Recent Decisions Related to Bankruptcy and Foreclosure in the First Circuit (Nov.2011) Part 1 of 3

Trustee’s action is time barred and equitable tolling does not apply to these facts:

HELEN G. SCHWARTZ, as Trustee in Bankruptcy for ROLAND RODRIGUEZ v. INDEPENDENT APPRAISALS,LLC, et als., 2011 U.S. Dist. LEXIS 132891 (D. Mass. 11/17/2011)(Richard G. Stearns, District Judge).

This case arises from Roland Rodriguez's alleged "entrapment in an elaborate and illegal property-flipping and equity skimming scheme perpetrated against him" by the defendants, "a group of real estate speculators, real estate agents and brokers, appraisers, mortgage brokers, attorneys and mortgage originators." Plaintiff Helen Schwartz filed this lawsuit on April 11, 2011, as Trustee in Bankruptcy for Rodriguez. Schwartz alleges several dozen counts against the various defendants involving Rodriguez's purchase of five Massachusetts properties in 2007. Schwartz pleads various claims for intentional misrepresentation, negligent misrepresentation, professional malpractice, negligence, unfair and deceptive trade practices in violation of Chapter 93A, aiding and abetting, breach of fiduciary duty, unjust enrichment, and civil conspiracy. On June 24, 2011, defendants moved to dismiss on the grounds that the action is barred by Massachusetts statutes of limitations, which the court granted.

Schwartz contends that defendants' wrongdoing was "inherently unknowable" to Rodriguez because of the fraudulent nature of the scheme and his remote Texas residency. It was not until December 22, 2009, Schwartz argues, when the Massachusetts Attorney General indicted BEI and others for mortgage fraud, that Rodriguez knew with any degree of certainty that he had actionable claims against the defendants. Whether a plaintiff knew or should have known of an injury so as to trigger the running of a statute of limitations is, with rare exception, a jury issue. Here, however, no independent factual inquiry is required because there can be no dispute that at the very latest, Rodriguez knew that he had been harmed on June 18, 2007, the date on which he mailed Chapter 93A demand letters to Independent Appraisals, Jenkins, and McDermott with regard to the Needham Street, Bellevue Street, and Claybourne Street properties. Also, Rodriguez is a poor candidate for equitable relief as equity will shun a plaintiff who has unclean hands.

Rhode Island adopts “Economic Unit” Approach rather than a strict “heads on beds” approach:

In re: GEORGE J. GABOURY and JUDITH A. GABOURY, Debtors, 2011 Bankr. LEXIS 4434 (Bankr. D.R.I 11/18/2011)(Arthur N. Votolato, Bankruptcy Judge).

Trustee's Objection to Confirmation of the Debtors' Chapter 13 plan: The Trustee contends that the test for determining the size of a debtor's household for the purposes of completing Form B22A (the Means Test) should be based upon a consideration of the facts of each case, i.e., the Economic Unit approach. On the other side of this issue, the Debtors, who provide lodging for their two adult children, favor either (or both) the Bureau of the Census's definition of "household" (the so-called "Heads on Beds" approach), or the Internal Revenue Service's ("I.R.S.") practice of counting the number of dependents according to certain Internal Revenue Code regulations. For the reasons discussed below, this Court finds the better reasoned analysis to be the "Economic Unit" approach, which, unlike the Census Bureau and  the IRS approaches, looks at and gives the most weight to the facts and circumstances of each case.

Put simply, the objectives of the means test are completely unrelated to the functions of either the Census Bureau or the I.R.S. "The appropriate definition of the debtor's 'household' must be the one which leads to the most accurate and realistic calculation of the debtor's projected disposable income given the economic realities of the debtor's family circumstances. Neither the Census Bureau nor the I.R.S. deal with projected disposable income, and unlike this Court, neither is charged with adjudicating the interests of bankruptcy debtors and creditors.

In contrast, the "Economic Unit" approach strives to determine, case-by-case, which people living in the same household constitute an economic entity. In applying the Economic Unit test, courts weigh a number of factors, including, but not limited to:

1) the degree of financial support provided to the individual by the debtor;
2) the degree of financial support provided to the debtor by the individual;
3) the extent to which the individual and the debtor share income and expenses;
4) the extent to which there is joint ownership of property;
5) the extent to which there are joint liabilities;
6) the extent to which assets owned by the debtor or the individual are shared, regardless of title; and
7) any other type of financial intermingling or interdependency between the debtor and the individual.

In the present case, the issue is whether, for means test purposes, the Debtors' 27 year old son, George, who lives at home and is "employed sporadically," is a member of the Debtors' household. Applying the "Economic Unit" considerations to the facts of this case, it is clear that Jr. is not part of this Economic Unit, and that while the Debtors do provide a roof over his head, additional support is limited to providing some cash through a bank account that may be accessed "only as needed." Jr.'s contribution to the household is minimal, i.e., he provides $30 per week "when he is working," and purchases food for the household, "when he can." There is no jointly owned  property, save for a bank account on which Mrs. Gaboury is merely a signator, and which is used solely as a means for the Debtors to provide Jr. with cash. There are no joint liabilities. George Jr. does not have a driver's license, thus does not even share the use of a car, and there is no other financial intermingling or interdependency between the Debtors and their son, George Jr. Debtor’s daughter, Megan (23) is a student enrolled in a student nursing program and her status as a household member is not disputed.

In short, based upon all of the circumstances, the Court considers that the Debtors' description of their son Jr.'s "contributions" consists mostly of affection and parental pride, and that, although he is probably a joy to have around, he is not a part of the economic engine that drives this household. Accordingly, for today's purposes, this household consists of three people (the Debtors and their daughter, Megan). The Debtors are ordered to complete the means test consistent with the terms of this decision.

Reconsideration denied for imposition of costs and fees due to creditor’s frivolous complaint objecting to the debtor’s discharge:

IN RE: JOSE ANTONIO SANTIAGO VASQUEZ, Debtor(s); BANCO BILBAO VIZCAYA ARGENTARIA PUERTO RICO v. JOSE ANTONIO SANTIAGO VASQUEZ, 2011 Bankr. LEXIS 4280 (Bankr. D.P. R. 11/4/11)(Brian K. Tester, Bankruptcy Judge)

PROCEDURAL POSTURE: Following the grant of fees and costs to defendant, a Chapter 7 debtor, for his defense of plaintiff creditor’s objection to discharge, the creditor filed a motion to amend judgment.
OVERVIEW: The creditor’s motion to amend judgment was filed 14 days after the court’s judgment and argued a mistake of law or fact, which was a determinative factor under both Fed. R. Civ. P. 59(e) and Fed. R. Civ. P. 60(b). Therefore, the court construed the motion under Fed. R. Civ. P. 59(e). In the motion to amend, the creditor advanced arguments regarding the propriety of the court’s imposition of sanctions that could or should have been presented to the court prior to the judgment. The creditor failed to make this argument in its opposition to the debtor’s motion for fees and costs, instead choosing to defend their position to the debtor’s motion to dismiss, a matter which had already been adjudicated by the court and was unappealable.
OUTCOME: The court denied the motion to amend the judgment.

Creditor’s objection to debtor’s discharge was dismissed having failed to satisfy the narrow definition of “debtor’s financial condition” as related to the debtor’s alleged false statements concerning the debtor’s pre-petition financial condition:

IN RE: CARL W. TUCCI AND YVETTE G. TUCCI, DEBTORS. SAMPSON LUMBER CO., INC., v. CARL W. TUCCI AND YVETTE G. TUCCI, 2011 Bankr. LEXIS 4402 (Bankr. D. Mass. 11/15/11)(William C. Hillman, Bankruptcy Judge).

PROCEDURAL POSTURE: Plaintiff creditor filed a complaint against defendant debtors, seeking to establish the nondischargeability of a judgment awarded against debtor pursuant to 11 U.S.C.S. § 523(a), Debtor husband moved for summary judgment, Fed. R. Civ. P. 56.
OVERVIEW: Debtor argued that the creditor could not establish the elements required for a determination of nondischargeability under 11 U.S.C.S. § 523(a)(2)(B). The court first addressed whether any of the allegedly false statements made by debtor concerned debtor's "financial condition." The court noted that it had previously held in another case that the narrow definition of "financial condition" was the proper interpretation of § 523(a)(2)(B), and stated that it had not altered its view. Applying the narrow definition to the present case, the Statement of Ownership (regarding a trust) did not qualify as a statement of financial condition because it was a statement of ownership of a single asset, and not an assessment of debtor's overall financial health. Accordingly, the Statement of Ownership did not satisfy the "financial condition" element of § 523(a)(2)(B). The creditor did not allege any other written statement made by debtor. Having found that it was impossible for the creditor to satisfy the "financial condition" element required for a nondischargeability determination under § 523(a)(2)(B), the court did not need to go further in addressing the creditor's other arguments.
OUTCOME: Debtor's motion was granted.

DISCUSSION: There is disagreement among courts as to the definition of the phrase "financial condition" with respect to 11 U.S.C. § 523(a)(2)(B). Some cases within the First Circuit define the phrase narrowly, so that financial condition means "a balance sheet and/or profit and loss statement or other accounting of an entity's overall financial health and not a mere statement as to a single asset or liability." Bal-Ross Grocers, Inc. v. Sansoucy (In re Sansoucy), 136 B.R. 20, 23 (Bankr. D. N.H. 1992). Other cases define the phrase "financial condition" broadly, so that something less than a "formal financial statement" may qualify as a statement of financial condition. I, however, have previously held in In re Soderlund  that the narrow definition of "financial condition" is the proper interpretation of 11 U.S.C. § 523(a)(2)(B), and I have not altered my view.  Applying the narrow definition to the present case, the Statement of Ownership does not qualify as a statement of financial condition because it was a statement of ownership of a single asset, and not an assessment of the Debtor's overall financial health. Standing to foreclose (MERS issues):

ORATAI CULHANE v. AURORA LOAN SERVICES OF NEBRASKA, 2011 U.S. Dist. LEXIS 136112 (D. Mass. 11/28/11)(William G. Young, District Judge).

"What does a judge do?" asked my three year old granddaughter Mia. Without half thinking, I answered, "A judge teaches law to people who come to court."  Upon reflection, that answer is about as good as any. Trial judges teach the law to lawyers through evidentiary rulings; they teach the law to juries through plain, easy to understand instructions; they teach the law to offenders and the public alike at sentencing hearings; and they teach the law to litigants through careful opinions that explicate judicial choice as "reasoned choice, candidly explained." Yet, as I explained to Mia, they teach the law only "to people who come to court." Trial judges have no roving commission to teach the law generally. Their teaching is limited only to "cases and controversies," and then only when the standards of ripeness, standing, and redressability are met.

Culhane brought this action against Aurora Loan Services, LLC to prevent the imminent foreclosure of her family's home. Aurora, after removing the action from state court, moved for summary judgment. In ruling on the motion, this Court must resolve whether the mortgage properly was assigned from MERS (the original mortgagee), to Aurora and, if so, whether Aurora otherwise has standing to foreclose under the statutory power of sale.

It is clear beyond peradventure that Culhane is substantially behind in paying her mortgage and appears unable to remediate her default. This, however, does not render her an outlaw, subject to having her home seized by whatever bank or loan servicer may first lay claim to it. She still has legal rights. Everything that follows attempts to sort out these competing claims.

In moving for summary judgment, Aurora contends that it has established its standing to foreclose by obtaining an assignment of Culhane's mortgage from MERS, the original mortgagee of record, prior to fulfilling its statutory obligation to publish and send notice of sale to all interested parties. Aurora argues that a mortgagee, or an assignee of the mortgagee, need not be the holder of the underlying promissory note to exercise the power of sale under Mass. laws. Even were unity of the note and mortgage a prerequisite to foreclosure in Massachusetts, Aurora asserts that here such unity exists because Aurora not only is the assignee of the mortgage, but also is the servicer of the loan on behalf of the current holder of the note.  Culhane, in contrast, argues that a mortgagee must be the note holder to initiate foreclosure proceedings, and she claims that Aurora has not presented evidence demonstrating that Deutsche lawfully holds her note. She asserts that Deutsche must have become the note holder on or before May 1, 2006, the cut-off date for loans to be transferred into the RALI Series 2006-QO5 Trust, for its ownership interest to be valid. Id. Culhane further argues that without knowing the date on which Deutsche became the note holder, it cannot be resolved on the summary judgment record whether Deutsche actually held the note when it instructed Aurora to obtain an assignment of the mortgage and then to foreclose.

While the parties dispute the timing of the transfer of the note to Deutsche and what bearing, if any, it has on Aurora's ability to foreclose, they agree that the mortgage was assigned by MERS to Aurora on April 7, 2009. The assignment was executed on a date before the notice of sale by an individual purporting to have the requisite authority to make the assignment. Because the assignment ostensibly conformed to the strictures of Massachusetts law, MERS's appearance in the chain of title to Culhane's mortgage could go by unnoticed. Culhane argues, however, that the presence of MERS, a privatized system for the registration and tracking of home mortgage loans that directly has facilitated the pooling and conversion of such loans into mortgage-backed securities, in the chain of title is hardly as innocuous as it may seem.

Requiring reunification of the note and mortgage prior to the notice of sale arises logically as a rule from the fact that a mortgage is "but an incident to the debt." Eaton, No. 11-1382, 2011 Mass. Super. LEXIS 211 at *5 (quoting Perry v. Oliver, 317 Mass. 538, 541, 59 N.E.2d 192 (1945)); see General Ice Cream Corp. v. Stern, 291 Mass. 86, 89, 195 N.E. 890 (1935) ("The debt is the principal thing and the mortgage is incident only."); Maglione v. BancBoston Mortg. Corp., 29 Mass. App. Ct. 88, 90, 557 N.E.2d 756 (1990) ("Although a mortgage vests [legal] title [in the mortgagee], that title is defeasible and is  [*35] an off-shoot of the underlying debt."). A mortgage, by virtue of being a security interest only, "is of no value as property" when detached from the debt that it is intended to secure. Eaton, No. 11-1382, 2011 Mass. Super. LEXIS 211 at *6 (quoting Sanger v. Bancroft, 78 Mass. 365, 367, 12 Gray 365 (1859)); see Kinney v. Stevens, 207 Mass. 368, 370, 93 N.E. 586 (1911) (holding that the note and the mortgage "must coexist to give the mortgage validity"). Contrary to the suggestion of the bankruptcy court in In re Marron, foreclosure of a mortgage does not become impossible only when the debt has been extinguished; rather, "[a] mortgage cannot be made available without connecting it with the debt or duty secured thereby." Sanger, 78 Mass. at 367 (emphasis added).  Therefore, unless the Supreme Judicial Court decides otherwise in Eaton v. Federal Nat'l Mortg. Ass'n, SJC-11041 (argued and taken under advisement on October 3, 2011), this Court, in agreement with two justices of the Massachusetts Superior Court, Adamson, 2011 Mass. Super. LEXIS 212, 2011 WL 4985490, at *7; Eaton, No. 11-1382,2011 Mass. Super. LEXIS 211, reads the law as requiring a mortgagee to possess the legal title to the mortgage and either hold the note or establish that it is servicing the loan on behalf of the note holder.

On April 7, 2009, MERS, as nominee, assigned the mortgage to Aurora. The assignment was executed before a notary public by JoAnn Rein, an employee of Aurora who, by corporate resolution, was also a vice president of MERS with the authority to make mortgage assignments on MERS's behalf. At the time of the assignment of the mortgage from MERS to Aurora, Aurora already was servicing Culhane's mortgage on behalf of Deutsche. Aurora became Deutsche's servicing agent for the mortgage loans in the RALI Series 2006-QO5 Trust pursuant to a Master Servicing Assignment and Assumption Agreement  effective April 1, 2008.

Therefore, it was Aurora, through its employee, JoAnn Rein, acting as MERS's agent, who caused the assignment of the mortgage from MERS to it, so that it could foreclose. By then, Culhane had defaulted on her payments. Aurora formally initiated foreclosure proceedings on September 21, 2009, by sending the notice of sale to be published.

The Court holds that there was no flaw in this process. Under Massachusetts law, MERS lawfully held the legal title to Culhane's mortgage in trust first for Preferred and subsequently for Deutsche. A purported officer of MERS then executed an assignment of the mortgage from MERS to Aurora before a notary public in accordance with Massachusetts General Laws chapter 183, section 54B. This assignment was made upon the request of Aurora, who services Culhane's loan on behalf of Deutsche. The assignment was necessary to comply with the common law of Massachusetts requiring unity of the note and mortgage in the same entity prior to foreclosing. Aurora, as Deutsche's loan servicer, has an interest in the underlying debt; Aurora also physically possesses the collateral file, including the note. With the assignment of legal title to the mortgage from MERS, Aurora became the mortgagee of record as well, thus perfecting its standing to bring a foreclosure action against Culhane.

Culhane makes much of the fact that the endorsement to Deutsche on the note and attached allonge is undated. While this Court agrees as matter of law that the mortgagee must hold the note or be the servicing agent of the note holder before initiating foreclosure proceedings, here Aurora did. Regardless of the date that Deutsche became the note holder, whether it was before or after the cut-off date for loans to be transferred into the RALI Series 2006-QO5 Trust, as of April 1, 2008, Aurora was servicing Culhane's loan for Deutsche. Aurora caused legal title to the mortgage to be assigned to it over a year after becoming the servicing agent, and it did not send the notice of sale to be published until September 21, 2009.
CONCLUSION.  For the foregoing reasons, Aurora's Motion for Summary Judgment is allowed. Judgment shall enter for Aurora declaring that it may foreclose the mortgage on Culhane's home in a commercially reasonable manner.

Broker’s fraud/negligence in inducing debtor’s mortgage not imputed to mortgagee:

IN RE: DONNA M. DIMARE, DEBTOR. DONNA M. DIMARE v. AMERIQUEST MORTGAGE COMPANY AND OPTION ONE MORTGAGE CORPORATION, 2011 Bankr. LEXIS 4433 (Bankr. D. Mass. 11/15/11)(William C. Hillman, Bankruptcy Judge).

OVERVIEW: The debtor contended that she dealt with a mortgage broker which she thought would be the lender, that the debtor did not learn until the loan closing that the loan had a higher interest rate and monthly payments than the broker represented, and that the debtor was forced to close the loan to avoid an imminent foreclosure. The bankruptcy court held that, while it was undisputed that fact issues remained concerning whether the mortgagee provided required disclosures, the debtor otherwise failed to show any actionable misconduct by the mortgagee. The debtor's claims of negligence and fraud were based on alleged misconduct by the broker which could not be imputed to the mortgagee, and there was no indication that the broker was an agent of the mortgagee. Further, the debtor failed to show that the refinancing loan was not in the debtor's best interest since, when compared to the debtor's prior mortgage loan, the new loan had a lower monthly payment, a reduced interest rate which changed from variable to fixed, and cancelled the foreclosure. Also, the pressure of the need to avoid the foreclosure did not by itself render the new loan unfair or unconscionable.
OUTCOME: The debtor's motion for summary judgment was denied, the mortgagee's cross-motion was granted, and the claim for nondisclosure was set for trial.