Mendelsohn v. Nationstar Mortg. (In re Hyung Taek Hong)

In re: Hyung Taek Hong and Yeon Og Cho, Debtor.

Allan B. Mendelsohn, Trustee of the Estat of Hyung Taek Hong and Yeon Og Cho, Plaintiff, v. Nationstar Mortgage d/b/a Mr. Cooper, Defendant.

No. 8-19-72287-las

Adv. Pro. No. 8-20-08003-las

United States Bankruptcy Court, E.D. New York

December 28, 2022

Chapter 7

MEMORANDUM DECISION AFTER TRIAL

Louis A. Scarcella United States Bankruptcy Judge

I. Introduction

Plaintiff Allan B. Mendelsohn, Esq., as chapter 7 trustee of the bankruptcy estate of Hyung Taek Hong ("Hyung") and Yeon Og Cho (together, the "Debtors"), commenced this adversary proceeding against defendant Nationstar Mortgage LLC d/b/a Mr. Cooper seeking to avoid and recover prepetition payments made by Debtors to defendant in the aggregate sum of $121,766.03 (the "Transfers"). Specifically, plaintiff asserts actual and constructive fraudulent transfer causes of action under 11 U.S.C §§ 544(b) and 548(a)(1)^[1] and New York Debtor and Creditor Law §§ 273, 275, 276, and 278.^[2] Plaintiff also seeks to recover attorneys' fees from defendant pursuant to NYDCL § 276-a. In addition, plaintiff asserts an unjust enrichment claim against defendant for its receipt of the Transfers.

For its part, defendant acknowledges receipt of the Transfers. Nevertheless, it argues that the Transfers were made by Debtors in lieu of rent owed to Hyung's brother, Jin H. Hong ("Jin"), the owner of the real property where Debtors resided when the Transfers were made and the obligor under the mortgage indebtedness to defendant. In short, defendant argues that plaintiff's constructively fraudulent claim must fail because rent in the amount of the monthly mortgage debt was paid to defendant rather than to Jin and Debtors received value in exchange for the payment of rent as they resided at the real property. Defendant also argues that plaintiff cannot avoid and recover the Transfers under an actual fraud theory as the circumstances surrounding the Transfers fail at every level to indicate fraudulent intent. Lastly, defendant argues that (i) plaintiff's claim under § 544(b) must fail because plaintiff has not identified the actual unsecured creditor whose rights plaintiff now seeks to assert, and (ii) because Debtors received value in exchange for the Transfers, defendant has not been unjustly enriched.

The Court has jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and the Standing Order of Reference entered by the United States District Court for the Eastern District of New York pursuant to 28 U.S.C. § 157(a), dated August 28, 1986, as amended by Order dated December 5, 2012. This is a core proceeding under 28 U.S.C. § 157(b)(2)(H). Each of the parties has either expressly or impliedly consented to this Court's exercising authority over this matter and entry of a final order or judgment by this Court. See Wellness Int'l Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015).

The Court observed carefully the demeanor and testimony of the witnesses and has thoroughly reviewed the parties' submissions and the trial record. This decision constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure, made applicable here by Bankruptcy Rule 7052. To the extent that a finding of fact includes a conclusion of law, it is deemed a conclusion of law and vice versa. For the reasons set forth below, the Court concludes that plaintiff has failed to meet his burden with respect to each claim alleged in the amended complaint. Accordingly, the Court enters judgment for defendant.

II. Procedural History

Plaintiff commenced this adversary proceeding by the filing of a complaint on January 3, 2020. [Dkt. No. 1]. The amended complaint, filed on January 6, 2020 ("Amended Complaint"), alleges (i) actual and constructive fraudulent transfer claims under § 544(b) and NYDCL §§ 273, 275, and 276, (ii) a constructive fraudulent transfer claim under § 548(a)(1),^[3]and (iii) a common law claim of unjust enrichment. [Dkt. No. 3]. The fraudulent transfer claims and the common law claim of unjust enrichment arise out of the Transfers made by Debtors to defendant during the period September 9, 2013 to March 11, 2018. Specifically, the Amended Complaint asserts ten causes of action: (1) constructive fraud under § 544(b) and NYDCL §§ 273 and 275 (First and Third Causes of Action), (2) intentional fraud under § 544(b) and NYDCL § 276 (Fifth Cause of Action), (3) recovery of the Transfers, once avoided, under § 550 and NYDCL § 278 (Second, Fourth, Sixth and Ninth Causes of Action), (4) recovery of attorneys' fees under NYDCL § 276-a (Seventh Cause of Action), (5) constructive fraud under § 548(a)(1) (Tenth Cause of Action), and (6) unjust enrichment (Eighth Cause of Action).

At trial, plaintiff did not argue or present evidence in support of his claim to avoid and recover the Transfers under NYDCL § 275 (Third Cause of Action) and § 276 (Fifth Cause of Action). Nor did plaintiff introduce evidence to support a demand for attorneys' fees under NYDCL § 276-a (Seventh Cause of Action). Rather, at trial, plaintiff placed primary emphasis on whether the Transfers may be avoided as constructively fraudulent under § 544(b) and NYDCL § 273 and § 548(a)(1)(B). Because this became the central issue at trial, plaintiff's assertion that Debtors did not receive fair consideration or reasonably equivalent value in exchange for the Transfers was the predominant argument addressed by the parties and the focus of the trial testimony and exhibits introduced into evidence.

III. Facts

The following facts are based on the trial record, which includes the parties' Joint Pre-Trial Statement ("JPTS") [Dkt. No. 44].^[4] The facts are largely undisputed, and resolution of the dispute requires only a handful of facts.

A. Stipulated Facts

Debtors filed for relief pursuant to chapter 7 of the Bankruptcy Code on March 20, 2019 ("Petition Date"). [JPTS ¶ 1]. As of the Petition Date, the Debtors resided at 14 Arielle Court, Islandia, New York ("Real Property"). [JPTS ¶ 3]. Defendant is the holder of a note and mortgage dated March 25, 2005 in the amount of $256,000.00 (the "Loan"), which is secured by an interest in the Real Property. [JPTS ¶ 4]. Debtors do not have any ownership interest in the Real Property. [JPTS ¶ 5]. Jin is the fee owner of the Real Property [JPTS ¶ 6], and the mortgagor/borrower under the Loan [JPTS ¶ 8]. Debtors remitted payments on the Loan to defendant. [JPTS ¶ 9].

B. Trial Testimony

Here, the Court summarizes the pertinent testimony of the witnesses at trial. Plaintiff presented three fact witnesses - Hyung, Jin, and Alan Blunt ("Blunt"), Senior Principal of Litigation Support for defendant. Defendant cross-examined all three of plaintiff's witnesses. The Court credits the relevant testimony of each witness. The Court carefully considered whether any basis for discrediting the witnesses' testimony existed but found none. "As the finder of fact, the Court is entitled to make credibility findings of the witnesses and testimony." Merck Eprova AG v. Gnosis S.p.A., 901 F.Supp.2d 436, 448 (S.D.N.Y. 2012), aff'd, 760 F.3d 247 (2d Cir. 2014); see also Krist v. Kolombos Rest. Inc., 688 F.3d 89, 95 (2d Cir. 2012) ("[A]s trier of fact, the judge is entitled, just as a jury would be, . . . to believe some parts and disbelieve other parts of the testimony of any given witness.") (internal quotation marks and citations omitted); Newman v. Herbst, No. 09-cv-4313 (TLM), 2011 WL 684165, at *1 (E.D.N.Y. Feb. 15, 2011) ("In any bench trial, the trial judge has to evaluate the credibility of the witnesses that testify, the witnesses' demeanor, any previous inconsistent statements by a witness, as well as the witness's explanation for any such inconsistent statements.").

1. Jin H. Hong

Jin is Hyung's brother. Tr. 10:13-15. He purchased the Real Property in 2004. Tr. 9:18-20. Jin resided at the Real Property for six years and made payments to defendant under the Loan before moving to New Jersey where he works. Tr. 10:4-24, 12:15, 13:1. Debtors currently reside at the Real Property with Jin's mother. Tr. 10:10-19. Debtors entered into a written lease agreement with Jin in 2010.^[5] Tr. 19:2-3. Jin testified that under the lease agreement, Debtors paid rent by paying the monthly mortgage debt to defendant. Tr. 19:10-11. According to Jin, Debtors paid the mortgage debt each month to defendant in lieu of rent. Tr. 19:12-16.

Jin testified that he believed that rent paid by Debtors comported with rents in the area. Tr. 20:2-4.^[6]

2. Hyung Taek Hong

Hyung has lived at the Real Property since 2004, Tr. 21:23-24, and pays rent to his brother for use of the house. Tr. 21:25-22:2, 29:24-25, 30:1. Hyung pays $2,200 per month in rent. Tr. 22:3-4,:9-10. Hyung testified that he pays the rent directly to defendant by check or online. Tr. 22:8-13, 30:2-4. According to Debtors' 2017 income tax return, Hyung had adjusted gross income of $39,321. Tr. 24:6-9, 25:1-2; PX 1. Hyung reported $45,934 of adjusted gross income on his 2018 tax return. Tr. 24:21-24, 25:1-2; PX 2. Hyung used the checking account of his company, EF Insurance Tech Corporation,^[7] to make payments to defendant from time to time when he didn't have sufficient funds in his personal bank account. Tr. 27:8-14; PX 4. Hyung testified that he had money to pay his other bills. Tr. 31:7. He and his wife filed for bankruptcy because of credit card debt. Tr. 31:24-25.

3. Alan Blunt

Blunt testified that defendant does not look to the source of any mortgage payments received. Tr. 34:13-15. He testified that defendant does not have a written policy concerning the source of mortgage payments. Tr. 34:23. Blunt further testified that, in general, mortgage payments are...