Kuklis, C. v. Wells Fargo Bank Northwest, N.A.

J. A03040/15
NON-PRECEDENTIAL DECISION - SEE SUPERIOR COURT I.O.P. 65.37
CYNTHIA KUKLIS, : IN THE SUPERIOR COURT OF
: PENNSYLVANIA
Appellant :
:
v. :
:
WELLS FARGO BANK NORTHWEST N.A., :
SUCCESSOR IN INTEREST TO :
WACHOVIA NATIONAL BANK, N.A. :
: No. 935 MDA 2014
Appeal from the Order Entered May 1, 2014
In the Court of Common Pleas of Schuylkill County
Civil Division No(s).: S-1631-13
BEFORE: MUNDY, STABILE, and FITZGERALD,* JJ.
MEMORANDUM BY FITZGERALD, J.: FILED APRIL 02, 2015
Appellant/Plaintiff, Cynthia Kuklis, takes this counseled appeal from
the order entered in the Schuylkill County Court of Common Pleas, which (1)
sustained the objections of Appellee/Defendant, Wells Fargo Bank Northwest
N.A., successor in interest to Wachovia National Bank, N.A., and (2)
dismissed Appellant’s complaint alleging misrepresentation under the
Pennsylvania Unfair Trade Practices and Consumer Protection Law
(“UTPCPL”).1 The gist of Appellant’s claim is that when her Chapter 7
*
Former Justice specially assigned to the Superior Court.
1
73 P.S. §§ 201-1 to 201-9.3.
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bankruptcy case discharged her personal liability under the instant
mortgage, it also removed Appellee’s lien on the property. We affirm.
Appellant filed the instant complaint on August 14, 2013. The trial
court summarized the factual averments as follows:
In the complaint, [Appellant] alleges that she was the
owner of real property with the address of 49 Ash Street,
Cressona, PA 17929. On July 29, 2005, [she] executed a
mortgage on the property for $40,400 with Wachovia Bank
and the mortgage was signed and recorded in the Recorder
of Deeds[.]
In 2009, [Appellant] filed [a Chapter 7] bankruptcy in
the Bankruptcy Court for the Middle District of
Pennsylvania. On April 16, 2009, Wachovia sought relief
from the automatic stay for the purpose of foreclosing on
and selling the real estate, which was granted by Order
dated May 5, 2009. On September 9, 2009, [Appellant]
obtained a total discharge of debts from the bankruptcy
court. [Appellant] alleges that during the bankruptcy
proceeding, she did not reaffirm the debt to Wachovia
[and] that Wachovia did not commence the mortgage
foreclosure proceedings during the bankruptcy
proceedings.
Trial Ct. Op., 6/24/14, at 1-2.
Appellant’s complaint further alleged the following. The September 9,
2009 bankruptcy discharge
relieved [her] from any liability to the bank under the
promissory note. In August 2010, Wachovia induced
[Appellant] to enter into a short sale of the property in the
amount of $28,500[,] acknowledging that [Appellant]
would not be personally liable for any shortfall under the
promissory note. [Appellant] alleges that Wachovia
misrepresented that it had a valid lien on the real property
which it used to induce her to enter the sale. [Appellant]
alleges that, based on the misrepresentation, she sold the
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real estate and tendered the proceeds of the sale to the
bank.
Id. at 2. The complaint concluded that Appellee’s actions violated the
UTPCPL.
Appellee filed preliminary objections on March 25, 2014,2 averring
Appellant’s complaint failed to state any claim under UTPCPL. Appellee
maintained that pursuant to the Bankruptcy Code and Johnson v. Home
State Bank, 501 U.S. 78 (1991), “a bankruptcy discharge does not render
a mortgage lien void.” Appellee’s Prelim. Obj., 3/25/14, at ¶ 23. Thus,
Appellee averred, “any representation [to Appellant] that [it] had a valid and
enforceable Mortgage lien against the Property during the short sale
negotiations was actually accurate as a matter of established law and was
not a misrepresentation.” Id. at ¶ 26. Appellant filed an answer. On May
1, 2014, the court entered the underlying order granting Appellee’s
preliminary objections and dismissing Appellant’s complaint. Appellant took
this timely appeal. Her sole claim is that the trial court erred in finding she
failed to plead misrepresentation and thus erred in dismissing her complaint.
For ease of disposition, we first consider the Johnson decision. The
High Court summarized the underlying facts, adding some legal discussion,
2
According to Appellee, “Appellant’s counsel granted [it] an open-ended
extension of time to file Preliminary Objections to the Complaint.” Appellee’s
Prelim. Obj., 3/25/14, at 4 n.5.
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as follows. The bank had instituted foreclosure proceedings against the
petitioner when the
petitioner filed for a liquidation under Chapter 7 of the
Bankruptcy Code. Pursuant to 11 U.S.C. § 727, the
Bankruptcy Court discharged petitioner from personal
liability on his promissory notes to the Bank.
Notwithstanding the discharge, the Bank’s right to
proceed against petitioner in rem survived the
Chapter 7 liquidation. After the Bankruptcy Court lifted
the automatic stay protecting petitioner’s estate, . . . the
Bank reinitiated the foreclosure proceedings.[ ] Ultimately,
the state court entered an in rem judgment of
approximately $200,000 for the Bank.
Johnson, 501 U.S. at 80 (emphasis added).
Before the foreclosure sale occurred, the petitioner filed a Chapter 13
bankruptcy petition. Id. In his Chapter 13, he “listed the Bank’s mortgage
in the farm property as a claim against his estate and proposed” a
repayment schedule. Id. at 81. “Over the Bank’s objection, the Bankruptcy
Court confirmed the Chapter 13 plan.” Id.
The case proceeded to review before the High Court on the question of
“whether a debtor can include a mortgage lien in a Chapter 13 bankruptcy
reorganization plan once the personal obligation secured by the mortgaged
property has been discharged in a Chapter 7 proceeding.” Id. at 80, 81. In
a unanimous decision, the Court stated:
[W]e must first say more about the nature of the
mortgage interest that survives a Chapter 7
liquidation. A mortgage is an interest in real property
that secures a creditor’s right to repayment. But unless
the debtor and creditor have provided otherwise, the
creditor ordinarily is not limited to foreclosure on the
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mortgaged property should the debtor default on his
obligation; rather, the creditor may in addition sue to
establish the debtor’s in personam liability for any
deficiency on the debt and may enforce any judgment
against the debtor’s assets generally. A defaulting debtor
can protect himself from personal liability by obtaining a
discharge in a Chapter 7 liquidation. However, such a
discharge extinguishes only “the personal liability of the
debtor.” [T]he Code provides that a creditor’s right to
foreclose on the mortgage survives or passes
through the bankruptcy.
Id. at 82-83 (citations omitted) (some emphases added). In “concluding
that a mortgage interest that survives the discharge of a debtor’s personal
liability” will be a claim in a subsequent Chapter 13 bankruptcy, the Court
noted, “Even after the debtor’s personal obligations have been extinguished,
the mortgage holder still retains a “right to payment” in the form of its right
to the proceeds from the sale of the debtor’s property.” Id. at 84.
In the instant appeal, Appellant avers the following rationale.
Pennsylvania “follow[s] the lien theory of mortgages,” in which “the
mortgage is but a pledge or security redeemable until foreclosure,” “the
debtor is primarily liable for the obligation and the mortgage is an
accessory,” and “[t]itle to the mortgaged property remains in the
mortgagor.” Appellant’s Brief at 8. “Under the title theory of mortgages,”
on the other hand,3
the mortgagor is the owner of the property as against the
world, save for the mortgagee, who as between the
3
Appellant does not set forth any citation to legal authority in her discussion
of the lien and title theories of mortgages. See Appellant’s Brief at 7-8.
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mortgagor and mortgagee is the owner. Title to the
property is conveyed to the mortgagee with a condition
subsequent, that upon payment of the underlying debt, the
mortgagee conveys title back to the mortgagor.
Id. Appellee asserts “the language” in Johnson is “clear:”
In those twenty eight states in which the lien theory of
mortgages is followed, the mortgagee may pursue its
rights in rem after a Chapter 7 discharge, as the title
holder of the property. [Johnson] did not establish a new
theory of mortgage rights, [it] simply stated that the
existing rights, as they may be, were unaffected by the
Bankruptcy Court in those jurisdictions in which the lien
theory of mortgages does not apply. Accordingly,
[Appellee] may have no reliance upon [Johnson] to
establish enforceable rights under the mortgage herein.
Id. at 8-9 (emphasis added).
Appellee then alleges the following. “Judicial foreclosure in
Pennsylvania requires . . . the mortgagee [to] prove that it holds the note.”
Id. In the instant case, however, the note given by Appellant “was
discharged by the United States Bankruptcy Court, and under federal law,
may not be collected.” Id. at 9-10. Appellant cites Section 3310 of the
Pennsylvania Uniform Commercial Code4 in stating “the discharge of the
obligation under the promissory note discharges the entire obligation,” and
in this case, “[o]nce the obligation under the promissory note was
extinguished . . . by way of [bankruptcy] discharge, the rights of the
lienholder are simultaneously discharged.” Id. at 10-11. Appellant further
alleges that once “[t]he Bankruptcy Court discharge[ ] eliminated the
4
13 Pa.C.S. § 3310.
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obligation,” Appellee’s “mortgage secured payments of nothing” and
“became little more than a cloud on the title to [her] property,” and Appellee
“did not have enforceable rights under the mortgage.” Id. at 11.
Appellant concludes that when Appellee “misrepresented to [her] that
it had a valid and enforceable lien against [the] property by way of the
mortgage, and induced [her] to sell the property by way of a short sale[, it]
engaged in fraudulent and deceptive conduct which created a likelihood of
confusion or of misunderstanding on [Appellant’s] part” in violation of the
UTPCPL. Id. Thus, Appellant argues, her complaint pleaded facts for which
the law permits recovery. We find no relief is due.
We note the relevant standard of review:
When an appeal arises from an order sustaining
preliminary objections in the nature of a demurrer, which
results in the dismissal of a complaint, the Superior Court’s
scope of review is plenary.
[We] appl[y] the same standard employed by the
trial court: all material facts set forth in the
complaint as well as all inferences reasonably
deducible therefrom are admitted as true for the
purposes of review.
We need not consider the pleader’s legal conclusions,
unwarranted inferences from facts, opinions, or
argumentative allegations.
Betts Indus., Inc. v. Heelan, 33 A.3d 1262, 1264-65 (Pa. Super. 2011)
(citations omitted).
“A demurrer tests the sufficiency of challenged pleadings. Fact-based
defenses, even those which might ultimately inure to the defendant’s
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benefit, are thus irrelevant on demurrer.” Id. at 1265 (citation omitted).
The question presented by a demurrer is whether, on the
facts averred, the law says with certainty that no recovery
is possible. Where affirmance of the trial court’s order
sustaining preliminary objections would result in the
dismissal of an action, we may do so only when the case is
clear and free from doubt.
To be clear and free from doubt that dismissal is
appropriate, it must appear with certainty that the
law would not permit recovery by the plaintiff upon
the facts averred. Any doubt should be resolved by
a refusal to sustain the objections. We review the
trial court’s decision for an abuse of discretion or an
error of law.
* * *
In the context of reviewing preliminary objections in the
nature of a demurrer, an abuse of discretion is not merely
an error of judgment. Rather, the trial court commits an
“abuse of discretion” when its judgment is manifestly
unreasonable, or when the law is not applied, or if the
record shows that the decision resulted from partiality,
prejudice, bias or ill will.
Id. (citations omitted).
In Pines v. Farrell, 848 A.2d 94 (Pa. 2004), the Pennsylvania
Supreme Court considered the lien and title theories of mortgages with
respect to a statute pertaining to filing fees. Id. at 99-100. Specifically, the
Court reviewed the propriety of the Court Administrator of Pennsylvania’s
interpretation of the term “property transfer,” as set forth in a statute of the
Judicial Code, to include mortgage assignments, mortgage releases, and
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mortgager satisfactions.5 Id. at 95. The Court cited “ample” Pennsylvania
case authority supporting both theories. Id. at 99 (“[T]here is ample
caselaw to support the position that mortgages are merely security interests
for the payment of money, performance or other collateral[;]” “On the other
hand, the title theory remains viable.”). In resolving the question
presented, however, the Supreme Court held:
[F]or purposes of determining whether mortgage
assignments, mortgage satisfactions and mortgage
releases are property transfers, we begin with the
premise that a mortgage conveys the property subject to
the mortgage to the mortgagee until the obligations under
the mortgage are fulfilled.[ ]
____________________________
[]
As our conclusion regarding the treatment of a mortgage
as a conveyance is limited to the recording acts and
Section 3733(a.1)(1)(v), it is unnecessary to address
the [intervenor’s6] fear of the adverse consequences of
applying the title theory on mortgages in bankruptcy
and foreclosure matters.
Id. at 100 (emphases added).
5
The statute at issue was 42 Pa.C.S. § 3733(a.1)(1)(v), which allows the
recorders of deeds, clerks of court, and similar officials to collect an
additional $10 “for each filing of a deed, mortgage or property transfer.”
Pines, 848 A.2d at 96. The Court Administrator promulgated financial
regulations which, inter alia, defined the term to include mortgages. Id.
The Chester County Recorder of Deeds filed a declaratory judgment action,
averring the Court Administrator exceeded his authority and that it was
“within the discretion of individual recorders of deeds to determine what the
General Assembly meant by the term ‘property transfer’ and that the
Administrator’s definition [was] invalid.” Id. at 97. The Supreme Court held
the Court Administrator did not exceed his authority, and then considered
the issue we set forth above. Id. at 98.
6
The City of Philadelphia filed an intervenor brief in the Pines case. Id. at
99.
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In the case sub judice, the gist of Appellant’s argument is that
Pennsylvania employs the lien theory of mortgages, but Johnson applies
only in cases with a title theory of mortgages. Furthermore, the logical
conclusion of Appellant’s rationale, although she does not articulate it, is
that a Chapter 7 discharge not only relieves a debtor from liability under a
mortgage or property-secured promissory note, but also grants her the
property free and clear of the mortgagee’s lien on the property.
Our review of Johnson reveals no mention of the two theories or any
discussion that could be interpreted as applying its holding to only one or the
other theory. Instead, Johnson clearly stated the following.
“Notwithstanding the discharge, the Bank’s right to proceed against
petitioner in rem survived the Chapter 7 liquidation.” Id. at 80. A Chapter
7 “discharge extinguishes only ‘the personal liability of the debtor” and “a
creditor’s right to foreclose on the mortgage survives or passes through the
bankruptcy.” Id. at 83. “Even after the debtor’s personal obligations have
been extinguished, the mortgage holder still retains a ‘right to payment’ in
the form of its right to the proceeds from the sale of the debtor’s property.”
Id. at 84. Accordingly, we reject Appellant’s interpretation of Johnson as
applying only to jurisdictions operating under the title theory.
Furthermore, we have not discovered any Pennsylvania decisional
authority supporting Appellant’s rationale. Our Supreme Court cited multiple
court decisions supporting the application of both the title and lien theory of
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mortgages in Pennsylvania, and in Pines, specifically stated it was not
addressing the application of the title theory in bankruptcy matters. Pines,
848 A.2d at 99-100 & n.7.
In light of the foregoing, we hold the trial court properly applied
Johnson to find Appellant failed to state a claim upon which relief was due.
Thus, we affirm the order granting Appellee’s preliminary objections and
dismissing Appellant’s complaint.
Order affirmed.
Judgment Entered.
Joseph D. Seletyn, Esq.
Prothonotary
Date: 4/2/2015
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