Kelley v. JPMorgan Chase Bank NA (In re Kelley)

545 B.R. 1

In re James Madison Kelley, Debtor.

James Madison Kelley, Plaintiff,

v.JPMorgan Chase Bank NA, Successor to Washington Mutual Bank, Defendant.

Bankruptcy Case No. 08–55305DM

Adversary Proceeding No. 10–5245DM

United States Bankruptcy Court, N.D. California.

Signed January 21, 2016

James Madison Kelley, Saratoga, CA, pro se.

Sheri M. Kanesaka, Parker Ibrahim & Berg LLC, Costa Mesa, CA, Christopher Yoo, Santa Ana, CA for Defendant.

MEMORANDUM DECISION ON MOTIONS FOR SUMMARY JUDGMENT

DENNIS MONTALI, U.S. Bankruptcy Judge

I. INTRODUCTION

Debtor James Madison Kelley ("Debtor") commenced the underlying chapter 11 case more than seven years ago after defaulting on two loans from Washington Mutual Bank ("WaMu"); the loans were secured by his residence in Saratoga, California (the "Property"). In this adversary proceeding he is attempting to defeat claims and security interests arising from the two WaMu loans. Debtor has not made any payments on the loans since he filed his chapter 11 petition on September 19, 2008, and defendant JP Morgan Chase Bank, N.A. ("Chase"), the assignee of the relevant WaMu notes and security interests, has paid all taxes and insurance on the Property.

In January 2009, Debtor filed a plan of reorganization in which he proposed to sell the Property and hold the proceeds pending resolution of a state court lawsuit between him and WaMu (and, subsequently, the Federal Deposit Insurance Corporation ("FDIC"), as receiver of the failed WaMu). The state court dismissed that action with prejudice on July 19, 2010.

Debtor commenced this adversary proceeding on July 15, 2010, two days after oral argument in the state court action. By that time, Chase had been appointed the successor to WaMu and was named as the defendant. In July 2015, the case was reassigned to this court, which in turn encouraged the parties to move forward with resolution of the matter, either through compromise, dispositive motions, or trial. Both Debtor and Chase filed motions and the court took the matters under submission following a hearing on November 10, 2015. For the reasons set forth below, the court will deny Debtor's motion for partial summary judgment and will grant Chase's motion for summary judgment.

II. RELEVANT FACTUAL BACKGROUND

A. The Loans

In June 2005 and November 2005, WaMu made two loans to Debtor and recorded two deeds of trust encumbering the Property (the "2005 Transactions"). Two years later, Debtor obtained the two refinance loans from WaMu that are the subject of this adversary proceeding, and WaMu reconveyed both of the 2005 deed of trusts upon execution of new deeds of trust to secure the refinance loans. Exhibits C–F of the Request for Judicial Notice ("RJN") appended to Chase's Opposition to Debtor's Motion for Summary Judgment at Docket Nos. 475–10 through 475–18.

As part of the 2007 refinancing, Debtor executed an adjustable rate note in the original principal amount of $2,992,265.00 ("First Loan") on July 26. Declaration of Joseph G. Devine, Jr. ("Chase Decl.") at ¶ 2, appended to Chase's Opposition to Debtor's Motion for Summary Judgment at Docket Nos. 475–4 through 475–6. Repayment of the First Loan is secured by a deed of trust recorded against the Property on July 31, 2007 ("First DOT"). RJN, Ex. A; Chase Decl. ¶ 3.

On or about September 17, 2007, Debtor obtained a home equity line of credit from WaMu in the maximum amount of $250,000.00 ("Second Loan," and together with the First Loan, the "Loans"). Chase Decl. ¶ 9. The terms of the Second Loan are set forth in the WaMu Equity Plus Agreement and Disclosure dated September 17, 2007, and executed by Debtor ("HELOC Agreement"). Chase Decl. ¶ 9. Repayment of Second Loan is secured by a deed of trust recorded against the Property on October 3, 2007 ("HELOC DOT," and together with the First DOT, the "Deeds of Trust"). See RJN Ex. B; Chase Decl. ¶ 10. The proceeds from the Loans paid off the 2005 WaMu loans that totaled approximately $2,943,255.76. RJN Ex. C, Ex. D, Ex. E, and Ex. F.

In early 2008, Debtor defaulted on both Loans, and WaMu recorded a notice of default and election to sell with respect to the First Loan on June 30, 2008. RJN Ex. G. On September 25, 2008, the Office of Thrift Supervision closed WaMu and appointed the FDIC as receiver. RJN Ex. H; Chase Decl. ¶ 16. On the same date, Chase entered into a purchase and assumption agreement ("P & A Agreement") with the FDIC (acting in its corporate capacity as well as receiver for WaMu) and acquired the Loans.¹ Id.

In October 2008, the FDIC published in several newspapers (albeit none based in the San Francisco Bay Area apart from the local edition of the Wall Street Journal) its procedures for the assertion of claims related to WaMu. These notices stated that the deadline for filing WaMu claims was December 30, 2008. RJN, Exh. Q. On February 19, 2009, the FDIC mailed written notice to Debtor, by and through his then counsel-of-record, explaining the mandatory procedures under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 ("FIRREA"), 12 U.S.C. §§ 1821(d)(3)-(d)(10), for asserting a claim against the FDIC as WaMu's receiver, and permitting Debtor to file a late claim no later than May 20, 2009. Debtor never filed any claim with the FDIC. RJN, Exh. Q.

B. The State Court Action, Letter of Rescission, and Bankruptcy

On July 28, 2008, Debtor filed a complaint against WaMu and Louis Helmonds ("Helmonds"), an employee of WaMu, in the Superior Court for the State of California, County of Santa Clara, Case No. 2–08–cv–118453 ("State Court Action"). RJN Ex. N. Chase was not named as a defendant. RJN Ex. O.

In the State Court Action, Debtor asserted nearly identical factual and legal arguments as those pled in this adversary proceeding, including contentions that the written commitment that he received from WaMu regarding the Second Loan contained more stringent documentation requirements than WaMu had represented in negotiations and during the execution of the First Loan; that he had relied on those oral representations and negotiations in executing the First Loan; that if WaMu had made full disclosure of the documentation requirements, he would not have obtained the First Loan or would have otherwise renegotiated terms; that WaMu knew that Debtor could not meet the more stringent terms of the Second Loan documentation requirements; that WaMu induced Debtor by calculated, deliberate misrepresentations and material omissions to enter into the First Loan at a higher interest rate and with a pre-payment penalty and then altered the terms of the commitment on the Second Loan which left Debtor undercapitalized; that WaMu engaged in bait-and-switch tactics, misrepresentations and omissions; that at the first attempt at closing the First Loan, Debtor received a loan package that required substantially larger monthly payments than had been discussed or disclosed and Debtor did not sign those documents; that Helmond claimed error and provided corrected documents the next day, and the two different loans led to confusion in the disclosures; that preliminary disclosures made by WaMu did not match the final loan numbers; and that the Property may have been over-appraised by WaMu.

Among other remedies, Debtor sought rescission of the Loans. RJN Ex. N. As discussed in section II(c) below, Debtor sent a letter of rescission to Chase approximately two years after the closing of the First and Second Loans. Debtor mailed the rescission letter on August 28, 2009, more than a year after he commenced the State Court Action and almost a year before the state court dismissed all of his claims (including the rescission claim) with prejudice.

On or about March 25, 2010, the FDIC filed a motion for summary judgment in the State Court Action contending that the state court lacked subject matter jurisdiction as a result of Debtor's failure to exhaust his mandatory administrative remedies under FIRREA. RJN Ex. P. The FDIC noted Debtor's failure to file a timely claim despite bar date notifications and a proffered extended deadline. RJN Ex. Q. On July 19, 2010, the state court entered an order granting the FDIC's motion for summary judgment, ruling that it lacked subject matter jurisdiction because Debtor had not exhausted his mandatory administrative remedies under the process set forth in §§ 1821(d)(3)-(d)(10)of FIRREA. RJN Ex. R. Accordingly, the court dismissed all of Debtor's claims, including those for rescission, against the FDIC (as the receiver of WaMu) with prejudice.

On July 15, 2010, Debtor filed this adversary proceeding, against Chase as "successor to Washington Mutual Bank." Chase contends that the state court judgment and the doctrine of issue preclusion bars Debtor's claims here. For the reasons discussed later, this court agrees that Debtor's claims are barred by FIRREA.

C. The Current Cross–Motions for Summary Judgment

In his motion for partial summary judgment ("Debtor's MSJ"), Debtor asserts that as a matter of law and undisputed fact that he is entitled to rescind the 2007 Loans. In contrast, Chase contends that Debtor has no cognizable claim against it, including any claim for rescission. As discussed below, all claims of Debtor against Chase are barred by FIRREA. Even if Debtor's contention that FIRREA excepts rescission claims from its bar were correct, his claims for rescission are time-barred, as they were filed more than three business days after execution of the respective Loans and Debtor has not satisfied the requirements for the three-year extension permitted if a lender has not complied with the disclosure requirements of the Truth in Lending Act ("TILA"). Even if his claims were not barred by FIRREA and were not time-barred under TILA, Debtor has not offered evidence that he would be able to satisfy the conditions for complete and effective tender. In other words, he has not presented an issue of material fact to rebut Chase's contention that effective tender is not possible. Finally,...