District Court Has Original Jurisdiction over 362(k) Claim

Posted by NCBRC - July 9, 2015

A district court has subject matter jurisdiction over a claim under section 362(k) without regard to a standing order referring all bankruptcy-related cases to the bankruptcy courts, and dismissal under FRCP 12(b)(6) is inappropriate where the allegations in the complaint present a plausible explanation for the defendants’ conduct. Houck v. Substitute Trustee Services, No. 13-2326 (4th Cir. July 1, 2015).

Patricia Houck filed suit in district court under section 362(k) against Substitute Trustee Services, Lifestore Bank, and Grid Financial Services. The complaint alleged violation of the automatic stay and various state claims resulting from the substitute trustee’s foreclosure sale of her residence after she had notified the lender and servicer that she had filed a second chapter 13 bankruptcy. The district court granted the substitute trustee’s motion to dismiss finding that the plaintiff failed to allege adequate facts relating to the trustee’s knowledge of the bankruptcy to support a finding that the trustee’s action were willful. Because this order related to only one of the defendants, the court of appeals found it to be interlocutory and dismissed an earlier appeal by the plaintiff. Grid Financial moved to dismiss on the basis that the district court lacked subject matter jurisdiction to rule on a case brought under 362(k). Relying on Scott v. Wells Fargo Home Mortgage, Inc., 326 F. Supp. 2d 709, 719 (E.D. Va.), aff’d sub nom. Scott v. Wells Fargo & Co., 67 F. App’x 238 (4th Cir. 2003) (per curiam), the district court agreed and dismissed the remaining claims.

After finding that the case was ripe for appeal under the doctrine of “cumulative finality” the Fourth Circuit court turned to whether the district court correctly found that it had no subject matter jurisdiction over a section 362(k) claim. The court noted that Scott, the case relied on by the district court, itself relied on cases that pre-dated section 362(k) which was added to the automatic stay provision in 1984. Prior to 1984 there was no private right of action for violation of the stay, but paragraph 362(k) was enacted to allow an individual injured by violation of the stay to recover actual damages for such violation. Section 1334 gives the district court original jurisdiction over all civil proceedings arising under Title 11 and authorizes it to refer cases to the bankruptcy courts.

The Fourth Circuit found that, while Congress delegated limited power to the bankruptcy courts, subject to the supervision of the district courts, “[i]n no circumstance . . . did the Act, in conferring such adjudicatory authority, give a bankruptcy court jurisdiction to the exclusion of a district court.” The court concluded that an action under 362(k) is a civil action under Title 11 over which the district has subject matter jurisdiction.

The court rejected the argument presented by amicus that the district court’s standing order under section 157 automatically referring all bankruptcy cases to the bankruptcy court acts to deprive the district court of jurisdiction. The court found that section 157 is a procedural statute that operates as a “traffic regulator” and does not implicate subject matter jurisdiction. Thus, even if the district court disregarded its own standing order, that had no effect on the issue of jurisdiction. The court also found that the defendants waived their right to complain about the district court’s retention of the case by failing to object to it.

Turning to the merits of Houck’s case against the substitute trustee the court found that a 12(b)(6) motion should be overruled when the complaint states sufficient facts “to raise a right to relief above the speculative level.” The district court, on the other hand, articulated the standard as: “[I]f after taking the complaint’s well-pleaded factual allegations as true, a lawful alternative explanation appears a more likely cause of the complained of behavior, the claim for relief is not plausible.” The court found that the district court erred in requiring the plaintiff to show that her claim was probably or more likely than an alternative. “If her explanation is plausible, her complaint survives a motion to dismiss under Rule 12(b)(6), regardless of whether there is a more plausible alternative explanation.”

The court noted that the plaintiff made detailed allegations that she, or her husband, contacted the lenders and the law firm representing the defendants to inform them of the bankruptcy. The court concluded that “[i]t is difficult to imagine that a court could demand more specificity with respect to the allegations of notice than the details that Houck provided in her complaint.” Contrary to the substitute trustee’s argument, section 362(k) does not require that for a stay violation to be willful, notice must be in writing. Likewise, the plaintiff specified in detail the injury suffered by reason of the foreclosure.

Finally, the court rejected the substitute trustee’s argument that, under section 109(g), the debtor was not eligible for protection by the automatic stay because her bankruptcy case followed within 180 days of a previously dismissed bankruptcy. Paragraph 109(g)(1) provides that no person may be a debtor if a previous bankruptcy was dismissed within 180 days of the current one by reason of “willful failure of the debtor to abide by orders of the court.” The court found that the plaintiff’s first pro se bankruptcy was dismissed because Ms. Houck failed to file certain documents. The bankruptcy court did not make a finding of willfulness nor did it dismiss with prejudice as it would have had it found willfulness. The circuit court held that a finding of willfulness was a fact-based question requiring evidential support that was absent from the record.

The court vacated the district court’s judgment relating to subject matter jurisdiction, reversed the dismissal of the plaintiff’s case against the substitute trustee, and remanded for further proceedings.

Houck 4th Cir. opinion

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  1. By Bankruptcy News Briefs 7/9 | NACBA Now on July 9, 2015 at 3:38 pm

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