Resto-Feliciano v. DLJ Mortg. Capital, Inc.

• Decision Date: 21 December 2020
• Docket Number: Civil No. 20-1562 (FAB)
• Parties: LINNETT RESTO-FELICIANO, et al., Plaintiffs, v. DLJ MORTGAGE CAPITAL, INC., et al., Defendants.
• Court: U.S. District Court — District of Puerto Rico

LINNETT RESTO-FELICIANO, et al., Plaintiffs, v. DLJ MORTGAGE CAPITAL, INC., et al., Defendants.

Civil No. 20-1562 (FAB)

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF PUERTO RICO

December 21, 2020

OPINION AND ORDER

BESOSA, District Judge.

Before the Court is defendants DLJ Mortgage Capital Inc. ("DLJ Mortgage Capital") and Select Portfolio Servicing. Inc. ("SPS") (collectively, "defendants")'s motion to withdraw reference to this Court from the United States Bankruptcy Court for the District of Puerto Rico ("Bankruptcy Court"). (Docket No. 1, Ex. 3.) For the reasons set forth below, the defendants' motion is DENIED.

I. Background

The motion to withdraw reference challenges the authority of the bankruptcy court to adjudicate an adversary proceeding. The underlying dispute concerns purported violations of the automatic stay and the Fair Debt Collection Practices Act ("FDCPA"). See 11 U.S.C. § 362; 15 U.S.C. §§ 1682 et seq.

A. The Mortgage Default and Litigation Settlement

On June 17, 2004, plaintiffs Linnette Resto-Feliciano ("Resto") and Luis Osvaldo Figueroa-Kercado ("Figueroa") (collectively, "plaintiffs") borrowed funds from Associates International Holding Company ("Associates International") to purchase a residential property in Ceiba, Puerto Rico. (Bankr. Pet. No. 20-086, Docket No. 1 at p. 6.) The plaintiffs failed to remit their monthly mortgage payments. Id. Subsequently, DLJ Mortgage Capital acquired the mortgage from Associates International. Id. at p. 5. SPS is the loan servicing company for DLJ Mortgage Capital. Id.

After defaulting on the mortgage, Resto and Figueroa commenced a civil action against American Security Insurance Company before the Puerto Rico Court of First Instance, Fajardo Division. Id.; see Luis Figueroa-Quercado v. Am. Sec. Ins. Co., Case No. CE2018CV00036. The parties then entered into a settlement agreement. Id. at p. 7.¹ Pursuant to this agreement, Resto, Figueroa, and SPS received a check for $27,332.20. Id. Resto and Figueroa asserted exclusive ownership of the settlement proceeds, however, and requested that DLJ Mortgage Capital and SPSendorse the check to them. Id. at p. 7. The defendants refused to do so. Id. In fact, DLJ Mortgage Capital and SPS proposed that Resto and Figueroa surrender the settlement check to cure the mortgage default. Id. at p. 8.²

B. The Bankruptcy Petition

On August 2, 2019, Resto and Figueroa filed a bankruptcy petition pursuant to Chapter 13 of the Bankruptcy Code. Bankr. Pet. No. 19-04427 (ESL), Docket No. 1; see 11 U.S.C. § 1301 et seq.³ The petition states that the settlement check and "potential claims" arising pursuant to the FDCPA constitute "money or property owed" to the estate. Id. at p. 18. Resto and Figueroa listed SPS as a creditor with an unsecured claim. Id. at p. 29. SPS received notice of the bankruptcy petition on August 5, 2019. (Bankr. Pet. No. 19-4427, Docket No. 8 at p. 1.) The notice informed SPS that:

The filing of the case imposed an automatic stay against most collection activities. This means that creditors generally may not take action to collect debts from the debtors, the debtors' property, and certain codebtors . . . Creditors cannot demand repayment from debtors by mail, phone, or otherwise.

Id. at p. 2. DLJ Mortgage Capital and SPS allegedly continued, however, to demand payment for pre-petition debt. (Adv. Proc. No. 20-086, Docket No. 1 at p. 9.) In addition to sending monthly account statements, DLJ Mortgage Capital and SPS failed to "turnover" the settlement check. Id. at p. 10.

DLJ Mortgage Capital filed a proof of claim ("POC") for $68,404.27, maintaining that a purported lien on the Ceiba property secured the mortgage. (Docket No. 3, Ex. 1 at p. 2.) A contemporaneous title search revealed, however, that the "alleged mortgage was not perfected and/or recorded." (Adv. Proc. No. 20-086, Docket No. 1 at p. 25.)⁴ Counsel for Resto and Figueroa requested that DLJ Mortgage Capital and SPS amend the POC, stating that: (1) solicitation of mortgage payments "would be in violation of the Automatic Stay," and (2) the defendants "[had] no legitimate claim to the [plaintiffs' settlement] check." Id. at p. 25. Through counsel, DLJ Mortgage Capital and SPS responded as follows:

[Plaintiffs are] correct as to the attached Title Search showing that the mortgage had been notified, taken out of the Registry and not presented again. This is an issue that should have been corroborated prior to filing [the POC]. Today I contacted SPS to either provide evidence of proper recording of the mortgage lien, which will allow us to file [an amended POC], or, in its absence, to authorize the withdrawal of the claim, which will clear the way for the confirmation of Debtor's Chapter 13 plan.

Id. at p. 27. Moreover, defense counsel requested additional information regarding the settlement check. Id.

Attempts to resolve the mortgage dispute without judicial intervention proved futile. Resto and Figueroa filed an objection to the POC, asserting that DLJ Mortgage Capital held "at best, an unsecured claim against the estate." (Bankr. Pet. No. 19-4426, Docket No. 29 at p. 1.) The bankruptcy court granted the plaintiffs' objection without opposition on February 10, 2020. (Bankr. Pet. No. 19-4426, Docket No. 36)

C. The Adversary Proceeding

Resto and Figueroa then commenced an adversary proceeding against DLJ Mortgage Capital and SPS on June 16, 2020. (Adv. Proc. No. 20-086, Docket No. 1.) Counts one and two aver that the defendants violated the automatic stay. First, Resto and Figueroa allege that DLJ Mortgage Capital and SPS allegedly "demanded that payment on the bankruptcy account be made" after the Chapter 13 petition. Id. at p. 13. Second, Resto and Figueroa maintain that DLJ Mortgage Capital and SPS appropriated estate assets by refusing to endorse the settlement check. Id. Counts three through six arise pursuant to the FDCPA, alleging, inter alia, that the defendants "misrepresent[ed] the character, amount, or legal status of the debt." Id. at pp. 16-23.

On September 24, 2020, DLJ Mortgage Capital and SPS answered the complaint and moved for mandatory withdrawal of reference. (Adv. Proc. No. 20-086, Docket Nos. 19 & 20.) DLJ Mortgage Capital and SPS argue that the bankruptcy court lacks jurisdiction with respect to the FDCPA causes of action. Id. Accordingly, they contend that this Court must withdraw reference to the bankruptcy court. Id. The Court disagrees.

II. The Jurisdiction of the Bankruptcy Court

Federal courts are courts of limited jurisdiction. Destek Grp. v. State of N.H. Pub. Utils. Comm'n, 318 F.3d 32, 38 (1st Cir. 2003); Celotex Corp. v. Edwards, 514 U.S. 300, 307 (1995) ("The jurisdiction of the bankruptcy courts, like that of other federal courts, is grounded in, and limited by, statute."). Although district and bankruptcy courts are federal entities, they derive their authority from distinct branches of government. The latter "is established pursuant to Article I, rather than Article III, and its jurisdiction is delimited accordingly." Sheridan v. Michels, 362 F.3d 96, 99 (1st Cir. 2004). "The judicial power of the United States must be vested in courts whose judges enjoy the protections and safeguards specified in [Article III]." In re Parque Forestal, 949 F.2d 504, 508 (1st Cir. 1991); (quoting N. Pipeline Co. v. Marathon Pipeline, Co., 458 U.S. 50, 62 (1982)). Because bankruptcy courts derive their authority from Congress, they "do not have a source of jurisdiction, but rather, their jurisdiction flows from the district courts." Empresas Omajede, Inc. v. La Electronica, Inc., 243 B.R. 211, 216 (D.P.R. 1999) (Pieras, J.).

Congress enacted the Bankruptcy Act of 1984 to address constitutional flaws in the preexisting statute, granting district courts "original but not exclusive jurisdiction" of all bankruptcy actions. 28 U.S.C. § 1334(b); see Wendy L. Trugman, The Bankruptcy Act of 1984: Marathon Revisited, 3 YALE L. & POLICY REV. (1984); 1 Collier on Bankruptcy § 1.01 (16th ed. 2020) ("Congress rewrote the Judicial Code to essentially allow bankruptcy judges to exercise broad jurisdiction, but with built-in review by Article III judges."). District courts may refer Chapter 11 actions and proceedings to bankruptcy courts. Marathon Pipeline, Co., 458 U.S. at 63 n. 13; see 28 U.S.C. § 157(a). In the United States District Court for the District of Puerto Rico, bankruptcy cases are referred automatically to the bankruptcy court pursuant to the Court's General Order of July 19, 1984. Juan Torruella, Resolution (July 19, 1984).⁵

A. The Core/Non-Core Dichotomy

Bankruptcy proceedings include those that: (1) arise under Title 11, (2) arise in cases under Title 11, and (3) relate to cases under Title 11. 28 U.S.C. § 1334(b); see, e.g., Gupta v. Quincy Med. Ctr., 858 F.3d 657, 662 (1st Cir. 2017) (holding that "in order for the [debtor's] severance claims to fall within 28 U.S.C. § 1334's statutory grant of jurisdiction, the claims must 'arise under,' 'arise in' or 'relate to' a case under title 11"). . . The first and second subcategories are core proceedings, tied inextricably to the bankruptcy petition and existing only in the Title 11 context. See Wood v. Wood, 825 F.2d 90, 96 (5th Cir. 1987) ("Congress used the phrase 'arising under title 11' to describe those proceedings that involve a cause of action created or determined by a statutory provision of title 11."); New Eng. Power and Marine, Inc. v. Town of Tyngsborough, 292 F.3d 16, 68 (1st Cir. 2002) ("'Arising in' proceedings generally are those that are not based on any right expressly created by title 11, but nevertheless, would have no existence outside of the bankruptcy.") (quotation omitted).

Congress authorized bankruptcy courts to "hear and determine . . . all core proceedings arising under title 11, or arising in a case under title 11." 28 U.S.C. § 157(b)(1); see Gupta,858 F.3d at 662 n. 5 ("Proceedings 'arising under title 11, or arising in a case under title 11' are...