PNC Bank v. Davis

PNC BANK, N.A., Appellant-Defendant, v. TERESA DAVIS AND CHRISTOPHER DAVIS, Appellees-Plaintiffs.

CIVIL No. JKB-21-01367

United States District Court, D. Maryland

November 18, 2021

MEMORANDUM

James K. Bredar, Chief Judge

This case comes before this Court on appeal from the United States Bankruptcy Court for the District of Maryland. The case arises from an adversary proceeding filed by debtors Teresa and Christopher Davis against PNC Bank, N.A. ("PNC") relating to the enforceability of a mortgage loan modification. PNC appeals the Bankruptcy Court's entry of final judgment in favor of the Davises. Because briefing has been bifurcated, the matter before the Court at this stage is only whether the Bankruptcy Court had the authority to enter final judgment in the adversary proceeding, (See ECF No. 7.) No. hearing is required. See Local Rule 105.6 (D. Md. 2021).

PNC asserts that the adversary proceeding was a non-core proceeding and that PNC did not consent to the entry of final judgment by the Bankruptcy Court. The Davises contend that the proceeding was a core proceeding and that PNC consented to final judgment. The Court concludes that the Bankruptcy Court did not have the authority to enter final judgment in the adversary proceeding. Accordingly, the judgment of the Bankruptcy Court is VACATED and the parties are DIRECTED to present the factual record and legal issues for this Court's de novo review.

I. Factual and Procedural Background^[1]

In short and as described in more detail below, the Davises have filed for bankruptcy twice and, during the second bankruptcy proceedings, they filed an adversary proceeding against PNC regarding the enforceability of a mortgage modification agreement. The Bankruptcy Court found that the adversary proceeding was a core proceeding and, thus, that it had authority to enter final judgment. The Bankruptcy Court found PNC liable for breach of contract and concluded that PNC had violated certain Maryland consumer protection statutes.

A. First Bankruptcy Case

In 2005, the Davises obtained mortgage financing from PNC. (Bankr. Ct. Mem. Op. ("Bk. Op.") at 4-5, ECF No. 3-3.) In January 2014, PNC informed the Davises that it was initiating foreclosure proceedings. (Id. at 12.) On November 4, 2014, the Davises filed their first voluntary Chapter 13 bankruptcy case. (Id. at 7.) In October 2015, during the pendency of this first bankruptcy case, PNC offered the Davises a mortgage modification, which would reduce the amount of the Davises' monthly payments as compared to the original loan terms (the "Modification Agreement"). (Id. at 14.) In November 2015, the Davises filed motions in the bankruptcy proceeding seeking court approval of the Modification Agreement. (Id. at 17.) The bankruptcy trustee objected to the Modification Agreement. (Id.)

In December 2015, PNC sent the Davises a letter withdrawing the Modification Agreement because, per the letter, the Davises "notified [PNC] on December 22, 2015 that [they] did not wish to accept the offer." (Id. at 18.) Around the same time, the Modification Agreement was recorded in the Carroll County, Maryland land records. (Id. at 6.) As noted above, the Court will not detail here the events surrounding the Davises' acceptance or non-acceptance of the Modification Agreement. However, suffice it to say that the parties disagree whether the Davises accepted the Modification Agreement such that it was enforceable.

The Davises eventually sought dismissal of the bankruptcy case prior to any hearing on (or approval of) the Modification Agreement, and the case was dismissed in March 2016. (Id. at 10, )

B. Second Bankruptcy Case

After the dismissal of the first bankruptcy case, PNC sent the Davises mortgage billing statements requiring them to pay current and past due amounts on the mortgage. (Id. at 5.) PNC used the original loan terms to calculate these amounts. (Id.) Because the Davises did not pay the amount due, PNC scheduled a foreclosure sale for April 25, 2016. (Id. at 6.)

On April 22,, 2016, the Davises filed a second voluntary Chapter 13 petition. (Id.) On August 26, 2016, 21st Mortgage Corporation filed a proof of claim, asserting that it held a claim in the amount of $596, 473.91 secured by the Davises' home. (Id. at 7.) The proof of claim identifies PNC as the loan servicer and as the party who should receive notices and payments. (Id.)

The Davises filed their Chapter 13 plan (the "Plan") on September 27, 2016. (PNC Br. At 8, ECF No. 8.) It was confirmed by the Bankruptcy Court on October 8, 2016. (Id. at 9.) The Plan indicates that the secured claim held by PNC was "not affected by this plan and will be paid outside of the plan directly by the Debtor." (PNC Br. App. at ¶ 0131, ECF No. 8-1.) The Plan also includes the following non-standard provision:

PNC Mortgage - the debtors have applied to modify this first mortgage. BY CONSENT WITH THE CREDITOR, in the event the debtors are not actively in a modification with a scheduled trial payment within 180 days of this case being confirmed, unless other arrangements have been made with PNC Mortgage, a motion to modify the plan after confirmation will be filed to include any arrears owed to PNC Mortgage, or this case will be converted or dismissed.

(Id.)

On January 25, 2017, PNC filed a Motion Seeking Relief from Stay, noting that "[a] Loan Modification Agreement was completed and executed by the parties herein. A copy of the loan modification is attached hereto as Exhibit D." (Bk. Op. at 6.) In response, the Davises described the events surrounding the Modification Agreement. (Id.) On January 9, 2018, PNC filed an amendment removing the Modification Agreement from the Motion Seeking Relief from Stay, noting that the Modification Agreement was invalid. (Id.) The Davises opposed this motion. (Id. at 6-7.)^[2]

1. Adversary Complaint

The Davises filed the instant adversary complaint against PNC on July 24, 2017. (PNC Br. at 9.) The Davises initially sought, inter alia, a declaratory judgment from the Bankruptcy Court that the Modification Agreement was operative and that the Davises were current on all payments at the time of the recordation of the Modification Agreement. (Compl. at 6-9, ECF No. 2-3.) However, in their May 2018 Amended Complaint, the Davises removed the claim for declaratory judgment on the enforceability of the Modification Agreement and included counts for breach of contract (seeking $50, 000 in damages as well as costs and attorney's fees), violations of the Maryland Consumer Debt-Collection Act ("MCDCA") (seeking $300, 000 in damages as well as costs and attorney's fees), violations of the Maryland Consumer Protection Act ("MCPA") (seeking $300, 000 in damages as well as costs and attorney's fees), and equitable relief, including sanctions in an amount to bring the Davises current on their mortgage payments and to cure related tax liabilities. (Am. Compl at 8-15, ECF No. 2-15.) In its Answer, PNC indicated under the heading "Statement in Compliance with Local Bankruptcy Rule 7012-1" that it "does not consent to the entry of final order[s] or judgments by the Bankruptcy Judge in this matter, in accordance with Federal Bankruptcy Rules 7008 and 7012(b)." (Answer at 12, ECF No. 2-16.)

2. Bankruptcy Court Decision

The Bankruptcy Court concluded that it had subject matter jurisdiction over the adversary proceeding, and that it was a "core proceeding" under 28 U.S.C. § 157(b). The Bankruptcy Court "considered and rejected] PNC's assertion that this adversary proceeding is not a statutory core proceeding under 28 U.S.C. § 157(b)." (Bk. Op. at 2, n.4.) The Bankruptcy Court explained that:

The question of the enforceability of the mortgage modification agreement at issue here is one that must be resolved as part of the claims allowance process. Moreover, PNC asserted as much itself when it filed a motion in this Court asserting that the agreement was part of the loan documents evidencing its alleged secured claim. Thus, it is clear that the claims made against PNC are matters under § 157(b)(2)(B) concerning the "allowance and disallowance of claims" or under § 157(b)(2)(C) concerning "counterclaims by the estate against persons filing claims against the estate." To the extent that it is found that the Court lacks authority to enter its order herein as a final order, the court submits this memorandum opinion as proposed findings of fact and conclusions of law in accordance with 28 U.S.C. § 157(c)(1).

(Id.)

The Bankruptcy Court concluded that PNC was liable for breach of contract and that PNC violated the MCDCA and MCPA, and awarded the Davises $72, 230 in damages (including $50, 000 in emotional distress damages) and $302, 472.67 in attorney's fees. (Id. at 25-38; Judgment, ECF No. 3-31.) While the Bankruptcy Court did not grant the sanctions sought by the Davises (i.e., sanctions in an amount to cure the default and tax liabilities), it determined that the Davises were entitled to cure any default and reinstate the mortgage loan on the terms of the Modification Agreement. (Bk. Op. at 38-39.)

II. Legal Standard

A district court reviewing a decision of a bankruptcy court reviews questions of law de novo. See In re Merry-Go-Round Enters., 400 F.3d 219, 224 (4th Cir. 2005). Whether a bankruptcy court had the authority to enter a final judgment in an adversary proceeding is a question of law, which this Court will review de novo. See Okoro v. Wells Fargo Bank N.A., 567 B.R. 267, 271 (D.Md. 2017).

III. Analysis

PNC argues that the adversary proceeding was a non-core, but related, proceeding. (PNC Br. at 11-12.) PNC further argues that, even if the proceeding was statutorily core, it was not constitutionally core, and PNC did not consent to the entry of final judgment. (Id. at...