Smith, In re

• Decision Date: 14 April 1989
• Docket Number: No. 88-1505,88-1505
• Citation: 866 F.2d 576
• Parties: Bankr. L. Rep. P 72,640 In re Johnnie Mae SMITH. Johnnie Mae SMITH, Appellant v. COMMERCIAL BANKING CORP., Buffalo Savings Bank, and its Servicing Agent, Fidelity Bond & Mortgage Co., and James J. O'Connell.
• Court: U.S. Court of Appeals — Third Circuit

Page 576

866 F.2d 576

Bankr. L. Rep. P 72,640

In re Johnnie Mae SMITH Johnnie Mae SMITH, Appellant v. COMMERCIAL BANKING CORP., Buffalo Savings Bank, and its Servicing Agent, Fidelity Bond & Mortgage Co., and James J. O'Connell.

No. 88-1505.

United States Court of Appeals Third Circuit.

Argued Nov. 3, 1988.

Decided Jan. 12, 1989.

As Amended April 14, 1989.

Irv Ackelsberg, Eric L. Frank (argued), Community Legal Services, Inc., Philadelphia, Pa., for appellant.

Joseph A. Goldbeck, Jr., Gary E. McCafferty (argued), Philadelphia, Pa., for appellee.

Before GIBBONS, Chief Judge, and BECKER and ROSENN, Circuit Judges.

OPINION OF THE COURT

ROSENN, Circuit Judge.

This case raises the issue of whether the foreclosure of residential property without either giving the required notice of intention to foreclose until a few days before the sheriff's sale or timely serving the foreclosure complaint constitutes injuries cognizable under the Pennsylvania "unfair or deceptive practices act" (UDAP) or under the Pennsylvania Loan Interest and Protection Law (Act 6). Both the district court and the bankruptcy court concluded that the UDAP did not extend to such injuries. Neither court, however, addressed the claim under Act 6. The plaintiff, Johnnie Mae Smith, appealed, and we reverse.

I.

Smith purchased a parcel of real estate at 1356 East Rittenhouse Street, Philadelphia, Pennsylvania in 1963 and mortgaged the property to Buffalo Savings Bank (the Bank). The mortgage was insured by the Federal Housing Administration (HUD) and serviced by Fidelity Bond and Mortgage Company of Philadelphia (Fidelity).

Because of health reasons, Smith joined her family in Germany. Prior to her departure she had arranged for her property to be managed by a third-party whose duties included collection of the rents and payment of the mortgage from those rents. Her agent, however, failed to collect the rents and to pay the mortgage. As a result, Smith became delinquent on the mortgage on which she had made monthly payments for approximately seventeen years.

On June 19, 1980, Smith sent Fidelity a notarized letter stating that she was residing in Germany for an indefinite period of time and asking Fidelity to send her an accounting there of the payments due. On July 1, 1980, Fidelity sent the requested information by certified mail to Smith in Germany. At that time, the sum needed to satisfy the delinquency amounted to $1,095.79.

Before the month's end, however, Fidelity instituted mortgage foreclosure proceedings by filing a complaint in the Court of Common Pleas of Philadelphia. The following month the sheriff attempted to effect service of the complaint by delivering a copy to an individual residing on the mortgaged property. Although, as both the bankruptcy court and the district court found, Fidelity knew that Smith did not reside at the property, ¹ service was neither made on her personally nor at her residence.

The court entered default judgment on the foreclosure complaint in favor of Fidelity on September 4, 1980. Shortly thereafter, Fidelity mailed a "HUD tenant letter" to the occupants of the property. Notably, no such letter was sent to Smith.

Smith did not learn of the foreclosure proceedings until three weeks after entry of the default judgment. She immediately communicated with Fidelity and learned of the impending sheriff's sale of the property on October 6, 1980. Smith requested that the sale be postponed and Fidelity complied by rescheduling the sale for November 3.

With hope of reinstating the mortgage, Smith flew from Germany to Philadelphia and offered Fidelity $1,300. Fidelity declined and stated that the outstanding deficiency now amounted to $1,997.88, consisting of $1,199.38 in delinquent monthly payments and late charges, $774.50 in attorneys' fees, and $24.00 in foreclosure inspection costs.

The sheriff sold the mortgaged property at public sale on November 3 to Commercial Banking Corporation (Commercial), the second lienholder, for $4,600. Smith then leased the property from Commercial.

On October 13, 1981, Smith filed a voluntary petition under Chapter 13 of the Bankruptcy Code. Shortly thereafter, she commenced an adversary proceeding against Buffalo, Fidelity, Commercial, and the bankruptcy trustee, ² requesting the bankruptcy court to set aside the foreclosure of the property. Commercial settled out of the litigation by selling the property back to Smith for $8,000, of which $7,000 was to be paid pursuant to a ten year mortgage at the rate of 14 percent per annum. After settling with Commercial, Smith sought monetary damages against Buffalo and Fidelity for violations of (1) the UDAP, and (2) Act 6.

The bankruptcy court heard plaintiff's case regarding the UDAP and Act 6 claims on June 17, 1985. Prior to the court's disposition of the case, Smith converted the Chapter 13 proceeding into a Chapter 7 case, and received a Chapter 7 discharge from the bankruptcy court in December 1985. On April 11, 1986, the court entered an order denying Smith any relief under the UDAP or Act 6. Smith filed a timely appeal to the United States District Court for the Eastern District of Pennsylvania which entered an order on May 23, 1988, affirming the judgment of the bankruptcy court. 87 B.R. 329. The plaintiff timely appealed to this court.

The only claims remaining before this court are the claims arising under Pennsylvania law which Smith contends are properly before this court as related to the original bankruptcy claim under 28 U.S.C.A. Sec. 157 (West Supp.1988). ³ Although the bankruptcy court found that Fidelity failed to make proper service of the foreclosure complaint upon Smith, it concluded, without discussion, that plaintiff had no action for Fidelity's conduct under the UDAP. 59 B.R. 298, 301 (Bankr.E.D.Pa.1986). The district court, on appeal, agreed with the bankruptcy court that improper service of the complaint did not constitute an injury cognizable under the UDAP, concluding that "[e]ven if the failure to give notice constituted a material omission, Smith was not damaged.... Any prejudice to Smith from the improper service was cured by the [30 day] postponement of the sheriff's sale."

II.

The threshold issue is whether the federal courts properly continued to exercise jurisdiction over these proceedings. Fidelity contends that the discharge of the plaintiff in the underlying bankruptcy proceeding, upon which jurisdiction over these claims originally depended, deprived the bankruptcy court of jurisdiction over the related claims. ⁴ As appellees correctly note, for an action to be related to a bankruptcy case, its outcome must potentially have some effect on the bankruptcy estate, such as altering debtor's rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankrupt estate. See Pacor, Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir.1984). Appellees fail, however, to distinguish between the determination of the existence of jurisdiction at the outset of these proceedings and the determination of whether "related" claims should be dismissed with the dismissal of the bankruptcy case or the discharge of the debtor.

As a general rule, the dismissal of a bankruptcy case should result in the dismissal of "related proceedings" because the court's jurisdiction of the latter depends, in the first instance, upon the nexus between the underlying bankruptcy case and the related proceedings. See In re Stardust Inn, Inc., 70 B.R. 888, 890 (Bankr.E.D.Pa.1987). The question remains, however, whether the court may exercise its discretion to retain jurisdiction over the related claims after the termination of the bankruptcy proceedings.

The few bankruptcy courts which have addressed this issue have held that the general rule that dismissal of a bankruptcy case terminates all adversary proceedings filed in that case is not without exception. See, e.g., Stardust Inn, 70 B.R. at 891; In re Pocklington, 21 B.R. 199, 201 (Bankr.S.D.Cal.1982). Drawing upon an analogy to the disposition of ancillary and pendent claims, the courts have held that they may consider a number of factors to determine whether jurisdiction should be retained. These factors include: (1) judicial economy; (2) fairness and convenience to the litigants; and (3) the degree of difficulty of the related legal issues involved. See Stardust Inn, 70 B.R. at 891.

Here, the existence of two of these factors persuades us that the bankruptcy court properly retained jurisdiction over the related claims. First, the court's interest in judicial economy argues in favor of the retention of jurisdiction. The core proceedings had been before the bankruptcy court for over four years and it had approved settlement of related litigation with Commercial, one of the defendants to this litigation. To have remanded at that stage to the state court would have served no purpose and would have wasted unnecessarily the resources and energies already invested by the parties and the court. Second, it would be unfair and would serve no useful purpose to compel Smith to bear the cost of and delay of a retrial in the state court at this time, simply because of the unfortunate way in which the bankruptcy court timed its orders. For these reasons, the bankruptcy court did not abuse its discretion in retaining jurisdiction over the related proceedings notwithstanding the earlier discharge of the debtor.

III.

Smith raises two issues on appeal. First, whether the invalid service of process, resulting in a default judgment, constitutes an unfair or deceptive practice or act in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, 73 Pa.Stat.Ann. Sec. 201-1 et seq. (Purdon Supp.1988) (UDAP). Second, whether the defendants violated Act 6, 41 Pa.Stat.Ann. Secs. 403, 504 (Purdon Supp.1988), by failing to send Smith the required thirty day pre-foreclosure notice advising her, inter alia, of the...