By: Scott B. Riddle, Esq.

In this February 29, 2008 post, I discussed the adversary complaint filed in the Northern District of Georgia against Countrywide by the Office of the United States Trustee.  See Walton, United States Trustee v. Countrywide Home Loans, Inc., Adv No. 08-6092, filed in the Chapter 13 case of In re Atchley, Ch. 13 Case No. 05-79232. The lawsuit and underlying facts were subsequently picked up by several local and national news outlets.

After several extensions, Countrywide has filed its response to the lawsuit in the form of a Motion and Supporting Brief to Withdraw the Reference (click here for copy)  and a Motion to Dismiss.   Please see the prior post for a summary of the complaint and allegations.

First, the Motion to Dismiss (download the supporting Brief by clicking here).  The grounds for dismissal, according to Countrywide, include:

1.      The United States Trustee Lacks Standing.

2.      The Claims are Moot.

Countrywide withdrew both of the offending motions for relief from stay, sent refund checks for monies received after satisfaction  of the loan, and withdrew its proof of claim. … Plaintiff fails to  allege any outstanding orders that Countrywide is violating or any provisions of the Bankruptcy  Code that Countrywide is currently violating. Plaintiff has failed to establish any “reasonable  expectation” that Countrywide will engage in any other allegedly improper conduct within the  course of the underlying bankruptcy case or that Countrywide will even have a continuing role in  the underlying case. …. If the Plaintiff’s allegations are  accepted as true, they illustrate how the adversary process effectively resolves disputes. The  dispute over Countrywide’s practices has been resolved. Countrywide procedurally cannot  repeat the allegedly harmful conduct, and any further examination of the issue is moot.

3.      Plaintiff Lacks The Statutory Authority To Commence Adversary Proceedings Aimed   At Policing Alleged Past Bankruptcy Code Violations.

 Lacking any statutory authority to prosecute this case, the UST will cite an isolated
comment from the legislative history of the statute creating the UST program as justification for launching an extensive and costly national investigation of Countrywide’s business practices and policies. See In re A-1 Trash Pickup, Inc., 802 F.2d 774, 775 (4th Cir. 1986) (citing H.R Rep. No. 95-595, at 88 (1977), reprinted in 1978 U.S.C.C.A.N. 5963, 6049). The UST asserts that a 
statement in the legislative history describing his office as a “watchdog” exponentially expands his statutory duties. However, “courts have no authority to enforce [a] principl[e] gleaned solely from legislative history that has no statutory reference point.”  …

The UST, however, does not believe he is constrained by the statutory powers and duties  granted by Congress, and instead believes section 307 of the Bankruptcy Code invests him with  unlimited powers of investigation and enforcement by providing that the UST “may raise and  may appear and be heard on any issue in any case or proceeding under this title but may not file a  plan under section 1121(c) of this title.” 11 U.S.C. § 307. …

Absent from the list of duties that Congress gave to the UST is the suggestion of the power to initiate adversary proceedings seeking sanctions, injunctive relief or any other form of relief. The UST is wholly without authority to unilaterally challenge any secured creditor for its past conduct or initiate adversary proceedings seeking contempt sanctions

 4.     The Bankruptcy Court Lacks Subject Matter Jurisdiction Over the Proceeding.

Plaintiff has failed to establish jurisdiction in this case and cannot use section 105 in an attempt to create bankruptcy jurisdiction. ..The Plaintiff fails to establish jurisdiction under either 28 U.S.C. § 1334(a) because Plaintiff does not invoke any substantive rights under the Bankruptcy Code or assert claims involving the handling of any administrative matters. … Neither the money damages sought by Plaintiff nor the injunction involve rights given to the Plaintiff under title 11, so the claim for “arising under” or “arising in” jurisdiction fails. Plaintiff cannot establish “related to” jurisdiction under § 1334(b) either. The cause of  action would have to involve the administration of the estate or the allocation of assets among creditors, and the Complaint fails to seek any money damages for the benefit of the estate and certainly fails to adjust allocation of assets under the Plan. ….

Bankruptcy court jurisdiction over non-core proceedings is limited to proceedings that are “otherwise related to a case under title 11”; however, any final order or judgment in a noncore  proceeding must be entered by a district court. 28 U.S.C. § 157(c)(1). Even the “related to”  requirement for non-core jurisdiction requires a connection to the estate, for “if the action does not involve property of the estate, then not only is it a noncore (sic) proceeding, it is an unrelated matter completely beyond the bankruptcy court’s subject matter jurisdiction.”…. Regardless of the outcome of this proceeding, there will be no effect on the bankruptcy estate whatsoever, and Plaintiff fails to allege any facts that would “involve” estate property or the administration of any estate. ..Thus, the Court lacks jurisdiction

 5.    The Court Lacks Jurisdiction to Enter the Relief Requested.

Bankruptcy courts lack the power to hold parties in criminal contempt. … If a plaintiff seeks “money damages in the form of  a fixed, non-compensatory fine, then the court may not order such monetary damages, as they are punitive and not coercive.” …

Thus, the sanctions sought by the Plaintiff are undoubtedly punitive in nature and aimed at vindicating the authority of the Court and addressing an alleged “pattern of conduct” by a “national lender and servicer of secured loans.” .. The Court should dismiss the Complaint because this relief could only be awarded, if at all, by a district court. …

Plaintiff has failed to show an imminent threat of future injury or any continuing, current injury warranting any sort of injunction…. Rather, Plaintiff alleges that “Countrywide’s practices and conduct are likely to continue to prejudice parties in interest.” (Compl. at ¶ 49).  The allegation fails to suggest an imminent threat of future harm but is merely a speculative, conclusory assertion. The allegedly offending conduct occurred in the past and was resolved, leaving no current conduct warranting restraint. Thus, the claim for relief resembles the claim in  Elend as Plaintiff alleges past harm to the debtors and then speculates that Countrywide will repeat this conduct in proceedings in the future. See Elend, 471 F.3d at 1207-08. … Plaintiff’s failure to adequately demonstrate future injury spills into the next gap in  Plaintiff’s argument for injunctive relief, for Plaintiff requests an injunction that Countrywide obey the bankruptcy laws by not “engaging in bad faith and abusive practices”—practices already prohibited by, inter alia, Federal Rule of Bankruptcy Procedure 9011. See Elend, 471  F.3d at 1209 (calling injunctions to obey the law “impermissible” in the Eleventh Circuit). Any hypothetical future injury requiring injunctive restraint is already addressed by existing rules and  procedures, and the injunction Plaintiff seeks would be an unnecessarily duplicative decree. Moreover, the claim for injunctive relief lacks any degree of specificity and fails to provide any  real guidance for Countrywide’s future conduct. … The injunctive relief Plaintiff seeks cannot be awarded by the Court. The Court’s inability to redress Plaintiff’s perceived, but non-existent, “injuries” requires dismissal.

6.      The Complaint Fails To State A Valid Cause of Action.

Plaintiff’s complaint contains four causes of action: Count I — Materially Inaccurate
And/Or Misleading Representations of Fact; Count II — Improper Acceptance of Property of the Estate; Count III — Failure to Reconcile the Proof of Claim with the Payoff Amount; and Count  IV — Repeated Failure to Ensure the Accuracy of Pleadings and Accounts. None of these  separate counts is a valid cause of action

7.       Plaintiff has Failed to State a Claim for Civil Contempt.

As established in Section D, supra, civil contempt and criminal contempt accomplish distinct goals, with civil contempt aimed at compensating an aggrieved party or coercing compliance with an order while criminal contempt punishes violations or vindicates the authority  of the court. … While the distinction remains significant in the context  of the subject matter jurisdiction of bankruptcy courts, it also reveals that Plaintiff has failed to  assert a cause of action for civil contempt. … Plaintiff’s desired sanctions are not designed to compensate any party. The only parties with an alleged injury would be the debtors; but the debtors are not parties to this proceeding,  and the Plaintiff did not purport to seek damages as compensation to the debtors or the debtors’  estate. (Compl. at 16). Additionally, Plaintiff has not alleged that Countrywide is currently violating an order of the Court or any part of the Bankruptcy Code; thus, Plaintiff has not alleged  civil contempt to coerce Countrywide’s compliance with an order. Instead, any monetary  sanction awarded under the Complaint would be purely punitive, which is outside the realm of  civil contempt.

8.      Plaintiff has Failed to State a Claim for Injunctive Relief.

A claim for injunctive relief has several requirements. First, the claimant must allege a real threat of imminent injury. … Second, the claimant must pursue more than a mere injunction to obey the law. … Third, the claimant must allege  with specificity the terms of the injunction. Id. Plaintiff’s allegations fall short. Plaintiff suggests that, absent an injunction,  “Countrywide’s practices and conduct are likely to continue to prejudice parties in interest.”  (Compl. at ¶ 49). Plaintiff fails to plead a “real and immediate threat” of future injury accompanied by “continuing, present adverse effects” and instead offers only a conclusory assertion.  .. Additionally, Plaintiff’s requested injunction adds nothing to the existing body of law to prevent the alleged conduct and, as such, is unnecessary and impermissible. … Finally, the terms of the injunction are little more than vague assertions offering no specific guidance and thus fail to satisfy the specificity requirement.

 The Motion, on its face, appears to make compelling arguments as to the United States Trustee’s standing and authority to bring the claims and the Bankruptcy Court’s (and perhaps any court’s) authority to rule on the claims in the form in which they have been alleged.  Although this and similar cases have become  bandwagon issues to some extent, with several courts jumping in, we can certainly expect multiple Circuit Court’s getting involved, if not the United States Supreme Court and Congress.

Should these matter be left to the Office of the United States Trustee?