In Re: Rocco

Opinions of the United
2007 Decisions States Court of Appeals
for the Third Circuit
11-28-2007
In Re: Rocco
Precedential or Non-Precedential: Non-Precedential
Docket No. 06-2438
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"In Re: Rocco " (2007). 2007 Decisions. Paper 184.
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NON PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
No. 06-2438
IN RE: JOSEPH F. ROCCO;
CHRISTINA ROCCO,
Appellants
v.
J.P. MORGAN CHASE BANK as trustee
for the Truman Capital Mortgage Loan Trust
Appeal from the United States Court
for the Western District of Pennsylvania
(D.C. No. 05-cv-00366)
District Judge: Honorable David S. Cercone
Submitted Under Third Circuit LAR 34.1(a)
September 27, 2007
Before: AMBRO, JORDAN and ROTH, Circuit Judges.
(Filed: November 28, 2007)
OPINION OF THE COURT
JORDAN, Circuit Judge
Debtors Joseph and Christina Rocco (the “Roccos”) appeal from the order of the
District Court for the Western District of Pennsylvania affirming the order of the
Bankruptcy Court for the Western District of Pennsylvania, which granted the Motion for
Relief from the Automatic Stay to Proceed with Eviction filed by J.P. Morgan Chase
Bank (“J.P. Morgan”), a creditor of the Roccos. For the reasons that follow, we will
affirm.
I.
The Roccos refinanced the mortgage on their residence in Latrobe, Pennsylvania
on August 3, 2000, and defaulted on that mortgage in the fall of 2003. J.P. Morgan, the
owner of the mortgage at the time of the default, got a foreclosure judgment against the
Roccos in November of 2003. The Roccos filed their initial petition for bankruptcy under
Chapter 13 of the Bankruptcy Code on January 2, 2004 to stop a foreclosure sale
scheduled for January 5, 2004. That petition was dismissed on February 3, 2004, due to
the Roccos’ failure to provide required information. A sheriff’s sale took place in early
March, 2004, at which J.P. Morgan purchased the property for one dollar. The Roccos
did not dispute that, at the time of the foreclosure, they owed J.P. Morgan a total of
approximately $137,490 in principal, interest, escrow, and fees, and that the property was
worth approximately $137,500.1 J.P. Morgan recorded the deed in early April 2004, just
before the Roccos filed their second Chapter 13 petition on April 13, 2004.
1
Before the District Court, the Roccos apparently tried to claim that the property was
worth more than $137,500, but also stated that they had no equity in the property. They
do not make that claim here.
2
The Roccos filed an adversary complaint against J.P. Morgan and others on May
13, 2004, alleging that the sheriff’s sale constituted a preferential and fraudulent transfer
in violation of 11 U.S.C. §§ 547 and 548,2 and alleging that their lender’s conduct at the
time the mortgage was executed violated the Truth-in-Lending Act, 15 U.S.C. § 1601, et
seq., and Pennsylvania’s Unfair Trade Practices Act, 73 P.A.C.S.A. 201-1, et seq., and
constituted fraud and civil conspiracy. On May 18, 2004, J.P. Morgan filed its Motion for
Relief from the Automatic Stay to Proceed with Eviction. The Roccos opposed that
motion, arguing that the sheriff’s sale was collusive, and that the claims they made in
their adversary complaint should prevent the stay from being lifted.
The Bankruptcy Court granted J.P. Morgan’s motion, finding that the Roccos did
not have standing to object to relief from the stay because J.P. Morgan’s purchase of the
property and recording of the deed meant that they no longer had any legal or equitable
interest in the property. The Bankruptcy Court also found that there was cause to lift the
stay, and that J.P. Morgan lacked adequate protection. Furthermore, the Bankruptcy
Court found that the sheriff’s sale was not a preferential transfer. The Bankruptcy Court
determined that the Roccos’ non-bankruptcy claims, including those under the Truth-in-
Lending Act, could have been raised in the state foreclosure proceedings, and thus could
not be raised in bankruptcy to avoid the non-collusive foreclosure sale. As a result, the
Bankruptcy Court found that because the Roccos no longer possessed any interest in the
2
In their brief to the District Court, the Roccos stated that they are no longer pursuing a
claim under 11 U.S.C. § 548.
3
property, they lacked standing to object to relief from the automatic stay, and that cause
existed to lift the stay.
The District Court affirmed the Bankruptcy Court’s decision. The District Court
found that there was cause for lifting the stay, and that J.P. Morgan lacked adequate
protection. The Court also noted that the Roccos’ allegations about irregularities in their
initial mortgage should have been brought and resolved in the state court foreclosure
action, and that the foreclosure sale was not a preferential transfer.
II.
We have jurisdiction over this case under 28 U.S.C. § 158. We exercise plenary
review over the District Court’s determinations, and “[i]n reviewing the bankruptcy
court’s determinations, we exercise the same standard of review as the district court.” In
re Trans World Airlines, Inc., 145 F.3d 124, 131 (3d Cir. 1998). We review the
Bankruptcy Court’s decision to lift the automatic stay for abuse of discretion. In re
Myers, 491 F.3d 120, 128 (3d Cir. 2007) (“Whether to annul the automatic stay is a
decision committed to the bankruptcy court’s discretion, and may be reversed only for
abuse of that discretion.”). “An abuse of discretion arises when the district court's
decision ‘rests upon a clearly erroneous finding of fact, an errant conclusion of law or an
improper application of law to fact.’” Oddi v. Ford Motor Co., 234 F.3d 136, 146 (3d
Cir. 2000). We exercise plenary review over questions of law. Calhoun v. Yamaha
Motor Corp., U.S.A., 350 F.3d 316, 325 (3d Cir. 2003).
4
The Roccos assert that the District Court abused its discretion when it lifted the
automatic stay. They claim that there was no cause to lift the stay because the transfer of
the property to J.P. Morgan at the sheriff’s sale was a preferential transfer, and thus that
the transfer could be avoided. They argue that, even though J.P. Morgan was owed an
amount almost identical to the value of the house, the amount owed should be reduced
because of the allegations in their adversary complaint, including the assertion that their
lender committed Truth-in-Lending Act violations. The Roccos’ arguments are without
merit.
A.
Under 11 U.S.C. § 362(d)(1), the automatic stay can be lifted “for cause, including
the lack of adequate protection of an interest in property of such party in interest[.]”
Here, J.P. Morgan had purchased the property at a sheriff’s sale, and had recorded the
deed to the property. It thus acquired the right to possess the property when the deed was
executed and delivered. See Butler v. Lomas and Nettleton Co., 862 F.2d 1015, 1019 (3d
Cir. 1988) (the right to possession of property passes to a sheriff’s sale purchaser when
the sheriff’s deed is executed and delivered). Despite J.P. Morgan’s right to the property,
the Roccos continue living on the property without making any payments to J.P. Morgan.
The Roccos claim that their adversary proceeding offered J.P. Morgan adequate
protection, because if the Roccos prevailed in that proceeding J.P. Morgan’s interest in
the property would be reduced, the foreclosure sale would be avoided as a preference, and
J.P. Morgan would not be entitled to lift the automatic stay. Even if the Roccos’ lawsuit
5
did provide some protection to J.P. Morgan’s interests,3 however, bankruptcy courts in
this Circuit have held that a lawsuit is too speculative in nature to offer adequate
protection. See In re Turner, 326 B.R. 563, 577-78 (Bankr.W.D. Pa. 2005) (“[L]itigation
is highly speculative. It is uncertain when and at what pace the litigation will proceed and
what the outcome will be.”); In re Ziegler, 88 B.R. 67, 70 (Bankr. E.D. Pa. 1988)
(“Debtor claims that the pending lawsuit adequately protects Hill's interests. We hold that
such a speculative funding source is insufficient to provide adequate protection.”). In
general, and in this specific instance, we agree with that conclusion. Thus, the
Bankruptcy Court did not abuse its discretion in finding that there was cause for lifting
the stay and that the Roccos had not offered adequate protection.
B.
The Roccos next assert that the automatic stay should not have been lifted because
the sheriff’s sale was an avoidable preference. See In re Andrews, 262 B.R. 299, 306
(Bankr. M.D. Pa. 2001) (“[T]he avoidance of the prepetition transfer moots the
Defendant’s request to lift the automatic stay[.]”). A transfer of the debtor’s interest in
property to a creditor is a preference and can be avoided where the transfer was made:
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor before such
transfer was made;
(3) made while the debtor was insolvent;
(4) made--
3
We note that the Roccos’ argument appears to show more how their own interests,
rather than those of J.P. Morgan, are protected by the adversary action.
6
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would
receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by
the provisions of this title.
11 U.S.C. § 547(b).
It is clear here that the first four elements of that legal test are met. Thus, the only
issue is whether J.P. Morgan received more than it would have if the estate were
liquidated and distributed as in a chapter 7 bankruptcy. A debtor asserting that a transfer
to a secured creditor is a preferential transfer will only succeed when the debtor can show
that the debtor has equity in the property such that the creditor was oversecured, and that
the trustee would therefore have sold the property to benefit the debtor’s unsecured
creditors. See In re Rambo, 297 B.R. 418, 433 (Bankr. E.D. Pa. 2003) (A trustee is
instructed “to sell only those secured assets that will generate funds for the benefit of
unsecured creditors.”); In re Union Meeting Partners, 163 B.R. 229, 236-37 (Bankr. E.D.
Pa. 1994) (A debtor asserting a transfer was preferential “cannot succeed if it is proven
that (1) the creditor was fully secured; (2) the transfer was nothing more than a seizure of
the secured creditor’s collateral; or (3) the unsecured creditors would be paid in full in a
Chapter 7 case.”).
Determining “what a trustee would receive in a liquidation ... is fact intensive.”
Rambo, 297 B.R. at 432. The Bankruptcy Court found that the Roccos owed J.P. Morgan
7
approximately $137,490, and that the property was worth approximately $137,500, so
that the Roccos had no equity in the property. In fact, it appears from the record that the
Roccos did not previously dispute those values. Nevertheless, they now argue that they
have a right of recoupment4 that should reduce the amount they owed J.P. Morgan, thus
making the transfer a preference under 11 U.S.C. § 547. Their asserted right of
recoupment is premised on the claims they have asserted in their adversary complaint,
including claims for violations of the Truth-in-Lending Act that allegedly occurred at the
time they executed their mortgage. J.P. Morgan responds that the Truth-in-Lending Act
and other non-bankruptcy claims could have been brought in the foreclosure action, and
are therefore precluded.
We conclude that the Roccos’ arguments are baseless. First, their Truth-in-
Lending Act claim is untimely. Truth-in-Lending Act claims must be brought within one
year, unless they are brought “in an action to collect the debt which was brought more
than one year from the date of the occurrence of the violation as a matter of defense by
recoupment or set-off in such action[.]” 15 U.S.C. § 1640(e). Thus, because their Truth-
in-Lending Act claims were not made within one year of the making of their mortgage,
4
Whether the Roccos claim is for “recoupment,” which is “the recovery or regaining of
something,” Black’s Law Dictionary 1280 (7th ed. 1999), or for “setoff,” which is “a
debtor’s right to reduce the amount of a debt by any sum the creditor owes the debtor,”
Black’s Law Dictionary 1376 (7th ed. 1999), is immaterial in this case, since the relief
that they are actually requesting is to undo the foreclosure sale. Because they
characterize their request for relief as “recoupment,” however, that is how we will refer to
it in this opinion.
8
the Roccos may only assert those claims as a defense to an action to collect the debt. Id.;
Randall, 358 B.R. at 171-72. Here, J.P. Morgan has already foreclosed on the property
and recorded the deed. Because J.P. Morgan’s request to lift the automatic stay is not an
action to collect a debt, the Roccos’ Truth-in-Lending Act claim is untimely.
Furthermore, even if the Truth-in-Lending Act claim were timely, the Roccos’
claims would still be barred under Pennsylvania law. In their adversary complaint, the
Roccos have requested relief under the Truth-in-Lending Act, the Pennsylvania Unfair
Trade Practices Act, and for fraud and civil conspiracy,5 asserting that their claims entitle
them to rescind their mortgage, recoup any amounts paid on the mortgage, and collect
damages. A claim for rescission under the Truth-in-Lending Act can be brought in a
foreclosure action. See In re Soto, 221 B.R. 343, 356 n.29 (Bankr. E.D. Pa. 1998) (“[A]
judgment in Debtor’s favor on the rescission claim would nullify the Bank’s rights and
interests as established by the [foreclosure] Judgment[.]”). Claims for money damages,
including recoupment claims, on the other hand, cannot be brought in a foreclosure
action. See New York Guardian Mortg. Corp. v. Dietzel, 524 A.2d 951, 953 (Pa. Super.
1987) (“[A] set-off for an alleged violation of the Truth-In-Lending Act cannot be
asserted as a counter-claim in a mortgage foreclosure action.”).
5
It is unclear whether the Roccos intend to assert all of these claims here, since their
brief to this Court argues only that they are entitled to relief under the Truth-in-Lending
Act.
9
Regardless of how the Roccos style the relief they are seeking, it is clear that they
could have asserted in the state law foreclosure action their underlying claims for
violations of the Truth-in-Lending Act, the Pennsylvania Unfair Trade Practices Act, and
for fraud. In re Soto, 221 B.R. at 356 n.29; In re Faust, 353 B.R. 94, 100 (Bankr. E.D.
Pa. 2006) (finding that rescission claim under the Pennsylvania Unfair Trade Practices
and Consumer Protection Law was precluded because favorable outcome on that claim
would negate foreclosure judgment); Green Tree Consumer Discount Co. v. Newton, 909
A.2d 811, 814 (Pa. Super. 2006) (“Fraud in the inducement of the mortgage is clearly a
permissible counterclaim under Rule 1148.”). They now attempt to assert those same
claims here, not to recover money damages but to undo the foreclosure judgment and to
return the property to their bankruptcy estate. Under Pennsylvania law, such an action is
barred by the doctrine of res judicata, because it would nullify the foreclosure judgment,
and impair J.P. Morgan’s rights as established in the foreclosure action.6 Del Turco v.
Peoples Home Sav. Ass'n, 478 A.2d 456, 463 (Pa. Super. 1984) (Claims that could have
been brought as counterclaims in a previous action are barred by the doctrine of res
judicata where “[t]he relationship between the counterclaim and the plaintiff’s claim is
6
We do not mean to assert that, in all cases, claims for violations of the Truth-in-
Lending Act or for fraud that could have been brought in a state mortgage foreclosure
proceeding are precluded in bankruptcy. See In re Randall, 358 B.R. 145, 161 (Bankr.
E.D. Pa. 2006) (Allowing a claim for recoupment to adjust “[t]he amount due the
mortgagee ... without affecting the validity of the mortgage itself, nor the right of the
mortgagee to foreclose upon its judgment.”). Here, however, the Roccos are not only
attempting to change the amount due to J.P. Morgan, but to undo the foreclosure and sale
altogether.
10
such that successful prosecution of the second action would nullify the initial judgment or
would impair rights established in the initial action.”). Thus, because the Roccos are
precluded from claiming that they owe J.P. Morgan less than the value of their home, the
transfer was not a preference under 11 U.S.C. § 547 and the automatic stay was properly
lifted.
III.
For the foregoing reasons, the judgment of the District Court will be affirmed.
11