Blake et al v. Vanderbilt Mortgage and Finance, Inc.
Filing
8
MEMORANDUM OPINION AND ORDER that the 1 MOTION of Vanderbilt Mortgage and Finance Inc. to Withdraw Reference be Granted and that the Adversary Proceeding 5:14-ap-5015 in the Blake Chapter 13 Action, U.S. Bankruptcy Court Case No. 5:14-bk-50003 be Withdrawn; that the Defendant's 7 Response to and Motion to Strike Plaintiffs' Notice of Supplemental Authority be Stricken from the record. Signed by Judge Irene C. Berger on 12/16/2014. (cc: Hon. Ronald Pearson, US Bankruptcy Judge, attys; any unrepresented party) (cds)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF WEST VIRGINIA
BECKLEY DIVISION
IN RE:
KENNETH DALE BLAKE
and CLAUDIA JEAN BLAKE,
Debtors.
KENNETH DALE BLAKE
and CLAUDIA JEAN BLAKE,
Plaintiffs,
v.
CIVIL ACTION NO. 5:14-mc-00148
VANDERBILT MORTGAGE AND
FINANCE, INC.,
Defendant.
MEMORANDUM OPINION AND ORDER
The Court has reviewed the Motion of Vanderbilt Mortgage and Finance, Inc. to Withdraw
Reference (Document 1) and Memorandum of Law in Support (Document 2), the Plaintiffs’
Response in Opposition to Defendant’s Motion to Withdraw the Reference (Document 3), as well
as the Defendant’s Reply to “Plaintiffs’ Response in Opposition to Defendant’s Motion to
Withdraw the Reference” (Document 5). The Court has also reviewed the parties’ attached
exhibits. After careful consideration, and for the reasons stated more fully herein, the Court finds
that the Defendant’s motion should be granted.
I.
FACTUAL AND PROCEDURAL HISTORY
The Debtors/Plaintiffs, Kenny and Claudia Blake, are a married couple residing with their
two sons in Rupert, West Virginia. They are unsophisticated in financial matters.1 In or around
April 2012, the Blakes sought a mobile home to place on land which they owned, and visited the
sales lot of CMH Homes, Inc., an affiliate of Vanderbilt Mortgage and Finance, Inc. (Vanderbilt),
in Beaver, West Virginia. They did not find an acceptable home during that visit, but afterwards,
did call “CMH and accepted its offer to sell them the home pictured in the [CMH] catalogue.”
(Document 3 at 3.)
The Blakes allege that they were instructed to meet in a room in Beckley, West Virginia, to
sign papers related to credit terms for the mobile home purchase. They assert that no attorney
attended the meeting, and that they were “simply instructed to sign here, sign here, with no
meaningful explanation of the documents and terms.” (Id.) (internal quotation and citation
omitted). The terms dictated that the Plaintiffs were giving both their (1) land and (2) subject
mobile home as a security interest, and furthermore stated that the loan was for a twenty (20) year
term with an interest rate of 10.17 percent. (Id.) The Plaintiffs also allege that “[t]he documents
conflict with one another, including disclosing of different amounts for attorney, settlement, and
title services.” (Id. at 3-4.)
When it came time for delivery, however, the home actually delivered was different “from
the home CMH had represented to Plaintiffs that it would provide,” and was only worth
approximately $58,776.04, as opposed to $70,000, the value for the home listed in the catalogue.
1
Kenny Blake did not finish high school, and works as a coal miner, while Claudia Blake is a homemaker.
(See Document 3 at 2-3.)
2
(Document 3 at 4.) Allegedly, the mobile home has further decreased in value since that time.
(Id.)
The Plaintiffs claim that the Defendant has engaged in abusive debt collection practices
and employed faulty accounting since the beginning of activity on the Plaintiffs’ account. (Id.)
For example, the Plaintiffs maintain that the Defendant incorrectly calculated their monthly
escrow payments and, thus, charged them incorrect amounts, as well as failed to pay their personal
property taxes on the home as agreed. (Id.) The Plaintiffs argue that the Defendant “has further
collected and threatened to collect illegal default fees and attorney fees from Plaintiffs, including
by letters dated December 5, 2013, and December 6, 2013.” (Id.)
The Plaintiffs filed their Chapter 13 Voluntary [Bankruptcy] Petition on January 8, 2014.
(See Case No. 5:14-bk-50003, Document 1.) On February 21, 2014, Defendant Vanderbilt filed
an Objection of Vanderbilt Mortgage and Finance, Inc. to Confirmation of Chapter 13 Plan (Case
No. 5:14-bk-50003, Document 24). On July 9, 2014, the Plaintiffs filed a Proof of Claim
Objection and Adversary Proceeding to Determine Validity of Lien (Document 46).
The
Plaintiffs’ complaint in the adversary proceeding contains the following five counts: Count One unconscionable inducement; Count Two - fraud as a defense to contract; Count Three - set off for
illegal debt collection; Count Four - set off for illegal fees and charges; and Count Five illegal/unconscionable arbitration clause. (Document 46 at 6-12.)
They argue that the Defendants violated several sections of the West Virginia Consumer
Credit Protection Act (WVCCPA), principally W. Va. Code §§ 46A-2-115, 46A-2-121,
46A-2-125, 46A-2-127, and 46A-2-128. They also assert a common law fraud claim. The
Plaintiffs seek to have the loan declared unenforceable, as well as to “setoff” any award of
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damages to the amount claimed due under the loan, attorney’s fees and cost of the litigation, and a
declaration that the arbitration clause is void and unenforceable.
On August 28, 2014, the Defendant filed the Motion to Withdraw Reference with its
Memorandum in Support. The Plaintiffs filed their Response in Opposition on September 5,
2014, and Vanderbilt filed its Reply on September 22, 2014. Seeking to bring additional case law
to the Court’s attention, the Plaintiffs also filed a Notice of Supplemental Authority (Document 6)
on October 24, 2014, and Vanderbilt filed the Defendant’s Response to, and Motion to Strike,
Plaintiffs’ “Notice of Supplemental Authority” (Document 7) on November 11, 2014. The Court
finds that the supplemental authority was available to the Plaintiffs for citation in their brief well
before the due date for the response in opposition, and further, there has been no showing of good
cause as to why the Plaintiffs did not include it with their original submission.
II.
APPLICABLE LAW
“Congress has divided bankruptcy proceedings into three categories: those that “aris[e]
under title 11”; those that “aris[e] in” a Title 11 case; and those that are “related to a case under title
11.” Stern v. Marshall, 131 S. Ct. 2594, 2605 (2011)(citing 28 U.S.C. § 157(a)). The Southern
District of West Virginia’s local rules declare that “all proceedings arising under Title 11 or arising
in or related to a case under Title 11, are referred to the Bankruptcy Court for disposition.” L.R.
Civ. P. 83.13 (citing 28 U.S.C. § 157(a)). The Court may, however, withdraw a reference “on its
own motion or on timely motion of any party, for cause shown.” 28 U.S.C. § 157(d). Six
relevant factors courts examine when assessing whether to withdraw a reference for cause include:
(1) whether the proceeding is core or non-core; (2) the uniform
administration of bankruptcy law; (3) promoting judicial economy;
(4) the efficient use of the parties' resources; (5) the reduction of
forum shopping; and (6) the preservation of the right to a jury trial.
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In re U.S. Airways Group, Inc., 296 B.R. 673, 682 (E. D. Va. 2003). While not dispositive, “the
first factor – whether the matter is core or non-core – generally is afforded more weight than the
others.” In re O’Brien, 414 B.R. 92, 98 (S. D. W. Va. 2009) (Johnston, J.). The Court also notes
that “[s]imply because the proceeding presents questions of state law does not necessarily mean
that the proceeding is non-core or otherwise beyond the jurisdiction of the bankruptcy courts.”
Blackshire v. Litton Loan Servicing, L.P., 2009 WL 426130 *2 (S. D.W. Va. 2009) (Goodwin, C.
J.) (not reported). Instead, to distinguish a core proceeding from a non-core one, courts should
evaluate whether:
(1) the claims are specifically identified as core proceedings under
28 U.S.C. § 157(b)(2).; (2) the claims existed prior to the filing of
the bankruptcy case; (3) the claims are based entirely on state law or
otherwise existed independently from title 11; and (4) the parties’
rights or obligations are significantly affected by the outcome of the
bankruptcy proceedings.
Id.
III.
DISCUSSION
Vanderbilt first argues that withdrawal of the reference is mandatory because “resolution
of the proceeding requires consideration of both title 11 and other laws of the United States
regulating organizations or activities affecting interstate commerce,” and notes that resolution of
Count V of the complaint will implicate the Arbitration Act found at 9 U.S.C. § 1, et. seq.
(Document 2 at 1) (internal quotation omitted). Vanderbilt’s memorandum focuses on the factors
courts use in determining whether to withdraw the reference, and argues that withdrawal is
appropriate here because all of the claims contained in the Blake’s complaint arise under state law
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and not under Title 11, or bankruptcy law, and are thus non-core.2 (Id. at 2-4.) It argues that the
Plaintiffs’ attempt, to “setoff” any amounts received as a result of the alleged WVCCPA
violations, does not otherwise bring those claims in the realm of bankruptcy law. (Id. at 4) (“The
Blakes’ claim that what they supposedly will recover on these [WVCCPA] claims will be involved
in the administration of their bankruptcy estate is saying nothing more than if this sum of money
becomes available to them, it will become an asset which can be administered in their bankruptcy
case.”)
Vanderbilt notes that withdrawing the reference would promote the uniform
administration of bankruptcy law because “no bankruptcy law is implicated in determining
whether [Vanderbilt] is liable for any of the wrongs alleged.” (Document 2 at 6.) Vanderbilt
argues that promotion of judicial economy and efficient use of the parties’ resources are
intertwined with the “preservation of the right to a trial by jury.” Vanderbilt points out that it has
not consented to a trial by jury yet, and is further weighing its options with respect to compelling
arbitration. (Id. at 6-7.) It notes that this Court will have to review, de novo, any proposed
findings of fact and conclusions of law from the bankruptcy court surrounding the non-core
proceedings, and this would result in a duplication of judicial resources. (Id. at 7) (internal
quotation and citation omitted.)
Vanderbilt finally argues that forum shopping would be encouraged if the Court did not
withdraw the reference because the Plaintiffs have unmistakably “tried to clothe their clearly
non-core claims with core proceeding rhetoric to support the illusion that their claims are core
2
Vanderbilt notes that any determination of “[w]hether the arbitration clause is enforceable will turn on
application of the Arbitration Act,” or federal law. (Document 2 at 5, n.1.)
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proceeding claims,” and denial of the motion to withdraw will only promote forum shopping. (Id.
at 7.)
The Blakes oppose withdrawal of the reference to bankruptcy court under any theory, and
argue that Vanderbilt has failed to carry its burden of showing that withdrawal of the reference is
mandatory. They note that deciding the instant matters “does not require substantial and material
interpretation of a non-bankruptcy statute, and as a result, withdrawal of the reference is not
mandatory.” (Document 3 at 5.) They also note that the Defendant has failed to establish cause
for otherwise withdrawing the reference. They characterize their complaint in the adversarial
proceeding as simply an “objection to and for the purpose of substantially reducing Vanderbilt’s
claim against the estate, making them core bankruptcy claims,” and nothing more than
“counterclaims by the estate against a person[] filing claims against the estate.” (Id. at 7-8) (citing
28 U.S.C. § 157(b)(2)(c)).
The Plaintiffs argue that the claims clearly impact the administration of the estate, and
“until it is resolved, the adversary complaint delays confirmation of Plaintiff’s Chapter 13 plan . .
..” (Id. at 8-9.) They also aver that their claims are constitutionally core under Stern v. Marshall,
131 S. Ct. 2594 (2011), because they will “be entirely resolved through the claim allowance
process,” and will otherwise impact each of the other creditors to the estate. (Id. at 10-11.) The
Plaintiffs allege that Vanderbilt’s consent to a jury trial is unnecessary because the claims are
constitutionally core, and “by filing a proof of claim, Vanderbilt consented to adjudication of the
claim (and the objections and counterclaims thereto) in the bankruptcy court.” (Id. at 12.)
Vanderbilt replies that the Plaintiffs have raised more than generally applicable contract
defenses to Count V. It argues that the Plaintiffs seek to preclude arbitration entirely as an
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alternative dispute resolution. Vanderbilt argues that the Plaintiffs have thus placed “at issue the
federal substantive law of arbitrability…” and that “the FAA preempts state laws that attack
arbitration itself as opposed to a transaction-specific issue in the parties’ contract.” (Document 5
at 2) (reference omitted). Put simply, the Plaintiffs “raise substantial and material interpretation
of a federal statute, namely, the FAA. Accordingly, mandatory withdrawal applies.” (Id. at 3.)
Vanderbilt argues that the Plaintiffs have implicated non-bankruptcy law when they tout the effect
that the United States Constitution, as well as federal rules of civil and appellate procedure, has on
this case, further demonstrating that mandatory withdrawal is appropriate. (Id. at 4.)
Vanderbilt further argues in support of discretionary withdrawal, or withdrawal of the
reference for cause shown, and notes that the claims are non-core because they do not arise in or
under the Plaintiffs’ bankruptcy case or Bankruptcy Code. (Id. at 5.) It argues that the Plaintiffs
misconstrue 28 U.S.C. § 157(b)(2), and also mischaracterize Stern. (Id. at 6-7.) Vanderbilt
wholeheartedly opposes any contention that the presence of potential “setoffs” renders the
Plaintiffs’ adversary proceeding claims constitutionally core. (Id. at 8.) It notes that the debt in
this instance is secured, and, therefore, there is no way that it can be “declared unenforceable as a
matter of law.”
(Id. at 9.)
Vanderbilt asserts that the bankruptcy court does not have
constitutional authority to render a final decision on Counts I, III, IV and V of the complaint
because this Court will have to review the Bankruptcy Court’s proposed findings of fact and
conclusions of law due to the fact that Vanderbilt is not waiving its right to request a jury trial nor
does it consent to trial in the Bankruptcy Court. (Id. at 11-13.) All of this, it argues, will create
unneeded judicial duplication and waste the parties’ resources. (Id. at 14-15.)
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After reviewing all of the parties’ arguments and the applicable case law, the Court finds
that the reference to the Bankruptcy Court should be withdrawn for cause shown. The Court
considers the claims contained in the adversary proceeding to be non-core.
They arose
independently of the bankruptcy matter, they are premised entirely on state common and statutory
law (Counts I, II, III, and IV), and they implicate the Federal Arbitration Act (Count V). Indeed,
they could have been originally brought in an action outside of the bankruptcy context. “Each of
the plaintiffs’ [five] counts in the [complaint] could have been filed if the debtors never filed for
bankruptcy. None of the claims arose under Title 11 or arose in a Title 11 case. The [complaint]
therefore, presents a non-core proceeding, which weighs heavily in favor of withdrawal.” Allen v.
National City Mortg., 2006 WL 3899997 at * 2 (S.D.W. Va. 2006) (Goodwin, J.) (not reported).
Further, both parties concede that their rights would be significantly affected by the outcome of the
bankruptcy proceeding, including the outcome of the adversary proceeding filed in relation to
Vanderbilt’s proof of claim as to the mobile home and/or land used as a security interest for said
home.
Having considered the claims contained in the Plaintiffs’ adversarial complaint to be
non-core, the Court next analyzes the propriety of withdrawing the reference. No questions are
presented regarding the uniform administration of bankruptcy law. That any amount received
may or could be offset against Vanderbilt’s proof of claim does not obviate discretionary
withdrawal, and does not otherwise bring the state and federal law claims within the context of
bankruptcy, as the Plaintiffs suggest. “The bankruptcy code defines setoff as the ‘right of a
creditor to offset a mutual debt owing by such creditor to the debtor that arose before the
commencement of the case under [title 11] against a claim of such creditor against the debtor that
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arose before the commencement of the case.’” In re O'Brien, 414 B.R. at 101 (citing 11 U.S.C. §
553(a)).
Here, in contrast, the purported setoffs—and the Plaintiffs’ right to them—did not arise
“before the commencement of the case.” The factual and procedural history of this case indicates
that these setoffs are not yet concrete but are merely claims at this point.
Furthermore, and fatal
to the Plaintiffs’ contention, “[s]etoffs are subject to the automatic stay, 11 U.S.C. § 362(a)(7),
and, therefore, are valid only if they occur prior to the petition or subsequent to relief from the
stay.” In re O'Brien, 414 B.R. at 102. The record in the underlying bankruptcy reveals that the
Debtors/Plaintiffs have already filed their Petition. (See Case No. 5:14-bk-50003, Document 1.)
The fact that the case may ultimately return to bankruptcy court after the claims are
resolved in this Court is not enough to avoid withdrawal of the reference. See Stern, 131 S. Ct. at
2619. Additionally, the Defendant has not acquiesced or otherwise waived its right to a jury trial
nor consented to trial in the bankruptcy court. Because a bankruptcy court lacks authority to enter
a final judgment on non-core claims, this Court would have to review de novo “those matters to
which any party has timely and specifically objected.” 28 U.S.C. 157(c)(1). Thus, judicial
economy, conservation of the parties resources, and preservation of the right to a jury trial weigh in
favor of withdrawing the reference. Lastly, the Court finds no indication of forum shopping on
behalf of either party. Contrary to the Plaintiffs’ suggestions, the Defendant’s exercise of its right
to engage in motion practice before this Court does not constitute forum shopping.
In summation, the claims contained in the adversary proceeding are non-core and do not
implicate the uniform administration of bankruptcy law. Withdrawal of the reference would
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promote judicial economy, be an efficient use of the parties’ resources, and preserve the
Defendant’s right to a jury trial.
CONCLUSION
Wherefore, after careful consideration and for the reasons stated herein, the Court
ORDERS that the Motion of Vanderbilt Mortgage and Finance, Inc. to Withdraw Reference
(Document 1) be GRANTED, and that the reference of Adversary Proceeding No. 5:14-ap-5015
in the Kenneth Dale Blake and Claudia Jean Blake Chapter 13 action, U.S. Bankruptcy Court Case
No. 5:14-bk-50003, be WITHDRAWN.
The Court further ORDERS that the Defendant’s Response to, and Motion to Strike,
Plaintiffs’ “Notice of Supplemental Authority” (Document 7) be GRANTED, and that the
Plaintiffs’ Notice of Supplemental Authority (Document 6) be STRICKEN from the record.
The Court DIRECTS the Clerk to send a certified copy of this Order to The Honorable
Ronald Pearson, United States Bankruptcy Judge for the Southern District of West Virginia, to
counsel of record, and to any unrepresented party.
ENTER:
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December 16, 2014
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