Orcutt v. GMAC Mortg., LLC (In re Orcutt), case # 11-10553

In re: David Roy Orcutt and Hollie Jean Stevens, Debtors.David Roy Orcutt and Hollie Jean Stevens, Plaintiffs,

v.GMAC Mortgage, LLC, Defendant.

case # 11-10553

Adversary Proceeding # 11-1013

UNITED STATES BANKRUPTCY COURT DISTRICT OF VERMONT

Dated: April 2, 2013

Chapter 13

Appearances: Michelle M. Kainen, Esq.

White River Junction, VT

Attorney for the Plaintiffs

Jan M. Sensenich, Esq.

Norwich, VT

Chapter 13 Trustee

James B. Anderson, Esq.

Rutland, VT

Attorney for the Defendant

MEMORANDUM OF DECISION

GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT

AND DENYING DEFENDANT'S CROSS-MOTION FOR SUMMARY JUDGMENT

ON REMAND

On February 24, 2012, this Court entered a memorandum of decision and order granting the Plaintiffs' motion for summary judgment and denying the Defendant's cross-motion for summary judgment (doc. ## 28, 29).¹ On December 14, 2012, the United States District Court for the District of Vermont issued an opinion and order vacating the order and remanding the matter to this Court for further proceedings consistent with its opinion and order (doc. # 49). The Plaintiffs, Defendant, and Chapter 13 Trustee subsequently filed memoranda of law addressing the issues on remand (doc. ## 60, 61, 62, 66, 67, 68). Pursuant to the remand order of the District Court, this decision is entered to articulate and clarify the basis for this Court's constitutional and statutory authority to enter a final judgment in this adversary proceeding.

For the reasons set forth below, the Court clarifies that the outcome of this adversary proceeding is integral to resolution of other pending matters in the bankruptcy case and therefore is not purely a state law matter; finds that in order to rule on the confirmation of the Plaintiffs' chapter 13 plan, address theDefendant's objection to confirmation, assess the allowance of the Defendant's claim, and adjudicate the Plaintiffs' claim of homestead exemption, it must determine the validity of the Defendant's mortgage; determines that, pursuant to controlling law, the Defendant's mortgage is inoperative; and rules that this determination disposes of all open legal issues pending in this case under the Bankruptcy Code. Therefore, it is consistent with the District Court's remand order to enter a final judgment that grants the Plaintiffs' motion and denies the Defendant's cross-motion at this time.

JURISDICTION

This Court has jurisdiction over this adversary proceeding and the instant motions pursuant to 28 U.S.C. §§ 157 and 1334, and declares it to be a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B), (K), and (L).²

DISCUSSION

The District Court's focus in its remand ruling was on whether this Court had constitutional authority to enter to issue a judgment in the instant adversary proceeding. The District Court found that

Under Stern and Waldman as applied to this case, the Bankruptcy Court lacked the constitutional authority to issue a declaratory judgment under Vermont law in order to adjudicate a purely state law claim involving private rights. It, however, possessed the constitutional authority to determine the validity of the 2007 Mortgage as part of the claims allowance process,⁴ or as an integral part of another proceeding under the Bankruptcy Code. See In re Sundale, Ltd., 2012 WL 5974125, at *4 (l1th Cir. Nov. 29, 2012) (affirming bankruptcy court's declaratory judgment regarding the extent, validity and priority of claims and debtor's recoupment counterclaim because both claims were "necessarily resolved in the process of ruling on a creditor's proof of claim."); DiVittorio, 670 F.3d at 282 n.4; In re Pulaski, 475 B.R. 681, 683 (W.D. Wis. 2012) (ruling bankruptcy court has jurisdiction to enter a final judgment in debtors' adversary proceeding in which debtors challenged creditor's proof of claim because "[c]learly this is part of the claims process, as the [debtors'] claims will be resolved at exactly the same time that there is a final determination as to whether the creditor is secured or not.").

Although the Bankruptcy Court aptly observed that, "[Debtors] are seeking relief that is more akin to an objection to the Defendant's claim or a determination of Defendant's secured status under § 506[,]" In re Orcutt, 2012 WL 627675, at *4, it did not adjudicate the claim on this basis but instead decided the issue purely as a matter of state law. As a result, this court thus cannot affirm the Bankruptcy Court's decision on the basis of claims allowance as the Sixth Circuit did in Waldman.

⁴ Debtors would have standing to object to GMAC's proof of claim. See 11 U.S.C. § 502(a) ("A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest ... objects."); see also In re Hudson Shipbuilders, Inc., 794 F.2d 1051, 1055 (5th Cir. 1986) ("Equally clear is the standing of the debtor and any interested creditor to object to the claim of a secured creditor filed in the bankruptcy proceeding.").

(doc. # 49, p. 16). The District Court directed this Court to "clarify the statutory and constitutional basis under which it is proceeding and adjudicate the issues raised by the parties consistent with that statutory and constitutional authority" (doc. # 49, p. 19).

1. A determination of the validity of the Defendant's mortgage under 27 V.S.A. § 141 is essential and integral to a determination of the Defendant's secured status under 11 U.S.C. § 506(a), resolution of the Defendant's objection to confirmation of the Plaintiffs' Chapter 13 plan under 11 U.S.C. § 1325(a)(3), and resolution of the Defendant's objection to the Plaintiffs' claim of homestead exemption under 11 U.S.C. § 522(b)(1) and 27 V.S.A. § 101.³

The Plaintiffs filed a voluntary Chapter 13 petition and a Chapter 13 plan on June 9, 2011 (ch 13 # 11-10553, doc. ## 1, 2). The Plaintiffs' Chapter 13 plan provided that "Debtors will address invalid mortgage of GMAC through adversary proceeding," and treated the Defendant as a general unsecured creditor rather than as a secured creditor (ch 13 # 11-10553, doc. # 2, p. 3, ¶ 6(d)).⁴ On July 15, 2011, the Defendant filed an objection to confirmation of the plan, alleging that the plan made no provision for paying the Defendant's mortgage in violation of Vermont law, and did not comply with § 1325(a)(3) (ch 13 # 11-10553, doc. # 19). On the same date, the Defendant filed an objection to the Plaintiffs' claim of homestead exemption under § 522(b)(1) and 27 V.S.A. § 101 based on the argument that the property is subject to the Defendant's mortgage (ch 13 # 11-10553, doc. # 20).⁵

On July 19, 2011, the Court held a hearing on confirmation of the plan, at which the Defendant argued that the plan did not comply with § 1325(a)(3) because it made no provision for paying the Defendant's claim, and it attempted to claim as exempt an estate asset otherwise available for the payment of unsecured creditors. The Court determined that, based upon the outstanding legal issues, there could be no distribution even if the plan were confirmed at that time, any confirmation order would need to be contingent upon resolution of the outstanding legal issues, and the essential issue to resolve first was the validity of the Defendant's mortgage, which was pending in this adversary proceeding. The Court continued the confirmation hearing to allow litigation to proceed in the adversary proceeding, and directed the parties to file a proposed scheduling order addressing all open issues in the bankruptcy case.

On August 8, 2011, the parties filed a stipulation indicating that the Defendant had filed a motion to dismiss the adversary proceeding, the parties were prepared to file cross-motions for summary judgment in the adversary proceeding, and "[t]he parties agree that a ruling on the Motion to Dismisswould significantly advance the litigation in this [adversary proceeding], as well as in the main case" (ch 13 # 11-10553, doc. # 33, p. 1). On August 12, 2011, the Court entered a scheduling order finding that "[w]hereas, the legal issues raised in the objection to confirmation, the objection to exemption and the adversary proceeding are related . . . [t]he court will defer ruling on the objection to confirmation and the objection to claim of exemption until the adversary proceeding has been resolved" (ch 13 # 11-10553, doc. # 35).

The record reflects that as of January 13, 2012, the objection to exemption was fully submitted and had been taken under advisement (see ch 13 # 11-10553, docket entry dated January 13, 2012). On June 11, 2012, the Court entered its findings and order confirming the Plaintiffs' plan, with a special provision addressing the import of the adversary proceeding:

Confirmation of the Plan is subject to the outcome of the appeal of the Court's decision in adversary proceeding 11-01013 (David Roy Orcutt et al v. GMAC Mortgage, LLC). In the event that the final decision of that appeal is inconsistent with the terms of the confirmed plan, the debtor shall modify the Plan to make it consistent with the outcome of the above referenced appeal.

(ch 13 # 10553, doc. # 49, p. 5, ¶ 25).⁶

In its opinion and order, the District Court found that this Court possesses the constitutional authority to determine the validity of the Defendant's mortgage as an integral part of the claims allowance process or another proceeding under the Bankruptcy Code. See doc. # 49, p. 16 (citing In re Sundale, Ltd., 2012 WL 5974125, at *4; In re DiVittorio, 670 F.3d at 282 n.4; In re Pulaski, 475 B.R. at 683); see also Porst v. Deutsch Bank Nat'l Trust Co. (In re Porst), 480 B.R. 97, 103 (Bankr. D. Mass 2012) (finding that since a determination of the nature and extent of the creditor's lien was integral to determining the validity of its proof of claim as well as its pending objection to confirmation of the debtor's chapter 13 plan filed in the main case, the adversary proceeding was beyond the narrow scope of Stern v. Marshall, 131 S. Ct. 3594 (2011)).

Here, a determination of...