Salem Mortg. Co., In re

Decision Date11 February 1986
Docket NumberNo. 84-1539,84-1539
Citation783 F.2d 626
Parties14 Collier Bankr.Cas.2d 202, 14 Bankr.Ct.Dec. 244 In re SALEM MORTGAGE COMPANY, et al., Debtors. Frank J. KELLEY, Plaintiff-Appellant, Salem Mortgage Co., et al., Defendants, Salem Mortgage Company, Fidelity Fund, Inc., Fidelity Securities Corporation, Nationwide Mortgage Company, Mutual Mortgage Company, Thomas J. Barrow, Trustee in Bankruptcy, Antonio Foglia, Ernest Pippin and Toni K. Scherschun, Defendants-Appellants, v. Bruce NODINE, Donald Brown, Marion Reddick, Winfrel and Magnolia Peterson, Amy Stevens, Sadie Soto, Cassandra Debonville, Harry Johnson, Richard Androvic, Gilbert Tucker, Mary Bankston, Ethel Jeffries and Irene and Virginia Puspustelak, Plaintiffs-Objectors/Appellees, Frances Kukowski, B & B Machining Retirement Trust, Bernard and Donna Bowman, Clawson Tool Profit Sharing Trust, Feg Gage Pension Trust, Wilbur and Carolyn Humphries, Mandeco Design Service Profit Sharing Trust, Fred or Betty McMurray, George and Betty Ofiara, James and Joan Thiesen, Elizabeth Thurwachter, Angelo or Mary Ann Timonte, Dr. Bruce Troutman Pension and Profit Sharing Trust, Two Plus Three Plus Four, and Varney Trucking Company Profit Sharing Trust, Defendants-Intervenors.
CourtU.S. Court of Appeals — Sixth Circuit

Frank J. Kelley, Atty. Gen. of Mich., Luis F. Fernandez (argued), Frederick H. Hoffecker, Robert S. Hertzberg, Lansing, Mich., for Frank J. Kelley.

John A. Anderson, John B. Kemp (argued), James Steffel, Birmingham, Mich., for Barrow.

Clark D. Cunningham (argued) Mich. Legal Services, Detroit, Mich., for Virginia Pustelak, Irene Pustelak, Sadie Soto, Winfrel Peterson and Magnolia Peterson.

Irwin M. Alterman, Southfield, Mich., for Salem Mortg. Co., Mut. Mortg. Co., Fidelity Fund, Inc. and Fidelity Securities Corp.

Arnold S. Schafer, Robert Hertzberg (argued), Birmingham, Mich., for defendants-appellants.

Mark Magidson, Detroit, Mich., for Bangston, Conklin, Johnson, Tucker, Soto, Debonville and Androvic.

James A. Keedy, Legal Services of Southeastern Mich., Jackson, Mich., Michael Chielens, Legal Aid of Western Mich., Grand Rapids, Mich., William Coash, Legal Services of Southcentral Mich., Battle Creek, Mich., for plaintiff-objectors/appellees.

L. Nicholas Treinen, James R. Porritt, Jr., Parenti & Treinen, Lake Orion, Mich., for defendants-intervenors.

Before MARTIN and WELLFORD, Circuit Judges; and EDWARDS, Senior Circuit Judge.

BOYCE F. MARTIN, Jr., Circuit Judge.

This case presents the question of the extent of the district court's bankruptcy jurisdiction under 28 U.S.C. Sec. 1471(b) 1 over civil proceedings "related to cases under title 11." 2 Although section 1471 was effectively repealed by the Bankruptcy Amendments and Federal Judgeship Act of 1984, 3 the "related to" jurisdictional grant to district courts is continued in the current version of 28 U.S.C. Sec. 1334(b). 4 The district court below held that this adversary proceeding was beyond the "related to" jurisdiction of the district court and dismissed the case. We hold that the district court had jurisdiction and therefore reverse.

While the debtors' pattern of business operations is not entirely clear, it appears that Salem Mortgage Company and related debtor and nondebtor corporations acted as mortgage brokers prior to bankruptcy. Borrowers who were unable to obtain credit from any other source were made loans secured by first, second, or wraparound mortgages on their residences; substantial "attorney" or "broker" fees were allegedly charged in connection with some of the loans. These mortgages were assigned to individuals, groups, corporations, or associations as investment vehicles. It is alleged that the actions of Salem and related parties were less than punctilious, and in particular that the mortgagors have possible claims against them for, inter alia, fraud, deceit, usury, breach of fiduciary duty, violations of the Michigan Consumer Protection Act, Mich.Comp.Laws Ann. Secs. 445.901-.922, violations of the Truth in Lending Act, 15 U.S.C. Secs. 1601-1667e, and misappropriation of escrow funds. The investors are mostly unsophisticated senior citizens and the victims of admitted securities fraud. 5 See Mich. Corp. & Securities Bureau case No. 82-39-S. It is unsettled, however, whether some, all, or none of the investors could claim the status of holder in due course.

Salem and three related corporations filed separate voluntary petitions under chapter 11 of the Bankruptcy Code on March 30, 1983. The bankruptcy court ordered the petitions of the four debtors, Salem, Fidelity Fund, Inc., Fidelities Securities Corporation, and Nationwide Mortgage Company, consolidated for administration and appointed Thomas J. Barrow as trustee for all four debtors. 6 Frank J. Kelley, Attorney General of the State of Michigan, on April 11, 1983, filed this adversary proceeding against the debtors and eight other defendants. 7 The complaint sought equitable, legal, and declaratory relief under the Michigan Consumer Protection Act and asked the court to certify the Attorney General as class representative for seven different subclasses of mortgagors. The Attorney General on May 23, 1983, filed an amended complaint, adding representative members of an asserted class of assignees of the mortgages as defendants.

The major parties in interest 8 negotiated a stipulation for temporary class certification and a proposed final consent judgment, which was presented to the bankruptcy court on May 23, 1983, and amended on June 13, 1983. This settlement proposed certification of three plaintiff classes of mortgagors--a second mortgage corporation borrower class, 9 a wraparound mortgage borrower class, 10 and a first mortgage borrower class 11--and certification of three defendant classes of assignees consisting of the owners of the mortgagees' interest in the loans of the respective plaintiff classes. The primary effect of the consent judgment would be to reform the mortgages: incorporated second mortgages would have their interest rate reduced to fifteen percent on the original principal balance after excluding any "attorney" or "broker" fee, wraparound mortgages would have their interest rate reduced to seven percent on the new money after excluding any "attorney" or "broker" fee, and the first mortgages would have their interest rate reduced by one percent from the commencement of the loan but not below fifteen percent. Mortgagors would retain claims against Salem's estate if their previous payments exceeded the reformed mortgage or if they suffered a loss from escrow payments for taxes and insurance. The reformation otherwise would form an accord and satisfaction of all the mortgagors' claims, leaving the assignees free to litigate their claims against the debtors. 12

The bankruptcy court on June 14, 1983, approved temporary classes for the purpose of considering the proposed settlement and conditionally approved the proposed consent judgment. Both mortgagors and assignees could opt out of the action, and a number from each class did so. 13 After taking testimony and considering the arguments of certain objector mortgagors who believed that the proposed settlement would not be sufficiently beneficial to them, the bankruptcy court on November 17, 1983, entered a Proposed Order Approving Class Certification, Settlement of Class Action Litigation, and Entry of Consent Judgment. In re Salem Mortgage Co., 34 B.R. 902 (Bankr.E.D.Mich.1983).

The proposed order was reviewed by the district court in accordance with the Interim Rule. See White Motor Corp. v. Citibank, 704 F.2d 254, 266-67 (6th Cir.1983). The district court for the first time raised the question whether it possessed subject matter jurisdiction. After oral argument and the consideration of briefs, the court concluded in a memorandum and order dated June 22, 1984, that it did not have subject matter jurisdiction under 28 U.S.C. Sec. 1471(b) over the adversary proceeding. Kelley v. Salem Mortgage Co., 41 B.R. 420 (E.D.Mich.1984). Both plaintiffs and defendants appealed. We find jurisdiction and therefore reverse.

To begin our review it should be noted that the district court filed its order on June 22, 1984, and the notice of appeal was filed on July 16, 1984. The appeal was thus taken six days after the effective date of the Bankruptcy Amendments Act and this appeal is subject to its provisions. 14

Bankruptcy appeals under the Bankruptcy Reform Act were governed by 28 U.S.C. Sec. 1293. Appeals are now authorized by 28 U.S.C. Sec. 158, which provides:

Sec. 158. Appeals

(a) The district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders, and decrees, and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title. An appeal under this subsection shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving.

(b)(1) The judicial council of a circuit may establish a bankruptcy appellate panel, comprised of bankruptcy judges from districts within the circuit, to hear and determine, upon the consent of all the parties, appeals under subsection (a) of this section.

(2) No appeal may be referred to a panel under this subsection unless the district judges for the district, by majority vote, authorize such referral of appeals originating within the district.

(3) A panel established under this section shall consist of three bankruptcy judges, provided a bankruptcy judge may not hear an appeal originating within a district for which the judge is appointed or designated under section 152 of this title.

(c) An appeal under subsections (a) and (b) of this section shall be taken in the same manner as appeals in civil proceedings generally are taken to the courts of appeals from the district...

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