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Kowalski v. Seterus, Inc.

United States District Court, D. Maine

January 9, 2017

SETERUS, INC., Defendant.



         This case arises out of a series of communications regarding mortgage loan payments and insurance for property located in Maine that a debt collector sent to a mortgagor both after a judgment of foreclosure had been entered on the property and after the statutory redemption period had expired. The debt collector moves to dismiss the action, arguing that all of the communications were lawful and accurate. Because the Court concludes that the mortgagor has pleaded sufficient facts to establish that the debt collector violated several provisions of federal and state debt collection acts by attempting to collect money not owed by the mortgagor, the Court denies the motion to dismiss in its entirety.

         I. BACKGROUND

         A. Procedural Background

         On March 11, 2016, Henry Kowalski filed a complaint against Seterus, Inc. (Seterus) alleging violations of the Fair Debt Collection Practices Act (FDCPA), 15 U.S.C. §§ 1692 et seq., the Maine Fair Debt Collection Practices Act (MFDCPA), 32 M.R.S. §§ 11001 et seq., and the Maine Consumer Credit Code (MCCC), 9-A M.R.S. §§ 1-101 et seq. Compl. (ECF No. 1). On April 28, 2016, Seterus moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. Def.'s Mot. to Dismiss for Failure to State a Claim Upon Which Relief May be Granted (ECF No. 8). Mr. Kowalski subsequently amended his complaint on May 18, 2016, removing his claim that a violation of the MCCC is a per se violation of the Maine Unfair Trade Practices Act (UTPA), 5 M.R.S. §§ 205-A et seq. Pl.'s First Am. Compl. (ECF No. 9) (Am. Compl.). He objected to Seterus' motion to dismiss the original complaint on the same day. Pl.'s Obj. to Def.'s Mot. to Dismiss (ECF No. 10). Seterus then moved to dismiss the amended complaint on May 27, 2016 and withdrew its initial motion to dismiss four days later. Def.'s Mot. to Dismiss Pl.'s Am. Compl. for Failure to State a Claim Upon Which Relief May be Granted (ECF No. 13) (Def.'s Mot.); Notice of Withdrawal of Doc. (ECF No. 14). On June 16, 2016, Mr. Kowalski objected to the motion to dismiss the amended complaint. Pl.'s Obj. to Def.'s Mot. to Dismiss Pl.'s Am. Compl. for Failure to State a Claim Upon Which Relief May be Granted (ECF No. 15) (Pl.'s Opp'n). Seterus replied on July 1, 2016. Def. Seterus Inc.'s Reply Mem. in Further Supp. of its Mot. to Dismiss Pl.'s Am. Compl. for Failure to State a Claim Upon Which Relief May be Granted (ECF No. 17) (Def.'s Reply).

         B. Factual Allegations[1]

         Henry Kowalski is an 84-year-old retired military veteran who lives in New Jersey with his wife Lois. Am. Compl. ¶ 12. Seterus, formerly known as Kyanite Financial Business Services, Inc., is a loan servicing entity incorporated in Delaware with a principal place of business in North Carolina. Id. ¶ 4.

         On or about March 9, 2007, Mr. Kowalski executed and delivered to Aegis Wholesale Corporation (Aegis) a promissory note in the original principal amount of $408, 750.00. Id. ¶ 13. To secure this note, Mr. Kowalski and his two sons, John C. Weber and Brad J. Kowalski, executed and delivered to Mortgage Electronic Registration Systems, Inc., acting as nominee for Aegis, a mortgage on Mr. Kowalski's real property located in Bryant Pond, Oxford County, Maine. Id. ¶ 14. The mortgage was assigned to OneWest Bank FSB (OneWest). Id. ¶ 16.

         Mr. Kowalski originally bought the Bryant Pond property to move into after retirement. Id. ¶ 17. He and his wife began living in the property for several months each year. Id. ¶ 18. In or around 2009, Mr. Kowalski fell on difficult financial times and entered into a forbearance plan on the loan. Id. ¶ 19. He believed that he was still on the forbearance plan when OneWest initiated a foreclosure action on the property in October 2009; the action was later dismissed. Id. ¶ 20.

         In June of 2013, OneWest filed a second foreclosure action against Mr. Kowalski and his two sons in the Maine District Court in South Paris. Id. ¶ 21. After failed attempts to resolve the foreclosure through the Foreclosure Diversion Program, Mr. Kowalski and his sons entered into a Stipulated Judgment of Foreclosure (Stipulated Judgment) on May 26, 2015. Id. ¶¶ 22, 23; id. Attach. 1 Stip. J. of Foreclosure and Order of Sale (Stip. J.). The Stipulated Judgment provided for a waiver of any deficiency on the loan and a release of personal liability on the note. Am. Compl. ¶ 22; Stip. J. at 2. The Kowalskis had 90 days to redeem the mortgage. Am. Compl. ¶ 25; Stip. J. at 2. They vacated the property in August 2015. Am. Compl. ¶ 26. On August 24, 2015, the 90-day redemption period expired; the Kowalskis did not redeem the property. Id. ¶¶ 27-28.

         After the Judgment, Mr. Kowalski and his wife were under the impression that everything was taken care of with respect to the mortgage debt and Bryant Pond property. Id. ¶ 29. Then, in or around May 2015, Seterus began delivering to Mr. Kowalski monthly account statements alleging over $200, 000 due on the loan. Id. ¶ 32. The notices that Seterus sent Mr. Kowalski differ from the types of notices Seterus typically sends customers advising them of reinstatement figures. Id. ¶ 68; id. Attach. 14 Sample Reinstatement Notice (Sample Notice). Seterus sent Mr. Kowalski statements dated July 16, 2015, August 17, 2015, September 16, 2015 and November 16, 2015. Am. Compl. ¶¶ 33, 36-38. Seterus sent the account statements to Mr. Kowalski's P.O. Box in Sumner, Maine and Mr. Kowalski's son Brad notified him of the statements each month. Id. ¶¶ 34, 39.

         Additionally, on or around November 20, 2015, a representative from Seterus called Mr. Kowalski at his home in New Jersey in an attempt to collect on the mortgage loan debt. Id. ¶ 40. Mr. Kowalski explained that he believed the debt had been taken care of in court and that he had an attorney, but the Seterus representative claimed there was no attorney on record. Id. ¶¶ 41-42. The representative explained that “if Mr. Kowalski did not pay the over $200, 000 he owed on the loan, Seterus would foreclose on his home”; Mr. Kowalski feared this meant that Seterus could take his New Jersey home. Id. ¶¶ 43-44.

         In severe distress over the potential loss of his New Jersey home and Seterus' continued attempts to collect on over $200, 000, Mr. Kowalski contacted his son Brad. Id. ¶ 45. Brad attempted to contact Seterus to understand what was happening, but Seterus refused to speak with him. Id. ¶ 46. Mr. Kowalski and his sons were worried that something had gone wrong at court and the Stipulated Judgment had not gone through. Id. ¶ 47. Brad contacted their foreclosure attorney, Andrew Kull, and retained him again to deal with Seterus' attempts to collect on the mortgage loan. Id. ¶ 48. Attorney Kull delivered a cease and desist letter to Seterus on November 20, 2015 by facsimile and included a copy of the Stipulated Judgment; Seterus acknowledged receipt of the facsimile on the same day. Id. ¶¶ 49, 51. Mr. Kowalski was relieved and hoped that Attorney Kull's actions would stop Seterus from trying to collect on the mortgage loan. Id. ¶ 52.

         However, Seterus sent Mr. Kowalski another account statement dated December 16, 2015, and Mr. Kowalski again feared that Seterus “would not stop until the debt was paid, either by him or by taking his New Jersey home.” Id. ¶¶ 53-54. In a letter dated January 4, 2016 to Attorney Kull, Seterus stated that it would no longer call Mr. Kowalski or his sons, or send correspondence to them, except for those “legally required.” Id. ¶ 56. Seterus asserted in the letter that Mr. Kowalski and his sons “remain the owners of record for the collateral property . . . until the foreclosure is complete. As a result, we will continue to mail certain legal notices until the foreclosure action is completed.” Id. Seterus sent another account statement dated January 18, 2016 and a statement dated January 22, 2016 providing a principal and escrow reconciliation directly to Mr. Kowalski. Id. ¶¶ 58, 59.

         In February 2016, Mr. Kowalski retained Andrea Bopp Stark, his current counsel. Id. ¶ 60. Attorney Stark delivered a demand letter to Seterus dated February 3, 2016 alleging violations of UTPA, the FDCPA, and the MFDCPA. Id. ¶ 61. Seterus received the letter on February 8, 2016 but did not reply. Id. ¶¶ 62-63. Seterus sent another account statement to Mr. Kowalski, c/o Attorney Stark, dated February 16, 2016, and has continued to send communications regarding the mortgage loan to Mr. Kowalski, both directly and via his attorney, since March 11, 2016, the date Mr. Kowalski filed the complaint in this Court. Id. ¶¶ 64-67.

         In addition to the account statements, Seterus sent a notice to Mr. Kowalski, c/o Attorney Stark, dated March 17, 2016 regarding lender placed insurance on the property that stated “SETERUS IS ATTEMPTING TO COLLECT A DEBT” and that the cost of the policy, $2, 850.60, was assessed to Mr. Kowalski. Id. ¶ 69. The property sold at a foreclosure auction on March 29, 2016. Id. ¶ 70. On April 26, 2016, Seterus sent two separate notices directly to Mr. Kowalski regarding the lender placed insurance stating that the premium for the policy, $2, 772.71, was charged to Mr. Kowalski. Id. ¶ 71.

         As a result of Seterus' continued attempts to collect on the mortgage loan, Mr. Kowalski has become severely distressed. Id. ¶ 72. He and his wife believed that their New Jersey home was in jeopardy of being lost to foreclosure and became afraid to answer the door for fear it was the sheriff telling them to leave. Id. Mr. Kowalski became very agitated and has a heart condition that causes his heart to race when he is distressed. Id. ¶ 75. He also became very moody and reserved and stopped going out as much to eat or do yard work. Id. ¶ 76. He shut down and would sit inside quietly. Id. He was frustrated, anxious, and confused about why Seterus was continuing to try to collect the mortgage loan. Id. Mr. Kowalski and his wife wanted to move to a smaller, more affordable home in Maine using equity in their New Jersey home and started making plans to sell the New Jersey house when the Stipulated Judgment was entered. Id. ¶¶ 30-31, 73. However, when the notices started, these plans were put on hold. Id. ¶ 74.


         A. The Amended Complaint

         In Counts I and II of the amended complaint, Mr. Kowalski alleges violations of identical provisions of the FDCPA and MFDCPA. Am. Compl. ¶¶ 78-88. Mr. Kowalski claims that Seterus violated 15 U.S.C. § 1692c(2) and 32 M.R.S. § 11012(1)(B) by communicating with him in connection with the collection of the mortgage debt when Seterus knew that he was represented by an attorney and had knowledge of the attorney's name and address. Id. ¶¶ 79(a), 85(a). Additionally, Mr. Kowalski claims that by delivering the notices and calling him to seek payment of money not owed by him, Seterus (1) engaged in conduct, the natural consequence of which was to harass, oppress, or abuse him, in violation of 15 U.S.C. § 1692d and 32 M.R.S. § 11013(1), id. ¶¶ 79(b), 85(b); (2) used false, deceptive, or misleading representations and falsely represented the character, amount, or legal status of the mortgage debt, in violation of 15 U.S.C. § 1692e and 32 M.R.S. § 11013(2), id. ¶¶ 79(c)-(d), 85(c)-(d); and (3) used unfair or unconscionable means to collect or attempt to collect the mortgage debt, in violation of 15 U.S.C. § 1692f and 32 M.R.S. § 11013(3), id. ¶¶ 79(e), 85(e). Mr. Kowalski claims that Seterus did these acts intentionally, with the purpose of coercing him to pay the alleged debt, and that the conduct constitutes a pattern and practice of violations. Id. ¶¶ 80-81, 86. As a result of these alleged violations, Mr. Kowalski states that Seterus is liable for declaratory judgment and actual damages, which include damages for emotional distress, statutory damages, costs, and attorney's fees. Id. ¶¶ 83, 88.

         In Count III, Mr. Kowalski alleges a violation of the MCCC. Id. ¶¶ 89-92. Mr. Kowalski claims that by attempting to collect on the mortgage debt through its communications, Seterus attempted to enforce a right that it had relinquished pursuant to the Stipulated Judgment. Id. ¶¶ 90-91. As a result of this alleged violation, Mr. Kowalski states that he is entitled to actual damages, including emotional distress. Id. ¶ 92.

         B. Seterus' Motion to Dismiss

         Seterus' first argument in support of its motion to dismiss is that it did not violate the FDCPA or the MFDCPA because it sent the communications in accordance with Maine law. Def.'s Mot. at 5. According to Seterus, “[a]lthough a stipulated judgment of foreclosure had entered, [Mr. Kowalski] retained title to the [Bryant Pond] Property because the redemption period was extended pursuant to 14 M.R.S. § 6323.” Id. Citing caselaw, Seterus explains that after the redemption period expires, a mortgagor's interest in the property is extinguished and title is vested in the mortgagee. Id. at 5-6. It argues that although the redemption period is traditionally 90 days, Maine law permits a mortgagee to “extend unilaterally the redemption period” before a public sale. Id. at 6.

         It then claims that “every complained-of communication (save the April 26, 2016 insurance letter) occurred during the extended redemption period” and that “each of the seven account statements set forth an amount to redeem the mortgage and reinstate the loan in order to avoid a foreclosure sale.” Id. It argues that “rather than being the ‘unfair' letters alleged, the letters provided notice to [Mr. Kowalski] that Seterus was extending his redemption period and that he could reinstate the loan and retain title to the Property if he were to make the reinstatement payment.” Id. at 6-7. Seterus adds that the phone call similarly concerned the reinstatement amount. Id. at 7 n.5. Seterus claims that because it is a servicer acting on behalf of the mortgagee, it has the authority to send these notices. Id. at 7. Seterus also claims that the Stipulated Judgment contemplated the extension by incorporating section 6323 and that the Stipulated Judgment conditioned the release of the debt on the foreclosure sale. Id.

         Stating that its analysis under the FDCPA applies equally to the MFDCPA claims, id. at 7 n.6, Seterus argues that it did not engage in “conduct the natural consequence of which is to harass, oppress, or abuse any person in connection with the collection of a debt” because the natural consequence of extending the redemption period is to “temporarily benefit the [borrower] by providing an opportunity to preserve his equity of redemption . . . and avoid a foreclosure sale.” Id. at 8-9. Seterus also argues that it did not mischaracterize the debt or use false, deceptive, and unconscionable means to collect on the debt because it was sending notice of the option to redeem, not seeking monthly payments. Id. at 9. Additionally, Seterus argues that the phone call did not violate the FDCPA because Mr. Kowalski's claim that he feared Seterus would foreclose on his New Jersey home “does not pass the [FDCPA's] hypothetical unsophisticated consumer test.” Id. at 11 n.8.

         Further, Seterus claims that the account statements cannot violate the FDCPA because Regulation Z of the Truth in Lending Act (TILA), 12 C.F.R. §§ 226.1 et seq., requires Seterus to send periodic statements as long as Mr. Kowalski retains title. Id. at 10-11. It maintains that Mr. Kowalski did retain title when Seterus extended the redemption period under section 6323 through the equity of redemption upon the loan. Id. at 10.

         Next, Seterus acknowledges that the FDCPA generally “prohibits direct communications with a debtor if the debt collector knows the debtor is represented by an attorney” but claims that the Consumer Financial Protection Bureau (CFPB) exempts from the FDCPA's scope any communications sent pursuant to 12 C.F.R. § 1026.41, which, it claims, includes the account statements. Id. at 12-13. Seterus also argues that Mr. Kowalski's claims based on the two insurance letters must fail because neither letter attempted to collect a debt and “the FDCPA applies only to communications that are intended to collect a payment.” Id. at 13-15 (collecting cases). It argues that the FDCPA disclaimer at the bottom of the letters stating “SETERUS, INC. IS ATTEMPTING TO COLLECT A DEBT” is legally irrelevant. Id. at 15-16.

         With regard to the MCCC claim, Seterus argues that because Maine law permits Seterus to extend the redemption period, it did not attempt to enforce a debt “that has been barred by law or a final order of the Supreme Judicial Court or a court of the United States.” Id. at 16 (citing 9-A M.R.S. § 9-403(G)). Further, Seterus acknowledges that violation of the MCCC is a per se violation of UTPA, but claims that to plead a violation of UTPA, a plaintiff must allege “loss of money or property” and Mr. Kowalski only alleges emotional harm. Id. at 16-17.

         C. Henry Kowalski's Opposition

         According to Mr. Kowalski, all three of his claims for relief state plausible legal claims. Pl.'s Opp'n at 3. First, Mr. Kowalski argues that Seterus misinterprets Maine law. Id. at 4. Mr. Kowalski claims that 14 M.R.S. § 6323 allows a mortgagee, such as Seterus, to permit a mortgage loan to be reinstated or redeemed after the redemption period expires, provided that the foreclosure sale has yet to occur, but that unless the mortgagor does reinstate or redeem the mortgage, title remains with the mortgagee having automatically vested upon expiration of the mandated 90-day redemption period. Id. at 5. He asserts that “[t]he redemption period is never extended.” Id. Mr. Kowalski then indicates that the Stipulated Judgment was entered on May 26, 2015, so the 90-day redemption period expired on August 24, 2015, and therefore, as of that date, any interest Mr. Kowalski had in the property was extinguished. Id. at 6.

         Mr. Kowalski then turns to Seterus' arguments that the account statements and call were not abusive, misleading, or unfair. Id. at 7-11. He compares his case to a recent case in the United States Bankruptcy Court for the District of Maine, In re Collins, 474 B.R. 317 (Bankr. D. Me. 2012), in which the court concluded that notices sent to debtors when the debtor no longer had personal liability or ownership interests constituted harassment. Id. at 7-8. Further, Mr. Kowalski argues that even if the intent behind the communications was in fact to provide reinstatement quotes, the notices served to mislead and deceive Mr. Kowalski. Id. at 8-9, 13-14. He points to language in the notices including “Amount Due, ” “DELIQUENCY NOTICE, ” “WE ARE ATTEMPTING TO COLLECT A DEBT, ” and “You are late on your mortgage payments.” Id. at 8-9. He asserts that the “small-font sized explanation regarding the reinstatement amount does little to clarify and reassure a consumer in Mr. Kowalski's situation that no monies are actually owed or due, now or ever, unless he wants to re-obtain the property.” Id. at 9. Mr. Kowalski also argues that it was reasonable for him to believe that Seterus might attempt to foreclose on his New Jersey home, especially considering the fact that he received the telephone call at his New Jersey home, the only home he owned at the time. Id. at 10.

         Next, Mr. Kowalski argues that the monthly account statements and telephone call were not protected or required by Regulation Z of TILA. Id. at 11. He explains that the relevant provision of Regulation Z provides that the periodic statements shall be transmitted “to the obligor” and that he ceased to be an obligor upon the entry of the Stipulated Judgment, expiration of the redemption period, and the agreement to waive the obligation. Id. Mr. Kowalski further argues that because Regulation Z is inapplicable, Seterus cannot use it as an excuse for communicating directly him despite its knowledge that he was represented by counsel. Id. at 12-13.

         Mr. Kowalski then argues that the insurance notices were attempts to collect money related to the mortgage and were neither required nor allowed. Id. at 14. He points out that the insurance notices contained the language in all caps on the first page “SETERUS, INC. IS ATTEMPTING TO COLLECT A DEBT” and that the notices discussed charges to Mr. Kowalski for the cost of the insurance. Id. at 14-15. He asserts that a reasonable interpretation of the notices is that Seterus was attempting to collect a debt and that the true nature of the letters was aimed at collecting a debt. Id. at 15 (collecting cases). Mr. Kowalski maintains that because his interest was extinguished, there was no obligation to purchase insurance and so the notices were unnecessary, false, deceptive, and misleading. Id. at 15-16.

         As to the MCCC claim, Mr. Kowalski argues that the fact that “loss of money or property are not alleged is immaterial to [his] entitlement to damages for [Seterus'] violation of the [MCCC].” Id. at 17. He explains that he withdrew his UTPA claim in the amended complaint and that the MCCC “has its own forms of relief available for consumers including statutory damages which is unique from the Maine UTPA.” Id.

         D. Seterus' Reply

         In reply, Seterus states the Mr. Kowalski concedes that the communications received before August 24, 2015, before the 90-day redemption period had expired, are not actionable. Def.'s Reply at 2. Seterus then states that Mr. Kowalski's new claim that only the communications received after the redemption period expired are actionable is “analytically flawed and should be rejected for at least three reasons.” Id. at 3.

         First, Seterus maintains that even after the expiration period expires, a mortgagor can redeem at any point until the date of sale under 14 M.R.S. § 6323, the only difference being that the mortgagee must agree to it. Id. Seterus argues that if the communications during the redemption-period are not illegal, neither are the communications after the redemption period but before the sale. Id. Second, Seterus argues that Mr. Kowalski's claim is “irreconcilable with the plain language of [section] 6323” which provides that if a mortgagor does redeem after the redemption period but before the sale, “all other rights of all other parties remain as if no foreclosure had been commenced.” Id. (emphasis by Seterus). It claims that because one of those rights is the right to redeem, it never really expires until the sale. Id. Third, it ...

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