In re Lafata

• Decision Date: 03 April 2007
• Docket Number: No. 06-9009.,No. 05-2510.,05-2510.,06-9009.
• Citation: 483 F.3d 13
• Parties: In re Vito Anthony LAFATA, Debtor. Eastern Savings Bank, FSB, Appellant, v. Vito Anthony Lafata, Appellee. In re Vito Anthony Lafata, Debtor. Eastern Savings Bank, FSB, Appellant, v. Vito Anthony Lafata; Denise M. Pappalardo, Trustee, Appellees.
• Court: U.S. Court of Appeals — First Circuit

483 F.3d 13

In re Vito Anthony LAFATA, Debtor.

Eastern Savings Bank, FSB, Appellant, v. Vito Anthony Lafata, Appellee.

In re Vito Anthony Lafata, Debtor.

Eastern Savings Bank, FSB, Appellant, v. Vito Anthony Lafata; Denise M. Pappalardo, Trustee, Appellees.

No. 05-2510.

No. 06-9009.

United States Court of Appeals, First Circuit.

Heard December 4, 2006.

Decided April 3, 2007.

Howard M. Brown, with whom James M. Liston, Thomas M. Looney, and Bartlett Hackett Feinberg P.C. were on brief, for appellant.

Laurel E. Bretta, with whom Bretta & Grimaldi, P.A., was on brief, for appellees.

Before TORRUELLA, Circuit Judge, STAHL, Senior Circuit Judge, and LIPEZ, Circuit Judge.

STAHL, Senior Circuit Judge.

At issue in this case of first impression is whether the Bankruptcy Code's protection of mortgage lenders against modification of claims secured by a principal residence applies when the residence in fact lies mostly on a lot abutting the mortgaged property. This case arises out of a bizarre set of facts. The debtor in this case and his then-wife mistakenly built a house on the property line between two lots owned by the debtor's ex-wife, a fact which was not discovered until after a mortgage on the lot believed to include the house had already been granted. Compounding this problem is the fact that everyone — the debtor, the bank, and the bankruptcy court — was mistaken as to who owned what property when. Despite this confusion, the bankruptcy court and the Bankruptcy Appellate Panel thoroughly addressed the dispositive issues, and we affirm.

I. Background

The issues here center around two contiguous pieces of property: 26 Jasper St (the "Jasper Lot")¹ and 31 Enfield Ave. (the "Enfield Lot") in Methuen, Massachusetts. Vito Anthony LaFata (the "Debtor") resides in a house that straddles the property line between the Jasper Lot and the Enfield Lot, with the majority of the house on the Enfield Lot, but with a street address of 26 Jasper St.² Both properties were originally owned by a realty trust controlled by Gail Ness,³ formerly the wife of the Debtor. As part of an earlier divorce settlement, Ness deeded the Jasper Lot to the Debtor. Importantly, both Ness and the Debtor had the mistaken belief at the time of the deed that the house lay entirely on the Jasper Lot. This erroneous belief was the first of two mistakes that resulted in this case being before us today.

In July 2003, still with the mistaken belief that his house was entirely on the Jasper Lot, the Debtor mortgaged the property to Eastern Savings Bank, FSB ("Eastern"), the appellant here. Eastern's title work did not disclose that the majority of the Debtor's residence actually lay on the Enfield Lot.⁴ In connection with the mortgage, the Debtor executed a note for $165,000, secured solely by the Jasper Lot. It appears that he never made any of the payments due on the note.

Following the grant of the mortgage to Eastern, Ness agreed to transfer the Enfield Lot to the Debtor in exchange for money owed to Ness by the Debtor under their original divorce settlement, apparently unaware of the title issue. Pursuant to this agreement, Ness executed a deed, dated June 4, 2004, purporting to transfer the Enfield Lot to the Debtor. However, because the payments were never made, the deed was never actually delivered to the Debtor for recording purposes. Instead it was held in escrow by Ness's attorney pending the payment of the additional funds owed by the Debtor to Ness. According to the record, because of nonpayment of the agreed-upon amount, Ness remains the owner of the Enfield Lot today. Hence the second mistake: the Debtor seemed to misunderstand this escrow arrangement, and during his bankruptcy proceedings operated with the mistaken belief that he was the fee simple owner of the Enfield Lot.

On August 5, 2004, the Debtor filed for Chapter 13 bankruptcy protection, claiming as assets both the Jasper Lot and the Enfield Lot. At some point not clear from the record the Debtor had become aware that his residence was not entirely on the Jasper Lot, but was instead mostly on the Enfield Lot.⁵ This encroachment made the Jasper Lot noncompliant with zoning, which essentially destroyed its value. An appraisal commissioned by the Debtor noted that, if compliant, the land would probably be worth around $100,000, but in its current state the property was worth only "what the neighbor will pay for it" — a value the appraiser estimated at $18,500.

Eastern filed a proof of claim for the full value of its mortgage, which it placed at $195,340, including delinquent interest and collection fees. On August 18, 2004, the Debtor filed an objection to this proof of claim, as well as a motion for determination of secured status under 11 U.S.C. § 506 and a proposed Chapter 13 plan.

As part of his proposed Chapter 13 plan, the Debtor sought to bifurcate Eastern Bank's claim into secured and unsecured portions, with the secured portion worth only $18,500, the appraised value of the collateral. That left, according to the Debtor, $131,500 in unsecured debt,⁶ for which the Debtor proposed to pay 10 cents on the dollar. Eastern thus stood to receive only $31,650 on a claim that may have been worth as much as $195,340. Eastern understandably objected to this. On August 27, 2004, it filed a response to the objection to the proof of claim, an objection to the motion for determination of secured status, and an objection to confirmation of the Chapter 13 plan.

Further complicating matters, the City of Methuen also filed an objection to the Debtor's motion for determination of secured status on or around August 20, in which it stated that, according to the registry of deeds, the Enfield Lot was actually owned by Ness. The Debtor responded on August 27 by providing the court with a copy of the July 4, 2004, deed of the Enfield Lot from Ness to the Debtor — the same deed that was subsequently discovered to be still in escrow. The bankruptcy court and Eastern appeared to believe the Debtor's assurances that he owned the property and did not pursue the issue of ownership further.⁷

The three objections raised by Eastern each depend on whether 11 U.S.C. § 1322(b)(2) would allow Eastern's claim to be bifurcated as proposed by the Debtor. The bankruptcy court ruled in favor of the Debtor on December 8, 2004, and allowed the bifurcation of the claim into a secured claim of $18,500 and an unsecured claim for the balance of the note. Eastern appealed to the U.S. District Court for the District of Massachusetts, which affirmed the bankruptcy court on July 7, 2005, without opinion. Eastern appeals from the district court's decision, and that appeal is the first of the two appeals before us today.

Following the bankruptcy court orders, Eastern began an adversarial action against the Debtor in bankruptcy court on January 19, 2005, seeking to reform the mortgage so as to include at least that portion of the Enfield Lot that included the Debtor's residence. During depositions for that proceeding, Ness and the Debtor both testified that the Enfield Lot was actually still owned by Ness. At that point Eastern moved for relief from judgment under Rule 60(b) of the Federal Rules of Civil Procedure.⁸ Eastern asked that the bankruptcy court vacate the three orders it had earlier decided in favor of the Debtor, citing newly discovered evidence and fraud on the court.

The bankruptcy court held a show cause hearing on October 7, 2005, to confirm whether the deed was in fact in escrow and whether it could be delivered to the Debtor. The court concluded that it could not be delivered. On October 21, the bankruptcy court denied the Rule 60(b) motion, saying only that Eastern "failed to meet its burden."

Eastern appealed the denial of the Rule 60(b) motion to the Bankruptcy Appellate Panel ("BAP") for the First Circuit, which affirmed. Eastern appealed to us, and that appeal makes up the second of the two appeals before us.

II. Discussion

A. The Bankruptcy Court's Orders

On appeal from a district court's review of a bankruptcy court decision, we review the bankruptcy court's legal conclusions de novo and its factual conclusions for clear error. Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int'l Inc.), 132 F.3d 104, 107 (1st Cir.1997).

Eastern's appeal from the bankruptcy court's orders raises three issues: whether the bankruptcy court correctly interpreted § 1322(b)(2) of the Bankruptcy Code as allowing bifurcation here; whether Eastern was allowed a reasonable opportunity to object to the valuation of the Jasper Lot collateral; and whether the bankruptcy court correctly applied the burden of proof.⁹

1. Section 1322(b)(2)

Section 1322(b)(2) of the Bankruptcy Code states that a Chapter 13 plan may:

modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims.

11 U.S.C. § 1322(b)(2). Prior to Nobelman v. American Savings Bank, 508 U.S. 324, 113 S.Ct. 2106, 124 L.Ed.2d 228 (1993), there was some disagreement among the circuits as to whether § 1322(b)(2) allowed for bifurcation of undersecured homestead mortgages, such as the one at issue here. See, e.g., Bellamy v. Fed. Home Loan Mortgage Corp. (In re Bellamy), 962 F.2d 176, 179 (2d Cir.1992) (holding that § 1322(b)(2) only prohibits modification of the secured claim, but that the existence and size of the secured claim must be determined according to § 506(a)). In Nobelman, the Supreme Court held that § 1322(b)(2) barred modification of the entire claim — secured and unsecured portions — if the claim is secured by the debtor's principal residence.¹⁰ 508 U.S. at 332, 113 S.Ct. 2106. Therefore, in the instant case, if Eastern's claim is secured by the Debtor's principal residence, then the claim cannot be modified by bifurcating it...