In re Ephraim

Decision Date14 September 2004
Docket NumberAdversary No. 03 A 04598.,Bankruptcy No. 03 B 35580.
Citation318 B.R. 419
PartiesIn re Inez EPHRAIM, Debtor. Inez Ephraim, Plaintiff, v. Provident Bank, Defendant.
CourtU.S. Bankruptcy Court — Northern District of Illinois

Nora E. Zuckerman, David S. Yen, Legal Assistance Foundation of Metropolitan Chicago, Chicago, IL, for Plaintiff.

Ronald O. Roeser, Roeser & Vucha, Elgin, IL, for Defendant.



This matter comes to be heard on the Defendant's Motion to Dismiss Adversary Complaint. For the reasons stated herein, the motion is granted.


This court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Moreover, the court has continuing jurisdiction over this post-confirmation proceeding because the potential recovery on the subject cause of action can be distributed to creditors under the confirmed chapter 13 plan. See, In re Smith, 280 B.R. 436, 440-441 (Bankr.N.D.Ill.2002). This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (K). Venue is proper in this court pursuant to 28 U.S.C. § 1409(a).


Because this matter comes to be heard on a motion to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable herein by Federal Bankruptcy Rule 7012, unless otherwise indicated, the following well-plead facts from the Complaint are taken as true.

On August 28, 2003 (the "Petition Date"), Inez Ephraim, a resident of Chicago (the "Debtor"), filed a petition under chapter 13 of title 11 of the United States Code (the "Bankruptcy Code").

In 1972, the Debtor purchased her current residence for $24,000. The loan was secured by a mortgage insured by the FHA (the "FHA Mortgage"). On October 30, 1997, when the FHA Mortgage was still a recorded encumbrance on the property, the Debtor obtained a loan from Freedom Mortgage Corporation ("Freedom") in the original principal amount of $20,000 with an interest rate of 12.34% and a "balloon rider" (the "Note").1 To secure the payment of the Freedom Note, the Debtor executed a mortgage in favor of Freedom, which was recorded against the property as junior to the FHA Mortgage (the "Mortgage"). Freedom's Note and Mortgage were assigned to Provident Bank, the plaintiff herein, on November 19, 1997.

The Debtor was charged with $1,335 in fees, consisting of a $440 loan origination fee, a $300 application process fee, a $200 document preparation fee, and a $395 underwriting fee (the "Loan Fees"), in connection with the closing on the Note and Mortgage. The total amount of the Loan Fees equals 6.67% of the principal amount of the Freedom Note. The loan origination fee and application process fees were paid to Midwest Express Mortgage Co. and Freedom received the underwriting fee and document preparation fee.

The Note is an "alternative mortgage transaction" and Provident Bank is a "state chartered housing creditor" within the meaning of the provisions of the Alternative Mortgage Transaction Parity Act. 12 U.S.C. § 3801 et seq. (the "Parity Act")2 According to the case docket, on February 5, 2004, the court entered an order confirming the Debtor's chapter 13 plan of reorganization (the "Plan"). On December 8, 2003, the Debtor filed a one-count complaint against Provident commencing this adversary proceeding (the "Complaint"). The Complaint, although it is one count, really seeks a variety of alternative relief. In the Preliminary Statement in the Complaint, the Debtor asserts that the Complaint is being brought "pursuant to 11 U.S.C. § 502, to object to the secured claim of Defendant Provident Bank." In the prayer for relief at the conclusion of the Complaint, however, the Debtor seeks: (i) the entry of a judgment in her favor and against Provident in the amount of $110,469.40, (ii) the offset of the damages awarded to her against the Note, (iii) the release of the Mortgage, (iv) the disallowance of Provident's claim against the estate, and (v) such "other, further and different relief as may be just and proper."

The gist of the Complaint is the Debtor's contention that the amount of the Loan Fees charged in connection with the note are in excess of the amounts allowed to be collected by lenders for such fees under the Illinois Interest Act, 815 ILCS 205/1, et seq. (the "Act"). According to the Debtor, the violation of the Act gives rise to a cause of action thereunder for monetary damages. If successful on that cause of action, the judgment in the Debtor's favor — as calculated in accordance with the provisions of the Act — will exceed the current amount of the Note. Consequently, the Note will be paid off and will no longer provide a basis for Provident's claim, necessitating the release of the Mortgage. So, the Preliminary Statement in the Complaint grounding the complaint on section 502 disallowance is not entirely accurate. That does not, however, doom the Complaint, as all a plaintiff need do in its pleading is include enough allegations to allow the court and the defendant to understand the gravamen of the complaint. McCormick v. City of Chicago, 230 F.3d 319, 325 (7th Cir.2000), Thompson v. Illinois Dept. of Professional Regulation, 300 F.3d 750, 755 (7th Cir.2002)(the complaint must simply "give the defendant notice of the claims and the grounds they rest upon."). Indeed, the specific legal theory need not be spelled out. Bartholet v. Reishauer A.G. (Zurich), 953 F.2d 1073, 1078 (7th Cir.1992).

On March 17, 2004, Provident Bank brought a motion to dismiss the Complaint pursuant to Rule 12(b)(6) raising two alternative arguments to defeat the complaint at the pleading stage. First, Provident Bank contends that the provision of the Act upon which the Debtor relies has been repealed, albeit impliedly so, by subsequent legislation. Second, if the provision was not repealed, it is nonetheless inapplicable because the entire Act is preempted by the Parity Act.

A. Standards for 12(b)(6) Motions to Dismiss

A complaint may not be dismissed under Rule 12(b)(6) unless no relief may be granted under any set of facts that could be proved consistent with the allegations in the complaint. Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 515, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002), Walker v. National Recovery, Inc. 200 F.3d 500, 503 (7th Cir.1999). In ruling on the motion, the court must accept as true all facts alleged in the complaint, and it draws all reasonable inferences from those facts in favor of the plaintiff. Jackson v. E.J. Brach Corp., 176 F.3d 971, 977-78 (7th Cir.1999); Zemke v. City of Chicago, 100 F.3d 511, 513 (7th Cir.1996).

The specific legal theory need not be spelled out in the complaint. Bartholet, 953 F.2d at 1078. Rather, a court should ask whether relief is possible under any set of facts that could be established consistent with the allegations. Id. The court is not, however, compelled to accept conclusory allegations regarding the legal effect of facts set out in the complaint. Reed v. City of Chicago, 77 F.3d 1049, 1051 (7th Cir.1996). When reviewing a Rule 12(b)(6) motion, the court may only review the complaint, exhibits attached to the complaint, and supporting briefs. Thompson, 300 F.3d at 753; Beam v. IPCO Corp., 838 F.2d 242, 245 (7th Cir.1988).

As noted earlier, the Debtor contends that the amount of the Loan Fees violates section 4.1(a) of the Act, giving rise to a cause of action for damages and a mandatory setoff of Provident's claim. Provident argues that section 4.1(a) was repealed and, if not, is preempted by the provisions of the Parity Act.

B. Has Section 4.1(a) of the Illinois Interest Act been repealed?

Section 4.1(a) of the Illinois Interest Act, which addresses charges for items paid or incurred in connection with loans, provides, in pertinent part,

Where there is a charge in addition to the stated rate of interest payable directly or indirectly by the borrower and imposed directly or indirectly by the lender as a consideration for the loan, ... whether denominated `points,' `service charge,' `discount,' `commission,' or otherwise, ... the rate of interest shall be calculated in the following manner:

The percentage of the principal amount of the loan represented by all of such charges shall first be computed, which in the case of a loan with an interest rate in excess of 8% per annum secured by residential real estate, other than loans described in paragraphs (e) and (f) of Section 4, shall not exceed 3% of such principal amount.

815 ILCS 205/4.1a.

The penalty provision of the Illinois Interest Act provides, inter alia,

If any person or corporation knowingly contracts for or receives, directly or indirectly, by any device, subterfuge or other means, unlawful interest, discount or charges for or in connection with any loan of money, the obligor may, recover by means of an action or defense an amount equal to twice the total of all interest, discount and charges determined by the loan contract or paid by the obligation, whoever is greater, plus such reasonable attorney's fees and court costs as may be assessed by court against that lender. The payments due and to become due including all interest, discount and charges included therein under the terms of the loan contract, shall be reduced by the amount which the obligor is thus entitled to recover.

815 ILCS 205/6.

The above-quoted provisions are fairly clear — generally speaking, if a bank charges more than a certain percentage in loan charges, the loan obligor can recover damages, which shall be used to offset the underlying loan obligation. However, the language of section 4.1(a) is at odds with other language in the same section of that Act. Specifically, section 4 provides, in pertinent part,

It is lawful to charge, contract for, and receive any amount of interest or compensatio...

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