Canning v. Beneficial Me., Inc. (In re Canning)

• Decision Date: 01 February 2013
• Docket Number: No. 12–9002.,12–9002.
• Citation: 706 F.3d 64
• Parties: In re Ralph G. CANNING, III, Megan L. Canning, f/k/a Megan L. Otis, Debtors. Ralph G. Canning, III and Megan L. Canning, f/k/a Megan L. Otis, Plaintiffs, Appellants, v. Beneficial Maine, Inc.; HSBC Mortgage Services, Inc.; HSBC Mortgage Corporation, Defendants, Appellees.
• Court: U.S. Court of Appeals — First Circuit

706 F.3d 64

In re Ralph G. CANNING, III, Megan L. Canning, f/k/a Megan L. Otis, Debtors.Ralph G. Canning, III and Megan L. Canning, f/k/a Megan L. Otis, Plaintiffs, Appellants,

v.Beneficial Maine, Inc.; HSBC Mortgage Services, Inc.; HSBC Mortgage Corporation, Defendants, Appellees.

No. 12–9002.

United States Court of Appeals,First Circuit.

Feb. 1, 2013.

James F. Molleur, with whom Tanya Sambatakos, were on brief for appellants.

Peter J. Haley, with whom Sean R. Higgins and Nelson Mullins Riley & Scarborough LLP, were on brief for appellees.

Before TORRUELLA, RIPPLE,^* and HOWARD, Circuit Judges.

TORRUELLA, Circuit Judge.

Plaintiffs–Appellants, Ralph G. Canning III and Megan L. Canning (the “Cannings”), filed a Chapter 7 bankruptcy petition and sought to surrender their residence. When their mortgage lenders, Defendants–Appellees, Beneficial Maine, Inc., HSBC Mortgage Services, Inc., and HSBC Mortgage Corporation (collectively “Beneficial”), refused to foreclose or otherwise take title to the residence, the Cannings demanded that the mortgage lien be released. ¹ Beneficial also refused to do so, and the Cannings began an adversary proceeding claiming a discharge injunction violation. On a stipulated record, the bankruptcy court found no discharge injunction violation in Beneficial's refusal to either foreclose or release the lien on the Cannings' residence. The Cannings appealed to the Bankruptcy Appellate Panel (“BAP”), with the same result. This second appeal followed, the parties reasserting the same arguments presented below. Finding no error in the holdings at issue, we affirm.

I. Background

After an unsuccessful attempt to refinance the two-year old mortgage loan encumbering their residence, defaulting on the terms of said loan, and with foreclosure proceedings already underway in state court, the Cannings filed a Chapter 7 bankruptcy petition on March 5, 2009. According to their bankruptcy schedules, the mortgage loan had an outstanding balance of $186,521, while the residence had a market value of $130,000.² The schedules also indicated that the Cannings intended to surrender the residence.³

Early in the bankruptcy case, Beneficial voluntarily dismissed the state court foreclosure proceedings without prejudice “due to the [Cannings'] filing Chapter 7 bankruptcy.” The Cannings received their bankruptcy discharge on June 3, 2009, and thus were released from their outstanding personal obligations on the mortgage loan. The exchange of correspondence underlying this appeal ensued two months thereafter.

Beneficial began the exchange with a letter informing the Cannings that it would “not initiate and/or complete foreclosure proceedings on [your residence]. You will retain ownership of the property” and “we will no longer advance any payments for taxes and insurances. You will be solely responsible for the payment of taxes, insurance, and maintenance of this property.” ⁴

In response, the Cannings reminded Beneficial of the bankruptcy discharge injunction and demanded that it either “(1) immediately commence foreclosure proceedings or (2) immediately discharge the mortgage on the property.” With no answer from Beneficial, on October 1, 2009, the Cannings sent it another letter to follow up on their demand.

Beneficial responded by letter dated October 19, 2009. As relevant here, Beneficial's letter stated: “we are unable to honor your request to release the lien until the lien balance is satisfied in the amount of $186,324.15. However, we could consider a settlement option or a short sale.” Beneficial also explained that the Cannings' account had been charged off, that they had no personal obligation to pay the lien balance, and that its letter was not an attempt to collect from them personally.

Despite this disclaimer from Beneficial, the Cannings interpreted the letter as a further violation of the discharge injunction. The next letter they sent to Beneficial emphatically indicated so and warned that a bankruptcy adversary proceeding would be filed if Beneficial failed to either foreclose or release its lien. But Beneficial did not budge, reiterating, instead, its prior response. The Cannings subsequently informed Beneficial that: (1) the residence had been vacated; (2) the utilities had been turned off; and (3) the municipal authorities, as well as the sewerage company, had been notified that Beneficial was the responsible party for any obligations pertaining to the residence.

True to their word, on December 21, 2009, the Cannings reopened their bankruptcy case and initiated an adversary proceeding against Beneficial. Among other things, they claimed actual and punitive damages in connection with Beneficial's “failure or refusal to commence foreclosure or otherwise recover possession of the [residence].” The Cannings also sought a declaratory judgment “ordering [Beneficial] to either recover possession of the Property or deliver unencumbered title to ... the[m].” In its responsive pleading, Beneficial denied all material allegations and raised nine affirmative defenses, including lack of intent to violate the discharge injunction. At that time, Beneficial estimated the market value of the residence to be $75,000.

After preliminary procedural nuances, the parties agreed to submit the issue of liability on the basis of a jointly filed “Stipulation and Exhibits” containing the facts just described.⁵ In their submission, the Cannings exclusively relied on our decision in Pratt v. General Motors Acceptance Corp. (In re Pratt), 462 F.3d 14 (1st Cir.2006), where we held that a secured creditor's refusal to foreclose or release its lien on an inoperable, worthless car was intended to objectively coerce the debtor into paying a discharged debt, in violation of the discharge injunction. According to the Cannings, “[t]he material facts ... considered in Pratt mirror the facts in this case so closely, that they dictate the ... determination that [Beneficial] acted in an objectively coercive manner.” Beneficial disagreed, advancing purported fundamental factual differences between the Cannings' case and Pratt—mainly, that the Cannings' plight revolved around valuable real estate property while Pratt involved a worthless car.

The bankruptcy court ruled in favor of Beneficial. See Canning v. Beneficial Maine, Inc. (In re Canning), 442 B.R. 165 (Bankr.D.Me.2011). In so doing, it first noted that “[t]he Cannings' demand of ‘foreclose or release, now’ ignore[d] the prospect that real estate values change (up, as well as down) over time” and that “[a] critical component of Pratt 's holding was the collateral's worthlessness and the fact that, unlike real estate, ‘vehicles rarely appreciate in value over time.’ ” Id. at 172. The court similarly observed that, “unlike the Pratts' secured creditor, [Beneficial] did not simply require that the Cannings ‘pay in full.’ Rather it responded by suggesting either a voluntary settlement or a ‘short sale.’ ” Id. Such a proposal, the bankruptcy court reasoned, “plainly reveals that [Beneficial] sought to collect no more than the value securing its lien.” Id. As a postlude, the court then added:

Of course, [Beneficial's] chosen course of action, or inaction, did not make things easy for the Cannings. Forces remained at work that could make their continued ownership of the real estate uncomfortable—forces like accruing real estate taxes and the desirability of maintaining liability insurance for the premises. But those forces are incidents of ownership. Though the Code provides debtors with a surrender option, it does not force creditors to assume ownership or take possession of collateral. And although the Code provides a discharge of personal liability for debt, it does not discharge the ongoing burdens of owning property.

Id.

The Cannings timely appealed to the BAP, where both parties reasserted their arguments under Pratt, and the BAP affirmed on the same reasoning. See Canning v. Beneficial Maine, Inc. (In re Canning), 462 B.R. 258 (1st Cir. BAP 2011). Like the bankruptcy court, the BAP found dispositive distinctions between the Cannings' case and Pratt, including that the Cannings' residence had significant value and that Beneficial had not simply required full payment on the loan to release its lien. Id. at 268. The BAP also noted that Pratt 's holding had been supported in part by evidence of actual expenses arising from the continued ownership of the collateral at issue. Id. at 267. It then established that the Cannings had failed to introduce evidence of similar expenses and instead rested their case on the mere possibility that liabilities could arise in the future. Id. Accordingly, “[b]ased upon the facts presented to and considered by the bankruptcy court,” the BAP found itself unable to conclude “that there was a particular confluence of circumstances that renders Beneficial's refusal to discharge its mortgage tantamount to coercing the payment of a discharged prepetition debt.” Id. at 268. This second appeal followed.

II. Discussion

When an appeal comes to us by way of the BAP, we independently scrutinizethe underlying bankruptcy court decision, reviewing factual findings for clear error and legal conclusions de novo. Brandt v. Repco Printers & Lithographics, Inc. (In re Healthco Int'l, Inc.), 132 F.3d 104, 107 (1st Cir.1997). In reviewing for clear error, we “ought not to upset findings of fact or conclusions drawn therefrom unless, on the whole of the record, we form a strong, unyielding belief that a mistake has been made.” Cumpiano v. Banco Santander Puerto Rico, 902 F.2d 148, 152 (1st Cir.1990); see also In re Healthco Int'l, Inc., 132 F.3d at 108 (“This familiar standard is not diluted merely because parties proceed on a stipulated record.”). In contrast, “[u]nder the de novo standard of review, we do not defer to the lower court's ruling but freely consider the matter anew, as if no decision had been rendered below.” United States v. Silverman, 861...