Terry v. Meb Loan Tr. II (In re Terry)

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In re: GREG P. TERRY, Debtor.

GREG P. TERRY, Plaintiff, v. MEB LOAN TRUST II, Defendant.

No. 22-22453

Adv. Proc. No. 22-02093

United States Bankruptcy Court, D. Utah, Central Division

September 14, 2023

MEMORANDUM DECISION ON DEFENDANT'S MOTION TO DISMISS COMPLAINT

Kevin R. Anderson, U.S. Bankruptcy Judge

Debtor Greg Terry ("Debtor") has not made a payment on his residential mortgage since October 2008. By the same measure none of the note holders initiated any foreclosure action against the Debtor until Defendant MEB Loan Trust II ("MEB") filed its notice of default and election to sell the Debtor's home in February 2022-over thirteen years after the Debtor's last payment. As a result, the Debtor filed this adversary proceeding seeking a ruling that (1) laches or the applicable statute of limitations bars MEB from enforcing its note and trust deed; and (2) the trust deed lien should be removed and title to the home quieted in the Debtor's favor. In response, MEB filed a Rule 12(b)(6) motion to dismiss the Debtor's complaint.

The parties briefed the motion, and the Court conducted a hearing on June 5, 2023, at which time the Court took the matter under advisement. After reviewing the Debtor's complaint the motion, and the parties' memoranda, and after considering the parties' oral arguments and conducting independent research of applicable law, the Court issues the following Memorandum Decision denying MEB's motion.^[1]

I. FACTS

When evaluating a Rule 12(b)(6) motion to dismiss, a court may consider the well-pleaded factual allegations in the complaint along with any exhibits attached thereto.^[2] The following facts come from the well-pleaded allegations in the Debtor's complaint and its accompanying exhibits.

1. Since at least 2006, the Debtor has owned the residential real property located at 4036 West Ivy Avenue, Morgan, UT 84050 (the "Home").

2. On December 21, 2006, the Debtor entered into a home equity loan agreement with First Horizon Home Loan Corporation (the "Lender") that involved a promissory note (the "Note") secured by a trust deed on the Home, which was recorded on December 28, 2006 (the "Trust Deed").

3. The term of the Note consists of two periods: a ten-year "Draw Period" running from 2007 to 2017 followed by a ten-year "Repayment Period" running from 2017 to 2027.^[3] 4. During the Draw Period, the Debtor could borrow funds up to the credit limit of $46,500.^[4] At the same time, the Lender was to send the Debtor monthly billing statements showing the loan balance and requiring a minimum monthly payment to cover accrued interest, costs, etc. However, the Note made clear that these minimum payments would "not repay any of the principal."^[5]

5. Ten years later, at the commencement of the Repayment Period in January 2017, the Debtor could no longer borrow funds, and the monthly payment would increase in an amortized amount sufficient to satisfy the loan balance over ten years.^[6]

6. While the Note does not list a specific maturity date, the Trust Deed states that all amounts owing under the Note must be repaid "in full no later than January 1, 2027."^[7]

7. The Trust Deed provides that the Debtor would be in default if he failed to make any Note payment by its due date.^[8]

8. The Debtor concedes that he has not made any Note payments since October 2008.

9. The Trust Deed further provides that if the Debtor defaulted, the Lender would give him notice of the default, which, among other things, would inform him "that failure to cure the default on or before the date specified in the notice may result in acceleration of the sums secured by [the Trust Deed] and sale of the [Home]."^[9] 10. Following their execution in December 2006, the Note and Trust Deed have been assigned to various holders, and they are presently held by MEB, who recorded an assignment of the Trust Deed on August 3, 2021.^[10]

11. On February 7, 2022, MEB recorded a Notice of Default and Election to Sell the Debtor's Home under the terms of the Trust Deed (the "Notice of Default").^[11] The Notice of Default describes the default as the Debtor's "failure . . . to pay the entire unpaid principal balance together with all accrued interest which became due in full on November 27, 2008."^[12]

12. The Notice of Default further states that "[u]nder the provisions of the [] Note and Trust Deed, the principal balance is accelerated and now due, together with accruing interest, late charges, costs and trustees' and attorneys' fees."^[13]

II. PROCEDURAL BACKGROUND

1. On June 29, 2022, the Debtor filed this chapter 13 bankruptcy case, which was before MEB could conduct its trust deed sale of the Home.

2. On July 26, 2022, Select Portfolio Servicing, Inc., as MEB's loan servicer, filed a proof of claim in the total amount of $493,430.45 (the "Proof of Claim").^[14] This sum is based on the principal balance of $46,141.77 plus fees costs of $3,414.04 for a subtotal of $49,555.81. The Proof of Claim also asserts a prepetition arrearage of $443,874.64 based on 164 missed monthly payments of $2,692.53 for a subtotal of $441,574.92 plus $2,299.72 in principal and interest. The Proof of Claim indicates that these amounts are all secured by the Trust Deed on the Debtor's Home.

3. On October 12, 2022, the Debtor filed this adversary proceeding seeking to have the Note and Trust Deed declared unenforceable and to avoid the trust deed lien on the Home based on various theories, including statute of limitations and laches.

4. On November 8, 2022, MEB filed its motion to dismiss the initial complaint for failure to state a claim under Fed.R.Civ.P. 12(b)(6) ("Rule 12(b)(6)").^[15]

5. In response to MEB's motion to dismiss, the Debtor twice amended his complaint,^[16] resulting in the present complaint filed at ECF No. 23 (the "Complaint"), which is the subject of MEB's present motion under Rule 12(b)(6).^[17]

6. The Complaint pleads four causes of action, which together seek disallowance of MEB's Proof of Claim and removal of the lien evidenced by its Trust Deed or, in the alternative, a determination that the balance owing on MEB's secured claim does not exceed $49,555.81.

7. Specifically, the first cause of action seeks disallowance and removal based on expiration of the applicable statute of limitations. The second cause of action seeks to quiet title to the Home in favor of the Debtor based on expiration of the applicable statute of limitations. The third seeks disallowance and removal or reduction of the lien amount based on the doctrine of laches. And the fourth seeks to determine the validity, priority, and extent of MEB's lien against the Home.

III. ANALYSIS

A. The Rule 12(b)(6) Standard to Dismiss for Failure to State a Claim.

Under Rule 12(b)(6), made applicable to bankruptcy adversary proceedings by Fed.R.Bankr.P. 7012(b), a plaintiff's complaint must contain sufficient facts "to state a claim to relief that is plausible on its face."^[18] Facial plausibility exists where "the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged."^[19] Thus, a complaint must do more than raise a "sheer possibility that a defendant has acted unlawfully."^[20] Where the facts in a complaint allow a court to infer no more than "the mere possibility of misconduct," the complainant has not met its burden to show that it is "entitled to relief."^[21] In other words, a plaintiff must "nudge[] [his] claims across the line from conceivable to plausible" to survive a motion to dismiss.^[22]

The Tenth Circuit has described the Twombly/Iqbal standard as "a middle ground between heightened fact pleading, which is expressly rejected, and allowing complaints that are no more than labels and conclusions or a formulaic recitation of the elements of a cause of action, which the [Supreme] Court stated will not do."^[23]

When considering a motion to dismiss under Rule 12(b)(6), the court must treat all well-pleaded allegations in the complaint as true and must view them in the light most favorable to the plaintiff,^[24] although this rule does not apply to legal conclusions.^[25] In addition, "[t]he court's function on a Rule 12(b)(6) motion is not to weigh potential evidence that the parties might present at trial, but to assess whether the plaintiff's complaint alone is legally sufficient to state a claim for which relief may be granted."^[26]

B. Does the Complaint Plead Sufficient Facts to State a Plausible Claim that the Statute of Limitations Has Run on the Enforcement of the Note and Trust Deed?

While Rule 12(b)(6) is a matter of federal law, the adequacy of the Complaint's pleadings as to the enforceability of the Note and Trust Deed is assessed under state law.^[27] Consequently, "[w]hen the federal courts are called upon to interpret state law, the federal court must look to the rulings of the highest state court, and, if no such rulings exist, must endeavor to predict how that high court would rule."^[28] If the highest state court has not yet issued a decision on the issue in question, "federal authorities must apply what they find to be the state law after giving 'proper regard' to relevant rulings of other courts of the State."^[29] "The decision of an intermediate appellate state court 'is a datum for ascertaining state law which is not to be disregarded by a federal court unless it is convinced by other persuasive data that the highest court of the state would decide otherwise."^[30]

While the Note states that it is "governed by applicable Federal law and the law of Tennessee," the Trust Deed is "governed by the law of the state in which the real property is located,"^[31] which is Utah, and the parties have stipulated that Utah law...