Aarons v. Patch of Land Lending, LLC (In re Aarons)

NOT FOR PUBLICATION

Appeal from the United States Bankruptcy Court for the Central District of California Neil W. Bason, Bankruptcy Judge, Presiding

Before: SPRAKER, GAN, and FARIS, Bankruptcy Judges.

MEMORANDUM ^[*]

INTRODUCTION

Ashley Susan Aarons believed that her secured creditor improperly calculated the balance owed on its secured loan and pursued foreclosure in violation of federal and state law. Aarons filed for chapter 11^[1] relief and

settled her claims with the secured creditor. She incorporated the settlement into her confirmed chapter 11 plan. Post-confirmation the bankruptcy court converted her case to chapter 7. Aarons then sued the secured lender in state court to quiet title, cancel the recorded documents setting the foreclosure in motion, and recover damages for wrongful foreclosure. The lender removed the action to the bankruptcy court and moved to dismiss it under Civil Rule 12(b)(6), made applicable by Rule 7012. The bankruptcy court granted the lender's dismissal motion without leave to amend. We agree with the bankruptcy court that the settlement precluded any claims based on the lender's pre-confirmation conduct, and any potentially surviving claims belonged to the bankruptcy estate, not to Aarons. Therefore, we AFFIRM.

FACTS^[2]

A. The parties and their roles in the loan transaction.

Patch of Land Lending, LLC ("Patch") loaned Aarons' family trust $3,000,000, evidenced by a promissory note requiring interest-only payments and maturing on April 1, 2020. Aarons, on behalf of the trust, executed a deed of trust to secure the loan, which encumbered real

property located on Bel Air Road in Los Angeles ("Bel Air Property"). Aarons personally guaranteed the loan. Patch thereafter sold and assigned its loan and lien rights to Wilmington Savings Fund Society, as trustee for a mortgage pool trust owned or controlled by Invictus Residential Pooler Trust 3A. In turn, Invictus sold and assigned its rights to the Verus Securitization Trust 2020-NPL1. Notwithstanding these assignments, Patch retained the servicing rights for the loan, and FCI Lender Services became the sub-servicer.

B. Default, bankruptcy, and burgeoning disputes between the parties.

By January 2019, the loan was in default, with payments in arrears of $73,168. Aarons alleges that she tendered $73,200 to pay the delinquency but Patch refused to apply the payment and placed it in a suspense account instead. Aarons contends that as a result Patch wrongfully calculated the balance of the loan and improperly charged interest and other fees. On February 1, 2019, Patch issued a notice of default.

Aarons filed her chapter 11 petition in June 2019. Through various filings in the bankruptcy court, Aarons and Patch skirmished over their respective rights and duties. In November 2019, Aarons filed a motion challenging the validity and amount of Patch's secured claim and contended that the lender had applied an improper interest rate, charged improper interest and late charges, had violated multiple consumer finance and usury laws, wrongfully interfered with Aarons' attempts to refinance the Bel Air Property, incorrectly accounted for the loan, and improperly

failed to credit her for the $73,200 payment.

In December 2019, Patch timely filed a proof of claim for $3,354,858.00 due and owing as of the petition date. In addition, in February 2020, Wilmington on behalf of Invictus filed a motion for relief from stay. Among other things, Wilmington obtained partial relief from stay permitting it to issue a new notice of default (collectively, "NODs") and a notice of trustee's sale ("NOTS") against the Bel Air Property. California TD Specialists is identified as the successor trustee in the NOD recorded in June 2020 against the Bel Air Property.

C. Settlement and plan confirmation.

In the spring and summer of 2020, the parties negotiated a tentative settlement resolving the issues relating to the loan and Patch's secured claim. The settlement was executed in September 2020 and attached to the brief Aarons filed in support of confirmation of her proposed plan. This agreement was supplemented and amended by four addenda, though none of the addenda terms are pertinent to this appeal.

The settlement treated Aarons' November 2019 motion as an objection to Patch's December 2019 proof of secured claim. According to Patch, by the time the original settlement was executed, Aarons owed it over $4,000,000 (including all interest, fees, and charges). The key terms of the settlement included the following:

• Reduction of Patch's secured claim from $4,006,291.07 (as of June 1, 2020) to a "New Principal Balance" of $3,432,916.07

• Reinstatement of the loan as "current" with a 7.5% nondefault interest rate as specified in the note and a default rate of 18% as specified in the note.

• Extension of the loan's maturity date to April 1, 2021, at which point the entire outstanding loan balance would be due.

• Monthly interest-only payments of $21,455.73, to be paid until full satisfaction of the debt.

• Treatment of Aarons' 2019 $73,200 payment as a reserve to be applied to satisfy the first three months of interest only payments, plus estimated real property taxes and part of the fourth monthly interest payment.

• A $60,000 fee for extension of the new maturity date for up to six months, subject to waiver under certain conditions.

In exchange for these new loan terms, Aarons granted Patch, FCI, Wilmington, and their successors, assigns, agents, and other representatives a very broad release of all then-existing claims she held against them.

In her own words, Aarons stated, "the settlement reached will result in substantial benefit for my bankruptcy estate and its creditors." According to Aarons, the settlement gave her breathing room from the secured debt obligations she owed to Patch and enabled her to refinance or sell the Bel Air Property to help fund her plan. She further predicted: "[i]f the Plan is not approved, I will lose this favorable opportunity to generate

funds from the Bel Air Property and more importantly, I will lose the Bel Air Property to a foreclosure sale."

The final version of the settlement, with all addenda, was made a part of Aarons' plan and was approved under Rule 9019 during the confirmation proceedings. The settlement became effective in February 2021-shortly after the bankruptcy court entered its order confirming Aarons' plan. By the time Aarons confirmed her plan and the settlement became effective, she had two months remaining before the note matured under the settlement.

On April 13, 2021, Aarons requested a six-month extension of the maturity date. The record does not include any response to the request for extension, but Aarons' subsequent request for forbearance was denied, and on August 11, 2021(more than six months after the maturity date under the settlement), a notice of default was recorded.

D. Plan default, conversion to chapter 7, and Aarons' complaint.

Aarons neither sold nor refinanced the Bel Air Property, and her case was converted to chapter 7 on October 18, 2021. In accordance with the terms of the plan and the conversion order, her property as the reorganized debtor vested in the chapter 7 estate, except for property that would have been excluded from the estate if the case always had been under chapter 7.

Several months after the conversion of the bankruptcy to chapter 7, Aarons filed a complaint in state court to quiet title to the Bel Air Property, for cancellation of the recorded NODs and NOTS, and for wrongful

foreclosure.^[3] The complaint named Patch, FCI, TD, and Verus as defendants (collectively, the "Patch Defendants"). Though the foreclosure had not yet occurred, many allegations read as if it had. The allegations are wide ranging and span the years from 2019 to 2022, including the alleged refusal to credit her loan account for the $73,200 she had paid to bring her loan current. Many of these allegations complain about events that were prior to, and the subject of, the settlement. Some of the allegations, however, occurred after confirmation and prior to conversion of the bankruptcy. Aarons also included in her allegations the post-conversion...