In re Herrington

• Decision Date: 08 August 2007
• Docket Number: Adversary No. 07-0009.,Bankruptcy No. 06-14433bif.
• Citation: 374 B.R. 133
• Parties: In re Kenneth HERRINGTON, Debtor. Kenneth Herrington, Plaintiff, v. Wells Fargo Bank, Minnesota, N.A., Delta Funding Corporation and Countrywide Home Loans, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of Pennsylvania

374 B.R. 133

In re Kenneth HERRINGTON, Debtor.

Kenneth Herrington, Plaintiff, v. Wells Fargo Bank, Minnesota, N.A., Delta Funding Corporation and Countrywide Home Loans, Defendants.

Bankruptcy No. 06-14433bif.

Adversary No. 07-0009.

United States Bankruptcy Court, E.D. Pennsylvania.

August 8, 2007.

COPYRIGHT MATERIAL OMITTED

Montgomery L. Wilson, Community Legal Services, Philadelphia, PA, for Plaintiff.

Dashika R. Wellington, Pelino & Lentz, P.C., Martin C. Bryce, Jr., Ballard Spahr Andrews & Ingersoll LLP, Philadelphia, PA, for Defendants.

MEMORANDUM

BRUCE FOX, Bankruptcy Judge.

Presently before me are the motions of defendants Delta Funding Corporation and Wells Fargo Bank, Minnesota, N.A. to compel arbitration as to two counts of the plaintiff's amended complaint,¹ Count II, styled "HOE PA Recoupment," and Count III, styled "UDAP."

"A motion to compel arbitration calls for a two-step inquiry into (1) whether a valid agreement to arbitrate exists and (2) whether the particular dispute falls within the scope of that agreement." Trippe Mfg. Co. v. Niles Audio Corp., 401 F.3d 529, 532 (3d Cir.2005). As will be discussed below, the plaintiff opposes defendant's motion by arguing that no valid arbitration agreement exists (as it is unconscionable) and that both counts in this proceeding are non-arbitrable within the express terms of the agreement. He also asserts that this court should exercise its discretionary authority not to enforce the arbitration agreement.

For the following reasons, the defendants' motions will be granted in large part.

I.

On September 30, 2006, the plaintiff filed a voluntary petition in bankruptcy under chapter 13. Wells Fargo then filed a secured proof of claim in the amount of $44,100.97 dated December 14, 2006. This claim is purportedly secured by real estate located at 1928 West Somerset Street, Philadelphia, Pennsylvania.

On January 12, 2007, the debtor commenced the above-captioned adversary proceeding. In an amended complaint, the debtor raises claims arising from a loan transaction of July 24, 2000, wherein he borrowed $19,800 from defendant Delta, secured by a mortgage on his residence. Wells Fargo is alleged to be Delta's assignee and current holder of the note and mortgage.

In Count I of the amended complaint, the debtor contends that the value of the realty serving as collateral for Wells Fargo's secured claim does not exceed $22,000. Amended Complaint, ¶ 18. The debtor further asserts that Delta assigned to Wells Fargo a security interest in his residence as well as certain of the debtor's personal property, Id., ¶ 21, the latter of which deprives the creditor of the "antimodification" protections of section 1322(b)(2). Id., ¶ 22. Accordingly, the debtor in Count I seeks to bifurcate Wells Fargo'g claim into secured and unsecured components by virtue of section 506(a), in which the secured component does not exceed $22,000. Id., ¶ 23.

In Count II of the amended complaint, the debtor asserts that Delta was required to provide "the Plaintiff with the specific HOEPA disclosures (`Section 32 Disclosures') at least three business days in advance of the July 24, 2000 loan closing, as required by 15 U.S.C. § 1639(a)(1); 12 C.F.R. § 226.32(c)(1)," Amended Complaint, ¶ 42, and that Wells Fargo is liable for this failure by virtue of 15 U.S.C. § 1641(d)(1). Id., ¶ 44. The debtor requests "recoupment of statutory damages ... to be offset against the total amount of the allowed secured claim of Wells Fargo ...," Id., "Wherefore clause," ¶ c, plus reasonable attorney's fees and costs under 15 U.S.C. § 1640(a)(3). Id., ¶ d.

In Count III of the amended complaint, the debtor avers that "Not providing Mr. Herrington with the statutorily required HOE PA notice is unfair and deceptive conduct under 73 P.S. § 201-2(xxi) of the Pennsylvania Unfair Trade Practices Act (`UDAP')." Id., ¶ 50. The debtor was purportedly damaged by the "amount of fees and costs he paid as a result of entering into this loan transaction." Id., ¶ 53. He seeks "recoupment of three times of his actual damages." Id., "Wherefore clause," ¶ e.

The July 2000 loan agreement contained an Arbitration Agreement signed by the debtor. This agreement, a true and correct copy of which is attached to Delta's motion to compel arbitration as Exhibit A, contains the following definitions:

"We" or "US" means Delta Funding Corporation ... its ... successors and assigns....²

"Credit Transaction" means the loan obligation identified by the above-referenced Loan Number and any prior loan obligation which was originated, owned and/or serviced by us....

"Claim" means any claim, dispute or controversy between you and us (except for Excluded Claims, defined below) arising from or relating to the Credit Transaction ... including the validity, enforceability or scope of this Agreement.... The term "Claim" is to be given the broadest possible meaning and includes, by way of example and without limitation, any claim ... that arises under or relates to the Truth in Lending Act, the Home Owners and Equity Protection Act and Regulation Z ... state insurance, usury and lending laws ... other federal or state consumer protection statutes or regulations....

"Excluded Claims" means (a) any action to effect a judicial or non judicial foreclosure or to establish a deficiency judgment (d) any action to assert, collect, protect, realize upon or obtain possession of the collateral for the Credit Transaction in any bankruptcy proceeding....

Delta's Motion to Compel Arbitration, Ex. A.

This arbitration agreement further defines non-arbitrable claims:

Notwithstanding the foregoing or any other term in this Agreement, Excluded Claims, as defined above, are excluded from arbitration. This means that neither you nor us can require the other to arbitrate any Excluded Claims. Participating in a lawsuit or seeking judicial relief with respect to any Excluded Claims shall not waive a party's right to arbitrate any Claims. For example, if we were to commence a foreclosure action against you in court, that action and any defenses asserted by you in that action would be adjudicated in court; however, if you asserted a counterclaim against us in that action which was covered by the scope of this Agreement, we would have the right to demand that the counterclaim be arbitrated (you would also have the right to arbitrate the counterclaim rather than asserting it in court).

Id. In addition, the Arbitration Agreement specifically stated that it was to be governed by the Federal Arbitration Act ("FAA"). Id.

The arbitration agreement also contained the following provision concerning costs and fees:

Hearing Location and Arbitration Costs. Any arbitration hearing that you attend shall take place in the federal judicial district of your residence. At your written request, we will consider in good faith making a temporary advance of all or part of the filing, administrative and/or hearing fees in connection with any Claim you initiate as to which you or we seek arbitration. At the conclusion of the arbitration, the arbitrator will decide who will ultimately be responsible for paying the filing, administrative and/or hearing fees in connection with the arbitration. Unless inconsistent with applicable law, each party shall bear the expense of that party's attorneys', experts' and witness fees, regardless of which party prevails in the arbitration.

Finally, the arbitration agreement included a severability clause:

If any portion of this Agreement is deemed invalid or unenforceable under any law or statute consistent with the FAA, it shall not invalidate the remaining portions of this Agreement or the Credit Transaction, each of which shall be enforceable regardless of such invalidity.

Id.

Based upon the above-quoted definition of an arbitrable claim, both Delta (as the original lender) and Wells Fargo (as the assignee) contend that the plaintiff's HOEPA and UDAP claims against them are expressly made arbitrable. Thus, these defendants seek to stay the resolution of Counts II and III in this adversary proceeding and to compel their determination via arbitration. See generally In re Brown, 311 B.R. 702 (Bankr.E.D.Pa.2004). They do not seek to compel arbitration of Count I, the bifurcation claim.³

The plaintiff raises three grounds for denying the motion to compel arbitration. First, he contends that the arbitration clause is both procedurally and substantively unconscionable. Second, he argues that this proceeding is a response to the secured proof of claim filed by Wells Fargo and thus is a claim excluded from the scope of the parties' arbitration agreement. And third, the plaintiff maintains that this bankruptcy court has the discretion to deny enforcement of the arbitration agreement and should exercise its discretion to do so.

II.

At the outset, I find unpersuasive the plaintiff's argument that I have the discretion not to enforce a valid arbitration agreement and stay any resolution of Counts II and III, which counts assert claims arising from federal and state consumer protection statutes.

"The FAA provides that arbitration agreements `shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.' 9 U.S.C. § 2. A court has the power to stay a proceeding if it determines that an issue falls under an applicable arbitration clause. 9 U.S.C. § 3. If one of the parties fails to comply with such an agreement, a court may order the parties to proceed to arbitration in accordance with the terms of the agreement.' 9 U.S.C. § 4." In re Mintze, 434 F.3d 222, 229 (3d Cir.2006). Thus, in general, "[t]he FAA makes agreements to arbitrate enforceable to the same extent as other contracts." Harris v. Green Tree Financial Corp., 183 F.3d 173, 178 (3d Cir.1999). Indeed, "federal law presumptively favors the enforcement of arbitration agreements." Id., at 178.

The duty to enforce arbitration...