Smith v. SunTrust Bank (In re Smith)

522 B.R. 788

In re Sue–Anna Shults SMITH, Debtor.

Sue–Anna Shults Smith, Plaintiff

v.SunTrust Bank, DefendantandKenneth Dale Smith, Intervenor–Defendant.

Bankruptcy No. 13–81362.

Adversary No. 14–09039.

United States Bankruptcy Court, M.D. North Carolina, Durham Division.

Signed Dec. 8, 2014.

Filed Dec. 9, 2014.

Benjamin David Busch, Law Office of Benjamin D. Busch, PLLC, Durham, NC, for Debtor.

MEMORANDUM OPINION DISMISSING ADVERSARY PROCEEDING

BENJAMIN A. KAHN, Bankruptcy Judge.

THIS ADVERSARY PROCEEDING came before the Court for hearing on August 28, 2014, on the Motion to Dismiss by Defendant SunTrust Bank (“SunTrust”) [Doc. # 17] (the “Motion to Dismiss”), SunTrust's Memorandum in Support of Motion to Dismiss [Doc. # 18] (“SunTrust's Brief”), and Debtor's Response to Defendant's Motion to Dismiss [Doc. # 24] (“Plaintiff's Response”). At the hearing, Brian D. Darer and Michael J. Crook appeared on behalf of SunTrust, Jeremy Todd Browner appeared on behalf of Intervenor–Defendant Kenneth Dale Smith (“Mr. Smith”), and Benjamin D. Busch appeared on behalf of Plaintiff Sue–Anna Shults Smith (“Plaintiff” or “Debtor”). After the hearing, the Court took the matter under advisement and allowed the parties through and including September 4, 2014, to submit any supplemental information or authorities with respect to: (1) whether, based upon the allegations and attachments to the Complaint and the matters of which this Court may take judicial notice, the Plaintiff should be deemed as a matter of law to have ratified the transactions of which she complains in the Complaint; and (2) whether this Court may consider the issue of ratification under the circumstances of this case in connection with SunTrust's Motion to Dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Bankruptcy Rule 7012. On August 29, 2014, Plaintiff filed Debtor's Post–Hearing Brief: Ratification [Doc. # 26] (“Debtor's Supplemental Brief), and, on September 3, 2014, counsel for SunTrust filed its Memorandum of Authority [Doc. # 28] (” SunTrust's Supplemental Brief).

Having considered the submissions of the parties, the undisputedly authentic documents either referred to in the Complaint or of which this Court may take judicial notice, and the arguments of counsel, the Court finds that the Motion to Dismiss should be granted and the Complaint should be dismissed for the reasons set forth herein.

I. Background¹

The Debtor and Mr. Smith's marriage began in May of 1978, but ended in separation and divorce in 2007 and 2008 amid the Debtor's allegations of infidelity, abuse, and forgery by her now ex-husband. (Complaint for Divorce from Bed & Board, Post–Separation Support, Alimony, Attorneys' Fees, And Equitable Distribution Of Marital Property (“Divorce Complaint”), ¶ 14; First State Court Order, as defined below, Findings of Fact ¶ 2). During the marriage, the parties owned two properties as tenants by the entireties: a home located at 8419 Doughton Dr., Bahama, North Carolina (“the Home”), and a farm consisting of 36.50 acres located at 9611 Rougemont Rd., Bahama, North Carolina (“the Farm”). (See First State Court Order, Decretal ¶¶ 2 and 3; Complaint ¶ 6). Also during the marriage, in September of 2002, Mr. Smith obtained a loan in the form of the Second Home Equity Line, as defined below, from Central Carolina Bank, a division of National Bank of Commerce, by forging the Debtor's signature to the loan documents, including the supporting Equity Line Deed of Trust. (Complaint ¶¶ 10, 12, 13, 15). An employee of National Bank of Commerce notarized the forgery. Id. ¶ 15. According to the Debtor, Mr. Smith used the loan proceeds “to finance an extra-marital affair,” and the Debtor received no benefit from the loan proceeds at the time of the loan. Id. ¶¶ 18–20.

On May 21, 2007, the Debtor filed her Divorce Complaint in the North Carolina General Court of Justice, District Court Division, Durham County (“the State Court”) against Mr. Smith, seeking post-separation support, alimony, equitable distribution of marital property, and divorce from bed and board (the “Divorce Litigation”). In the Divorce Complaint, the Debtor described how Mr. Smith had forged her signature on the Second Home Equity Line loan documents. (Divorce Complaint ¶ 10.a.; Complaint ¶ 14.(a).). In the Divorce Answer, Mr. Smith admitted to the forgery. (Complaint ¶ 14.(a).; Divorce Answer ¶ 10).

In connection with resolving the Divorce Litigation, and with Mr. Smith's answer on record, the State Court entered various orders, including the following: (1) August 18, 2008 Order Resulting from Memorandum of Judgment/Order (effective nunc pro tunc to July 16, 2008) (“the First State Court Order”); (2) November 14, 2011 Order Re: Motion to Modify Alimony for Contempt and Attorneys' Fees (the “Second State Court Order”); (3) February 8, 2012 Consent Order Re: Motion for New Trial Motion to Modify Alimony and Motion for Contempt and Attorneys' Fees (“the Third State Court Order”); and (4) September 13, 2013 Order for Contempt (“the Fourth State Court Order”)² (the First State Court Order, the Second State Court Order, the Third State Court Order, and the Fourth State Court Order shall be collectively referred to herein as “the State Court Orders”).

The First State Court Order arose out of a mediation between the parties and was entered by consent. It provides in relevant part:

3. [Debtor] shall have sole possession and ownership of the farm ... as well as the house....

4. [Debtor] will bring the mortgage on the house ... and the equity line on the farm ... current. She will thereafter be responsible for the [First Home Mortgage] monthly payment, as well as the payment to Suntrust on the first equity line (a/c# xxx ... 3748)³ and will indemnify Defendant on the same, provided that his alimony is and has been paid in a timely manner....

5. [Mr. Smith] will, effective immediately and for a twelve (12) month period hereafter, be responsible for the monthly payment [on the Second Home Equity Line] on the house, as well as for the monthly payment [on the Farm Equity Line]; and will indemnify and hold her harmless for the same.

7. [Mr. Smith] and/or his counsel will work with [the Debtor] and/or her counsel to attempt to terminate the current listing contract on the house ..., and [the Debtor] shall immediately choose and contract with a new realtor to sell the house.

* * *

9. [Mr. Smith's] obligation on the two (2) mortgages shall end after twelve (12) months, ... however if the house is sold, his obligation to pay the [Second Home Equity Line] shall end, as that and both other encumbrances will be paid from the proceeds of the sale. Any proceeds above the cost of these three (3) encumbrances shall belong to [Debtor], free of any claims of [Mr. Smith].

10. [Debtor] may, if she chooses, sell portion(s) of the farm, with any and all proceeds being her separate property, and [Mr. Smith's] obligation to pay on that loan ... shall continue unaffected. If, however, [Debtor] sells the entire farm, the proceeds shall be used to pay off this mortgage, after which [Debtor] receives any and all remaining proceeds.

(First State Court Order, Decretal ¶¶ 3, 4, 5, 9, and 10). At the time of entry of the First State Court Order, the Second Home Equity Line was scheduled to mature on September 26, 2012. From September 10, 2008, through March 23, 2012, the Debtor made payments on the Second Home Equity Line. (Complaint ¶ 46).

As reflected in the Second Home Equity Line Claim, SunTrust has been the holder of the Second Home Equity Line at all times relevant to this case.⁴ Following entry of the First State Court Order, in October of 2009, the Debtor informed SunTrust that her husband had forged her signature on the Second Home Equity Line loan documents, and requested that SunTrust investigate the loan. Id. ¶ 22. In response, SunTrust notified the Debtor that it had opened a fraud investigation with respect to the loan. Id. ¶ 24. In January of 2010, however, SunTrust notified the Debtor that it was “unable to pursue ... [the Debtor's] case as fraudulent[,]” because the Debtor failed to provide SunTrust with a copy of a police report of the fraud. Id. ¶ 28.

Nearly a year later, in December of 2010, SunTrust offered the Debtor a modification of the Second Home Equity Line. (Complaint ¶ 30). In response, the Debtor again noted that her signature was a forgery, and stated that she only had been paying the monthly minimum to prevent foreclosure. Id. ¶ 31. The Debtor stated that, due to the forgery, she did not want to be liable on the loan. Id.

Despite these statements and her knowledge of the forgery, however, the Debtor signed a modification agreement on March 21, 2011 (the “Modification Agreement”), and continued making payments under the loan, in amounts as modified under the Modification Agreement. Id. ¶¶ 33. Under the Modification Agreement, the Debtor is listed as the sole borrower. (See generally Modification Agreement).⁵ In the Modification Agreement, the Debtor acknowledged that the Second Home Equity Line was secured by a lien on the home, and that “there are no defenses, adjustments, or offsets to [the Debtor's] obligation to pay under the terms of the Equity Line Agreement.” Id. ¶ 1.⁶

On September 13, 2013, the State Court entered the Fourth State Court Order, which arose as a result of the Debtor's failure to list the Home for sale and her failure to make the required payments thereon. (Fourth State Court Order, Findings of Fact ¶¶ 5–7). In the Fourth State Court Order, the State Court found, inter alia: (1) that the Debtor could not assert the fact that Mr. Smith had “signed [Debtor's] name to secure said loan” as a defense to her obligations to make the ongoing payments under the loan, as the Debtor “knew of the same prior to her agreeing to sign the [First State Court Order] entered August 18, 2008 and all subsequent Consent Orders entered thereafter[,]” id. ¶...