In re Harlan

Decision Date25 March 2009
Docket NumberBankruptcy No. 08-50132.,Adversary No. 08-05056.
Citation402 B.R. 703
CourtU.S. Bankruptcy Court — Western District of Virginia
PartiesIn re Allen Thomas HARLAN and Kristian Leigh Harlan, Debtors. Allen Thomas Harlan and Kristian Leigh Harlan, Plaintiffs. v. Rosenberg & Associates, LLC and EMC Mortgage Corporation, Defendants.

C. Connor Crook, Boyle, Bain, Reback & Slayton, Charlottesville, VA, for Plaintiffs.

Gregory T. St. Ours, Wharton, Aldhizer & Weaver, PLC, Harrisonburg, VA, Brandy M. Rapp, LeClairRyan, Roanoke, VA, for Defendants.


ROSS W. KRUMM, Bankruptcy Judge.

At Harrisonburg in said District this 25th day of March, 2009:

This matter comes before the Court on separate motions to dismiss the above-captioned adversary proceeding filed by the Defendants, Rosenberg & Associates, LLC ("Rosenberg") and EMC Mortgage Corporation ("EMC"). Allen T. Harland and Kristian L. Harlan (the "Debtors") filed this adversary proceeding seeking actual and punitive damages and legal fees from the Defendants for their alleged violation of the discharge injunction under 11 U.S.C. § 524 and the Fair Debt Collection Practices Act (the "FDCPA"), 15 U.S.C. § 1692 et seq.


The Debtors filed a Chapter 7 petition with this Court on February 19, 2008. The Defendants were properly noticed. On March 14, 2008, EMC filed a motion for relief from the automatic stay under Bankruptcy Code section 362(d) to enable EMC to enforce its rights under a note and deed of trust secured by the Debtors' residence located at 512N Bath Avenue, Waynesboro, VA 22980 (the "Residence"). The section 341(a) meeting of the creditors was held on March 18, 2008. This Court entered an order granting EMC's motion for relief on May 8, 2008. The order specifically permits EMC to commence a foreclosure proceeding against the Debtors' real property. An order discharging the Debtors from all personal liability for debts existing on the petition date was entered May 20, 2008 (the "Discharge Order").

The Debtors received a letter from EMC dated May 23, 2008 (the "1st EMC Letter") providing formal notice that the Debtors were in default under the note and deed of trust. (Am.Compl.Ex.A.) The "Servicer," identified as "EMC Mortgage Corporation," was authorized by the "Creditor," unidentified, to provide such notice. The Debtors were advised that they had to cure a default in the amount of $5,340.50, including the sum of payments, late charges, and collection expenses that accrued after the Debtors filed their bankruptcy petition. "EMC Mortgage Corporation is attempting to collect a debt" appears in the center of the letter in bold typeface. The lone indication that EMC was only attempting to enforce its in rem rights is embedded in regular font in the middle of the second paragraph: "If you received a bankruptcy discharge that included this debt, this notice is not intended and does not constitute an attempt to collect a debt against you personally."

EMC sent the Debtors a second letter dated July 22, 2008 (the "2nd EMC Letter") notifying the Debtors that EMC forwarded their account to an "attorney/trustee to immediately initiate foreclosure proceedings." (Am.Compl.Ex.B.) The "attorney/trustee" is identified as Rosenberg. The letter informs the Debtors that foreclosure actions will continue unless the loan is brought current or an alternative arrangement is agreed upon. A separate notice at the bottom of the letter states that "EMC is attempting to collect a debt and any information obtained will be used for that purpose."

The Debtors received a letter from Rosenberg dated July 24, 2008 (the "Rosenberg Letter") identifying itself as attorney for Commonwealth Trustees, LLC ("Commonwealth") and stating that Mortgage Electronic Registration Systems, Inc. referred the loan to Rosenberg "for legal action based upon a default under the terms of the loan agreement." (Am.Compl.Ex. C.) The letter informed the Debtors that they owed $120,335.57 and that the letter "is an attempt to collect a debt and that any information obtained will be used for that purpose." The letter's final sentence states: "If you are currently in bankruptcy or your debt has been discharged in bankruptcy, Rosenberg & Associates, LLC is only exercising its rights against the property and is not attempting to hold you personally liable on this Note."

Commonwealth sent the Debtors a notice also dated July 24, 2008 (the "Commonwealth Letter") to advise them that Commonwealth "has been requested by Mortgage Electronic Registration Systems, Inc., secured party, holder of a Deed of Trust against the [Residence], to institute foreclosure proceedings against the property due to the delinquency of payments due under a Promissory Note secured by a Deed of Trust." (Am. Compl.Ex.D.) Diane S. Rosenberg, the signatory on the Rosenberg Letter, also signed on behalf of Commonwealth.

The Debtors initiated this adversary proceeding on October 7, 2008. The Debtors' bankruptcy case remains active. They filed the Amended Complaint on December 12, 2008. The Debtors allege in the First Claim of their Amended Complaint that the Defendants violated the discharge injunction of 11 U.S.C. § 524(a) in seeking to collect payment on a discharged debt and were in contempt of this Court's Discharge Order. In their Second Claim the Debtors assert that the Defendants violated provisions of the FDCPA through its post-discharge collection efforts. Both EMC and Rosenberg filed motions to dismiss this adversary proceeding. The Court held a hearing on February 18, 2009 and took this matter under advisement.


Rosenburg moves the Court to dismiss this adversary proceeding pursuant to Federal Rule of Civil Procedure 12(b)(1), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b), for lack of subject matter jurisdiction and Rule 12(b)(6) for failure to state a claim upon which relief can be granted. EMC also moves to dismiss under Rule 12(b)(6). First, this Court must determine whether it has subject matter jurisdiction to hear the Debtors' claims. Second, the Court will decide whether the Debtors' pleading prevails over a Rule 12(b)(6) motion to dismiss for the failure to state a claim upon which relief may be granted.

I. Rosenberg's Motion to Dismiss for Lack of Subject Matter Jurisdiction

Rosenberg moved the Court to dismiss both the First Claim and the Second Claim of the Debtors' Amended Complaint on the grounds that this Court lacks subject matter jurisdiction. This Court holds that the Debtors' claim for willful violation of the discharge injunction is properly before the Court. The Court does not have subject matter jurisdiction, however, to hear the Debtors' claims under the FDCPA.

Bankruptcy courts have limited jurisdiction derived from the district courts. Canal Corp. v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir.1992). District courts have "original and exclusive jurisdiction of all cases under title 11," 28 U.S.C. § 1334(a), and "original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." § 1334(b). Each district court may, however, refer such proceedings to the bankruptcy courts pursuant to 28 U.S.C. § 157(a). Poplar Run Five Ltd. P'ship v. Va. Electric & Power Co. (In re Poplar Run Five Ltd. P'ship), 192 B.R. 848, 855 (Bankr.E.D.Va. 1995). The United States District Court for the Western District of Virginia referred all such cases and proceedings to the bankruptcy judges of this district by standing order dated December 6, 1994.

A bankruptcy court may "hear and determine all cases under title 11 and all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1). Absent the consent of all parties a bankruptcy court may hear, but not issue final orders in, noncore proceedings that are otherwise "related to" the bankruptcy case. § 157(c). A "core proceeding" as described in 28 U.S.C. § 157(b)(2) must "arise under" the Bankruptcy Code or "arise in" a debtor's bankruptcy case and generally involves bankruptcy administrative matters, avoidance actions, or matters concerning property of the estate. See 1 Collier on Bankruptcy ¶ 3.02[2] (15th ed. rev.2008); see also Poplar Run, 192 B.R. at 856 ("To determine whether the proceeding at hands falls within our `core' jurisdiction, we must address whether the proceeding `arises under' title 11, or whether it otherwise `arises in' a case under title 11."). Therefore, this Court may "hear and determine" only those cases and core proceedings "arising under" the Bankruptcy Code or "arising in" a case under the Code. § 157(b)(1). This Court may only "hear a proceeding that is not a core proceeding but that is otherwise related to a case under title 11 .... [and] shall submit proposed findings of fact and conclusions of law to the district court ... [who shall enter] any final order or judgment." § 157(c)(1) (emphasis added).

Proceedings "arising under" the Bankruptcy Code are " `only those cases in which a well-pleaded complaint establishes either that federal [bankruptcy] law creates the cause of action or that the plaintiffs right to relief necessarily depends on resolution of a substantial question of federal [bankruptcy] law.'" Poplar Run, 192 B.R. at 855 (alteration in original) (quoting Franchise Tax Bd. v. Constr. Laborers Vacation Trust, 463 U.S. 1, 27-28, 103 S.Ct. 2841, 2856, 77 L.Ed.2d 420 (1983)). The bankruptcy court "appl[ies] the same test used for deciding whether a civil action presents a federal question under 28 U.S.C. § 1331." Id.

A controversy "arising in" a case under Title 11 is one "not based on any right expressly created by Title 11, but nevertheless, would have no existence outside of the bankruptcy." Valley Historic Ltd. P'ship v. Bank of N.Y., 486 F.3d 831, 835 (...

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