the pleadings are presented to and not
excluded by the court, the motion shall be treated as one for
summary judgment and disposed of as provided in Rule 56,
and all parties shall be given reasonable opportunity to present
all material made pertinent to such a motion by Rule 56.
As explained by the Third Circuit Court of Appeals, a trial court may not
grant a motion for judgment on the pleadings
unless the movant clearly establishes there are no material
issues of fact, and he is entitled to judgment as a matter of
law. . . . We must view the facts presented in the pleadings
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and the inferences to be drawn thetefrom in the light most
favorable to the nonmoving party.
Sikirica v. Nationwide Insurance Co.. 416 F.3d 214, 220 (3d Cir. 2005); see, e.g., Hayes
v. Community General Osteopathic Hosp.. 940 F.2d 54, 56 (3d Cir. 1991); Institute for
Scientific Information, Inc. v. Gordon & Breach, Science Publishers. Inc., 931 F.2d 1002,
1004 (3d Cir. 1991); Society Hill Civic Ass'n v. Harris. 632 F.2d 1045, 1054 (3d Cir.
1980). Thus, when a Rule 12(c) motion is raised by a defendant, the factual assertions
made in the plaintiffs amended complaint are accepted as true, as well as reasonable
inferences from those facts.
Similarly, a claim should not be dismissed for failure to state a cause of
action under Rule 12(b)(6), incorporated by Federal Rule of Bankruptcy Procedure
7012(b), unless it appears beyond doubt that the plaintiff can prove no set of facts in
support of that claim which would entitle him to relief. Conlev v. Gibson. 355 U.S. 41,
45-46 (1957). A trial court must accept as true all of the well-pleaded facts alleged in the
complaint and any reasonable inferences therefrom. See Scheuer v. Rhodes, 416 U.S.
232, 236 (1974); Gibson, 355 U.S. at 45-46.
A motion to dismiss pursuant to Rule 12(b)(6) may be granted
only if, accepting all well pleaded allegations in the complaint
as true, and viewing them in the light most favorable to
plaintiff, plaintiff is not entitled to relief. Bartholomew v.
Fischl. 782 F.2d 1148, 1152 (3d Cir. 1986). "The issue is not
whether a plaintiff will ultimately prevail but whether the
claimant is entitled to offer evidence to support the claims."
Scheuer v. Rhodes. 416 U.S. 232, 236 ... (1974).
In re Burlington Coat Factory Securities Litigation. 114 F.3d 1410, 1420 (3d Cir. 1997).
Thus, as defendant First NLC acknowledged, when a defendant files a Rule
12(c) motion, the appropriate standard for determination is identical to that used in
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deciding whether to grant a Rule 12(b)(6) motion to dismiss a complaint for failure to
state a cause of action: that is, either motion can only be granted if, after accepting as true
the plaintiffs' factual averments and reasonable inferences, the defendant is entitled to
judgment as a matter of law. See Institute For ScieiUifi^Informatjgji^Inc._y._^Q_rdQia.and
Breach, Science Publishers, Inc., 931 F.2d at 1004. (One technical difference between a
motion under Rule 12(b)(6) and one under Rule 12(c) is the timing. The former motion
must be filed before any responsive pleading, while the latter motion is filed after the
close of the pleadings. See Turbe v. Government of the Virgin Islands. 938 F.2d 427, 428
(3d Cir. 1991)). "In this fashion the courts hope to insure that the rights of the
nonmoving party are decided as fully and fairly on a rule 12(c) motion, as if there had
been a trial." Society Hill Civic Ass'n v. Harris. 632 F.2d at 1054 (quoting 5 C. Wright &
A. Miller, Federal Practice and Procedure, § 1368, at 690 (1969)).
Moreover, even if a complaint is defective in failing to sufficiently plead a
claim, leave to amend, rather than dismissal, may be appropriate. "[U]nless the facts
alleged in the complaint clearly show that the plaintiff has no legitimate claim, courts
ordinarily will allow the plaintiff leave to amend the complaint." 2 Moore's Federal
Practice. § 12.34[5] at 12-77 (3d ed. 1999). But where repleading could not correct the
defects in a party's claim, a court should not grant leave to replead. See e.g., Alston v.
Parker. 363 F.3d 229, 235 (3d Cir. 2004) ("We have held that even when a plaintiff does
not seek leave to amend, if a complaint is vulnerable to 12(b)(6) dismissal, a District
Court must permit a curative amendment, unless an amendment would be inequitable or
futile."); Peterson v. Philadelphia Stock Exchange, 717 F. Supp. 332, 337 (E.D. Pa.
1989); see generally Mosler v. M/K Ventures Int'l. Inc.. 103 F.R.D. 385 (N.D. 111. 1984);
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see also Massarskv v. General Motors Corp.. 706 F.2d 111, 125 (3d Cir. 1983), cert
denied. 464 U.S. 937 (1983); Sarfaty v. Nowak. 369 F.2d 256, 259 (7th Cir. 1966), cert,
denied. 387 U.S. 909 (1967) ("Rule 15(a) does not require a court to do a futile thing.").
B.
Congress enacted TILA "to assure a meaningful disclosure of credit terms
so that the consumer will be able to compare more readily the various credit terms
available to him and avoid the uninformed use of credit, and to protect the consumer
against inaccurate and unfair credit billing and credit card practices." 15 U.S.C. §
1601 (a); see Beach v. Ocwen Federal Bank, 523 U.S. 1408 (1998). In general, TILA is
construed in favor of borrowers. See Ramadan v. Chase Manhattan Corp.. 156 F.3d 499,
502 (3d Cir. 1998).
In order to implement TILA, the Federal Reserve Board promulgated
Regulation Z, 12 C.F.R, Part 226, and also issued Official Staff Commentary to
Regulation Z and TILA, which is "accorded the same deference" as the regulations.
Wright v. Mid-Penn Consumer Discount Company. 133 B.R. 704, 708 (E.D. Pa. 1991)
(citing Ralph J. Rohner, The Law of Truth in Lending. 2.01[2][cJ (1989)).3
3The Official Staff Commentary is found in Supplement I to Part 226,12 C.F.R.
Part 226, and is titled "Official Staff Interpretations." The Supreme Court has instructed that
official staff interpretations concerning TILA are entitled to deference unless irrational. Ford
Motor Credit Co. v. Milhollin. 444 U.S. 555, 565 n.9 (1980); see Aronson v. Peoples Natural
Gas Co.. 180 F.3d 558, 563 (3d Cir. 1999).
8
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Both TIL A and its implementing regulations require creditors to make
various disclosures, depending upon the type of loan transaction and the type of security
taken. 15 U.S.C. §§ 1631, 1635, 1638; 12 C.F.R. § 226.17. Certain of these disclosures
are deemed "material disclosures" including: the annual percentage rate, the finance
charge, the amount financed, an itemization of the amount financed, the payment
schedule, and the total number of payments. 15 U.S.C. § 1602(u); 12 C.F.R. §§ 226.23
n.48. If a lender violates the material disclosure requirements of TILA, a credit consumer
maybe entitled to rescission of the loan. 15 U.S.C. § 1635; 12 C.F.R. § 226.23(a). If the
lender fails to make all required disclosures, even non-material disclosures, the lender
may be liable for statutory damages as well as reasonable attorneys' fees. 15 U.S.C. §1640.
If a loan contains a variable rate, involves a mortgage on the borrower's
residence, and has a term longer than one year, the borrower is entitled to receive certain
additional loan disclosures, including: "The booklet titled Consumer Handbook on
Adjustable Rate Mortgages published by the Board and the Federal Home Loan Bank
Board, or a suitable substitute"; the fact that the interest rate and payment of the loan can
change; the index or formula used in making rate adjustments; a source of information
about the index or formula; an explanation of how the interest rate and payment will be
determined; and the frequency of interest rate and payment changes. 12 C.F.R. §
226.19(b).
The failure to provide certain variable rate disclosures may constitute a
material TILA violation. As one court observed recently:
In its commentary to this section of Regulation Z, the Federal
Reserve Board explains that the failure to give material
disclosures which extends the rescission period for three years
includes "failure to inform the consumer of the existence of a
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variable rate feature." 12 C.F.R. Pt. 226 Supp. I. FRB
Commentary to 12 C.F.R. § 226.23(a)(3), If 2 (Material
Disclosures). However, "[fjailure to give the other required
[variable interest rate] disclosures does not prevent the
running of the rescission period, although that failure may
result in civil liability or administrative sanctions." Id.
Oscar v. Bank One. N.A.. 2006 WL 401853, at *2 (E.D. Pa. 2006), appeal dismissed.
2007 WL 843846 (3d Cir. 2007); Pulphus v. Sullivan 2003 WL 1964333, at *14 (N.D.
111. 2003):
The plain meaning of the Board's commentary on 12 C.F.R. §
226.23(a)(3) is that only one variable rate disclosure
violation-a lender's failure to disclose the existence of a
variable rate feature-tolls the rescission period. A lender's
failure to provide any of the other variable rate disclosures
required by 12 C.F.R. §§ 226.18(f) and 226.19(b) may subject
it to other sanctions, but it will not extend the rescission
period granted to the consumer. According to the Supreme
Court, "deference [to the Board] is especially appropriate in
the process of interpreting the Truth in Lending Act and
Regulation Z. Unless demonstrably irrational, [the Board's]
staff opinions construing the Act or Regulation should be
dispositive." Ford Motor Credit Co. v. Milhollin. 444 U.S.
555, 565 (1980). There is nothing irrational about the Board's
desire to extend the period to rescind a loan, a rather
Draconian remedy, only for those consumers who were
completely unaware that their loan had a variable rate.
Accordingly, we will adhere to the plain language of its
interpretation and hold that the only variable rate disclosure
that is material within the meaning of 12 C.F.R. §
226.223(a)(3) is the disclosure that a loan has a variable
interest rate feature.
See also Andrews v. Chevy Chase Bank. FSB. 240 F.R.D. 612, 621 (E.D. Wis. 2007).
If a lender fails to provide all material disclosures, the borrower has up to
three years from the date of the loan transaction to exercise her right of rescission. 12
C.F.R. § 226.23(a)f31: see In re Community Bank of Northern Virginia. 418 F.3d 277,
10
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305 (3d Cir. 2005). Moreover, Regulation Z describes the effects of a borrower's valid
exercise of a right of rescission, which procedures are subject to some court discretion:
(d) Effects of rescission.
(1) When a consumer rescinds a transaction, the security
interest giving rise to the right of rescission becomes void and
the consumer shall not be liable for any amount, including any
finance charge.
(2) Within 20 calendar days after receipt of a notice of
rescission, the creditor shall return any money or property that
has been given to anyone in connection with the transaction
and shall take any action necessary to reflect the termination
of the security interest.
(3) If the creditor has delivered any money or property, the
consumer may retain possession until the creditor has met its
obligation under paragraph (d)(2) of this section. When the
creditor has complied with that paragraph, the consumer shall
tender the money or property to the creditor or, where the
latter would be impracticable or inequitable, tender its
reasonable value. At the consumer's option, tender of
property may be made at the location of the property or at the
consumer's residence. Tender of money must be made at the
creditor's designated place of business. If the creditor does
not take possession of the money or property within 20
calendar days after the consumer's tender, the consumer may
keep it without further obligation.
(4) The procedures outlined in paragraphs (d)(2) and (3) of
this section may be modified by court order.
12 C.F.R. § 226.23(d).
Concerning loan assignees, TILA provides that, with certain exceptions,
any action that
may be brought against a creditor may be maintained against
any assignee of such creditor only if the violation for which
such action or proceeding is brought is apparent on the face of
the disclosure statement.... For the purpose of this section,
a violation apparent on the face of the disclosure statement
includes, but is not limited to (1) a disclosure which can be
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1
determined to be incomplete or inaccurate from the face of the
disclosure statement or other documents assigned, or (2) a
disclosure which does not use the terms required to be used by
this subchapter.
15 U.S.C. § 1641 (a). Therefore, if the variable rate feature of a loan was not disclosed to
the plaintiffs, and this nondisclosure was apparent from the face of the loan documents,
then JP Morgan could also be liable under TILA. Similarly, if there were other TILA
violations on the face of the loan documents, the assignee/defendant could be held
responsible.
As noted earlier, the plaintiffs in this proceeding allege that the finance
charge was improperly disclosed. In general, a loan finance charge is defined as:
the cost of consumer credit as a dollar amount. It includes
any charge payable directly or indirectly by the consumer and
imposed directly or indirectly by the creditor as an incident to
or a condition of the extension of credit. It does not include
any charge of a type payable in a comparable cash transaction.
12 C.F.R. § 226.4(a). The finance charge thus includes interest payments, points and
certain loan fees. IcL at § 226.4(b). Some charges and fees paid by a borrower may be
included in the finance charge, unless otherwise excluded by section 226.4(c)-(f), if the
creditor:
(i) requires the use of a third party as a condition of or an
incident to the extension of credit, even if the consumer can
choose the third party; or
(ii) retains a portion of the third-party charge, to the extent of
the portion retained.
12 C.F.R. § 226.4(a)(l).
Section 1605(e) provides for the exclusion of certain charges from the
finance charge:
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Items exempted from computations of finance charge in
extensions of credit secured by an interest in real property.
The following items, when charged in connection with any
extension of credit secured by an interest in real property,
shall not be included in the computation of the finance charge
with respect to that transaction:
(1) Fees or premiums for title examination, title insurance, or
similar purposes.
(2) Fees for preparation of loan-related documents.
(3) Escrows for future payments of taxes and insurance.
(4) Fees for notarizing deeds and other documents.
(5) Appraisal fees, including fees related to any pest
infestation or flood hazard inspections conducted prior to
closing.
(6) Credit reports.
15 U.S.C. § 1605(e). "Regulation Z clarifies that those costs are excluded from the
finance charge calculation if assessed in residential mortgage transactions or transactions
secured by real property, as long as they are 'bona fide and reasonable in amount. 12
C.F.R. § 226.4(c)(7) (1996).'" Stutman v. Chemical Bank. 1996 WL 539845, at *3
(S.D.N.Y. 1996): see Household Credit Services. Inc. v. Pfennig, 124 S. Ct. 1741, 1743
(2004) (where Congress left a gap for an agency to fill, "the agency's regulation is 'given
controlling weight unless [it is] arbitrary, capricious, or manifestly contrary to the
statute.'") (quoting Chevron U.S.A. Ing v. Natural Resources Defense Council. Inc.. 467
U.S. 837, 842(1984)).
The term "reasonable" has been defined as whether "the disputed charges
are comparable to the prevailing rates of the industry in the locality at the time of the
transaction." In re Crisomia. 2002 WL 31202722, at *7 (Bankr. E.D. Pa. 2002) (citing
Brannam v. Huntington Mortgage Co.. 287 F.3d601,606 (6th CJr.). cert, denied, 123 S.
Ct. 123 (2002). quoting Grigsbv v. Thorp Consumer Discount Co. (In re Grigsby). 119
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B.R. 479, 487 (Bankr. E.D. Pa. 1990), vacated on other grounds. 127 B.R. 759 (E.D. Pa.
1991). "Thus, if the creditor picks an 'expensive' third party and is receiving a rebate,
there is some risk a hidden finance charge may be determined to exist." In re Grigsby,
119 B.R. at 488, quoting R. Rohner, The Law of Truth in Lending, If 3.03[2][a], at 3-30 to
3-31 (1984).
TILA grants to lenders a variance for accuracy in disclosing the finance
charge, so not every error results in liability:
(f) Tolerances for accuracy
In connection with credit transactions not under an open end
credit plan that are secured by real property or a dwelling, the
disclosure of the finance charge and other disclosures affected
by any finance charge-
(1) shall be treated as being accurate for purposes of this
subchapter if the amount disclosed as the finance charge-
(A) does not vary from the actual finance charge by more than
$100; or
(B) is greater than the amount required to be disclosed under
this subchapter; and
(2) shall be treated as being accurate for purposes of section
1635 of this title [rescission] if-
(A) except as provided in subparagraph (B), the amount
disclosed as the finance charge does not vary from the actual
finance charge by more than an amount equal to one-half of
one percent of the total amount of credit extended[.]
15 U.S.C. § 1605(f); see also 12 C.F.R. § 226.23(g).
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c.
The Real Estate Settlement Procedures Act ("RESPA") imposes a duty
upon loan servicers to respond to certain borrower inquiries. See Griffin y. Citifinancial
Mortg. Co.. Inc.. 2006 WL 266106, at *2 (M.D. Pa. 2006). The Act provides for
individual causes of action and "allows for actual damages, as well as statutory damages
upon a showing of a pattern or practice of noncompliance with the duty to respond to
borrower inquiries," Cortez v. Keystone Bank. Inc., 2000 WL 536666, at *10 (E.D. Pa.
2000); see also 12 U.S.C. § 2605(f).
A loan "servicer" is defined as "the person responsible for servicing of a
loan." 12 U.S.C. § 2605(i)(2). RESPA defines "servicing" of a loan as "receiving any
scheduled periodic payments from a borrower pursuant to the terms of any loan ... and
making the payments of principal and interest and such other payments with respect to the
amounts received from the borrower as may be required pursuant to the terms of the
loan." 12 U.S.C. § 2605(i)(3).
Under RESPA, the borrower, or his agent, can initiate communication with
the servicer by providing it with a qualified written request for loan information. See 12
U.S.C. § 2605(e)(l)(B). A qualified written request is defined as
a written correspondence, other than notice on a payment
coupon or other payment medium supplied by the servicer,
that-
(i) includes, or otherwise enables the servicer to identify, the
name and account of the borrower; and
(ii) includes a statement of the reasons for the belief of the
borrower, to the extent applicable, that the account is in error
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or provides sufficient detail to the servicer regarding other
information sought by the borrower.
12 U.S.C, § 2605(e)(l)(B)(i)-(ii). The statute imposes a duty upon the loan servicer to
acknowledge receipt of the borrower's request within 20 days of receipt thereof. See 12
U.S.C. § 2605(e)(l)(A).
RESPA also requires loan servicing companies to: "take appropriate action
with respect to the inquiry either by making corrections or providing a written explanation
or clarification; and ... protect the borrower's credit rating by not reporting to credit
bureaus the overdue payments relating to the request for 60 days after receiving the
request." Hutchinson v. Delaware Sav. Bank FSB, 410 F. Supp. 2d 374, 382 (D.N.J.
2006); see also 12 U.S.C. § 2605(e)(2)(A)-(C).
D.
In applying these legal principles to the defendants' instant motions, one
must also consider general federal pleading requirements.
Federal Rule of Civil Procedure 8(a)(2), incorporated by Fed. R. Bank. P.
7008, provides for "notice pleading," that is, that "a pleading which sets forth a claim for
relief.. . shall contain ... a short and plain statement of the claim showing that the
pleader is entitled to relief. ..." This standard relieves a plaintiff from setting out in
detail all facts upon which he bases his claim. Williams v. United Credit Plan of
Chalmette. Inc.. 526 F.2d 713, 714 (5th Cir. 1976). As noted by the Third Circuit:
To meet Rule 8(a)'s liberal pleading requirements, a
complaint need only contain a "short and plain statement of
the claim" that "give[s] the defendant fair notice of what the
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plaintiffs claim is and the grounds upon which it rests."
Fed.R.Civ.P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 47
(1957).
Still v. Regulus Group LLC.. 123 Fed. Appx. 56, 58 (3d Cir. 2005) (non-precedential)
(parallel citation omitted).
Although more than "bare assertions of legal conclusions is ordinarily
required to satisfy federal notice pleading requirements^]" Advocacy Org. for Patients
and Providers v. Auto Club Ins. Ass'n. 176 F.3d 315, 319 (6th Cir. 1999), "the alleged
facts need not be spelled out with exactitude, nor must recovery appear imminent."
Quality Foods de Centre America v. Latin American Agribusiness Pev. Corp.. 711 F.2d
989, 995 (llth Cir. 1983). "For fair notice to be given, 'a complaint must at least include
the operative facts upon which a plaintiff bases his claim.'" Cunningham v. Equicredit
Corp. of Illinois. 256 F. Supp. 2d 785, 792 (N.D. 111. 2003) (quoting Lucien v. Preiner,
967 F.2d 1166, 1168 (7th Cir. 1992) (internal quotation omitted)). "The issue the court
reviews is whether 'sufficient facts have been pleaded to allow the district court to
understand the gravamen of the plaintiffs complaint.'" Cunningham. 256 F. Supp. at 792
(quoting Doherty v. City of Chicago. 75 F.3d 318, 326 (7th Cir. 1996)).
Therefore a complaint should not be dismissed because a plaintiff has not
pled all facts upon which his claim is based. Williams v. United Credit Plan of
Chalmette. Inc.. 526 F.2d 713, 714 (5th Cir. 1976). Discovery rules are intended to reveal
the details of a plaintiff s claim. See In re Bvrd. 51 B.R. 649, 652 (Bankr. S.D. Ohio
1985) ("The availability of the several varieties of discovery common in federal practice,
as well as the availability of pre-trial conference procedures, all may be resorted to by
defendant in order to satisfy his desire for particularity."). Moreover, "[pjretrial
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procedures such as summary judgment (Fed. R. Civ. P. 56) and the motion for a more
definite statement (Fed. R. Civ. P. 12(e)) are the appropriate devices to narrow the issues
and disclose the boundaries of the claim and defense." Id.
In applying the liberal notice pleading standard of Rule 8, courts have
generally required that plaintiff/borrowers provide enough information regarding the
defendant's alleged violation of a consumer protection statute so that the defendant is on
notice of the violation, but need not detail the specific violation. For example, one court
observed:
In her complaint, Plaintiff states that she was "entitled to a
disclosure of the annual percentage rate and finance charges,"
Compl. If 14, and that "the disclosures provided to the
plaintiffs [sic] were inaccurate," Compl. f 15. It does not
matter that Plaintiff has not specified the specific statute or
regulations that entitle her to relief.. .. The allegation that
the disclosure that she received was inaccurate is sufficient to
state a claim upon which relief could be granted.
Staley v. Americorp Credit Corp.. 164 F. Supp. 2d 578, 582-83 (D. Md. 2001). In another
reported TILA decision, a court found the plaintiffs cursory allegations
sufficient under Rule 8(a). The challenged pleading was described as follows:
The Complaint alleges:
11. (b) The plaintiffs gave cancellation of the transactions on
November 27, 2001. The notice directed all further
communications to Plaintiff's counsel.
(c) This notice was received by the defendants.
(Compl.l 1 l(b), (c).) Count IX-A alleges "The Defendant
took no appropriate action in response to the Plaintiffs' timely
cancellation, in violation of 15 U.S.C. § 1635 and Regulation
Z, 12 C.F.R. § 226.23." These short and plain statements are
sufficient to meet the requirements of Rules 8(a) and (e) and
put the Defendants on notice as to the nature of the claim.
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Brown v. Mortgaeestar. Inc.. 194 F. Supp. 2d 473, 477 (S.D. W.Va. 2002). And another
court refused to compel a borrower to plead in more detail with the following analysis:
As to Paragraph 7a, CHC contends that the plaintiff should be
required to set forth the manner in which a security interest is
alleged to have been created or to be acquired by the
defendant as well as the nature and circumstances of the
disclosure deficiency in its contract. As to Paragraph 7b,
CHC believes that the plaintiff should be required to allege
which of the disclosures required by the cited regulation
failed to meet the location requirement of the regulation.
We do not believe that CHC's motion is well founded. The
plaintiff is not required to set out in detail the facts upon
which he bases his claims, Conley v. Gibson, supra. The
details are available to this defendant through the utilization
of the pretrial discovery techniques authorized in Rules 26-37,
inclusive of the Federal Rules of Civil Procedure. The
plaintiff's complaint meets the minimum requirements of
notice pleading of Rule 8(a)(2), Fed. R. Civ. P., and thus
necessitates the rejection of defendant's motion. It is clear
that Rule 12(e) 'is designed to strike at unintelligibility rather
than want of detail. If the pleading meets the requirement of
Rule 8 and fairly notifies the opposing party of the nature of
the claim, a motion for a more definite statement will not be
granted.' 2A Moore's Federal Practice If 12.18 Although
plaintiff conceivably could have drafted his complaint in
greater detail, his failure to do so is not inconsistent with the
spirit of the modern rules of procedure that are designed to
reduce complexity in pleading yet increase the pretrial
knowledge of the litigants concerning the positions of their
opponents through liberal pretrial discovery. The plaintiff has
clearly put CHC on notice of the nature of his claims.
Accordingly, CHC's motion for a more definite statement is
denied.
Garza v. Chicago Health Clubs, Inc., 329 F. Supp. 936, 942 (D.C. 111. 1971).4
'Compare Marks v. Chicoine. 2007 WL 160992, at *7 (N.D. Cal. 2007):
Plaintiffs fifth cause of action, entitled "violation of the truth in
lending act," lists a variety of statutes and regulations which were
allegedly violated, including several sections of the Federal Trade
(continued...)
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II.
I now turn to the specifics of defendants' motions to dismiss and for
judgment on the pleadings.
The plaintiffs do not dispute that they signed various documents including a
form entitled "Truth-In-Lending Disclosure for Real Estate Mortgage Loans (Variable
Rate Option)." See Exhibit A to Plaintiffs' Complaint. However, by virtue of 15 U.S.C.
§ 1635(c), "written acknowledgment of receipt of any disclosures required under this
subchapter by a person to whom information, forms, and a statement is required to be
given pursuant to this section does no more than create a rebuttable presumption of
delivery thereof." Therefore, plaintiffs are afforded the opportunity to rebut the
presumption of delivery of disclosures, see generally In re Williams, 232 B.R. 629, 640
4(...continued)
Commission Act, the Truth in Lending Act (TILA), the Home
Ownership and Equity Protection Act, and TILA implementing
Regulation Z. The FAC does not allege how defendants violated
the various statutes and regulations mentioned, and thus does not
"give the defendant fair notice of what the plaintiffs claim is and
the grounds upon which it rests." Copley v. Gibson. 355 U.S. 41,
47, 78 S. Ct. 99, 103,2 L. Ed. 2d 80 (1957). The Court therefore
DISMISSES plaintiffs fourth cause of action, with leave to
amend. Should she choose to amend this cause of action, plaintiff
should be sure to comply with Rule 8(e) of the Federal Rules of
Civil Procedure, which requires that "each averment of a pleading
shall be simple, concise, and direct." In practical terms, the
requirements of Rule 8 ensure that a defendant will be able to
respond to the allegations against her. Edwards v. N, AJIL
Rockwell Corp., 291 F. Supp. 199, 211 (C.D. Cal.1968) ("Rule
8(a)(2) envisions the presentation of factual allegations of
sufficient clarity and certainty to enable defendants to determine
the basis of plaintiff s claim and to formulate a responsive
pleading.").
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(Bankr. E.D. Pa. 1999), and their allegation of non-receipt of required documents cannot
be dismissed via a motion to dismiss. Cf. The Winer Family Trust v. Queen, 2004 WL
2203709, at *3 n.3 (E.D. Pa. 2004) (giving the plaintiff the benefit of a rebuttable
presumption of reliance in connection with defendant's Rule 12(b)(6) motion).5
Accordingly, dismissal of Count I as to defendants First NLC and JP Morgan, alleging
nondisclosure of the variable rate, is not appropriate at this time,
JP Morgan also argues that the plaintiffs' allegation regarding misdisclosure
of the finance charge does not specify how the finance charge was inaccurate, while First
NLC contends that the plaintiffs' allegation on this point is deficient in that it does not
allege that the inaccuracy in the finance charge exceeded certain TILA tolerances for
disclosure. The challenged averment made by the plaintiffs is found in Count I:
[T]he Plaintiffs were charged very high fees for a great many
alleged purposes. Most of the charges on the Settlement
Statement should have been disclosed as part of the "Finance
Charge" in this transaction, but it appears that they were not.
For example, First NLC charged an exorbitant prepaid finance
5I appreciate that Complaint Exhibit A, the TILA disclosure statement, does refer
at the top to the "variable rate option"; moreover, the plaintiffs admit in paragraph 5 of their
complaint that they received this disclosure statement. First NLC maintains that this admission
alone proves that the plaintiffs received the material disclosure that they were signing a variable
rate loan agreement and thus their claim for rescission is precluded on this point. It may.
However, given my inability at this time to to address plaintiffs' other basis for rescission, I
cannot strike the rescission demand from Count I pursuant to Rule 12(f) (incorporated by Fed. R.
Bankr. P. 7012).
I also do not now decide the quantum of evidence needed by the plaintiffs to rebut
the presumption that they received various disclosures. Compare Oscar v. Bank One, N.A., 2006
WL 401853, at *3 (E.D. Pa. 2006) ("Plaintiffs' execution of the Federal Truth In Lending
Disclosure Statement creates a presumption that those disclosures were, in fact received and
Alvin Oscar's statement to the contrary is not, by itself, sufficient to rebut that presumption.")
with In re Bell. 309 B.R. 139,156 (Bankr. E.D. Pa. 2004) ("Because I find that the Debtor
testified credibly that she was not given copies of the loan documents, including the Notice of
Right to Cancel, at closing, she has rebutted the presumption of delivery on the Notice of Right
to Cancel.").
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charge of $8,942.50, and an entity named Express Financial
Services added charges of $320.00 of its own. When these
and all other charges are analyzed, it is clear that charges
properly characterized as part of the Finance Charge in this
transaction have only been partially disclosed as such, if at all,
which renders the disclosure of the Finance Charge and
Annual Percentage Rate of the Finance Charge on the
[Disclosure Statement] erroneous, which are material
violations of the TILA.
Complaint, If 6.
Count I cannot be dismissed on this issue, given the low pleading standard
of Rule 8(a), as it sufficiently put the defendants on notice of the claim against them. It is
not necessary for a plaintiff to allege in the complaint that a defendant exceeded the
applicable tolerance. Inge v. Rock Financial Corp.. 281 F.3d 613, 621 (6th Cir. 2002)
("Our examination of § 1605(f) leads us to conclude that it does not impose an
independent pleading hurdle for TILA plaintiffs."). That issue can be raised by the
defendants at a later time.6
Furthermore, for purposes of the instant motion, there is insufficient
information to enable the court to determine whether the finance charge was correctly
calculated. The plaintiffs allege that it was not. Although the complaint attaches the
settlement sheet, Ex. B, which reveals the fees and charges paid by the plaintiffs at the
6The decisions First NLC cites in its reply memorandum, such as Guise v. BWM
Mortgage LLC. 377 F.3d 795 (7th Cir. 2004) and Sterten v. Option One Mortgage Corp.. 479 F.
Supp. 2d 479 (E.D. Pa. 2007), do not hold that a TILA complaint must be dismissed if the
borrower has not alleged that the misdisclosures exceed the statutory tolerance levels. Instead,
decisions such as Guise hold that if the pleadings reveal the tolerance limits, and if the pleadings
also make it clear that the plaintiff will be unable to prove at trial that the tolerance levels were
exceeded, then the TILA claim may be dismissed prior to trial. Sterten holds that if, after trial, it
is demonstrated that the tolerance level was not exceeded, the lender does not waive that
tolerance protection even if the lender has not pled it as affirmative defense. The court in Sterten
did not place any pleading obligation upon the plaintiff/borrower.
t
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loan closing, there is no basis at present to evaluate the reasonableness of any such fees
and charges. Accordingly, the defendants' request to dismiss plaintiffs' complaint for
failure to state a claim as it pertains to inaccurate finance charge disclosures must be
denied.
The parties agree that Litton Loan Servicing is the entity responsible for
servicing the plaintiff/debtors' mortgage loan. Moreover, the letter attached to plaintiffs'
complaint as Exhibit D may constitute a qualified written request for loan information
under RESPA, as it is a written correspondence from the borrowers' agent that provided
the loan servicer with the borrowers' names and account information, and included
sufficient detail about the loan information the borrowers were requesting. See id.
I cannot decide for purposes of the instant motion to dismiss, however,
whether Litton's December 14, 2006 reply, Exhibit E, complies with section 2605(e)(2)
of RESPA. Plaintiffs' request posed nine specific inquiries to Litton. See Exhibit D. In
its response, Litton answered four of those inquiries by referring to attachments to its
December 14th letter. See Exhibit E. The complaint did not include copies of those
attachments. Therefore, from a review of the complaint itself, it is not possible to
determine whether Litton fully responded to plaintiffs' qualified written request for loan
information in compliance with section 2605 of RESPA.
Accordingly, defendant Litton's motion to dismiss Count II of plaintiffs'
complaint for failure to state a cause of action must be denied at this juncture.
If the plaintiffs are correct that First NLC failed to inform them of the
variable rate component to their loan and provide them with the requisite disclosures, or
failed to accurately disclose the finance charge, then First NLC may have violated TILA's
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requirement to provide material disclosures, thereby extending the plaintiffs right to
rescind the loan transaction from three days to three years. See 15 U.S.C. § 1635(f); 12
C.F.R. § 226.23(a)(3). Because the loan transaction was consummated on or about
September 7, 2005, and the plaintiffs exercised their right to rescind the loan by way of
correspondence dated November 27, 2006, Ex. D, the rescission election, if valid, would
have been timely made.
If the plaintiffs properly rescinded the loan, then they may be entitled to
relief not only from JP Morgan—the current note and mortgage holder—but even from
First NLC, the assignor. If First NLC received any payments from the plaintiffs prior to
assigning the note, it may have to disgorge those payments as part of rescission. See
Miranda v. Universal Financial Group. Inc., 459 F. Supp. 2d 760, 765 (N.D. 111. 2006).
Since the record does not reveal whether First NLC received payments from the plaintiffs
prior to assignment of the loan to defendant JP Morgan, that component of Count I cannot
be adjudicated in First NLC's favor at this time. Id., at 765 ("The Court finds that there is
a question of fact as to whether the Assignee Defendants received and have retained any
such payments. If this factual question is construed in Miranda's favor she might be
entitled to relief from the Assignee Defendants, precluding dismissal.").
The plaintiffs also allege that the defendants failed to honor their request to
rescind the loan. The "failure to honor a valid rescission demand is itself a TILA
violation giving rise to statutory damages." See 15 U.S.C. § 1640(a)(3); In re Armstrong,
288 B.R. 404, 419 (Bankr. E.D. Pa. 2003). Under TILA, a borrower "who is entitled to
rescission of a loan, may also recover a statutory damage award for the creditor's failure
to rescind voluntarily." Armstrong. 288 B.R. at 419. Accordingly, the plaintiffs have
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asserted a claim for rescission and for damages against First NLC and JP Morgan that,
conceivably, may entitle them to recovery.7
In sum, accepting as true all of the plaintiffs' allegations, giving them the
benefit of all reasonable inferences, and applying the liberal notice pleading standard, I
cannot conclude that they fail to state causes of actions in Counts I and II (except that, as
orally agreed, Count II is limited to defendant Litton). Therefore, defendants' motions
shall be denied.
An appropriate order shall be entered.
7First NLC and JP Morgan are correct, however, that they cannot be held liable
under Count I for statutory damages under section 1640 stemming from erroneous disclosures
allegedly made in September 2005 when the loan closed, since this proceeding commenced
beyond the one-year limitations period.
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UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
In re
KELLYANN HOPKINS and
ROBERT J. HOPKINS
Debtor
KELLYANN HOPKINS and :
ROBERT J. HOPKINS
Plaintiff :
v. :
FIRST NLC FINANCIAL SERVICES, LLC;
LITTON LOAN SERVICING, LP, and
JP MORGAN CHASE BANK, N.A. :
Defendant :
Chapter 13
Bankruptcy No. 06-15503bif
Adversary No. 07-0114
ORDER
AND NOW, this 22nd day of June 2007, for the reasons stated in the
accompanying memorandum, it is hereby ordered that the defendants' motions for
judgment on the pleadings and to dismiss for failure to state a claim are denied, except
Count II is dismissed as to defendants JP Morgan Chase Bank, N.A., and First NLC
Financial Services, LLC.
BRUCE FOX
United States Bankruptcy Judge
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Copies to:
David A. Scholl, Esquire
Regional Bankruptcy Center of SE PA
6 St Albans Avenue
Newtown Square, PA 19073
Sandhya M. Feltes, Esquire
Kaplin Stewart Meloff Reiter & Stein, P.C.
Union Meeting Corporate Center
910 Harvest Drive
Blue Bell, PA 19422
Jonathan J. Bart, Esquire
Wilentz Goldman & Spitzer P.A.
Two Penn Center Plaza, Suite 910
Philadelphia, PA 19102
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