Fraction v. Jacklily, LLC (In re Fraction)

622 B.R. 642

IN RE Steven E. FRACTION, Rhonda L. Fraction a/k/a Lynne Fraction, Debtors

Steven E. Fraction, Rhonda L. Fraction a/k/a Lynne Fraction, Plaintiffs,

v.Jacklily, LLC, Scott Waterman, Chapter 13 Trustee, Defendants,Specialized Loan Servicing, LLC, Third Party Defendant

Bky. No. 18-11159 ELF

Adv. No. 19-121

United States Bankruptcy Court, E.D. Pennsylvania.

Signed November 19, 2020

John R.K. Solt, John R. K. Solt, P.C., Bethlehem, PA, for Debtor

MEMORANDUM

ERIC L. FRANK, U.S. BANKRUPTCY JUDGE

I. INTRODUCTION

Plaintiff-Debtors Steven and Rhonda Fraction ("the Debtors") own their residence subject to two (2) mortgages. The junior mortgagee, Defendant Jacklily, LLC ("Jacklily"), filed a secured claim in this chapter 13 case.

In this adversary proceeding, the Debtors request a determination, pursuant to 11 U.S.C. § 506(a), that Jacklily's claim should be disallowed as a secured claim and allowed only an unsecured claim. The Debtors also request that the court void the lien that Jacklily holds on their property pursuant to the Third Circuit's decision in In re McDonald, 205 F.3d 606 (3d Cir. 2000). In McDonald, the court held that the anti-modification clause of 11 U.S.C. § 1322(b)(2) applies only if a claim is at least partially secured and therefore, a totally undersecured claim may be modified and its holder's lien stripped in a chapter 13 case. Id. at 611, 614.

In response, Jacklily contends that its mortgage has priority over a portion of the senior mortgagee's mortgage because, after Jacklily recorded its mortgage, the first mortgagee and the Debtors modified that mortgage and increased the loan principal without Jacklily's consent, thereby prejudicing its lien position. Therefore, according to Jacklily, its mortgage has priority over the increased portion of mortgage principal resulting from the modification. Based on the value of the Debtors' residence, Jacklily's mortgage therefore, would only be undersecured — not wholly unsecured — and its lien would not be void under McDonald.

Each side has filed a Motion for Summary Judgment.

For the reasons explained below, I will grant the Debtors' Motion, deny Jacklily's Motion and grant the Debtors the relief that they seek.

II. PROCEDURAL HISTORY

The Debtors filed a petition for chapter 13 bankruptcy on February 21, 2018. Included in the Debtors' bankruptcy estate is their primary residence — a single-family home at 6925 Tuscany Drive, Macungie, PA 18062 ("the Property").

Specialized Loan Servicing, LLC ("SLS") filed a proof of claim in the Debtors' bankruptcy case for $403,132.48. This proof of claim indicated that SLS's claim is secured by a mortgage on the Property. Jacklily subsequently filed a proof of claim in the Debtors' bankruptcy case for $206,375.99, which also asserted that Jacklily's claim is fully secured by a mortgage on the Property.

On August 20, 2018, the Debtors filed a Motion to Determine the Value of the Secured Claim of Jacklily. After holding a hearing on that Motion on March 26, 2019, the court entered an Order on April 24, 2019 that determined the value of the Property as $400,000.00.¹

On June 3, 2019, the Debtors filed the present adversary proceeding. Their adversary complaint alleges that Jacklily's claim is wholly unsecured based on (1) the court's valuation of the Property at $400,000.00, (2) the Debtors' assertion that SLS's $403,132.48 secured claim has priority over Jacklily's $206,375.99 secured claim, and (3) the resulting conclusion that SLS's secured claim fully encumbers the Property. Accordingly, the Debtors seek a determination in this adversary proceeding that the lien securing Jacklily's claim is void.²

Jacklily filed an answer to the Debtors' adversary complaint on July 30, 2019.

The Debtors filed their Motion for Partial Summary Judgment on January 7, 2020.³ Jacklily filed its Motion for Summary Judgment on January 10, 2020.

On February 7, 2020, with leave of court, Jacklily filed an amended answer to the Debtors' complaint, which included a third-party complaint against SLS. SLS filed an answer to Jacklily's third-party complaint on March 20, 2020, denying that that Jacklily's mortgage has priority over the modified portion of its own mortgage.

On September 16, 2020, after all the parties had filed memoranda in support of their positions, I entered an Order reopening the summary judgment record. The Order permitted the parties to submit any additional evidence regarding any modification of SLS's mortgage that occurred prior to its 2017 modification. I also granted the parties leave to file a supplemental memorandum of law addressing the effect of any additional evidence submitted to the court.

On October 1, 2020, each of the parties submitted additional evidence and/or memoranda on this issue to the court.

To ensure that the parties had an opportunity to respond to newly submitted evidence, by Order dated October 20, 2020, I extended the deadline for final submissions until October 27, 2020. Jacklily submitted a Supplemental Memorandum of Law on October 27, 2020.

The motions are now ready for a decision.

III. SUMMARY JUDGMENT STANDARD

The Debtors and Jacklily have filed cross motions for summary judgment pursuant to Fed. R. Civ. P. 56, made applicable to adversary proceedings by Fed. R. Bankr. P. 7056. I have previously discussed the legal standard for summary judgment motions:

Summary judgment is appropriate only when, drawing all reasonable inferences in favor of the nonmoving party, there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. E.g., Tri–M Group, LLC v. Sharp, 638 F.3d 406, 415 (3d Cir. 2011) ; In re Bath, 442 B.R. 377, 387 (Bankr. E.D. Pa. 2010). In other words, summary judgment may be entered if there are no disputed issues of material fact and the undisputed facts would require a directed verdict in favor of the movant. SeeFitzpatrick v. City of Atlanta, 2 F.3d 1112, 1115 (11th Cir. 1993).

In evaluating a motion for summary judgment, the court's role is not to weigh the evidence, but to determine whether there is a disputed, material fact for resolution at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A genuine issue of material fact is one in which sufficient evidence exists that would permit a reasonable fact finder to return a verdict for the non-moving party. Id. at 248, 106 S.Ct. 2505. In evaluating the record, the court must view the underlying facts and make all reasonable inferences therefrom in the light most favorable to the party opposing the motion. Montone v. City of Jersey City, 709 F.3d 181, 189 (3d Cir. 2013) ; United States v. 717 South Woodward St., 2 F.3d 529, 533 (3d Cir. 1993). On the other hand, if it appears that the evidence "is so one-sided that one party must prevail as a matter of law," the court should enter judgment in that party's favor. Anderson, 477 U.S. at 252, 106 S.Ct. 2505.

Proper resolution of a motion for summary judgment also requires consideration of the parties' respective burdens.

As a threshold matter, the moving party's initial burden is to demonstrate that there are no disputed issues of material fact. E.g., U.S. v. Donovan, 661 F.3d 174, 185 (3d Cir. 2011) ; Aman v. Cort Furniture Rental Corp., 85 F.3d 1074, 1080 (3d Cir. 1996) ; Chipollini v. Spencer Gifts, Inc., 814 F.2d 893, 896 (3d Cir. 1987). How the movant meets this burden and how the respondent may rebut the movant's showing is affected by the allocation of the evidentiary burden of persuasion if the dispute were to proceed to trial.

If the moving party bears the burden of proof, the movant must "support its motion with credible evidence ... that would entitle it to a directed verdict if not controverted at trial." Fitzpatrick, 2 F.3d at 1115 (citation omitted). The evidence must establish "all the essential elements of its case on which it bears the burden of proof at trial, [such that] no reasonable jury could find for the non-moving party." Id. (citation omitted); see alsoBath, 442 B.R. at 387. If the movant (with the burden of proof at trial) meets this initial burden, the responding party may not rest on the pleadings, but must designate specific factual averments through the use of affidavits or other permissible evidentiary material which demonstrate a genuine issue of material fact to be resolved at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) ; Anderson, 477 U.S. at 247–50, 106 S.Ct. 2505.

If the moving party does not bear the burden of proof at trial, the analysis is more complicated. The movant must still demonstrate the absence of a disputed issue of material fact, but an entitlement to judgment in its favor may be established in either of two (2) ways.

First, and most simply, if the movant (who does not bear the burden of proof) presents evidence establishing that the undisputed facts negate at least one (1) element of the respondent's claim, the movant is entitled to summary judgment. SeeQuaker State Minit–Lube, Inc. v. Fireman's Fund Ins. Co., 868 F. Supp. 1278, 1287 n.5 (D. Utah 1994).

Alternatively, the movant may obtain summary judgment by demonstrating that the responding party (with the burden of proof at trial) lacks evidence to support an essential element of its claim. See, e.g., Orson, Inc. v. Miramax Film Corp., 79 F.3d 1358, 1366 (3d Cir. 1996) ; Chipollini, 814 F.2d at 896.... SeeCelotex, 477 U.S. at 322, 106 S.Ct. 2548 ("[ Rule 56 ] mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial"); see alsoIn re Roemmele, 2011 WL 4804833, at *4 (Bankr. E.D. Pa. Oct. 11, 2011).

In re Polichuk, 506 B.R. 405, 420-22 (Bankr. E.D. Pa. 2014) (footnotes omitted).

IV. FACTS

The parties do not dispute the material facts...