Bankowski v. Wells Fargo Bank, N.A. (In re Reid)

• Decision Date: 10 October 2012
• Docket Number: Bankruptcy No. 09–17166–FJB.,Adversary No. 10–1354.
• Citation: 480 B.R. 436
• Parties: In re Norris J. REID and Cheryl Reid, Debtors. Carolyn A. Bankowski, Chapter 13 Trustee, Plaintiff v. Wells Fargo Bank, N.A., Defendant.
• Court: U.S. Bankruptcy Court — District of Massachusetts

480 B.R. 436

In re Norris J. REID and Cheryl Reid, Debtors.Carolyn A. Bankowski, Chapter 13 Trustee, Plaintiff

v.Wells Fargo Bank, N.A., Defendant.

Bankruptcy No. 09–17166–FJB.

Adversary No. 10–1354.

United States Bankruptcy Court,

D. Massachusetts,

Eastern Division.

Oct. 10, 2012.

Patricia A. Remer, Boston, MA, for Plaintiff.

Mark B. Johnson, Johnson & Borenstein, LLC, Andover, MA, for Defendant.

MEMORANDUM OF DECISION ON DEFENDANT'S MOTION FOR SUMMARY JUDGMENT

FRANK J. BAILEY, Bankruptcy Judge.

By Count I of her complaint in this adversary proceeding, the chapter 13 trustee, Carolyn Bankowski (the “Trustee”), exercising her “strong arm power” under 11 U.S.C. § 544(a)(3), seeks to avoid the mortgage held by defendant Wells Fargo Bank, N.A. (“Wells Fargo”) on the debtors' residence. On the same basis, she also objects in Count II to Wells Fargo's proof of claim insofar as it claims secured status, and she asks in Counts III and IV that Wells Fargo be ordered to remit to the Trustee all payments that the Trustee and debtors have made to Wells Fargo since the commencement of this case pursuant to a “cure and maintain” provision in the debtors' confirmed chapter 13 plan, for redistribution of the same to unsecured creditors. Wells Fargo now seeks summary judgment, arguing that the order confirming that plan precludes the relief sought in all four counts. The Court agrees. The plan is res judicata as to the relief requested.

FACTS AND PROCEDURAL HISTORY

There is no genuine issue as to any material fact. The facts, including relevant procedural history, are as follows.

By virtue of a deed dated and recorded on May 27, 2004, Norris and Cheryl Reid (the “Debtors”) became the owners of the real property located at 119 Vesey Street, Brockton, Massachusetts (the “Property”). On or about July 18, 2005, the Debtors granted a mortgage on the Property to Mortgage Electronic Registration Systems, Inc. as nominee for Taylor, Bean and Whitaker Mortgage Corp. (the “Mortgage”). The Mortgage was later assigned to Wells Fargo.

On or about July 29, 2009, the Debtors filed a joint petition for relief under chapter 13 of the Bankruptcy Code. On August 27, 2009, Wells Fargo filed a proof of claim in the case in the amount of $271, 890.10. Wells Fargo indicated in the proof of claim that its claim was secured by the Mortgage. On September 16, 2009, Wells Fargo filed an amended proof of claim, which decreased the amount of the claim to $271,606.96. No one objected to the proof of claim or to the amended proof of claim.

On August 7, 2009, the Debtors filed a chapter 13 plan (the “Plan”), which included the following relevant features. First, the claim of Wells Fargo was treated entirely in the section designated “Secured Claims.” Specifically, in that section, the Plan stated that prepetition arrears in the amount of $2,000.00 would be paid “through the plan,” meaning through the chapter 13 trustee, and that Wells Fargo's claim, described as “mortgage,” would otherwise be paid directly to Wells Fargo. By this somewhat cryptic language, the Debtors were electing to treat Wells Fargo's claim under 11 U.S.C. § 1322(b)(5), known as the “cure and maintain” option.¹ The Plan elsewhere specified that no secured claim would be modified by the Plan. Second, the Plan provided for a distribution of $14,110.60 through the Trustee to unsecured creditors, whose claims the plan quantified in total at $56,439.00, for a dividend of no less than 25 percent. Third, to fund the distributions to be made through the Trustee, the Plan obligated the Debtors to make 60 equal monthly payments of $299.00 to the Trustee, for total plan contributions of $17,900.40. And fourth, the Plan included a liquidation analysis that indicated (i) that the fair market value of the Property was $220,000, (ii) that there was no equity in the Property for distribution to unsecured creditors because liens on the property, quantified at $268,593.00, exceeded its value, (iii) that the Debtor's personalty had no value that was not subject to a lien or an exemption, and, for these reasons, (iv) that $0 would be available for distribution to unsecured creditors were this case in chapter 7. The purpose of the liquidation analysis in a chapter 13 plan is to show that the plan satisfies 11 U.S.C. § 1325(a)(4), known as the “best interest of creditors test.” ²

No party objected to the Plan and no changes were made to it. On December 29, 2009, the Court entered an order confirming the Plan (the “Confirmation Order”). In the section of the Confirmation Order entitled “Summary of Disbursements to be Made Under the Plan,” the Confirmation Order stated that there were no modified secured claims, and it set forth the treatment of Wells Fargo's claim in the subsection entitled “Unmodified Secured Claims.” There the Confirmation Order stated:

Wells Fargo Home Mortgage [ i.e., Wells Fargo] is retaining its lien on 119 Vesey Street, Brockton, MA. The Debtor(s) shall continue to make regular monthly payments in accordance with the contract with Wells Fargo Home Mortgage. Wells Fargo Home Mortgage will be paid its prepetition arrearage in the sum of $2,000 over 60 months in the sum of $33.34.

In addition, the Confirmation Order also included the following standard language:

Unless otherwise ordered by the Court, all property of the estate as defined in [11] U.S.C. §§ 541 and 1306, including, but not limited to, any appreciation in the value of real property owned by the debtor as of the commencement of the case, shall remain property of the estate during the term of the plan and shall vest in the debtor(s) only upon discharge.

After entry of the Confirmation Order, no appeal was taken from it. No party has moved to vacate, revoke, amend, or modify it.

On December 15, 2010, the Trustee filed the four-count complaint that commenced the present adversary proceeding. In Count I, she alleges and argues that that the notary acknowledgement for the Mortgage fails to contain a specific reference to the Debtors as the persons who personally appeared before the notary, that this is a material defect that should have prevented the Mortgage from being recorded, and that, by virtue of the power she enjoys under 11 U.S.C. § 544,³ she may avoid the Mortgage. On that basis, she demands in Count I that the Mortgage be avoided and that the Debtors be declared to take the Property free and clear of the defective Mortgage. ⁴ In Count II, the Trustee objects to Wells Fargo's proof of claim and amended proof of claim (together, the “Proof of Claim”),⁵ arguing that, in view of the avoidance requested in Count I, the claim should be allowed as an unsecured claim, not as a secured claim. In Count III, the Trustee contends that, in view of the avoidance requested in Count I, Wells Fargo is not entitled to retain some $1,596.06 that the Trustee paid to Wells Fargo pursuant to the confirmed Plan, and she demands an order that these be refunded to her. And in Count IV, the Trustee contends that, in view of the avoidance requested in Count I, Wells Fargo is not entitled to retain the mortgage payments that the Debtors have made directly to Wells Fargo since the filing of their bankruptcy petition, and she demands an order requiring that these too be refunded to her “for redistribution to creditors.” Here it is clear that by “creditors” she means the unsecured creditors, in which she would, upon avoidance of Wells Fargo's mortgage, include the claim of Wells Fargo. Although she does not expressly say so in Count III, I understand that her Count III recovery is being requested for the same purpose, for redistribution on a pro rata basis to unsecured creditors.

In its answer to the Trustee's complaint, Wells Fargo pleaded as affirmative defensesthat the various counts are barred, wholly or in part, by “the doctrine of res judicata and/or collateral estoppel” and by “the doctrine of estoppel.” Now, by the motion before the Court, Wells Fargo seeks summary judgment on the basis of the affirmative defenses of res judicata and judicial estoppel. The motion does not challenge the Trustee's case in chief.

ARGUMENTS OF THE PARTIES

Wells Fargo advances four arguments. First, by operation of the principles of claim and issue preclusion and of 11 U.S.C. § 1327(a), a confirmed chapter 13 plan is res judicata as to all issues that were or could have been decided in the confirmation process. The alleged notarization defect that forms the basis of the Trustee's complaint was discoverable in time to have been raised as an objection to plan confirmation but was not timely raised. Even the Giroux decision, on which the Trustee relies for the proposition that the defect is a basis for avoidance under § 544(a), was decided well before confirmation. Absent fraud or concealment, neither of which is alleged here, late discovery of a basis to change the treatment of a secured claim is not cause to revisit an issue decided by a plan's confirmation. Second, the doctrine of judicial estoppel bars the Trustee from taking a contrary position now from the position that she took earlier, when, by her lack of objection to the plan's confirmation, she effectively took the position that the Mortgage was valid and effective. Third, under 11 U.S.C. § 1330(a), an order of confirmation may be revoked only for fraud and only within 180 days after confirmation, but the Trustee has neither alleged fraud nor moved within 180 days. And fourth, although 11 U.S.C. § 1329(a) permits a trustee to modify a plan after confirmation, the Trustee has not shown the requisite cause, and the modification she seeks to effect is not among those permitted.

The Trustee responds with a raft of arguments of her own. First, § 1327(a) expressly makes a confirmed chapter 13 plan binding only on the debtor and all creditors; its silence as to the trustee must be construed as indicating that a confirmed plan is not binding on the trustee, and therefore the plan has no preclusive...