Kreitzer v. Household Realty Corp. (In re Kreitzer)

489 B.R. 698

In re Carl E. KREITZER, Sherry L. Kreitzer, Debtors.Carl E. Kreitzer, Sherry E. Kreitzer, Plaintiffs

v.Household Realty Corporation et al., Defendants.

Bankruptcy No. 10–35888.

Adversary No. 11–3273.

United States Bankruptcy Court,

S.D. Ohio,

Western Division.

April 4, 2013.

Charles J. Roedersheimer, Dayton, OH, for Plaintiffs.

Jesse R. Lipcius, Reuel D. Ash, Cincinnati, OH, for Defendants.

Decision Granting in Part and Denying in Part Defendants' Motion for Summary Judgment and Denying Plaintiffs' Cross–Motion for Partial Summary Judgment

GUY R. HUMPHREY, Bankruptcy Judge.

I. Introduction

This decision concerns three separate issues arising out of an adversary proceeding filed within the debtors' Chapter 13 bankruptcy case: 1) whether the debtors can bifurcate a residential mortgagee's claim into secured and unsecured portions because of the inclusion of language within the mortgage which provides the mortgagee with a security interest in miscellaneous proceeds, generally defined as including compensation, damages, or proceeds paid by a third party for misrepresentations of, or omissions as to, the value or condition of the residence; 2) whether the debtors are barred from pursuing some of their causes of action under preclusion principles as a result of determinations made in a state court foreclosure action; and 3) whether the debtor or a trustee may avoid a mortgage based upon a defective recording of a mortgage assignment. The following constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

II. Findings of Fact

Carl Kreitzer borrowed $114,400 from Decision One Mortgage Company, LLC, Ltd. (“Decision One”), evidenced by an adjustable rate promissory note (the “Note”; Movant Exhibit 1) signed on July 20, 2001. The Note was endorsed in blank, with no date included, by Charise Lewis, a closing agent for Decision One. The Note is secured by a mortgage granted by the debtors, Carl and Sherry Kreitzer (the “Kreitzers”), on their residence at 3434 Lindale Avenue, Dayton Ohio (the “Property”), signed on July 20, 2001 (the “Mortgage”; Movant Exhibit 1).

The Mortgage was recorded by Decision One on August 2, 2001. A Corporate Assignment of Mortgage assigned the Mortgage to Mortgage Electronic Registration Systems, Inc. (“MERS”) on July 30, 2001, two days prior to the recording date. A separate corporate assignment dated April 24, 2009 assigns the Mortgage and Note from MERS, acting as nominee for Household Finance Corporation, to Household Realty Corporation (“Household Realty”). The 2009 assignment was signed by Christopher Ribbeck, Vice–President (“Ribbeck”) and notarized by Jamie Giglio (“Giglio”).

On April 28, 2009 Household Realty filed a complaint in foreclosure against the Kreitzers in the Montgomery County Ohio Court of Common Pleas (the “State Court”). On June 16, 2009 the Kreitzers filed a pro se answer which stated that “[w]e are committed to remaining in our home of twelve years. We have maintained this home in a very satisfactory manner performing numerous updates as well as making plans for further improvements. We are agreeable to any reasonable resolutions which will avoid foreclosure.” Household Realty moved for summary judgment on June 29, 2009 and the Kreitzers failed to respond. The motion included an affidavit from an employee of HSBC, an agent for Household Realty, which indicated Household Realty acquired the Note and Mortgage before April 21, 2009 and that the Note was in default. The State Court entered judgment in favor of Household Realty on September 29, 2009 (the “State Court Judgment”). The State Court Judgment states that Household Realty “submitted sufficient evidence that it was the owner in possession of both the Note and the Mortgage prior to the filing of the complaint and the execution of the assignment. Accordingly, the court finds that [Household Realty] was the owner of both the note and mortgage when the case was filed and has standing to bring this case.” ¹ The foreclosure sale was stayed by the Kreitzers' bankruptcy filing.

On September 13, 2010 the Kreitzers filed a Chapter 13 petition for relief (estate doc. 1) commencing their underlying bankruptcy case. The Kreitzers' Chapter 13 plan (estate doc. 7) states that 3434 Lindale Avenue, Dayton Ohio (the “Property”) is their personal residence and proposes to treat the secured mortgage loan by seeking a loan modification and, in the interim, paying the current terms of the loan, but not any pre-petition arrearage. If a modification did not occur within six months after confirmation of the plan, the Property would be surrendered in full satisfaction of Household Realty's claim or the Kreitzers would pay “the allowable amount of Creditor's claim.” Household Realty objected, arguing that the mortgage loan could not be modified because it constitutesthe Kreitzers' primary residence (estate doc. 15). The objection was withdrawn (estate doc. 22) and the plan was confirmed (estate doc. 17).

In addition, the Kreitzers objected to Household Realty's proof of claim [claim 2–1] (the “Proof of Claim”), arguing it has failed to establish ownership of the claim, the listed principal and arrearage is inaccurate because it fails to account for certain monthly payments made by the Kreitzers, and various costs and fees included in the Proof of Claim are unreasonable (estate doc. 18). Household Realty responded by denying all the allegations of the claim objection (estate doc. 20). The parties agreed to address this dispute and a supplemental proof of claim concerning 2010 real estate taxes (the “Supplemental Proof of Claim”) through an adversary proceeding. See proof of claim 23–1 and estate docs. 76, 80 & 85.

On August 2, 2011 the Kreitzers filed a multi-count complaint to commence this adversary proceeding against Household Realty and its servicer, HSBC Mortgage Services, Inc. (“HSBC”) (collectively, “Household”) (doc. 1). The first count seeks to bifurcate Household Realty's claim into secured and unsecured portions under 11 U.S.C. § 506² on the basis that the mortgage loan is not protected by the provision in § 1322(b)(2) barring modification of claims secured only by a debtor's principal residence. The second count seeks disallowance of the Proof of Claim in the amount of the charges included in it for forced place insurance and inspection fees on the basis that those fees are unreasonable under the loan documents. The third count seeks sanctions under Federal Rule of Bankruptcy Procedure 9011 against Household on account of the Proof of Claim being false and fraudulent. The fourth count seeks disallowance of the Proof of Claim on the basis that Household lacked standing to file it. The fifth count seeks avoidance of the Mortgage under § 544(a)(3) on behalf of the Chapter 13 Trustee as a hypothetical bona fide purchaser of real property on the basis that an assignment of the Mortgage was not properly recorded.

Household Realty and HSBC answered (doc. 17), generally denying the Kreitzers' allegations. Household Realty and HSBC moved for summary judgment (doc. 42) and the Kreitzers filed a response and a cross-motion for partial summary judgment as to the first count (doc. 47).

III. Positions of the Parties

The Kreitzers argue they are entitled to summary judgment as to the first count of their complaint because Household's claim is secured through the Mortgage, which creates an additional security interest in “miscellaneous proceeds.” The premise of Kreitzers' argument is that § 506 allows claims secured by collateral to be bifurcated into secured and unsecured portions, except when the claims are secured only by real property that is the debtor's principal residence. The Kreitzers argue that since the Mortgage is secured by miscellaneous proceeds—which are personal property—the claim is not secured only by real property that is the Kreitzers' residence, but rather, is also secured by personal property, thereby removing the Mortgage from the anti-modification protection of § 1322(b)(2).

The second count of the complaint is an objection to $4,331 of Household's claim on the basis that the charges for forced place insurance, foreclosure fees, and inspection fees are unreasonable. Household argues that this count is barred by the doctrine of res judicata due to the pre-petition foreclosure judgment.

The Kreitzers' third count seeks sanctions under Federal Rule of Bankruptcy Procedure 9011 on account of the filing of the Proof of Claim, including the award of actual and punitive damages, attorney fees, and court costs. Specifically, the Kreitzers claim that the Mortgage, which was attached to the Proof of Claim, failed to show HSBC had the authority to assign the Mortgage from MERS to Household Realty on April 24, 2009. The Kreitzers assert that the signing of the assignment by Christopher Ribbeck, acting as a vice-president of MERS, was inadequate because Ribbeck is an employee of HSBC. The Kreitzers also assert his signature was not properly acknowledged by the notary, an individual named Jamie Giglio. The Kreitzers assert Ribbeck and Giglio alternated in roles with HSBC and MERS and routinely signed loan documents and had them notarized outside the signer's presence. The Kreitzers assert Household and its agent should have been aware the Proof of Claim was fraudulent.

Kreitzers' fourth count seeks to have the Proof of Claim disallowed on the basis that Household lacked standing under Federal Rule of Civil Procedure 17 to file it.

In the fifth count of their complaint, the Kreitzers assert derivative standing on behalf of the Chapter 13 Trustee to avoid the Mortgage pursuant to § 544 and treat Household's claim as unsecured on account of the second assignment of the Mortgage not having been witnessed by Giglio as the witness.

Household argues that counts three through five are barred under the doctrines of res judicata and collateral estoppel...