Allen-Morris v. Nicholas Fin., Inc. (In re Allen-Morris)
| Decision Date | 29 October 2014 |
| Docket Number | No. 14–12944.,14–12944. |
| Citation | 523 B.R. 532 |
| Parties | In re Gwendolyn ALLEN–MORRIS, Debtor. Gwendolyn Allen–Morris, Appellant, v. Nicholas Financial, Inc., Appellee. |
| Court | U.S. District Court — Eastern District of Michigan |
Edward J. Gudeman, Brian A. Rookard, Gudeman & Associates P.C., Royal Oak, MI, for Appellant.
Stephen W. King, King & Murray PLLC, Birmingham, MI, for Appellee.
This is an appeal from a March 26, 2014 Bankruptcy Court order dismissing Appellant Gwendolyn Allen–Morris' (“Allen–Morris”) adversary proceeding against Appellee Nicholas Financial, Inc. The Bankruptcy Court dismissed the adversary proceeding pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons stated below, the Bankruptcy Court's order is AFFIRMED.
This appeal concerns Allen–Morris' purchase of a car. Allen–Morris purchased the car, a used 2002 Jeep Grand Cherokee Sport (“Jeep”), from Suburban Chrysler Jeep Dodge, Inc. (“Suburban Chrysler”). According to the sales contract, the “total cash price” of the Jeep was $9,881.70. (Compl., Ex. A.) This included a cash price of $9,131.00, a sales tax of $560.70, and a document preparation fee of $190.00.1 After Allen–Morris made a down payment of $1,152.00, the balance of the purchase price (and some other charges) were financed at an interest rate of 25% for a term of 48 months. Suburban Chrysler then assigned the sales contract to Nicholas Financial. Nicholas Financial is a finance company that principally provides credit to credit-challenged buyers of used cars. (Appellant's Br. at xv-xvii, Nicholas Financial SEC Filings.)2 After the buyers execute the contracts with the dealership, Nicholas Financial purchases the contracts at a discounted price depending on the age and creditworthiness of the buyer, and the value of the car. (Id. )
Two years after purchasing the Jeep, Allen–Morris filed for Chapter 13 bankruptcy. She listed the Jeep and her lawsuit against Nicholas Financial on her bankruptcy schedules, and also listed Nicholas Financial as holding a lien on the Jeep. (R. at 101; Tr. at 27.) Nicholas Financial responded to Allen–Morris' bankruptcy in two ways. It first filed a proof of claim for the Jeep. (Compl., Ex. A.) It then filed a motion for relief from the automatic stay for the Jeep. (R. at 101; Tr. at 27.) The Bankruptcy Court later granted Nicholas Financial's motion for relief from the automatic stay, and the Jeep was sold at an auction.
Before the Bankruptcy Court granted Nicholas Financial's motion for relief from the automatic stay, however, Allen–Morris filed an adversary proceeding against Nicholas Financial. The purpose of the adversary proceeding was to object to Nicholas Financial's proof of claim and to void its lien on the Jeep. Count I of the complaint seeks to disallow Nicholas Financial's proof of claim under Michigan's “wrongful-conduct rule” because the sale of the Jeep violated Michigan's criminal usury statute, Mich. Comp. Laws § 438.41, and the Michigan Motor Vehicle Sales Finance Act (MVSFA). Mich. Comp. Laws § 492.101 et seq. Count II of the complaint seeks to void Nicholas Financial's lien on the Jeep under 11 U.S.C. § 506(d).
The Bankruptcy Court dismissed Allen–Morris' adversary proceeding pursuant to Federal Rule of Civil Procedure 12(b)(6). The Court noted that because Nicholas Financial had already sold the Jeep, the entire case may have been moot. (R. at 98; Tr. at 24.) Despite this concern, the Court addressed Allen–Morris' substantive claims and found that Allen–Morris' complaint did not plausibly establish a violation of either statute. Accordingly, the Court held that Allen–Morris could not establish a violation of Michigan's wrongful-conduct rule. Allen–Morris later brought a motion for reconsideration that the Bankruptcy Court denied. (R. at 126.)
Allen–Morris now appeals the Bankruptcy Court's order dismissing her adversary proceeding.
This Court has jurisdiction to hear appeals from final judgments, orders, and decrees of the bankruptcy court. 28 U.S.C. § 158(a)(1). On appeal, a bankruptcy court's findings of fact are reviewed for clear error, while its legal conclusions are reviewed de novo. McMillan v. LTV Steel, Inc., 555 F.3d 218, 225 (6th Cir.2009). A ruling on a motion to dismiss a bankruptcy court adversary proceeding is reviewed de novo. In re Grenier, 430 B.R. 446, 449 (E.D.Mich.2010) aff'd, 458 Fed.Appx. 436 (6th Cir.2012).
A motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6) tests the sufficiency of a complaint. In a light most favorable to the plaintiff, the court must assume that the plaintiff's factual allegations are true and determine whether the complaint states a valid claim for relief. See Albright v. Oliver, 510 U.S. 266, 114 S.Ct. 807, 127 L.Ed.2d 114 (1994) ; Bower v. Fed. Express Corp., 96 F.3d 200, 203 (6th Cir.1996). To survive a Rule 12(b)(6) motion to dismiss, the complaint's “[f]actual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (internal citations and emphasis omitted). See also Ass'n of Cleveland Fire Fighters v. City of Cleveland, Ohio, 502 F.3d 545, 548 (6th Cir.2007).
Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The court is “not bound to accept as true a legal conclusion couched as a factual allegation.” Id. at 679, 129 S.Ct. 1937 (internal quotation marks and citation omitted). “Only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id.
Although neither party addresses the Bankruptcy Court's mootness concerns at any length in their briefs, this Court is obligated to decide whether the fact that Nicholas Financial has already sold the Jeep has mooted this case. McPherson v. Michigan High Sch. Athletic Ass'n, Inc.,
119 F.3d 453, 458 (6th Cir.1997) (). Under Article III of the Constitution, federal courts only have jurisdiction to adjudicate actual “cases or controversies,” and this applies to bankruptcy courts as equally as it does to district courts. In re A.P. Liquidating Co., 421 Fed.Appx. 583, 587 (6th Cir.2011) (citing In re Resource Tech. Corp., 624 F.3d 376, 382 (7th Cir.2010) ). Because moot cases no longer present an actual case or controversy, “a federal court has no authority to render a decision upon moot questions or to declare rules of law that cannot affect the matter at issue.” United States v. City of Detroit, 401 F.3d 448, 450–51 (6th Cir.2005). A case becomes moot “when—for whatever reason—the dispute discontinues or [the court] is no longer able to grant meaningful relief to the prevailing party.” Kentucky v. U.S. ex rel. Hagel, 759 F.3d 588, 595 (6th Cir.2014). However, if the parties have a “concrete interest, however small, in the outcome of the litigation, the case is not moot.” Chafin v. Chafin, ––– U.S. ––––, 133 S.Ct. 1017, 1023, 185 L.Ed.2d 1 (2013).
This case is not moot. Allen–Morris' complaint contains two counts. Count I seeks the disallowance of Nicholas Financial's proof of claim. Although the car has been sold, Allen–Morris still has a concrete interest in having the proof of claim disallowed. There are many effects of allowing a proof of claim. If the claim is allowed, Nicholas Financial may have a claim for a deficiency balance on the Jeep.3 Furthermore, an order allowing a proof of claim can be a “final judgment” for res judicata purposes. EDP Med. Computer Sys., Inc. v. United States, 480 F.3d 621, 625 (2d Cir.2007) ; Siegel v. Fed. Home Loan Mortgage Corp., 143 F.3d 525, 529 (9th Cir.1998) ; In re Baudoin, 981 F.2d 736, 742 (5th Cir.1993). Allen–Morris has an interest in disallowing the claim to avoid these effects. Count II of the complaint, however, is moot. Because the Jeep has been sold, there is no longer any lien on it for a court to void. Nevertheless, Allen–Morris' continued interest in Count I gives this Court the power to hear this case.4
Relying on Michigan's “wrongful-conduct rule,” Allen–Morris argues that Nicholas–Financial's proof of claim must be disallowed because it is the result of a criminally usurious transaction. The wrongful-conduct rule is an affirmative defense. Indus. Quick Search, Inc. v. Terryn, No. 284163, 2010 WL 481057, at *2 (Mich.Ct.App. Feb. 11, 2010).5 According to the rule, a plaintiff's claim is barred when it “is based, in whole or in part, on his own illegal conduct.” Orzel by Orzel v. Scott Drug Co., 449 Mich. 550, 537 N.W.2d 208, 212–13 (1995). The rule has two requirements: (1) “the plaintiff's conduct must be prohibited or almost entirely prohibited under a penal or criminal statute”; and (2) “a sufficient causal nexus must exist between the plaintiff's illegal conduct and the plaintiff's asserted damages.”Id. at 214–15.
Allen–Morris bases her wrongful-conduct defense on the violation of two statutes: Michigan's criminal usury statute and the MVSFA. Nicholas Financial argues that if anyone violated these statutes it is Suburban Chrysler, and Allen–Morris cannot bring her defense against Nicholas Financial because a provision in the Truth in Lending Act (TILA), 15 U.S.C. § 1641(a), preempts the Michigan law that would allow her to do so. It also argues that the sale did not violate either statute. These arguments are addressed below.
Although...
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