In re Junk

566 B.R. 897

IN RE: Daniel L. JUNK and Christine H. Junk, Debtors.

Case No. 13–55139

United States Bankruptcy Court, S.D. Ohio, Eastern Division.

April 19, 2017

James A Coutinho, J Matthew Fisher, Allen, Kuehnle Stovall & Neuman LLP, Susan L Rhiel, Levinson LLP, Columbus, OH, Kristin Radwanick, Centerville, OH, for Debtor.

Myron N Terlecky Columbus, OH, for Trustee

OPINION AND ORDER ON AMENDED MOTION OF CHAPTER 7 TRUSTEE FOR AN ORDER (1) AUTHORIZING AND APPROVING THE COMPROMISE OF CLAIMS WITH CITIMORTGAGE, INC., ITS AFFILIATES, PREDECESSORS OR SUCCESSORS IN INTEREST, (2) AUTHORIZING AND APPROVING THE TRANSFER OF REAL ESTATE LOCATED AT 181 OLDFIELD WAY, BLUFFTON, SOUTH CAROLINA AND LOT 50 ADJACENT THERETO TO CITIMORTGAGE, INC., AND (3) ENJOINING THE DEBTORS FROM VIOLATING THE TERMS OF THE COMPROMISE AND SALE (DOC. 207)

John E. Hoffman, Jr., United States Bankruptcy Judge

I. Introduction

Myron N. Terlecky ("Terlecky"), the Chapter 7 trustee of the bankruptcy estates of Daniel L. Junk and Christine H. Junk (the "Junks"), seeks authority to sell estate property to CitiMortgage, Inc. ("CitiMortgage"), to settle any claims the estates have against CitiMortgage, and to enjoin the Junks from taking any actions based on those claims. Terlecky also requests relief from the 14–day stay of any order approving the proposed sale. For the reasons stated below, the Court approves the sale and compromise and enjoins the Junks from taking any actions based on the claims being settled, but declines to grant relief from the 14–day stay.

II. Background

The Junks make several arguments in opposition to Terlecky's settlement with CitiMortgage, including an argument challenging the Court's authority to approve the settlement. To provide context for those arguments, some background is in order.

In 2005, the Junks purchased residential real estate located in South Carolina (the "Real Estate") and financed more than $800,000 of the purchase price by borrowing money from, and executing a promissory note and mortgage in favor of, American Home Mortgage. That same year, they borrowed approximately $200,000 more from a different lender in order to make improvements to the Real Estate. Then, in late 2006, the Junks refinanced the loans they took out the year before by executing a $1.2 million note (the "Note") and a mortgage (the "Mortgage") in favor of American Home Mortgage. See Junk v. CitiMortgage (In re Junk) , 512 B.R. 584, 589–90 (Bankr. S.D. Ohio 2014) (the " Stay Relief and Abstention Order").

In 2009, the Junks stopped making payments on the Note and took several steps designed to remove the Mortgage from the Real Estate and eliminate their obligation under the Note without making all the payments due under it. For instance, in March 2009, they sent CitiMortgage a notice purporting to rescind the Note and the Mortgage. See id. at 589, 592. In addition, in April 2009, "[Daniel] Junk—asserting that he was an agent of American Home Mortgage—signed and filed a document with the [county] recorder stating that it was a satisfaction of mortgage and that the Mortgage was released and satisfied in full." Id. at 592. He filed the satisfaction of mortgage even though he knew that the Junks had not come close to paying the full amount due under the Note. See id. Indeed, at that point, the Junks had made payments on the 30–year Note for just a little over two years.

As a result of the events described above, several years of litigation ensued in South Carolina between the Junks and CitiMortgage (as well as numerous other parties sued by the Junks) in the Beaufort County Court of Common Pleas (the "State Court"). The history of that litigation is set forth in detail in the Stay Relief and Abstention Order, id. at 592–602, but suffice it to say here that things did not go as the Junks had hoped. For example, Daniel Junk told the State Court that "I've never got [the 2005] note[s] back" and "[s]o I don't know if they paid off" the owner of the 2005 notes. Id. at 595. Hearing that argument, the State Court expressed considerable skepticism, noting that no entity had tried to collect on the 2005 notes and pointing out that the 2005 mortgage had been satisfied of record. Id. at 595–96.

In addition to expressing views contrary to the legal positions taken by the Junks in the case, the State Court issued one ruling after another against them. See id. at 596–602. For example, the State Court dismissed the claim they had brought against CitiMortgage for rescission of the Note and the Mortgage under the Truth in Lending Act ("TILA"). The State Court dismissed the Junks' rescission claim with prejudice for two reasons:

(1) that the [Junks] had failed to state a claim for relief because they had "failed to plead or otherwise allege in the counterclaims that they possessed the ability to tender the loan proceeds as required to maintain a TILA rescission counterclaim" but instead were "seek[ing] to avoid their mortgage obligation altogether while keeping the house[;]" and (2) the [Junks] did not exercise the right, if any, to rescind in a timely fashion.

Id. at 601. As discussed in more detail in connection with the Junks' opposition to Terlecky's request for approval of the settlement with CitiMortgage, the Junks rely heavily on the rescission claim even though the State Court has already dismissed it with prejudice.

The State Court also dismissed with prejudice claims asserted by the Junks against CitiMortgage for fraud, negligent misrepresentation, breach of contract, civil conspiracy, and slander of title. In fact, the State Court dismissed with prejudice each of the claims they asserted against CitiMortgage, so all that would remain for the State Court to decide absent the settlement would be CitiMortgage's claims in its foreclosure case against the Junks and their defenses to the enforceability of the Note and the Mortgage in that case. See id.

The Junks moved to Ohio while the State Court case and their appeals from the State Court's decisions remained pending. See id. at 597. Then, after litigating unsuccessfully in South Carolina for nearly two more years, they commenced a Chapter 11 case in this Court. CitiMortgage filed proof of claim number 6–3 ("Claim 6–3") in the bankruptcy case, asserting a secured claim in the amount of $1,495,088.84. Attachments to the proof of claim include a copy of the complaint filed in the State Court (the "State Court Complaint"). The State Court Complaint identifies the plaintiff as Bayview Loan Servicing, LLC ("Bayview"). But also attached to Claim 6–3 are copies of two other documents—an Assignment of Mortgage from Bayview to CitiMortgage, and a copy of the Note indorsed from American Home Mortgage to CitiMortgage. As this Court previously noted, the State Court "granted Bayview's motion to substitute CitiMortgage as plaintiff based on the assignment of the Mortgage from Bayview to CitiMortgage and CitiMortgage's possession of the original Note bearing an indorsement to CitiMortgage." Stay Relief and Abstention Order, 512 B.R. at 596. No entity other than CitiMortgage has asserted that it is entitled to payments under the Note or any other promissory note relating to the Real Estate.

After filing their bankruptcy petition, the Junks commenced an adversary proceeding in which they asserted "essentially the same arguments they were making in South Carolina in support of their position that the Note and the Mortgage are unenforceable." Id. at 597 n.17, 622. Because the adversary proceeding was an attempt by the Junks to rehash arguments they had made in the State Court—many of which the State Court had already rejected or called into question—CitiMortgage requested relief from the automatic stay and abstention from the adversary proceeding so that the litigation could continue in the State Court. The Junks opposed both requests. On July 2, 2014, the Court issued the Stay Relief and Abstention Order. In that order, the Court granted CitiMortgage relief from the automatic stay for "cause" under § 362(d)(1) so that it could pursue a State Court judgment and abstained from hearing the adversary proceeding as to the issues to be decided by the State Court. The Junks appealed the Stay Relief and Abstention Order, which was affirmed by both the District Court, Doc. 182, and the Sixth Circuit, Doc. 191.

The Junks engaged in misconduct multiple times during their Chapter 11 case, including making false oaths and failing to observe their duties as debtors in possession. As a result, the Court issued a bench decision ruling that their Chapter 11 case should be converted to Chapter 7, Doc. 148, and entered an order converting the case on January 13, 2015, Doc. 136, leading to Terlecky's appointment the next day.¹ The Junks appealed the conversion order, which was affirmed by the District Court, Doc. 182, and by the Sixth Circuit on May 19, 2016, Doc. 191. The Junks requested a rehearing from the Sixth Circuit, but the request was denied, and the Sixth Circuit issued its mandate on July 19, 2016. The mandate simply stated that "[p]ursuant to the court's disposition that was filed 05/19/2016 the mandate for this case hereby issues today." Case No. 15–3986, Doc. 26 (6th Cir. July 19, 2016).²

After the orders granting relief from stay and converting the case to Chapter 7 became final and nonappealable, Terlecky filed his initial motion for authority to enter into the settlement with CitiMortgage (Doc. 201).³ A couple of weeks later, the Junks filed a "Joint Petition for a Writ of Prohibition" (the "Writ Petition") (Doc. 203). By the Writ Petition, the Junks sought to prevent the Court from authorizing the settlement between Terlecky and CitiMortgage. The Sixth Circuit, however, entered an order denying the Writ Petition. Doc. 209 at 1.

Terlecky filed an amended motion for approval of the proposed compromise and sale (the "Motion") (Doc. 207) and a Notice of Intent to Seek Injunctive Relief Against the Debtors and Any Parties Claiming By and Through...