Desmond v. Raymond C. Green, Inc. (In re Harborhouse of Gloucester, LLC)

523 B.R. 749

HARBORHOUSE OF GLOUCESTER, LLC, Debtor.

John O. Desmond, Chapter 7 Trustee, Plaintiff–Appellant/Cross–Appellee

v.Raymond C. Green, Inc., as Trustee of Raymond C. Green Trust, Defendant–Appellee/Cross–Appellant.

BAP Nos. MB 14–013

MB 14–014.

Bankruptcy No. 10–23078–HJB.

Adversary No. 11–01351–HJB.

United States Bankruptcy Appellate Panel of the First Circuit.

Oct. 29, 2014.

Mark W. Corner, Esq., Boston, MA, on brief for Plaintiff–Appellant/Cross–Appellee.

Michael K. Lane, Esq. and John M. McAuliffe, Esq., Newton, MA, on brief for Defendant–Appellee / Cross–Appellant.

Before LAMOUTTE, DEASY, and KORNREICH, United States Bankruptcy Appellate Panel Judges.

Opinion

KORNREICH, Bankruptcy Judge.

These appeals by the chapter 7 trustee and a secured creditor arise from the bankruptcy court's mixed rulings on the parties' cross-motions for summary judgment in an adversary proceeding commenced by the trustee to challenge the secured creditor's claim to collect on a lost note and enforce the mortgage securing that note. Relying upon the version of § 3–309 of the Uniform Commercial Code enacted in Massachusetts, the bankruptcy court ruled in favor of the trustee on the note and in favor of the secured creditor on the mortgage. We AFFIRM the amended judgment for the reasons set forth below.

BACKGROUND

The undisputed facts are contained in the bankruptcy court's amended memorandum of decision. See Desmond v. Raymond C. Green, Inc. (In re Harborhouse of Gloucester, LLC ), 505 B.R. 365 (Bankr.D.Mass.2014). Taking what is necessary from the record and that memorandum, we begin with an outline of how Raymond C. Green, Inc. came to assert a secured claim in this bankruptcy case.

Harborhouse's Assumption of Murphy's Mortgage to Hansbury

In 2004, Harborhouse of Gloucester, LLC, acquired property consisting of a restaurant and two residential apartments from Timothy A. Murphy. The purchase price was $1.00 plus the assumption of all encumbrances against the property, including the mortgage given by Murphy to Philip J. Hansbury, trustee of the 90 Rantoul Real Estate Trust, to secure a promissory note. Significantly, there is nothing in the record suggesting that Harborhouse incurred any direct in personam liability to Hansbury.

Hansbury's Assignment of the Murphy Note and Mortgage to CPIC

In 2006, Hansbury assigned his rights in the Murphy note and mortgage to Connect Plus International Corporation (“CPIC”). However, because Hansbury had lost the Murphy note, he gave CPIC an assignment of the mortgage, a lost note affidavit with a copy of the note, and an allonge purporting to transfer rights under the note.¹ But there is nothing in the record to show that Harborhouse incurred any direct in personam liability to CPIC as a result of this transaction.

CPIC's Assignment of the Murphy Note and Mortgage to gage to Green

In 2007, CPIC borrowed $150,000.00 from Green, trustee of Raymond C. Green Trust. As security for this loan, CPIC assigned its rights under the Murphy note and mortgage to Green. According to the allonge given by CPIC, the balance due on the Murphy note was $602,557.73 when it was assigned to Green. Yet there is nothing in the record to indicate that Harborhouse incurred any personal liability to Green as a consequence of this transaction.

Bankruptcy, Green's Secured Claim, and the Trustee's ustee's Objection

Harborhouse sought relief under chapter 11 on December 1, 2010. Green filed a secured proof of claim in the amount of $795,926.56 as the assignee of the Murphy note and mortgage. Within a year, the case was converted to chapter 7.²

The chapter 7 trustee challenged Green's secured claim in an adversary proceeding against Green and CPIC. CPIC did not respond. Following the trustee's unsuccessful attempt at summary judgment, the adversary proceeding was dismissed without prejudice. Sometime later, the bankruptcy court authorized the trustee to sell the property free and clear of liens. Green's disputed lien attached to the proceeds of sale.³ Later, over Green's objection, the bankruptcy court reinstated the trustee's original adversary proceeding. The trustee then filed his six-count amended complaint against Green and CPIC.⁴ Green answered and asserted counterclaims. CPIC defaulted.

The Rulings Below

The issues were fixed and determined on dueling motions for summary judgment.⁵ Neither party was satisfied with the outcome and each filed a motion seeking clarification. On those motions, the bankruptcy court issued the amended memorandum of decision, amended orders, and amended judgment that are before us on appeal. The bankruptcy court framed the issue to be whether Green, as the holder of the lost note affidavit, may stand in the shoes of Hansbury, the original holder of the Murphy note or, alternatively, whether Green, as assignee of the mortgage, may assert rights under the mortgage. The decision was split with judgment in favor of the trustee on the note and in favor of Green on the mortgage.⁶ Both parties appealed.

JURISDICTION

Before addressing the merits of an appeal, we must assay our own jurisdiction, even when the litigants themselves do not raise a challenge. We have jurisdiction to hear appeals from the final judgments, orders, and decrees of bankruptcy courts. See 28 U.S.C. § 158(a)(1). An order granting summary judgment is a final order where no counts against any defendants remain. Pendergast v. Mass. Dep't of Rev. ( In re Pendergast), 510 B.R. 1, 7 (1st Cir. BAP 2014) ; Frykberg v. JPMorgan Chase Bank (In re Frykberg), 490 B.R. 652, 656 (1st Cir. BAP 2013) (citation omitted). The bankruptcy court's summary judgment is final because it disposed of all counts of the complaint and all counterclaims. Moreover, even though the outcome turned on state law, the adversary proceeding resulted in the adjudication of Green's claim. Claims in bankruptcy are defined under 11 U.S.C. § 101(5) and are allowed under 11 U.S.C. § 502. Consequently, the adversary proceeding arose under title 11 in a case under title 11 and the bankruptcy court acted within its authority when it issued its final judgment. See 28 U.S.C. §§ 1334(b) and 157(a), (b)(1) and (2)(B), and (c); Rule 201 of the Local Rules of the United States District Court for the District of Massachusetts. Our jurisdiction is not in doubt.

STANDARD OF REVIEW

We review an order granting summary judgment de novo. Scotiabank de P.R. v. Burgos (In re Plaza Resort at Palmas, Inc.), 741 F.3d 269, 283 (1st Cir.2014) ; see also Weiss v. Wells Fargo Bank, N.A. (In re Kelley), 498 B.R. 392, 396 (1st Cir. BAP 2013) (citations omitted); Backlund v. Stanley–Snow (In re Stanley–Snow), 405 B.R. 11, 17 (1st Cir. BAP 2009) (citations omitted). Summary judgment is appropriate when the record shows that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” See Fed. R. Civ. P. 56(a) ; see also OneBeacon Am. Ins. Co. v. Commercial Union Assurance Co. of Can.,

684 F.3d 237, 241 (1st Cir.2012) (quoting Fed. R. Civ. P. 56(a) ).

DISCUSSION

The bankruptcy court concluded that Green was not the holder of the Murphy note and, accordingly, that Green had no claim against the bankruptcy estate, per se. Additionally, the bankruptcy court determined that CPIC was never a holder of the note. However, because Green possessed a valid legal interest in the Murphy mortgage, it was entitled to hold the proceeds of sale of the property in trust for the true holder of the note. Without deciding the issue, the bankruptcy court pointed to Hansbury as the most likely holder.

The bankruptcy court supported its judgment with a thorough discourse on the negative impact of § 3–309 of Massachusetts' version of the Uniform Commercial Code on Green's ability to enforce the Murphy note and a fine analysis of Green's ability to enforce the mortgage. Our conclusion is that § 3–309 does not apply because Harborhouse never incurred personal liability under the Murphy note. We agree that Green was entitled to hold the proceeds of sale of the property in trust for the true holder of the note. We also agree that the trustee had no interest in the proceeds because the mortgage had not been avoided.

The Lost Note

The note was a negotiable instrument under state law. See Mass. Gen. Laws ch. 106, § 3–104. As such it was governed by the Uniform Commercial Code as enacted in Massachusetts. Relying upon Dennis Joslin Co., LLC v. Robinson Broad. Corp., 977 F.Supp. 491 (D.D.C.1997) ; Marks v. Braunstein, 439 B.R. 248 (D.Mass.2010), and Dudley v. S. Va. Univ. (In re Dudley), 502 B.R. 259 (Bankr.W.D.Va.2013), the bankruptcy court determined Green was not a person entitled to enforce the note under Mass. Gen. Laws ch. 106, § 3–301 because Green was not a holder, a non-holder in possession, or one entitled to enforce a lost note under Mass. Gen. Laws ch. 106, § 3–309(a).⁷ With regard to Green's ability to enforce the lost note under § 3–309(a), the bankruptcy court ruled, like the courts in Joslin, Marks, and Dudley, that one who seeks to enforce a lost note must be the person who was in possession of the note and entitled to enforce it when the loss of possession occurred.⁸ In reaching this conclusion, the bankruptcy court recited the dual standard reiterated in Marks: “A party seeking to enforce a note must show that, prior to the loss ... of the note, he 1) was entitled to enforce the instrument and 2) had possession of the instrument.” Marks, 439 B.R. at 251 (citing Joslin, 977 F.Supp. at 495 ). As further support, the bankruptcy court cited other courts in accord. See Kemp v. Countrywide Home Loans, Inc. (In re Kemp), 440 B.R. 624, 626 (Bankr.D.N.J.2010) ; Cadle Co. of Conn., Inc. v. Messick, No. CV00092983, 30 Conn. L. Rptr. 21, 2001 Conn.Super. LEXIS 1752 (Conn.Super.Ct. Jun. 26, 2001). According to the bankruptcy court, the requirement of actual possession at the time of loss under § 3–309 provides an objective method to determine a party's right to enforce a negotiable...