Wolinsky v. Frye (In re Frye)

620 B.R. 61

IN RE: Berton R. FRYE and Virginia R. Frye, Debtors.

Douglas J. Wolinsky, Trustee, Plaintiff,

v.Berton R. Frye, Virginia Frye, Northeastern Vermont Development Association, Inc., Internal Revenue Service, Vermont Community Loan Fund, Inc., and Northern Community Investment Corporation, Defendants.

Case # 15-10242

Adversary Proceeding # 19-01009

United States Bankruptcy Court, D. Vermont.

Signed August 31, 2020

Douglas J. Wolinsky, Burlington, VT, pro se.

Jeremy Seth Grant, Burlington, VT, for Plaintiff.

Berton R. Frye, pro se.

Virginia Frye, pro se.

Steven Marcus Dean, Karen E. Wozniak, U.S. Department of Justice, Washington, DC, Christine Pierpont, Law Office of Charles D. Hickey PLC, St. Johnsbury, VT, for Defendants.

MEMORANDUM OF DECISION

GRANTING INTERNAL REVENUE SERVICE'S MOTION FOR SUMMARY JUDGMENT AND DENYING JOINT CROSS-MOTION FOR SUMMARY JUDGMENT OF VERMONT COMMUNITY LOAN FUND AND NORTHERN COMMUNITY INVESTMENT CORPORATION

Colleen A. Brown, United States Bankruptcy Judge

The three remaining parties to this adversary proceeding – the Internal Revenue Service (the "IRS"), Vermont Community Loan Fund, Inc. ("VCLF"), and Northern Community Investment Corporation ("NCIC") (collectively, the "Remaining Parties") – each claim an interest in certain insurance proceeds (the "Insurance Proceeds"). The IRS asserts it is entitled to all of these proceeds based on the priority of its federal tax liens, and VCLF and NCIC contest the priority of the IRS's interest, asserting they have a superior right to the Insurance Proceeds because the IRS expressly subordinated its liens to the VCLF and NCIC mortgage liens.

For the reasons set forth below, the Court concludes summary judgment is proper, and the IRS has a superior right to the Insurance Proceeds as a matter of law. Therefore, the Court grants the IRS's motion for summary judgment and denies VCLF and NCIC's joint cross-motion for summary judgment.

JURISDICTION

This Court has jurisdiction over this adversary proceeding, and each of the motions for summary judgment, pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered on June 22, 2012. This a core proceeding arising under Title 11 of the United States Code as defined in 28 U.S.C. § 157(b)(2)(K). The Remaining Parties have consented to this Court's authority to enter a final judgment determining their respective rights in the Insurance Proceeds in this interpleader action (see doc. # 41).

PROCEDURAL HISTORY

The Chapter 7 case trustee (the "Trustee") commenced the instant adversary proceeding on September 12, 2019 and filed an amended complaint on October 11, 2019 (doc. # 4, the "Amended Complaint"). The Trustee obtained a Clerk's Entry of Default against Defendants Berton R. Frye, Virginia Frye, and Northeastern Vermont Developmental Association, Inc. (collectively, the "Default Defendants"), on February 4, 2020 (doc. # 30).¹ On April 8, 2020, the Court granted the Trustee's motion for a default judgment against the Default Defendants (doc. # 38, the "Default Judgment"). In the Default Judgment, the Court determined the Default Defendants had no claim or interest in the Insurance Proceeds and barred them from asserting any claim against the Trustee relating to, or arising out of, the Insurance Proceeds or this proceeding.

On May 12, 2020, the Court entered a judgment and order granting judgment in favor of the Trustee on five of the six prayers for relief in the Amended Complaint, dismissing the Trustee from the proceeding with prejudice, and directing the Trustee to deposit the Insurance Proceeds into the Court's registry pending adjudication of the Remaining Parties' claims to the Insurance Proceeds (doc. # 47). The Trustee subsequently deposited the Insurance Proceeds in the amount of $72,871.87 into the Court's registry (doc. # 50).

Pursuant to the Court's scheduling order (doc. # 41), the Remaining Parties timely filed a stipulation of facts (doc. # 49), the IRS filed a motion for summary judgment (doc. # 51), NCIC and VCLF (together, the "Bank Lienholders") filed a joint cross-motion for summary judgment (doc. # 52), and the IRS and Joint Bank Lienholders both filed objections and replies to the pending motions (doc. ## 53–56). The cross-motions for summary judgment were fully submitted as of June 20, 2020.

ISSUE PRESENTED

The sole issue presented in these interpleader cross-motions for summary judgment is whether the IRS or the Joint Bank Lienholders holds a superior interest in the Insurance Proceeds.

SUMMARY JUDGMENT STANDARD

Summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) ; see also Jackson v. Fed. Express, 766 F.3d 189, 193–94 (2d Cir. 2014). "A genuine issue exists – and summary judgment is therefore improper – where the evidence is such that a reasonable jury could decide in the non-movant's favor." Brandon v. Kinter, 938 F.3d 21, 31 (2d Cir. 2019) (citation and quotation marks omitted). "[T]he substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. Factual disputes that are irrelevant or unnecessary will not be counted." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (citation omitted). "The court construes all evidence in the light most favorable to the non-moving party, drawing all inferences and resolving all ambiguities in [that party's] favor." Amore v. Novarro, 624 F.3d 522, 529 (2d Cir. 2010) (citing LaSalle Bank Nat'l Ass'n v. Nomura Asset Capital Corp., 424 F.3d 195, 205 (2d Cir. 2005) ); see also Burns v. Martuscello, 890 F.3d 77, 83 (2d Cir. 2018). However, "conclusory statements, conjecture, or speculation by the party resisting the motion will not defeat summary judgment[.]" Flores v. United States, 885 F.3d 119 (2d Cir. 2018) (quoting Kulak v. City of New York, 88 F.3d 63, 71 (2d Cir. 1996) ).

UNDISPUTED MATERIAL FACTS

The Court finds the following facts to be undisputed and material to the outcome of these cross-motions for summary judgment (each, a "UMF"):

1. This dispute involves a priority determination of the Remaining Parties' interests in the Insurance Proceeds in the amount of $72,871.87,² which resulted from a fire that occurred on or around May 20, 2014, at the Debtors' former residence, 1076 Oneida Road, Danville, VT (the "Oneida Property"). (Doc. # 49, ¶ 1; doc. # 50; doc. # 51, p. 2, ¶ 1; doc. # 54.)

2. Community National Bank ("CNB") held a first mortgage on the Oneida Property. Pursuant to the mortgage document with CNB, the Debtors were required to maintain insurance on the Oneida Property. (Doc. # 49, ¶ 2(a); case # 15-10242, claim # 14-1.)

3. The Joint Bank Lienholders held second mortgages on the Oneida Property and on commercial parcels owned by the Debtors. Pursuant to the mortgage documents with the Joint Bank Lienholders, the Debtors were required to maintain insurance on the Oneida Property. (Doc. # 49, ¶ 2(b); case # 15-10242, claim ## 19-1, 20-1.)

4. The IRS had numerous federal tax liens against the Debtors for various outstanding federal tax liabilities. The Debtors' tax liability exceeds the amount of the Insurance Proceeds; their joint 2004 federal income tax liability as of the petition date was $92,976.58. The IRS filed a secured claim in the amount of $124,050, based on some of those liabilities, an unsecured priority claim in the amount of $92,340.30, and a general unsecured claim in the amount of $238,005.76. (Doc. # 49, ¶ 3; doc. # 51, p. 2, ¶¶ 1–3; doc. # 54; case # 15-10242, claim # 5-3.)

5. At the time the Joint Bank Lienholders made the loans to the Debtors that resulted in the creation of their liens, the IRS agreed to subordinate its federal tax liens to that of the Joint Bank Lienholders on all of the Debtors' real estate and on certain commercial equipment, in exchange for $120,000. The Joint Bank Lienholders each filed a secured claim in the amount of $81,000. (Doc. # 49, ¶¶ 2(c), (f); doc. # 49-1; case # 15-10242, claim ## 19-1, 20-1.)

6. With respect to the buildings and real estate,³ the Joint Bank Lienholders and the IRS had perfected liens against the Oneida Property prior to the fire, with outstanding balances in excess of the amount of the Insurance Proceeds, in the following order of priority: VCLF, NCIC, and the IRS federal tax liens. (Doc. # 49, ¶ 4; doc. # 51, p. 2, ¶ 1; doc. # 54.)

7. In or around January 2014, the Debtors took out a homeowner's insurance policy on the Oneida Property, issued by Certain Underwriters at Lloyd's London Subscribing Severally to Policy No. WSH108007 ("Underwriters"). The insurance policy provided for coverage of up to $225,000 for the dwelling, $112,500 for personal property, and $45,000 for loss of use. The insurance policy listed one mortgagee, CNB. (Doc. # 49, ¶¶ 7–9, 11.)

8. On or about May 20, 2014, the Oneida Property was destroyed in a fire, and this Court approved an application for a public adjuster in connection with the fire. (Doc. # 49, ¶ 10.)

9. On October 24, 2014, Underwriters brought a declaratory judgment action against the Debtors and CNB in the United States District Court for the District of Vermont (5:14-cv-227) in relation to an insurance coverage dispute regarding the Debtors' insurance policy. That litigation was resolved through a settlement in December 2015, resulting in a payment of $80,000 to the Debtors. (Doc. # 49, ¶¶ 11–12, 14; case # 15-10242, doc. # 107.)

10. On May 20, 2015, the Debtors filed a Chapter 13 bankruptcy petition in this Court, within which this adversary proceeding was brought; the case was converted to Chapter 7 on February 11, 2016, and the Trustee was appointed. The Court then directed that the $80,000 in settlement proceeds be delivered to the Trustee. (Doc. # 49, ¶¶ 13, 15; case # 15-10242, doc. ## 1, 135,

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