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Hutchinson v. Delaware Savings Bank FSB

410 F.Supp.2d 374 (D. N.J. 2006)

BANKRUPTCY—Even if a creditor is omitted in a Bankruptcy Chapter 13 filing, the debtor is precluded from making claims against that creditor once a plan is approved; but, if the case is converted to a Chapter 7 case, those claims may be pursued.

Homeowners had a first mortgage loan and also had unsecured credit card debt. Thy responded to an advertisement offering to consolidate their loans into one mortgage loan with one low monthly payment at a low interest rate. They closed on two mortgage loans with a bank in September 1998. Then, they claimed that the bank engaged in predatory lending practices by misrepresenting the loans and interest rates, with the intent of charging double fees. The homeowners also claimed that the bank created a false settlement statement with respect to the second loan wherein it reported they received a substantial sum when, in fact, they received a nominal sum. The homeowners claimed that as a result of the loans they were forced to file a Chapter 13 bankruptcy petition. Their Chapter 13 Plan left their mortgage loans with the bank unaffected and eventually their bankruptcy case was converted to a Chapter 7 liquidation which resulted in the loss of their home.

Shortly after the homeowners’ debts were discharged and their house surrendered, they began receiving collection notices from the bank’s mortgage servicers with respect to the second mortgage loan. The homeowners sent notice to the mortgage servicers, as required by the Real Estate Settlement Procedures Act, demanding that they stop sending default notices. The mortgage servicers failed to investigate the problem and continued reporting the nonpayment on the discharged loan. The homeowners sued the bank and mortgage servicers for breach of contract, fraud, and violation of New Jersey’s Consumer Fraud Act. In response, the bank argued that the homeowners’ breach of contract and fraud claims were precluded by bankruptcy code section 1327(a) which provides that a confirmed Chapter 13 plan binds a debtor and each creditor, whether or not the creditor’s claims are listed in the plan or even if the creditor objected to the plan. Such a confirmed plan acts much like a final judgment and would bar claims that were not raised in the confirmed plan. In response, the homeowners claimed that their Chapter 13 plan was not akin to a final judgment because their bankruptcy case was converted to a Chapter 7 case, and the claims against the bank were listed in the Chapter 7 case. The Court agreed, noting that the sparse case law on the subject stood for the proposition that Chapter 13 plans were only a provisional determination of a creditor’s and debtor’s rights and were not final until an order denying or granting a discharge was signed. It held that since the homeowners’ Chapter 13 case was converted to a Chapter 7 case, their payment plan was abandoned. Therefore, their failure to list their claims against the bank in the Chapter 13 case (which they did in the Chapter 7 case) did not prohibit them from pursuing their case. Nonetheless, the Court agreed with the bank that the bankruptcy trustee was the proper party to the suit on the debtor’s behalf. However, instead of dismissing the case (as requested by the bank), the Court added the trustee as a plaintiff.

The bank then argued that the homeowners’ fraud claim was insufficient as a matter of law because even if it did specify with particularity the instances of fraud since, it did not specify the dates when the fraud occurred or name the parties. The Court disagreed, finding that the homeowners provided sufficient information to allege fraud, and also provided a time in which the fraud occurred. In fact, the homeowners had alleged that the fraud occurred in the month of September 1998, the month in which they contacted the bank and closed on the loan. The bank and mortgage servicers then argued that the homeowners’ state law claims were pre-empted by the Fair Credit Reporting Act (FCRA). The Court agreed, finding that the homeowner’s claims that their credit was damaged because the mortgage servicers continued to report their nonpayment of the loans after they were discharged was pre-empted by the FCRA.

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