Litton Loan Servicing, L.P. v. Schubert

631 B.R. 868

LITTON LOAN SERVICING, L.P., et al., Appellants and Cross-Appellees,

v.Dennis SCHUBERT, et al., Appellees and Cross-Appellants.

Case No. 1:19-cv-03005

Appeal from Bankr. Ct. No. 19-01088

United States District Court, N.D. Ohio, Eastern Division.

Signed September 22, 2021

Bryan T. Kostura, Cleveland, OH, Rudy J. Cerone, New Orleans, LA, for Appellants and Cross-Appellees Litton Loan Servicing, L.P., Ocwen Financial Corporation.

Daniel C. Gibson, Nelson M. Reid, Bricker & Eckler, Columbus, OH, for Appellants and Cross-Appellees JPMorgan Chase Bank, N.A.

Kenneth P. Frankel, Avon Lake, OH, for Appellees and Cross-Appellants.

OPINION AND ORDER

J. Philip Calabrese, United States District Judge

In this bankruptcy appeal, Litton Loan Servicing, L.P., Ocwen Financial Corporation, and JPMorgan Chase Bank, N.A., (collectively, "Creditors") appeal the bankruptcy court's December 2019 judgment, arguing that the court improperly: (1) granted the abandonment motion of Dennis and Sue Schubert ("Debtors"); and (2) abstained under 28 U.S.C. § 1349(c) from considering Creditors' claim for an injunction. Debtors cross-appeal, arguing that the bankruptcy court improperly exercised jurisdiction over Creditors' adversary proceeding because they lacked standing. On each issue, the Court AFFIRMS the judgment of the bankruptcy court.

FACTUAL AND PROCEDURAL BACKGROUND

The facts are largely undisputed. In 2000, Debtors executed a promissory note secured by a mortgage, payable to Bank One, N.A., in connection with a $128,600 loan to purchase real estate from Mr. Schubert's father. (ECF No. 9-1, PageID #101–02.) Litton Loan Servicing serviced that loan at the time of issue. (Id. , ¶ 2, PageID #102.) In July 2004, Bank One assigned the loan, including the mortgage, to Wachovia Bank as the trustee for registered holders of certain bundled mortgages; and Ocwen Loan Servicing acquired Litton and took over servicing the loan. (Id. , ¶ 3, PageID #102.) Later, U.S. Bank replaced Wachovia as trustee for the bundled mortgages. (Id. )

A. Debtors' Bankruptcy

In July 2003, Debtors filed a voluntary petition for bankruptcy under Chapter 13. (Id. , ¶ 5, PageID# 102.) About a month later, they filed amended schedules and an amended bankruptcy plan, identifying the property and Litton Loan as the servicer. (Id. , ¶ 6, PageID #102–03.) At the time, the plan identified $5,081 in arrearages due on the loan, including accrued fees for late payments. (Id. ) The plan required Debtors to identify their assets and liabilities and to provide other information, including a list of any "contingent and unliquidated claims of every nature" such as "tax refunds, counterclaims" or any "rights to setoff claims." (Id. ) Debtors did not list any claims, counterclaims, or rights to setoff then or at any point during the bankruptcy. (Id. , ¶ 7–9, PageID #103.)

In September 2004, Bank One filed its first proof of claim, stating the principal balance owed on the loan, monthly payment amounts, details of the arrearages, and attached copies of the loan and mortgage documents. (Id. , ¶ 12, PageID #103.) The proof of claim also asserted that Debtors missed five monthly payments worth $6,048.80 and owed $302.45 in late fees. (Id. , ¶ 13, PageID #104.) After crediting Debtors for amounts held in suspense, Bank One claimed $5,197.57 in arrearages. (Id. , ¶ 15, PageID #104.)

That November, the bankruptcy court confirmed Debtors' amended Chapter 13 plan. (Id. , ¶ 16, PageID #104.) That confirmation order did not preserve any cause of action, counterclaim, or right of setoff between Debtors and any other entity, including Creditors. (Id. ) Notably, the plan identified $5,081.00 in arrearages—as opposed to the $ 5,197.57 claimed by Bank One—with no interest rate or fixed payment amount indicated. (Id. , ¶ 17, PageID #104.)

In September 2006, Debtors completed their Chapter 13 plan and emerged from bankruptcy. (Id. , ¶ 20, PageID #105.) In the final accounting and report to the Court, the trustee confirmed that Debtors had fully paid the $5,197.57 in arrearages that Bank One claimed. (Id. , ¶ 21, PageID #105.) The bankruptcy court entered its final decree and closed the bankruptcy estate in December 2006. (Id. , ¶ 22, PageID #105.)

B. The State Court Claims

Four years later, at the end of 2010, U.S. Bank filed a foreclosure action in State court against Debtors for failing to make their agreed-to monthly mortgage payments. (Id. , ¶ 25, PageID #106.) In 2013, after answering and amending several times, Debtors filed their fourth amended answer and counterclaims against U.S. Bank, Ocwen, Litton Loan, and Chase. (Id. ) Debtors counterclaimed, on behalf of themselves and all others similarly situated, alleging that, between 2000 and 2004, Litton Loan and Ocwen charged late-payment fees greater than what the loan permitted—a breach of contract—which Debtors maintain ultimately benefitted U.S. Bank and Chase. (Id. , ¶ 32, PageID #106; see also id. , PageID #122–38.) Debtors also raised counterclaims related to the foreclosure, including wrongful foreclosure, violations of the Real Estate Settlement Procedures Act of 1974 and the Fair Debt Collection Practices Act, intentional infliction of emotional distress, negligence, gross negligence, "multiple mortgage servicing abuses," and breach of good faith. (See id. , PageID #117–21.)

The State court severed and stayed the putative class-action counterclaim but permitted the foreclosure and other counterclaims to go to trial. (Id. , ¶ 33, PageID #106.) The State trial court issued a judgment of foreclosure for U.S. Bank and Ocwen and dismissed the outstanding counterclaims. (Id. , PageID #234–36.) As for the class-action counterclaim, the parties agreed that a stay was appropriate pending appeal. (Id. , PageID #237–38.) On September 5, 2017, the State appellate court affirmed the trial court's foreclosure decision, leaving only the class-action counterclaim for breach of contract intact.

In June 2019, Litton Loan and Ocwen moved to dismiss that counterclaim for lack of subject matter jurisdiction. In August, Debtors opposed that motion and requested more time so they could reopen their Chapter 13 proceeding and seek abandonment of their claims (they had already moved the bankruptcy court to reopen in July 2019). (Schubert ECF No. 50.¹ ) The State court again stayed the case pending the resolution of Debtors' motion in the bankruptcy court.

C. Reopening the Bankruptcy and the Adversary Proceeding

On September 9, 2019, the bankruptcy court granted Debtors' request to reopen. (Schubert ECF No. 63.) The next day, Debtors moved for an order that the trustee had abandoned the counterclaim. (Schubert ECF No. 64.) As the basis for that request, they maintained that they "did not schedule the claims in their petition" because they "did not become aware of the claims" until "late 2012," roughly six years after the bankruptcy closed. (Id. at 8.)

Two days later, Creditors initiated an adversary proceeding against Debtors. Count I of the complaint requested that the bankruptcy court declare that Debtors' counterclaim belonged to the estate, and Count II sought to enjoin Debtors from pursing the counterclaim in State court. (Schubert ECF No. 67; Litton ECF No. 1, at 12–17.) Creditors argued that the counterclaim was undisclosed and unadministered during the bankruptcy and must remain property of the estate. (Id. at 12–13.) Creditors sought an injunction based on res judicata, operation of the confirmation order under 11 U.S.C. § 1327(a), judicial and equitable estoppel, waiver, and voluntary payment. (Id. at 13–24.) Subsequently, Creditors moved for summary judgment on each claim. (Litton , ECF No. 3.) In response, Debtors moved to dismiss or, alternatively, for summary judgment, arguing that the bankruptcy court lacked subject matter jurisdiction over the adversary proceeding because Creditors lacked standing. (Litton , ECF No. 17.)

On December 18, 2019, after holding a hearing in the adversary proceeding, the bankruptcy court: (1) granted Creditors' motion for summary judgment as to the declaratory judgment request—that the counterclaim remained property of the estate until it was abandoned; (2) overruled Debtors' motion to dismiss or motion for summary judgment; and (3) dismissed without prejudice Creditors' request for an injunction on grounds of permissive abstention under 28 U.S.C. § 1344(c). (Litton ECF No. 28.) Then, in the core proceeding, the bankruptcy court held that the trustee abandoned the counterclaim, returning the claim to Debtors' possession. (Schubert ECF No. 77.)

The parties timely appeal and cross-appeal. (ECF No. 1; see ECF No. 6, ECF No. 8.)

STANDARD OF REVIEW

The Court reviews the bankruptcy court's findings of fact for clear error and conclusions of law de novo. WesBanco Bank Barnesville v. Rafoth (In re Baker & Getty Fin. Servs.) , 106 F.3d 1255, 1259 (6th Cir. 1997).

The Court reviews for abuse of discretion a bankruptcy court's order of abandonment and its decision to abstain. See In re Blasingame , 598 B.R. 864, 868 (B.A.P. 6th Cir. 2019) (abandonment); McDaniel v. ABN Amro Mortg. Grp. , 364 B.R. 644, 650 (S.D. Ohio 2007) (abstention); see In re Harris , 966 F.3d 439, 441–42 (6th Cir. 2020) (vacated on separate grounds) (abstention). An abuse of discretion "occurs if the [bankruptcy] court relies on clearly erroneous findings of fact, applies the wrong legal standard, misapplies the correct legal standard when reaching a conclusion, or makes a clear error of judgment." Young v. Nationwide Mut. Ins. Co. , 693 F.3d 532, 536 (6th Cir. 2012).

STANDING

Debtors argue that the bankruptcy court erred by denying their motion to dismiss the adversary proceeding because Creditors lacked standing to bring it in the first place. (ECF No. 13, PageID #270–76.) In their view, Creditors are not "parties in interest" because their "pecuniary interests... were not, and never could have been, directly affected by the bankruptcy proceedings" because they ...