First Bank of Roxton v. Shankles (In re Shankles)

IN RE MARY HARP SHANKLES, Debtor.

THE FIRST BANK OF ROXTON, TEXAS f/k/a SECURITY BANK

OF WHITESBORO, Plaintiff, v. MARY HARP SHANKLES, Defendant, v. MARK A. WEISBART, CHAPTER 7 TRUSTEE, Intervenor.

Case No. 11-43075

Adversary No. 12-4012

Adversary No. 11-4217

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF TEXAS SHERMAN DIVISION

Signed: September 23, 2013

(Chapter 7)

(Consolidated)

FINDINGS OF FACT AND CONCLUSIONS OF LAW

In this consolidated adversary proceeding,¹ the plaintiff is seeking a declaration that it has a valid and enforceable lien against the debtor-defendant's home. The plaintiff is also seeking a nondischargeable judgment against the debtor-defendant based on claims of actual fraud and false pretenses, 11 U.S.C. § 523(a)(2)(A), and the use of a materially false financial statement in connection with a home equity loan application, 11U.S.C. § 523(a)(2)(B). The chapter 7 trustee has intervened in this proceeding and seeks a judgment avoiding the plaintiff's lien on the debtor-defendant's home and disallowing any unsecured claim by the plaintiff against the bankruptcy estate. The Court exercises its core jurisdiction over this matter, see 28 U.S.C. §§ 157(b)(2)(B), (C), (I), (K), and makes the following findings of fact and conclusions of law, see FED. R. BANKR. P. 7052.

SUMMARY OF THE DISPUTE

The plaintiff in this case is a bank that claims to hold a mortgage on the debtor's home and the surrounding 10 acres. The nature of the debtor's interest in her homestead has been the subject of dispute in the underlying bankruptcy case. Following a contested hearing in the bankruptcy case, the Court concluded that the debtor did not obtain an economic interest in the homestead when she fraudulently forged a will that purported to bequeath her husband's separate interest in various properties, including the homestead, to herself. The Court found that she did not obtain an economic interest in her homestead until she entered into a settlement agreement with her deceased husband's children that transferred the property to her. The Court, therefore, concluded that the debtor's interest in the homestead was capped by § 522(p)(1), because she acquired the economic interest within 1,215 days of her initiation of bankruptcy.

The bank obtained its lien on the debtor's home after she forged the will, but before the settlement agreement transferring title to the home to the debtor. The settlement agreement purported to preserve the bank's lien on the property. The debtor subsequently failed to make payments to the bank as and when due. She nonetheless opposes the bank's efforts to foreclose on its interest in her home, arguing that if she did not own an economic interest in the home when she sought a home equity loan from thebank, then the bank could not have obtained a secured interest in it. If this Court does not find that the debtor's fraud and forgery results in a mortgage-free house, the debtor alternatively argues that the bank's lien is invalid because the bank failed to comply with all of the requirements for a home equity loan under Texas law.

The chapter 7 trustee has intervened in this adversary proceeding. His interests are generally aligned with the debtor. The trustee seeks to set aside the bank's lien on the debtor's home, which this Court has determined is exempt from the debtor's creditors only up to the capped amount of $146,450, thereby increasing the pool of assets in the bankruptcy estate available for distribution. The chapter 7 trustee also seeks to disallow the bank's claims for a distribution from the debtor's bankruptcy estate.

The bank seeks a declaratory judgment under 28 U.S.C. § 2201 that it has a valid and enforceable lien on 10 acres of the debtor's homestead. The bank seeks a non-dischargeable judgment for its debt, interest, legal fees and costs as secured against the real property.² The bank also requests that the Court lift the automatic stay so that it can foreclose on the debtor's homestead in satisfaction of the judgment.

FINDINGS OF FACT

A. The Parties

1. The plaintiff is The First Bank, Roxton, Texas, formerly known as Security Bank of Whitesboro.

2. The debtor-defendant is Mary Harp Shankles.

3. The intervenor is Mark Weisbart, acting as trustee of the Debtor's bankruptcy estate under chapter 7 of the Bankruptcy Code.

B. The Debtor's Acquisition of her Homestead

4. When the debtor married her husband, he owned numerous real properties, including approximately 180 acres known as 7782 Plainview Road in Sherman, Grayson County, Texas.

5. The debtor and her husband lived at 7782 Plainview Road throughout their marriage.

6. The debtor's husband died at their home on January 14, 2004.

7. At some point in or around January 2004, the debtor signed her husband's name to a will dated January 14, 2004. The signature was not witnessed. The debtor later obtained a notarization and the signature of individuals who claimed to have witnessed the signing of the will.

8. After her husband's death, the debtor submitted for probate the will that her husband purportedly signed on January 14, 2004. The will named the debtor as the sole independent executor and bequeathed her husband's separate property interest in their homestead, as well as his separate interest in numerous other properties he had acquired prior to their marriage, to the debtor.

9. The debtor's husband had children from a prior marriage. The children contested the probate of the 2004 will.

10. In September 2004, the children filed a Notice of Lis Pendens in the real property records of Grayson County, Texas, where the debtor's homestead is located. The lis pendens advised of the litigation in probate court.

11. The debtor, acting under her authority as independent executor under the forged will, deeded the homestead to herself.

12. The litigation in the probate court went on for years. The debtor began experiencing financial difficulties.

C. The Home Equity Loan

13. For all of 2006, the 180 acres of land at 7782 Plainview Road was designated in the records of the Grayson County Central Appraisal District as property 119289, with two acres classed as residential and 178 acres in various classes of agricultural use, including 35 acres designated as "Average Crop," an additional 14.24 acres designated as "Average Crop," 44.4 acres designated as "Marginal Crop," 10.52 acres designated as "Pasture," and 74.06 acres designated as "Poor Pasture."

14. According to the records of the Grayson County Appraisal District, the two residential acres were the "homesite."

15. On May 4, 2007, the debtor signed a form requesting removal of the agricultural exemption designation on eight acres of property number 119289. Nothing in the form designated which of the 178 acres of agricultural property were the eight affected acres. Accordingly, the appraisal district removed the agricultural exemption on eight acres of property designated as "Poor Pasture" in order to minimize the tax impact on the debtor. Nothing in the records of the Grayson County Appraisal District reveals which eight of the 74.06 of "Poor Pasture" acres were reclassified.

16. In late May 2007, the debtor approached the bank about a home equity loan. The debtor signed a personal financial statement dated May 31, 2007, in which she listed all of the property she had deeded to herself as the executor of the 2004 will. She told the bank officer that her husband had passed away. In the application, she answered"yes" when asked whether there was litigation pending against her. The bank officer did not inquire as to the nature of the litigation.

17. The bank reviewed the debtor's credit report as well as an appraisal of the homestead property in determining whether to make a home equity loan to the debtor.

18. The bank was aware that some of the debtor's homestead was designated in the real property records as exempt agricultural property.

19. In June 2007, the bank agreed to loan the debtor $175,000 to be secured by 10 acres of real property located at 7782 Plainview Road in Sherman, Grayson County, Texas.

20. In June 2007, Cox Land Surveying Company surveyed a 10-acre rectangular tract out of the 180 acres at 7782 Plainview Road. The tract is approximately 370 feet wide by 1200 feet long. The survey was dated June 27, 2007. This 10-acre tract is the subject of the home equity loan.

21. The loan closing took place on June 27, 2007, at the title office of Security Title Inc. in Sherman, Texas.

22. At the closing, the debtor executed a Texas Home Equity Promissory Note ("Note") in the original principal amount of $175,000 dated June 27, 2007. The Note was payable to Security Bank of Whitesboro.

23. At the closing, the Debtor executed a Texas Home Equity Security Instrument ("Security Instrument") that was later recorded at No. 00016262, Volume 4280, Page 88 of the Official Public Records of Grayson County, Texas. The legal description to the property in the Security Instrument was the same description on the Cox survey.

24. At the closing, the debtor executed a Texas Home Equity Borrower Affidavit and Agreement (the "Affidavit"). The debtor stated in the Affidavit that the 10 acres was the debtor's homestead and was not designated for agricultural use.

D. The Settlement

25. On or about August 21, 2009, the debtor entered into a settlement agreement with the children of Douglas Shankles resolving the will contest.

26. Pursuant to the settlement agreement, the parties agreed to admit to probate a will dated July 8, 1993, which will was admitted to probate by the Grayson County Court at Law on December 12, 2008.

27. The 1993 will provided, with respect to the Plainview Road property, that the home and surrounding five acres would be given in trust to Mary Harp Shankles, as trustee and as beneficiary for life. The remaining 175 acres were willed to a generation skipping trust for the benefit of Douglas' children and grandchildren, together with all other real property that Douglas owned at death....