Green v. HSBC Mortg. Servs., Inc. (In re Green)

474 B.R. 790

In re Maria Jill GREEN, Debtor.Maria Jill Green, Plaintiff/Counter–Defendant

v. HSBC Mortgage Services, Inc., Defendant/Cross–Claim DefendantandChase Home Finance, LLC., Servicer for Government National Mortgage Association, Defendant/Counter–Plaintiff and Cross–Claimant.

United States Bankruptcy Court, D. Maryland.

Bankruptcy 10–30606–TJC.

Adversary No. 10–737.

July 25, 2012.

Christina E. Shin, Christina E. Shin, Esq., Rockville, MD, Mary Park McLean, Nancy S. Grigsby, Bowie, MD, Plaintiff/Counter–Defendant.

Christopher Hamlin, Greenbelt, MD, Kevin R. Feig, BWW Law Group, LLC, Bethesda, MD, Defendant/Cross–Claim Defendant.

MEMORANDUM OF DECISION

THOMAS J. CATLIOTA, Bankruptcy Judge.

Before the Court is the motion for summary judgment (the “Motion”) (Docket No. 38) filed by counter-defendants Maria Jill Green (the “Debtor”) and Nancy Spencer Grigsby, chapter 13 trustee (the “Trustee” and together with the Debtor, the “Plaintiffs”). The counter-plaintiff/cross-claimant Chase Home Finance LLC, Servicer for Government National Mortgage Association (“Chase”) filed an opposition and cross-motion for summary judgment (the “Cross–Motion”) (Docket No. 39). A hearing was held on February 9, 2012 to consider the Motion and Cross–Motion. Post-hearing briefs were filed by the Debtor on February 23, 2012 (Docket No. 49), the Trustee on February 27, 2012 (Docket No. 53) and Chase on March 5, 2012 (Docket No. 54). No further hearing is necessary. For the reasons set forth herein, the Cross–Motion will be granted.

Material Facts Not in Dispute

On September 7, 2010, the Debtor filed a voluntary petition for relief under chapter 13 of the Code. Shortly thereafter on September 30, 2010, the Debtor commenced the instant adversary proceeding against Defendant HSBC Mortgage Services, Inc. (“HSBC”) to determine the secured status of its claim. The Debtor filed the amended complaint (the “Complaint”) on October 4, 2010 against HSBC, who had filed a proof of claim in the amount of $63,462.66 in the Debtor's bankruptcy case. Case No. 10–30606, Claim No. 2–1. The claim is secured by the Debtor's real property located at 14136 Reverend Rainsford Court, Upper Marlboro, Maryland 20772 (the “Property”). The Complaint seeks a determination of the validity, priority, and extent of HSBC's lien against the Property.

The material facts pertinent to this adversary proceeding are not in dispute. On December 21, 2005, the Debtor signed a purchase money note and deed of trust in the amount of $260,000 in favor of IndyMac Bank, F.S.B. The note was secured by a first priority deed of trust against the Property, which was recorded on February 1, 2006 in the land records of Prince George's County, Maryland (the “IndyMac First DOT”). The Debtor also signed a second promissory note in the amount of $65,000 and granted a second priority deed of trust in favor of IndyMac, which deed of trust was also recorded on February 1, 2006 (the “IndyMac Second DOT”).

Chase is the servicer of a loan obtained by the Debtor on June 4, 2008 from Government National Mortgage Association. This refinance loan in the original principal amount of $274,050 was provided by First Horizon Home Loans, a Division of First Tennessee Bank (“First Horizon”). The Debtor signed a deed of trust securing the loan (the “First Horizon DOT”). The First Horizon DOT was intended to provide a first priority lien against the Property in favor of First Horizon. The proceeds of the refinance loan were applied to satisfy the IndyMac First DOT. A copy of the certificate of satisfaction for the IndyMac First DOT was filed in the land records on June 13, 2008. However, for unknown reasons, the First Horizon DOT was never recorded. The IndyMac Second DOT was not paid off by the First Horizon loan and remained recorded in the land records. In 2008, the IndyMac Second DOT was transferred to HSBC.

Subsequently on August 4, 2010, First Horizon filed a complaint (the “State Court Action”) against the Debtor and HSBC in the Circuit Court for Prince George's County, Maryland requesting a declaratory judgment that the First Horizon DOT is, nunc pro tunc, a valid and enforceable lien on the Property under the equitable legal theories of equitable mortgage and equitable subrogation. First Horizon Home Loans v. Maria Jill Green, Case No. CAE 10–24006.

The Debtor then filed her chapter 13 petition and shortly thereafter the instant adversary proceeding against HSBC to determine the secured status of its claim. On October 20, 2010, Chase, who now holds the First Horizon DOT and Promissory Note, filed its initial secured proof of claim in the Debtor's case in the amount of $270,063.23.¹ Case No. 10–30606, Claim No. 6–1. The Debtor stated in the original complaint in this adversary proceeding that Chase allegedly held a secured first deed of trust against the Property in the amount of $267,571. The Debtor sought to value the Property at $225,156 and asked the Court to determine that the IndyMac Second DOT in the amount of $64,041 was avoidable under 11 U.S.C. § 506² of the Bankruptcy Code. On December 16, 2010, the Debtor and HSBC entered into a consent order resolving this adversary proceeding (Docket No. 14). HSBC conceded that the First Horizon DOT lien exceeds the fair market value of the Property. Thus, pursuant to § 506, HSBC's claim was wholly unsecured and would be treated accordingly under the Debtor's chapter 13 plan.

On July 18, 2011, in the adversary proceeding, the Debtor filed a motion to vacate the consent order (Docket No. 16) arguing that because Chase's lien was not perfected, HSBC holds the senior lien, which is not subject to strip off pursuant to 11 U.S.C. § 506. Immediately thereafter on July 20, 2011, Chase filed a motion to intervene, which was granted by the Court on September 13, 2011.

Chase filed an answer to the complaint and counterclaim against the Plaintiffs and cross-claim against HSBC on September 13, 2011. Chase is seeking declaratory judgment that the First Horizon DOT has a first lien position against the Property. Alternatively, Chase seeks to establish that the First Horizon DOT is equitably subrogated to the first lien position that the IndyMac First DOT held. The last two counts request an equitable mortgage and a constructive trust. The Debtor and the Trustee then filed the Motion; prior to entering into the consent order, HSBC filed an answer to the Complaint, however, HSBC has failed to respond to the cross-claim asserted against it by Chase.

Conclusions of Law

The parties agree there are no material facts in dispute and the matter is ripe for summary judgment. Therefore, the Court will only briefly address the summary judgment standards:

A court may award summary judgment only when there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); In re Apex Express Corp., 190 F.3d 624, 633 (4th Cir.1999). In evaluating a summary judgment motion, a court “must consider whether a reasonable [factfinder] could find in favor of the non-moving party, taking all inferences to be drawn from the underlying facts in the light most favorable to the nonmovant.” Apex, 190 F.3d at 633. In doing so, a court is not entitled to either weigh the evidence or make credibility determinations. See Anderson, 477 U.S. at 255, 106 S.Ct. 2505 (“Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge”). If the moving party is unable to demonstrate the absence of any genuine issue of material fact, summary judgment is not proper and must be denied. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).

Mercantile Peninsula Bank v. French (In re French), 499 F.3d 345, 351–352 (4th Cir.2007).

Here, Chase contends that it is entitled under the doctrine of equitable subrogation to assert the rights under the IndyMac First DOT. Plaintiffs, however, contend that the Trustee's rights under § 544(a)(3)—those of a bona fide purchaser for value without notice—defeat Chase's claim for equitable subrogation. Chase responds that the filing of the State Court Action constitutes a lis pendens against the Property that defeats Plaintiffs' § 544(a)(3) claim because it put a prospective purchaser on notice of the equitable subrogation claim. Plaintiffs counter that the lis pendens is an avoidable preference under § 547, and once avoided, § 544(a)(3) defeats Chase's equitable subrogation claim or, at least, results in the Trustee holding an interest in the Property superior to Chase's interest under the IndyMac First DOT. Thus, the ultimate issue before the Court is whether the lis pendens is an avoidable preference under § 547 and, if so, what is the effect of avoidance on Chase's equitable subrogation claim.

For the reasons that follow, the Court concludes that Plaintiffs' effort to defeat Chase's equitable subrogation claim by avoiding the lis pendens as a preferential transfer must fail. The Court therefore concludes that Chase is entitled to assert its equitable subrogation rights.

Equitable Subrogation, Lis Pendens and § 544(a)(3).

Equitable subrogation is a well-established and accepted legal doctrine that is widely applied in law and is common in bankruptcy. Subrogation is broadly defined as the “substitution of one person in the place of another with reference to a lawful claim or right.” Rinn v. First Union National Bank of Maryland (Rinn), 176 B.R. 401, 407 (D.Md.1995) (citation omitted). The doctrine is governed by equitable principles and is “intended to provide relief against loss to a meritorious creditor who has paid the debt of another.” Id. The doctrine provides that one who pays the lien of another and takes a new lien as security will be subrogated to the rights of the first lien holder as against...