Scubla v. New Rez, LLC (In re Scubla)

631 B.R. 262

Susan SCUBLA, f/k/a Susan Hentschel, Debtor.

Susan Scubla, f/k/a Susan Hentschel, Plaintiff-Appellant,

v.New Rez, LLC, d/b/a Shellpoint Mortgage Servicing, f/k/a New Penn Financial, LLC, and PCSB Bank, f/k/a Putnam County Savings Bank, Defendants-Appellees.

BAP NO. MW 20-037

Bankruptcy Case No. 19-40426-EDK

Adversary Proceeding No. 19-04036-EDK

United States Bankruptcy Appellate Panel of the First Circuit.

August 11, 2021

Michael B. Feinman, Esq., Andover, on brief for Plaintiff-Appellant.

Joshua A. Burnett, Esq., on brief for Defendant-Appellee, New Rez, LLC.

No brief submitted for Defendant-Appellee, PCSB Bank.

Before Finkle, Harwood, and Cary, United States Bankruptcy Appellate Panel Judges.

Harwood, U.S. Bankruptcy Appellate Panel Judge.

The chapter 11 debtor, Susan Scubla, f/k/a Susan Hentschel (the "Debtor"), commenced an adversary proceeding to avoid a mortgage in favor of New Rez, LLC, d/b/a Shellpoint Mortgage Servicing ("New Rez").¹ The Debtor appeals from: (1) the Amended Order denying, in part, her motion for summary judgment and granting summary judgment sua sponte in favor of New Rez; and (2) the Partial Judgment in favor of New Rez. For the reasons discussed below, we AFFIRM both rulings.

BACKGROUND

I. Pre-Bankruptcy Events

The Debtor previously co-owned property in Wainscott, New York (the "Property") with her former spouse, Robert Hentschel ("Mr. Hentschel"). On November 13, 2003, the Debtor and Mr. Hentschel granted a mortgage on the Property (the "2003 Mortgage") to Washington Mutual Bank, FA ("Washington Mutual") which was recorded on November 25, 2003. The 2003 Mortgage secured repayment of a $675,500 promissory note (the "2003 Note") signed only by Mr. Hentschel.²

On May 6, 2008, Mr. Hentschel signed a promissory note in favor of Washington Mutual in the amount of $417,000 (the "Consolidated Note"). On the same date, both the Debtor and Mr. Hentschel executed a Consolidated Mortgage in favor of Washington Mutual to secure repayment of the Consolidated Note. The Consolidated Note and the Consolidated Mortgage were appended as exhibits C and D, respectively, to an "Extension[ ] and Modification Agreement" (the "Modification Agreement") (collectively with the Consolidated Note and the Consolidated Mortgage, sometimes the "2008 Instruments") executed by the Debtor and Mr. Hentschel on May 6, 2008.³ Recorded on May 23, 2008, the 2008 Instruments were intended to modify the terms of the 2003 Note and 2003 Mortgage. No additional property was encumbered, and no additional funds were advanced. With respect to the 2003 Note and the 2003 Mortgage, the Modification Agreement provided (in an unidentified person's handwriting) that the "New Reduced Principal Now due + owing" was $417,000. The Modification Agreement also provided, in pertinent part:

II. AGREEMENT TO COMBINE NOTES AND MORTGAGES

(A) By signing this Agreement, Lender and I are combining into one set of rights and obligations all of the promises and agreements stated in the Notes and Mortgages including any earlier agreements which combined, modified, or extended rights and obligations under any of the Notes and Mortgages. This means that all of Lender's rights in the Property are combined so that under the law Lender has one mortgage and I have one loan obligation which I will pay as provided in this Agreement. This combining of notes and mortgages is known as a "Consolidation."

....

III. AGREEMENT TO CHANGE TERMS OF THE CONSOLIDATED NOTE

Lender and I agree that the terms of the Notes are changed and restated to be the terms of the "Consolidated Note" which is attached to this Agreement as Exhibit C. The Consolidated Note contains the terms of payment for the amounts that I owe to Note Holder. I agree to pay the amounts due under the Notes in accordance with the terms of the Consolidated Note. The Consolidated Note will supersede all terms, covenants, and provisions of the Notes.

IV. AGREEMENT TO CHANGE TERMS OF THE CONSOLIDATED MORTGAGE

Lender and I agree that the terms of the Mortgages are changed and restated to be the terms of the "Consolidated Mortgage" which is attached to this Agreement as Exhibit D. The Consolidated Mortgage secures the Consolidated Note and will constitute in law a single lien upon the Property. I agree to be bound by the terms set forth in the Consolidated Mortgage which will supersede all terms, covenants, and provisions of the Mortgages.

The Modification Agreement defined "Notes" and "Mortgages" as those documents identified in the attached Exhibit A.

That exhibit, captioned "List of Mortgages, Notes, and Agreements," listed: (1) the Consolidated Mortgage; (2) the Consolidated Note; (3) the 2003 Note; and (4) the 2003 Mortgage. Exhibit A also provided: "[T]he unpaid principal balance secured by [the 2003] Mortgage is ... $477,416.42 which has been further reduced to $417,000.00."⁴

Thereafter, two additional documents relating to the Property were executed, each captioned "Satisfaction of Mortgage." The first, dated May 23, 2008 and recorded June 17, 2008 (the "First Satisfaction"), provided in relevant part:

WASHINGTON MUTUAL BANK ..., holder of a certain mortgage evidencing an indebtedness in the amount of $675,500.00 plus interest, whose parties, dates and recording information are below, does hereby acknowledge that it has received full payment and satisfaction of the same, and in consideration thereof, does hereby satisfy and discharge said mortgage.

The First Satisfaction set forth the names, dates, and recording information for the 2003 Mortgage as follows:

Mortgagor: ROBERT J[.] HENTSCHEL AND SUSAN HENTSCHEL

Mortgagee: WASHINGTON MUTUAL BANK, FA

Dated: 11/13/2003 Recorded: 11/25/2003 ....

The second document (the "Second Satisfaction"), dated May 26, 2016 and recorded on July 8, 2016 by JPMorgan Chase Bank, N.A, ("JPMorgan"), successor in interest to Washington Mutual, provided that:

JPMORGAN CHASE BANK ... does hereby certify that a certain indenture of mortgage, bearing date of November 13, 2003, made and executed by ROBERT J. HENTSCHEL AND SUSAN HENTSCHEL to WASHINGTON MUTUAL BANK ... to secure payment of the principal sum of $675,500.00 ... and duly recorded on November 25, 2003 ... is PAID, and does hereby consent that the same be discharged of record....

....

List of Additional Mortgages, Consolidation Extension Modifications and Assignments:

EXTENSION AND MODIFICATION AGREEMENT FROM ROBERT J. HENTSCHEL AND SUSAN HENTSCHEL TO WASHINGTON MUTUAL BANK, FA DATED MAY 6, 2008, RECORDED MAY 23, 2008 ....

JPMorgan subsequently assigned the 2003 Mortgage to New Penn Financial, LLC ("New Penn") on July 30, 2018. Thereafter, New Penn changed its name to New Rez, LLC.

In December 2018, Mr. Hentschel transferred his interest in the Property to the Debtor. Prior to that transfer, PCSB Bank, f/k/a Putnam County Savings Bank ("PCSB"), recorded various judicial liens against Mr. Hentschel's interest in the Property.

II. Bankruptcy Proceedings

The Debtor filed a chapter 11 bankruptcy petition in March 2019. Several months later, the Property was sold pursuant to § 363, with existing liens attaching to the proceeds of the sale.⁵

A. The Adversary Proceeding

In August 2019, the Debtor commenced an adversary proceeding against multiple defendants, including New Rez and PCSB, to determine the extent, priority, and validity of their secured claims against the Property. In her complaint, the Debtor's only allegation against New Rez was that:

New Rez, claiming to be holder of a mortgage on the Property, [wa]s entitled to no proceeds from the sale of the Property due to the fact that the mortgage it held on the Property ha[d] been discharged by it, and the underlying promissory note was executed only by the Debtor's ex-husband, Robert.^{[6 ]}

The Debtor alleged PCSB was entitled to proceeds from the sale of the Property only to the extent its judicial liens attached to Mr. Hentschel's interest in the Property before he transferred it to the Debtor. In her prayer for relief, the Debtor asked the court to determine that she was entitled to one half of the sale proceeds.

B. The Motion for Summary Judgment

In January 2020, the Debtor filed a motion for summary judgment against New Rez and PCSB (the "Summary Judgment Motion"). There, for the first time, she referenced the Modification Agreement, referring to it as a "restructure" of the 2003 Mortgage, and the First Satisfaction. Her sole argument advanced in the Summary Judgment Motion was one she had neglected to make in the complaint—that under § 544, she assumed the status of a "lien creditor and [ ] bona fide purchaser" and, as such, could avoid the lien of New Rez as an unperfected lien and preserve it for the benefit of the bankruptcy estate under § 551.⁷ She did not elaborate, however, on the legal basis for her theory that New Rez's lien was unperfected. Nonetheless, the Debtor asked the court to "grant her summary judgment ... and to preserve the lien of New Rez for the benefit of the estate."

C. Opposition of New Rez

New Rez opposed the Summary Judgment Motion, arguing there existed a genuine issue of material fact as to whether the Consolidated Mortgage remained "in full force and effect." Citing Benson v. Deutsche Bank National Trust, Inc., 109 A.D.3d 495, 970 N.Y.S.2d 794 (2013), New Rez argued that under New York law, the 2003 Mortgage and the 2008 Modification Agreement retained their "independence and effectiveness." New Rez asserted that, consistent with Benson, the Modification Agreement was "an accommodation between the contracting parties to provide a single enforceable lien that nevertheless create[d] rights that [we]re independently enforceable." Additionally, New Rez argued that the First Satisfaction and Second Satisfaction did not discharge the Debtor's underlying obligation to New Rez, as New York "Consolidated Laws Chapter 50, Article 8, § 275 expressly states that mortgage discharges made in the context of a modification to an existing loan do not act as a release of the...