In re Watts

• Court: U.S. District Court — Eastern District of Pennsylvania
• Writing for the Court: BECHTLE
• Citation: In re Watts, 93 B.R. 350 (E.D. Pa. 1988)
• Decision Date: 30 November 1988
• Docket Number: Civ. A. No. 87-4814.
• Parties: In re Dorothy WATTS, Robert Bratton, and John and Irene Pizzileo.

93 B.R. 350 (1988)

In re Dorothy WATTS, Robert Bratton, and John and Irene Pizzileo.

Civ. A. No. 87-4814.

United States District Court, E.D. Pennsylvania.

November 30, 1988.

Jo Lynn Stoy, Francis Haas, Jr., Harrisburg, Pa., W. Jeffrey Garson, David Searles, Philadelphia, Pa., Edward M. Mazze, Furlong, Pa., Horace Stern, Christopher G. Kuhn, Philadelphia, Pa., for plaintiffs.

MEMORANDUM AND ORDER

BECHTLE, District Judge.

This matter is before the court on appeal from the bankruptcy court pursuant to 28 U.S.C. § 1334(a). The appellants are the Pennsylvania Housing Finance Agency, a governmental instrumentality of the Commonwealth of Pennsylvania, and Robert F. Bobincheck, an official of said agency (hereinafter collectively referred to as "PHFA" or "appellants"). The appellees, Dorothy Watts, Robert Bratton and John and Irene Pizzileo (hereinafter "debtors" or "appellees"), are the bankruptcy debtors in three separate Chapter 7 bankruptcy proceedings. The debtors brought suit below in their individual capacities and as representatives of a class of unnamed persons who had their benefits under the Pennsylvania Homeowners Emergency Mortgage Assistance Program, 35 Pa.Stat.Ann. § 1680.401c, et seq. (hereinafter "HEMAP"), terminated a short time after they had filed for bankruptcy under federal laws.

The debtors instituted an action against the appellants in the bankruptcy court claiming that PHFA wrongfully terminated benefits being received by the debtors under HEMAP. In the course of this proceeding, cross-motions for summary judgment were filed on behalf of both sets of litigants. The bankruptcy court eventually granted appellees' request for summary judgment while denying the appellants' motion. The court below based its decision upon its finding that the appellants' unilateral termination of HEMAP benefits discriminated against the debtors in violation of 11 U.S.C. § 525(a), which prohibits governmental units from denying licenses, permits, charters, franchises, or other similar grants to persons who are or become debtors under federal bankruptcy laws. The bankruptcy court also held that the appellants violated the automatic stay provision of 11 U.S.C. § 362(a)(3) by exercising control over property of the bankruptcy estate without being authorized to do so. In addition, the court further held that the appellants, through state action and in violation of federal laws, deprived the debtors of their civil rights in violation of 42 U.S.C. § 1983.¹ 76 B.R. 390.

PHFA now appeals from this decision of the bankruptcy court. For the following reasons, the decision of the bankruptcy court will be affirmed.

I. BACKGROUND

In 1983, the Pennsylvania General Assembly found that, as a result of a severe recession, the capacity of many homeowners to continue to make their mortgage payments had deteriorated, and concluded that many could retain their homes if they received temporary financial assistance. In response to these conditions, the General Assembly enacted HEMAP, and delegated its administration to the PHFA. The law was intended to prevent widespread mortgage foreclosure and distress sales of homes by providing emergency mortgage assistance payments to homeowners who defaulted on their mortgages due to circumstances beyond their control. See, Statement of Purpose, Preamble to Act 91 of 1983, 35 Pa.Stat.Ann. § 1680.401c (Supp. 1988) (note). From time to time, the General Assembly has appropriated limited funds to PHFA for the implementation of HEMAP.

Under HEMAP, PHFA makes subsidized loans to eligible homeowners facing mortgage foreclosure by advancing funds directly to the homeowner's mortgagees. The loan is secured by a mortgage taken against the real estate and is repaid with interest as the homeowner's financial condition improves. 35 Pa.Stat.Ann. § 1680.405c(a), (c), (f), (g) (Supp.1988). If the assistance is granted, the homeowner is loaned money to bring his mortgage current. In addition, if the homeowner's financial condition falls below a statutorily set threshold, PHFA will lend money on a monthly basis to assist the homeowner with his or her monthly payments. 35 Pa. Stat.Ann. § 1680.405c(b) (Supp.1988). In the event the homeowner receives this special assistance, the statute requires the homeowner to assume full monthly mortgage payments without agency help within three years. Id.

Certain eligibility requirements for loans under HEMAP must be met before any funds are distributed. In general, to be eligible for assistance, the property owned by the applicant must be a one or two family owner-occupied Pennsylvania residency, subject to a loan secured by a mortgage, which is the principal residence of the mortgagor. Moreover, the mortgage lender must have notified the homeowner of its intention to foreclose or have initiated other legal action to take possession of the secured real estate. 35 Pa.Stat.Ann. § 1680.404c (Supp.1988).

Each of the named debtors' cases present similar factual situations. The named debtors were Pennsylvania homeowners who fell behind in payments on their residential mortgages. After falling behind on these payments, each homeowner applied to PHFA for HEMAP benefits. In each case, HEMAP benefits were granted. Appellees Watts and Bratton had their mortgage arrears paid and were receiving ongoing monthly assistance from HEMAP. Appellee Pizzileo's petition for HEMAP benefits was approved but the monies have not been disbursed.

At some point after having been approved for HEMAP benefits, each homeowner filed a bankruptcy petition. After notification of the petition, PHFA, without seeking relief from the automatic stay imposed by 11 U.S.C. § 362(a)(3), admittedly sent each of the named debtors and unnamed class members a form letter stating that "the PHFA is discontinuing your monthly assistance under HEMAP due to your filing for bankruptcy." The letter, under the signature of appellant Bobincheck, went on to state two reasons for the action: (1) a homeowner is ineligible for HEMAP benefits when the mortgagee "is prevented by law from foreclosing upon the mortgage," pursuant to 35 Pa.Stat. Ann. § 1680.404c(a)(7), and the imposition of the automatic stay prohibits such foreclosure; and (2) the bankruptcy filing is a "change in your financial circumstances" provided for at 35 Pa.Stat.Ann. § 1680.405c(d) necessitating a reevaluation of the debtor's eligibility. In addition to the named debtors, PHFA admitted, in discovery, that thirteen other debtors had received this letter and, like the appellees, had their benefits terminated until their bankruptcy actions were resolved.

PHFA now contends that the bankruptcy court erred in holding that the suspension of HEMAP loan payments violated §§ 525(a) and 362(a)(3) of the Bankruptcy Code. Each of these contentions will be addressed separately below.²

II. DISCUSSION

A. The Suspension of HEMAP Benefits by the PHFA Violated the Antidiscrimination Provisions of 11 U.S.C. § 525(a)

PHFA contends that the bankruptcy court erred in interpreting the language of 11 U.S.C. § 525(a) to include the extension of credit or the making of loans within the scope of the statute's enumerated protections. Section 525 reads in pertinent part:

A governmental unit³ may not deny, revoke, suspend, or refuse to renew a license, permit, charter, franchise, or other similar grant to, condition such a grant to, discriminate with respect to such a grant against . . . a person that is or has been a debtor under this title . . . solely because such bankrupt or debtor is or has been a debtor under this title . . ., has been insolvent before the commencement of the case under this title, or during the case but before the debtor is granted or denied a discharge, or has not paid a debt that is dischargeable in the case under this title or that was discharged under the Bankruptcy Act.

The legislative history of § 525 indicates that Congress added this section to the Bankruptcy Code specifically to codify the United States Supreme Court's holding in Perez v. Campbell, 402 U.S. 637, 91 S.Ct. 1704, 29 L.Ed.2d 233 (1971), S.Rep. No. 989, 95th Cong., 2nd Sess. 81, reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5867.

In Perez, the petitioners filed a bankruptcy petition two days before judgment was entered against them for personal injuries and property damages arising from an automobile accident. The judgment was eventually discharged in bankruptcy by order of the district court. Pursuant to an Arizona state statute which provided for the suspension of a person's driving privileges when an accident-related judgment remained unsatisfied for sixty days, the petitioners' driving privileges were suspended. In order to have such privileges reinstated, the petitioners were required, pursuant to the statute, to satisfy the judgment against them and give proof of future financial responsibility.

The Supreme Court concluded that the Arizona statute was "at odds" with the purposes underlying federal bankruptcy law, and declared it unconstitutional under the Supremacy Clause of the United States Constitution. In so holding, the Court concluded that the statute had the effect of frustrating one of the primary purposes of the Bankruptcy Act which was "to give debtors `a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of pre-existing debt.'" 402 U.S. at 649, 91 S.Ct. at 1711, quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934).

Most courts have broadly applied the antidiscrimination provision of § 525. See In re Rose, 23 B.R. 662, 666-67 (Bankr.D. Conn.1982); In re Gibbs, 9 B.R. 758, 764 (Bankr.D.Conn.1982); In re The Rath Packing Company, 35 B.R. 615, 618 (Bankr.N.D.Iowa 1983). As a result, this section has been invoked successfully in areas as diverse as liquor licenses, drivers' licenses, government contracts, school transcripts, public housing, mortgage financing, utility...