Sywilok v. Internal Revenue Serv. (In re Gianninoto)

539 B.R. 452

In re: James H. Gianninoto aka James Gianninoto aka James Hall Gianninoto, Debtor.

John W. Sywilok, Plaintiff

v.Internal Revenue Service, State of New Jersey, JP Morgan Chase, NA, and Wendy P. Gianninoto, Defendants.

Case No.: 14–35883JKS

Adv. Pro. No. 15–01195JKS

United States Bankruptcy Court, D. New Jersey.

Signed October 16, 2015

Kopelman & Kopelman LLP, Michael S. Kopelman, Esq., 55 Main Street, Hackensack, New Jersey 07601, Counsel for Plaintiff, John W. Sywilok, Chapter 7 Trustee

Buckley Madole, P.C., Richard P. Haber, Esq., 99 Wood Avenue South, Suite 803, Iselin, New Jersey 08830, Co–Counsel for Defendant, JP Morgan Chase Bank, N.A.

Fidelity National Law Group, David A. Niles, Esq., 105 Eisenhower Parkway, Suite 103, Roseland, New Jersey 07068, Co–Counsel for Defendant, JPMortgan Chase Bank, N.A.

Gardy & Notis, LLP, James H. Gianninoto, Esq., 560 Sylvan Avenue, Suite 3085, Englewood Cliffs, New Jersey 07632, Counsel for Defendant, Wendy P. Gianninoto

OPINION

THE HONORABLE JOHN K. SHERWOOD, BANKRUPTCY JUDGE

Before the Court is the motion of plaintiff John W. Sywilok, chapter 7 trustee (the “Trustee”) of the bankruptcy estate of James H. Gianninoto (the “Debtor”), for partial summary judgment against defendant JP Morgan Chase, NA (“Chase”). The Trustee's motion seeks a declaration that Chase does not have a security interest in the Debtor's property located at 19 Glenwood Road, Upper Saddle River, New Jersey 07458 (the “Property”) because it failed to record its mortgage prior to the filing of the Debtor's petition. Chase has filed cross-motions for summary judgment on counterclaims asserted against the Trustee and cross-claims asserted against the Debtor's wife, Wendy P. Gianninoto. For the reasons set forth below, the Court will grant the Trustee's motion. Chase's cross-motion is granted in part and denied in part. The remaining issues in this adversary proceeding are preserved for trial.

JURISDICTION

The Court has jurisdiction over the motions pursuant to 28 U.S.C. §§ 1334(b), 157(a), and the Standing Order of Reference from the United States District Court for the District of New Jersey dated July 23, 1984 as amended September 18, 2012. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K). Venue is proper under 28 U.S.C. §§ 1408 and 1409(a).

FACTS AND PROCEDURAL HISTORY

The Debtor and his wife, Wendy P. Gianninoto (“Mrs. Gianninoto”), acquired title to the Property as tenants by the entirety on August 20, 1993. (Mrs. Gianninoto's Supp. Stmt. of Facts at ¶¶ 5–6, ECF No. 33). The Debtor and Mrs. Gianninoto remain married and continue to live in the Property. On December 5, 2007, the Debtor refinanced the mortgage on the Property by obtaining a loan in the amount of $890,000 from Washington Mutual Bank (“Washington Mutual”), which was memorialized by a note due from the Debtor alone (the “Note”) but secured by a mortgage from both the Debtor and Mrs. Gianninoto (the “Mortgage”). (Chase's Am. Answer, Counterclaims, and Cross–Claims (“Chase's Am. Answer”) at 10, ¶¶ 5–6, ECF No. 241). Mrs. Gianninoto asserts that she did not intend to encumber her interest in the Property and that she only signed the Mortgage to acknowledge that the Debtor was encumbering his interest in the Property. (Mrs. Gianninoto's Supp. Stmt. of Facts at ¶¶ 39–40). Chase is the successor-in-interest on the Note and Mortgage by purchase from the Federal Deposit Insurance Corporation as receiver of Washington Mutual. (Chase's Am. Answer at 10, ¶ 5).

One of the main reasons this matter is before the Court is that, for unknown reasons, the Mortgage was never recorded and is now presumed lost. (Id. at 10, ¶ 9). Before the Debtor filed his bankruptcy case, Chase took actions to remedy this problem through filings with the county clerk and ultimately by bringing suit in state court. The effectiveness of Chase's corrective actions (described below) is a key issue, and possibly an issue of first impression.

On May 6, 2013, apparently having realized that the Mortgage acquired from Washington Mutual was not recorded, Chase filed a “notice of settlement” against the Property pursuant to New Jersey's Notice of Settlement Act, N.J.S.A. 46:26A–11. (See Cert. of Michael S. Kopelman in Opp'n to Cross–Motion for Summ. J. (“Kopelman Cert.”), Ex. A, ECF No. 31). The statute allows a party to a real estate transaction to record a notice of settlement to protect its anticipated interest in property (as owner or mortgagee) against intervening liens created between the time the notice is filed and when the deed or mortgage is actually recorded. Provided that the underlying interest is properly recorded within the effective period described in the statute (60 days, subject to one potential extension of an additional 60 days), it has priority over subsequent liens. See N.J.S.A. 46:26A–11(d), (f).

On June 26, 2014, counsel for Chase sent a letter addressed to the Debtor and Mrs. Gianninoto advising them that the Mortgage was not recorded and requesting that they execute a replacement mortgage. (Cert. of Mrs. Gianninoto in Opp'n to Cross–Mot., at ¶¶ 37–39, ECF No. 34–1). The letter referenced a “Document Correction Agreement” allegedly executed by the homeowners in connection with the original loan. (Id., Ex. E, ECF No. 34–4). Shortly thereafter, the Debtor requested a copy of the Document Correction Agreement and that Chase specifically identify the errors or inaccuracies it was seeking to correct with the replacement mortgage. (Id. at ¶ 39). On June 30, 2014, Chase recorded a second notice of settlement with respect to the Property. (Kopelman Cert., Ex. B, 31–3). This was necessary because the first notice of settlement was filed more than a year prior and had expired.

On September 5, 2014, counsel for Chase responded to the Debtor's request by sending a letter and enclosing a copy of an “Occupancy, Misrepresentation and Nondisclosure Affidavit and Agreement,” which provided, in relevant part:

[I]f as a result of a clerical error, omission or other mistake, corrections need to be made to my loan documentation or any additional documents that may be required to enable Lender to sell to a government agency or other Investor, upon the request of the Lender or the Closing Agent, I shall, as applicable: i) authorize Lender or Closing Agent to make correction(s) and indicate on the modified document that a correction was made; (ii) initial any correction(s) made to any loan documentation; and (iii) re-execute corrected loan documentation.

(Cert. of Mrs. Gianninoto in Opp'n to Cross–Mot., Ex. F, ECF No. 34–4).¹ The letter also renewed Chase's request that the Debtor and Mrs. Gianninoto execute a replacement mortgage. (Mrs. Gianninoto's Supp. Stmt. of Facts at ¶ 72). The homeowners did not comply with this request and Chase filed a third notice of settlement with respect to the Property on October 14, 2014. (Chase's Am. Answer at 10, ¶ 11; Kopelman Cert., Ex. C., ECF No. 31–4). On December 19, 2014, Chase recorded a fourth notice of settlement. (Kopelman Cert., Ex. D, ECF No. 31–5).

By late 2014, it either was or should have been apparent that the Debtor and Mrs. Gianninoto were not going to voluntarily fix the problem with the Mortgage that Chase inherited from Washington Mutual. Thus, on December 22, 2014, Chase filed a lawsuit in the Superior Court of New Jersey, Chancery Division, Bergen County, captioned JP Morgan Chase Bank, National Association v. James H. Gianninoto, et al., Docket No. BER–C–360–14 (the “State Court Action”), seeking to quiet title and reform the mortgage to correct the lot number.² (Chase's Am. Answer at 10, ¶ 12). On December 24, 2014, the state court entered an Order to Show Cause requiring the Debtor and his wife to show why an order should not be entered permitting Chase to record a copy of the Mortgage as an original. (Id. ).

On December 29, 2014, the Debtor filed his voluntary petition for relief under chapter 7 of the Bankruptcy Code. (Id. at ¶ 15). The State Court Action was dismissed shortly thereafter without prejudice, subject to reinstatement upon dismissal of the bankruptcy or entry of an order granting Chase relief from the automatic stay. (Cert. of James H. Gianninoto in Opp'n to Cross–Mot., Ex. D, ECF No. 38–3).

On February 17, 2015, the Trustee filed this adversary proceeding against Chase, Mrs. Gianninoto, the Internal Revenue Service, and the State of New Jersey seeking authority to sell the Property free and clear of their interests pursuant to §§ 363(f) and (h) of the Bankruptcy Code. (Compl., ECF No. 1).³ Count Four of the Trustee's complaint seeks a determination that the bankruptcy estate's interest in the Property is superior to that of Chase because the Mortgage is unrecorded and may be avoided pursuant to the Trustee's “strong arm” powers under section 544(a) of the Bankruptcy Code. (Id. at 5–6).

On May 7, 2015, the Trustee filed the motion for summary judgment against Chase. (Mot. for Summ. J., ECF No. 17). On May 11, 2015, Chase filed a motion to dismiss the Debtor's bankruptcy case for a lack of good faith, or in the alternative, for limited stay relief allowing Chase to continue the State Court Action. (In re James H. Gianninoto, Case No. 1435883, ECF No. 29). The Court entered an order denying Chase's motion without prejudice on June 2, 2015. (Id., ECF No. 34).

On June 19, 2015, Chase filed an amended answer, counterclaims, and cross-claims asserting counterclaims against the Trustee and cross-claims against Mrs. Gianninoto, and seeking declaratory relief allowing Chase to record a copy of the Mortgage. (See Chase's Am. Answer). Mrs. Gianninoto filed an answer, defenses, and her own cross-claims against Chase on July 9, 2015. (Mrs. Gianninoto's Answer, ECF No. 26). On July 14, 2015, Chase filed its cross-motion for summary judgment on Counts One through Three of its counterclaims against the Trustee and on Count Four of its cross-claims against Mrs. Gianninoto. (Chase's Cross–Mot. for Summ. J., ECF...