Professional Documents
Culture Documents
United States Court of Appeals, Third Circuit
United States Court of Appeals, Third Circuit
2d 576
This case raises the issue of whether the foreclosure of residential property
without either giving the required notice of intention to foreclose until a few
days before the sheriff's sale or timely serving the foreclosure complaint
constitutes injuries cognizable under the Pennsylvania "unfair or deceptive
practices act" (UDAP) or under the Pennsylvania Loan Interest and Protection
Law (Act 6). Both the district court and the bankruptcy court concluded that the
UDAP did not extend to such injuries. Neither court, however, addressed the
claim under Act 6. The plaintiff, Johnnie Mae Smith, appealed, and we reverse.
I.
2
Because of health reasons, Smith joined her family in Germany. Prior to her
departure she had arranged for her property to be managed by a third-party
whose duties included collection of the rents and payment of the mortgage from
those rents. Her agent, however, failed to collect the rents and to pay the
mortgage. As a result, Smith became delinquent on the mortgage on which she
had made monthly payments for approximately seventeen years.
On June 19, 1980, Smith sent Fidelity a notarized letter stating that she was
residing in Germany for an indefinite period of time and asking Fidelity to send
her an accounting there of the payments due. On July 1, 1980, Fidelity sent the
requested information by certified mail to Smith in Germany. At that time, the
sum needed to satisfy the delinquency amounted to $1,095.79.
Smith did not learn of the foreclosure proceedings until three weeks after entry
of the default judgment. She immediately communicated with Fidelity and
learned of the impending sheriff's sale of the property on October 6, 1980.
Smith requested that the sale be postponed and Fidelity complied by
10
On October 13, 1981, Smith filed a voluntary petition under Chapter 13 of the
Bankruptcy Code. Shortly thereafter, she commenced an adversary proceeding
against Buffalo, Fidelity, Commercial, and the bankruptcy trustee,2 requesting
the bankruptcy court to set aside the foreclosure of the property. Commercial
settled out of the litigation by selling the property back to Smith for $8,000, of
which $7,000 was to be paid pursuant to a ten year mortgage at the rate of 14
percent per annum. After settling with Commercial, Smith sought monetary
damages against Buffalo and Fidelity for violations of (1) the UDAP, and (2)
Act 6.
11
The bankruptcy court heard plaintiff's case regarding the UDAP and Act 6
claims on June 17, 1985. Prior to the court's disposition of the case, Smith
converted the Chapter 13 proceeding into a Chapter 7 case, and received a
Chapter 7 discharge from the bankruptcy court in December 1985. On April 11,
1986, the court entered an order denying Smith any relief under the UDAP or
Act 6. Smith filed a timely appeal to the United States District Court for the
Eastern District of Pennsylvania which entered an order on May 23, 1988,
affirming the judgment of the bankruptcy court. 87 B.R. 329. The plaintiff
timely appealed to this court.
12
The only claims remaining before this court are the claims arising under
Pennsylvania law which Smith contends are properly before this court as
related to the original bankruptcy claim under 28 U.S.C.A. Sec. 157 (West
Supp.1988).3 Although the bankruptcy court found that Fidelity failed to make
proper service of the foreclosure complaint upon Smith, it concluded, without
discussion, that plaintiff had no action for Fidelity's conduct under the UDAP.
59 B.R. 298, 301 (Bankr.E.D.Pa.1986). The district court, on appeal, agreed
with the bankruptcy court that improper service of the complaint did not
constitute an injury cognizable under the UDAP, concluding that "[e]ven if the
The threshold issue is whether the federal courts properly continued to exercise
jurisdiction over these proceedings. Fidelity contends that the discharge of the
plaintiff in the underlying bankruptcy proceeding, upon which jurisdiction over
these claims originally depended, deprived the bankruptcy court of jurisdiction
over the related claims.4 As appellees correctly note, for an action to be related
to a bankruptcy case, its outcome must potentially have some effect on the
bankruptcy estate, such as altering debtor's rights, liabilities, options, or
freedom of action, or otherwise have an impact upon the handling and
administration of the bankrupt estate. See Pacor, Inc. v. Higgins, 743 F.2d 984,
994 (3d Cir.1984). Appellees fail, however, to distinguish between the
determination of the existence of jurisdiction at the outset of these proceedings
and the determination of whether "related" claims should be dismissed with the
dismissal of the bankruptcy case or the discharge of the debtor.
14
15
The few bankruptcy courts which have addressed this issue have held that the
general rule that dismissal of a bankruptcy case terminates all adversary
proceedings filed in that case is not without exception. See, e.g., Stardust Inn,
70 B.R. at 891; In re Pocklington, 21 B.R. 199, 201 (Bankr.S.D.Cal.1982).
Drawing upon an analogy to the disposition of ancillary and pendent claims,
the courts have held that they may consider a number of factors to determine
whether jurisdiction should be retained. These factors include: (1) judicial
economy; (2) fairness and convenience to the litigants; and (3) the degree of
difficulty of the related legal issues involved. See Stardust Inn, 70 B.R. at 891.
16
Here, the existence of two of these factors persuades us that the bankruptcy
court properly retained jurisdiction over the related claims. First, the court's
interest in judicial economy argues in favor of the retention of jurisdiction. The
core proceedings had been before the bankruptcy court for over four years and
Smith raises two issues on appeal. First, whether the invalid service of process,
resulting in a default judgment, constitutes an unfair or deceptive practice or act
in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection
Law, 73 Pa.Stat.Ann. Sec. 201-1 et seq. (Purdon Supp.1988) (UDAP). Second,
whether the defendants violated Act 6, 41 Pa.Stat.Ann. Secs. 403, 504 (Purdon
Supp.1988), by failing to send Smith the required thirty day pre-foreclosure
notice advising her, inter alia, of the lender's intention to institute foreclosure
suit if the default is not cured. Because both these issues involve determinations
of matters of law, our review is plenary. We turn first to the UDAP.
A.
18
The UDAP protects consumers of goods and services from unfair or deceptive
trade practices or acts. The objective of the UDAP and other similar state and
federal statutes is to "place on more equal terms seller and consumer."
Commonwealth v. Monumental Prop., Inc., 459 Pa. 450, 458, 329 A.2d 812,
816 (1974). Specifically, section 3 of the UDAP provides that "[u]nfair
methods of competition and unfair or deceptive acts or practices in the conduct
of any trade or commerce as defined by ... section 2 of th[e] act and regulations
promulgated under section 3.1 of this act are hereby declared unlawful." 73
Pa.Stat.Ann. Sec. 201-3. Section 2 of the UDAP enumerates seventeen specific
acts which constitute unfair or deceptive acts or practices. Smith contends that
Fidelity's conduct falls within the catch-all provision which makes unlawful "
[e]ngaging in any other fraudulent conduct which creates a likelihood of
confusion or of misunderstanding." 73 Pa.Stat.Ann. Sec. 201-2(4)(xvii).
19
Smith must overcome three hurdles in order to prevail under the UDAP. First,
she must establish that mortgage transactions are a trade or commerce within
the meaning of section 3 of the UDAP. Second, she must demonstrate that the
UDAP grants a private cause of action for injuries sustained from mortgage
transactions and activities appurtenant thereto. Third, she must establish that the
invalid service of process complained of here is either unfair or deceptive
because it is fraudulent conduct creating a likelihood of confusion or
misunderstanding within the meaning of sections 2 and 3 of the UDAP.
1. Trade or Commerce.
20
21
22
Statutes prohibiting unfair trade practices and acts have routinely been
interpreted to be flexible and adaptable to respond to human inventiveness. In
construing section 5 of the Federal Trade Commission Act relating to unfair
trade practices, for example,5 the Supreme Court determined that the Act was
to be both broad in sweep and flexible in application. The Court's conclusion
rested primarily upon the House Conference report which admonished that:
23is impossible to frame definitions which embrace all unfair practices. There is no
It
limit to human inventiveness in this field. Even if all known unfair practices were
specifically defined and prohibited, it would be at once necessary to begin over
again. If Congress were to adopt the method of definition, it would undertake an
endless task.
24
FTC v. Sperry & Hutchinson Co., 405 U.S. 233, 240, 92 S.Ct. 898, 903, 31
L.Ed.2d 170 (1972) (quoting H.R.Conf.Rep. No. 1142, 63d Cong., 2d Sess. 19
(1914)).
25
Courts generally have adopted a similar "broad and flexible" approach with
respect to the UDAP. See, e.g., In re Jungkurth, 74 B.R. 323, 324
(Bankr.E.D.Pa.1987); In re Russell, 72 B.R. 855, 871 (Bankr.E.D.Pa.1987);
Monumental Properties, 459 Pa. at 465-66, 329 A.2d at 819-20. Noting that not
only did the legislature fail to define "unfair or deceptive" by reference to
specific practices or acts but that it also specifically excluded particular acts
and practices from the Act's scope, the courts understandably have been
reluctant to expand the scope of exclusions absent express congressional
authorization. Instead, relying upon the all-inclusive language of the UDAP,
the courts have applied the proscriptions of the UDAP to a variety of acts and
practices. See, e.g., Culbreth v. Lawrence J. Miller, Inc., 328 Pa.Super. 374,
392, 477 A.2d 491, 501 (1984) (insurance agreements); Pennsylvania Retailers'
Ass'n v. Lazin, 57 Pa.Cmwlth. 232, 426 A.2d 712, 718 (1981) (debt collection);
Monumental Properties, 459 Pa. at 466, 329 A.2d at 820 (leasing of
residences).
26
Moreover, the practice of mortgages and mortgage financing has not escaped
application of the UDAP. See Andrews, 78 B.R. at 82; Jungkurth, 74 B.R. at
335; Russell, 72 B.R. at 872. As the court in Andrews concluded, " 'the
business of mortgage lenders is the sale of a service' within the scope of the
UDAP." 78 B.R. at 82. Certainly, the mortgage transaction has all the earmarkings of a sale of a service within the scope of the UDAP:
Johnson v. Phoenix Mutual Life Insurance, 300 N.C. 247, 266 S.E.2d 610, 620
(1980) (interpreting language similar to the UDAP).
29
We next turn to the issue of whether a consumer's private cause of action under
section 9.1 extends only to those acts or practices which have induced the
consumer to enter into the mortgage agreement. Fidelity argues that Smith has
failed to state a cause of action under section 9.2, contending that the section is
not intended to encompass mortgage transactions. Fidelity further argues that
even if mortgages fall within section 9.2, the conduct complained of, namely,
invalid service of process, did not induce Smith to enter into the mortgage
agreement and therefore is beyond the scope of the section. We hold that the
scope of section 9.2 is not limited to the initial mortgage agreement only, but
includes transactions and dealings between the parties during the life of the
mortgage.
32
Section 9.2 provides that "any person who purchases or leases goods or services
primarily for personal, family or household purposes and thereby suffers any
ascertainable loss of money or property, real or personal, as a result of the use
or employment by any person of a method, act or practice declared unlawful by
section 3 of [the UDAP] may bring a private action to recover [damages]...." 73
Pa.Stat.Ann. Sec. 201-9.2 (emphasis added). In Mason v. National Central
Bank, 19 D & C.3d 229 (Chester County Ct.C.P.1980), the plaintiff alleged that
the defendant bank induced her by deception into surrendering possession of
her vehicle in which the bank held a security interest. Relying entirely upon the
language that plaintiff must "thereby" suffer a loss, the court concluded that, in
order to state a cause of action, "the loss must follow the purchase, and ... the
purchase itself must have been due to a deceptive practice." 19 D. & C.3d at
232. Because the alleged deceptive conduct occurred months after the purchase,
the court held that plaintiff failed to state a cause of action under section 9.2.
Id.; see also DiTeodoro v. J.G. Durand Int'l, 566 F.Supp. 273, 275
(E.D.Pa.1983) (adopting conclusion of Mason).
33
34
Instead, the section appears merely to provide a private remedy for all
violations of section 3 which might otherwise escape remedy because they do
not affect the public interest and would not therefore be subject to enforcement
by the Attorney General under section 4 of the UDAP. A contrary conclusion
would insulate all kinds of practices from the UDAP, such as debt collection,
which occur after entering an agreement and which were not a basis for the
original agreement. The adoption of such a restrictive approach, moreover,
would undermine the legislative goal of eliminating a broad range of unfair and
deceptive practices attributable to the unequal bargaining position existing
between consumers and sellers in the marketplace. Therefore, we reject the
more narrow interpretation that the only practices permitting a private right of
action under the UDAP are those which induce the consumer to enter into the
initial agreement with the seller. We conclude that, given the other restrictions
discussed, section 9.2 is intended to be coextensive with section 3 of the UDAP.
3.
35Unfair or deceptive conduct.
36
Having concluded that Smith may properly allege a private cause of action
under section 9.2, we next turn to the issue of whether Fidelity's conduct
constitutes an unfair or deceptive act under the UDAP.
37
38
According to Smith, Fidelity's conduct here included (1) the improper service
of the foreclosure action, (2) the failure to give her at least thirty days' notice of
intention to commence foreclosure proceedings, (3) the creation of unnecessary
costs and expenses to cure default, and (4) the refusal to accept partial payment
in violation of federal regulations. The district court, concluding that Smith
failed to state a cause of action, found that (1) the improper service of process,6
and the failure to give notice of intention to foreclose, even if material
omissions, were not "deceptive, misleading, or fraudulent" because the thirtyday postponement of the foreclosure sale cured any damage to Smith; (2) even
if Fidelity improperly insisted on payment of fees and costs, there was no
recovery under UDAP because the conduct did not involve any
misrepresentations or omissions upon which Smith relied; and (3) Fidelity had
no obligation to accept partial payment under the HUD regulations because
plaintiff tendered such payment after the filing of the foreclosure complaint.
The district court held that the failure to make proper service of the foreclosure
complaint was not actionable under the UDAP because Fidelity's actions were
neither deceptive, misleading, or fraudulent. The court erred, however, in its
failure to focus upon Fidelity's earlier actions which misled or lulled Smith into
a false sense of reliance, ultimately permitting Fidelity to obtain a default
judgment and to foreclose on the property.
40
41
42
Although the failure properly to serve the foreclosure complaint may not by
itself be an unfair practice, here we have considerably more. Fidelity's conduct
effectively deprived Smith both of an opportunity to cure the default before
imposing additional and unnecessary costs and expenses on her, and of her
opportunity to defend in court. We hold that such conduct is "unfair" in the
most basic sense of the word and fraudulent within the meaning of the UDAP.
43
44
Here, Smith also may have selected a more favorable resolution of the dispute
than suffer foreclosure of the mortgage when the debt had almost been
liquidated, had she received proper notice of the intended proceedings. For
example, prior notice may have enabled Smith to work out a settlement with
Fidelity, or to make partial payment, or Smith may have chosen to sell the
property herself. Moreover, if Smith had received notice prior to the initial
filing of the complaint, as required by 41 Pa.Stat.Ann. Sec. 403, 7 her options
potentially would have been even greater. For example, as the district court
implicitly recognized, at that stage the mortgagee would not have incurred
substantial attorneys' fees and costs so that Smith's initial offer to pay the debt
would have been sufficient to cover the mortgage deficiency. See In re
Schwartz, 68 B.R. 376, 378 (Bankr.E.D.Pa.1986) (41 Pa.Stat.Ann. Sec. 406
prohibits mortgagee from recovering attorneys' fees and costs incurred prior to
or during the thirty-day notice provided in 41 Pa.Stat.Ann. Sec. 403).
45
Even if her offer had still been insufficient, it is arguable that Fidelity would
have been obligated to accept partial payment in accordance with the internal
regulations of the United States Department of Housing and Urban
Development (HUD), assuming such an offer was made prior to the filing of
the complaint.8 As the district court noted, however, once foreclosure
proceedings have begun, the lender is no longer obligated to accept such partial
payments.
46
B.
47
We now turn to the issue of whether Smith has stated a cause of action under
Act 6, 41 Pa.Stat.Ann. Sec. 504 (Purdon Supp.1988). That section provides
that:
48 person affected by a violation of the act shall have the substantive right to bring
Any
an action on behalf of himself individually for damages by reason of such conduct or
violation, together with costs including reasonable attorney's fees and such other
relief to which such person may be entitled under law.
49
As discussed, Act 6 specifically requires that "at least thirty days in advance" of
the commencement of residential mortgage foreclosure, the mortgage lender
shall give the mortgage debtor notice of such intention. The Pennsylvania
Superior Court has held that such notice is mandatory. General Electric Credit
Corp. v. Slawek, 269 Pa.Super. 171, 176, 409 A.2d 420, 422 (1979). Such
notice must, moreover, be sent to the mortgage debtor's last known address if it
is different than the address of the residential property subject to the mortgage.
41 Pa.Stat.Ann. Sec. 403(a)-(b). Failure to comply with this mandatory
provision, as well as failure to make a good-faith effort to ascertain the current
address of the mortgage debtor violates Act 6. See In re Sharp, 24 B.R. 817,
821 (Bankr.E.D.Pa.1982) (foreclosure set aside where lender failed to ascertain
last known address of debtor); see also Main Line Federal Savings & Loan
Ass'n. v. Joyce, 632 F.Supp. 9, 10 (E.D.Pa.1986) (proper notice under section
403 is jurisdictional prerequisite for foreclosure action).
50
Here, there is no doubt that Fidelity heedlessly violated Act 6. Its own files
definitely contained information that Smith was not residing at the property.
Moreover, Fidelity's correspondence to Smith in Germany recognized that it
knew that Smith's current address was in Germany. Therefore, because its
failure to send notice to Smith in Germany at her last known address at least
thirty days prior to instituting the foreclosure proceedings constituted a
violation of Act 6, Smith has a cause of action for damages under section 504 of
that Act.9
IV.
51
Accordingly, the judgment of the district court will be reversed and the case
remanded for further proceedings consistent with this opinion. Costs taxed to
the Buffalo Savings Bank and Fidelity Bond & Mortgage Company, appellees.
Fidelity contends that the courts' findings that Fidelity knew, at the time
process was served, that Smith resided in Germany and not at the property was
clearly erroneous. However, Fidelity's own correspondence to Smith in
Germany immediately prior to the service of process belies the validity of its
contention. The courts' findings on this point, therefore, are not clearly
erroneous
When the complaint was originally filed, plaintiff claimed jurisdiction under 28
U.S.C. Sec. 1471 (1982) which provided that the bankruptcy courts and the
district courts could assume jurisdiction over "all civil proceedings arising
under title 11 or arising in or related to cases under title 11." Section 1471 has
since been repealed and replaced by 28 U.S.C.A. Secs. 157, 1334 (West
Supp.1988), governing jurisdiction in the bankruptcy and district courts,
respectively. The pertinent language of section 1471 has been, however,
retained in toto
Fidelity admitted in its answers to the original and amended complaints that
plaintiff properly invoked jurisdiction pursuant to 28 U.S.C. Sec. 1471, now 28
U.S.C.A. Secs. 157 and 1334. Presumably, Fidelity does not now contend that
the state law claims raised by the appellant would not be related to the now
discharged bankruptcy claims. The only contention is that this court must
decline to decide those state law claims because the core federal proceedings
are not also before us
Because of the strong similarity in language and purpose between the UDAP
and both the FTCA and Lanham Act, the courts frequently look to these federal
statutes for guidance in interpreting the UDAP. See In re Andrews, 78 B.R. 78,
82 (E.D.Pa.1987); Monumental Properties, 459 Pa. at 462, 329 A.2d at 818
Both the bankruptcy court and district court concluded, and we agree, that the
In her pleadings and briefs, Smith did not ask for relief under Act 6 itself, but
instead argued that Fidelity's violation of Act 6 entitled her to relief under the
UDAP. However, although the claim for Act 6 relief was not raised in her
pleadings, we can treat the pleadings as amended to conform with the evidence
adduced at trial. See Nanavati v. Burdette Tomlin Memorial Hospital, 857 F.2d
96, 104 (3d Cir.1988)