Malin et al v. JP Morgan et al (TV2)
Filing
11
MEMORANDUM OPINION AND ORDER; Chase's motion to dismiss 3 is GRANTED in part, to the extent that plaintiffs' second, third, and fourth causes of action are DISMISSED, and DENIED in part, to the extent that plaintiffs' first and fifth causes of action will be permitted to go forward. Signed by District Judge Thomas A Varlan on 3/12/12. (ADA) Modified note on 3/12/2012; c/m pro se filers (ADA).
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF TENNESSEE
AT KNOXVILLE
HOLLIS H. MALIN, JR. and
LINDA D. MALIN,
Plaintiffs,
v.
JPMORGAN; JP MORGAN CHASE;
JPMORGAN CHASE BANK;
)
)
)
)
)
)
)
)
)
No.:
3:11-CV-554
(VARLAN/SHIRLEY)
JPMORGAN CHASE, NATIONAL ASSOCIATION; )
and CHASE HOME FINANCE, LLC,
Defendants.
)
)
)
MEMORANDUM OPINION AND ORDER
This civil action is before the Court on the Motion to Dismiss [Doc. 3], submitted by
defendant JPMorgan Chase Bank, N.A., for itself and as successor by merger to Chase Home
Finance, LLC (referred to hereinafter as “Chase” or “defendants”).1 In the motion, Chase
requests that all claims of plaintiffs, Hollis and Linda Malin, proceeding pro se, be dismissed
pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. Plaintiffs have submitted
a response in opposition [Doc. 7], and Chase has submitted a reply [Doc. 10].
For the reasons set forth herein, the motion to dismiss will be GRANTED in part and
DENIED in part.
1
Chase was incorrectly named in the complaint as “JPMorgan, JPMorgan Chase, and
JPMorgan Chase Bank,” and is proceeding with its motion to dismiss as JPMorgan Chase Bank,
N.A., for itself and as successor by merger to Chase Home Finance, LLC [Doc. 4, p. 1].
I.
Relevant Facts and Background2
On October 23, 2003, plaintiffs entered into a contract with Washington Mutual Bank
(“WAMU”) in which WAMU loaned plaintiffs $525,000.00 to purchase real property
consisting of a house and a lot located at 809 Dry Gap Pike, Knoxville, Tennessee (the
“Property”) [Doc. 1-1, ¶ 5]. In connection with this loan, plaintiffs granted WAMU a note
and a deed of trust [Id.]. According to the complaint, “WAMU was insured by the Federal
Deposit Insurance Corporation (the “FDIC”), which closed WAMU in September 2008 and
transferred its assets to one or more of the Defendants.” [Id., ¶ 4]. Plaintiffs allege that upon
information and belief, prior to the closure of WAMU by the FDIC, plaintiffs’ loan was
assigned to and is currently held by WAMU Mortgage Pass-Through Certificate 2003-AR3
Trust [Id., ¶ 9].
On February 23, 2011, prior to filing the instant case, plaintiffs filed petitions (the
“petitions”) under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court
for the Eastern District of Tennessee (the “Bankruptcy Court”) [Docs. 3-2, 3-3]. In the
petitions, plaintiffs listed Chase as a creditor holding a secured claim or “First Mortgage”
over the Property and that 2003 was the year the claim was incurred [Doc. 3-2, pp. 9, 16, 25;
Doc. 3-3, pp. 6, 14]. Chase filed motions for relief from the automatic stay and abandonment
in both bankruptcy cases, submitting that Chase “holds a security interest in [the Property]
2
The Court takes the factual allegations in a complaint as true for purposes of a motion to
dismiss pursuant to Rule 12(b)(6). See Erickson v. Pardus, 551 U.S. 89, 94 (2007) (noting that,
“when ruling on a defendant’s motion to dismiss, a judge must accept as true all the factual
allegations contained in the complaint”) (citations omitted); see also Zaluski v. United Am.
Healthcare Corp., 527 F.3d 564, 570 (6th Cir. 2008).
2
. . . by virtue of a Deed of Trust[.]” [Doc. 3-4]. In the motions, Chase asserted that the
automatic stay should be terminated for cause due to lack of adequate protection of its
security interest, because there was little or no equity in the Property, and because the
Property was burdensome and of inconsequential value to the bankruptcy estate [Id.].
On April 28, 2011, the Bankruptcy Court granted Chase’s motions for relief from the
automatic stay, noting that Chase had asserted a valid, properly perfected deed of trust in the
Property, and finding that sufficient grounds existed for termination of the automatic stay for
cause [Doc. 3-5]. Chase submits that following the lifting of the automatic stay in regard to
the Property, plaintiffs were discharged from their respective bankruptcy proceedings [Doc.
4, p. 4].
On October 17, 2011, plaintiffs filed this action in the Chancery Court of Knox
County, Tennessee, alleging five causes of action: (1) mistaken and erroneous representations
as to standing to foreclose; (2) predatory lending practices; (3) a violation of the Fair Debt
Collection Practices Act (the “FDCPA”), including a claim under the Real Estate Settlement
Practices Act (“RESPA”); (4) unfair business practices; (5) and to quiet title [Doc. 1-1]. In
their complaint, plaintiffs allege that Chase is not the holder and is not in possession of the
note secured by the Property, that Chase has pursued non-judicial foreclosure “without right
under law,” and that Chase has misrepresented that it has the right to payment and to conduct
a non-judicial foreclosure sale in place of WAMU [Id., ¶¶ 6, 7].
Chase removed the state-court action to this Court [see Doc. 1], and filed the motion
to dismiss [Doc. 3], seeking dismissal of plaintiffs’ claims on two grounds. First, because
3
plaintiffs’ causes of action related to the allegation that Chase lacks the authority to foreclose
on the Property are barred by res judicata and/or collateral estoppel given the Bankruptcy
Court’s orders lifting the automatic stay. Second, because the purchase and assumption
agreement (the “PAA”) entered into on September 25, 2008 between Chase and the FDIC,
as receiver of WAMU, provides that Chase is not responsible for claims brought by
borrowers related to any action and/or inaction of WAMU. Plaintiffs’ claims, Chase asserts,
with the exception of their first and fifth causes of action, stem entirely from the origination
of the loan and/or their interactions with WAMU prior to September 25, 2008.
In response [Doc. 9], plaintiffs contend that given their allegation that Chase is not a
holder of the promissory note secured by the Property, their claims do not involve WAMU
and Chase cannot escape liability under the PAA. Relying on Grella v. Salem Five Cent Sav.
Bank, 42 F.3d 26 (4th Cir. 1994), plaintiffs also assert that res judicata and/or collateral
estoppel do not preclude them from disputing whether Chase is a holder or is in possession
of the promissory note secured by the Property.
In reply, Chase reiterates its argument that based on the terms of the PAA, it is not
liable for any alleged actions or inaction of WAMU prior to September 25, 2008. Chase also
argues that Grella is distinguishable from the instant case. Finally, Chase raises the
argument that plaintiffs’ claims are barred by the doctrine of judicial estoppel.
While Chase raised, in its motion to dismiss, the issue of the preclusive effects of res
judicata and collateral estoppel on plaintiffs’ claims, Chase did not raise the judicial estoppel
argument until its reply brief. It is well-settled that a movant cannot raise new issues for the
4
first time in a reply brief because consideration of such issues “deprives the non-moving
party of its opportunity to address the new arguments.” Cooper v. Shelby Cnty., No. 07-2283STA-cgc, 2010 WL 3211677, at *3 n.14 (W.D. Tenn. Aug. 10, 2010) (collecting Sixth
Circuit and district court cases discussing this principle). “Further, the non-moving party
ordinarily has no right to respond to the reply brief, at least not until oral argument.”
Scottsdale Ins. Co. v. Flowers, 513 F.3d 546, 553 (6th Cir. 2008) (citation omitted). The
Local Rules of this District also provide that “reply briefs are not necessary and are not
required by Court. A reply brief shall . . . directly reply to the points and authorities
contained in the answering brief.” E.D. TN. LR 7.1(c).3 Accordingly, as a matter of
litigation fairness and procedure, the Court declines, at this time, to address this argument.4
II.
Standard of Review
Chase has moved for dismissal of plaintiffs’ claims pursuant to a Rule 12(b)(6)
motion.
While Chase has relied on documents outside the pleadings—specifically,
documents filed in prior bankruptcy proceedings—the Court concludes that these documents
do not convert the motion to dismiss into a motion for summary judgment pursuant to Rule
12(d). The submitted copies of plaintiffs’ bankruptcy petitions, the motions for relief from
the automatic stay, and the orders of the Bankruptcy Court, are matters of public record and
3
The Local Rules provide a means by which a party may move the Court to file a
supplemental brief or file a supplemental brief without seeking leave of Court to call attention to
developments occurring after a party’s final brief is filed. E.D. TN. LR 7.1(d).
4
Thus, this memorandum opinion and order does not address the relative merits of the
judicial estoppel argument.
5
therefore the Court’s taking of judicial notice of the bankruptcy filings do not convert this
motion into one for summary judgment. Nieman v. NLO, Inc., 108 F.3d 1546, 1554 (6th Cir.
1997); Signature Combs, Inc. v. United States, 253 F. Supp. 2d 1028, 1041 n. 5 (W.D.Tenn.
2003).
When reviewing a Rule 12(b)(6) motion to dismiss, the Court must construe the
complaint in the light most favorable to the plaintiff, accept the complaint’s factual
allegations as true, Thurman v. Pfizer, Inc., 484 F.3d 855, 859 (6th Cir. 2007), and determine
whether the plaintiff has pleaded “enough facts to state a claim to relief that is plausible on
its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A complaint need only
contain a “short and plain statement of the claim showing that the pleader is entitled to
relief,” Ashcroft v. Iqbal, — U.S. —, —, 129 S.Ct. 1937, 1940 (2009) (quoting Fed. R. Civ.
P. 8(a)(2)), but that statement must contain “factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.” Id.
In deciding a motion to dismiss, the question is not whether a plaintiff will ultimately
prevail but whether the plaintiff is entitled to offer evidence to support the claims made in
the complaint. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 511 (2002). At the same time,
bare assertions of legal conclusions are insufficient, and the “complaint must contain either
direct or inferential allegations respecting all the material elements to sustain a recovery
under some viable legal theory.” Scheid v. Fanny Farmer Candy Shops, Inc., 859 F.2d 434,
436 (6th Cir. 1988). Unsupported allegations and legal conclusions “masquerading as factual
conclusions” are not sufficient. Mezibov v. Allen, 411 F.3d 712, 716 (6th Cir. 2005).
6
III.
Analysis
A.
Claims Arising Out of the Alleged Conduct of WAMU
In their second cause of action, plaintiffs allege that WAMU engaged in predatory
lending practices and that Chase, as successor to WAMU, is liable for its actions [Doc. 1-1,
¶ 15]. Plaintiffs allege that WAMU engaged in misrepresentations that resulted in plaintiffs
entering into a loan agreement for which they were not qualified, that WAMU had an
appraisal on the Property done on September 3, 2003 that improperly inflated its value, that
escalating payments and increasing interest rates were not disclosed to plaintiffs, and that
defendants engaged in a conspiracy to deceive plaintiffs into taking out the loan, and that
defendants knew, prior to the origination of the loan, that plaintiffs were not qualified to
make payments under the terms of the loan [Id., ¶¶ 15-24]. In the third cause of action,
plaintiffs allege that defendants violated the FDCPA and RESPA [Id., ¶¶ 26, 27]. Plaintiffs
have not, however, alleged any specific provisions under the FDCPA or RESPA or alleged
any facts against Chase specifically under these acts. Rather, the only allegation in the
complaint that pertains to these acts is plaintiffs’ allegation that escalating payments and/or
increases in the interest rate were not properly disclosed [Id., ¶ 20]. In the fourth cause of
action, plaintiffs allege that defendants engaged in “unlawful business acts and/or practices”
with regard to the failure to comply with the disclosure requirements of the FDCPA and
RESPA and that defendants’ misconduct has led to an unfair competition advantage over
plaintiffs because plaintiffs were unaware of disclosure requirements [Id., ¶¶ 28, 29].
7
Chase contends that it is not liable for any of WAMU’s alleged conduct that occurred
prior to September 25, 2008, when Chase purchased certain asserts of WAMU from the
FDIC. Chase therefore argues that plaintiffs’ second, third, and fourth causes of action
should be dismissed because the alleged conduct of WAMU, if proved in fact, cannot be the
basis for a cause of action against Chase. In response, plaintiffs assert that their claims do
not involve WAMU and that the PAA argument is a red herring.
The PAA between the FDIC and Chase provides, in relevant part:
2.5 Borrower Claims. Notwithstanding anything to the contrary in this
Agreement, any liability associated with borrower claims for payment
of or liability to any borrower for monetary relief, or that provide for
any other form of relief to any borrower, whether or not such liability
is reduced to judgment, liquidated or unliquidated, fixed or contingent,
matured or unmatured, disputed or undisputed, legal or equitable,
judicial or extra-judicial, secured or unsecured, whether asserted
affirmatively or defensively, related in any way to any loan or
commitment to lend made by [WAMU] prior to failure, or to any loan
made by a third party in connection with a loan which is or was held by
[WAMU], or otherwise arising in connection with [WAMU’s] lending
or loan purchase activities are specifically not assumed by [Chase].
[Doc. 3-1].5 Courts interpreting the PAA have held that Chase ‘“expressly disclaimed
assumption of liability arising from borrower claims . . . [t]his section leaves the FDIC as the
responsible party with respect to those claims.’” Hilton v. Wash. Mut. Bank, No. 09-1191,
2009 WL 3485953, at *3 (N.D. Cal. Oct. 28, 2009) (internal quotations and citation omitted);
see also Yeomalakis v. FDIC, 562 F.3d 56, 60 (1st Cir. 2009) (upholding the district court’s
5
The PAA is a public document which the Court may consider in deciding the motion to
dismiss. Kostrzewa v. City of Troy, 247 F.3d 633, 644 (6th Cir. 2001).
8
denial of the plaintiff’s motion to substitute Chase as a party for the FDIC because the FDIC
is the party liable for WAMU’s alleged misconduct under the PAA); Harajli v. Wash. Mut.
Bank, No. 09-14598, 2010 WL 2813281, at *3 (E.D. Mich. July 16, 2010) (concluding that
Chase, in purchasing some of WAMU’s assets and liabilities from the FDIC, did not assume
liability for WAMU’s alleged misconduct in connection with the plaintiff’s claim).
Here, plaintiffs have alleged that they entered into the loan agreement with WAMU
on October 23, 2003, a date prior to September 25, 2008 [Doc. 1-1, ¶ 5]. In addition,
plaintiffs’ factual allegations supporting their second, third, and fourth causes of action arise
out of either the origination of the loan with WAMU, the terms disclosed or not disclosed to
plaintiffs at the time plaintiffs entered into the loan agreement, and an appraisal that allegedly
occurred in September 2003 [Id., ¶¶ 15-20, 24 (alleging that defendants engaged in a
“conspiracy to unlawfully deceive Plaintiff[s] into taking out the subject loan . . . was willful
and wanton, justifying an award for punitive damages.”)].
In Gossen v. JPMorgan Chase Bank, — F. Supp. 2d —, 2011 WL 4939828 (W.D.
Wash. Oct. 18, 2011), the plaintiffs brought claims for wrongful foreclosure, quiet title, and
violations of RESPA and the Truth in Lending Act, among others, against WAMU and
Chase, contending that WAMU had failed to “identify loan charges, fees, and terms at the
origination of the loan agreement.” Id. at *3. The Western District of Washington dismissed
the plaintiffs’ claims, relying on Article 2.5 of the PAA and noting that Chase expressly did
not assume any WAMU liabilities involving claims by borrowers and that Chase “is not a
successor to [WAMU] for liabilities related to [the plaintiffs’] loan origination.” Id. at *4.
9
The Gossen court also noted that there were no alleged facts supporting the plaintiffs’ claims
for violations of RESPA and the Truth in Lending Act. Id.
Upon review, and similar to Gossen, the Court finds plaintiffs’ second, third, and
fourth causes of action do not confer a basis of potential liability upon Chase. All the
allegations in plaintiffs’ complaint relate to conduct that allegedly occurred prior to
September 25, 2008. As found by the other federal courts that have addressed this issue,
Gossen, 2011 WL 4939828, at *5; Mazur v. Wash. Mut. Bank, F.A., No. 09-13371, 2011
WL 108926, at *5 (E.D. Mich. Jan. 10, 2011); Javaheri v. JPMorgan Chase Bank, N.A., No.
CV10-08185 ODW (FFMx), 2011 WL 97684, at *3 (C.D. Cal. Jan. 11, 2011); McCann v.
Quality Loan Serv. Corp., 729 F. Supp. 2d 1238, 12441 (W.D. Wash. 2010), Chase explicitly
did not assume, via the PAA, liability for any claims of borrowers in positions similar to that
occupied by plaintiffs.
Accordingly, plaintiffs’ second, third, and fourth causes of action against Chase will
be DISMISSED.
B.
Res Judicata and/or Collateral Estoppel
The Court now turns to plaintiffs’ first and fifth causes of action claiming mistaken
and erroneous representations as to standing to foreclose and to quiet title. Chase has
requested dismissal of these claims under the doctrines of res judicata and/or collateral
estoppel because Chase contends that plaintiffs are attempting to re-litigate the issue of
whether Chase has the right to foreclose. Chase asserts that this issue was determined in
plaintiffs’ prior bankruptcy proceedings in the context of the Bankruptcy Court’s orders
10
granting Chase relief from the automatic stay.6 In response, plaintiffs assert that the first and
fifth causes of action are “based on the factual premise that [Chase is] not the holder of the
promissory note secured by the [Property]” [Doc. 9, p. 2]. Plaintiffs contend that neither res
judicata nor collateral estoppel preclude them from disputing, in this action, whether Chase
is the holder or possesses the promissory note securing the Property. Plaintiffs assert that
Chase’s attempt to bar plaintiffs’ claims based on these doctrines and the Bankruptcy Court’s
orders is similar to a strategy that was rejected in Grella and should similarly be rejected by
this Court.
Collateral estoppel bars re-litigation of an issue if it was raised in an earlier case
between the same parties, actually litigated, and necessary to the judgment in the earlier case.
Rally Hill Prods., Inc. v. Bursack (In re Busack), 65 F.3d 51, 54 (6th Cir. 1995) (citing
Massengill v. Scott, 738 S.W.2d 629, 632 (Tenn. 1987)). Res judicata, or claim preclusion,
6
After a debtor files a bankruptcy petition, he or she is protected by the automatic stay
provision of 11 U.S.C. § 362(a). To obtain relief from an automatic stay, a creditor may bring a
request pursuant to 11 U.S.C. § 362(d). Section 362(d) provides as follows:
On request of a party in interest and after notice and a hearing, the court shall
grant relief from the stay provided under subsection (a) of this section, such
as by terminating, annulling, modifying or conditioning such stay(1) for cause, including the lack of adequate protection of an interest
of such party in interest; or
(2) with respect to a stay of an act against property, if (A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.
11 U.S.C. § 362(d).
11
generally refers to the effect of a prior judgment in foreclosing successive litigation of the
very same claim, whether or not re-litigation of the claim raises the same issues as the earlier
suit. New Hampshire v. Maine, 532 U.S. 742, 748-49 (2001). In the Sixth Circuit, a claim
is barred by the res judicata effect of prior litigation if each of these four elements are
established: “‘(1) a final decision on the merits by a court of competent jurisdiction; (2) a
subsequent action between the same parties or their ‘privies’; (3) an issue in the subsequent
action which was litigated or which should have been litigated in the prior action; and (4) an
identity of the causes of action.’” Browning v. Levy, 283 F.3d 761, 771 (6th Cir. 2002)
(citing Bittinger v. Tecumseh Prods. Co., 123 F.3d 877, 880 (6th Cir.1997)). A party
asserting res judicata as a defense bears the burden of proving each element. Id. at 772.
The case relied upon by plaintiffs, Grella v. Salem, involved a Chapter 7 trustee’s
attempt to avoid a bank’s unperfected security interest in property of the bankruptcy estate
on preferential transfer grounds. 42 F.3d 26. Following the debtor’s filing of a bankruptcy
petition, the bank filed a motion for relief from the automatic stay in regard to seventeen
notes that were a part of the property of the bankruptcy estate. Id. at 27. In the motion for
relief from the automatic stay, the bank claimed to have a “perfected security interest”
because it was “in sole and exclusive possession” of the original seventeen notes. Id. The
bank did not state or allege any other details regarding the bank’s allegedly perfected security
interest in the notes. Id. The trustee did not contest the bank’s motion, but stated he had not
had sufficient time to determine the existence of possible defenses to the bank’s claim. Id.
at 28. After a hearing, the bankruptcy court granted the bank’s motion and lifted the stay in
12
regard to the notes. Id. In neither the hearing nor the order did the bankruptcy court make
any findings about the status of the bank’s security interest. Id.
The bank filed an adversary proceeding to determine the validity of its lien, alleging
for the second time that it had a perfected security interest in the seventeen notes because it
was in sole and exclusive possession of the originals. Id. at 19. The trustee filed an answer
and counterclaim against the bank alleging that its interest in one of the notes was avoidable
as a preferential transfer. Id. In opposing the trustee’s counterclaim, the bank argued that
the trustee was barred from pursuing his preference action based on either claim or issue
preclusion because the trustee had not objected to the bank’s motion for relief from the
automatic stay, and because the validity of the bank’s security interest had been decided
when the bankruptcy court granted relief from the automatic stay. Id.
Based on an issue preclusion analysis, the First Circuit Court of Appeals held that a
determination on a motion for relief from an automatic stay is limited in scope and does not
have preclusive effect on a trustee’s subsequent preferential transfer or avoidance claims.
Id. at 35. The court of appeals noted that Congress created the provision allowing relief from
the automatic stay for certain creditors if grounds for relief are present, including “the
adequacy of protection for the creditor, the debtor’s equity in the property, and the necessity
of the property to an effective reorganization.” Id. at 31. The court of appeals distinguished
a motion for relief from the automatic stay from a preferential transfer claim, noting the
summary nature of a relief from stay proceeding:
13
[A] motion for relief from [the automatic] stay should seek only to
determine whether the party seeking relief has a colorable claim to
property of the estate. The statutory and procedural schemes, the
legislative history, and the case law all direct that the hearing on a
motion to lift the stay is not a proceeding for determining the merits of
the underlying substantive claims, defenses, or counterclaims. Rather,
it is analogous to a preliminary injunction hearing, requiring a speedy
and necessarily cursory determination of the reasonably likelihood that
a creditor has a legitimate claim or lien as to a debtor’s property. If a
court finds that likelihood to exist, this is not a determination of the
validity of those claims, but merely a grant of permission from the court
allowing that creditor to litigate its substantive claims elsewhere
without violating the automatic stay.
Id. at 33-34. The Grella court also pointed out that the bankruptcy court’s order lifting the
automatic stay did not make any findings about the status of the bank’s security interest in
the seventeen notes and that the bankruptcy court “did not, and indeed, could not adjudicate
the substantive merits of either the creditor’s claim or any possible defenses or
counterclaims.” Id. at 35.
In re Lebbos (“Lebbos”), a case from the Eastern District of Michigan, involves facts
similar to those in Grella.7 Lebbos, 455 B.R. 607 (Bankr. E.D. Mich. 2011). In Lebbos, the
district court determined that a trustee’s preferential transfer and avoidance claims in an
adversary proceeding were not barred on res judicata grounds when the trustee had not
opposed or otherwise responded to the bank’s motion for relief from the automatic stay in
the prior bankruptcy proceeding. Id. at 610, 614-16. Central to the Lebbos court’s holding
was that the third element of the res judicata analysis was not satisfied, that is, whether the
7
In Grella, the First Circuit’s analysis was based on issue preclusion. Lebbos, 455 B.R. at
613. The Lebbos court proceeded on a res judicata analysis. Id. at 612.
14
issues raised in the adversary proceeding by the trustee were litigated or could have been
litigated at the time the bank moved for relief from the automatic stay. Id. at 612. Finding
the facts and reasoning of the Grella court persuasive, id. at 614, the Lebbos court noted that
while the trustee could have asserted his preferential transfer and avoidance claims as
counterclaims to the bank’s motion for relief from the automatic stay, the trustee was not
required to do so, nor was the bankruptcy court required to rule on such claims. Id. at 615.
As determined by the Lebbos court, “any determination under § 362(d) is narrowly limited
to whether a creditor has a colorable claim against property of the estate. Any decision [on
whether the stay should be lifted] would be made solely on the statutory grounds expressed
in § 362(d). The possible avoidability of a transfer. . . or a lien avoidance action . . . are
beyond the scope of a court’s limited inquiry under § 362(d).” Id. (citing Grella, 42 F.3d at
32, In re Vitreous Steel Prod. Co., 911 F.2d 1223, 1234 (7th Cir. 1990) (noting that questions
of preferential transfers are not generally at issue in a § 362 hearing, but only whether there
is a colorable claim on property)). Applying the reasoning of Grella, the Lebbos court found
no preclusive effect on the issues raised by the trustee in the adversary proceeding given the
circumstances of the lifting of the automatic stay. Id. at 614.
After considering the case law summarized above, the Court concludes that the third
element of res judicata is not satisfied in this case. For the third element of res judicata to
be established, the Court must determine whether the issues underlying plaintiffs’ first and
fifth causes of action—standing to foreclose and whether Chase is a holder and in possession
of the note securing the Property—were litigated or could have been litigated at the time
15
Chase moved for relief from the automatic stay. It is apparent from plaintiffs’ bankruptcy
petitions that both plaintiffs averred in those petitions that Chase was a secured creditor in
regard to the Property and a First Mortgage holder. In addition, in the motions to lift the
automatic stay, Chase alleged that it was a “secured creditor” holding a security interest in
the Property and that it was entitled to relief from the stay based on the statutory grounds
provided under § 362(d)(1) and (2). Neither plaintiffs nor the trustee objected to the motions
for relief from the stay. In the Bankruptcy Court’s orders granting Chase relief from the
automatic stay, the Bankruptcy Court noted that Chase had asserted a “valid, properly
perfected” security interest in the Property in support of their motions for relief from the
automatic stay and found that grounds existed under 11 U.S.C. § 362(d)(1) for terminating
the stay for cause. Unlike this case, neither Grella nor Lebbos contain facts regarding any
statements made under oath by the debtor with regard to the security interests in question,
such as statements by a debtor in a bankruptcy petition. However, the Court finds the
reasoning of Grella and Lebbos, along with those courts’ considerations of similar
circumstances to those presented in this case, to militate against a finding that res judicata
or collateral estoppel apply to these facts.
First, similar to Lebbos, in the motions for relief from the automatic stay, Chase
alleged only that it held a “security interest” in the Property by virtue of the deed of trust.
Id., 455 B.R. at 615 (stating that the bank “merely alleged that it was a ‘holder of a mortgage
on property owned by the Debtor’”). Second, similar to Lebbos, Chase did not allege that
it held a perfected interest in the Property, nor did it allege any other facts about the validity
16
of its security interest. Id. (stating that the bank “did not allege that it held a perfected
interest in the Debtor’s property. Nor did it allege any other facts about the validity of its
security interest”). Third, similar to Lebbos, Chase alleged that it was entitled to relief from
the automatic stay based on the grounds provided in § 362(d)(1) and (2). Id. (stating that the
bank “alleged facts asserting that it was entitled to relief under § 362(d)(1) and (2)”).
Finally, while the Court notes that the Bankruptcy Court’s orders granting the motions for
relief from the automatic stay state that “[i]t appears that [Chase] asserts a valid, properly
perfected Deed of Trust” [Doc. 3-5, p. 1; Doc. 3-6, p. 1], the only relief actually granted by
the Bankruptcy Court is that the automatic stay pursuant to § 362 was terminated, the stay
waived as to the Property, and the trustee’s interest in the Property abandoned. Lebbos is
somewhat distinguishable on this point, as the Lebbos court noted that the bankruptcy court’s
order was devoid of any findings as to the validity of or the avoidability of the bank’s interest
in the property, id. at 616, however, given the other relevant circumstances, the Court does
not find this sufficient for res judicata purposes.
In sum, the Court agrees with the reasoning of Grella and Lebbos that “any
determination under § 362(d) is narrowly limited to whether a creditor has a colorable claim
against property of the estate . . . [and a]ny decision would be made solely on the statutory
grounds expressed in § 362(d).” Lebbos, 455 B.R. at 615; see also Grella, 42 F.3d at 32.
Similarly, because the Bankruptcy Court’s orders were pursuant to § 362 only, the Court
does not find that collateral estoppel, which requires that the precluded issue be raised and
necessary to the prior judgment, operates to bar plaintiffs’ claims. Accordingly, the Court
17
concludes that neither res judicata nor collateral estoppel operate to bar plaintiffs’ first and
fifth causes of action and the motion to dismiss will be DENIED in regard to these claims.
IV.
Conclusion
For the reasons stated above, Chase’s motion to dismiss [Doc. 3] is GRANTED in
part, to the extent that plaintiffs’ second, third, and fourth causes of action are DISMISSED,
and DENIED in part, to the extent that plaintiffs’ first and fifth causes of action will be
permitted to go forward.
IT IS SO ORDERED.
s/ Thomas A. Varlan
UNITED STATES DISTRICT JUDGE
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