Majchrowski v. Norwest Mortgage, Inc.
| Citation | 6 F.Supp.2d 946 |
| Decision Date | 19 May 1998 |
| Docket Number | No. 97 C 3831.,97 C 3831. |
| Parties | Stanislaw MAJCHROWSKI and Danuta Majchrowski, on behalf of themselves and all others similarly situated, Plaintiffs, v. NORWEST MORTGAGE, INC. and John Does 1-10, Defendants. |
| Court | U.S. District Court — Northern District of Illinois |
Cathleen M. Combs, Daniel A. Edelman, James O. Latturner, Ignacio Daniel Maramba, Charley Hoon Lee, Edelman & Combs, Chicago, IL, for Stanislaw Majchrowski, Danuta Majchrowski.
Thomas William Engelhardt, Ann Paton Goodman, McCullough, Campbell & Lane, Chicago, IL, Mark G. Schroeder, Briggs & Morgan, St. Paul, MN, for Norwest Mortgage, Inc.
In recent years, the line between civil RICO, a formidable weapon authorizing treble damages and attorneys' fees, and conventional breach of contract actions has faded considerably. Put succinctly by Justice Powell, Sedima, S.P.R.L. v. Imrex Co., 473 U.S. 479, 529, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985) (Powell, J., dissenting). There is no better illustration than the case before this Court. The Majchrowskis, representative plaintiffs in this certified class action, claim that Norwest Mortgage, their mortgage service company, violated RICO, committed unfair and deceptive practices, and breached mortgage agreements when it filed in the Majchrowskis' Chapter 13 bankruptcy proceedings a Proof of Claim that charged $66.00 in property inspection fees and a $100.00 proof of claim fee. The Majchrowskis allege that these routinely imposed "bogus" fees — which allegedly appear nowhere in the mortgage agreements — are part of a diabolical scheme to defraud and encumber the property of unwitting mortgage borrowers who find themselves in bankruptcy. Norwest vehemently denies any fraudulent activity; moreover, it insists that its standard form mortgage contracts fully authorize property inspection and proof of claim fees against defaulting borrowers who have filed for bankruptcy. Before the Court are the parties' cross-motions for partial summary judgment on the discrete issue of whether Norwest's standard mortgage contracts authorize these fees, as well as Norwest's motion to dismiss the plaintiffs' RICO claims.
In 1995, the Majchrowskis decided to buy a home in Illinois. They obtained a mortgage loan from Mega Mortgage Company, which then transferred the loan to Norwest for servicing. Pls.' Facts ¶ 8. In June 1996, the Majchrowskis stopped making mortgage payments. Affidavit of Scott Walker ¶ 20. In light of their failure to cure the loan default, Norwest began foreclosure proceedings against the Majchrowskis on November 11, 1996. Those proceedings were stayed when the Majchrowskis filed for Chapter 13 bankruptcy in December 1996. Later, the bankruptcy court lifted the automatic stay because the Majchrowskis were unable to make the mortgage payments required under the bankruptcy plan. Id. ¶¶ 21-22. The Majchrowskis' mortgage loan is currently in foreclosure. Def.'s Facts ¶ 10.
While the Majchrowskis' Chapter 13 proceedings were still pending, Norwest filed a Proof of Claim with the bankruptcy court. The "Statement of Amount Due" included inter alia, a $100 "file proof of claim" fee, as well as a $24.75 charge for "collection property inspections" and a $41.25 charge for "foreclosure property inspections." Pl.'s Facts ¶ 9; Walker Aff. Ex. C. The legitimacy of these fees drives this entire case — the question is whether they were "authorized" by Norwest's standard form mortgage agreements.
The Majchrowskis executed two agreements in connection with their mortgage loan — a Multistate Fixed Rate Note ("Note") and a Uniform Security Instrument ("Security Instrument"). See Walker Aff. Ex. A & B. These agreements are standard form contracts that contain mostly uniform provisions, with slight variations for some jurisdictions. See Note ¶ 10; Security Instrument at 2. Essentially, the Note embodies the terms governing the lender's promise to loan money in exchange for the borrower's pledge to repay it with interest. The Security Instrument confirms that agreement and includes additional covenants to protect the lender "from possible losses which might result if [borrower] do[es] not keep the promises" made in the Note. Note ¶ 10; see Ford v. Dovenmuehle Mortgage, Inc., 273 Ill.App.3d 240, 248, 209 Ill.Dec. 573, 651 N.E.2d 751, 757 (1st Dist.1995) ().
Both agreements have provisions for charging the borrower various fees. For example, the Note imposes "Late charges for overdue payments" (¶ 6(A)), and, if the borrower defaults and the lender chooses to accelerate payment, the Note requires the borrower to reimburse lender for "all of its costs and expenses in enforcing this Note to the extent not prohibited by applicable law ... includ[ing], for example, reasonable attorneys' fees" (¶ 6(E)). The Security Instrument reiterates the Note's late charge provision (¶ 1), and requires the borrower to pay funds into an escrow account for taxes, assessments, and insurance (¶ 2); to remedy any shortage in the escrow accounts (¶ 2); to purchase hazard or property insurance (¶ 5); to buy mortgage insurance if the lender requires it (¶ 8); and to pay the costs of recording the discharge releasing the mortgage (¶ 22). Another protection the Security Instrument affords the lender is the right to inspect the mortgaged property upon notice to the borrower:
Inspection. Lender or its agent may make reasonable entries upon and inspections of the Property. Lender shall give Borrower notice at the time of or prior to an inspection specifying reasonable cause for the inspection. (¶ 9).
Paragraph 9 says nothing, however, about charging the borrower for inspections conducted under its provisions.
In the event the borrower defaults, or becomes involved in legal proceedings that may impair the lender's rights in the property, the Security Instrument provides the lender with sweeping remedies:
Protection of Lender's Rights in the Property. If Borrower fails to perform the covenants and agreements contained in this Security Instrument, or there is a legal proceeding that may significantly affect Lender's rights in the Property (such as a proceeding in bankruptcy ...), then Lender may do and pay for whatever is necessary to protect the value of the Property and Lender's rights in the Property. Lender's actions may include paying any sums secured by a lien which has priority over this Security Instrument, appearing in court, paying reasonable attorneys' fees and entering on the Property to make repairs....
Any amounts disbursed by Lender under this paragraph 7 shall become additional debt of Borrower secured by this Security Instrument.... (¶ 7) (emphasis added)
Failure to cure a default on the mortgage loan further entitles the lender to "require immediate payment in full" and to "foreclose this Security Instrument by judicial proceeding." (¶ 21). The lender then has the right "to collect all expenses incurred in pursuing the remedies provided in this paragraph 21, including, but not limited to, reasonable attorneys' fees and costs of title evidence." Id.
Norwest contends that these contractual provisions, particularly paragraph 7 of the Security Instrument, authorized it to impose the proof of claim and property inspection fees in its Proof of Claim. According to Scott Walker, an assistant Vice President who manages Norwest's bankruptcy department in Charlotte, N.C., the purpose of filing a Proof of Claim in bankruptcy is to protect the secured lender's rights in the borrower's property; otherwise, he explains, the lender "would not be paid on outstanding arrearages." Walker Aff. ¶ 12. Norwest thus passed on to the Majchrowskis the cost of assembling the Proof of Claim, a service performed by a law firm with an on-site office across from Norwest's bankruptcy department.2 Pls.' Supp. Facts ¶ 2. The firm has a contract with Norwest to prepare Proofs of Claim at a cost of $100 each.3 Walker Dep. at 55.
The property inspections, states Walker, were likewise necessary to protect the value of and Norwest's rights in the Majchrowskis' property. Walker Aff. ¶ 18. He explains that an inspection may reveal whether the property is still occupied, whether the utilities remain connected, and whether the property has fallen into disrepair. Id. ¶ 16. After the Majchrowskis defaulted on the loan, Norwest hired outside vendors to inspect their property periodically. The $24.75 and $41.25 fees in Norwest's Proof of Claim represent vendor charges that Norwest claims it actually incurred and passed "straight through" to the Majchrowskis.4 Id. ¶ 18. It is undisputed that Norwest did not give the Majchrowskis notice before inspecting their property, and that the company frequently dispenses with notice when the borrower has defaulted on the mortgage loan. Walker Dep. at 179, 182.
Plaintiffs not only deny that the proof of claim and property inspection fees were authorized by the mortgage contracts, they take the dispute to another level — alleging elements of deception and racketeering activity under the Racketeer Influenced and Corrupt Organizations Act. In essence, plaintiffs' civil RICO claims assert that Norwest knowingly extorts these "unauthorized and bogus" charges from bankrupt borrowers in...
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