Isaacs v. DBI-ASG Coinvestor Fund III, LLC (In re Isaacs)

In the Matter of LINDA S ISAACS, Debtor.

LINDA S ISAACS, Plaintiff v. DBI-ASG COINVESTOR FUND III, LLC, Defendant.

CASE NO. 14-50679

CASE NO. 14-05021

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF KENTUCKY

June 27, 2019

Chapter 13

Adversary Proceeding

MEMORANDUM OPINION

Before this Court are cross motions for summary judgment on the adversary proceeding initiated by Chapter 13 debtor Linda Isaacs against second mortgagee DBI-ASG Coinvestor Fund III, LLC. The complaint attempts to avoid this second mortgage lien on her residential real property.

BACKGROUND

Debtors Linda and Michael Isaacs filed jointly for Chapter 7 relief on March 19, 2004, listing their homestead real estate at 494 Highway 819, Kuttawa, Kentucky 42055. This property continues as their residence. In the 2004 Chapter 7 case, the debtors scheduled $820,666.80 in unsecured debt and $502,690.65 in secured debt. Included among the secured debts were the first and second mortgages on the homestead residence both held by GMAC Mortgage Corp., with the debtors valuing the property at $375,000 in the 2004 Chapter 7 petition. The Schedule D listed the first mortgage balance at $319,450 and the second at $86,552, leaving approximately $31,001 of the second mortgage as unsecured according to the bankruptcy petition. GMAC recorded the second mortgage (originally executed February 5, 2003) on June 23, 2004, in Lyon County, which was roughly three months after the Chapter 7 filing, thereby violating the automatic stay of 11 U.S.C. § 362(a). On July 1, 2004, the debtors filed a reaffirmation agreement with GMAC on the first mortgage under § 524(c) of the Bankruptcy Code; the second mortgage, in contrast, was never the subject of a reaffirmation agreement.

The Court issued the Chapter 7 discharge on July 12, 2004, and then on August 27, 2004, the interim Chapter 7 trustee issued a report concluding that no assets could be administered for the benefit of estate creditors, with the case ultimately being closed in 2006. Although their personal liability had been discharged on the second mortgage, the in rem aspect of their liability continued in the form of the voluntary mortgage lien placed on the residence. Believing that they would inevitably lose their home in a foreclosure if they did not pay the second mortgage, the debtors continued to make payments thereon during and after the Chapter 7 case (roughly totaling $3320 and $34,030, respectively), while the mortgage company continued to bill them each month up until January 2014, with a total of 117 bills being sent either during or after the Chapter 7 case.

At some point after December 2007, Ocwen Loan Services acquired GMAC's reaffirmed first mortgage, while Roundpoint Mortgage Servicing Corporation ("Roundpoint") had acquired GMAC.'s second mortgage, for which no reaffirmation of personal liability had occurred in the Chapter 7. On the second mortgage, the debtors stopped paying the monthly installments, and Roundpoint filed a foreclosure action on April 10, 2014 (Case No. 14-CI-00047). It also filed a lis pendens notice of the foreclosure case with the Clerk of Lyon County on April 17, 2014. TheLyon County Circuit Court entered a default judgment and order of sale on August 22, 2014, and the foreclosure sale was scheduled for September 30, 2014.

To deal with this imminent foreclosure action, the debtor Linda Isaacs, this time acting alone without Michael Isaacs as a joint debtor, filed the instant Chapter 13 case on September 29, 2014 (Case No. 14-50679), listing only one unsecured claim in the form of a credit-card debt for $261 and one priority unsecured claim for $950. This time, the debtor listed her one-half interest in the real property as holding a value of $131,250, with the full interest of both spouses being $262,500. The balance on the first mortgage that had been reaffirmed in the Chapter 7 case, and now held by Ocwen Loan Service, was listed in Schedule D as $194,000, while the second mortgage now held by Roundpoint was listed as a disputed secured claim with a balance of $103,659.¹

On October 9, 2014, as the major component of filing the Chapter 13 to defeat the impending foreclosure on the in rem claim, the debtor ("Plaintiff") filed an adversary proceeding (No. 14-05021) against second-mortgage-assignee Roundpoint to have the mortgage lien and associated foreclosure judgment be deemed null and void ab initio or - alternatively - to strip off the in rem claim remaining after the Chapter 7 by derivatively using a trustee's strong-arm avoidance powers under 11 U.S.C. § 544(a). Plaintiff also sued codefendant Wingspan Portfolio Advisors, LLP as an assignee of Roundpoint that took over as loan servicer after Roundpoint filed its foreclosure complaint. On January 3, 2015, this Court granted an agreed motion to dismiss Roundpoint as a party to this adversary proceeding, leaving Wingspan as sole defendant. On July 24, 2015, Defendant DBI-ASG Coinvestor Fund III, LLC ("Defendant") was substitutedfor Wingspan as sole defendant.

Although the original complaint in the adversary proceeding does not allege separate counts, it alleges three distinct legal theories of recovery. First, it alleged that the foreclosure action in state court was not initiated within 10 years of the original default in violation of the applicable statute of limitations in KRS § 413.160. Second, it alleged that the lien could be avoided pursuant to 11 U.S.C. § 544(a)(1) and (3) using the trustee's strong-arm power, given that the mortgage was never recorded until the automatic stay was in effect during the previous Chapter 7 case, rendering the act null and void. Thus, the second mortgage lien was never perfected, leaving it vulnerable to the priority given to a trustee's hypothetical judgment-creditor lien over an unperfected security interest. Third, it alleged that the lien could be avoided pursuant to 11 U.S.C. § 544(a)(3), again using the trustee's strong-arm power in that provision, given that an unperfected security interest loses in a priority contest against a trustee holding the rights of a bona fide purchaser of real property who hypothetically records the deed on the date the debtor files the bankruptcy case.

Plaintiff and Defendant filed cross motions for summary judgment seeking to determine the validity of the second mortgage lien in 2016, exploring a legal theory that was never pled in the complaint. At that time, the issue was whether the second mortgage lien had ever attached at all to secure the loan, given the particular language present in the mortgage agreement and the automatic stay violation in the 2004 Chapter 7 case. Although Debtor initially prevailed on that theory, on July 18, 2018, the Sixth Circuit Court of Appeals held that this Court had no subject matter jurisdiction to consider the theory, given the appellate strictures placed on federal courts by the Rooker-Feldman doctrine, and given the adjudications already made by the state-courtdecree in the foreclosure case. In re Isaacs, 895 F.3d 904 (6^th Cir. 2018). That court specifically held that the existing legal theories pled under § 544(a) were unaffected by the Rooker-Feldman doctrine, because they were independent federal legal theories that did not call into question the correctness or incorrectness of the issues decided by the state court in the foreclosure action. Id. at 914-15.

On February 19, 2019, Isaacs filed an amended complaint abandoning the statute-of-limitation theory of recovery but adding an additional count to avoid the foreclosure judgment as a preferential transfer on a prepetition debt under 11 U.S.C. § 547(b). As to this amended complaint, Defendant and Plaintiff filed the second round of cross motions for summary judgment currently before this Court on March 29, 2019, and April 26, 2019, respectively.

The Court has subject matter jurisdiction over this adversary proceeding as a matter that arises under Title 11, pursuant to 28 U.S.C. § 1334(b). Use of a trustee's avoiding powers under various provisions of Title 11 is a core matter that has been referred by the district court to the bankruptcy court for final determination pursuant to 28 U.S.C. § 157(b).

STANDARD FOR SUMMARY JUDGMENT

Summary judgment is proper where no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. See Fed. R. Civ. P. 56(c). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In considering such a motion, the court must view the evidence and draw all reasonable inferences in favor of the nonmoving party.

Parks v. LaFace Records, 329 F.3d 437, 444 (6th Cir. 2003). "Upon a motion for summary judgment, the . . . court is not to make credibility determinations or weigh the evidence . . . ." Adams v. Metiva, 31 F.3d 375, 384 (6th Cir. 1994). On cross motions for summary judgment,the trial court is not required to grant either one side's motion or the other. Rather, both motions may be denied where "neither party met its burden of demonstrating that no genuine issue of material fact existed when all inferences were drawn, in turn, for the non-moving party, such that it would be proper for the case to go to trial." B.F. Goodrich Co. v. U.S. Filter Corp., 245 F.3d 587, 593 (6th Cir. 2001).

DISCUSSION AND ANALYSIS

Count Utilizing Trustee's Strong-Arm Avoidance Powers Under 11 U.S.C. § 544(a)(1) & (3)

To avoid the second mortgage, the debtor has, pursuant to prior court order, been granted derivative standing to utilize the Chapter 13 trustee's strong-arm avoidance powers under 11 U.S.C. § 544(a), specifically the theories enumerated in § 544(a)(1) and (a)(3):

(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any

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