Brei v. Ben Brinck, Asset Acceptance, LLC (In re Brei)

599 B.R. 880

IN RE: Scott Joseph BREI, Debtor.

Scott Joseph Brei, Plaintiff,

v.Ben Brinck, Asset Acceptance, LLC f/k/a Asset Acceptance Corp., and Hudson & Keys, LLC, Defendants.

Ben Brinck, Counter-Plaintiff,

v.Scott Joseph Brei, Counter-Defendant.

CASE NO. 18-31920-SGJ-7

ADV. NO. 18-03211-SGJ

United States Bankruptcy Court, N.D. Texas, Dallas Division.

Signed March 4, 2019

Filed March 5, 2019

Eric A. Liepins, 12770 Coit Rd., Suite 1100, Dallas, TX 75251, Counsel for Debtor/Plaintiff/Counter-Defendant.

Darrell Wayne Cook, 5005 Greenville Ave., Suite 200, Dallas, TX 75206, Counsel for Defendant/Counter-Plaintiff.

FINDINGS OF FACT AND CONCLUSIONS OF LAW IN SUPPORT OF DECLARATORY JUDGMENT THAT: (A) THE DEBTOR'S MOCKINGBIRD PROPERTY WAS HOMESTEAD IN CHARACTER; AND (B) THE DEFENDANTS' LIENS THEREON ARE VOID

Stacey G. C. Jernigan, U.S. Bankruptcy Judge

The Chapter 7 Debtor, Scott Brei (the "Plaintiff/Debtor"),¹ filed the above-referenced adversary proceeding (the "Adversary Proceeding") on June 15, 2018, seeking a declaratory judgment that three, separate liens on his real property located at 4509 Mockingbird Lane in Highland Park, Dallas County, Texas (the "Mockingbird Property"), which he claims as his Texas homestead, were invalidly attached and should be declared void. The three defendants with alleged liens are: Hudson & Keyes, LLC (a small judgment creditor); Asset Acceptance, LLC (another small judgment creditor); and Ben Brinck (an individual who made a $ 75,000, one-year-term, 12% loan to the Plaintiff/Debtor and his then-wife, back in the year 2004, and purported to take a junior lien on each of two residential properties they owned, including the Mockingbird Property). Defendants Hudson & Keyes, LLC and Asset Acceptance, LLC both failed to answer or otherwise defend in the Adversary Proceeding, although duly served; thus, default judgments will be entered as to them.² Ben Brinck (the "Defendant/Brinck") filed an answer and a counterclaim against the Plaintiff/Debtor, requesting a declaratory judgment in his favor—specifically asking this court to declare that his lien is, indeed, valid against the Mockingbird Property because, while he does not dispute that the Mockingbird Property is now being used as the Plaintiff/Debtor's homestead, he states that it was not the Plaintiff/Debtor's exempt homestead fifteen years ago, at the time his note and deeds of trust were executed. Rather, the Defendant/Brinck argues, a different real property located at 148 Bayside Drive in Malakoff, Henderson County, Texas (the "Malakoff Property")—which was long ago foreclosed upon by another, senior lender—was being used as the Plaintiff/Debtor's homestead and the Mockingbird Property was a secondary residence . Therefore, the Defendant/Brinck has asserted that he has a valid lien against the Mockingbird Property and should be permitted to foreclose on the Mockingbird Property. The Defendant/Brinck's primary evidence is: (a) testimony of the Debtor's ex-wife (testifying that the Malakoff Property was the family's homestead back in 2004, not the Mockingbird Property); (b) designations of homestead on file in the Henderson County property records and with the appraisal district (as to the Malakoff Property) before, during, and after the time that the Defendant/Brinck made his loan; and (c) the absence of a homestead designation on file in the Dallas County appraisal district records for the Mockingbird Property in the years shortly before, during, and after the time that the Defendant/Brinck made his loan.

Accordingly, this Adversary Proceeding requires the court to revisit some of the basic principles of Texas homestead law including: (a) the very narrow set of circumstances, under the Texas Constitution and statutes, when liens can encumber a homestead; (b) the short hurdle of a property owner to establish the homestead character of his property; (c) the tougher hurdle for one to disprove the property's homestead character (such as through abandonment), once homestead character is initially established by the owner; (d) some of the complexities that arise with dual residences when there is ambiguity as to which one is the debtor's homestead (sometimes, in such situations, a declaration of homestead or non-homestead usage, provided by a borrower to a lender, may operate as an estoppel against the borrower, but estoppel has rarely been applied by courts and, in any event, there was no such declaration provided in the case at bar); and (e) the general inability of a lender to rely on designations of homestead in county records (i.e. , property records or appraisal district records) to estop a borrower from claiming a homestead—these cannot change the true character of a property as homestead in nature, and a lender relies on them at his peril, even if the end result seems to reward a dishonest debtor.

On November 19, 2018, this court conducted an evidentiary trial (the "Trial") on this matter. Based upon the evidence submitted including testimony from the Plaintiff/Debtor, Mary Catherine Brei ("Mrs. Brei" or the "Debtor's Ex-Wife"), and the Defendant/Brinck, the court finds and concludes that the Mockingbird Property was the Plaintiff/Debtor's exempt homestead at the time the Defendant/Brinck's note and deeds of trust were executed, and, accordingly, the Defendant/Brinck's lien did not attach to the Mockingbird Property and is void.

I. JURISDICTION

Bankruptcy subject matter jurisdiction exists in this matter, pursuant to 28 U.S.C. § 1334(b). This bankruptcy court has authority to exercise bankruptcy subject matter jurisdiction pursuant to 28 U.S.C. § 157(a) & (c) and the Standing Order of Reference of Bankruptcy Cases and Proceedings (Misc. Rule No. 33 ), for the Northern District of Texas, dated August 3, 1984. This is a core proceeding in which this court has statutory authority to issue final orders, pursuant to at least 28 U.S.C. § 157(b)(2)(A), (K), and (O).

II. FINDINGS OF FACT

A. The Plaintiff/Debtor's and Mrs. Brei's Acquisition of Two Different Residential Real Properties.

1. The Plaintiff/Debtor and Mrs. Brei married in the year 1995.³ Shortly before they were married, in 1994, they together purchased the Malakoff Property in Henderson County, Texas. There was no evidence introduced regarding any loans undertaken for this acquisition.

2. Then, a few years later, on December 18, 1998, while still owning the Malakoff Property, the Plaintiff/Debtor and Mrs. Brei purchased the Mockingbird Property. In connection with that purchase, they executed a Promissory Note in favor of Muirfield Mortgage Limited Partnership⁴ in the original amount of $ 238,500. The Promissory Note was secured by a Deed of Trust on the Mockingbird Property (the "1998 Mockingbird Property Deed of Trust").⁵

3. Thus, the Plaintiff/Debtor and Mrs. Brei, beginning in late 1998, owned two residential properties: One in the prestigious Highland Park area of Dallas, and one not far from Dallas, in a rural area near Cedar Creek Lake.⁶

4. Paragraph 6 of the 1998 Mockingbird Property Deed of Trust provided that "Borrower shall occupy, establish, and use the Property as Borrower's principal residence within sixty days ... and shall continue to occupy the Property as Borrower's principal residence for at least one year after the date of occupancy."⁷

5. The Plaintiff/Debtor testified that he began occupying the Mockingbird Property within 60 days of signing the 1998 Mockingbird Property Deed of Trust, consistent with Paragraph 6, and further testified that he had continued living in the Mockingbird Property up until the day he filed for bankruptcy. The court found this testimony credible.

6. A few years later, on or about October 3, 2001, the Plaintiff/Debtor and Mrs. Brei executed a Homestead Lien Contract and Deed of Trust in favor of Bank One, N.A. as to the Mockingbird Property (the "2001 Mockingbird Property Homestead Loan"), which provided that "Owner represents to Lender that the Property is Owner's homestead."⁸ This appears to have been a home equity loan.

7. Around the same time, on or about October 18, 2001, a Voluntary Designation of Homestead as to the Mockingbird Property was filed on behalf of the Plaintiff/Debtor and Mrs. Brie in the Dallas County property records.⁹

8. Interestingly, the Dallas County Appraisal District records reflect a gap in time when there was no homestead exemption claimed on the Mockingbird Property by the Plaintiff/Debtor and Mrs. Brie. Specifically, there was a homestead exemption for the Mockingbird Property for the years 1999-2001, then a gap for a few years (from the years 2002 through 2008) , and then a homestead exemption for it again in the years 2009-2018.

B. The Malakoff Property: Inconsistent Homestead Designations in Property Records and in Appraisal District Records.

9. The Plaintiff/Debtor testified that he never considered the Malakoff Property as his homestead. Moreover, there was evidence submitted showing that the Plaintiff/Debtor only signed a "Designation of Homestead and Affidavit of Nonhomestead," on or about October 23, 2000, wherein the Plaintiff/Debtor designated the Mockingbird Property as his homestead and the Malakoff Property as his non-homestead.¹⁰ This document was filed in the Deed Records for Henderson County on November 7, 2000 and reflects that Wells Fargo Bank requested that it be recorded. Notwithstanding this filing, other evidence¹¹ reflected that the Henderson County Appraisal District was still showing the Malakoff Property to be homestead property until the property was foreclosed in 2011. Specifically, the Henderson County Appraisal District records reflect that it was claimed as exempt homestead property for tax purposes by the Plaintiff/Debtor and Mrs. Brei from at least as early as the year 1999 through the year 2011¹² —in other words, for at least 13 consecutive years— even though: (a) the Mockingbird Property was acquired in late 1998 and the couple had claimed it as exempt in the Dallas County...