by Interpreting the Supreme Court decision in Stern v. Marshall, 131 U.S. 2594 (2011), the Bankruptcy Court for the Eastern District of Kentucky found that it had subject matter jurisdiction over debtor’s state common law counterclaims but did not have jurisdiction over the counterclaims based on Kentucky’s usury and consumer protection statutes. In re Tolliver, No. 09-2076 (Bankr. E.D. Ky. February 2, 2012). The issue arose in an adversary proceeding in which debtor objected to a proof of claim filed by Ocwen Federal Bank, as servicer to Bank of America. Debtor filed counterclaims advancing state statutory and common law claims based on Ocwen’s alleged charging of unauthorized and duplicative fees and costs and improperly inflating debtor’s balance causing her to default.
The Court in Stern v. Marshall said that “a bankruptcy court lacks constitutional authority to enter a final judgment on state law counterclaims that are not necessarily resolved by a ruling on a creditor’s proof of claim.” Based on this rule, Bankruptcy Judge Tracey Wise rejected the creditor’s broad interpretation that, under Stern, bankruptcy courts no longer have jurisdiction to render final judgments on state counterclaims. Rather, the court found that there was no per se lack of jurisdiction over state law counterclaims but a requirement that the courts conduct a case-by-case inquiry to determine whether the counterclaims are “necessarily resolved” in the claims objection process. The inquiry requires a court to consider both the factual overlap between the objection to the proof of claim and the counterclaims, as well as any overlap in the legal elements. The court cautioned that neither of these considerations were necessarily dispositive of the issue but were merely factors to be weighed. Even in the absence of subject-matter jurisdiction, however, the court found that it could hear the claims and issue proposed findings of fact and conclusions of law.
The court then turned to each counterclaim to determine whether it would be “necessarily resolved in the claims objection process.” With respect to the usury claim the court found that to sustain the objection to the POC, the debtor would merely have to show that the interest charged was not that agreed upon in the contract, not that it was usurious under the state statute. Therefore, violation of that statute would not be “necessarily resolved in the course of the claim objection process.” Likewise, with respect to the debtor’s claim that Ocwen’s conduct violated Kentucky’s consumer protection laws, the court found that while some of the factual issues between debtor’s objection to the POC and the state law claim overlapped, the state claim had further legal requirements such as whether Ocwen’s conduct was “unfair, false, misleading, or deceptive,” that would have to be proved over and above those necessary to resolve the objection to POC claim. Therefore, both statutory claims were referred to the district court for final determination.
In contrast, the court found that the state common law claims were co-extensive in facts and legal proofs with the objection to the POC and could be finally resolved in the adversary proceeding. The court went through the elements of each of the debtor’s counterclaims and compared them to the proof that the debtor would have to make to prevail on her objection to the POC and found that the same proofs would be necessary for both. For instance, with respect to the fraud/misrepresentation claim, the court found that the POC depended upon a finding of whether the forbearance agreements were valid. This in turn required a finding on the issue of whether they were induced by fraud. Thus, allowance or disallowance of the POC would require a finding on the debtor’s counterclaim for fraud. Similarly, for the conversion counterclaim the court found that if the debtor prevailed on her objection to the POC it based upon misapplication of her payments, then the elements of conversion would necessarily be established as well. Applying the same analysis steps the court found that the remaining state common law claims each required proof of the same elements as would be required to prevail on the objection to the POC and the court, therefore, had jurisdiction over those claims.