Watts v. Pennsylvania Housing Finance Co.

• Court: U.S. Court of Appeals — Third Circuit
• Writing for the Court: Before SEITZ, SLOVITER, and GREENBERG; GREENBERG
• Citation: Watts v. Pennsylvania Housing Finance Co., 876 F.2d 1090 (3rd Cir. 1989)
• Decision Date: 05 June 1989
• Docket Number: No. 88-1968,88-1968
• Parties: , 21 Collier Bankr.Cas.2d 521, Bankr. L. Rep. P 72,915 In re WATTS, Dorothy, Bratton, Robert, Pizzileo, John & Irene, Debtors, v. PENNSYLVANIA HOUSING FINANCE CO. and Robert F. Bobincheck, ind. and in his official capacity as Director of the Pennsylvania Housing Finance Agency, Appellants.

Page 1090

876 F.2d 1090

57 USLW 2740, 21 Collier Bankr.Cas.2d 521,

Bankr. L. Rep. P 72,915

In re WATTS, Dorothy, Bratton, Robert, Pizzileo, John & Irene, Debtors, v. PENNSYLVANIA HOUSING FINANCE CO. and Robert F. Bobincheck ind. and in his official capacity as Director of the Pennsylvania Housing Finance Agency Appellants.

No. 88-1968.

United States Court of Appeals Third Circuit.

Argued April 18, 1989.

Decided June 5, 1989.

Ernest D. Preate, Jr., Atty. Gen., Mary Benefield Seiverling (argued), Deputy Atty. Gen., Calvin R. Koons, Deputy Atty. Gen., John G. Knorr, III, Chief Deputy Atty. Gen., Chief, Litigation Section, Harrisburg, Pa., for appellants.

Henry J. Sommer, David A. Searles (argued), Community Legal Services, Inc., Philadelphia, Pa., for appellees.

Before SEITZ, SLOVITER, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

GREENBERG, Circuit Judge.

Pennsylvania's Homeowner's Emergency Mortgage Assistance Program (HEMAP), 35 Pa.Cons.Stat.Ann. Secs. 1680.401c et seq. (Purdon Supp.1988), provides loans to homeowners in financial difficulty to prevent imminent mortgage foreclosure. Loan payments are suspended during the pendency of bankruptcy proceedings, when foreclosure is prohibited under the Bankruptcy Code; they may resume, however, if the automatic stay under the Bankruptcy Code is lifted or when bankruptcy proceedings end if foreclosure once again is impending. The district court held that the suspension of the plaintiffs' loan payments pursuant to these provisions violated the anti-discrimination and automatic stay provisions of the Bankruptcy Code, 11 U.S.C. Secs. 525 and 362(a)(3), as well as 42 U.S.C. Sec. 1983. We disagree and therefore will reverse.

HEMAP was passed in 1983 to establish "a program which will, through emergency mortgage assistance payments, prevent widespread mortgage foreclosures and distress sales of homes which result from default caused by circumstances beyond a homeowner's control." 35 Pa.Cons.Stat.Ann. Sec. 1680.401c (note) (Findings and Purpose). It authorizes the Pennsylvania Housing Finance Agency (PHFA) to pay directly to an eligible homeowner's mortgagee the full amount needed to make the mortgage current, as well as monthly payments to help keep it so. 35 Pa.Const.Stat.Ann. Sec. 1680.405c(a), (b). A loan for the assistance is made to eligible homeowners, secured by a mortgage lien on their homes and repayable with interest. 35 Pa.Cons.Stat.Ann. Secs. 1680.405c(g); 1680.406c.

A homeowner must satisfy various eligibility requirements to obtain a loan under HEMAP, including the requirement that the mortgagee "has indicated to the mortgagor its intention to foreclose." 35 Pa.Cons.Stat.Ann. Sec. 1680.404c(a)(2)(i). Relatedly, and significantly for present purposes, a condition of eligibility is that "[t]he mortgagee is not prevented by law from foreclosing upon the mortgage." 35 Pa.Cons.Stat.Ann. Sec. 1680.404c(a)(7). The pertinent regulations note that if a homeowner is in bankruptcy and the automatic stay is in effect, the lender is legally prevented from foreclosing, further elaborating that if a homeowner is in bankruptcy at the time of application, assistance is contingent upon, inter alia, the lifting of the stay. 16 Pa.Code Sec. 40.202(e).

If all eligibility requirements are met and if "money is available in the Homeowner's Emergency Mortgage Assistance Fund," assistance will follow. 35 Pa.Cons.Stat.Ann. Sec. 1680.404c(b); see also 35 Pa.Cons.Stat.Ann. Sec. 1680.409c. PHFA must review a homeowner's financial circumstances at least annually, 16 Pa.Code Sec. 40.204(c)(6), and "[p]ayments may stop if the Agency determines that, because of changes in the homeowner's financial circumstances, the payments are no longer necessary." 16 Pa.Code Sec. 40.204(c)(2).

The named plaintiffs in this case, Dorothy Watts, Robert Bratton, and John and Irene Pizzileo, all applied for loans under HEMAP and were determined eligible for assistance. PHFA cured Watts' and Bratton's arrearages, and for a time provided them with monthly assistance. However, when Watts and Bratton filed Chapter 7 bankruptcy petitions, their monthly payments were suspended. The PHFA approved the Pizzileos' loan application but, after the Pizzileos filed bankruptcy proceedings under Chapter 7, the PHFA reevaluated their eligibility, and notified their mortgagee that payments would not be made.

PHFA notified Watts, Bratton, and other unnamed class members of the termination of monthly assistance in a form letter, which provided in part,

[p]lease be advised that the Agency is discontinuing your monthly assistance under the Homeowner's Emergency Mortgage Assistance Program due to your filing for bankruptcy.

Pursuant to Act 91, a homeowner is ineligible for assistance when the mortgagee is prevented by law from foreclosing upon the mortgage. (35 P.S. Section 1680.404(a)(7)). As long as the automatic stay of the Bankruptcy Court remains in effect, the mortgagee is prohibited from instituting foreclosure proceedings against you. Accordingly, you presently fail to satisfy this eligibility requirement. ¹

The plaintiffs, in their individual capacities and on behalf of a class consisting of "all individuals who have been or will in the future apply for or be awarded benefits under HEMAP and thereafter become debtors under the Bankruptcy Code," filed suit against PHFA and Robert Bobincheck, its director (hereinafter collectively referred to as PHFA). Complaint, p 10. They alleged that PHFA's suspension of monthly assistance following the filing of their bankruptcy petitions violated the anti-discrimination provision of the Bankruptcy Code, 11 U.S.C. Sec. 525, the automatic stay provision, 11 U.S.C. Sec. 362, and 42 U.S.C. Sec. 1983. Complaint, paragraphs 39-41.

After the complaint was filed, Watts received a discharge in bankruptcy. PHFA then apparently reinstated assistance and cured her mortgage default. Appx. 43; 93. Bratton also received a discharge, Appx. 9, and the record indicates that he was reevaluated "and will be reinstated" after providing documentation "that the automatic stay has been lifted for all mortgagees, all discharged mortgage obligations have been reaffirmed, and the Bankruptcy Court and the Trustee have approved of his receiving emergency mortgage assistance." Appx. 42. Although the record does not reveal whether the Pizzileos have received a discharge, it does indicate that they have been reevaluated and "determined eligible for mortgage assistance pending the submittal of requested bankruptcy information" equivalent to that required of Bratton. Appx. 44.

Following discovery, the parties filed cross-motions for summary judgment. The bankruptcy court, by written opinion and order of June 30, 1987, granted the plaintiffs' motion, holding that the defendants' practices of suspending mortgage assistance upon the filing of a bankruptcy petition violated 11 U.S.C. Secs. 525 and 362, and 42 U.S.C. Sec. 1983. In re Watts, 76 B.R. 390 (Bkrtcy.E.D.Pa.1987). The court further granted the plaintiffs' motion to maintain this action as a class action under Fed.R.Civ.P. 23(b)(2), the class being all individuals who have applied for or been awarded benefits under HEMAP "or will do so in the future." While the bankruptcy court found that the defendants had violated 42 U.S.C. Sec. 1983, it did not award the plaintiffs damages for the violation as they had not, at least yet, suffered any damages by reason of the violation. Thus, as the bankruptcy court noted, the relief was essentially injunctive and declaratory both as to the plaintiffs individually and the class. The defendants then appealed to the district court, which affirmed by opinion and order of November 30, 1988. 93 B.R. 350 (E.D.Pa.1988). The defendants then appealed to this court and we have jurisdiction under 28 U.S.C. Sec. 158(d).

A. Antidiscrimination Provision

Section 525 of the Bankruptcy Code provides in pertinent part that "a governmental unit may not deny, revoke, suspend or refuse to renew a license, permit, charter, franchise or other similar grant to, condition such a grant to, [or] discriminate with respect to such a grant against," a bankruptcy debtor "solely because" of the bankruptcy filing. 11 U.S.C. Sec. 525(a) (emphasis added). PHFA does not dispute that it is a "governmental unit." It does however, strenuously challenge the holdings of the bankruptcy and district courts that in enacting section 525, Congress intended to prohibit the sort of temporary suspension of mortgage financing involved in this case.

PHFA correctly notes that the express terms of the statute support its position; a HEMAP loan simply is not a "license, permit, charter, franchise or other similar grant." Indeed, it seems perfectly clear that the items enumerated are in the nature of indicia of authority from a governmental unit to the authorized person to pursue some endeavor. Thus, a "similar grant" should be given the same meaning. Furthermore, as the Court of Appeals for the Second Circuit also has recognized,

[a] credit guarantee is not a license, permit, charter or franchise; nor is it in any way similar to those grants.... Although the exact scope of the items enumerated may be undefined, the fact that the list is composed solely of benefits conferred by the state that are unrelated to credit is unambiguous.

In re Goldrich, 771 F.2d 28, 30 (2d Cir.1985) (section 525 does not prevent government denial of student loan based upon default in repayment of prior discharged loan). ² It follows that if a credit guarantee is not a "similar grant," neither is a loan.

The district court, however, did not adopt the above reasoning, as it concluded that a narrow interpretation of section 525 would defeat its purpose, as revealed by its legislative history, to avoid discriminatory practices by governmental entities so that debtors could get the fresh start provided by the Bankruptcy Code. 93 B.R. at 355 (citations omitted). The obvious...