Nowling v. SN Servicing Corp.

MICHAEL NOWLING and JANICE NOWLING, Plaintiffs, v. SN SERVICING CORPORATION andU.S. BANK TRUST NATIONAL ASSOCIATION, as Trustee of the Igloo Series II Trust, Defendants.

Case No. 19-CV-1605 (PJS/TNL)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

March 16, 2020

ORDER

Christopher Wilcox and Daniel M. Eaton, CHRISTENSEN LAW OFFICE PLLC, for plaintiffs.

Calvin P. Hoffman and James Schoeberl, STINSON LLP, for defendants.

Plaintiffs Michael and Janice Nowling (collectively, the "Nowlings") have a home-mortgage loan with defendant U.S. Bank Trust National Association, as Trustee of the Igloo Series II Trust ("U.S. Bank"). The loan is serviced by defendant SN Servicing Corporation ("SN Servicing"). In December 2017, the Nowlings began sending a series of letters to SN Servicing requesting information about their loan and disputing their remaining balance. After receiving what they regarded as an unsatisfactory response, the Nowlings filed this lawsuit, asserting claims under the Real Estate Settlement Procedures Act ("RESPA") and Minnesota's Mortgage Originator and Servicer Licensing Act ("MOSLA"), as well as a claim for breach of contract.

On the date that they filed this lawsuit, the Nowlings were debtors in ongoing Chapter 13 bankruptcy proceedings. The Nowlings failed to disclose their claims against defendants to the bankruptcy court in those proceedings, as they were required to do. Defendants now move to dismiss the Nowlings' claims, arguing that the Nowlings are judicially estopped from pursuing their claims because of their failure to disclose their claims to the bankruptcy court. The Court disagrees and denies defendants' motion to dismiss.

I. BACKGROUND

In 2002, the Nowlings borrowed $155,600 to purchase a home and secured the loan with a mortgage. ECF No. 18 ¶ 20; ECF No. 27 at 2. The Nowlings refinanced four times between 2008 and 2013, increasing the principal each time. ECF No. 28-1 at 30-38, 49-76. In 2014, the Nowlings filed for Chapter 13 bankruptcy. ECF No. 18 ¶ 23; ECF No. 28-1 at 78-124.

Among the schedules that bankruptcy debtors are required to file is an itemized list of the debtors' personal property, known as "Schedule B." Schedule B requires debtors to disclose various categories of assets, including any "contingent and unliquidated claims." ECF No. 28-1 at 88. On their Schedule B, the Nowlings listed claims for unpaid wages and for unpaid Social Security and unemployment benefits. Id.

A couple of years after filing for bankruptcy—and while their bankruptcy proceedings were still pending—the Nowlings began sending a series of letters to SN Servicing. In those letters, the Nowlings requested information about their loan and disputed the amount that they owed. The first letter was sent by the Nowlings' former counsel on their behalf on December 8, 2017. ECF No. 18-1 at 1. That letter was characterized as a "qualified written request" ("QWR"). Id. Under RESPA, when a mortgage servicer receives a QWR, the servicer is required to respond within 30 days by: (1) correcting the borrower's account; (2) conducting an investigation and providing an explanation of why the servicer believes the account is correct; or (3) conducting an investigation and providing either the information requested or an explanation of why the information is unavailable. See 12 U.S.C. § 2605(e)(2). The December 8 letter promised "aggressive enforcement" of the Nowlings' rights if SN Servicing should fail to respond to the QWR in an adequate and timely manner. ECF No. 18-1 at 1.

On January 10, 2018, SN Servicing responded with some, but not all, of the requested information. Id. at 3. The Nowlings proceeded to send four additional letters asserting that the reported principal amount was incorrect and demanding information about the loan agreement and payment history. Id. at 4-5, 7, 9. SN Servicing responded to three of the letters, but each of the responses was deemed inadequate by the Nowlings. Id. at 6, 8, 11.

On May 13, 2019, the bankruptcy court entered an order discharging the Nowlings' unsecured debt on the basis of the schedules they had filed. ECF No. 28-1 at 144. As noted, those schedules did not disclose any claim against U.S. Bank or SN Servicing. Id. at 88. On June 18, 2019—after the discharge, but while the bankruptcy proceedings were still pending—the Nowlings filed this lawsuit, alleging that SN Servicing violated RESPA and MOSLA when it failed to provide adequate and timely responses to their letters. ECF No. 1. The Nowlings also brought a breach-of-contract claim, alleging that U.S. Bank and SN Servicing violated the loan agreement by incorrectly applying payments, by charging improper fees and interest rates, and by claiming an incorrect outstanding balance. Id. at 27; ECF No. 18 at 30. Again, however, the Nowlings did not notify the bankruptcy court of their claims.

On July 25, 2019, defendants moved to dismiss the Nowlings' claims, arguing that those claims were barred by the doctrine of judicial estoppel because the claims had never been disclosed by the Nowlings in their pending Chapter 13 proceedings.¹ ECF No. 13. Later that same day, the Nowlings' bankruptcy counsel amended their Schedule B to include their RESPA claim. ECF No. 18-1 at 12-27. The trustee took noaction in response to the disclosure. ECF No. 18 ¶ 81. On August 12, 2019, the bankruptcy proceedings closed. Id. ¶ 82.

A week later, the Nowlings filed an amended complaint in this action, again asserting RESPA, MOSLA, and contract claims against defendants. ECF No. 18. Defendants now move to dismiss the amended complaint, arguing that the Nowlings' belated amendment of their Schedule B did not cure the original omission, and that judicial estoppel should still apply to bar the Nowlings from raising their claims. ECF No. 27.

II. ANALYSIS

A. Standard of Review

To survive a motion to dismiss under Fed. R. Civ. P. 12(b)(6), an amended complaint must "state a claim to relief that is plausible on its face." Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). Although the factual allegations in the amended complaint need not be detailed, they must be sufficient to "raise a right to relief above the speculative level." Id. at 555. In addition to the facts alleged in the amended complaint, the Court may consider matters of public record and matters necessarily embraced by the amended complaint. See Zean v. Fairview Health Servs., 858 F.3d 520, 526 (8th Cir. 2017). In assessing the sufficiency of the amended complaint, the Court need not consider legal conclusions that are couched as factual allegations. Ashcroft v.Iqbal, 556 U.S. 662, 678-79 (2009). The Court must, however, accept as true all factual allegations in the amended complaint and draw all reasonable inferences in favor of the non-moving party. See Aten v. Scottsdale Ins. Co., 511 F.3d 818, 820 (8th Cir. 2008).

B. Judicial Estoppel

In New Hampshire v. Maine, the Supreme Court described judicial estoppel as "an equitable doctrine invoked by a court at its discretion." 532 U.S. 742, 750 (2001). A court may apply judicial estoppel to "prevent[] a party from asserting a claim in a legal proceeding that is inconsistent with a claim taken by that party in a previous proceeding." Id. at 749. The doctrine is intended to protect the integrity of the judicial system by preventing litigants from "deliberately changing positions according to the exigencies of the moment." Id at 750.

While acknowledging that "the circumstances under which judicial estoppel may appropriately be invoked are probably not reducible to any general formulation of principle," the Supreme Court in New Hampshire identified three factors that "typically inform the decision whether to apply the doctrine in a particular case." Id. "First, a party's later position must be clearly inconsistent with its earlier position." Id. Second, a party's earlier position must have been accepted by a court, "so that judicial acceptance of an inconsistent position in a later proceeding would create the perception that either the first or the second court was misled." Id. Third, courts must consider"whether the party seeking to assert an inconsistent position would derive an unfair advantage or impose an unfair detriment on the opposing party if not estopped." Id. at 751.

The Supreme Court cautioned that its three-factor test was not meant to "establish inflexible prerequisites or an exhaustive formula for determining the applicability of judicial estoppel." Id. The Court explicitly acknowledged that "[a]dditional considerations may inform the doctrine's application in specific factual contexts," id., and noted that judicial estoppel may not be warranted when the prior inconsistent statement was the result of inadvertence or mistake, id. at 753.

The New Hampshire framework has regularly been applied in cases in which a plaintiff seeks to assert claims that arose prior to or during the pendency of bankruptcy proceedings but were not disclosed to the bankruptcy court. In Van Horn v. Martin, 812 F.3d 1180 (8th Cir. 2016), for example, the Eighth Circuit upheld the lower court's application of judicial estoppel to bar the plaintiff (Van Horn) from asserting employment-discrimination claims. Van Horn had filed two charges with the Equal Employment Opportunity Commission ("EEOC") while she was a debtor in Chapter 13 bankruptcy proceedings, but she had not listed her potential claims on her bankruptcy schedules. Id. at 1182. The Eighth Circuit deemed Van Horn's omission to be an implicit representation to the bankruptcy court that her claims did not exist. Id. at 1183.Van Horn's later assertion of those claims in district court was therefore inconsistent with her prior position, and the court concluded that the first New Hampshire factor was met. Id.

The Eighth Circuit found that the second New Hampshire factor was also met because the bankruptcy court's discharge of Van Horn's unsecured debts based on her incomplete schedules constituted judicial...