Barnard v. Nationstar Mortg. LLC (In re Kramer)

In re: Michael Kramer aka Michael B. Kramer,

and Margaret E. Kramer aka Margaret Cohen aka Margaret Mills, Debtors.

R. Kenneth Barnard, as Chapter 7 Trustee of the Estates of Michael Kramer aka Michael B. Kramer,and Margaret E. Kramer aka Margaret Cohen aka Margaret Mills, Plaintiff, v. Nationstar Mortgage LLC, as Servicing Agent for Wells Fargo Bank, National Association, as Trustee for

Securitized Asset Backed Receivables LLC Trust 2005-FR4 Mortgage Pass-Through Certificates, Series 2005-FR4,

John Doe "1" Through "100", and Other John Doe Entities "1" Through "100", Defendants.

Case No. 17-70741-reg

Adv. Pro. No. 18-08002-reg

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF NEW YORK

November 27, 2019

Chapter 7

MEMORANDUM DECISION

This matter is before the Court pursuant to motions for summary judgment in an adversary proceeding commenced in the case of Michael Kramer and Margaret Kramer (the "Debtors") by Robert Pryor, the Chapter 7 trustee ("Trustee" or "Plaintiff") seeking to have mortgages recorded against the Debtors' residence deemed unenforceable. One mortgage, held by Fremont Investment & Loan ("Fremont") and dating from 2001, was satisfied by a subsequent mortgage loan made by Fremont Investment & Loan in 2005, which was ultimately assigned to Wells Fargo, National Association, as trustee for Securitized Asset Backed Receivables LLC Trust 2005-FR4 Mortgage Pass-Through Certificates, Series 2005 FR4 ("Wells Fargo"). Nationstar Mortgage LLC ("Nationstar" or "Defendant") is the servicer for Wells Fargo on this mortgage loan. In addition to seeking a determination on summary judgment that the two mortgages of record on the Debtors' residence should be canceled and discharged, the Trustee also seeks to have the note held by Wells Fargo deemed unenforceable. While there is no opposition to the relief sought in the Trustee's motion with respect to Fremont's mortgage of record, the Trustee cannot utilize the Bankruptcy Code to accomplish this goal. Instead, the Trustee should proceed in state court to cancel Fremont's mortgage as a lien of record.

The Trustee also seeks entry of summary judgment that the mortgage held by Wells Fargo is unenforceable as the statute of limitations to commence a foreclosure action has expired. Therefore, while the mortgage held by Wells Fargo was validly executed and recorded, the mortgage is no longer enforceable, and the note executed by the Debtors reflecting this obligation is likewise unenforceable. The Defendant moves for summary judgment as well, arguing that a foreclosure action was properly commenced within the six-year statute of limitations and remains pending in New York State Supreme Court, albeit stayed by the filing of this bankruptcy case. As a result, its mortgage lien and note are fully enforceable under New York law and are valid claims against the Debtors and their real property.

Applying the proper Bankruptcy Code sections to this matter is not difficult, nor does it raise novel questions. Every day, bankruptcy courts are asked to rule on what is essentially a claims objection. However, the challenge facing the Court in this case involves the application of New York real property and contract law to the facts and the application and effect of the relevant bankruptcy statutes. Becauseboth parties filed for summary judgment, the Court has to first determine whether it could resolve the issues as presented based on the stipulated facts, or whether an evidentiary hearing is required. As to that issue the Court agrees with the parties that this dispute does not involve a disagreement about the relevant facts, but rather disputes of law, which may be resolved by summary judgment.

Put simply, the Court is asked to determine whether under applicable New York law Wells Fargo properly commenced a foreclosure action within the six-year period from the time the mortgage and note were accelerated. The answer to that question, as set forth in this decision, requires a detailed analysis of the factual record before the Court as agreed to by the parties and an analysis of what are admittedly divergent opinions by New York courts.

The Court is mindful that the current state of the law may be considered unsettled with respect to whether a notice of default like the notice received by the Debtors can trigger acceleration of the mortgage debt, and the extent to which the withdrawal of a foreclosure action can be viewed as a revocation of a notice of acceleration of a mortgage debt. However, it is undisputed by any court that has been exposed to the human carnage resulting from the mortgage crisis that is still being felt daily in state and federal courts across the country that some very real and systemic problems were exposed in the litigation that followed. These problems are attributable to both the borrowers and the financial institutions that made the loans. Nevertheless, a significant factor in the rise of problematic foreclosure proceedings can be traced to the mutation of the traditional relationship between the borrower and the mortgagee. Once lenders stopped holding mortgages and commenced entering into complex transactions to sell the mortgages, which were then pooled and sold to trusts as collateralized debt obligations, the seeds of the mortgage crisis were planted. The most obvious result was that millions of foreclosure proceedings were commenced in all parts of the country causing severe hardships to the homeowners and their communities. This Court and its sister bankruptcy courts have consistently maintained that while compassion is an essential element of the bankruptcy process, creditors have an absolute right to exercise all available remedies to the fullest extent of the law. However, they must abide by the rules, just as theborrowers must play by the rules. This case highlights this tension between the laws and procedures that protect homeowners from the unlawful taking of their homes, and the laws that permit the lenders to enforce their rights in foreclosure proceedings.

If the Court were to find that the statute of limitations had not expired, it would have had to overlook inherent inconsistencies in the Defendant's various arguments. In addition, the Court would have to find that a notice of default stating that the note would be accelerated by a date certain was of no consequence, and a foreclosure action pursuant to which the lender represented that it held the note was a nullity. The Defendant's core argument is that the notice of default is irrelevant and that because the Defendant did not have the legal authority to commence the first foreclosure action, that action should not count. The Court is not prepared to find that a lender, because of its own failures to either understand the law or failure to abide by the law, is entitled to a do-over in order to negate the consequences of its actions. The result of the lender's inability to follow the clear and unambiguous procedures in this matter leave the lender in a circumstance where the applicable statute of limitations has expired, leaving the note and mortgage held by Wells Fargo unenforceable. For these reasons and the reasons that follow, the Trustee is entitled to entry of an order directing that the note and mortgage held by Wells Fargo be discharged and canceled.

Procedural History

On February 9, 2017, the Debtors filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the Bankruptcy Code. The Trustee was appointed as the interim Chapter 7 Trustee, has duly qualified, and is the permanent trustee of the Debtors' estate. On March 22, 2017, a Notice of Discovery of Assets was filed, advising the creditors in the case that all proofs of claim must be filed on or before June 20, 2017. On April 3, 2017, Nationstar filed a motion ("Lift Stay Motion") to vacate the automatic stay with respect to the Debtors' residence located at 91 Whiskey Road, Middle Island, NY (the "Property"). On May 5, 2017, the Trustee filedopposition to the Lift Stay Motion. On September 11, 2017, Nationstar withdrew the Lift Stay Motion. On January 3, 2018, the Trustee filed this adversary proceeding. On February 26, 2018, Nationstar filed a motion to dismiss the adversary proceeding, and on April 16, 2018, the Trustee filed opposition to the motion to dismiss. On April 23, 2018, Nationstar filed a reply, and at a hearing held on April 30, 2018, the Court denied the motion to dismiss the adversary proceeding. Nationstar filed an answer to the complaint on July 16, 2018, and an amended answer on August 7, 2018.

On May 6, 2019, Nationstar filed a motion for summary judgment ("Nationstar Motion"). On May 29, 2019, the Trustee filed opposition to the Nationstar Motion. On June 13, 2019, Nationstar filed a reply. On May 6, 2019, the Trustee also filed a motion for summary Judgment ("Trustee Motion"). On May 29, 2019, Nationstar filed opposition to the Trustee Motion. On June 13, 2019, the Trustee filed a reply. A hearing on the Nationstar Motion and the Trustee Motion was held on June 19, 2019. On August 8, 2019, the Court made a request by letter for any additional submissions regarding the location of the note that is the subject of this adversary proceeding from October 17, 2006 through January 30, 2017. On August 28, 2019, counsel to Nationstar responded. Thereafter, the matter was marked submitted.

Facts

The following is taken from the Joint Statement of Material Facts and from the exhibits provided by the Trustee and Nationstar. On October 3, 2001, the Debtors borrowed the principal sum of $212,000 (the "Fremont First Loan") from Fremont Investment & Loan ("Fremont"). The Fremont First Loan is memorialized by a note in the principal amount of $212,000 (the "Fremont First Note") dated October 3, 2001. As security for the Fremont First Note, the Debtors executed a mortgage dated October 3, 2001 (the "Fremont First Mortgage") in favor ofFremont, which encumbered the Property. The Fremont First Mortgage was...