Pickett et al v. Washington Mutual Bank et al

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1 | NOT FOR PUBLICATION

2

3

4 ‘ FILED “.

5 FEB ~§ 2007;

6 Me

7 - mT

8 UNITED STATES BANKRUPTCY COURT

9 CENTRAL DISTRICT OF CALIFORNIA

10 SAN FERNANDO VALLEY DIVISION

11

Inre
12 Keenan Cary Pickett & Wanda Kimie Case No. SV 06-11080 MT
3 Pickett,
Chapter 13
14 Debtor.
Adv. No. SV 06-01286 MT
15 MEMORANDUM OF DECISION
16 Keenan Cary Pickett & Wanda Kimie
Pickett, Date: February 1, 2006
7 Time: 2:00 p.m.
Plaintiffs, Place: Courtroom 302

18 Washington Mutual Bank,

19 Defendant.
20
21
92 || Background
23 Plaintiffs filed a Complaint for Declaratory Judgment and Damages Pursuant to
94 || 11 U.S.C. § 105(a) and FRBP 7001(1), (7) and (9) (‘Complaint’) against Washington
95 || Mutual Bank ("WaMu") on October 30, 2006, alleging that certain language in Exhibit A
26 || to the Proof of Claim (“POC”) filed by WaMu in Plaintiffs’ Chapter 13 bankruptcy case is

an attempt to arbitrarily add legal fees and expenses onto Plaintiffs’ mortgage loans

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when and if Defendant deems appropriate and convenient, without any prior notice to
Plaintiffs, the Chapter 13 Trustee or the Court, and without prior approval by this Court.
Plaintiffs allege that WaMu’s attempt to charge fees and expenses is fraudulent,
deceitful and an abuse of the bankruptcy process, and, therefore, unlawful, illegal and
otherwise void. Plaintiffs further allege that WaMu's actions violate the automatic stay
and are inconsistent with the Chapter 13 plan, local rules, administrative orders,
published opinions, and, in particular, the fee application procedures of FRBP 2016.
Finally, Plaintiffs allege that WaMu has acted in a conspiracy with other law firms to
create and implement an illegal scheme “to avoid the published Rules, Orders and
Decisions of this Court,” and that “this conspiracy has been executed by filing the
Proofs of Claims by way of mail fraud." Complaint, J] 26.
Plaintiffs Complaint is based on the following language in the POC:
Please be advised that reasonable fees and costs for the review of the
bankruptcy pleadings, review of client information, preparation and filing of
the Proof of Claim will be charged to the lender/servicer for post-petition
services rendered subsequent to the filing of this bankruptcy matter.
Further, note that future fees and costs for bankruptcy related services are
expected to accrue throughout the life of this bankruptcy case, and will be
charged to the lender/servicer. If such fees and costs or charges are not
paid through the bankruptcy, the lender reserves the right, at the lender's
discretion, to seek future reimbursement for the fees, costs, and charges
related to services rendered and expenses incurred pursuant to the terms
provided for in the underlying security instrument, the bankruptcy code
and other applicable jaw.
Plaintiffs request that this Court issue “declaratory judgment” by “declaring that the
disclaimer and reservation of rights language be stricken,” Complaint, J 29, and by
“enjoining the Defendants from using any such language in the future." /d., 31.
Plaintiffs request that relief be applied to the proof of claim in this case and in “all
similar Proof of Claims filed in any case in the Central District of California." Plaintiffs

further request an accounting, attorney fees, costs and punitive damages.

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Although it was not pled in the Complaint, at oral argument Plaintiffs additionally
requested that the Court find that the reservation of rights language in the POC not
estop them from later challenging any fees charged by WaMu as unreasonable.

Defendant WaMu moves to dismiss the Complaint because (1) the language
Plaintiffs rely on is merely a “reservation of rights,” (2) there is no case or controversy
regarding the language in question because whatever issue Plaintiffs may have is not

ripe, and (3) the claims for fraud and conspiracy were not pled with specificity.

Discussion

A Ruie 12(b)(6) motion tests the legal sufficiency of the claims asserted in the
complaint. FRCP 12(b)(6) (incorporated by FRBP 7012). A court may not dismiss a
complaint for failure to state a claim “unless it appears beyond doubt that the plaintiff
can prove no set of facts in support of his claim which would entitle him to relief.”
Conley v. Gibson, 355 U.S. 41, 45-46 (1957). A dismissal pursuant to FRCP 12(b)(6)
is proper only where there is either a “lack of a cognizable legal theory or the absence
of sufficient facts alleged under a cognizable legal theory.” Balistreri v. Pacifica Police
Dept., 901 F.2d 696, 699 (9th Cir. 1988).

In deciding a motion to dismiss pursuant to FRCP 12(b)(6), the court's review is
limited to the contents of the complaint. Campanelli v. Bockrath, 100 F.3d 1476, 1479
(9th Cir. 1996); Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381,
385 (9th Cir. 1995). The court must accept all factual allegations pleaded in the
complaint as true, and must construe them and draw all reasonable inferences from
them in favor of the nonmoving party. Cahill v. Liberty Mutual Ins. Co., 80 F.3d 336,

337-38 (Sth Cir. 1996). However, it need not accept as true unreasonable inferences or

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conclusory legal allegations cast in the form of factual allegations. Western Mining
Council v. Waitt, 643 F.2d 618, 624 (9th Cir. 1981).

According to 11 U.S.C. § 506(b), an oversecured creditor is allowed interest,
reasonable fees, costs or charges provided under the agreement or state statute under
which the claim arose. Here, the reservation of rights language in the proof of claim
does not contradict § 506(b). As WaMu is an oversecured creditor of the Debtors,
WaMu would be entitled to interest, reasonable fees, costs or charges as allowed in its
contract with the Debtors or applicable state statute. Thus, the Complaint, at its heart,
alleges that the lender is at fault for, and should be prohibited from, reserving its rights
to interest, fees, costs and charges to which it is lawfully entitled.

Plaintiffs claim that factual allegations remain in dispute. They contend that
whether WaMu is attempting to collect anything beyond the $182.50 arrearage claimed
in its POC is a disputed fact that the Court must construe in Plaintiffs’ favor. They
contend, further, that the because the loan agreement provides that “any amounts
disbursed by lender under this paragraph 7 shall become additional debt of borrower,”
whether WaMu will increase its loan due to postpetition interest, fees, costs and
charges is not truly discretionary. As | have already determined that WaMu would be
entitled to interest, fees, costs and charges due to its oversecured status as a matter of
law and that the reservation of rights merely reserves rights otherwise available at law,
whether additional amounts will or will not be charged is irrelevant.

At oral argument, while Plaintiffs did not dispute the Court’s legal analysis of the
issue relating to the accrual of interest, fees, costs and charges under § 506(b),
Plaintiffs posed the following policy question that appears to be at the crux of this
dispute: How can Debtors ensure that oversecured creditors only add “reasonable fees”

to the loan pursuant to § 506(b) if there is no apparent mechanism in the Code, the

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Federal Rules of Bankruptcy Procedure or local rules to compel oversecured creditors
to notify debtors, the chapter 13 trustee, or the Court of the amount of interest, fees,
costs and charges to be added to the loan pursuant to § 506(b)? What is to prevent
oversecured creditors from overcharging Debtors? While it is true that the underlying
issue in the Complaint appears to be WaMu’s failure to provide notice of exactly what
fees and costs will be, notice has no affect on the continued validity of the WaMu’s lien.
In general, secured creditors are not required to file proofs of claims in bankruptcy
cases to retain their liens. in re Alderman, 150 B.R. 246, 251 (Bankr. D. Mont 1993).
While there is no doubt that Debtors’ question may demonstrate a significant dilemma
for them at the conclusion of their chapter 13 case, that problem must be addressed
through a mechanism other than this Complaint.

To the extent that Plaintiffs are concerned that unreasonable fees have been
charged during the pendency of the Chapter 13 case, that concern can be addressed
by a specific objection that the fee, if then known, is unreasonable. To the extent that
Plaintiffs are concerned about lack of notice of what fees remain due once the plan is
completed and discharge is about to be entered, filing a motion closer to that time might
be able to resolve that question, should it even arise. The reservation of rights in the
POC does nothing to alter the ability to resolve this issue at the conclusion of the
Chapter 13 case. How to get actual notice and address the reasonableness of the fees
and costs is another issue for another day, which | need not address here.

How can or how should WaMu proceed in this bankruptcy case to assert the
amount owed to it under § 506(b)? In Atwood v. Chase Manhattan Mortgage Co. (in re
Atwood), 293 B.R. 227 (9th Cir. BAP 2003), the BAP held that an oversecured creditor
could assert a claim for attorney fees via a proof of claim without the need to file an

application for compensation under FRBP 2016. /d. at 232. Filing a § 506(b) motion, a

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fee application, or some other similar procedure would also be a permissible procedure
under Atwood. /d. ("We do not exclude the possibility that other procedural vehicles
could also be pressed into service to resolve creditors’ fees and charges.”). There is a
split of authority on whether secured creditors who have not filed proofs of claim are
permitted to participate in plan distributions. Compare in re Hydorn, 94 B.R. 608,
612-613 (Bankr.W.D. Mo.1988) and 5 COLLIER ON BANKRUPTCY § 1327.01[3] at 1327-10,
fn 43 (15th Ed.1992) ("a secured creditor may be provided for in a plan even if it does
not file a claim”), with In re Alderman, 150 B.R. 246 (Bankr. D. Mont. 1993) (holding that
in order to receive a distribution under a Plan, a Proof of Claim must be filed on behalf
of a creditor with a secured claim). Presumably courts that require a creditor to file a
proof of claim would also require an amended proof of claim detailing any increased
amounts sought pursuant to § 506(b) in order for the secured creditor to receive these
additional amounts through the plan. Assuming that WaMu does not file an amended
proof of claim in this case, the reservation of rights in and of itself does not appear to
create a problem inasmuch as the additional amounts that may be added to the loan
are limited to what is allowable under “the underlying security agreement, the
bankruptcy code and other applicable law.” If such law provides that to participate in
distribution, the creditor needs to file a proof of claim and WaMu does not, the
reservation of rights does not give WaMu any power to obtain a contrary result.

Based on the above analysis, | will address Plaintiffs causes of action in the

Complaint one by one:

(1) Declaratory Relief

WaMu argues that the declaratory relief cause of action must be dismissed

because there is no controversy. The test for determining whether an actual

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controversy exists is “whether the facts alleged, under all circumstances, show that
there is substantial controversy, between the parties having adverse legal interests, of
sufficient immediacy and reality to warrant the issuance of a declaratory judgment.
Maryland Cas. Co. v. Pacific Coal & Oil Co., 312 U.S. 270, 273 (1941). Here, WaMu
has not yet made any attempt to collect any fees beyond the $182.50 arrearage in its
proof of claim. While there appears to be no dispute that WaMu will seek additional
interest, fees, costs and charges at some point from the Debtors, WaMu admits in the
POC itself that it must do in accordance with applicable law. As there appears to be no
immediate dispute over whether the reservation of rights language entitles WaMu to
greater rights than are otherwise ailowed under the contract, the Code and applicable
law, there is no case or controversy and this cause of action must fail.

More specifically, this cause of action is not yet ripe. There is no allegation of
any unreasonable fee that could serve as a basis for declaratory relief at this time. Until
WaMu charges unreasonable fees to Plaintiffs in violation of the Code and then asserts
it is entitled to charge such amounts due to the reservation of rights language in its
POC, there is no case or controversy with respect to the reservation of rights language.
At this early vantage point, however, the Court notes that it appears that this language
is harmless, and was drafted to prevent the countervailing argument that secured
creditors are estopped from later asserting their right to postpetition interest, fees, costs
and charges by the filing of an initial proof of claim that does not detail such amounts.
The reservation of rights does not appear to increase the rights of WaMu beyond what
is allowed pursuant to 11 U.S.C. § 506(b). This cause of action must be dismissed.

(2) Permanent Injunction

For the reasons as stated above, this cause of action must also be dismissed.

Moreover, Plaintiffs have failed to show that they have been requisitely damaged.

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(3) Accounting

For the reasons as stated above, this cause of action must also be dismissed.
Moreover, Plaintiffs have failed to show that they have sufficient standing to require
WaMu to produce for inspection and review all similar proofs of claim filed in any case
in the Central District of California. That sort of relief could likely be granted only by
way of a class action lawsuit under FRCP 23 (incorporated by FRBP 7023).

(4) Fraud, Conspiracy & Violation of the Automatic Stay

Although fraud, conspiracy and violation of the automatic stay were not pled as
causes of actions in the Complaint, | will quickly dispose of them under the assumption
that the references to them in the Complaint were intended either as separate,
unenumerated causes of action or part and parcel of one of the enumerated causes of
actions discussed above.

Under FRCP 9(b) (incorporated by FRBP 7009) fraud must be pled with
specificity. The essential elements that must be specifically pled are (1)
misrepresentation or concealment; (2) knowledge of falsity; (3) intent to defraud; (4)
justifiable reliance; and: (5) resulting damages. Here, the allegations of both fraud
generally and mail fraud are conclusory and contain no detail whatsoever. As such,
they are insufficiently pled under Rule 9. This cause of action must be dismissed.

Conspiracy is also similarly insufficiently pled. For a valid conspiracy, there must
be (1) a formation and operation of a conspiracy; (2) a wrongful act or acts done
thereto; and (3) damages resulting. There are no allegations of a wrongful act in the
Complaint to support this allegation. It is not a crime to reserve rights, especially when
the reservation specifically says the rights reserved will be exercised according to the

loan document and applicable law. This cause of action must be dismissed.

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Finally, with regard to the automatic stay, it is not a violation of the automatic
stay to file a proof of claim. See In re Roxford Foods, Inc., 12 F.3d 875 (9th Cir. 1993);
In re North Coast Village, Ltd., 135 B.R. 641 (9th Cir. B.A.P. 1992) (holding that “the
stay does not apply to proceedings commenced against the debtor in the bankruptcy
court where the debtor's bankruptcy is pending” and specifically noting that applying the
automatic stay to the filing of a proof of claim would be absurd). Similarly, and for the
same reason, a § 506(b) motion or other similar procedure would not violate the stay.
Moreover, providing information regarding a lien that survived bankruptcy to a debtor
postpetition, at least where there is no coercion or harassment, is considered not to be
a violation of either the automatic or permanent stay. See Garske v. Arcadia Financial,
287 B.R. 537 (9th Cir B.A.P. 2002): see also Morgan Guaranty Trust Co. V. American
Sav. & Loan Assoc., 804 F. 2d 1487, 1491 (9th Cir. 1986).

Defendant's motion to dismiss is granted in its entirety. Defendant shall lodge an

appropriate order consistent with this memorandum granting its motion.

DATED: February 6 , 2007 NNiarnt Sale

MAUREEWA. TIGHE
United States Bankruptcy Judge

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1 CERTIFICATE OF SERVICE BY MAIL
2 | certify that a true copy of this ORDER was served on

6 2007

to the parties listed below:

4 || [see attached service list]

° Ln Wilheme
7| ated: FEB 6 2007 ‘ a

DEPUTY CLERK 7"-*

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PICKETT vs. WASHINGTON MUTUAL BANK
ADVERSARY CASE NUMBER SV 06-01286 MT
In re Keenan & Wanda Pickett
Main Case Number SV 06-11080 MT
SERVICE LIST

ATTORNEY FOR PLAINTIFFS (DEBTORS):

M. Erik Clark, Esq. -

BOROWITZ, LOZANO & CLARK, LLP

100 N. Barranca Avenue, Suite 250

West Covina, CA 91791

ATTORNEYS FOR DEFENDANT:

William G. Malcolm

MALCOLM ¢ CISNEROS,

A Law Corporation

10 || 2112 Business Center Drive

Second Floor

11] lrvine, CA 92612

12 || OFFICE OF THE U.S. TRUSTEE:

21051 Warner Center Lane
13 || Suite 115

Woodland Hills, CA 91367

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oO ON ODO oO KR ew PD