Arnot v. Endresen (In re Endresen)

530 B.R. 856

In re: Michael W. Endresen, Joanne Maureen Endresen, Debtors.

Stephen P. Arnot, Chapter 7 Trustee, Plaintiff

v.Michael W. Endresen; Joanne Maureen Endresen; Green Tree Servicing, LLC; The Bank of New York Mellon, f/k/a The Bank of New York, as Trustee for the Holders of First Horizon Mortgage Pass–Through Certificates, Series FHAMS 2004–AA7; The Bank of New York Mellon, as Successor to JPMorgan Chase Bank, as Trustee for the Holders of Bear Stearns Alt–A Trust 2005–1 Mortgage Pass–Through Certificates, Series 2005–1; The Bank of New York Mellon, f/k/a The Bank of New York, as Trustee for the Holders of American Home Mortgage Investment Trust 2004–4; U.S. Bank National Association, as Trustee for Adjustable Rate Mortgage Trust 2005–2, Adjustable Rate Mortgage–Backed Pass–Through Certificates, Series 2005–2, Defendants.

Bankruptcy Case No. 11–35396–rld7

Adv. Proc. No. 14–3131–rld

United States Bankruptcy Court, D. Oregon.

Signed April 15, 2015

Todd Trierweiler, Portland, OR, for Debtors.

MEMORANDUM OPINION

RANDALL L. DUNN, U.S. Bankruptcy Judge

On December 18, 2014, I heard oral argument (“Hearing”) on the motion for summary judgment (“SJ Motion”) filed by plaintiff Stephen P. Arnot, Chapter 7 Trustee (“Trustee”), and the cross-motions for summary judgment (“Cross–Motions”) filed by the debtor defendants Michael and Joanne Endresen (the “Endresens”) and by the lender defendants, The Bank of New York Mellon (in various capacities) and Green Tree Servicing LLC (collectively, “Lenders”). At the Hearing, I announced a tentative decision followed by an extensive colloquy with counsel for the parties. At the conclusion of the Hearing, I granted the parties until Friday, January 9, 2015, to file supplemental legal memoranda on the issue as to whether a security interest in the personal property proceeds of the settlement of construction defect claims could attach and be perfected under Oregon state law by means other than as provided for in Article 9 of the Uniform Commercial Code, as adopted in Oregon (“UCC”). All parties filed supplemental memoranda by the deadline. In addition, on January 9, 2015, the Trustee filed a motion for leave to file a second amended complaint, alleging a new claim based on the theory that any security interest of the Lenders in the proceeds of the settlement is subordinate as to the Trustee. The Lenders objected to the Trustee's motion to further amend the complaint. The Trustee further filed a supplemental authority on January 29, 2015. Thereafter, I took the matter under advisement.

In preparing this Memorandum Opinion, I have carefully reviewed the parties' pleadings in this adversary proceeding (“Adversary Proceeding”), the SJ Motion and the Cross–Motions, the parties' supporting legal memoranda, the Declaration of Stephen P. Arnot, and Plaintiff's Concise Statement of Material Facts (“Concise Statement”) and the responses by the Endresens and the Lenders to the Concise Statement. The Lenders requested that I take judicial notice (“Judicial Notice Request”) of certain public record documents filed with county recorders' offices, pursuant to Federal Rule of Evidence 201. No party objected to the Judicial Notice Request, and I have reviewed the documents specified in the Judicial Notice Request. I further have taken judicial notice of the docket and documents filed in the Adversary Proceeding, in the Endresens' main chapter 7 case, Case No. 11–35396–rld7, and in the Endresens' currently pending chapter 13 main case, Case No. 11–39658–tmb13, for purposes of confirming and ascertaining facts not reasonably in dispute. Federal Rule of Evidence 201 ; In re Butts, 350 B.R. 12, 14 n. 1 (Bankr.E.D.Pa.2006). In addition, I have reviewed applicable authorities, both as cited to me and as located through my own research.

This Memorandum Opinion sets forth my conclusions of law in light of the record before me pursuant to Civil Rule 52(a), applicable in the Adversary Proceeding under Rule 7052.¹

I. FACTS

The facts in this matter are not in dispute. In October and November 2004, the Endresens purchased ten residential real properties located on N. Columbia Way and N. Oregonian Avenue in Portland, Oregon (the “Properties”), to be used as rentals. All deeds to the Properties were recorded in November 2004. In connection with their purchases of the Properties, the Endresens obtained a series of purchase money loans secured by trust deed liens on each of the Properties.

The Lender deed of trust (“Trust Deed”) in each case is a form instrument designated as “OREGON—Single Family—Fannie Mae/Freddie Mac UNIFORM INSTRUMENT WITH MERS Form 3038 1/01.” The Lenders' Trust Deeds apparently have some variations, but the provisions relevant to the issues before me are identical in each of their Trust Deeds. Specifically, among the defined terms in each Trust Deed is “Miscellaneous Proceeds.”

(N) “Miscellaneous Proceeds” means any compensation, settlement, award of damages, or proceeds paid by any third party ... for: (i) damage to, or destruction of, the Property; (ii) condemnation or other taking of all or any part of the Property; (iii) conveyance in lieu of condemnation; or (iv) misrepresentations of, or omissions as to, the value and/or condition of the Property.

Section 2 of each Trust Deed, entitled “Application of Payments or Proceeds,” provides in relevant part:

Except as otherwise described in this Section 2, all payments accepted and applied by Lender shall be applied in the following order of priority: (a) interest due under the Note; (b) principal due under the Note; (c) amounts due under Section 3. Such payments shall be applied to each Periodic Payment in the order in which it becomes due. Any remaining amounts shall be applied first to late charges, second to any other amounts due under this Security Instrument, and then to reduce the principal balance of the Note.

...

Any application of payments, insurance proceeds, or Miscellaneous Proceeds to principal due under the Note shall not extend or postpone the due date, or change the amount, of the Periodic Payments.

Section 11 of each Trust Deed, entitled “Assignment of Miscellaneous Proceeds; Forfeiture,” provides in relevant part:

All Miscellaneous Proceeds are hereby assigned to and shall be paid to Lender.

If the Property is damaged, such Miscellaneous Proceeds shall be applied to restoration or repair of the Property, if the restoration or repair is economically feasible and Lender's security is not lessened. During such repair and restoration period, Lender shall have the right to hold such Miscellaneous Proceeds until Lender has had an opportunity to inspect such Property to ensure the work has been completed to Lender's satisfaction, provided that such inspection shall be undertaken promptly. Lender may pay for the repairs and restoration in a single disbursement or in a series of progress payments as the work is completed. Unless an agreement is made in writing or Applicable Law requires interest to be paid on such Miscellaneous Proceeds, Lender shall not be required to pay Borrower any interest or earnings on such Miscellaneous Proceeds. If the restoration or repair is not economically feasible or Lender's security would be lessened, the Miscellaneous Proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower. Such Miscellaneous Proceeds shall be applied in the order provided for in Section 2.

In the event of a total taking, destruction, or loss in value of the Property, the Miscellaneous Proceeds shall be applied to the sums secured by this Security Instrument, whether or not then due, with the excess, if any, paid to Borrower.

...

The Lenders hold the Trust Deeds on eight of the Properties as successors in interest to the original lenders. No issue has been raised as to the standing of any of the Lenders to appear in this Adversary Proceeding. The deeds of trust as to the remaining two Properties apparently are held by U.S. Bank National Association, as Trustee for Adjustable Rate Mortgage Trust 2005–2, Adjustable Rate Mortgage–Backed Pass–Through Certificates, Series 2005–2 (“U.S.Bank”), which has not appeared in this action, even though the docket reflects that U.S. Bank was properly served with a summons and the Trustee's First Amended Complaint.

Apparently, unbeknownst either to the Endresens or to the Lenders, the homes constructed on the Properties had defects in their construction that resulted in significant damage to the Properties over time.

The Endresens filed their chapter 7 petition on June 21, 2011. On October 17, 2011, the court entered an order discharging the Endresens and closing their main chapter 7 case as a “no asset estate.”

On November 9, 2011, the Endresens filed a new chapter 13 petition, commencing Case No. 11–39658–tmb13. The Lenders' claims are provided for in the Endresens' confirmed chapter 13 plan and remain unsatisfied.

On or about May 8, 2013, the Endresens were added as co-plaintiffs in a civil action pending in Multnomah County Circuit Court entitled Pine River Properties LLC v. GLC Homes, Inc., et al., Case No. 1210–13038 (the “State Court Action”). In their complaint in the State Court Action, the Endresens alleged, among other things, that 1) construction of the ten homes on the Properties was completed in 2003, 2) the homes on all ten Properties were negligently constructed, and 3) the Endresens discovered the construction defects in the homes and related damage during the summer in 2012. The Endresens' construction defect claims alleged in the State Court Action are referred to collectively as the “Construction Defect Claims.”

On February 3, 2014, the court entered an order reopening the Endresens' chapter 7 case. The Trustee was duly appointed as the chapter 7 trustee in the Endresens' reopened case. On or about the same date, the Construction Defect Claims were settled for a gross amount of $318,200.

On March 21, 2014, the court...