Vienneau et al v. Saxon Mortgage Services et al

1Although Morgan Stanley’s memorandum is styled as its own, counsel’s signature block
indicates it was filed on behalf of the Saxon Defendants as well.
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
In re 	: 	Chapter 7
JOSEPH C. VIENNEAU 	: 	CASE NO. 07-43690-JBR
M. JEANNETTE VIENNEAU 	:
DEBTOR 	:
JOSEPH C. VIENNEAU and , 	:
M. JEANNETTE VIENNEAU 	:
Plaintiffs 	:
v. 	: 	Adv. Pro. No 08-4021
SAXON CAPITAL, INC., SAXON MORTGAGE 	:
SERVICES, and MORGAN STANLEY & Co., 	:
INCORPORATED, 	:
Defendants. 	:
__________________________________________:
MEMORANDUM OF DECISION ON MOTIONS TO DISMISS
This matter came before the Court for hearings on the Motion to Dismiss of Saxon
Capital, Inc. (“Saxon Capital”) and Saxon Mortgage Services (“Saxon Mortgage” and
collectively with Saxon Capital, the “Saxon Defendants”) [# 15] as well as the “Partial Motion to
Dismiss” filed by Morgan Stanley & Co, Incorporated (“Morgan Stanley”) [#31]. The Saxon
Defendants submitted a memorandum in support of their motion [# 16], and joined in the one
filed by Morgan Stanley [# 32].1 The Saxon Defendants and Morgan Stanley request dismissal
of Counts III through VIII of the Amended Complaint, which seek damages for alleged
violations of federal and state law primarily as a result of letters sent and actions taken by
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Defendant Saxon Mortgage postpetition. The Plaintiffs oppose both motions to dismiss [# 22
and # 44].
FACTS
On October 7, 2007 (the “Petition Date”), the Debtors filed a voluntary petition under
Chapter 7 of the United States Bankruptcy Code. At that time the Debtors owned real estate in
Baldwinville, Massachusetts (the “Property”) which was encumbered by a mortgage held by
NovaStar Home Mortgage Inc. (“NovaStar”). According to the Amended Complaint, the
mortgage was subsequently transferred to either Saxon Capital or Saxon Mortgage. All
correspondence attached as exhibits to the Amended Complaint emanate from Saxon Mortgage.
In their Statement of Intention, the Debtors noted their intent to surrender the Property. On
February 7, 2008 the Debtors’ discharge orders entered. The Chapter 7 Trustee has filed a
Report of No Distribution.
On October 27, 2007 NovaStar filed a motion for relief to foreclose on the Property but
withdrew the motion a few weeks later. 	Subsequently Saxon Mortgage sent the Debtors a
Mortgage Loan Statement dated as of December 17, 2007 advising the Debtors, among other
things, that over $16,000, including current and delinquent payments along with various fees and
late charges, was due. The single page was perforated so the Debtors could detach the payment
coupon and send it, along with their payment, to Saxon Mortgage. Just above the perforation,
the Mortgage Loan Statement contained the following italicized language:
If you are a borrower on this loan and have filed for bankruptcy protection, this
statement is for informational purposes only and is not attempting any act to
collect, recover, or offset any discharged debt as your personal liability.
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On January 7, 2008 the Debtors’ bankruptcy attorney sent Saxon Mortgage a certified letter
advising it of the Debtors’ bankruptcy, reserving the Debtors’ right to seek sanctions for violation
of the automatic stay, and directing that all future correspondence by sent to the attorney, not to
the Debtors. The letter was received by Saxon Mortgage on January 17, 2008. Although the
actual date on which Saxon Mortgage sent the Debtors another Mortgage Loan Statement is
unclear, the Debtors received one dated February 18, 2008. The February 2008 statement was
substantially similar to the December 2007 Mortgage Loan Statement, only the amount due had
increased to over $20,000. On or about February 19, 2009 Saxon Mortgage sent a letter,
addressed only to the husband Debtor, notifying him that Saxon Mortgage had obtained forced
place insurance for the Property and that the insurance premium would be charged to the loan. A
copy of the Evidence of Insurance was enclosed with the letter. The Evidence of Insurance lists
Southwest Business Corporation (“Southwest”) as the insurance agency while American Modern
Surplus Lines (“American Modern”) is listed as the actual insurer.
On February 25, 2008 the Debtors’ attorney sent Dennis Stowe, the president of Saxon
Mortgage, a demand letter pursuant to M.G.L. c. 93A, demanding $25,000 plus costs and
attorneys’ fees for violating the automatic stay, the discharge injunction, and M.G.L. c. 93A.
Similar letters were sent to Southwest and American Modern. Saxon Mortgage responded by
sending the Debtors a letter advising them that Saxon Mortgage had received the “written
request” and would be responding “soon.” On March 21, 2008 Saxon Mortgage sent the virtually
identical letter to the Debtors. In the interim, on or about March 18, 2008 the Debtors received
another Mortgage Loan Statement showing that the amount due was in excess of $21,000 and
containing the same statement regarding bankruptcy as had the earlier Mortgage Loan Statements.
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TRAVEL OF THE CASE
On February 27, 2008 the Debtors commenced the above adversary proceeding against
Saxon Mortgage, Saxon Capital, Morgan Stanley, which owns the Saxon Defendants, Southwest,
and American Modern. Shortly thereafter the Plaintiffs amended their complaint whereby they
sought damages against all of the Defendants: for violating the automatic stay (Count I), the
discharge injunction (Count II), the Fair Debt Collection Practices Act (“FDCPA”), 15 U.S.C.
§1692a(5) (Count III), and the Massachusetts version of a fair debt collection act, M.G.L. c. 93§
49 (Count IV); for breaching the covenant of good faith and fair dealing (Count V), intentional
infliction of emotional distress (Count VI), the negligent infliction of emotional distress (Count
VII); and for violating M.G.L. c. 93A (Count VIII). Since filing the amended complaint, the
Plaintiffs dismissed the action against Southwest and American Modern with prejudice.
The Saxon Defendants moved to dismiss the Counts III through VIII of the amended
complaint on the grounds that those causes of action are not core matters and that those claims are
preempted by the Bankruptcy Code. Morgan Stanley filed its motion to dismiss Counts III
through VIII on the grounds that the Bankruptcy Code impliedly repealed the FDCPA and
preempts state law remedies, that it is not a debt collector under the FDCPA, and that this Court
lacks jurisdiction over the personal injury claims. All of the Defendants joined in the
Memorandum in Support of Morgan Stanley’s Partial Motion to Dismiss. The Plaintiffs oppose
both motions. The Court stayed the adversary proceeding pending a decision by the First Circuit
Court of Appeals of an appeal of the district court’s order affirming this Court’s decision in Nosek
v. Ameriquest Mortgage Company, 363 B.R. 643 (Bankr. D. Mass. 2007). That decision entered,
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2The First Circuit did not address the issue of preemption which formed the basis of the
district court’s first appellate decision in Nosek, in which the district court remanded the matter
to this Court for further consideration in light of its conclusion that the Bankruptcy Code had
preempted certain federal and state law causes of action. Nosek v. Ameriquest Mortgage
Company, 354 B.R. 331 (D. Mass. 2006) (“Nosek I”).
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544 F.3d 34 (1st Cir. 2008). 2
POSITION OF THE PARTIES
The Defendants seek dismissal of Counts III through VIII of the Amended Complaint
pursuant to Fed. R. Civ. P. 12(b)(1) and (6), made applicable to the adversary proceeding by Fed.
R. Bankr. P. 7012(b). Their arguments fall into four categories: (i) those causes of action are not
within the core jurisdiction of this Court, in part because at least some of them are based on state
law; (ii) the causes of action are preempted by the Bankruptcy Code; (iii) this Court lacks
jurisdiction over personal injury torts; and (iv) at least with respect to Morgan Stanley, that it is
not a debt collector to whom the FDCPA applies. They urge the Court to follow Judge Young’s
decision in Nosek I and the Ninth Circuit’s decision in Walls v. Wells Fargo, 276 F.3d 302 (9th
Cir. 2002), and determine as a matter of law that the Bankruptcy Code preempts these claims,
including the FDCPA claim.
Not surprisingly the Plaintiffs allege that the claims fall within the Court’s core
jurisdiction, or at least within its related to jurisdiction, and assert that the Court should follow
“the more conventional approach to statutory construction” taken by the Seventh Circuit in
Rudolph v. IMBS, Inc., 368 F.3d 726 (7th Cir. 2004), and a recent unpublished decision, Eastman
v. Baker Recovery Services, A.P. 08-5505 (Bankr. D. Tx. April 17, 2009), a copy of which is
attached to the Plaintiff’s Supplemental Memorandum [# 44]. Alternatively, in the event that the
Court concludes these claims are not within its core or related to jurisdiction, the Plaintiffs argue
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that the Court may exercise supplemental jurisdiction pursuant to 28 U.S.C. § 1367 as these
counts arise out of the same set of facts as their counts for violation of the automatic stay and
violations of the discharge injunction, both of which the Defendants concede come within the
Court’s core jurisdiction. The Plaintiffs argue that the Fifth Circuit’s decision in Morrison v.
Western Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473 (5th Cir. 2009), cited by the
Eastman court supports such an expansive view of bankruptcy court jurisdiction.
DISCUSSION
Initially the Court must determine whether it has jurisdiction to adjudicate Counts III
through VIII. If it does not, those counts cannot be tried in this Court.
In determining whether a motion to dismiss for lack of subject matter jurisdiction under
Fed. R. Civ. P. 12(b)(1) should be granted when the facts essential to the jurisdictional challenge
are not in dispute, a court “accepts the plaintiff’s version of jurisdictionally-significant facts as
true and addresses their sufficiency, thus requiring the court to assess whether the plaintiff has
propounded an adequate basis for subject-matter jurisdiction.” Valentin v. Hosp. Bella Vista, 254
F.3d 358, 363-64 (1st Cir. 2001). All reasonable inferences must be drawn in favor of the
Plaintiff. Id. Moreover each count must come within the Court’s subject matter jurisdiction.
Ralls v. Docktor Pet Centers, Inc., 177 B.R. 420, 425 (D. Mass.1995). Even though the Plaintiffs
are aided by the acceptance of their version of the facts and all reasonable inferences, the burden
remains with them to establish jurisdiction. As set forth below, the Plaintiffs have failed to meet
that burden.
Bankruptcy courts, like other lower federal courts, cannot create its own jurisdiction; they
have only the jurisdiction permitted under the Constitution and given to them by Congress.
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Celotex Corp. v. Edwards, 514 U.S. 300, 307, 115 S.Ct. 1493, 1498, 131 L.Ed.2d 403 (1995).
With the passage of 28 U.S.C. § 1334, Congress invested the district courts with original and
exclusive jurisdiction for cases “under title 11,” that is, the actual bankruptcy case commenced by
the filing of a petition, and original but not exclusive jurisdiction for civil proceedings “arising
under title 11, or arising in or related to cases under title 11.” 28 U.S.C. § 1334(a) and (b).
Congress also granted the district courts the power to refer bankruptcy cases as well as civil
proceedings which arise in or under the Bankruptcy Code and those related to bankruptcy cases to
the bankruptcy courts. 28 U.S.C. § 157(a). In Massachusetts, the district court has referred the
broadest possible universe of cases which a bankruptcy court could hear, namely all cases over
which the district court may exercise jurisdiction under either § 1334(a) or (b). LR, D. Mass 201.
An adversary proceeding, which is a civil proceeding, “arises under” the Bankruptcy
Code, if it involves a “cause of action created or determined by a statutory provision of title 11.”
Wood v. Wood (In re Wood), 825 F.2d 90, 96 (5th Cir. 1987). In contrast, proceedings “arising in”
a bankruptcy case “are those that are not based on any right expressly created by title 11, but
nevertheless, would have no existence outside of the bankruptcy.” Id. at 97. Together,
proceedings that “arise in” and “arise under” title 11 constitute the bankruptcy court’s “core”
jurisdiction. See 28 U.S.C. § 157(b); Id. at 96-97. None of Counts III through VIII come within
the Court’s core jurisdiction. They are not causes of action created by the Bankruptcy Code; each
of them can exist outside of the bankruptcy case.
A bankruptcy court has jurisdiction over a non-core proceeding provided the proceeding is
“related to” a bankruptcy case. The breadth of the bankruptcy court’s related to jurisdiction is
great but not unlimited. “The usual articulation of the test for determining whether a civil
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328 U.S.C. § 1367(a) provides:
Except as provided in subsections (b) and (c) or as expressly provided otherwise by
Federal statute, in any civil action of which the district courts have original jurisdiction,
the district courts shall have supplemental jurisdiction over all other claims that are so
related to claims in the action within such original jurisdiction that they form part of the
same case or controversy under Article III of the United States Constitution. Such
supplemental jurisdiction shall include claims that involve the joinder or intervention of
additional parties.
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proceeding is related to bankruptcy is whether the outcome of that proceeding could conceivably
have any effect on the estate being administered in bankruptcy.” In re G.S.F. Corp., 938 F.2d
1467, 1475 (1st Cir. 1991) (quoting Pacor v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984)).
Proceedings which are outside the boundaries of § 1334(a) or (b), that is, proceedings which do
not fall even within the “related to” jurisdiction, are outside of the subject matter jurisdiction of a
bankruptcy court. Nickless v. Aaronson (In re Katz), 341 B.R. 123, 127-28 (Bankr. D. Mass.
2006).
Here the Plaintiffs are Debtors in a Chapter 7 case. Each of the acts complained of
occurred post-petition. Their claims arising from post-petition actions are not property of the
estate. 11 U.S.C. § 541(a)(1); In re Deceder, 351 B.R. 261 (Bankr. D. Mass. 2006), In re Steele,
258 B.R. 319 (Bankr. D.N.H. 2001). Whatever the outcome of these causes of action, the
Debtors’ estates will be unaffected. Therefore the Court lacks “related to” jurisdiction.
The Plaintiffs argue that nevertheless the Court may exercise supplemental jurisdiction
pursuant to 28 U.S.C. § 1367 as all of the causes of action arise from the same set of facts. By its
very language that section applies only to district courts. 3 This Court has previously rejected the
idea that a non-article III court, such as the bankruptcy court, could exercise supplemental
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4The Bankruptcy Appellate Panel for the First Circuit addressed the issue in Cambio v.
Mattera (In re Cambio), 353 B.R. 30 (1st Cir. BAP 2004). The majority held that bankruptcy
courts lack jurisdiction, at least in cases where there are no assets available for distribution to
creditors, and vacated the money judgment entered by Judge Volalato. I dissented on the basis
that discretion to liquidate the debt should remain with the trial court, which could exercise
jurisdiction over the entire proceeding in the interests of judicial economy and the efficient use
of judicial and litigant resources. In this district, Judge Hillman, a member of the panel majority
in Cambio, and Chief Judge Boroff have held that bankruptcy courts lack jurisdiction to liquidate
nondischargeable debts in no asset cases while Judge Feeney and I have found such jurisdiction
exists. See Rinella v. Bartlett ( In re Bartlett), 397 B.R. 610, 623 n. 13 (Bankr. D. Mass. 2008)
(Chief Judge Boroff); Baker v. Friedman (In re Friedman), 300 B.R. 149 (Bankr. D. Mass.
2003)( Judge Feeney).
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jurisdiction. In re Perez, 2008 WL 4164372, *4 (Bankr. D. Mass. 2008). See also In re
Adamson, 334 B.R. 1, 12 (Bankr. D. Mass.2005) (argument that bankruptcy courts have
supplemental jurisdiction is a “dubious proposition”); In re Found. for New Era Philanthropy,
201 B.R. 382, 398 (Bankr. E.D. Pa. 1996) (deciding that bankruptcy courts do not have
supplemental jurisdiction because § 1367 “makes no reference to the bankruptcy court”); In re
Remington Development Group, Inc. 180 B.R. 365, 373 (Bankr. D.R.I. 1995) (“Section 1367's
supplemental jurisdiction grant extends district court jurisdiction virtually to the limits of Article
III.... It would be anomalous to conclude that the bankruptcy court, which obtains jurisdiction by
circumscribed statutory reference from the district court, may exercise § 1367 supplemental
jurisdiction at the outer limits of Article III.... To conclude otherwise is asking to run another
Marathon.”).
The Plaintiffs, however, urge the Court to examine its jurisdiction in light of the Fifth
Circuit’s decision in Morrison, a case that involved the question of whether a bankruptcy court
may enter a monetary judgment in a nondischargeability action. Although the First Circuit Court
of Appeals has not addressed that question, 4 the Morrison court joined every other circuit to have
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5See Cowen v. Kennedy (In re Kennedy), 108 F.3d 1015, 1017-18 (9th Cir. 1997); Longo
v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir. 1993); Abramowitz v. Palmer, 999
F.2d 1274, 1278-79 (8th Cir. 1993); N.I.S. Corp. v. Hallahan (Matter of Hallahan), 936 F.2d
1496, 1508 (7th Cir. 1991). The Morrison court also cited Porges v. Gruntal & Co. (In re
Porges), 44 F.3d 159, 163-65 & n. 7 (2d Cir. 1995), as analogous. Porges, citing McLaren,
Halloran, and In re Devitt, 126 B.R. 212 (Bankr. D. Md. 1991), held that the bankruptcy court
had jurisdiction to enter a money judgment valuing a creditor’s claim under 11 U.S.C. § 502(b)
even though the debtor dismissed his chapter 13 case after the adversary proceeding had been
tried but before a judgment had entered. “[I]t is illogical to separate the function of determining
the validity of a claim from the function of fixing the claim’s monetary value.” Porges, 44 F.3d
at 164.
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addressed this issue by finding jurisdiction. 5
The bases for the circuit decisions prior to Morrison are varied. For example, the Ninth
Circuit was persuaded by the bankruptcy court’s reasoning in In re Devitt, 126 B.R. 212, 215
(Bankr. D. Md. 1991), in which the bankruptcy court stated:
If it is acknowledged as beyond question that a complaint to determine dischargeability of
a debt is exclusively within the equitable jurisdiction of the bankruptcy court, then it must
follow that the bankruptcy court may also render a money judgment in an amount certain
without the assistance of a jury. This is true not merely because equitable jurisdiction
attaches to the entire cause of action but more importantly because it is impossible to
separate the determination of dischargeability function from the function of fixing the
amount of the non-dischargeable debt.
The Sixth Circuit was also persuaded by the Devitt court’s reasoning as well as the
additional pragmatic considerations addressed by the Seventh Circuit in Halloran. Although the
Seventh Circuit concluded that the bankruptcy court correctly struck the debtor’s demand for a
jury trial, it noted that there could be instances in which a jury trial on the issue of liability or
damages might be appropriate. “Requiring the empaneling of a jury in bankruptcy court in the
midst of the dischargeability proceedings, or perhaps referring the matter back to district court for
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a jury trial there, creates a cumbersome process.” Hallahan, 936 F.2d at 1508.
In Morrison the court noted that a bankruptcy court’s exercise of jurisdiction in
liquidating a debt held to be nondischargeable in a no asset case “stands in tension with the
predominant theory of bankruptcy court jurisdiction.” Morrison, 555 F.3d at 478.
Although determining that a debt is nondischargeable is plainly a “core” proceeding
governed by a specific provision of the Bankruptcy Code, the rendition of a monetary
judgment in favor of the creditor on that debt is not itself a core proceeding and, further, is
not clearly related to the bankruptcy case or administration of the debtor’s estate. Indeed,
that portion of the judgment has, in the usual case, no bearing on the bankruptcy case
because it requires the debtor to pay a single debt outside of, apart from, and even after the
completion of bankruptcy, and it frees the creditor thereafter from limiting its collection
efforts to those afforded by the bankruptcy system.
Id. at 479. Indeed the “tension” did not escape the notice or criticism of commentators. See
Honorable Alan Ahart, “Enforcing Nondischargeable Money Judgments: the Bankruptcy Courts’
Dubious Jurisdiction,” 74 Am Bank. L. J. 115, 127-28 (2000); Ralph Brubaker, “On the Nature of
Federal Bankruptcy Court Jurisdiction: A General Statutory and Constitutional Theory,” 41 Wm.
& Mary L. Rev. 743, 911 (2000). Nevertheless the Morrison court agreed that the approach,
based on “tradition and pragmatism,” made sense.
“Traditionally,” under Section 17(c)(3) of the 1898 Bankruptcy Act, bankruptcy courts
were empowered to enter such money judgments. See 11 U.S.C. § 35(c)(3) (repealed
1978). The Bankruptcy Code did not specifically codify this authority upon its enactment
in 1978, but, as one court noted, the Code authorized bankruptcy courts generally to hear
all core proceedings, including nondischargeability complaints, and to “enter appropriate
orders and judgments.” 28 U.S.C. § 157(b)(1), (2)(I); In re Kennedy, 108 F.3d at 1017. It
is not unreasonable to conclude that Congress, which intended bankruptcy courts to
exercise far more expansive jurisdiction under the Code than under previous law, could
not have intended to cut back on their ability to enter money judgments in the core
proceedings encompassed by non-dischargeability complaints.
The pragmatic reasoning adopted by most circuit courts is hard to contradict. Logically,
the litigation necessary to prove nondischargeability also proves the basis for and amount
of the debt. There would be no judicial efficiency in requiring the beneficiary of a
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nondischargeability judgment to pursue a separate lawsuit in state or federal court in order
to secure a money judgment against the debtor. Moreover, entry of judgment for the debt
is proper because the court actually determined “the existence and validity of the debt” in
a core proceeding. In re McLaren, 990 F.2d 850 at 854.
Morrison, 555 F.3d at 479.
Professor Brubaker revisited the jurisdictional tension identified by the Morrison court
after the decision was published. Recognizing that bankruptcy court jurisdiction to liquidate a
nondischargeable debt “cannot be reconciled with any of the prevailing “tests” for the existence
of federal bankruptcy jurisdiction,” Professor Brubaker concluded that the exercise of such
jurisdiction “can only be explained by principles of supplemental jurisdiction, [and] the circuits
courts’ uniform approval of this jurisdiction is both a sub rosa repudiation of Pacor and an
implicit (if grudging) acceptance of the notion that third-party ‘related to’ bankruptcy jurisdiction
is simply a codification of conventional principles of supplemental jurisdiction.” Ralph Brubaker,
“Bankruptcy Court Jurisdiction to Enter a Money Judgment on a Nondischargeable Debt:
Exposing Pacor’s Deficiencies and the True Supplemental Nature of Third-Party ‘Related To’
Bankruptcy Jurisdiction,” 29 No. 4 Bankr. Law Letter 1 (2009).
The First Circuit has not addressed the issue of whether bankruptcy courts may exercise
supplemental jurisdiction and, if so, the boundaries of such jurisdiction. Yet this Court is mindful
of the limitations on bankruptcy court jurisdiction arising from the fact that bankruptcy judges are
not Article III judges. Moreover, the First Circuit has adopted the Pacor test as establishing the
outside boundaries for “related to” jurisdiction. Whatever the First Circuit’s ultimate answer to
the question of whether a bankruptcy court has jurisdiction to liquidate a nondischargeable claim
in a no asset case, the leap that the Plaintiff’s advocate this Court now take would bring this Court
so far down the proverbial slippery slope that it would cross over the boundaries set by Article III.
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Consequently the Court cannot exercise supplemental jurisdiction over Counts III through VIII.
Although the Court could stop at this juncture and simply dismiss counts III through VIII,
the Court will follow the procedure espoused by other courts, namely granting the Plaintiffs an
opportunity to have the district court withdraw the reference. See, e.g., In re County Seat Stores,
Inc., 2007 WL 4191946, 4 (Bankr. N.D. Tex. 2007). 	Should the district court then determine it
has jurisdiction and chooses to withdraw the reference, the parties will still have a single forum in
which to try this proceeding. Failing withdrawal of the reference, however, the Court will dismiss
Counts III through VIII for lack of subject matter jurisdiction.
CONCLUSION
For the foregoing reasons, the Court will enter orders giving the Plaintiffs 30 days within
which to move the district court for withdrawal of the reference. If the Plaintiffs fail to timely
seek withdrawal, or if the reference is not withdrawn within 90 days, the Court will dismiss
Counts III through VIII of the Amended Complaint.
Separate orders will issue.
Dated: August 12, 2009 	______________________________
Judge Joel B. Rosenthal
United States Bankruptcy Judge
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