In re Wyatt, Bankruptcy No. 04-01245

440 B.R. 204

In re James WYATT, III, Debtor.William D. White, Trustee, Plaintiff,

v.Wachovia Dealer Services, Inc., formerly known as WFS Financial, Inc., Defendant.

Bankruptcy No. 04-01245.

Adversary No. 04-10087.

United States Bankruptcy Court, District of Columbia.

Nov. 17, 2010.

Kevin R. McCarthy, William D. White, McCarthy & White, PLLC, McLean, VA, for Plaintiff.

William M. Rudow, Baltimore, MD, for Defendant.

MEMORANDUM DECISION AND ORDER ADDRESSING CROSS-MOTIONS FOR SUMMARY JUDGMENT

S. MARTIN TEEL, JR., Bankruptcy Judge.

If a lienholder has no right to pursue payment of the debt secured by its lien as a personal obligation of the debtor, and the debtor pays the debt to avoid loss of the collateral, the result is this: the value of the lien has proven to be the amount of the payments made on account of that lien even though the lien would have fetched less had the collateral been liquidated. As a consequence, the plaintiff White, as the successor via his avoidance powers to the defendant Wachovia's lien rights, is entitled to recover the postpetition payments the debtor Wyatt made on account of Wachovia's lien, which secured payment of a monetary obligation that the intervention of bankruptcy barred Wachovia from enforcing as a personal liability of Wyatt.

I

The plaintiff William D. White, the trustee in the debtor Wyatt's case under chapter 7 of the Bankruptcy Code (11 U.S.C.), commenced this adversary proceeding against WFS Financial Inc., now known as Wachovia Dealer Services, Inc. For ease of discussion, I will refer to WFS as Wachovia as though that had been its name all along.

By his complaint, White sought to set aside as a voidable transfer under 11 U.S.C. § 547(b) Wyatt's grant of a security interest in his truck to Wachovia, to preserve the avoided security interest for the benefit of the estate, to recover all postpetition payments made by Wyatt to Wachovia on account of the security interest, and to sell the vehicle free and clear of Wachovia's security interest and keep the sale proceeds as property of the estate. White does not seek to recover the prepetition payments made to Wachovia, presumably because the payments, even if made on account of an unsecured debt, would fit within the 11 U.S.C. § 547(c)(2) exception to the avoidability of the payments under § 547(b).

The parties filed cross-motions for summary judgment. The only real issue remaining is whether, as a matter of law, White is entitled to recover the postpetition payments Wyatt made to Wachovia prior to White's selling the vehicle. The court will grant summary judgment in favor of White for the following reasons.

II

The facts not genuinely in dispute are as follows. On June 1, 2004, Wyatt purchased a motor vehicle, a Chevrolet Tahoe truck, from Pohanka Imports, Inc., and Wyatt took possession of the truck the same day. On June 1, 2004, Wyatt executed a Contract and Security Agreement with Pohanka, which provided purchase money financing for the truck and contained a grant of a purchase money security interest in the truck securing Wyatt's obligation to pay amounts that were to come due under the contract. The Contract and Security Agreement was duly assigned to Wachovia, and the District of Columbia Certificate of Title reflects Wachovia as the lienholder. The Certificate of Title identifies the date of issuance as July 2, 2004. Under the Contract, Wyatt was required to make payments to Wachovia of $572.98 per month beginning on July 16, 2004.

Wyatt filed for protection under chapter 7 of the Bankruptcy Code on August 16, 2004. The parties agree that under McCarthy v. BMW Bank of North America, 509 F.3d 528 (D.C.Cir.2007), perfection of Wachovia's security interest occurred upon the District of Columbia's issuance of the certificate of title to the truck, and that the date of perfection was too late for the transfer of the lien to be exempt under 11 U.S.C. § 547(c)(3) from White's § 547(b) avoidance powers. The resolution of this adversary proceeding was stayed pending the resolution of BMW first at the bankruptcy court level (where the BMW litigation began in 2004), then at the district court level, and finally at the court of appeals level.

The principal balance of the loan as of the petition date was $24,779.98. Pending the resolution of BMW, and until White sold the truck, Wyatt continued to tender postpetition payments to Wachovia totaling $22,508.38 exclusive of force-placed insurance payments, which Wachovia also received as an agent.¹ As established by Wyatt's affidavit, Wyatt made those postpetition payments to Wachovia with the intention of reducing the amount of debt secured by Wachovia's lien on the truck.²

The allowed proofs of claim filed in this case exceed $15,000 and do not include any claim by Wachovia. Other than this cause of action, the bankruptcy estate has no non-exempt assets. Pursuant to an order entered on April 16, 2008, in the main case, White sold the truck to Wyatt free and clear of Wachovia's lien, but with White to hold a lien securing Wyatt's "future post-petition payments to the Trustee subject to the same contractual terms that originally existed between him and Wachovia." Accordingly, White seeks the amounts dueunder the lien that were paid to Wachovia postpetition and to collect as well (pursuant to the terms of the sale) the remaining amounts that would have been due under Wachovia's lien. At the hearing on the cross-motions for summary judgment, White indicated that he had already sold the truck to Wyatt. Because the parties agree that Wachovia's security interest is avoidable, there was no dispute that the estate was entitled to retain the related sale proceeds free and clear of Wachovia's security interest. White takes the position that he is entitled to recover the postpetition payments to Wachovia as proceeds of the avoided lien; Wachovia takes the position that, regardless of the value of the truck on the petition date, White is not entitled to recover any of the $22,508.38 in payments on the debt that stood at $24,779.98 on the petition date.³

III

White has established that Wyatt's transfer to Wachovia of a security interest in the truck constitutes a transfer avoidable under 11 U.S.C. § 547(b), ⁴ and it follows that the avoided lien is preserved for the benefit of the estate. 11 U.S.C. § 551. Although Wachovia's answer to the complaint did not concede this issue, and Wachovia attempted to muddy the waters as to this issue in opposing White's motion for summary judgment, Wachovia ultimately failed to present a genuine issue regarding the avoidability of the granting of the security interest.

A

Wachovia presented no evidence to rebut White's showing of avoidability. At the hearing on the cross-motions for summary judgment, counsel for Wachovia conceded on at least two occasions that the granting of the security interest in Wyatt's truck constituted an avoidable transfer within the meaning of 11 U.S.C. § 547(b). Indeed, the parties treated White's asserted right to recover postpetition payments as the only remaining issue in this proceeding. In light of the briefing on the issue and the representations made by counsel at the hearing, the court treats the elements of an avoidable transfer as having been established by White and conceded by Wachovia, and the dispute as having been narrowed to a question of whether White is entitled to recover postpetition payments in light of the avoidable transfer.

At the conclusion of the hearing, however, when the court indicated that it wouldlikely grant summary judgment in favor of White and permit his recovery of postpetition payments made by Wyatt to Wachovia, counsel for Wachovia stated that Wachovia intended to pursue an equitable subrogation defense as to the avoidability of the lien. Although Wachovia asserted the defense in its answer to the complaint, Wachovia did not raise equitable subrogation as a defense in its opposition to White's motion for summary judgment.

White's motion sought an adjudication that he was entitled to recover the payments, which required a predicate finding that the lien was avoidable, and any issue of equitable subrogation ought to have been raised in opposition to the motion for summary judgment. For that reason, and for reasons stated at the hearing, Wachovia has forfeited its equitable subrogation defense, and, in any event, it failed to plead a proper equitable subrogation defense.⁵

In arguing that Wachovia should nevertheless be permitted to advance its equitable subrogation defense, counsel for Wachovia notes that discovery was stayed pending the resolution of the parties' cross-motions for summary judgment, and that Wachovia ought not be barred from pursuing its equitable subrogation defense until it has had a fair opportunity to take discovery. Had Wachovia deemed it necessary to take discovery to adequately assert defenses to White's motion, however, it should have sought leave to do so rather than waiting until after the motion had been fully briefed and brought before the court for decision. Wachovia failed to file an affidavit under Fed.R.Civ.P. 56(f) presenting reasons why it was unable to present by affidavit facts essential to justifying its opposition to White's motion for summary judgment.

B

By receiving the security interest, Wachovia received more than it would have received if the security interest had not been transferred and Wachovia had instead received payment on Wyatt's indebtedness only to the extent provided by the Bankruptcy Code. This was established by the file in this bankruptcy case (namely, the timely proofs of claims on file; Wyatt's schedules, executed under penalty of perjury, reflecting Wyatt's non-exempt property; and White's filing of only this adversary proceeding). The court takes judicial notice of that file in assaying White's statement of material facts not in genuine dispute. In its papers (see Dkt. No. 33), Wachovia contends that there is a genuine dispute as to this issue,...