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Butterline v. Bank of New York Mellon Trust Co.

United States District Court, E.D. Pennsylvania

March 20, 2017

LISA BUTTERLINE, et al.
v.
THE BANK OF NEW YORK MELLON TRUST COMPANY, NATIONAL ASSOCIATION, et al.

          MEMORANDUM

          Juan R. Sánchez, J.

         Following the dismissal of their Amended Class Action Complaint, Plaintiffs Lisa and Mark Butterline seek leave to file a Second Amended Class Action Complaint against the Bank of New York Mellon Trust Company, N.A. (the Bank), the City of Philadelphia, and the Philadelphia Sheriff's Office, [1] to recover the “excess proceeds” generated by the sale of their home in a sheriff's foreclosure sale at which the Bank, the mortgagee of the home, was the winning bidder. According to the proposed Second Amended Complaint, the Bank's bid at the sheriff's sale exceeded the sum of its foreclosure judgment plus the costs owed on the property by more than $10, 000. Although Plaintiffs are entitled to these excess proceeds under Pennsylvania law, they have not received the funds to date. The City did not collect the excess from the Bank, but instead required the Bank to pay only the costs, as is its practice when the winning bidder at a sheriff's sale is also the executing creditor.

         On behalf of themselves and a class of similarly situated persons whose real property was sold at a sheriff's sale and who did not recover the excess proceeds generated by the sale, Plaintiffs seek leave to pursue constitutional claims against the City for violations of their procedural and substantive due process rights. Plaintiffs also seek leave to pursue a breach of contract claim against both the City and the Bank as third-party beneficiaries of the contract created as a result of the sheriff's sale. Finally, in a request submitted after briefing on the instant motion to amend was complete, Plaintiffs seek leave to pursue an additional claim against the City for negligent mishandling of funds. The City opposes Plaintiffs' proposed amendment as futile, arguing the claims against the City are both legally insufficient and time-barred. The Bank does not oppose amendment. Because the Court agrees with the City that Plaintiffs' proposed claims against it would not withstand a motion to dismiss, Plaintiffs' motion to amend will be denied as to the City. Plaintiffs will be granted leave to amend as to the Bank.

         FACTS[2]

         The facts alleged in Plaintiffs' proposed Second Amended Complaint are substantially the same as the facts in their first Amended Complaint. Plaintiffs previously owned real property located at 2713 East Huntingdon Street in Philadelphia (the Property). Plaintiffs fell behind on their mortgage payments, and in November 2007, the Bank initiated foreclosure proceedings in the Court of Common Pleas of Philadelphia County. The Bank eventually obtained a default judgment in the amount of $62, 764.79 in April 2009.

         The Bank thereafter sought to execute its foreclosure judgment, causing the Property to be sold at a sheriff's sale on November 1, 2011. After competitive bidding, the Bank purchased the Property with a winning bid of $93, 000, approximately $30, 000 more than the amount of its foreclosure judgment. Following the sale, the City did not prepare and keep on file a schedule of proposed distribution of the sale proceeds, as required by Pennsylvania Rule of Civil Procedure 3136(a).[3] Nor did the City comply with the terms of its own advertisements regarding the sale, which advised the public (and Plaintiffs) that, in the event of competitive bidding, the highest bidder would be required to post certain costs at the time of sale and to deposit the balance of the purchase price with the Sheriff within 30 days of the date of sale. Instead, on July 23, 2012, the City deeded the Property to the Bank in exchange for the Bank's payment of the costs owed on the Property-e.g., the Sheriff's costs in conducting the sale, taxes, charges for water and gas, etc.-which totaled $16, 291.11, [4] rather than the entire $93, 000 bid amount (or the full amount by which the bid amount exceeded the Bank's foreclosure judgment).[5] The deed was recorded on October 31, 2012. See Second Am. Compl. Ex. C.

         Plaintiffs allege the City has a policy of collecting only the costs owed to the City where, as here, the winning bidder is also the executing creditor, leaving any excess proceeds from the sheriff's sale-i.e., the amount by which the bid exceeds the sum of the foreclosure judgment and the costs on the property-uncollected. In contrast, when the winning bidder is a third party, the City collects the full amount of the bid, though it does not distribute the excess proceeds to the former owner unless he submits an administrative claim to the Sheriff's Office's Defendant Asset Recovery Team, known as a “DART” claim, pursuant to the sheriff's local rules.

         In December 2014, after unsuccessfully moving to set aside the sheriff's sale in the Court of Common Pleas, [6] Plaintiffs filed a DART claim requesting all excess funds obtained as a result of the sale. On December 18, 2014, the City rejected the claim, stating that because the Bank, as executing creditor, “won the bid, ” it was required to pay only the “pending cost (i.e. Sheriff's cost, transfer taxes, water)” and Plaintiffs were thus “not due any monies from the Sheriff Sale.” Second Am. Compl. Ex. E.

         Plaintiffs thereafter filed this putative class action lawsuit against the City and the Bank, asserting a procedural due process claim against the City for depriving them of their interest in the excess funds generated by the sale of their property without due process of law, and a claim for breach of implied contract against the Bank, alleging the Bank breached its duty of good faith and fair dealing under the mortgage contract by failing to pay the City the full amount of the difference between its winning bid and its foreclosure judgment. Defendants each moved to dismiss Plaintiffs' claims. In response to the Bank's motion, Plaintiffs requested leave to amend their complaint to pursue a breach of contract claim against the Bank as a third-party beneficiary of the agreement between the Bank and the Sheriff. On March 31, 2016, this Court granted the motions to dismiss, but allowed Plaintiffs an opportunity to amend.[7]

         On April 21, 2016, Plaintiffs filed the instant motion for leave to amend their first Amended Complaint, seeking to pursue procedural and substantive due process claims against the City and a third-party beneficiary breach of contract claim against both the City and the Bank. The City opposes the amendment as futile. The Bank, however, has not opposed the amendment. On May 20, 2016, after briefing on the motion for leave to amend was completed, Plaintiffs filed a further motion to substitute a different Second Amended Complaint, adding a claim against the City for negligent mishandling of funds. The City again opposes the motion.

         DISCUSSION

         Under Federal Rule of Civil Procedure 15, leave to amend should be “freely give[n] . . . when justice so requires.” Fed.R.Civ.P. 15(a)(2). Although Rule 15 “embodies a liberal approach to pleading, ” Arthur v. Maersk, Inc., 434 F.3d 196, 202 (3d Cir. 2006), leave to amend need not be given “if it is apparent from the record that . . . the amendment would be futile, ” Hill v. City of Scranton, 411 F.3d 118, 134 (3d Cir. 2005). “An amendment is futile if the amended complaint would not survive a motion to dismiss for failure to state a claim upon which relief could be granted” pursuant to Federal Rule of Civil Procedure 12(b)(6), Alvin v. Suzuki, 227 F.3d 107, 121 (3d Cir. 2000), or could not “withst[an]d a motion to dismiss on the basis of the statute of limitations, ” Garvin v. City of Phila., 354 F.3d 215, 222 (3d Cir. 2003).

         To withstand dismissal under the Rule 12(b)(6) standard, a complaint “must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). The facts pleaded must support “more than a sheer possibility that a defendant has acted unlawfully”; they must “allow[] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Although the statute of limitations is an affirmative defense that a defendant typically must plead in its answer, a limitations defense may be the basis for a Rule 12(b)(6) dismissal if the limitations bar is “apparent from the face of the complaint.” See Schmidt v. Skolas, 770 F.3d 241, 249 (3d Cir. 2014) (citation omitted).

         A. Due Process Claims

         Plaintiffs seek to pursue procedural and substantive due process claims against the City for depriving them of their property interest in the excess proceeds generated by the sale of their home as a result of the City's policies with respect to sheriff's sales at which the executing creditor is the winning bidder. Specifically, Plaintiffs challenge the City's policies of (1) not collecting the full amount by which the executing creditor's winning bid exceeds the amount of its judgment and instead collecting only amounts owed to the City, Second Am. Compl. ¶¶ 26, 34, 40, 41, 49; (2) not filing a schedule of proposed distribution following a sale to an executing creditor, id. ¶¶ 41, 50; and (3) not distributing excess proceeds to the property owner, as required under Pennsylvania Rule of Civil Procedure 3136(d), id.

         “To state a claim under § 1983 for deprivation of procedural due process rights, a plaintiff must allege that (1) he was deprived of an individual interest that is encompassed within the Fourteenth Amendment's protection of ‘life, liberty, or property, ' and (2) the procedures available to him did not provide ‘due process of law.'” Hill v. Borough of Kutztown, 455 F.3d 225, 233-34 (3d Cir. 2006). In addressing the procedural due process claim in Plaintiffs' first Amended Complaint, this Court concluded Plaintiffs' asserted interest in the excess proceeds generated by the sheriff's sale was a constitutionally protected property interest for procedural due process purposes because Plaintiffs have a legitimate claim of entitlement to such proceeds under state law. See Mem. 7, Mar. 31, 2016, ECF No. 31.[8] The Court nevertheless dismissed the claim, finding Plaintiffs had not plausibly alleged the City had deprived them of this interest as the Bank, not the City, holds the excess funds, and the City has not prevented Plaintiffs from seeking to recover the proceeds from the Bank. The Court also observed that, although the City's policy of not collecting the full amount owed by an executing creditor appeared to run afoul of the procedures outlined in the Pennsylvania Rules of Civil Procedure governing sheriff's sales, allegations that the City failed to comply with these procedures were insufficient to state a procedural due process claim, as Plaintiffs do not have a property interest in those procedures.

         Acknowledging the procedural due process claim in their proposed Second Amended Complaint is not materially different from the prior iteration of this claim, Plaintiffs in effect seek reconsideration of the Court's ruling, arguing that even if they are ultimately able to recover the excess proceeds from the Bank, they have nevertheless suffered-and are continuing to suffer-at least a temporary deprivation of those funds because, despite their clear entitlement to receive the funds, they still do not have them. Plaintiffs also maintain the availability of a potential state law remedy against the Bank does not defeat their constitutional claim because such a post-deprivation remedy may satisfy due process only when the deprivation is the result of a random and unauthorized act by a government actor, not when, as here, the deprivation is the result of an established governmental policy. The Court finds it unnecessary to address Plaintiffs' arguments for reconsideration, for regardless of the merits of their due process claim, the claim is time barred.

         Section 1983 claims are subject to the statute of limitations for personal injury tort claims in the state where the cause of action arose. Kach v. Hose, 589 F.3d 626, 634 (3d Cir. 2009). In Pennsylvania, the applicable statute of limitations is two years. Id. Plaintiffs filed this action on March 19, 2015; hence, if it appears from the face of the proposed Second Amended Complaint that their procedural due process claim accrued more than two years prior to March 19, 2015- i.e., before March 19, 2013-the claim is time barred.

         The application of a state statute of limitations to a § 1983 claim involves aspects of state and federal law. Federal law governs the accrual date of the claim. Id. “Under federal law, a cause of action accrues, and the statute of limitations begins to run, ‘when the plaintiff knew or should have known of the injury upon which its action is based.'” Id. (quoting Sameric Corp. v. City of Phila., 142 F.3d 582, 599 (3d Cir. 1998)). The federal accrual standard is objective, focusing not on “what the plaintiff actually knew but [on] what a reasonable person should have known.” Id. Tolling of the statute of limitations, in contrast, is generally governed by state law. See Dique v. N.J. State Police, 603 F.3d 181, 185 (3d Cir. 2010) (“State law, unless inconsistent with federal law, . . . governs the . . . issue of whether a limitations period should be tolled.”). Of particular relevance here is Pennsylvania's discovery rule, which “tolls the running of the applicable statute of limitations until the point where the complaining party knows or reasonably should know that he has been injured and that his injury has been caused by another party's conduct.” Schmidt, 770 F.3d at 251 (quoting Crouse v. Cyclops Indus., 745 A.2d 606, 611 (Pa. 2000)). A plaintiff seeking the benefit of the discovery rule must show he exercised “reasonable diligence” in discovering his injury. Kach, 589 F.3d at 642 (describing reasonable diligence as “those qualities of attention, knowledge, intelligence and judgment which society requires of its members for the protection of their own interests and the interests of others” (quoting Wilson v. El-Daief, 964 A.2d 354, 363 n.6 (Pa. 2009))). Application of the discovery rule may be determined as a matter of law “[o]nly where the facts are so clear that reasonable minds cannot differ.” Schmidt, 770 F.3d at 251 (emphasis and citation omitted).

         As noted, the property interest at stake in this case is Plaintiffs' right to receive the excess proceeds from the sheriff's sale of their home. To the extent the City can be regarded as having deprived Plaintiffs of this property interest, the deprivation (and thus Plaintiffs' injury) would have occurred no later than when the City gave the Bank complete title to the Property without (1) requiring it to pay that portion of the purchase price representing the excess proceeds and (2) distributing those proceeds to Plaintiffs. See Montanez v. Sec'y Pa. Dep't of Corr., 773 F.3d 472, 480 & n.4 (3d Cir. 2014) (holding the injury in a procedural due process claim occurs when the plaintiff is deprived of property without due process). The deprivation would thus have occurred no later than July 23, 2012, when the City deeded the Property to the Bank, or, at the very latest, October 31, 2012, when the deed was recorded. See Butler v. Lomas & Nettleton Co., 862 F.2d 1015, 1019 (3d Cir. 1988) (“[T]he right to possession of the property does not pass to a Sheriff's sale purchaser until the Sheriff's deed is ...


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