Opinion
NO. 1:03-cv-01485-DFH-VSS
May 13, 2004
ENTRY ON U.S. BANK'S MOTION TO DISMISS
Defendant U.S. Bank, N.A. has moved to dismiss all claims against it for failure to state a claim upon which relief can be granted. For the reasons explained below, the motion is denied.
Background
Plaintiffs Arthur G. Meriweather and Gracie Meriweather have sued attorney Septtimous Taylor and U.S. Bank, N.A. on claims arising from an effort to enforce a promissory note and residential mortgage after the Meriweathers fell behind and defaulted. Plaintiffs allege that attorney Taylor violated the federal Fair Debt Collection Practices Act, 15 U.S.C. § 1692 et seq., in several respects. Plaintiffs also allege state law claims against U.S. Bank for consumer fraud under Ind. Code § 24-5-0.5-1 et seq., for statutory deception under Ind. Code § 34-24-3-1, and under the common law for money had and received contrary to the terms of the parties' contract. The court has jurisdiction over the FDCPA claims pursuant to 28 U.S.C. § 1331 and 1337. Because plaintiffs' state law claims against U.S. Bank arise from the same transaction — the joint effort by U.S. Bank and its attorney Taylor to enforce the note and mortgage — the court has supplemental jurisdiction over the state law claims against U.S. Bank pursuant to 28 U.S.C. § 1367(a).
In considering a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, the court must assume the truth of all well-pleaded allegations in the complaint. The court may grant the motion to dismiss only if it is clear that plaintiffs would not be entitled to relief under any set of facts that would be consistent with the allegations in the complaint. Swierkiewicz v. Sorema N.A., 534 U.S. 506, 514 (2002); Hishon v. King Spalding, 467 U.S. 69 73 (1984); Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
In considering the motion to dismiss, the court may consider the copy of the relevant mortgage attached to U.S. Bank's motion to dismiss. Plaintiffs attached an incomplete copy to their complaint, and the document is of course central to the complaint. See Fed.R.Civ.P. 10(c); Rosenblum v. Travelbyus.com Ltd., 299 F.3d 657, 661 (7th Cir. 2002).
Plaintiffs' Allegations
In 1999 the Meriweathers executed a mortgage that secured a note on a loan used to purchase their residence in Indianapolis. Defendant U.S. Bank eventually became the holder of the note and mortgage. At some time before December 1, 2002, the Meriweathers defaulted on their payments due under the note. The Meriweathers later tendered a partial payment on their back payments.
On February 4, 2003, U.S. Bank sent a letter to the Meriweathers that returned their partial payment and demanded payment in full. The letter read in relevant part, with emphasis in the original:
Enclosed please find return of check number 1330 in the amount of $1,000.00 tendered as partial payment of mortgage deficiency. Unfortunately, your mortgage account is delinquent and a default declared with foreclosure proceedings; however, your mortgage account may be reinstated and the foreclosure proceedings terminated upon the immediate payment of all arrearage, court costs and foreclosure fees incurred. In this regard, payment of the following amounts, in full, on or before February 15, 2003, will terminate the foreclosure proceedings and allow reinstatement of the mortgage account:
Principal, interest, late charges and escrow advances $5,299.50
Foreclosure fees and court costs 1,892.00
Total payment for termination of U.S. Bank's foreclosure action $7,191.50
In the event you desire reinstatement of the mortgage account and termination of foreclosure proceeding, please comply with the above requirements on or before February 15, 2003. Please note that the payment must be by cashier's check or certified bank draft, made payable to U.S. Bank, NA, and received by our Attorney, Septtimous Taylor, 4830 Towne Square Court, Owensboro, KY 42301, prior to the above referenced date. Finally, further note that although the mortgage account is reinstated as of February 15, 2003, the March, 2003, payment will be due and payable on March 1, 2003.
Although the letter refers to "the foreclosure proceeding," as of February 4, 2003, U.S. Bank had not filed a foreclosure action, nor had it incurred court costs in any foreclosure proceeding against the Meriweathers.
To charge the Meriweathers for attorney fees and court costs, U.S. Bank relies upon the following provisions of the mortgage:
10. Reinstatement. Borrower has a right to be reinstated if Lender has required immediate payment in full because of Borrower's failure to pay an amount due under the Note or this Security Instrument. This right applies even after foreclosure proceedings are instituted. To reinstate the Security Instrument, Borrower shall tender in a lump sum all amounts required to bring Borrower's account current including, to the extent they are obligations of Borrower under this Security Instrument, foreclosure costs and reasonable and customary attorneys' fees and expenses properly associated with the foreclosure proceeding. * * *
* * *
18. Foreclosure Procedure. If Lender requires immediate payment in full under paragraph 9, Lender may foreclose this Security Instrument by judicial proceeding. Lender shall be entitled to collect all expenses incurred in pursuing the remedies provided in this paragraph 18, including, but not limited to, reasonable attorneys' fees and costs of title evidence. * * *
On February 12, 2003, the Meriweathers delivered a certified check to U.S. Bank for the entire sum demanded, $7,191.50, which included the $1,892.00 that U.S. Bank had demanded for attorney fees and court costs.
On February 26, 2003, attorney Taylor filed in a state court a complaint by U.S. Bank against the Meriweathers to foreclose on the mortgage. The complaint included in the prayer for relief a claim for $1,500.00 in attorney fees plus unspecified court costs. The Meriweathers allege on information and belief in this action that Taylor "is actually paid less than $1,500 to prosecute an average foreclosure action in Court."
The pleadings indicate disagreement over some basic facts, such as the date that the foreclosure proceeding was filed in state court. U.S. Bank's complaint is file-stamped February 26, 2003, but shows signatures dated February 12, 2003. On a motion to dismiss, of course, the court must assume that plaintiffs' version is correct.
Plaintiffs' Claims against U.S. Bank
Plaintiffs' claims against U.S. Bank are built on the premise that the mortgage did not authorize U.S. Bank to charge them for attorney fees and court costs before a foreclosure proceeding was actually filed in court. U.S. Bank contends that the terms of the mortgage permitted it to impose such charges even before filing a foreclosure proceeding in court. The issue is at bottom one of contract interpretation.
Paragraph 10 of the mortgage seems to assume a judicial proceeding has been filed. The paragraph refers to a right to reinstatement even after foreclosure proceedings are instituted, and it refers to "foreclosure costs and reasonable attorneys' fees and expenses properly associated with the foreclosure proceeding." If there is no foreclosure proceeding, there is nothing with which to associate the attorney fees and court costs.
Paragraph 18 of the mortgage also seems to assume a judicial proceeding has been filed. There certainly is no clear indication of an intent to authorize a debt for attorney fees when no suit is filed.
Plaintiffs have suggested that such an interpretation of the mortgage might render it unconscionable. The court does not address that possibility here.
To support its interpretation of the mortgage, U.S. Bank cites Hosford v. Johnson, 74 Ind. 479, 481 (1881). That case held that after a foreclosure action had been filed and concluded with a sheriffs sale, the cost of redeeming the property included all debts secured by the mortgage, including the attorney fees incurred in the actual lawsuit. The decision offers no direct support for the bank's position here. In fact, additional language in Hosford indicates that no obligation to pay attorney fees even accrued until the foreclosure proceeding was filed:
Whenever the senior mortgagee instituted an action, to recover the debt secured by the mortgage, whether such action were upon the notes alone, or upon the notes and mortgage for a foreclosure, the right to recover the attorney's fees accrued and became a part of the mortgage debt, and for this reason we hold that the junior mortgagees were bound to include the amount of such fees in their offer to redeem.74 Ind. at 482-83 (emphasis added). The question presented by the Meriweathers' case was not presented in Hosford, but this dictum is at least consistent with the theory of their case against U.S. Bank.
The bank also cites Warner v. Webber Apartments, Inc., 400 N.E.2d 1180, 1182 (Ind.App. 1980), in which the appellate court affirmed an award of attorney fees incurred in a collection action that did not involve actual foreclosure. The court held that the mortgage included a personal obligation to pay attorney fees incurred in the collection proceeding. There was no indication in the opinion, however, that a fee award would have been proper if the matter had been resolved before suit had even been filed.
The bank also misunderstands the plaintiffs' position and attacks a straw man. Plaintiffs have not argued that the bank would be unable to collect for attorney fees incurred before filing a foreclosure action, so long as a foreclosure action was in fact filed. (Under plaintiffs' theory, though, filing a foreclosure action that was moot upon filing — because the debt had already been paid also would not entitle the bank to fees and costs.) Plaintiffs have argued that, in the absence of a non-moot lawsuit, the mortgage does not authorize a fee award. The court is inclined to agree. At least, the mortgage does not unambiguously authorize a fee award without a judicial proceeding.
The bank points out that a foreclosure proceeding, like any lawsuit, must be prepared before it is filed, and that such preparation is not free. The bank also points out that when federal courts award fees under fee-shifting statutes (like 42 U.S.C. § 1988) or contract provisions, they ordinarily include fees for work done by attorneys in preparing the lawsuit. That point is so well established in the law that it is taken for granted. E.g., Moses v. New York City Transit Auth., 2003 WL 22939122, *3 (S.D.N.Y. Dec. 12, 2003) (one phase of litigation for which fees were awarded was "investigation of claims and drafting of the complaint"); Young v. City of Chicago, 1999 WL 104405, *1 (N.D. Ill. Feb. 24, 1999) (allowing fees for "pre-filing time" spent investigating and preparing complaint), aff'd, 202 F.3d 1000 (7th Cir. 2000); Killebrew v. City of Greenwood, 2000 U.S. Dist. Lexis 1042, *12 (N.D. Miss. Jan. 24, 2000).
The bank's suggestion to use § 1988 law as a guide here, however, does not help the bank. The bank's argument begs the question. For example, unless and until a lawsuit is filed under 42 U.S.C. § 1983, there is no proceeding within which an award of fees under 42 U.S.C. § 1988 would be possible. Even under the now-abandoned "catalyst rule," when a defendant changed its ways without being ordered to do so by a court, a plaintiff who did not actually win judicial relief would have to show that her "lawsuit [was] causally linked to the achievement of the relief obtained," and that the defendant did not act "wholly gratuitously." E.g., Zinn v. Shalala, 35 F.3d 273, 274 (7th Cir. 1994). The catalyst theory assumed at a minimum that a lawsuit had actually been filed before a fee could be awarded under the theory.
Even the catalyst theory, which would not apply to the situation in this case, has been rejected by the Supreme Court. It is now clear that a fee award under fee-shifting statutes requires not only that the party file a lawsuit but also that the party go further and obtain some relief with a formal judicial imprimatur. Buckhannon Bd. and Care Home, Inc. v. West Virginia Dept. of Health and Human Resources, 532 U.S. 598, 610 (2001) (holding that "catalyst theory" is not a permissible basis for awarding attorney fees under most federal fee-shifting statutes in favor of "prevailing parties"). The controversy in Buckhannon was over whether a defendant's change in behavior, after suit had been filed and in response to the suit, was sufficient to justify a fee award. The Supreme Court held it was not, applying logic that applies to nearly all federal fee-shifting statutes.
Applying these principles, if a prospective plaintiff threatens a local government with a § 1983 lawsuit and the government agrees to change its ways before any lawsuit is filed, the prospective plaintiff cannot obtain a fee award from a court under § 1988. The court is aware of no authority that would authorize a fee award where the defendant changes its behavior in response to a mere threat of suit, as U.S. Bank seeks here. According to the allegations in the complaint, the Meriweathers paid U.S. Bank every penny it asked for more than two weeks before they ever heard from the bank's attorney and two weeks before they were sued. The suit was moot when it was filed; the Meriweathers were no longer in default.
The bank also makes much of the fact that it signed and verified its foreclosure complaint on February 12, 2003, the same day that the Meriweathers allege they paid the bank's demand. The bank's letter of February 4, 2003 gave the Meriweathers a payment deadline of February 15, 2003 (which was a Sunday). Even under the bank's theory, it seems possible that the bank jumped its own gun.
The bank suggests that the result would be "absurd" if pre-lawsuit fees and costs were recoverable only if a foreclosure complaint were actually filed. That would certainly be the result in a civil rights or environmental lawsuit under a fee-shifting statute, if such a suit were filed after the prospective defendant had given the plaintiff all the substantive relief that had been requested. And the result argued for by plaintiffs is certainly no less startling than the bank's suggestion that the borrowers agreed to pay for a lender's attorney who worked too early to file a lawsuit that was already moot when it was filed. That intent is not evident in the language of the mortgage in this case, and the bank has not cited any case in which a court awarded attorney fees to a party that obtained everything it wanted before it filed a lawsuit. No doubt it would be possible to write a contract to require compensation of investigation costs triggered by certain events, but all of the cases cited by the bank are cases in which the party seeking the fee award actually filed suit to obtain relief.
Assuming that the mortgage here did not authorize U.S. Bank to charge the Meriweathers for attorney fees and costs associated with a foreclosure proceeding that was already moot when it was filed, the Meriweathers have stated legally viable claims for money had and received, consumer fraud, and statutory deception. Accordingly, U.S. Bank's motion to dismiss is hereby denied. If U.S. Bank needs a more specific statement of plaintiffs' claims, it can seek additional detail through discovery.
So ordered.