O'Flynn v. PHH Mortg. Corp. (In re O'Flynn)

654 B.R. 296

IN RE: David Robert O'FLYNN Pamela Sue O'Flynn Debtors.

David Robert O'Flynn, et. al On behalf of themselves and others Similarly situated Plaintiffs, v. PHH Mortgage Corporation, Ocwen Financial Corporation, and AltiSource Solutions, Inc. Defendants.

CASE NO. 12-13117-RLM-13

ADV. PRO. 21-50079

United States Bankruptcy Court, S.D. Indiana, Indianapolis Division

Signed September 28, 2023

Brad Aaron Catlin, Ronald J. Waicukauski, Williams Law Group, LLC, Indianapolis, IN, Travis W. Cohron, William W. Gooden, Olivia Hess, Jennifer F. Perry, Clark Quinn Moses Scott & Grahn, LLP, Indianapolis, IN, for Plaintiffs.

Alicia J. Batts, Joie Hand, Harmony A. Mappes, Erin L. McCann, Emanuel Lee McMiller, Faegre Drinker Biddle & Reath LLP, Simon Fleischmann, Michael Kind, Phillip Russell Perdew, Isabella Seeberg, Locke Lord LLP, Chicago, IL, for Defendants.

BANKRUPTCY COURT'S PARTIAL DISMISSAL and REPORT and RECOMMENDATION REGARDING DEFENDANTS' MOTIONS TO DISMISS

Robyn L. Moberly, United States Bankruptcy Judge

I. Background

Defendant Ocwen Financial Corporation ("Ocwen") is a financial services company servicing consumer mortgage loan accounts, focusing on subprime loans. Defendant PHH Mortgage Corporation ("PHH") is a wholly owned subsidiary of Ocwen. In 2018, Ocwen merged its mortgage servicing operations into PHH and its mortgage servicing operations were thereafter performed under the PHH name. In 2009, a portion of the Ocwen business was spun off to create Defendant AltiSource Portfolio Services (designated in this matter as defendant "AltiSource Solutions, Inc." or "AltiSource"), which provided a suite of services for mortgage loans in default.

Four named Plaintiffs, David R. O'Flynn (O'Flynn), Kenneth Novak (Novak), Donald L. Wilhold (Wilhold) and James Addison (Addison), have brought their Amended Complaint¹ to redress injuries they allege to have suffered during and after their respective bankruptcy cases. In their eight (8) count Amended Complaint, Plaintiffs allege that Ocwen/PHH Mortgage and AltiSource, through a fraudulent scheme, overcharged for services performed during their bankruptcy cases, intentionally failed to comply with federal law governing the actions of loan servicers, violated the bankruptcy discharge injunction, gave false information to credit reporting agencies, and collected unearned fees. Further, Plaintiffs allege together the Defendants constitute an Enterprise and their actions constitute violations of the RICO statute. The Plaintiffs' Amended Complaint also alleges violations of (1) The Fair Debt Collection Practices Act (FDCPA); (2) The Real Estate Settlement Procedures Act (RESPA); (3) the Indiana Deceptive Consumer Sales Act (IDCSA); (4) the Indiana Home Loan Practices Act (IHLPA); (5) the discharge injunction (11 U.S.C. § 524) and Rule 3002.1 of the Federal Rules of Bankruptcy Procedure as well as (6) recovery under the theory of unjust enrichment. The Plaintiffs have limited their claims against AltiSource to Counts I and II (RICO and RICO conspiracy) and Count VIII (Unjust Enrichment).

II. Procedural History

Suit was filed in this Bankruptcy Court for the Southern District of Indiana on August 31, 2021 on behalf of the four named Plaintiffs. On November 22, 2021 AltiSource filed a Motion to Dismiss² all counts of the Complaint, along with a brief in support. Ocwen and PHH also filed their joint Motion to Dismiss and brief on November 22, 2021.³ After consultation with counsel, the Bankruptcy Court filed a Recommendation to the District Court to Withdraw the Reference as to all matters other than the claims based on violations of the discharge injunction, as it is this Court's opinion that the court must have subject matter jurisdiction to enter final Orders, which it does not have, and that counsel can not confer jurisdiction if it does not otherwise exist. The parties agreed in District Court that the bankruptcy court had "authority" to enter final Orders, but only if the bankruptcy court determined that dismissal of any or all of the matters was appropriate. Any matters not dismissed would "need to be decided by the District Court." Thereafter, the District Court entered its Order declining to withdraw the reference to the Bankruptcy Court.

III. Subject Matter Jurisdiction

A preliminary discussion about this Court's jurisdiction is in order. The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in and limited by statute. Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 131 L.Ed.2d 403 (1995). Pursuant to 28 U.S.C. § 1334(b), district courts have jurisdiction over "civil proceedings arising under title 11, or arising in or related to cases under title 11." Bankruptcy judges "constitute a unit of the district court," 28 U.S.C. § 151, and the district court may refer to them "any or all proceedings arising under title 11 or arising in or related to a case under title 11." 28 U.S.C. § 157(a). The United States District Court for the Southern District of Indiana refers all cases or proceedings that "arise under", "arise in" or are "related to" a case under Title 11 (the Bankruptcy Code) to the Bankruptcy Judges of this District by general order dated July 11, 1984. The jurisdiction of the bankruptcy courts is thus "derivative" because it flows from the statutory grant of jurisdiction to the district courts. Matter of FedPak Systems, Inc., 80 F.3d 207, 213 (7th Cir. 1996); In re K & L, Ltd., 741 F.2d 1023, 1028 (7th Cir.1984).

A bankruptcy case or proceeding "arises under" title 11 when the cause of action is based on a right or remedy expressly provided in the Bankruptcy Code. In re Kewanee Boiler Corp., 270 B.R. 912, 917 (Bankr. N. D. Ill. 2002). "Arising in" jurisdiction exists when the proceeding does not arise under a specific statutory provision of the Bankruptcy Code but would have no practical existence but for the bankruptcy. Banc of Am. Inv. Serv., Inc. v. Fraiberg (In re Conseco), 305 B.R. 281, 285 (Bankr. N. D. Ill. 2004). Proceedings that "arise in" or "arise under" a bankruptcy case are "core" proceedings in which bankruptcy judges are authorized under 28 U.S.C. § 157 to enter Final Orders and judgments. See, Ortiz v. Aurora Health Care, 665 F.3d 906, 911 (7th Cir. 2011), quoting, Stern v. Marshall, 564 U.S. 462, 131 S.Ct. 2594, 2605, 180 L.Ed.2d 475 (2011).

The Seventh Circuit views "related to" jurisdiction narrowly to include only those proceedings that affect the amount of property for distribution from the estate or the allocation of property among creditors. FedPak Sys., Inc., 80 F.3d at 213-14; Home Insurance Co. v. Cooper & Cooper, Ltd., 889 F.2d 746, 749 (7th Cir.1989); In re Xonics, Inc., 813 F.2d 127, 131 (7th Cir.1987).⁴ Bankruptcy judges may also hear, but may not enter final orders or judgments on, proceedings which are "related to" the bankruptcy case.

The Plaintiffs' original complaint (Dkt. 1) filed August 31, 2021 and the Amended Complaint (Dkt. 86) filed August 23, 2022 (to which the Defendants' motions to dismiss pertain) are substantially identical other than the Amended Complaint added two counts alleging violation of Indiana consumer protection statutes. The Defendants also moved to dismiss the original complaint. Recognizing that all counts of the original complaint — other than the bankruptcy discharge violation count for contempt and sanctions which is Count V of the original complaint and Count VII of the amended complaint — are not within its "core" jurisdiction, this Court expressed trepidation about entering a final order in this matter. It suspended briefing on all pending motions and scheduled a status conference for January 5, 2022.

Specifically addressing the jurisdiction issue, the Court questioned whether it had any jurisdiction since the Plaintiffs' bankruptcy cases had been closed. (Transcript, Dkt. 49, page 9 of 11, line 9-14). The Plaintiffs averred that this Court has both personal jurisdiction and subject matter jurisdiction pursuant to 28 U.S.C. §§ 157(b)(2) and 1334. (Dkt. 1, ¶8; Dkt 86, ¶9). The Defendants maintained that this Court has jurisdiction because "the claims that are asserted in the complaint really do boil down to allegations of a discharge violation." (Transcript, Dkt. 49, page 7 of 11, line 14-16). The parties reported to the Court that neither would move the District Court to withdraw the reference and that, to the extent any of the claims were "non-core", they consented to this Court's entry of a final order on those claims for purposes of the motions to dismiss. The Court on its own recommended withdrawal of the reference (Dkt. 50) and the District Court declined, based on the parties' consent to entry by the bankruptcy court of a final order on the non-core claims.

Lack of subject matter jurisdiction may be raised at any time and a court has an independent duty to inquire as to such, even if the litigants do not raise the issue. Fed. R. Bankr. P. 7012(h); In re Dircks, 329 B.R. 687, 689 (Bankr. C. D. Ill. 2005) (bankruptcy judge noted that "this court has jurisdiction to determine its own jurisdiction" where defendant did not raise the issue). Because subject matter jurisdiction can be raised at any time, it cannot be waived. In re Trutko-Clayton, 384 B.R. 813, 816 (Bankr. N. D. Ind. 2007). Parties cannot confer subject matter jurisdiction on a court by consent. Id.; In re Olde Prairie Block Owner, LLC, 457 B.R. 692, 700 (Bankr. N. D. Ill. 2011).

In this Court's view, the parties' consent to this Court's entry of final orders over "non-core" claims for purposes of the motions to dismiss does not resolve the jurisdiction issue. The so-called "non-core" claims are not "related to" the bankruptcy cases. All named Plaintiffs have received their bankruptcy discharges and their bankruptcy cases have been closed, with the exception of O'Flynn's which was reopened for the sole purpose of filing this adversary proceeding. The bankruptcy cases...