No Jurisdiction over TILA Claim Post-Discharge

Posted by NCBRC - April 16, 2014

Once the trustee abandoned the real property and the debtor was discharged from her chapter 7 case, the court declined to exercise jurisdiction over the pending adversary proceeding involving Truth in Lending Act claims. Bank of Amer. v. Travers, No. 11-12650, A.P. No. 11-1047 (Bankr. D. R.I. March 25, 2014). In that case, the debtor filed an adversary proceeding against, Bank of America (BA), the holder of the mortgage on her property, alleging violation of the Truth in Lending Act. In her AP the debtor alleged that upon closing of the Mortgage Transaction, she did not receive an accurate Disclosure Statement as required by the TILA. On June 19, 2010, within three years of the mortgage, the debtor sent a Notice of Rescission to BA’s servicer, BAC. BAC refused the rescission on June 30, and on the same day, the debtor filed a chapter 13 bankruptcy petition along with the adversary complaint against BA. Shortly thereafter, the debtor converted to chapter 7. On her Schedules she listed her real property with a value of $165,000 and a secured claim against it in the amount of $183,050. She claimed an exemption in the real property at $0, and an exemption in the TILA claim in an unknown amount. There were no objections to the exemptions. The trustee abandoned all of the estate’s assets to the debtor and she received her discharge on November 2, 2011, with her adversary proceeding still pending.

The AP included three claims for relief: 1) rescission of the Mortgage Transaction and actual damages under 15 U.S.C. § 1635(a) and § 1640(a), 2) recovery of twice the finance charge and actual damages, and 3) disallowance of any proof of claim BA might file. BA moved to dismiss for lack of subject matter jurisdiction after the underlying bankruptcy case was closed.

The court began with Stern v. Marshall, – U.S. –, 131 S. Ct. 2594 (2011), to determine whether the instant case was a “core” proceeding or whether it was a proceeding that “related to” a bankruptcy case over which it had jurisdiction. It rejected the debtor’s claim that the case was a core proceeding because it involved the determination of the validity of the BA’s lien under section 157(b)(2)(K). Citing Maxwell v. HSBC Mortg. Corp. (USA) (In re Maxwell), 2012 WL 3678609, at *2 (Bankr. N.D. Ga. Aug. 22, 2012) (“engrafted upon all [section 157(b) proceedings] is the overarching requirement that property of the estate under § 541 be involved”), the court found that, because the trustee had abandoned the real property, a determination of the validity of the lien stood to benefit only the debtor and not the bankruptcy estate. For the same reason, there was no jurisdiction under section 527(b)(2)(O).

The court turned to whether it had jurisdiction because the case was “related to” a case under section 527. This judicial underpinning has been found by the First Circuit to require that the outcome of the litigation “potentially [could] have some effect on the bankruptcy estate, such as altering debtor’s rights, liabilities, options, or freedom of action, or otherwise have an impact upon the handling and administration of the bankruptcy estate.” Boston Reg’l Med. Ctr., Inc. v. Reynolds (In re Bos. Reg’l Med. Ctr., Inc.), 410 F.3d 100, 105 (1st Cir. 2005). The court found that, because such jurisdiction is temporal as well as substantive, at the commencement of the case it undoubtedly had jurisdiction over the TILA, but, in light of the fact that the trustee abandoned the property and the debtor received her discharge, the outcome of the TILA case would now have no effect on the bankruptcy estate. Therefore, it was no longer “related to” the bankruptcy case for jurisdictional purposes.

Finally, the court addressed discretionary retention of jurisdiction finding that four factors must be considered: judicial economy, convenience to the parties, fairness and comity. None of these factors justified retaining jurisdiction. At this stage, the expenditure of time and resources on the adversary proceeding was minimal and its outcome would affect only the debtor and BA. It would not be unduly inconvenient to the parties to have to begin again in a non-bankruptcy setting and the TILA claims would be more appropriately handled by a court of general jurisdiction rather than a bankruptcy court.

In discussing the final factor—fairness—the court noted that here the statute of limitations could render it unfair to relinquish jurisdiction. With respect to the debtor’s rescission claim, courts are divided as to whether the three year statute of limitations requires that the borrower seek rescission within that time frame, or actually commence a civil action based on that claim. In this case, however, the issue would not affect the debtor’s rights. While she sought rescission within the three year time limitation, she did not file the adversary proceeding until after that period had expired. Therefore, the statute of limitations issue would be the same in either case.

The same was not the case with the claim against BA for its alleged wrongful denial of rescission. That claim carried a one year statute of limitations which had not run when the debtor brought the adversary proceeding but had since run. The court found that loss of this claim could deprive the debtor of the statutory damages but that such loss, amounting to $2,000, was de minimus and, therefore, insufficient to overcome the factors weighing against retention of jurisdiction.

Travers opinion

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