Page 1
19 of 201 DOCUMENTS
View U.S. District Court Opinion
View Original Source Image of This Document
In re: Jacalyn S. Nosek Debtor. Ameriquest Mortgage Co., Appellant, v. Jacalyn
S. Nosek, Appellee.
Case No. CA 06-40170-WGY
UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS
2006 U.S. Dist. Ct. Briefs 40170; 2006 U.S. Dist. Ct. Briefs LEXIS 937
September 14, 2006
Appeal from United States Bankruptcy Court, District of Massachusetts Joel B.
Rosenthal Presiding. Bankruptcy Case. No. 02-46025-JBR. Adversary Proceeding
No. 04-04517.
Initial Brief: Appellant-Petitioner
VIEW OTHER AVAILABLE CONTENT RELATED TO THIS DOCUMENT: U.S. District Court:
Brief(s); Motion(s)
COUNSEL: [**1] BUCHALTER NEMER, A Professional Corporation, Jeffrey K. Garfinkle (Cal. Bar.
153496; pro hac vice application pending), 18400 Von Karman Avenue, Suite 800, Irvine, California 92612,
(949) 760-1121 Telephone, (949) 720-0182 Facsimile, igarfinkle@buchalter.com.
and
ABLITT & CHARLTON, PC, Steven M. Ablitt (BBO 641316), Robert F. Charlton (BBO 081200), 92
Montvale Avenue, Suite 2950, Stoneham, Massachusetts 02180, (781) 246-8995 Telephone, (781) 246-8994
Facsimile, sablitt@acdlaw.com.
JUDGES: JUDGE WILLIAM G. YOUNG
DISCLOSURES: AMERIQUEST MORTGAGE COMPANY'S CORPORATE DISCLOSURE
STATEMENT PURSUANT TO LOCAL RULE 7.3(A)
Pursuant to Rule 7.3(A) of the Local District Rules, Ameriquest Mortgage Company ("Ameriquest"),
appellant in the above-captioned appeal, hereby discloses as follows:
1. The parent corporation of Ameriquest is ACC Capital Holdings Corporation ("ACC Capital").
Ameriquest is a wholly-owned subsidiary of ACC Capital.
Page 2
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
2. No publicly held company owns 10% or more of the shares of ACC Capital.
Respectfully Submitted,
Dated: September 14, 2006
Ameriquest Mortgage Company
By Its Attorneys
ABLITT & CHARLTON, PC
/Is/ Robert F. Charlton (BBO 081200)
Steven [**2] M. Ablitt (BBO 641316)
92 Montvale Avenue, Suite 2950
Stoneham, Massachusetts 02180
(781) 246-8995 Telephone
(781) 246-8994 Facsimile
sablitt@acdlaw.com
and
BUCHALTER NEMER, PC
Jeffrey K. Garfinkle (Cal. Bar. No. 153496;
pro hac vice application pending)
18400 Von Karman Avenue, Suite 800
Irvine, California 92612
(949) 760-1121 Telephone
(949) 720-0182 Facsimile
jgarfinkle@buchalter.com
TITLE: APPELLANT'S OPENING BRIEF
TEXT: [*1] Appellant Ameriquest Mortgage Company ("Ameriquest") hereby respectfully submits this
Opening Brief ("Brief").
I. INTRODUCTION
The central issues involved in this appeal have implications to thousands of bankruptcy cases and to the
home mortgage lending industry as a whole. In summary, this appeal primarily addresses the questions of
whether a Chapter 13 debtor is entitled to assert state or federal law causes of action (outside of the Bankruptcy Code) against a creditor based upon that creditor's conduct during the course of a bankruptcy case. It
also raises the question as to whether a home mortgage lender is entitled to continue to accept, apply and
otherwise account for post-petition bankruptcy payments according to the terms of the underlying loan documents and recognized industry practices. To understand these issues, it is necessary to explain the history of
Chapter 13 and what happens when borrowers file Chapter 13 bankruptcy cases with respect to the mortgages on their primary residences.
A.
[**11] Chapter 13 in General, and Home Mortgage Loans in Particular.
Page 3
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
The Bankruptcy Code of 1978 was enacted as the result of a legislative process that commenced in 1970.
Since 1978, the Bankruptcy Code has been amended several times, the most recent occurring in 2005 pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA"). n1
n1 Because plaintiff and appellee Jacalyn Nosek commenced her most recent bankruptcy case on October 2, 2002, the provisions of BAPCPA are not applicable. However, the issues involved in this appeal involve all Chapter 13 cases regardless of when they were commenced.
Chapter 13 of the Bankruptcy Code provides the statutory mechanism for the adjustment of the debts of
an individual debtor with regular income, through extensions, composition and curative plans, usually extending no more than five years, funded out of the debtor's future [*2] income. The House Report (H.R.
8200) accompanying the Bankruptcy Act of 1978, explains the purpose of Chapter [**12] 13:
"The purpose of chapter 13 is to enable an individual, under court supervision and protection,
to develop and perform under a plan for the repayment of his debts over an extended period. . .
. [Creditors] must receive payment only under the plan. . . .
The benefit to the debtor of developing a plan of repayment under chapter 13 rather than opting
for liquidation under chapter 7, is that it permits the debtor to protect its assets. . . ."
H.Rep. No. 595, 95th Cong., 1st Sess. 118 (1977), U.S. Code Cong. & Admin.News. p. 6079.
Of significance to the issues involved in this appeal, the Chapter 13 provisions of the Bankruptcy Code
are designed to: 1) cure and avoid the erratic and uncertain application "resulting from a hodgepodge of state
and federal statutory provisions," S.Rep., No. 989, 95th Cong., 2d Sess. p. 13 (1978). U.S. Code Cong. &
Admin.News. p. 5799; and 2) with respect to secured debts, the authority to permit a Chapter 13 debtor to
cure defaults over a "reasonable time" and to maintain the payments while the Chapter 13 case is pending.
H.Rep. supra. at 429; see also Grubbs v. Houston First Am. Sav. Ass'n., 730 F.2d 236, 239-240 (5th Cir.
1984) [**13] (en banc). In short, under Chapter 13, individual debtors may obtain adjustment of their indebtedness through a flexible repayment plan approved by a bankruptcy court.
Section 1322 of the Bankruptcy Code sets forth the elements of a confirmable Chapter 13 plan. The plan
must provide, inter alia, "for the submission of a portion of the debtor's future earnings and income to the
control of a trustee and for supervised payments to creditors over a period not exceeding five years." Nobelman v. American Sav. Bank, 508 U.S. 324, 327-328 (1993); see also 11 U.S.C. §§ 1322(a)(1) and 1322(c).
Section 1322(b)(2) of the Code allows [*3] modification of the rights of secured creditors, subject to special protections for creditors whose claims are secured only by a lien on a debtor's home. It provides that the
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, or of holders of unsecured
claims, or leave unaffected the rights of holders of any class of claims." 11 U.S.C. § 1322 (b)(2)
[**14] (emphasis added).
Notwithstanding the prohibition against modifying a claim secured by a debtor's primary residence, a
home mortgage lender's contractual rights are affected by the mortgagor's Chapter 13 bankruptcy case. A
Page 4
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
home mortgage lender's ability to enforce its rights -- and, in particular, its right to foreclose on the property
in the event of default -- is checked by the Bankruptcy Code's automatic stay provision. 11 U.S.C. § 362. See
United Sav. Ass'n. of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 369-370 (1988). In
addition, § 1322(b)(5) of the Bankruptcy Code permits a debtor to "cure" prepetition defaults on a home
mortgage by paying off arrearages over the life of the plan "notwithstanding" the exception in § 1322(b)(2).
See Nobleman, 508 U.S. at 329. n2 As explained in more detail below in Section V(B), Section 1322(b)(2)
prohibits any other modifications to the rights of a secured home lender.
n2 Prior to the enactment of BAPCPA, a debtor was permitted to wait until 30 days after its plan was
before he/she was required to commence making "cure" payments. Now, pursuant to § 1326(a)(1) of
the Bankruptcy Code,
Unless the court orders otherwise, the debtor shall commence making payments no later
than 30 days after the date of the filing of the plan or the order for relief, whichever is
earlier in the amount-- (A) proposed by the plan to the trustee.
A Chapter 13 debtor now is required to make cure payments almost immediately after its bankruptcy
cases is commenced and, in some instances, before a Chapter 13 plan is proposed. In many instances,
a plan is never confirmed or, even if a plan is confirmed, the debtor defaults on its plan obligations
and his/her case is either dismissed or converted to Chapter 7. See e.g., Standing Chapter 13 Trustee
FY 05 Audited Annual Report, pp. 36-49;
http://www.usdoj.gov/ust/eo/private_trustee/library/chapter13/docs/FY05_Annual_Report_Revised.pd
f. This further complicates the internal accounting issues faced by home mortgage lenders.
[**15]
[*4] B. Ameriquest and Other Home Lenders/Mortgage Servicers and Post-Petition
Payments.
Ameriquest is one of the largest and oldest home mortgage lenders and loan servicers in the United
States. It originates and services home loans in 48 states. As of July 2006, Ameriquest services approximately 437,000 loans. Of those loans, nearly 7,200 involve borrowers that are currently Chapter 13 debtors. n3
n3 Each year hundreds of thousands of Chapter 13 cases are commenced. In 2004 alone, more than
449,000 Chapter 13 cases were commenced. See
http://www.usdoj.gov/ust/eo/public_affairs/statistics/docs/national/05national.pdf.
There are no uniform national rules and statutes governing the manner in which Chapter 13 cure payments must be made. The lack of rules results in a hodgepodge of practices that vary bankruptcy judge by
bankruptcy judge. Some judges adhere to the practice of requiring debtors to pay non-delinquent ("ongoing")
mortgage payments through the Chapter 13 trustee [**16] ("through the plan") in cases where the trustee is
also curing the accumulated pre-petition mortgage arrears. Other bankruptcy judges give Chapter 13 debtors
the discretion to choose whether to pay a secured creditor directly, independent of the Chapter 13 trustee. See
Page 5
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
e.g., In re Clay, 339 B.R. 784, 785 (Bankr. D. Utah 2006). Some judges give debtors this discretion both as
to the pre-petition "cure" payments and the "ongoing" payments. Others only give this discretion as to "ongoing" payments. n4
n4 In 2001, a nationwide study was conducted of the various payment practices in Chapter 13 cases by
the then director the Executive Office of the United States Trustee. See
http://www.usdoj.gov/ust/eo/public_affairs/articles/docs/abi01junnumbers.html. This study evidences
the nationwide disparity in payment practices.
On a daily basis, mortgage servicers such as Ameriquest receive and process payments for thousands of
borrowers in Chapter 13 bankruptcy cases. Because of the wide disparity [**17] of [*5] payment practices, these payments come from a variety of sources--oftentimes without any indication of what the payment
is for or who the payment is from. n5
n5 One need only look at the payments made by Nosek that are the subject of this litigation. On or
about August 18, 2003, Ameriquest received a cashier's check dated August 7, 2003 in the amount of
$ 700.11. Appellant's Excerpts of Record ("Appellant E.R."), Doc. No. 20, pp. 169-170. Handwritten
on that check was the notation: "Loan # 421-9515 Ch 13 Case No. 02-46025 JBR" Nowhere on this
check is there any indication of the purpose of this payment. Was it for Nosek's "ongoing" mortgage
payments? Or was it for cure payments of her pre-petition arrears?
Nosek may argue that this payment must have been for ongoing mortgage payments because her
Chapter 13 trustee was responsible for making the "cure" payments. However, to a national mortgager
servicer that process thousands of payments on a daily basis, it is far from clear.
Mortgage [**18] servicers are then faced with a dilemma. They can either reject payments, which they
generally will not do, or accept payments and determine the proper application of payments at a later date.
To accomplish this later determination, home mortgage lenders such as Ameriquest will record the payment
as having been received and place such payments into an internal account called a "suspense account." These
type of suspense accounts are internal bookkeeping entries and are transparent to the entire world, including
the borrowers.
Accounting for Chapter 13 borrowers is a manual process. Most of the national mortgage servicers use a
loan servicing program called Mortgage Servicing Platform ("MSP"), also known as Fidelity National Information System. Based upon the data entered into the program (i.e., the original amount borrowed, the applicable interest rate(s) and payments received), MSP indicates contractual amounts owed. See Memorandum
Decision, p 7, ftnt. 10. No computer program exists that is capable of accounting for payments by Chapter 13
borrowers.
Thus, when payments are received for borrowers in Chapter 13, mortgage companies such as Ameriquest
input the payments into MSP. [**19] Ameriquest, for internal purposes only, sometimes places these
payments into a suspense account until the proper allocations can be made (if they can be made). Because
this is a manual process, involving employees of [*6] Ameriquest, there can be delays in making the internal credits and debits between the suspense account and a borrower's main account. Nevertheless, when
these accounting entries are made, payments are recorded as being received on the date Ameriquest initially
received payment. Overall, so long as a Chapter 13 debtor is making his or her required payments, the temporary placement of funds into a suspense account will have no impact whatsoever on the borrower.
Page 6
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Ameriquest will not impose late fees or charges. No additional interest will accrue. Ameriquest will not seek
any relief from the Bankruptcy Court or otherwise seek to enforce its rights and remedies. Ameriquest does
not report payment delinquencies to any credit bureaus.
C. The Bankruptcy Court Erroneously Awarded Nosek $ 250,000 in Emotional Distress
Damages for these Business Practices.
One of Ameriquest's bankrupt borrowers is Jacalyn Nosek ("Nosek"). In the Spring of 2004, during
[**20] the course of her third bankruptcy case, Nosek demanded a payment history from Ameriquest. She
did so under the guise of needing that payment history in order to refinance her home. The payment history
Ameriquest provided reflected each of the payments that Ameriquest had received to date. It also reflected
that Ameriquest had accounted for these payments as being held in a "suspense account."
Nosek then used this payment history as a basis to commence litigation against Ameriquest. In a seven
count complaint filed in December 2004, Nosek alleged that by virtue of the manner in which Ameriquest
accounted for payments, Ameriquest violated the Truth in Lending Act and Regulation Z, 12 C.F.R. §
226.20(c) (collectively, "TILA"), § 2605(e) of the Real Estate Settlement Procedures Act ("RESPA"), Massachusetts General Law c. 83A, §§ 2 and 9. n6 She also alleged that Ameriquest was unjustly enriched,
breached the implied covenant of [*7] good faith and fair dealing, inflicted emotional distress, and caused
her lost income. Ameriquest answered the Complaint, denied liability and among its other affirmative defenses asserted that Nosek had failed to state valid causes of action. n7
n6 A copy of the Complaint is attached to Appellant E.R. as Document No. 1.
[**21]
n7 A copy of the Answer is attached to Appellant E.R as Document No. 2.
On June 30, 2006, after trial, the Bankruptcy Court issued its Order and Memorandum of Decision (collectively, the "Memorandum Decision"). n8 As part of that decision, the Bankruptcy Court ruled that
Ameriquest breached the implied covenant of good faith and fair dealing under Massachusetts law. Notwithstanding the determination by the Bankruptcy Court that Nosek had not suffered any "actual damages" or
physical damages, the Bankruptcy Court awarded Nosek $ 250,000 for her "emotional distress damages."
The Bankruptcy Court also determined that Ameriquest violated RESPA and Mass.G.L. c. 93A. Again, the
Bankruptcy Court ruled that Nosek had not suffered any actual damages. Notwithstanding this factual determination, the Bankruptcy Court awarded Nosek nominal damages plus attorney's fees and costs for these
supposed statutory violations. The Bankruptcy Court rejected all of the affirmative defenses pled by
Ameriquest in its Answer, including the first affirmative defense that the Complaint "fails to state a claim for
which [**22] relief could be granted." It is these rulings that are the subject of this appeal.
n8 A copy of the Memorandum Decision is attached to Appellant E.R as Document No. 3.
As explained herein, due to numerous legal errors, the decision of the Bankruptcy Court must be reversed. Any claim for breach of the covenant of good faith and fair dealing under Massachusetts law is
preempted and barred by the Bankruptcy Code. Moreover, Ameriquest's internal accounting practices and the
Page 7
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
determination that Nosek did not suffer any actual damages preclude judgment on the Fifth Cause of Action.
Similarly, the claims for violation of RESPA [*8] and Mass.G.L. § 93A are preempted by the Bankruptcy
Code. Judgment should have been awarded to Ameriquest on these causes of action once the Bankruptcy
Court determined that Nosek had not suffered any damages as a result of the supposed violations of these
statutes.
II. FACTUAL BACKGROUND
A. Within Five Years After Ameriquest Made its Loan to Nosek, She
Three Separate Bankruptcy Cases.
[**23]
Filed
Ameriquest's relationship with Nosek began in November 1997. On November 25, 1997, Nosek borrowed $ 90,000 from Ameriquest. Memorandum Decision, p. 2. At the time she borrowed these funds, Nosek
executed and delivered to Ameriquest an Adjustable Rate Note (the "Note"). Id. The Note is secured by a
duly recorded Mortgage against Nosek's primary residence (the "Mortgage"). n9
n9 The Note and the Mortgage are sometimes collectively referred to the "Loan Documents." The
Loan Documents are attached to the Amended Proof of Claim (Claim No. 16) that Ameriquest filed in
Nosek's third bankruptcy case. A copy of the Amended Proof of Claim is attached to Appellant E.R.
as Document No. 4.
By 2000, Nosek was in default of her contractual obligations to Ameriquest. Memorandum Decision, p.
3. Throughout 2000 and 2001, Nosek frequently failed to make the required monthly payments. Id.
Faced with foreclosure, on May 15, 2001, Nosek filed her first bankruptcy case (Case [**24] No.
01-43293). n10 During the course of the case, Nosek failed to provide information to the Chapter 13 trustee
and in December 2001 the trustee moved to dismiss Nosek's bankruptcy case based upon unreasonable delay
that was prejudicial to her creditors. n11 On January 22, 2002, the [*9] Bankruptcy Court granted the
Chapter 13 trustee's motion, and dismissed Nosek's bankruptcy case. n12
n10 The docket from Nosek's first bankruptcy case is attached to Appellant E.R. as Document No. 5.
n11 A copy of the Chapter 13 Trustee's Motion to Dismiss Nosek's first bankruptcy case is attached to
Appellant E.R. as Document No. 6.
n12 A copy of the Order Dismissing Nosek's first bankruptcy case is attached to Appellant E.R. as
Document No. 7.
Faced again with foreclosure, Nosek filed her second Chapter 13 bankruptcy case on February 28, 2002
(Case No. 02-41217). n13 Memorandum Decision, p. 3. This second bankruptcy case was filed one month
after the dismissal of Nosek's first bankruptcy case. [**25] Id., pp. 3-4. Once again, Nosek failed to provide information requested by the Chapter 13 trustee. And once again, the Chapter 13 trustee moved to dismiss Nosek's bankruptcy case based upon unreasonable delay that was prejudicial to her creditors. n14 On
September 3, 2003, the Bankruptcy Court dismissed this bankruptcy case.
Page 8
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
n13 The docket from Nosek's second bankruptcy case is attached to Appellant E.R. as Document No.
8.
n14 A copy of the Chapter 13 Trustee's Motion to Dismiss Nosek's second bankruptcy case is attached
to Appellant E.R. as Document No. 9.
One month later, on October 2, 2002, Nosek filed her third Chapter 13 case (Case No. 02-46025). n15
Memorandum Decision, p. 4. During the course of this third bankruptcy case, Nosek objected to
Ameriquest's proof of claim, Ameriquest sought relief from stay (due to the failure of Nosek to make the required post-petition payments), and Ameriquest and Nosek entered into an "adequate protection stipulation"
(the "Stipulation"). n16 Memorandum [**26] Decision, p. 20. Pursuant to the Stipulation, Nosek was required to make regular monthly payments on or before certain dates. Id. Nosek repeatedly breached the terms
of this Stipulation. Id.
n15 The docket from Nosek's third and current bankruptcy case is attached to Appellant E.R. as
Document No. 10.
n16 A copy of the Stipulation is attached to Appellant E.R. as Document No. 11.
[*10] B. Both Before and After Nosek's Plan Was Confirmed, Ameriquest Accepted
Each and Every Payment Tendered By Nosek.
When Nosek commenced her third bankruptcy case, she owed Ameriquest $ 106,533.17. Of that aggregate amount, $ 18,810.95 was for pre-petition arrears. This aggregate amount is itemized in the amended
proof of claim Ameriquest filed in Nosek's third bankruptcy case. Appellant E.R., Doc. No. 4. On December
1, 2003, fourteen months after the start of her third bankruptcy case, Nosek proposed her "Second Amended
Plan of Reorganization" (the "Plan"). n17 On January 16, 2004, the [**27] Bankruptcy Court entered an
order confirming the Plan. n18 Pursuant to the Plan, Nosek was obligated to pay the pre-petition arrears over
the five year life of the Plan, at a rate of $ 442 per month, and Nosek agreed to pay directly the "ongoing"
payments due to Ameriquest under the Loan Documents. The relevant portions of the Plan were incorporated
into the Order Confirming Second Amended Chapter 13 Plan as a Supplement which reads, in pertinent part:
2. Unmodified Secured Claims
Ameriquest Mortgage (the "Mortgagee") is retaining its lien on the property located at 60
Bolton Road, South Lancaster, Massachusetts. The debtor shall continue to make regular
monthly payments in accordance with the contract with the Mortgagee. The Mortgagee will be
paid its prepetition arrearages in the sum of $ 18,810.95 over 60 months at the amount of $
313.52 per month.
n17 A copy of the Second Amended Plan is attached to Appellant E.R. as Document No. 12.
n18 A copy of the Order Confirming Second Amended Chapter 13 Plan is attached to Appellant E.R.
as Document No. 13.
[**28]
Page 9
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Both before and after confirmation of the Plan, Nosek was late in making her payments to Ameriquest.
Under the terms of the Loan Documents, and pursuant to the terms of the Plan, Nosek was required to pay
Ameriquest on the first day of every month. For example, the third [*11] post-confirmation payment
Ameriquest received was on May 4, 2004 (for internal purposes Ameriquest accounted for this payment
against the overdue February 2004 payment). Appellant E.R., Doc. Nos. 3, p. 0072 and No. 14, p. 0137. The
next payment Ameriquest received was on June 8, 2004 (for internal purposes Ameriquest accounted for this
$ 700 payment against the overdue March 2004 payment). Appellant E.R., Doc. No. 16, p. 0158. The next
payment Ameriquest received was on July 15, 2004 (for internal purposes Ameriquest accounted for this $
700 payment against the overdue April 2004 payment). The last payment Ameriquest received was on August 24, 2004 (for internal purposes Ameriquest accounted for this $ 1,400 payment against the overdue May
and June 2004 payments). Appellant E.R., Doc. No. 17, p. 01563. Since August 24, 2004, Nosek has not
made a single payment to Ameriquest. n19
n19 It is ironic that Nosek levels a myriad of accusations against Ameriquest, including breaching the
supposed covenant of good faith and fair dealing, when at the same time she disregards her obligations under the Plan and the Loan Documents and her statutory obligations under the Bankruptcy
Code. By statute and pursuant to the Plan and the Loan Documents, Nosek is required to pay cure
payments to the Chapter 13 trustee and current payments to Ameriquest. Currently, she is at least 25
months delinquent on her post-petition payments due to Ameriquest and, Ameriquest believes, has
stopped making any payments under her Plan. In fact, the Chapter 13 trustee has again requested dismissal of Nosek's current bankruptcy case. Appellant E.R., Doc. No. 10 (see docket entry no. 128).
[**29]
C. In May 2004, Ameriquest Provided a Payment History to Nosek.
In May 2004, Nosek submitted a written request to Ameriquest's counsel asking for a payment history.
Memorandum Decision, p. 5. On May 10, 2004, Ameriquest provided a twelve month payment history to
Nosek. n20 Id. The payment history listed each payment received. It specifically listed each item received as
a "payment." In a separate column, under the column heading "description," the single word "suspense" is
listed.
n20 A copy of the May 10, 2004 payment history is attached to Appellant E.R. as Document No. 14.
[*12] D. July 23, 2004, Nosek Sent a Written Request under RESPA to Ameriquest's
Counsel.
On July 23, 2004, Nosek's counsel sent a letter to Ameriquest's Massachusetts bankruptcy counsel. n21
In that letter, Nosek's counsel raised a number of points, made various demands against Ameriquest, and advised that he had prepared a complaint against Ameriquest alleging violations of "various [**30] state and
Federal statutes."
Page 10
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
n21 A copy of the July 23, 2004 letter is attached to Appellant E.R. as Document No. 15.
E. In August 2004, Nosek Stopped Tendering any Payments to Ameriquest and Filed a
"Motion to Determine Amount of Liens."
As noted above, the last payment Ameriquest received from Nosek was on August 24, 2004. On August
11, 2004, two weeks before this payment was received, Nosek filed a "Motion to Determine Amount of
Lien." n22 The motion was filed one day before the August 12, 2004 deadline under RESPA to respond to
the July 23, 2004 letter. In that motion, Nosek raised many of the allegations that ultimately were contained
in the Complaint. In her request for relief, Nosek asked the Bankruptcy Court to determine "the amount owed
to Ameriquest."
n22 A copy of the Motion to Determine Lien is attached to Appellant E.R. as Document No. 16.
[**31]
At a hearing held on September 7, 2004, the Bankruptcy Court required Ameriquest to provide a detailed
accounting and an explanation of the use of "suspense accounts" within fifteen days. On September 23, 2004,
Ameriquest filed a Statement regarding how it applies payments for borrowers in bankruptcy and an accounting.
At a second hearing held on October 5, 2004, the Bankruptcy Court required Ameriquest to submit additional briefing regarding its usage of suspense accounts. The Bankruptcy Court [*13] also ordered
Ameriquest to reconcile its "numbers" with Nosek's counsel within two weeks. n23 On November 9, 2004,
Ameriquest filed a "Declaration by Ameriquest Mortgage Company Use of Suspense Accounts." n24
n23 A continued hearing was held on November 2, 2005. Because Ameriquest had not yet filed its
supplemental brief regarding the usage of suspense accounts, the Bankruptcy Court sanctioned
Ameriquest $ 500. Undoubtedly, Nosek will emphasize this fact. It is, however, irrelevant to the issues
involved in this appeal.
n24 A copy of Declaration by Ameriquest Mortgage Company Use of Suspense Accounts is attached
to Appellant E.R. as Document No. 17.
[**32]
F. In December 2004, Shortly After Ameriquest Provided an Explanation Regarding the
Use of "Suspense Accounts," Nosek Commenced Her Lawsuit Against Ameriquest.
On December 2, 2004, Nosek commenced her lawsuit against Ameriquest. In the lawsuit, Nosek asserted
seven causes of action against Ameriquest. They included alleged violations of TILA, RESPA and
Mass.G.L. c. 93A, §§ 2 and 9 (Causes of Action One through Three, respectively), unjust enrichment (Cause
of Action Four), breach of the covenant of good faith and fair dealing (Cause of Action Five), Infliction of
Emotional Distress (Cause of Action Six), and Lost Income (Cause of Action Seven). On January 3, 2005,
Ameriquest filed its Answer to the Complaint.
Page 11
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
On September 14, 2005, Nosek filed a motion for partial summary judgment. The hearing on the motion
for summary judgment was held on October 25, 2005. At the conclusion of that hearing, the Bankruptcy
Court ruled that Ameriquest had "violated" § 2605 of RESPA and section 2(a) of Mass.G.L. c. 93A. The
Bankruptcy Court denied the remainder of Nosek's summary judgment motion. On the two counts for which
the Bankruptcy Court found statutory [*14] violations, [**33] this Court continued the matter for trial
on damages, if any, and entry of a final judgment. n25
n25 A copy of the Proceeding Memorandum/Order from the October 25, 2005 hearing is attached to
Appellant E.R. as Document No. 18.
Thereafter, Ameriquest filed a motion for reconsideration of the partial grant of summary judgment,
which Nosek opposed. One of the grounds raised in the reconsideration motion was that the July 23, 2004
letter did not qualify as a "qualified written request" under RESPA in that it was sent to Ameriquest's counsel, and not Ameriquest (as required by RESPA). On November 17, 2005, the Bankruptcy Court denied the
reconsideration motion in its Decision and Order Regarding Motion for Reconsideration (# 41). n26
n26 A copy of the Decision and Order Regarding Motion for Reconsideration is attached to Appellant
E.R. as Document No. 19.
[**34]
G. After Trial, the Bankruptcy Court Entered Judgment in Favor Nosek on Three of
Seven Causes of Action in the Complaint.
During November 2005, December 2005 and January 2006, the Bankruptcy Court conducted a six day
trial on the following matters: (a) Nosek's supposed damages under § 2605(f) of RESPA and section 2(a) of
Mass.G.L. c. 93A; and (b) Nosek's remaining five causes of action alleged in the Complaint--violation of
TILA, Unjust Enrichment, Breach of Implied Covenant of Good Faith and Fair Dealing, Intentional Infliction
of Emotional Distress, and Lost Income. n27
n27 After conclusion of the trial, Nosek sought to add additional causes of action to the Complaint.
The Bankruptcy Court denied that request.
On June 30, 2006, the Bankruptcy Court issued its Memorandum Decision. As to the violations by
Ameriquest of RESPA and section 2(a) of Mass.G.L. c. 93A, the Bankruptcy Court determined that Nosek
had not proven she suffered any damages as a result of the violations. [*15] [**35] Nevertheless, this
Court awarded the nominal sum of $ 1.00 under RESPA and $ 25.00 under Mass.G.L. c. 93A, plus attorney's
fees and costs The TILA cause of action was dismissed based upon Nosek's admission that Ameriquest had
correctly calculated interest. The infliction of emotional distress and lost income causes of action were dismissed for lack of jurisdiction. Judgment was entered in favor of Ameriquest on the unjust enrichment claim.
Lastly, the Bankruptcy Court determined that during 2004 Ameriquest improperly accounted for payments
(on its own internal books and records) in contravention of Nosek's Plan and breached the covenant of good
faith and fair dealing under Massachusetts law. On this claim, the Bankruptcy Court determined that Nosek
Page 12
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
did not incur any actual damages as a result of the supposed breach. The Bankruptcy Court did award Nosek
$ 250,000 for her "mental suffering."
Ameriquest timely filed its notice of appeal on July 10, 2006. Nosek did not file a cross-appeal. Nor did
she designate any issues on appeal. n28
n28 Nosek's motion for attorney's fees and costs is still pending before the Bankruptcy Court. That
motion is of no import to this appeal. White v. New Hampshire Dep't of Employment Security, 455
U.S. 445, 450, fn 14 (1982) (trial court's determination of entitlement to attorney's fees may take place
even if one of the parties has appealed the underlying judgment).
[**36]
III. ISSUES ON APPEAL
Ameriquest's appeal involves the following issues:
(1) Whether the Bankruptcy Court erred in finding that Nosek asserted a valid cause of action for "breach
of implied covenant of good faith and fair dealing."
(2) Whether the Bankruptcy Court erred in finding Ameriquest's internal use of "suspense accounts" and
post-petition applications of payments violated the terms of the Plan.
(3) Whether the Bankruptcy Court erred in ruling that Ameriquest breached the "covenant of good faith
and fair dealing."
[*16] (4) Whether the Bankruptcy Court erred in awarding Nosek emotional damages for breach of the
covenant of good faith and fair dealing.
(5) Whether the Bankruptcy Court erred in entering judgment against Ameriquest on the RESPA cause
of action, after the Bankruptcy Court determined that Nosek suffered no damages as a result of this supposed
statutory violation.
(6) Whether the Bankruptcy Court erred in determining the July 23, 2004 letter constituted a qualified
written request under RESPA.
(7) Whether the Bankruptcy Court erred in ruling that Nosek asserted a valid cause of action for violations of RESPA that allegedly occurred after [**37] commencement of Nosek's bankruptcy case.
(8) Whether the Bankruptcy Court erred in entering judgment against Ameriquest on the Mass.G.L. c.
93A cause of action, after the Bankruptcy Court determined that Nosek suffered no damages as a result of the
supposed statutory violation.
(9) Whether the Bankruptcy Court erred in ruling Nosek asserted a valid cause of action under Mass.G.L.
c. 93A for supposed violations that occurred after commencement of Nosek's bankruptcy case.
IV. STANDARD OF REVIEW
Appellate courts reviewing an appeal from a bankruptcy court generally apply the clearly erroneous
standard to findings of fact and de novo review to conclusions of law. See, e.g., Prebor v. Collins (In re I
Don't Trust), 143 F.3d 1, 3 (1st Cir. 1998); Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco
Int'l, Inc.), 132 F.3d 104, 107 (1st Cir. 1997); TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 928 (1st Cir.
1995). All of the issues on appeal involve conclusions or application of law based upon undisputed facts, and
are subject to de novo review.
Page 13
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
[*17] V. THE BANKRUPTCY COURT ERRED IN FINDING [**38]
THAT NOSEK ASSERTED A VALID CAUSE OF ACTION FOR "BREACH OF IMPLIED COVENANT OF GOOD
FAITH AND FAIR DEALING."
A. Any Cause of Action Against Ameriquest for Breach of the Covenant of Good Faith
and Fair Dealing Is Preempted By Federal Law.
The Supremacy Clause of the United States Constitution, Article VI, Clause 2, provides that federal law
"shall be the supreme Law of the Land . . . any Thing in the Constitution or Laws of any State to the contrary
notwithstanding." Preemption of state law by federal authority may be express or implied, and often, an Act
of Congress may touch a field of law in which federal interest is so dominant that the federal system will be
assumed to preclude enforcement of state laws on the same subject. See Fidelity Fed. Sav. & Loan Ass'n v. de
la Cuesta, 458 U.S. 141, 152-53 (1982).
As explained in the introduction, the Bankruptcy Code provides a comprehensive federal system governing all aspects of bankruptcy cases, including the permissible treatment of home mortgage claims in
Chapter 13 cases. Protections and penalties under the Bankruptcy Code govern the orderly conduct of debtor's affairs and creditor's rights. [**39] See Eastern Equip. and Servs. Corp. v. Factory Point Nat'l Bank of
Bennington, 236 F.3d 117, 121 (2nd Cir. 2000).
As to the Fifth Cause of Action, the main issue is whether the Bankruptcy Court erred in finding that
Nosek held a valid claim under Massachusetts law against Ameriquest based upon the manner in which
Ameriquest internally accounted for payments from Nosek. In rejecting Ameriquest's first affirmative defense that Nosek did not state a valid cause of action for breach of the supposed "covenant of good faith and
fair dealing," the Bankruptcy Court failed to apply numerous controlling preemption cases.
In the First Circuit, there are two leading cases addressing bankruptcy preemption: Patriot Portfolio,
LLC v. Weinstein (In re Weinstein), LLC, 164 F.3d 677 (1st Cir. 1999), cert. [*18] denied sub nom., Patriot Portfolio, LLC v. Weinstein, 527 U.S. 1036 (1999) and Bessette v. Avco Fin. Servs., Inc., 230 F.3d 429,
447 (1st Cir. 2000), cert. den. sub. nom., Textron Funding Corp. v. Bessette, 532 U.S. 1048 (2001). Both of
these cases support the conclusion that Nosek's claim for "Breach [**40] of Implied Covenant of Good
Faith and Fair Dealing" is preempted by the Bankruptcy Code.
In Weinstein, a creditor held a judgment lien against the debtor's residence. The debtor asserted a $
55,000 homestead exemption against his residence. Pursuant to § 522(f), the debtor sought extinguishment of
the judgment lien as it impaired his homestead exemption. Rejecting the judgment creditor's reliance on
Massachusetts law, the First Circuit stated, "[S]tates may not pass or enforce laws to interfere with or complement the Bankruptcy [Code] or provide additional or auxiliary regulations." Id. at 682-83.
One year after Weinstein, the First Circuit in Bessette again addressed the issue of preemption in bankruptcy cases. Bessette involved factual circumstances similar to those present in this case. In Bessette, prior
to the Chapter 7 debtor receiving her statutory discharge, she executed a reaffirmation agreement with one of
her creditors. That reaffirmation agreement was not filed with the bankruptcy court and did not otherwise
comply with the applicable provisions of the Bankruptcy Code governing reaffirmation agreements.
The debtor then filed a lawsuit against [**41] the creditor in which she asserted a cause of action for
"unjust enrichment" under Massachusetts law. In affirming the district court's dismissal of the unjust enrichment cause of action, the First Circuit stated as follows:
"In a case such as this, where there is no explicit statutory language preempting state law,
this Court will find implied preemption under one of two circumstances: (1) where the federal
statutory scheme is so pervasive that Congress clearly intended to "occupy the field" to the ex-
Page 14
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
clusion of state law, or (2) where a particular state law is in direct conflict with the federal law
to an [*19] extent that the statutes cannot coexist. See Summit Inv. & Dev. Corp., v. Leroux,
69 F.3d 608, 610 (1st Cir. 1995) [other citations omitted]. In reaching our conclusion that a
state law claim for unjust enrichment is preempted, we rely on the existence of the first condition.
In Patriot Portfolio, LLC v. Weinstein (In re Weinstein), we observed that: "states may not
pass or enforce laws to interfere with or complement the Bankruptcy Act or to provide additional or auxiliary regulations." 164 F.3d 677, 682-83 (1st Cir. 1999), [**42] cert. denied
sub nom., Patriot Portfolio, LLC v. Weinstein, 527 U.S. 1036 (1999). The district court correctly noted that the broad enforcement power under the Bankruptcy Code preempts virtually
all alternative mechanisms for remedying violations of the Code. See Bessette, 240 B.R. at 163.
Other courts that have been faced with a state unjust enrichment claim have held that Congress's intent in enacting the remedial provisions of the Bankruptcy Code leaves "no room for
the state cause of action." Cox v. Zale Del., Inc., 242 B.R. 444, 450 (N.D. Ill. 1999). See also
Pereira v. First N. Am. Nat'l Bank, 223 B.R. 28, 31-32 (N.D. Ga. 1998); Reyes v. FCC Nat'l
Bank (In re Reyes), 238 B.R. 507, 513 (Bankr. D.R.I. 1999)."
Without question, Chapter 13 of the Bankruptcy Code serves as a comprehensive statutory scheme for
the treatment of home mortgage claims in Chapter 13 cases (as discussed in the introduction) and the specific
relationship between Nosek, as a debtor, and Ameriquest, as her home mortgage lender. The provisions of
the Bankruptcy Code preempt any claims under Massachusetts law for supposed [**43] breaches of the
Plan or for the manner in which Ameriquest accounted for payments prior to and after confirmation of the
Plan.
Other Courts of Appeals are in agreement with this conclusion. They uniformly hold the Bankruptcy
Code preempts state claims arising during the course of a bankruptcy proceeding. A leading case is Pertuso
v. Ford Motor Credit Co., 233 F.3d 417 (6th Cir. 2000), in which the Sixth Circuit engaged in a thorough
analysis of legal and policy considerations before [*20] concluding that state law claims that "presuppose"
violations of the Bankruptcy Code are preempted:
"[A] mere browse through the complex, detailed, and comprehensive provisions of the
lengthy Bankruptcy Code, 11 U.S.C. §§ 101 et seq., demonstrates Congress's intent to create a
whole system under federal control which is designed to bring together and adjust all of the
rights and duties of creditors and embarrassed debtors alike. [Footnote omitted.] While it is true
that bankruptcy law makes reference to state law at many points, the adjustment of rights and
duties within the bankruptcy process itself is uniquely and exclusively federal. It is [**44]
very unlikely that Congress intended to permit the superimposition of state remedies on the
many activities that might be undertaken in the management of the bankruptcy process." MSR
Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910, 914 (9th Cir. 1996).
***
[T]he Pertusos' state law claims presuppose a violation of the Bankruptcy Code. Permitting
assertion of a host of state law causes of action to redress wrongs under the Bankruptcy Code
would undermine the uniformity the Code endeavors to preserve and would "stand" as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress."
Bibbo v. DeanWitter Reynolds, Inc., 151 F.3d 559, 562-63 (6th Cir. 1998). Accordingly, and
because Congress has preempted the field, the Pertusos may not assert these claims under state
law."
Page 15
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
233 F.3d at 426-26; see also Eastern Equip. and Servs. Corp. v. Factory Point Nat'l Bank of Bennington,
236 F.3d 117, 121 (2nd Cir. 2000) (affirming dismissal on preemption grounds of state law claims arising
from violation of automatic stay); MSR Exploration, Ltd. v. Meridian Oil, Inc., 74 F.3d 910 (9th Cir. 1996)
[**45] (same).
There are also numerous decisions from other courts, both federal and state, which have reached the
same conclusion. See Raymark Indus., Inc. v. Baron, 1997 U.S. Dist. LEXIS 8871, * 30-36 (E.D. Pa. June 23,
1997) (state law claims arising out of wrongful filing of involuntary bankruptcy petitions preempted); In re
Smith, 43 B.R. 313, 318 (Bankr. N.D. Ill. 1984) ("federal [*21] law must control the court's power to confirm a Chapter 13 plan."); In re Lenior, 231 F.R. 662, 675 (B. N.D. Ill. 1999) (state law claims for allegedly
inflated proof of claim preempted; "[t]he expansive reach of the Bankruptcy Code preempts virtually all
claims relating to alleged misconduct in the bankruptcy courts"); Shiner v Moriarty, 706 A.2d 1228, 1238-38
(Pa. Super. 1998) (following federal decisions on the issue and holding that Pennsylvania law claims are
preempted by the Bankruptcy Code).
The conclusion that Nosek's claim is preempted is further supported by a recent amendment to the
Bankruptcy Code. As part of the 2005 amendments to the Bankruptcy Code under BAPCPA, there now is a
specific statutory provision addressing [**46] the failure to credit payments received under a plan. 11
U.S.C. § 524(i). n29 This statute further establishes the existence of a comprehensive federal scheme addressing all aspects of bankruptcy cases including those under Chapter 13. That scheme overrides all other
state laws, including Nosek's claim for breach of the covenant of good faith and fair dealing under Massachusetts law.
n29 Section 524(i) reads as follows:
The willful failure of a creditor to credit payments received under a plan confirmed
under this title, unless the order confirming the plan is revoked, the plan is in default, or
the creditor has not received payments required to be made under the plan in the manner
required under the plan (including crediting the amounts due under the plan), shall constitute a violation of an injunction under subsection (a)(2) if the act of the creditor to
collect and failure to credit payments in the manner required by the plan caused material
injury to the debtor.
This statute now controls over other enforcement rights that previously existed under the Bankruptcy
Code.
[**47]
For the foregoing reasons, the Bankruptcy Court's judgment on the Fifth Cause of Action must be reversed.
[*22] B. The Bankruptcy Court Erred In Determining that Ameriquest Was Required
to Account for Payments in the Same Manner as Nosek Was Permitted to Cure Past Defaults.
A cornerstone of the Bankruptcy Court's ruling that Ameriquest breached the covenant of good faith and
fair dealing (under Massachusetts law) was the Court's view that the manner in which Ameriquest credited
payments violated the Plan. That view was in error.
Page 16
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
There are two sections of the Bankruptcy Code which are germane to this issue: sections 1322(b)(2) and
(5). Those sections read as follows:
§ 1322. Contents of Plan.
(b) Subject to subsections (a) and (c) of this section, the plan may-(2) 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, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;
(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default
within a reasonable [**48] time and maintenance of payments while the case is pending on
any unsecured claim or secured on which the last payments is due after the date on which the
final payment under the plan is due[.] n30
n30 Bankruptcy Code §§ 1322(c) and (e) also apply to the treatment secured home loans in Chapter
13 plans. Those sections have no applicability to the issues before this court.
The substance of these provisions is that a Chapter 13 debtor is permitted to cure, i.e. pay, defaults under its
home mortgage loan over the life of its plan. Except for this one right, all other provisions of the underlying
loan documents cannot be modified. The provisions which cannot be modified include provisions governing
how payments must be applied.
[*23] This precise issue has been addressed by at least one bankruptcy court. In In re Good, 207 B.R.
686 (Bankr. D. Idaho 1997), a Chapter 13 debtor proposed a plan which specifically required the home
mortgage lender to apply payments in a manner [**49] contrary to the terms of the underlying loan documents. As explained by the bankruptcy court in Good:
"This otherwise uncomplicated case gives rise to an interesting issue of bankruptcy law: may a
Chapter 13 plan require that payments made under the plan to cure a home mortgage default be
applied by the lender first to the principal portion of the default balance and, thereafter, to accrued interest on the default, contrary to the terms of the underlying promissory note and deed
of trust?"
Id. at 688. In concluding that the debtor was statutorily prohibited from modifying the application of payment provisions in the underlying loan documents, the Good court stated as follows:
"Debtor observes that Chapter 13 does not compel her to apply payments on the mortgage default in any particular fashion. She is right. However, the Code also does not allow her to modify Creditor's rights under its note and deed of trust. Therefore, the Court concludes that the
parties are bound by their contracts concerning how default payments must be applied."
Page 17
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Id. at 689 (emphasis added). See also In re Araujo, 277 B.R. 166, 167 (Bankr. D. R.I. 2002) [**50] (bankruptcy court denied confirmation of plan that proposed contractual modifications to the manner in which
lender could assess post-confirmation fees and costs). n31
n31 The Bankruptcy Court relied on In re Wines, 239 B.R. 703, 707 (Bankr. D. N.J. 1999) in support
of its judgment on the Fifth Cause of Action. That decision, which merely quotes In re Rathe, 114
B.R. 253, 257 (Bankr. D. Idaho 1990), did not address the anti-modification restrictions contained in §
1322(b)(2) of the Bankruptcy Code.
Ameriquest in no way contravened the terms of the plan. It accepted all cure payments that were
tendered. It did not commence any actions against Nosek. The only act it did undertake was to supply,
at Nosek's request, a payment history that reflected the payments received to date and that those payments had been placed into an internal suspense account.
[*24] There are real practical reasons for the rule that the right to cure does not alter how payments
should be applied [**51] under the operative loan documents. Most Chapter 13 cases never result in fully
performed Chapter 13 plans. n32 The more likely outcome is that the cases are dismissed (as happened twice
in Nosek's first two bankruptcy cases), there are defaults under the plan, and the secured creditor forecloses,
or the property is sold or refinanced. Mortgage lenders should not be forced to expend the time or resources
to apply payments according to the same manner in which the plan allows cure payments to be made. If, at
the end of the Chapter 13 plan the debtor has fully performed, the chapter 13 debtor's loan balance will be the
same regardless of whether payments are applied according to the loan documents or applied according the
methodology for curing past defaults. n33
n32 This statement is supported by the most recent data compiled by the Executive Office of the
United States Trustee. See footnote 2, supra.
n33 Notwithstanding that Ameriquest had no statutory obligation to do so, it did track Nosek's
post-petition bankruptcy payments in a manner different from its normal computer program for tracking loan payments. See Memorandum Decision, p. 7.
[**52]
Illustrative of the accounting problems that could arise if mortgage lenders are required to account for
payments in a manner different than provided for under their operative documents are the cure payments that
Ameriquest actually received in this case. Under the Plan, Ameriquest was supposed to be paid $ 313.52 per
month. The "effective date" of confirmation was May 5, 2003. The first plan payment Ameriquest actually
received was on June 14, 2004 (over year after the effective date of the plan) in the amount of $ 2,527.20.
Memorandum Decision, p. 3. By that date, Ameriquest should have received $ 3,726.24 (12 months x $
313.52 per month). No explanation was provided to Ameriquest as to why it was not receiving monthly
payments (as required by the Plan), or why the payment was $ 1,235.04 below what was required [*25] to
have been paid by that date under the Plan, or which months this payment was for. Notwithstanding all of
these deficiencies, Ameriquest accepted this payment and placed the payment into an internal suspense account. The acceptance of this payment and placement of this payment in an internal suspense account is not
violative of the Debtor's cure rights under [**53] 11 U.S.C. § 1322(b)(5).
Page 18
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Section 3 of the Mortgage and section 3 of Note contain detailed language governing how payments are
to be applied. There is no language in the Plan which modifies either section of these Loan Documents. Nor,
as explained above, would such modifications be permissible under the Bankruptcy Code. 11 U.S.C. §
1322(b)(2). Ameriquest has not and did not breach any provisions of the Loan Documents. It is notable that
Nosek never alleged a claim for breach of contract in her Complaint, with the exception of her TILA and unjust enrichment claims. It is also notable that the Bankruptcy Court rejected Nosek's allegations (contained in
the First and Fourth Cause of Action for unjust enrichment) that Ameriquest improperly calculated interest
and improperly charged for attorney's fees and costs and late fees.
The Bankruptcy Court had the erroneous belief that Ameriquest was required to apply post-petition
payments in accordance with the terms of Plan. It then used that belief to reach the conclusion that
Ameriquest "contravened the terms of a confirmed Chapter 13 plan" and, therefore, violated the covenant of
good faith and [**54] fair dealing. For these reasons set forth herein, these conclusions were in error. As a
result, judgment on the Fifth Cause of Action must be reversed.
[*26] VI. THE BANKRUPTCY COURT ERRED IN RULING THAT AMERIQUEST VIOLATED
THE SUPPOSED "COVENANT OF GOOD FAITH AND FAIR DEALING" AND THAT NOSEK
WAS ENTITLED TO RECOVER EMOTIONAL DAMAGES.
Judgment on the Fifth Cause of Action was based upon supposed breaches of the covenant of good faith
and fair dealing. Assuming, arguendo, that this Court does not reverse that judgment on the basis of preemption (as explained above in Section V(A)) and does not reverse that judgment on the basis of the Bankruptcy
Court's error in construing and applying §§ 1322(b)(2) and (5) (as explained above in Section V(B)), the
judgment on the Fifth Cause of Action still must be reversed because there was no breach of the covenant
and because Nosek only suffered emotional damages.
A. There Was No Breach of the Implied Covenant by Ameriquest.
The covenant of good faith and fair dealing is implied in every contract under Massachusetts law. Uno
Rest., Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385 (2004). [**55] The breach of the implied
covenant of good faith and fair dealing is contractual in nature; it is not a tort. n34 J. Bertrand v. Quincy Mkt.
Cold Storage & Warehouse Co., 728 F.2d 568, 571 (1st Cir. 1984); Jennings v. Nathanson, 404 F. Supp. 2d
380, 399 (D.Mass. 2005). The bankruptcy court recognized these general rules of law in its Memorandum
Decision, p. 31.
n34 In the Memorandum of Decision, the Bankruptcy Court cited Figueroa-Torres v. Toledo-Davila,
232 F.3d 270, 275 (1st Cir. 2000), for the rule that "[I]t is well settled that in an action for damages,
the tortfeasor 'takes his victim as he finds him.'" The reliance on this tort case and this tort rule of law
in a contractual dispute is an additional reason why the judgment on the Fifth Cause of Action must be
reversed.
The implied covenant of good faith and fair dealing provides that, "[N]either party shall do anything that
will have the effect of destroying or injuring the right of the other [**56] party to receive the fruits of the
contract." Uno Rest., Inc., 441 Mass. at 385; Anthony's Pier Four, Inc., [*27] 411 Mass. at 471. This
Court in Christensen v. Kingston Sch. Comm., 360 F. Supp. 2d 212, 226 (D. Mass. 2005) held that,
Page 19
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
"It is important not to read too much into the words just quoted, however, since while every
breach of contract has the 'effect of destroying or injuring the rights of the other party to receive
[its] fruits,' not every breach of contract is a breach of the implied covenant of good faith and
fair dealing. As the law has developed recovery under the latter theory requires conduct taken
in bad faith either to deprive a party of the fruits of labor already substantially earned or unfair
leveraging of the contract terms to secure undue influence."
The covenant is preserved (i.e., not breached) so long as neither party injures the rights of another to reap
the benefits prescribed by the terms of the contract. Uno Rest., Inc., 441 Mass. at 385; Druker v. Roland Wm.
Jutras Assoc., Inc., 370 Mass. 383, 385 (1976). The duty of good faith and fair dealing [**57] concerns the
manner of performance. Id.; see also Hawthorne's Inc. v. Warrenton Realty, Inc., 414 Mass. 200, 211 (1993).
The essential inquiry is whether the challenged conduct conformed to the parties' reasonable understanding of performance obligations, as reflected in the overall spirit of the bargain, not whether the defendant abided by the letter of the contract in the course of performance. Speakman v. Allmerica Fin. Life Ins.,
367 F. Supp. 2d 122, 132 (D.Mass. 2005). The covenant may not, however, be invoked to create rights and
duties not otherwise provided for in the existing contractual relationship, as the purpose of the covenant is to
guarantee that the parties remain faithful to the agreed expectations of the parties in their performance. Uno
Rest., Inc., 441 Mass. at 385. The implied covenant does not serve to impute greater rights or impose impractical duties not contemplated in the contractual relationship. Id. at 388 and 966. See also In re Greenberg,
229 B.R. 544, 550 (1st Cir. BAP 1999) (holding that covenant of good faith and [*28] fair dealing requires
banks to be honest [**58] with customers but does not require that they fashion most advantageous prepayment method for customers).
Ameriquest's obligation under the Plan and the Loan Documents, which are the subject contracts, n35
was to accept payments tendered by Nosek and the Chapter 13 trustee. Ameriquest did exactly what it was
required to do.
n35 Whether a Chapter 13 or Chapter 11 plan is actually a "contract" thus giving rise to the potential
claim of breach of a covenant of good faith and fair dealing is not settled law. Some courts and commentators construe a plan more in the manner of a judicial consent decree. Others view the plan as a
contract for certain purposes. For the purposes of this argument, Ameriquest is treating the Plan as a
contract. In its research, Ameriquest could not located a single decision in which any court applied the
covenant of good faith and fair dealing to a bankruptcy plan.
In its Memorandum Decision, the Bankruptcy Court made the following factual determinations:
"[Ameriquest] maintained [**59] two different accounts: one through a computer loan servicing program which tracked contractual obligations due under the Note and another done manually by a bankruptcy specialist who tracked the post-petition due dates. Through the loan servicing program, each payment received, regardless of the source, was automatically matched to
the oldest contractual obligation due. If the amount received was not sufficient to pay the contractual obligation according to the loan servicing program, the payment was placed into suspense. When the next payment was received, it was placed in suspense and if the total in suspense then equaled a contractual obligation, then the oldest outstanding contractual obligation
was deemed paid, at least in theory. Any monies that exceeded the amount of the monthly contractual obligation due remained in suspense until the next contractual obligation could be satisfied. . . .
Page 20
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Simultaneously, Nosek was also being credited for making timely post-petition payments in a
manual accounting maintained by an employee in [Ameriquest's] bankruptcy department. If the
payment received for [Nosek] satisfied the post-petition amount due, then the bankruptcy specialist [**60] advanced [Nosek's] post-petition schedule one payment and her payment was
deemed current by [Ameriquest] . . . The method of tracking an account in bankruptcy by
[Ameriquest] occurred without the knowledge of [*29] Nosek. This procedure was not mentioned in any of the [Loan Documents] . . ." n36
Memorandum Decision, pp. 7-8.
n36 As seen by this excerpt from the Memorandum Decision, the Bankruptcy Court focused on the
absence in the Loan Documents (which are the standard forms used in Massachusetts for home loans
of the type obtained by Nosek) of any provisions addressing how a loan servicer will internally account for payments when and if a borrower files bankruptcy. Of course they do not contain such provisions. That is beyond the scope of contracts entered into between the parties. A contract governs the
pre-bankruptcy relationship between the parties. Unless otherwise agreed to by the parties, it does not
govern how one party will satisfy its internal performance obligations, particularly when those obligations are impacted by one party filing for bankruptcy. So long as the loan servicer credits the borrower
for all payments made (as Ameriquest did with respect to Nosek), there is no breach of the Loan
Documents.
[**61]
Chapter 13 bankruptcies involuntarily thrust lenders and loan servicers into a setting in which they must
alter their normal accounting methodologies and loan servicing protocols. The unique aspects of each individual Chapter 13 case deprive lenders and loan servicers of the full benefits of MSP--the loan servicing
program used throughout the country by most loan servicers. n37 Under MSP, loan payments are applied
according to the provisions of standardized nationwide loan documents. n38 Because Ameriquest cannot use
MSP to track bankruptcy payments and because at present no software program exists to track such payments, Ameriquest and other loan servicers must allocate employee resources to account for Chapter 13
payments [*30] manually. The use of a suspense account allows a Chapter 13 debtor to receive credit immediately for her payment, while allowing the lender or loan servicer time to allocate the employee resources
necessary to process and correctly apply payments for bankrupt borrowers. If, at the end of the Chapter 13
plan a debtor has fully performed her obligations, both under the Chapter 13 plan and the loan documents,
that debtor's loan balance will be the same [**62] regardless of whether payments are applied according to
the loan documents or applied according to the methodology for curing past defaults. Simply put, the use of
suspense accounts in no way deprived Nosek of the "fruits" of her Plan or the Loan Documents. For these
reasons, there was no breach of the covenant of good faith and fair dealing.
n37 MSP is owned, developed and licensed by Fidelity National Information Services ("Fidelity"). Its
web site is www.fidelityinfoservices.com. As self-described by Fidelity:
"MSP provides automation to service a wide range of loan products including, but
not limited to, fixed-rate mortgages, adjustable-rate mortgages, construction loans, equity lines of credit and daily simple interest loans.
Page 21
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
MSP is the mortgage banking industry's most widely used servicing system. It is
used to service more than 27 million loans with a principal balance of $ 3.9 trillion. Additionally, MSP provides comprehensive automation for the subprime market and services more than 2.5 million subprime loans.
More than 50 percent of mortgages in the U.S. are serviced on MSP."
[**63]
n38 For example, Nosek executed the Loan Documents using the Fannie Mae Mortgage Association//Federal Home Loan Mortgage Corp. uniform adjustable rate note and mortgage for Massachusetts. These are standardized agreements used in Massachusetts by almost all of the home lenders.
B. The Bankruptcy Court Erred In Determining Nosek is Entitled to Recover Only Emotional Distress Damages.
As a starting point, the law of this case is that Nosek did not suffer any actual damages as a result the
supposed breach of the covenant of good faith and fair dealing. That was the ruling of the Bankruptcy Court.
Memorandum Decision, p. 31.
As a general rule, under Massachusetts law, mental suffering resulting from a breach of contract without
physical harm is not compensable. McClean v. Univ. Club, 327 Mass. 68, 76 (1951); Sackett v. St. Mary's
Church Soc'y., 18 Mass.App.Ct. 186, 187 (1984); St. Charles v. Kender, 38 Mass. App.Ct. 155, 161 (1995).
This rule exists because mental suffering caused by a supposed breach of contract, although [**64] it may
be a real injury, is not generally considered as a basis for compensation in contractual actions. Williston on
Contracts, Damages for Breach of Contract, § 64:7.
[*31] In St. Charles, a breach of contract was found, but with no actual damages, other than alleged
emotional distress. As stated by the St. Charles court:
In the absence of any physical injury . . ., we are of the opinion that in circumstances such as
these, a claim founded on a contract theory for damages arising from emotional distress also
does not succeed. . . . When no physical injury results and the facts are devoid of harmful intent, emotional distress is best written off as among the shocks and counter shocks of life which
the law does not seek to remedy.
Id. at 161 (emphasis added).
The Bankruptcy Court did not find that Ameriquest had any harmful intent when it placed funds into the
suspense account or when it applied payments in accordance the terms of the underlying Loan Documents.
The Bankruptcy Court merely ruled that it is "reasonably foreseeable" that Nosek would be "emotionally distressed." The Bankruptcy Court applied the incorrect test. Under [**65] the facts of this case and the law,
the mere fact that it was reasonably foreseeable that Nosek would be emotionally distressed by the placement
of funds into an internal suspense account is legally insufficient to award emotional distress damages.
Every published decision from Massachusetts courts on this issue (with one exception discussed below)
supports this conclusion. St. Charles, 38 Mass.App.Ct. at 161; Sackett v. St. Mary's Church Society, 18
Page 22
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Mass.App.Ct. at 187; McClean, 327 Mass. at 76. It is also supported by the Restatement (Second) of Contracts § 353, which reads,
"Emotional disturbance. Damages for emotional disturbance are not ordinarily allowed. Even if
they are foreseeable, they are often particularly difficult to establish and to measure. There are,
however, two exceptional situations where such damages are recoverable. In the first, the disturbance accompanies a bodily injury. . . . In the second exceptional situation, the contract or
the [*32] breach is of such a kind that serious emotional disturbance was a particularly likely
result." n39
n39 It should be noted that the Comment to the above paragraph states: "Breach of other types of contracts, resulting for example in sudden impoverishment or bankruptcy, may by chance cause even
more severe emotional disturbance, but if the contract is not one where this was a particularly likely
risk, there is no recovery for such disturbance." (emphasis added).
[**66]
Neither exception applies here. There was no bodily injury. Nor could it be said that serious emotional
disturbance was a particularly likely result of Ameriquest placing payments into an internally named "suspense account" or purportedly not applying payments consistent with the terms of the Chapter 13 plan. n40
n40 The Fifth Circuit in Dean v. Dean, 821 F.2d 279 (5th Cir. 1987) provides a good summary of the
Restatement's exception to this rule:
"In all of these cases the basic requirement is that the essence of the contract must be
so related to the matter of the mental concern of the party to whom a duty is owed under
the contract that the parties would reasonably contemplate that a breach would most
likely cause severe mental anguish. Generally, the cases allowing recovery involve contracts related to personal feelings. Thus, recovery has been allowed in highly personal
contracts such as those involving dead bodies or the delivery of messages relating to
death. In other situations, where the contract does not have as its essence personal feelings so that it is not particularly likely that a party to it would suffer mental anguish from
a breach, the courts consistently hold that the parties did not contemplate that emotional
distress would result from a breach and such damages cannot b e recovered."
821 F.2d at 283. See also, Lyons v. Midwest Glazing, L.L.C. 235 F. Supp.2d 1030, 1049 (N.D. Iowa
2002)(damages for emotional distress are not recoverable because the nature of the contract clearly
does not indicate that such damages were within the contemplation or expectation of the parties); Buie
v. Palm Springs Motors, Inc., 2001 U.S. Dist. LEXIS 13756. *21 (C.D. Calif. 2001)(when the express
object of the contract is the mental and emotional well-being of one of the contracting parties, the
breach of the contract may give rise to damages for mental suffering or emotional distress. If emotional concerns are not the essence of the contract, emotional distress damages are not recoverable).
[**67]
Page 23
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Federal courts, applying Massachusetts law, concur that that damages for mental suffering are generally
not recoverable in an action for breach of contract. Jennings, 404 F. Supp. 2d at 396 (holding that emotional
damages could not be recovered on contract principles on the facts of that case); Orono Karate, Inc. v. Fred
Villari Studio of Self Defense, 776 F. Supp. 47, 52 [*33] (D. N.H. 1991) (holding that in Massachusetts, it
has long been settled that mental suffering resulting from breach of contract is not a subject of compensation).
In the Bankruptcy Court's Memorandum Decision, the only case cited in support of awarding emotional
damages was this Court's decision in Jennings. n41 In Jennings, this Court examined the question of whether
there could be the recovery of emotional contract damages without any physical injury. This Court considered the Occean v. Marriot Corp. decision, 2 Mass. L. Rep. 628, 1994 Mass. Super. LEXIS 386, at *2 (1994)
(Lopez, J.), and declined to follow its reasoning. As this Court is aware, Occean is the only published decision from any Massachusetts court permitting the recovery of [**68] emotional contract damages where no
physical injury resulted. n42
n41 It should be noted that the Bankruptcy Court in its Memorandum Decision indicated that the
standard for the recovery of emotional damages for a breach of contract is the Restatement standard,
and cited Jennings for that proposition. However, in Jennings, although this Court cites the Restatement standard, it did not hold that Massachusetts courts have adopted the Restatement standard.
n42 The viability and correctness of the Occean decision was questioned by Judge Woodlock in
Sorenson v. H & R Block, Inc., 2002 WL 31194868 (D. Mass).
In Jennings, this Court divided its analysis of the contractual causes of action into two parts: breach of
contract and breach of the covenant of good faith and fair dealing. This Court stated "as discussed above, at
best Jennings can only establish a causal relationship between the Nathanson's alleged breach and her emotional damages. Such damages, this Court has determined, [**69] cannot be recovered under contract
principles on these facts." Id. at 399. Thus, Jennings seems to hold that more than a causal relationship is
required before a party can recover emotional damages for breaching the covenant of good faith and fair
dealing. Here, Nosek did nothing beyond proving a causal relationship between her emotional distress damages and [*34] Ameriquest's accounting practice of using suspense accounts (which Nosek alleged and the
Bankruptcy Court found violated the covenant of good faith and fair dealing).
Jennings supports the inexorable conclusion that the Bankruptcy Court's judgment on the Fifth Cause of
Action must be reversed. Ameriquest's and other lenders/servicers' use of suspense accounts allows a Chapter
13 debtor to get immediate credit for payments made while allowing the lenders or loan servicers time to allocate the personnel resources necessary correctly to account for the payment on a manual basis. Complying
with bankruptcy law does not constitute bad faith, nor does it deprive Nosek of the fruits of the Plan or the
Loan Documents. It also does not unfairly leverage Nosek into acceding to new or different contract terms by
which [**70] Ameriquest would secure an "undue economic advantage." n43 The Bankruptcy Court never
correlated how Ameriquest's use of suspense accounts was in bad faith or was an attempt to secure an undue
economic advantage over Nosek. The absence of bad faith actions, "to deprive a party of the fruits of labor
already substantially earned or unfair leveraging of the contract terms to secure undue economic advantage,"
(as is the case here with Ameriquest) formed the basis of this Court's decision in Jennings to grant the defendants' summary judgment motion as to the breach of the implied covenant of good faith and fair dealing
claim. Jennings, 404 F. Supp. 2d at 398-400. The result should have be the same in this case.
Page 24
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
n43 It is actually more expensive for loan servicers to service a Chapter 13 debtor's loan because it
requires the use of individual employees in addition to use of MSP.
For these reasons, judgment on the Fifth Cause of Action should be reversed.
[*35] VII. THE BANKRUPTCY [**71]
COURT ERRED IN RULING THAT AMERIQUEST
VIOLATED RESPA AND MASS G.L. C. 93A. § 2
A. Judgment Should Have Been Entered in Favor of Ameriquest on Second Cause of Action.
1. The Bankruptcy Court's Determination of No Damages Requires Judgment on the Second Cause of Action in Favor of Ameriquest.
In the Second Cause of Action, Nosek alleged that Ameriquest violated RESPA and she was entitled to
damages. Under RESPA, a mere violation does not equal a claim. In order for a borrower to have a claim
under RESPA, the borrower must incur actual damages as a result of the RESPA violation. See e.g. Byrd v.
Homecoming Fin. Network, 407 F. Supp. 2d 937, 945-946 (N.D. Ill. 2005); see also, 12 U.S.C. § 2605(f). If a
borrower is not able prove actual damages, then the borrower does not have a claim under RESPA. Id.
The Byrd court applied this fundamental legal principle when it rejected the borrower's claim for violation of RESPA. In Byrd, the borrower's attorney submitted a qualified written request to the loan servicer
and the loan servicer failed to respond. In dismissing the borrower's RESPA [**72] claim and related request for attorney's fees, the Byrd court stated as follows:
"RESPA, 12 U.S.C.A. § 2605(f), requires a party to show actual damages from a violation of §
2605(e)(2). Byrd does not and cannot allege actual damages. . . Therefore, Byrd fails to state a
claim under RESPA as a matter of law." Id.
Nine months ago, the "actual damage" rule enunciated by the Byrd court was restated by another district
court. See Hutchinson v. Delaware Sav. Bank FSB, 410 F. Supp. 2d 374 (D.N.J. 2006). In Hutchinson, a loan
servicer allegedly violated RESPA by failing to respond to a qualified written request. In denying the defendants' motion to dismiss the RESPA claim, the Hutchinson court repeated the requirement of "actual
damages" as a necessary element to any RESPA claim:
[*36] . . . [A]lleging a breach of RESPA duties alone does not state a claim under RESPA.
Plaintiff must, at a minimum, also allege that the breach resulted in actual damages. See 12
U.S.C. § 2605(f)(1)(A) (Whoever fails to comply with this section shall he liable to the borrower . . . [f]or any actual [**73] damages to the borrower as result of the failure"); Cortez v.
Keystone Bank, No. 98-2457, 2000 U.S. Dist. LEXIS 5705 at *40 (E.D. Pa. May 2, 2000) (a
claimant under 12 U.S.C. § 2605 must allege a pecuniary loss attributable to the alleged violation) (emphasis added).
We hold Plaintiffs have sufficiently pled actual damages resulting from the breach of RESPA
duties. Accordingly, [defendant's] motion to dismiss the RESPA claim will be denied. Id. at
383.
Page 25
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
After considering all of the evidence presented by Nosek, the Bankruptcy Court concluded that she had
not proven any actual damages as a result of the RESPA violation. As the Bankruptcy Court noted, "[S]he
did not provide a basis to award actual damages." Memorandum Decision, p. 13, lines 5-7. Nosek also failed
to provide any "causal link between the [RESPA] violation and the emotional distress." Id. at p. 14, lines
11-14. Thus, Nosek failed to prove a claim under RESPA because she failed to prove actual damages as a
result of the RESPA violation. See, Hutchinson v. Delaware Sav. Bank FSB, 410 F. Supp. 2d at 383; Byrd v.
Homecoming Fin. Network, 407 F. Supp. 2d at 945-946. [**74]
Nosek's failure to establish actual damages results in her not being successful in this aspect of the litigation. Ruiz-Rodriguez v. Colberg-Comas, 882 F.2d 15, 17 (1st Cir. 1989) (stating that award of zero damages
is "commonly viewed as, in effect, a judgment for defendant"); Poulin Corp. v. Chrysler Corp., 861 F.2d 5, 7
(1st Cir. 1988) (holding that, upon award of zero damages, "plaintiff has failed to establish an essential part
of its proof, and judgment should have been entered for defendant"). In awarding Nosek nominal damages
and attorney's fees and costs, the Bankruptcy Court erroneously concluded that she had established all of the
necessary elements to established a cause of action for violation of RESPA. For that [*37] reason, and
based on the controlling case law from the First Circuit Court of Appeals, this Court should reverse the
Bankruptcy Court's judgment on the Second Cause of Action.
2. The Bankruptcy Court Erred in Holding There Was a Qualified Written Request.
It is undisputed that that the June 23, 2004 letter was sent to Ameriquest's counsel. The Bankruptcy
Court determined that this letter was a qualified [**75] written request and then declined to consider
Ameriquest's motion to reconsider this ruling. Those determinations were in error.
Under 12 U.S.C. § 2605(e)(1)(A), "if a servicer of a federally related mortgage loan receives a qualified
written request from the borrower (or an agent of the borrower) . . . the servicer shall provide a written response." A servicer is "the person responsible for servicing of a loan." 12 U.S.C. § 2605(i)(2).
Here, Ameriquest did not receive a request from Nosek. Rather, Ameriquest's outside counsel received a
request from borrower's counsel. Under the plan language of 12 U.S.C. § 2605(e)1)(A), Ameriquest had no
duty to respond under the RESPA provisions at issue in this litigation. Griffen v. Citifinancial Mortgage Co.,
2006 WL 266106 (M.D. Pa. 2006). As a result, the Bankruptcy Court's determination that Ameriquest violated RESPA was in error and judgment on the Second Cause of Action must be reversed.
3. The RESPA Claim Is Precluded by the Bankruptcy Code.
Nosek based her RESPA claim on the sending of a letter to Ameriquest's counsel on July 23, 2004, and
[**76] Ameriquest's failure to respond within 20 days. Nosek was in bankruptcy on July 23, 2004, and continues to be in bankruptcy. During her bankruptcy case, Nosek used the dispute resolution provisions of
RESPA to try to resolve her disagreements over the amount of Ameriquest's claim. That claim was being
paid in part under the Plan. The Bankruptcy Code, which is exclusive as to such activities, precludes a claim
under RESPA that arises during the [*38] course of a bankruptcy case. As the Ninth Circuit Court of Appeals recently explained in a case involving the Fair Debt Collections Practices Act (FDCPA):
"The Bankruptcy Code provides its own remedy for violating § 524, civil contempt under §
105. To permit a simultaneous claim under the FDCPA would allow through the back door
what Walls cannot accomplish through the front door - a private right of action. This would
circumvent the remedial scheme of the Code under which Congress struck a balance between
the interests of debtors and creditors by permitting (and limiting) debtors' remedies for violating the discharge injunction to contempt. . . Nothing in either Act persuades us that Congress
Page 26
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
intended to allow debtors to [**77] bypass the Code's remedial scheme when it enacted the
FDCPA." (citation omitted).
Walls v. Wells Fargo Bank, N.A., 276 F.3d 502, 510 (9th Cir. 2002). Here, Nosek should have used the
mechanisms provided by the Bankruptcy Code to resolve her disputes with Ameriquest concerning the
amount of its claims. n44
n44 Indeed, on August 11, 2004, Nosek filed a Motion to Determine the Amount of Liens. It should
be noted that this pleading was filed before the twenty days allotted by RESPA to respond to a qualified written response had lapsed.
Walls is in accord with the substantial weight of authority from the district courts on this issue. Diamante
v. Solomon & Solomon, P.C., 2001 U.S. Dist. LEXIS 14818, * 18 (N.D.N.Y. Sept. 18, 2001) (surveying and
analyzing decisions on the exclusivity issue and concluding that "[a]fter reviewing all of the above-cited
cases, this Court concludes that the reasoning of those cases holding that the Bankruptcy Code precludes
claims under [**78] the FDCPA when those claims are based upon violations of the Bankruptcy Code is
more persuasive. . . . To permit Plaintiff to circumvent that provision [§ 524] and its remedy by bringing a
claim under the FDCPA, which provides for damages and attorney's fees, would directly contravene the
Bankruptcy Code's remedial scheme."); Dregrosiellier v. Solomon & Solomon, P.C., 2001 U.S. Dist. LEXIS
15254, * 17-18 (N.D.N.Y. Sept. 27, 2001) (extensive analysis of decisions not finding preclusion, and [*39]
explaining why their rationales were incorrect); Baldwin v. McCalla, 1999 U.S. Dist. LEXIS 6933, * 11-12
(N.D. Ill. April 19, 1999) (FDCPA claim premised on an allegedly fraudulent proof of claim filed in debtor's
Chapter 13 proceeding dismissed; "This court finds that the FDCPA does not apply to proofs of claim in
bankruptcy proceedings and, accordingly, dismisses Plaintiff's complaint," relying on Kokoszka v. Belford,
417 U.S. 642 (1974), which held that no claim could be stated under the Consumer Credit Protection Act's
wage garnishment provisions occurring after the debtor commenced bankruptcy proceedings); Kibler v. WFS
Fin., Inc. 2000 U.S. Dist. LEXIS 19131 [**79] (C.D. Cal. Sept. 12, 2000) (FDCPA claim arising from
post-petition debt collection efforts dismissed); Gray-Mapp v. Sherman, 1999 U.S. Dist. LEXIS 21988 (N.D.
Ill. 1999) (FDCPA claim based on the filing of an allegedly inflated proof of claim dismissed; bankruptcy
law is exclusive).
The same analysis courts use to preclude FDCPA claims that arise during bankruptcy cases applies with
equal force to RESPA claims that arise during a bankruptcy case. The Bankruptcy Code and Rules contain a
detailed statutory scheme for the assertion of claims against a debtor and the resolution of claim objections.
The claims resolution process is a core matter for which pursuant to 28 U.S.C. § 1334(b) bankruptcy courts
have exclusive jurisdiction. Under 28 U.S.C. § 1334(b) and by reference from the district courts, bankruptcy
courts have exclusive jurisdiction over all matters arising under, arising in or related to a case under title 11.
Pursuant to 28 U.S.C. § 157(b)(2)(B), the allowance, disallowance and estimation of claims are core proceedings.
Bankruptcy Rule 3001 sets forth the form and content of proofs of [**80] claims against an estate.
Bankruptcy Rule 3002 and Interim Bankruptcy Rule 3002 set forth the rules for filing proofs of claims.
Bankruptcy Rule 3004 allows a debtor to file a proof of claim in those [*40] instances where a creditor
fails to file a proof of claim. Lastly, Bankruptcy Rule 3007 sets forth the procedure for challenging proofs of
claim.
These rules are supplemented by various provisions of the Bankruptcy Code. Under § 502(a), a proof of
claim is deemed allowed unless that claim is objected to by a party in interest. Under § 502(b), if an objec-
Page 27
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
tion to a proof of claim is made, the bankruptcy court is required to determine the amount of the claim. Under § 502(c), the bankruptcy court may estimate certain claims.
In Chapter 13 cases (such as the one involving Nosek), there are additional statutes addressing claims.
Section 1305 of the Code covers the filing and allowance of postpetition claims. Section 1322 of the Code, in
part, addresses how certain claims must be dealt with in a plan--including secured claims, such as the claim
held by Ameriquest. Section 1326 addresses how claims may be paid under a Chapter 13 plan.
To the extent a debtor requires additional [**81] information regarding a claim, the Bankruptcy Rules
provide mechanisms for obtaining that information. A debtor is entitled to seek discovery of the creditor
pursuant to Bankruptcy Rule 2004 and, to the extent there is an existing adversary proceeding or contested
matter, utilize the discovery powers under Part VII of the Bankruptcy Rules.
Outside of bankruptcy, borrowers have a different process for resolving disputes over mortgage claims.
With respect to these types of claims, borrowers have a right under RESPA to assert that the "account is in
error" (12 U.S.C. § 2605(e)(1)(B)(ii)) and demand that the loan servicer make appropriate corrections to the
account (12 U.S.C. § 2605(e)(2)(A)).
As is obvious, the provisions of RESPA relating to the dispute resolution process between borrowers and
mortgagee servicers are contrary to and in conflict with the provisions [*41] and processes of the Bankruptcy Code and Rules governing the allowance and disallowance of claims. The Bankruptcy Code and
Rules control over the contrary provisions of RESPA.
In this case, Nosek bypassed the provisions of the Bankruptcy Code and Rules for the disallowance
[**82] of claims when she brought suit against Ameriquest for supposedly violating RESPA. Rather than
filing another objection to Ameriquest's claim, Nosek filed a lawsuit alleging a post-petition violation of
RESPA. That statute, along with all of the other provisions of RESPA to the extent they involve
post-petition disputes over claims asserted in a bankruptcy case, are overridden by the exclusive provisions
and statutory framework of the Bankruptcy Code and Rules governing the allowance, disallowance, estimation and treatment of all claims asserted against a debtor's estate--including claims held by or against mortgage companies. For this reason the Bankruptcy Court erred in determining that Nosek asserted a valid cause
of action for violations of RESPA.
4. Judgment Should Be Entered in Favor of Ameriquest on the Third Cause of Action.
a. The Bankruptcy Court's Determination of No Damages Requires Judgment on the Third Cause of Action in Favor of Ameriquest.
Under the Code of Massachusetts Regulations, a violation of a federal consumer protection statute is a
per se violation of Mass.G.L. c. 93A, § 2. 940 Mass. Code Regs. 3.16(4). Because [**83] the Bankruptcy
Court found Ameriquest in violation of RESPA, a federal consumer protection statute, the Bankruptcy Court
also found Ameriquest in violation of Mass.G.L. c. 93A, § 2. That determination was in error.
As pointed out above, by virtue of the determination that Nosek suffered no damages as a result of the
violation of RESPA, Ameriquest was entitled to have judgment entered in its favor on the Second Cause of
Action. Once that occurs, any cause of action under Mass.G.L. c. 93A, § 2 [*42] fails as there is no longer
a per se violation of that statute. Even assuming that Ameriquest violated RESPA and thereby per se violated Mass.G.L. c. 93A, § 2, Nosek is still not entitled to recovery under Mass.G.L. c 93A, § 9 unless Nosek
established that she suffered a loss or injury and that there is a causal connection between Ameriquest's per
se violation of Mass.G.L. c. 93A, § 2 and the loss or injury suffered by Plaintiff. Hershenow v. Enter.
Rent-A-Car Co. of Boston, 445 Mass. 790, 798 (Mass. 2006) ("a plaintiff seeking a remedy under G.L. c.
93A, § 9, must demonstrate that even a per se [violation] caused a loss.").
Page 28
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
This was the holding [**84] of the Supreme Judicial Court of Massachusetts nine months ago in the
Hershenow decision. In Hershenow, the Supreme Judicial Court of Massachusetts ruled that a per se violation of section 2 of Mass.G.L. c. 93A does not constitute a per se injury under section 9 of that statute.
Hershenow at note 17 and note 22 ("an act that violates a consumer statute is per se deceptive under
Mass.G.L. c. 93A, § 2. That does not make it per se an injury under Mass.G.L. c. 93A, § 9."). Hershenow set
out in no uncertain terms that a plaintiff had to show some injury or loss in order to prevail:
"Under the plaintiffs' theory of "injury," any consumer contract, oral or written, that violates the requirement of law in any respect, i.e., is noncompliant with any statute, rule regulation or court decision, automatically constitutes an "injury" under G. L. c. 93A (is an injury per
se) entitling the plaintiff to recover statutory damages . . . even though the plaintiff cannot
demonstrate that the illegal contract (the invasion of a legally protected interest) causes any
loss. There is nothing to suggest that the Legislature ever intended such a result, it is contrary
[**85] to the regulation promulgated by the Attorney General, and this court has never sanctioned that view." Id. at 800.
Under Hershenow, for a plaintiff to prevail under Mass.G.L. c. 93A, § 9, the plaintiff must establish and
the trial court must find that the plaintiff suffered a loss or injury, and that loss or injury was caused by the
defendant's per se violation of Mass.G.L. c. 93A, § 2. [*43] Hershenow at 535. After six days of trial,
which included the testimony by Nosek and her witnesses, the Bankruptcy Court ruled Nosek had failed to
establish she suffered a loss or injury as a result of the violations of RESPA and Mass.G.L. c. 93A, § 2.
Memorandum Decision, p. 17. To put it another way, this Court did not find that Ameriquest's per se violation of Mass.G.L. c. 93A, § 2 caused any loss or injury to Nosek.
In granting judgment to Nosek on the Third Cause of Action, the Bankruptcy Court failed to apply the
controlling case of Hershenow. The Supreme Judicial Court of Massachusetts in Hershenow concluded by
stating that "[e]very consumer is, of course, entitled to the full protection of law. . . . A consumer is not,
however, entitled [**86] to redress under Mass.G.L. c. 93A, where no loss has occurred." Id. at 535 (emphasis added). For these reasons, the judgment on the Third Cause of Action should be reversed.
b. Attorney's Fees and Costs Under Mass.G.L. Chapter 93A Are Preempted by Federal
Law.
As explained above in Section V(A), the Bankruptcy Code preempts state claims arising during the
course of a bankruptcy proceeding. The same analysis cited as to why the Fifth Cause of Action for breach of
the covenant of good faith and fair dealing is preempted applies with equal force to Nosek's claim against
Ameriquest for violations of Mass.G.L. c. 93A.
Ameriquest incorporates by reference the legal analysis contained in Section V(A). That analysis establishes why the Third Cause of Action is not a valid cause of action in a bankruptcy case and why the Bankruptcy Court erred in ruling that Nosek was entitled to a judgment on that cause of action.
Further supporting the conclusion that the claim for violation of Mass.G.L. c. 93a is precluded is a case
involving Illinois' consumer protection statute. Holloway v. Household Auto. Fin. Corp., 227 B.R. 501 (N.D.
Ill. 1998). Holloway [**87] involved similar facts to those present in [*44] this case. A secured automobile lender filed a proof of claim and an amended proof of claim against a chapter 13 debtor. Id. at 503. The
amended proof of claim was $ 200 higher than the amount scheduled by the debtor. Id. The secured creditor
asserted the value of its collateral in amount higher than the debtor claimed in her schedules. Id. Prior to confirmation of her chapter 13, the debtor did not object to the secured creditor's claim. Id. Subsequent to confirmation of the plan, the debtor commenced a lawsuit against the creditor for, among other claims, supposed
violations of Illinois' Consumer Fraud and Deceptive Practices Act (a statute similar in purpose to Mass.G.L.
Page 29
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
c. 93A). Id. The debtor/plaintiff alleged that by filing an inflated proof of claim, the creditor had engaged in
deceptive trade practices. Id.
In ruling that Illinois' Consumer Fraud and Deceptive Practices Act was preempted by the Bankruptcy
Code and Rules, the Holloway court stated as follows:
"[T]he Code provides both "its own enforcement scheme and separate adjudicative framework." [citation omitted]. [**88] Section 502(a) provides that a party can object to proofs of
claim in a bankruptcy proceeding. Even if such an objection is not made, and a confirmation
order is entered, § 1330(a) provides that a Chapter 13 confirmation order may be revoked if
procured by fraud, so long as such an allegation is filed within 180 days of the confirmation
order's entry. As such, the Bankruptcy Code contemplates and provides for a comprehensive
scheme by which to guard against fraud and remedy it.
The Code provides "complex, detailed, and comprehensive" provisions, especially as to
proofs of claim and fraud. Under both the reasoning of MSR Exploration and Shape, and because the Code has sections applicable to adjudicate the value of secured claims and provides
remedies for fraud, we hold that Plaintiff's state law CFA claim is preempted by the Bankruptcy
Code."
Id. at 507.
In this case, Nosek alleged a violation of a state consumer fraud protection statute (Mass.G.L. 93A c. 2,
as reflected in 940 Mass. Code Regs. 3.16 (2006)) by virtue of [*45] Ameriquests's supposed failure to
respond to Nosek's post-petition request for an accounting of Ameriquest's claim. That [**89] claim is evidenced by the amended proof of claim Ameriquest filed on May 5, 2003. Appellant E.R., Doc. No. 4. Based
upon the supposed violation of Mass.G.L. c. 93A, Nosek sought and obtained a judgment against Ameriquest
on the Third Cause of Action. For the same reasons that Nosek's claims for breach of the covenant of good
faith and fair dealing and violations of RESPA are overridden by the provisions and overall framework of
the Bankruptcy Code and Rules, Nosek's claim for violation of Mass.G.L. c. 93A is preempted by the Bankruptcy Code.
VIII. CONCLUSION
Over the past four years, Ameriquest has endured 3 separate bankruptcy cases, 25 months of
non-payment, breaches of the confirmed Chapter 13 Plan, and the leveling of specious allegations by Nosek.
After a lengthy trial spanning six days over three months, Nosek could not even establish that Ameriquest
miscalculated the amounts due under her Loan Documents or caused her any actual damages. The payoff
amounts Ameriquest provided to Nosek in May 2005 and September 2005 were accurate. Without question,
Nosek had sufficient information to refinance her home if that was truly her intent.
Instead, Nosek asserted commenced [**90] a multi-count lawsuit against Ameriquest asserting claims
that are preempted by the Bankruptcy Code. The Bankruptcy Court's decisions to overrule Ameriquest's affirmative defense that these claims were not valid and the Bankruptcy Court's decision to enter judgment on
the Second, Third and Fifth Causes of Action and award Nosek at least $ 250,000 in emotional distress
damages, nominal damages under RESPA and Mass.G.L. c. 93A, and attorney's fees and costs were in error.
For the reasons explained in this Opening Brief, the Order and Memorandum Decision of the Bankruptcy
Court should be reversed. A mandate should issue that provides as follows:
Page 30
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
[*46] (a) As to the Fifth Cause of Action, dismissal with prejudice on the basis that any claim for
breach of the "covenant of good faith and fair dealing" is preempted by the Bankruptcy Code. Assuming,
arguendo, this Court does not dismiss the Fifth Cause of Action, entry of judgment in favor of Ameriquest.
(b) As to the Second and Third Causes of Action, entry of judgment in favor of Ameriquest based upon
Nosek's failure to prove any damages under these causes of action. Assuming, arguendo, this Court does not
enter judgment [**91] in favor of Ameriquest on the Second and Third Causes of Action, dismissal with
prejudice of these causes of action on the basis that they are preempted by the Bankruptcy Code.
(c) Instructions to the Bankruptcy Court that it should consider Ameriquest's entitlement to attorney's
fees and costs in connection with this litigation and Nosek's bankruptcy case.
[*47] (d) Awarding Ameriquest attorney's fees and costs in connection with this appeal, as presented
by the Loan Documents, with the amount of attorney's fees and costs to be determined by the Bankruptcy
Court.
Respectfully Submitted,
Dated: September 14, 2006
Ameriquest Mortgage Company
By Its Attorneys
ABLITT & CHARLTON, PC
/Is/ Robert F. Charlton (BBO 081200)
Steven M. Ablitt (BBO 641316)
92 Montvale Avenue, Suite 2950
Stoneham, Massachusetts 02180
(781) 246-8995 Telephone
(781) 246-8994 Facsimile
sablitt@acdlaw.com
and
BUCHALTER NEMER, PC
Jeffrey K. Garfinkle (Cal. Bar. No. 153496;
pro hac vice application pending)
18400 Von Karman Avenue, Suite 800
Irvine, California 92612
(949) 760-1121 Telephone
(949) 720-0182 Facsimile
jgarfinkle@buchalter.com
MOTION FOR ADMISSION [**92]
TO PRACTICE PRO HAC VICE
I, Robert F. Charlton, the undersigned attorney, a member of the bar of the United States District Court
for the District of Massachusetts, request that Jeffrey K. Garfinkle be admitted, pro hac vice, before the
United States District Court for the District of Massachusetts, on behalf of Ameriquest Mortgage Company
("Ameriquest"), in connection with the appeal of the Order and Memorandum of Decision entered in the adversary proceeding captioned, Jacalyn S. Nosek v. Ameriquest Mortgage Company, Adversary Proceeding
No. 04-4517, United States Bankruptcy Court for the District of Massachusetts, Western Division.
Page 31
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Pursuant to Local Rule 85.3(b) of the United States District Court for the District of Massachusetts, the
undersigned has filed the instant motion on Mr. Garfinkle's behalf. Also pursuant to Local Rule 85.3(b) of
the United States District Court for the District of Massachusetts, Mr. Garfinkle has attached hereto an affidavit certifying that he: (1) is a member of the bar in good standing in every jurisdiction where he has been
admitted to practice; (2) there are no disciplinary proceedings pending against him as a member of the bar in
[**93] any jurisdiction; and (3) he is familiar with the Local Rules of the United States District Court for
the District of Massachusetts.
For purposes of the case for which the undersigned seeks Mr. Garfinkle's admission on a pro hac vice
basis, Steven M. Ablitt and Robert F. Charlton of the law firm of Ablitt and Charlton, PC shall serve as
Ameriquest's Massachusetts counsel.
Dated: September 14, 2006
ABLITT & CHARLTON, PC
By: /Is/ Robert F. Charlton (BBO 641316)
Steven M. Ablitt (BBO 641316)
92 Montvale Avenue, Suite 2950
Stoneham, MA 02180
(781) 246-8995
sablitt@acdlaw.com
[SEE APPENDIX IN ORIGINAL]
[SEE APPENDIX IN ORIGINAL]
CERTIFICATE OF SERVICE
I, Robert F. Charlton, do hereby certify on this day I electronically filed and served by overnight mail the
following documents:
1. Appellant's Opening Brief;
2. One Line Exhibit (Ameriquest Mortgage Company's Excerpt of Record Delivered to Clerk's
Office and Copy Mailed to Attorney Phillip Stone, 44 Front Street, Worcester, MA 01608);
3. Index of Excepts of Record;
4. Motion for Admission to Practice Pro Hac Vice and Affidavit of Jeffrey K. Garfinkle in
Support [**94] of Pro Hac Vice Application;
5. 7.3 Corporate Statement.
/is/ Robert F. Charlton
BBO # 081200
Ablitt & Charlton, P.C.
92 Montvale Avenue
Suite 2950
Page 32
2006 U.S. Dist. Ct. Briefs 40170, *; 2006 U.S. Dist. Ct. Briefs LEXIS 937, **
Stoneham, MA 02180
(781) 246-8995
September 14, 2006