Candelario et al v. HSBC Bank USA N.A., as Trustee on behalf of ACE S

I N THE U NITED STATES B ANKRUPTCY C OURT
FOR THE E ASTERN DISTRICT OF PENNSYLVANIA
I N RE : 	: CHAPTER 13
:
RALEIGH B LYTHE AND ROSE CANDELARIO 	:
:
D EBTOR( S) 	: B ANKRUPTCY NO. 08-15626 SR
RALEIGH B LYTHE AND ROSE CANDELARIO 	:
:
PLAINTIFF ( S) 	:
VS. 	:
HSBC B ANK USA, N.A., AS T RUSTEE ON BEHALF OF 	:
ACE SECURITIES CORP. H OME EQUITY L OAN T RUST 	:
AND FOR THE REGISTERED HOLDERS OF ACE 	:
SECURITIES CORP. HOME EQUITY L OAN T RUST, 	:
SERIES 2005-SD3, A SSET B ACKED PASS-T HROUGH 	:
CERTIFICATES 	:
:
D EFENDANT( S) 	: A DVS. NO. 08-350
OPINION
B Y: STEPHEN RASLAVICH, CHIEF UNITED STATES B ANKRUPTCY JUDGE .
Introduction
Before the Court are two matters: Plaintiffs’ Motion for Leave to Amend
Complaint and Defendant’s Motion for Judgment on the Pleadings. Both of the motions
are opposed. After a hearing held on July 29, 2009, the Court took the matters under
advisement.1
1As this adversary proceeding seeks to determine the validity, extent or priority of a
secured claim, it is within this Court’s core jurisdiction. 28 U.S.C. § 157(b)(2)(K).
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 1 of 13

Background
Plaintiffs would amend their Complaint for the second time. 2 In response to the first
Amended Complaint, HSBC filed a Motion to Dismiss. This Court’s Opinion and Order
of May 6, 2009 denied that motion as to all but one count. In response, HSBC filed an
Answer to the Amended Complaint and a Motion for Judgment on the Pleadings.
Before filing a response to HSBC’s Motion, Plaintiffs filed this Motion for Leave to
Amend their Complaint. Because allowing amendment would moot any pending
motion, 3 the Plaintiffs’ request must be taken up first.
Causes of Action
The legal theories which the alleged facts support—both old and new—remain
much as they were. Formerly, six counts were plead where now eight are set forth. As
before, Count I seeks to determine the extent of the HSBC lien. Counts II and III again
allege violations of the Home Owners Equity Protection Act4 (HOEPA). Count IV adds a
third HOEPA violation. Count V alleges the same violation of the Truth in Lending Act
(TILA) as before. Count VI objects to the HSBC Proof of Claim. The final two counts
are new: both allege violations of the Pennsylvania Uniform Trade Practices and
2 This is the first time, however, for which leave to amend is requested. The prior
amendment was done as a matter of course.
3It is black letter law that “an amended complaint supercedes the original version in
providing the blueprint for the future course of a lawsuit.” Snyder v. Pascack Valley Hospital,
303 F.3d 271, 276 (3d Cir. 2002).
415 U.S.C. § 1639, a section of the Truth in Lending Act, 15 U.S.C. 1601 et seq.,
devoted to certain “high cost” mortgage loans.
2
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 2 of 13

Consumer Protection Law, 5 one of which is derivative of a state usury law6 (Count VII)
while the other (Count VIII) alleges an independent violation of the statute.
Applicable Rule
Amendment of pleadings is governed by Fed. R.Bankr.P. 7015, which
incorporates Fed.R.Civ.P. 15. The rule provides, in pertinent part:
(a)
Amendments Before Trial.
(1)
Amending as a Matter of Course. A party may
amend its pleading once as a matter of course:
(A) before being served with a responsive pleading; or
(B) within 20 days after serving the pleading if a responsive
pleading is not allowed and the action is not yet on the trial
calendar.
(2)
Other Amendments. In all other cases, a party may
amend its pleading only with the opposing party's written
consent
or the court's leave. The court
should freely give
leave when justice so requires.
Fed.R.Civ.P. 15(a)(1),(2) (2007) (emphasis added). The Supreme Court has made it
clear that the application of this presumption is “a mandate to be heeded.”
	Foman v.
Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). It furthers the
policy of trying cases on their merits.
	Id. It also avoids the possibility of the opposing
party suffering prejudice or surprise. 6 Wright & Miller,
Fed. Prac. & Proc.,
Civ. 2d §
1474. The precise delineation of when leave should be granted or denied is impossible;
therefore, the determination is left to the sound discretion of the trial judge.
	NAACP v.
Harrison, 907 F.2d 1408, 1417 (3d Cir.1990). This requires the Court to consider the
positions of
both parties and the effect that the request will have on them. Wright &
573 P.S. § 201-1.
641 P.S. § 401 et seq. (referred to “Act 6")
3
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 3 of 13

Miller,
supra at § 1487. For that reason, the court may deny a request to amend when
the moving party has demonstrated undue delay, bad faith or dilatory motive or where
the amendment would prejudice the opposing party.
	See Foman, supra, id.;
Grayson v.
Mayview State Hosp., 293 F.3d 103, 108 (3d Cir.2002). Equally, an amendment will be
denied where it is futile.
	Id.
HSBC’s Objection
HSBC’s objection to Plaintiffs’ proposed amendments is limited. It would “permit
the addition of the factual allegations which support Count II as well as the inclusion of
Count IV as proposed.” See HSBC’s Response to Motion to Amend, 2. As to the
remaining counts, HSBC’s objection is vague. It states that the proposed amendment
attempts to include claims that “fail as a matter of law” and that “would be futile.” Id.
Yet when HSBC comes to a particular count, it either provides no argument in support
of the objection or the argument offered is based not on futility, but rather, on principles
of preclusion. Given that lack of clarity, it is best for the Court to simply address each
count (and objection) in order.
Count I Stripdown
Count I seeks to reduce the amount of the HSBC secured claim. The security for
the HSBC claim is a mortgage on the Plaintiffs’ home. The proposed amendment to
this count explains — as did its previous iteration — that while this loan is secured by
the Plaintiffs’ principal residence, it may nonetheless be modified. The sole change
which the proposed amendment makes to this count is to add a paragraph (¶ 56) which
explains why the plan may pay HSBC’s claim a rate of interest less than the contract
4
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 4 of 13

rate.
Although it objects to allowing leave to amend this count as proposed, HSBC
offers no reasons for its opposition. For its part, the Court observes that § 506 provides
that
An allowed claim of a creditor secured by a lien on property
in which the estate has an interest, or that is subject to setoff
under section 553 of this title, is a secured claim to the
extent of the value of such creditor's interest in the estate's
interest in such property, or to the extent of the amount
subject to setoff, as the case may be, and is an unsecured
claim to the extent that the value of such creditor's interest or
the amount so subject to setoff is less than the amount of
such allowed claim. Such value shall be determined in light
of the purpose of the valuation and of the proposed
disposition or use of such property, and in conjunction with
any hearing on such disposition or use or on a plan affecting
such creditor's interest.
11 U.S.C. § 506(a)(1). 7 Section 1322 of the Code provides that a Chapter 13 plan may
“modify the rights of holders of secured claims, other than a claim secured only by a
security interest in real property that is the debtor's principal residence....” 11 U.S.C. §
1322(b)(2) (emphasis added). Put more directly, the anti-modification clause bars a
debtor from modifying the rights of a creditor who has a claim secured only by the
debtor's principal residence. In re McDonald, 205 F.3d 606, 609 (3d Cir.2000). 	That
clause, however, is not without exceptions:
Notwithstanding subsection (b)(2) and applicable non-
bankruptcy law—
…
(2) in a case in which the last payment on the original
payment schedule for a claim secured only by a security
7A determination of the validity, extent or priority of a secured claim is initiated via an
adversary proceeding. B.R. 7001(2). Thus, Plaintiffs have followed the correct procedure.
5
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 5 of 13

interest in real property that is the debtor’s principal
residence is due before the date on which the final payment
under the plan is due, the plan may provide for the payment
of the claim as modified pursuant to section 1325(a)(5) of
this title.
11 U.S.C. § 1322(c)(2). The Plaintiffs assert that their loan qualifies for this very
exception. The last payment on the Plaintiffs’ loan from HSBC is due in August 2013;
the last payment under their Chapter 13 plan will be made in September 2013. See
Plaintiffs’ Proposed Amended Complaint, ¶¶ 54, 55. Because the last loan payment
precedes the last plan payment, the Plaintiffs’ treatment of HSBC qualifies for the
exception to the anti-modification rule of § 1322(b)(2).
As a result, the value of the HSBC secured claim may be determined under § 506.
Count II HOEPA - Failure to Disclose
No objection is lodged as to this count and so leave to amend it as proposed will
be allowed.
Count III HOEPA - Negative Amortization
As before, the third count alleges that HSBC has violated the statute’s
proscription against loans which provide for negative amortization. Where it is different,
however, is in its factual premise for the claim. Formerly, it was alleged that HSBC
impermissibly applied payments “as if the mortgage loan was a daily interest loan.”
Amended Complaint, ¶ 42. That, it concluded, resulted in negative amortization in
violation of the statute. Id., ¶ 43, 44. The proposed second amendment would change
that to state that the loans’s terms per se resulted in negative amortization. See
Proposed Second Amendment, ¶ 62. In other words, a HOEPA violation occurred
regardless of how HSBC may have applied monthly payments to principal and interest.
6
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 6 of 13

Id., ¶ 63.
HSBC maintains that the negative amortization claim is precluded by the Court’s
May 6 ruling. See Transcript of Hearing, July 29, 2009 (T-), 11. They explain that
resolving that claim requires re-application of every monthly payment made since the
loan’s inception into a principal and interest component. That, they explain, would
require reopening of the foreclosure judgment. As a result, they conclude, such a cause
of action is precluded under res judicata.
The Court finds that no recalculation of interest and principal payments would be
required by the proposed amendment. Here, the negative amortization claim is alleged
to exist on the face of the loan. From its inception, the Plaintiffs allege, the loan will
necessarily result in the principal balance growing, as opposing to amortizing. To prove
that will not require analysis of Plaintiffs’ payment history. Thus, no preclusion principle
should bar the claim as amended.
That being said, the Court must express some dissatisfaction with what it
perceives as legal maneuvering on the part of Plaintiffs’ counsel. T-14 Counsel never
explained why this new ground for asserting negative amortization was not apparent
sooner. T-20. However, given that the case is still at the pleadings stage, the Court
would not go so far as to impute bad faith or dilatory motive on Plaintiffs’ part.
Moreover, this is not an instance of a litigation staking out a completely contrary position
after the earlier one failed. And in fairness to Plaintiffs, the newly offered reason for the
negative amortization claim is based on the documents (i.e., the note) which is in
HSBC’s possession. Likewise, discovery has not yet commenced so it cannot be
argued that there might be any duplication of effort or resource. In sum, no
7
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 7 of 13

demonstrable harm is done to HSBC in granting Plaintiffs this latitude. As the case
progresses, however, such requests would be judged by a higher standard.
Count IV HOEPA - Prepayment Penalty
This Count alleges that HSBC also violated HOEPA by charging a penalty for
prepayment. As this count as proposed is not objected to, it may be pleaded in the
second amendment.
Count V - TILA
This count alleges that the lender violated TILA not in failing to give disclosures,
but in giving inaccurate ones. Simply stated, the Plaintiffs allege that their loan included
certain charges in the “amount financed” which should have been disclosed as part of
the “finance charge.” 8 The sole change to this count in the proposed amendment is to
itemize specifically which charges were part of the amount financed when they should
have been included in the finance charge. See Proposed Amendment, ¶ 70.
HSBC utterly fails to explain why this proposed change should not be allowed.
This is especially curious given that its motion for judgment on the pleadings on the first
Amended Complaint did not challenge the TILA claim. For its part, the Court cannot
see how the amendment—either on this record or on its face—might fail. Our previous
opinion explained how consumer lending claims are not precluded by a prior foreclosure
ruling. Equally, alleging that a lender understated the finance charge is a common TILA
violation. Consumer lenders are required to disclose the “amount financed” as well as
the “finance charge.” See 15 U.S.C. § 1638(a)(2), (3). Exactly what goes into the
8Both terms are specifically defined under TILA. See 15 U.S.C. §§ 1605(a) (defining
“finance charge”), 1638(a)(2)(A) (defining “amount financed”)
8
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 8 of 13

“finance charge” is explained at § 1605 of TILA and § 226.4 of Regulation Z. 9 It defines
that term as “the sum of all charges, payable directly or indirectly by the person to whom
the credit is extended, and imposed directly or indirectly by the creditor as an incident to
the extension of credit.” 15 U.S.C. § 1605(a). If the amount of the finance charge is
inaccurate, then the creditor has not “clearly and conspicuously” disclosed the cost of
credit to the consumer as TILA requires.10 See In re Sterten, 546 F.3d 278, 280 (3d Cir.
2008) (explaining that lender may be liable under TILA for failing to disclose finance
charge accurately) As a result, the Court finds that proposed Count V states a claim
under TILA. The amendment as proposed to that count will be allowed.
Count VI - Objection to Claim
HSBC next challenges the Plaintiffs’ request to amend its objection to HSBC’s
Proof of Claim.11 As proposed, the amendment relies on the merger doctrine to disallow
certain fees and from the claim as well as to limit the rate of interest chargeable to it.
See Proposed Second Amendment ¶¶ 75-78. HSBC implicitly concedes that post-
judgment fees and costs are not recoverable. T-39,40. As to interest, however, it
steadfastly asserts its right to interest at the contract rate. It incorporates what is set
forth in its Motion for Judgment on the Pleadings. There, HSBC relies on the exception
to the merger doctrine which the Third Circuit recognized in Stendardo. That exception
9Its interpretative regulation drafted by the Federal Trade Commission.
10The statute and its interpretative regulation tolerate a de minimis level of inaccuracy of
$100. See 15 U.S.C. § 1605(f); 12 C.F.R. § 226.18(d)(1). The proposed amendment alleges
understatement of the finance charge in excess of that threshold amount. See ¶ 70.
11HSBC appears to have misidentified this Count. It refers to Count V as the objection to
the HSBC Claim, but that count is listed as Count VI. Count V alleges a TILA violation. See
Proposed Second Amended Complaint.
9
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 9 of 13

allowed for the possibility that the contract rate of interest might survive the foreclosure
judgment if the parties had so agreed beforehand. See Motion for Judgment on the
Pleadings, 4.
Whether HSBC is correct on the this point however is a question of proof, and
not pleading. And at the pleadings stage, what is alleged is presumed true for purposes
of judging legal viability. It would be premature then at this stage for the Court to
consider matters beyond what is alleged. And by the same token, the Court makes no
finding as to Plaintiffs’ contention that they may pay HSBC interest of not more than 7%
on its Proof of Claim. That determination likewise cannot be determined in this context.
For present purposes, the Court need only judge the sufficiency of the amendment.
The Court finds that based on what is proposed in Count VI is enough to state an
objection to the HSBC Proof of Claim.
Counts VII and VIII - Act 6/UDAP
The last two counts are new and charge HSBC with violating the Uniform Trade
Practices and Consumer Protection Law, 73 P.S. § 201-1 (UDAP). 12 The violations are
alleged to have occurred in two ways, one derivative and the other direct. First, Count
VII alleges that the loan’s prepayment penalty is a violation of the state usury statute
(referred to as “Act 6"), 41 P.S. § 405. That, in turn, has been held to constitute a per
12Like most American jurisdictions, Pennsylvania has enacted a statute which is
generically known as a law prohibiting and punishing "unfair or deceptive acts and practices,"
i.e., a UDAP statute, specifically the Unfair Trade Practices and Consumer Protection law, 73
P.S. § 201-1, et seq. (referred to hereafter as "UDAP").
10
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 10 of 13

se violation of UDAP. 13 Second, HSBC is accused of having misrepresented the
material terms of the loan in order to induce the Plaintiffs to take out a loan that was
unfavorable to them. See 73 P.S. § 201-2(4)(v), (xxi) (listing as fraudulent or deceptive
acts the “represent[ation] that goods or services have sponsorship, approval,
characteristics, ingredients, uses, benefits or quantities that they do not have” and
“engaging in any other fraudulent or deceptive conduct which creates a likelihood of
confusion or of misunderstanding.”)
HSBC’s objection to these counts is based on the same doctrines of preclusion
and comity on which it relied before. It contends that these counts “would purport to
add back in additional state law claims attacking the state court foreclosure judgment in
violation of the preclusion and Rooker-Feldman doctrines.” Response, 2 That is
completely without legal basis. The Court’s earlier opinion discussed the preclusive
reach of a foreclosure judgment in Pennsylvania. Such a proceeding is in rem and thus
the extent of matters which may be brought in response to it is limited. For that reason,
the Court upheld Plaintiffs’ right to raise TILA and HOEPA claims after the foreclosure
judgment. There is no reason why the UDAP claims, also in personam and also
consumer protection-based, would be precluded in this context.
13This is established law. A vicarious violation of UDAP has been held to have occurred
where a different consumer protection statute is violated. In re Wylie, 1991 WL 42236 *4
(E.D.Pa.) (“UDAP’s general catch-all provision also covers violations of Pennsylvania's various
consumer protection statutes, many of which do not themselves provide for private causes of
action.”) ; see, e.g., Safeguard Investment Corp. v. Commonwealth, 44 Pa.Cmwlth. 417, 419,
404 A.2d 720, 721 (1979) (holding that violation of Act 6 would support an action under UDAP);
See In re Milbourne, 108 B.R. 522, 544 (Bankr.E.D.Pa.1989) (“a violation of TILA may also
constitute a violation of UDAP”); and see also In re Barker, 251 B.R. 250, 260
(Bankr.E.D.Pa.2000) (“Any violations of Pennsylvania's Credit Services Act (CSA) are deemed
to be violations of the state's UDAP statute”)
11
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 11 of 13

Likewise, neither is the Rooker-Feldman 14 doctrine implicated. That doctrine bars
“inferior” federal courts from sitting as appellate courts for state judgments. See In re Knapper,
407 F.3d 573, 580 (3d Cir.2005) Specifically, a claim is barred if (1) the federal claim
was actually litigated in state court prior to the filing of the federal action or (2) if the
federal claim is inextricably intertwined with the state adjudication meaning that federal
relief can only be predicated upon a conviction that the state court was wrong. 	Id. 	A
federal claim is“inextricably intertwined” with the state court adjudication when the
federal court must take an action that would negate the state court's judgment. Id., at
581. It is grounded in principles of federalism and designed to serve two primary
functions: It furthers the interest of finality in court decisions, and ensures that federal
courts show proper respect for their state counterparts. See Guarino v. Larsen, 11 F.3d
1151, 1157 (3d Cir.1993).
Nothing about the UDAP counts contravenes the interests protected by the
Rooker-Feldman doctrine. Contrary to HSBC’s premise, those claims do no violence to
the state foreclosure judgment. To reiterate, any ruling on the UDAP claims in Plaintiffs’
favor will not alter the result of the foreclosure ruling. The former seeks damages while
the latter seeks a determination of rights in specific property. HSBC may rely on that
ruling as final. Allowing this amendment would not compromise any interests of
federalism.
Summary
The Court finds that the circumstances support the granting of leave to Plaintiffs
14See D.C. Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206
(1983); Rooker v. Fid. Trust Co., 263 U.S. 413, 416, 44 S.Ct. 149, 68 L.Ed. 362 (1923).
12
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 12 of 13

to amend their complaint for a second time. The proposed amendments are neither
futile nor precluded by what has already occurred in state court. As a result of this
determination, HSBC’s Motion for Judgment on the Pleadings is rendered moot.
An appropriate Order follows.
By the Court:
Stephen Raslavich
Chief U.S. Bankruptcy Judge
Dated: August 25, 2009
13
Case 08-00350-sr Doc 58 Filed 08/25/09 Entered 08/26/09 16:34:12 Desc Main
Document Page 13 of 13