Everbank v. Chacon, 16–P–1467

92 Mass.App.Ct. 1101

87 N.E.3d 116 (Table)

EVERBANK

v.Gerardo CHACON.

16–P–1467

Appeals Court of Massachusetts.

Entered: July 28, 2017.

MEMORANDUM AND ORDER PURSUANT TO RULE 1:28

On appeal from a judgment entered in the Housing Court in a summary process case, awarding possession of his home to his former lender EverBank, Gerardo Chacon² asks us to weigh in on a particularly muddy area of bankruptcy law: what it means for a Chapter 7 debtor to state an intention, pursuant to 11 U.S.C. § 521(a)(2) (2012), to "surrender" property of the bankruptcy estate that secures a debt listed on the debtor's schedule of assets and liabilities. In a detailed and thoughtful series of rulings on cross motions for summary judgment, the judge ultimately concluded that Chacon, while in Chapter 7 bankruptcy, had "surrendered" the property to EverBank and so could not contest the validity of EverBank's foreclosure and its consequent superior right to possession. We find it necessary to reverse that portion of the judgment.

Background. EverBank held Chacon's home mortgage, which was federally insured and thus subject to certain regulations issued by the United States Department of Housing and Urban Development (HUD).³ After Chacon defaulted on the mortgage, EverBank foreclosed, acquired the property at the foreclosure sale, and then brought this summary process action against Chacon. Chacon defended on the ground that EverBank had failed to comply with a condition precedent to foreclosure, imposed by HUD regulations and incorporated by reference into the mortgage, requiring that, in the event of a payment default, "[t]he mortgagee must have a face-to-face interview with the mortgagor, or make a reasonable effort to arrange such a meeting," before commencing foreclosure proceedings or acquiring title to the property. 24 C.F.R. § 203.604(b) (2016). See 24 C.F.R. § 203.500 (2016). An obvious purpose of such a face-to-face interview is to discuss a repayment plan, modification of the mortgage, or other measures that may avoid the need for foreclosure and allow the mortgagor to remain in his or her residence and repay the loan, thus minimizing the need for HUD, as insurer, to pay losses to mortgagees. See 24 C.F.R. §§ 203.501, 203.600 – 203.616 (2016).

The motion judge initially agreed with Chacon, ruling that EverBank's noncompliance with the regulation rendered its foreclosure on Chacon's home void ab initio, so that EverBank had no right of possession superior to Chacon's.⁴ On EverBank's motion for reconsideration, however, the judge—while reiterating that as a general matter a HUD-insured mortgagee's noncompliance with the regulation would invalidate a foreclosure and thus be a defense to a summary process action⁵ —ruled that Chacon was no longer entitled to raise that defense. The judge reasoned that in the Chapter 7 proceeding, "Chacon had elected to surrender any interest he had in the mortgaged property to EverBank," and so the doctrines of waiver and judicial estoppel now barred Chacon from contesting the validity of the foreclosure. Chacon appeals the resulting judgment awarding possession to EverBank.⁶

Discussion. We first address and reject EverBank's two threshold procedural arguments for affirmance. We then explain why Chacon's election of the Chapter 7 "surrender" option did not bar him from raising in Housing Court the defense that noncompliance with the HUD regulation rendered the foreclosure invalid—a defense that the judge ruled was, if available, sufficient to order judgment for Chacon.

a. Timeliness. Although the judge and the Appeals Court Clerk's Office deemed this appeal timely filed, EverBank continues to assert that the appeal is untimely. To the extent that the order on our court docket does not finally dispose of any questions of timeliness, we conclude, substantially for the reasons set forth in Chacon's reply brief, that the appeal was timely.

b. Res judicata. EverBank argues that prior judgments issued by the United States Bankruptcy Court for the District of Massachusetts and the Land Court preclude Chacon from now challenging the validity of the foreclosure in this summary process action. We conclude that neither issue preclusion⁷ nor claim preclusion⁸ bars Chacon's defense here.

i. Bankruptcy Court proceeding. We reject EverBank's argument that the Bankruptcy Court's allowance of EverBank's motion for relief under 11 U.S.C. § 362(e) (2012) from the automatic bankruptcy stay precludes Chacon from challenging the validity of the mortgage foreclosure in the summary process proceeding. The Housing Court judge correctly concluded that no such preclusion applied, because a Bankruptcy Court judge's decision to lift the stay under § 362(e) results from a limited, expedited hearing. See Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 31–35 (1st Cir. 1994). It is not an adversary proceeding, does not involve a full adjudication on the merits, and determines no substantive claims, defenses, or counterclaims underlying the validity of a lien. See ibid. A fortiori, it can have no issue or claim preclusive effect with regard to the validity of the process used to foreclose upon a lien (here, the mortgage) after the stay is lifted.

ii. Land Court proceeding. We also reject Everbank's argument as to the preclusive effect of the Land Court judge's preforeclosure judgment that Chacon was not entitled to protection under the Servicemembers Civil Relief Act (SCRA). See 50 U.S.C. app. § 501 et seq. (2012); St. 1943, c. 57, as amended through St. 1998, c. 142. That Land Court judgment made no determination whatsoever as to the parties' rights and obligations under the mortgage itself. See HSBC Bank USA, N.A. v. Matt, 464 Mass. 193, 196–197 (2013) (SCRA proceedings address limited subject matter and are neither part of nor necessary to foreclosure process). Indeed, a party not entitled to relief under the SCRA is not even permitted to appear in a Land Court SCRA proceeding, see id. at 198–199, much less assert a preemptive defense to an anticipated foreclosure. The validity of the foreclosure was not actually litigated, and therefore issue preclusion does not apply. And because the validity of the foreclosure was not a claim that could, let alone "should have been adjudicated in the [earlier] action," claim preclusion does not apply. Heacock v. Heacock, 402 Mass. 21, 23 (1988).

c. Effect of the Chapter 7 "surrender." We first review the applicable Chapter 7 bankruptcy framework and the relevant events in Chacon's Chapter 7 proceeding. If an individual debtor files a schedule of assets and liabilities that includes debts secured by property of the estate, then the debtor must file "a statement of his intention with respect to the retention or surrender of such property and, if applicable, specifying that such property is claimed as exempt, that the debtor intends to redeem such property, or that the debtor intends to reaffirm debts secured by such property." 11 U.S.C. § 521(a)(2)(A). The debtor is given a limited time to "perform his intention," 11 U.S.C. § 521(a)(2)(B). But "nothing in [the provisions just quoted] shall alter the debtor's or the [bankruptcy] trustee's rights with regard to such property under this title." 11 U.S.C. § 521(a)(2).⁹

These provisions must be read together with the requirement in the same section that the debtor "surrender to the [bankruptcy] trustee all property of the estate." 11 U.S.C. § 521(a)(4). The trustee, after notice and hearing, "may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(a) (2012). And, "[u]nless the court orders otherwise, any property scheduled under section 521(a)(1) of this title not otherwise administered at the time of the closing of a case is abandoned to the debtor." 11 U.S.C. § 554(c).

Chacon initially filed for Chapter 13 bankruptcy; he listed his home as securing a claim of $420,868, but as having a value of only $318,500. EverBank sought and obtained relief from the automatic stay that barred it from foreclosing upon its mortgage during the bankruptcy. Chacon then converted his bankruptcy case to Chapter 7 and timely filed a statement of intention to "surrender" the property. Because EverBank's secured claim exceed the property's value (putting the property "under water"), and because the bankruptcy estate included no other nonexempt assets that were available to pay Chacon's liabilities, the trustee treated the case as a "no asset" case, "abandoned" the property, and closed the case in late 2011.

This resulted in the discharge (under 11 U.S.C. § 524 [a][2] ) of Chacon's personal liability on the note, but did not impair EverBank's ability to proceed in rem by foreclosing on the mortgage. See Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) ("[A] creditor's right to foreclose on the mortgage survives or passes through the bankruptcy," unaffected by discharge of in personam liability). Some months later, EverBank, without seeking a face-to-face interview with Chacon pursuant to the HUD regulation, commenced the foreclosure, acquired the property, and sought to evict Chacon.

i. Conclusions of the Housing Court judge. The Housing Court judge concluded that Chacon "surrendered" the property "to EverBank," that this was "a condition for obtaining a Chapter 7 discharge of his mortgage loan," and that "the bankruptcy court issued its Chapter 7 bankruptcy discharge [of Chacon's personal liability] in reliance on Chacon's explicit statement of his intentions to surrender the property." On this basis, the judge ruled that "Chacon waived any right he may have had to assert the non-compliance with [the HUD regulation] as a defense in this summary process action," and that the doctrine of judicial estoppel now barred Chacon from contesting EverBank's right to foreclose.¹⁰

We are constrained to disagree. We first note that nothing in Chacon's statement of intention to surrender, or in...