Post-Closing Demands for Mortgage-Related Fees Assessed During a Chapter 13 Plan Part I Does the Court Have Jurisdiction

Journal Issue

May 2006

Column Name

Feature

Citation

ABI Journal, Vol. XXV, No. 4, p. 24, May 2006

Topic Tags

Consumer Bankruptcy

Discharge/Dischargeability

Mortgage

Professional Compensation/Fees

Venue/Jurisdiction

Journal HTML Content

Saving a principal residence from foreclosure and
curing a mortgage arrearage are key reasons why many debtors file for
chapter 13. While paying a home mortgage arrearage through a chapter
13 plan can cure that pre-petition arrearage, a home mortgage creditor
may assess fees or other charges after confirmation that the debtor
might not be aware of until the debtor's chapter 13 plan is completed.
Generally, the debtor is unaware of the post-confirmation assessments
because the creditor has not declared them to be due until after the
case is closed. These post-closing demands for payment are often
legitimate under the terms of the loan documents and applicable state
law, but they are burdensome to debtors and, in extreme cases, may
result in a second chapter 13 petition. This three-part article
examines bankruptcy issues concerning the post-closing collection
efforts by home mortgage creditors to recover fees and charges incurred
during the pendency of a debtor's chapter 13 plan. This article focuses
on (1) bankruptcy court jurisdiction (in this installment), (2) the
legality of a mortgage creditor's post-closing collection of fees and
charges assessed during the pendency of a debtor's chapter 13
plan2 and (3) what—if anything—a debtor may do
about it. A vignette helps to crystalize the issues discussed herein.
Stephen and Marion Winfree3 filed a chapter 13 petition to
prevent a foreclosure on their principal residence. Their chapter 13
plan provided that the mortgage arrearage claim of $7,091.23 and
payments on the long-term mortgage debt were to be made by the chapter
13 trustee. As of the petition date, the Winfrees' mortgage creditor
was oversecured. The Winfrees successfully completed their plan, and
the trustee filed a final report detailing that the full amount of the
mortgagee's arrearage claim was paid as well as payments on the
underlying long-term debt. Based on the trustee's report, the Winfrees
received their chapter 13 discharge. The clerk's office then closed
the Winfrees' case. Shortly thereafter, the Winfrees began receiving
demands from their mortgage creditor to pay $967.00—representing
property-preservation fees, attorney's fees, broker's price opinion
fees and recordation fees that the creditor assessed during the
pendency of their chapter 13 plan.4 One can easily imagine
that the Winfrees felt bamboozled after just having successfully
completed their chapter 13 plan and then being confronted with a new
arrearage claim, which was the very basis for their original
bankruptcy filing. Returning to the bankruptcy court, the Winfrees
sought sanctions, damages and attorney's fees from the mortgage
creditor for allegedly violating the automatic stay and the discharge
injunction. Jurisdiction over Post-Discharge Activities As
illustrated by the vingnette, the activities of the mortgage creditor
seeking to collect mortgage-related fees and charges from the Winfrees
occurred after the Winfrees received their chapter 13 discharge and
after their case was closed. Thus, as an initial matter, the parties
and the court must ascertain if the bankruptcy court has any
jurisdictional basis for adjudicating a dispute over the
post-discharge activities of a former debtor and creditor. When a debtor
seeks redress for alleged violations of the automatic stay or
discharge injunction, then bankruptcy court jurisdiction is
straightforward.5 When a debtor seeks redress on different grounds,
however, bankruptcy court jurisdiction is less certain. To
adjudicate its bankruptcy laws, Congress granted federal district courts
original and exclusive jurisdiction over all cases under the
Bankruptcy Code; even in cases where Congress had otherwise conferred
exclusive jurisdiction to a different court, Congress granted the
district court original, but nonexclusive, jurisdiction over all civil
proceedings arising under, arising in, or related to a bankruptcy
case.6 The district courts have delegated this grant of
jurisdiction to the bankruptcy courts.7 In short,
controversies "arise in" the bankruptcy when they "have
no existence outside of the bankruptcy."8 Claims
"arise under" the Code if the claims "clearly invoke
substantive rights created by bankruptcy law."9 A
proceeding is "related to" a bankruptcy case when the
resolution of the proceeding could conceivably have an effect on the
bankruptcy estate.10 Accordingly, before a bankruptcy
court may exercise jurisdiction over the post-closing activities of a
former debtor and creditor, the underlying dispute must arise under,
arise in or be related to a case under the bankruptcy laws.
Jurisdiction generally cannot be imposed either by consent of the
parties or under the terms of a confirmed plan.11 Stated
another way, when the dispute concerns nondebtor parties, does not
involve property of the estate, does not affect the administration of
the estate or where payments to creditors under a confirmed plan are
not affected, then the bankruptcy court will generally not have
jurisdiction.12 On the other hand, a bankruptcy court will
likely have post-confirmation jurisdiction "where there is a
close nexus to the bankruptcy plan or proceeding, as when a matter
affects the interpretation, implementation, consummation, execution or
administration of a confirmed plan...."13 Once the
jurisdictional basis for a bankruptcy court to hear a matter is
determined, the jurisdictional basis is further refined into
"core" and "non-core" proceedings. In general
terms, core proceedings depend on the Bankruptcy Code for their
existence and are those matters that either "arise in" or
"arise under" the Bankruptcy Code.14

"Non-core" matters are those that may otherwise be brought
in a different forum but that are related to a bankruptcy
case.15 In "non-core" cases, the bankruptcy court
only makes recommendations to the district court about their
disposition.16 The parties, however, may consent to having
the matter finally determined by the bankruptcy court.17
Discharge Injunction Debtors seeking an adjudication of a
creditor's post-discharge activities often rely on the continuing
effects of the discharge injunction of §524 as a basis for
bankruptcy court jurisdiction. The discharge injunction generally
prohibits creditor attempts to collect debts that have been discharged
by the completion of the chapter 13 plan.18 Bankruptcy
court jurisdiction exists to adjudicate alleged violations of the
discharge injunction because it is a right that "arises
under" the Bankruptcy Code.19 Although a violation of
the discharge injunction is not specifically listed as a
"core" matter,20 the claim is decidedly
"core" inasmuch as the claim itself depends on the Code for
its existence.21 Automatic Stay Like the
discharge injunction, the automatic stay22 prohibits creditor
attempts to collect on pre-petition debts and, in some cases,
post-petition debts. The obvious difference between the two provisions
is that the automatic stay generally applies after a debtor files a
bankruptcy petition and, at the latest, terminates when the case is
closed.23 The discharge injunction only applies after the
order of discharge is entered. Because chapter 13 plans can last
several years and a chapter 13 discharge is not entered until after
the chapter 13 plan is completed,24 it is the automatic
stay that is in effect during the chapter 13 plan. Although a chapter
13 case may be closed, the mere act of closure does not terminate a
debtor's rights to allege a violation of the automatic stay that
occurred while the stay was still in effect.25 Indeed, the
automatic stay of the Code preempts state law tort claims for stay
violations.26 Like the discharge injunction, an alleged
violation of the automatic stay is sufficient to create a
jurisdictional basis for adjudication in the bankruptcy court on the
basis that it is a claim that "arises under" the
Code,27 and that the claim is a core
proceeding.28 Other Causes of Action Merely
alleging a violation of the discharge injunction or the automatic stay
is an insufficient basis to boot-strap other causes of action that might
exist under the guise of supplemental jurisdiction. Unlike the federal
district courts, bankruptcy courts are generally considered not to
enjoy supplemental jurisdiction over causes of action that do not
arise in, under or that are not related to a case arising under Title
11.29 Supplemental jurisdiction remains in the federal
district courts,30 and if the supplemental claim does not
fit within the specific parameters of the grant of jurisdiction to the
bankruptcy courts under 28 U.S.C. §1334, then it is not a claim
that has been referred by the district courts to the bankruptcy
courts.31 Unless a jurisdiction recognizes supplemental
jurisdiction in the bankruptcy court, post-petition activities that
violate state or federal law may not be adjudicated by the bankruptcy
court—even though the claims form part of the same case or
controversy.32 For example, by analyzing each cause of
action in light of the bankruptcy court's jurisdictional grant of
authority, courts have determined that no bankruptcy court
jurisdiction exists over related post-petition activities that might
have violated, inter alia, the Fair Debt Collection Practices
Act.33 If a debtor believes that a creditor's activity
violates rights arising under the Code in addition to related state or
federal law—for which no independent basis exists for exercising
bankruptcy court jurisdiction—then the debtor may seek to file a
motion to withdraw the order of reference34 delegating the
authority of the district court to the bankruptcy court. In this manner,
the debtor may file the case in federal district court and adjudicate
all claims in a single forum under the district court's grant of
original or supplemental jurisdiction. <h3> Footnotes</h3> 1 The
views expressed in this article are solely those of the author. 2 The
focus of this article does not encompass the legality of mortgage fees
and charges under state law. 3 In re Winfree, No. 02-13890
(Bankr. M.D.N.C. 2002). 4 By the time the parties reached a
settlement in the matter, the creditor's fees and charges had
blossomed to $1,976.69. 5 The author does not believe that the
automatic stay or discharge injunction is applicable to the
post-closing collection efforts of a mortgage lender—without
more—when the fees and charges were incurred post-confirmation.

6 28 U.S.C. §1334. 7 28 U.S.C. §157(a). 8 U.S.
Trustee v. Gryphon at the Stone Mansion Inc., 166 F.3d 552, 555
(3d Cir. 1999). 9 Glinka v. Federal Plastics Mfg. Ltd. (In
re Housecraft Indus. USA Inc.), 310 F.3d 64, 70 (2d Cir. 2002).
10 Belcufine v. Aloe, 112 F.3d 633, 636 (3d Cir. 1997);
Pacor Inc. v. Higgins, 743 F.2d 984, 994 (3d Cir. 1984). 11

See, e.g., Binder v. Price Waterhouse & Co. LLP
(In re Resorts Int'l. Inc.), 372 F.3d 154, 160 (3d Cir. 2004)
("retention of jurisdiction provisions will be given effect,
assuming there is bankruptcy court jurisdiction. But neither the
bankruptcy court nor the parties can write their own jurisdictional
ticket. Subject-matter jurisdiction 'cannot be conferred by consent'
of the parties") (citation omitted). 12 See, e.g.,
Zerand-Bernal Group v. Cox, 23 F.3d 159, 162-63 (7th Cir. 1994)
(holding that bankruptcy court jurisdiction did not exist over a
product-liability suit arising out of a bankruptcy sale when the debtor
no longer existed, all its assets were transferred, the dispute
concerned nondebtor parties and the cause of action arose after the
bankruptcy); Smith v. First Suburban Nat'l. Bank (In re
Smith), 224 B.R. 388, 394 (Bankr. N.D. Ill. 1998) (reforming a
post-discharge note insofar as it attempted to collect a discharged
debt of the former debtor, but refusing to reform the note insofar as
it related to the obligation of the former debtor's wife and daughter on
the basis that the court lacked jurisdiction over those nondebtor
parties). 13 Binder v. Price Waterhouse & Co. LLP (In
re Resorts Int'l. Inc.), 372 F.3d 154, 168-69 (3d Cir. 2004)
(holding that post-confirmation jurisdiction did not exist over a tort
dispute between a litigation trust and an accounting firm hired by the
trust). See, also, Boston Reg'l. Med. Ctr. Inc. v.
Reynolds (In re Boston Reg'l. Med. Ctr. Inc.), 410 F.3d
100, 106 (1st Cir. 2005) ("once confirmation has occurred, fewer
proceedings are actually related to the underlying bankruptcy case. That
makes good sense: as the corporation moves on, the connection
attenuates"); Montana v. Goldin (In re Pegasus Gold
Corp.), 394 F.3d 1189, 1194 (9th Cir. 2005)
("post-confirmation bankruptcy court jurisdiction is necessarily
more limited than pre-confirmation jurisdiction, and that the Pacor
formulation may be somewhat overbroad in the post-confirmation
context. Therefore, we adopt and apply the Third Circuit's 'close
nexus' test for post-confirmation 'related to' jurisdiction because it
recognizes the limited nature of post-confirmation jurisdiction but
retains a certain flexibility..."). 14 See, e.g.,

Dunmore v. United States, 358 F.3d 1107, 1114-5 (9th Cir. 2004)
("we determine Dunmore's claims to be 'non-core' proceedings if
they do not depend on the Bankruptcy Code for their existence and they
could proceed in another court"); Mich. Empl. Sec. Comm'n. v.
Wolverine Radio Co. (In re Wolverine Raido Co.), 930 F.2d
1132, 1144 (6th Cir. 1991) ("§157 apparently equates core
proceedings with the categories of 'arising under' and 'arising in'
proceedings") (citation omitted), cert. dismissed 503 U.S. 978
(1992). A nonexclusive list of matters that are "core" is
contained in 28 U.S.C. §157(b)(2). 15 28 U.S.C. §157(b)(3).
16 §157(c)(1). 17 §157(c)(2). 18 11 U.S.C.
§§524(a) and 1328(a). 19 See, e.g.,
Insurance Co. of North America v. NGC Settlement Trust &

Asbestos Claims Management Corp. (In re National Gypsum Co.),
118 F.3d 1056, 1064 (5th Cir. 1997) ("a proceeding to enforce or
construe a bankruptcy court's...discharge injunction issued pursuant
to its confirmation order—and whether the confirmed
reorganization plan precludes certain post-confirmation collection
efforts—necessarily arises under Title 11 and supports a finding
that federal jurisdiction exists under 28 U.S.C. §1334 and that
such a proceeding is 'core' under 28 U.S.C. §157(b)");
Steele v. Ocwen Fed. Bank (In re Steele), 258 B.R. 319,
322 (Bankr. D. N.H. 2001) (holding that the bankruptcy court has
subject-matter jurisdiction over the debtor's adversary proceeding
alleging a violation of the discharge injunction when the
mortgage-holder sought to collect "bankruptcy fees" after
the debtor had received a chapter 13 discharge and the case was closed).
20 28 U.S.C. §157(b)(2). 21 See, e.g.,
Dunmore v. United States, 358 F.3d 1107, 1114-5 (9th Cir. 2004)
("the claim that the government violated the discharge injunction
depends on the bankruptcy court's authority to enforce its own orders
under the Bankruptcy Code. Accordingly, this claim is a core
proceeding"). 22 11 U.S.C. §362(a). 23 §362(c). The
automatic stay will not apply 30 days after filing if a debtor had a
case dismissed within the previous year and no showing is made to
extend the automatic stay deadline. §362(c)(3)(A). No automatic
stay arises if a debtor had two cases dismissed within the past year
unless the court issues an order imposing the stay after a motion is
filed by the debtor. §362(c)(4)(A). 24 §1328(a). 25

See, e.g., Price v. Rochford, 947 F.2d 829, 830-31
(7th Cir. 1991) ("we hold that 11 U.S.C. §362[(k)] creates a
cause of action that can be enforced after bankruptcy proceedings have
terminated"). 26 As explained in the case Eastern Equip.
& Servs. Corp. v. Factory Point Nat'l. Bank, 236 F.3d 117 (2nd
Cir. 2001): [S]tate tort claims alleging violations of the automatic
stay provision are completely preempted by federal bankruptcy law.
This preemption arises because (1) Congress placed bankruptcy
jurisdiction exclusively in the district courts under 28 U.S.C.
§1334(a); (2) Congress created a lengthy, complex and detailed
Bankruptcy Code to achieve uniformity; (3) the Constitution grants
Congress exclusive power over the bankruptcy law, see U.S.
Const. Art. I, §8, cl. 4; (4) the Bankruptcy Code establishes
several remedies designed to preclude the misuse of the bankruptcy
process; and (5) the mere threat of state tort actions could prevent
individuals from exercising their rights in bankruptcy, thereby
disrupting the bankruptcy process. Id. at 121 (discussing
MSR Exploration Ltd. v. Meridian Oil Inc., 74 F.3d 910, 913-16
(9th Cir. 1996)). But see Randolph v. IMBS Inc., 368
F.3d 726, 730-33 (7th Cir. 2004) (holding that the automatic stay did
not "preempt" a Fair Debt Collection Practices claim). 27
28 U.S.C. §§157(b)(2)(G) and 1334; Davis v. Courington
(In re Davis), 177 B.R. 907, 912 (BAP 9th Cir. 1995)
("appellant's action for willful violation of the automatic
stay...arises under Title 11 and is within the subject-matter
jurisdiction of the bankruptcy court"). 28 See,

e.g., Budget Serv. Co. v. Better Homes, 804 F.2d 289,
292 (4th Cir. 1986) ("we are of opinion and hold that a proceeding
to prosecute a violation of the automatic stay is a core proceeding
within the meaning of 28 U.S.C. §157(b)(1) and (2)"). 29
28 U.S.C. §§157(a) and (b) and 1334. See infra, notes
32-33. 30 §1367. 31 §157. 32 §1367. See,
e.g., Chapman v. Currie Motors, 65 F.3d 78, 81 (7th Cir.
1995) (assuming that the bankruptcy court does not have supplemental
jurisdiction on the basis that a contrary finding would "step on
the toes of the bankruptcy statute conferring 'related to'
jurisdiction"); Walker v. Cadle Co. (In re Walker),
51 F.3d 562, 572 (5th Cir. 1995) ("while §1367 addressed the
power of the district courts to exercise supplemental jurisdiction, it
did not discuss the power of the bankruptcy courts to reach pendent
parties... Because there is no congressional statute conferring upon
the bankruptcy courts the power to exercise supplemental jurisdiction,
we find no error in the district court's conclusion that the bankruptcy
court did not have the power to hear [the supplemental claim]")
(emphasis in original); Block-Lieb, Susan, "The Case Against
Supplemental Bankruptcy Jurisdiction: A Constitutional, Statutory and
Policy Analysis," 62 Fordham L. Rev. 721 (1994) (concluding that
a district court's adjudication of supplemental claims related to a
"related to" proceeding may be unconstitutional,
unauthorized by statute and inconsistent with the primary purpose of
bankruptcy jurisdiction—the efficient administration of a
bankruptcy estate—and proposing a balancing approach when
supplemental jurisdiction is based on claims "arising under"
or "arising in" title 11). Contra Sasson v. Sokoloff

(In re Sasson), 424 F.3d 864, 869 (9th Cir. 2005) (stating that
a bankruptcy court enjoys supplemental jurisdiction under §1367);
Montana v. Goldin (In re Pegasus Gold Corp.), 394 F.3d
1189, 1195 (9th Cir. 2005) ("this circuit has applied §1367
to bankruptcy claims, even when the subject-matter jurisdiction is
based on 'related to' bankruptcy jurisdiction. Here, the remaining
claims involve a 'common nucleus of operative facts' and would
ordinarily be expected to be resolved in one judicial proceeding, and
therefore the bankruptcy court has supplemental jurisdiction over the
remaining claims"); Jones v. Woody (In re W. J.
Services Inc.), 139 B.R. 824, 826 (Bankr. S.D. Tex. 1992) (stating
that as unit of the district court, bankruptcy courts may exercise
supplemental jurisdiction). 33 See, e.g., Gates v.
Didonato (In re Gates), 04-1240, 2004 Bankr. LEXIS 2303 at
* 9-10 (Bankr. E.D. Va. Oct. 20, 2004) ("bankruptcy courts may
not exercise supplemental jurisdiction... Accordingly, notwithstanding
the obvious judicial economy that would result from this court
exercising jurisdiction over the Fair Debt Collection Practices Act
claims, the court reluctantly concludes that it is without power to do
so"); Steele v. Ocwen Federal Federal Bank (In re
Steele), 258 B.R. 319, 321 (Bankr. D. N.H. 2001) ("the FDCPA
and state law claims do not fall within the court's 'related-to
jurisdiction.' Any recovery on the part of the debtor would be his
alone and would not inure to the benefit of the bankruptcy
estate") (citations omitted). 34 28 U.S.C. §157.

Journal Authors

Ryan Winquist Johnson

Journal Date

Monday, May 1, 2006 - 12:00

Bankruptcy Rule

2006

none