Capital Bank, N.A. v. Cornerstone Capital, LLC (In re Shkor), Case No. 21-00041-ELG

Docket NumberCase No. 21-00041-ELG,Adv. Pro. No. 21-10012
Decision Date01 September 2022
Citation644 B.R. 410
Parties IN RE: Matthew Edward SHKOR, Debtor. Capital Bank, N.A., Plaintiff, v. Cornerstone Capital, LLC, et al., Defendants.
CourtUnited States Bankruptcy Courts – District of Columbia Circuit

Alan D. Eisler, Eisler Hamilton, LLC, Rockville, MD, for Defendant Matthew Edward Shkor.

Andrew Gerlowski, Whiteford, Taylor & Preston LLP, Columbia, MD, Catherine Keller Hopkin, Yumkas, Vidmar, Sweeney & Mulrenin, LLC, Annapolis, MD, for Defendant Cornerstone Capital, LLC.

Bradley D. Jones, Odin, Feldman & Pittleman, P.C., Reston, VA, for Plaintiff.

MEMORANDUM DECISION AND ORDER ON MOTIONS FOR SUMMARY JUDGMENT

Elizabeth L. Gunn, United States Bankruptcy Judge

Before the Court are dueling motions for summary judgment filed by Plaintiff Capital Bank, N.A. ("Capital Bank") and Defendant Cornerstone Capital, LLC ("Cornerstone"). On March 9, 2022, the Court held a combined hearing on Capital Bank's Motion for Partial Summary Judgment (ECF No. 47) (the "Capital Bank Partial Motion") and Cornerstone's Motion for Summary Judgment (ECF No. 49) (the "Cornerstone Motion"). At the conclusion of the hearing, the Court took both motions under advisement. For the reasons set forth below, the Court grants in part and denies in part the Capital Bank Partial Motion and denies the Cornerstone Motion.

I. Background

On April 28, 2017, Matthew E. Shkor ("Mr. Shkor") acquired residential property located at 1738 R St., NW, Washington, D.C. 20009 (the "Property") by deed, which was subsequently recorded on May 1, 2017. Am. Compl. to Determine the Priority of Liens at ¶¶ 10-12, ECF No. 17. In conjunction with the purchase of the Property, Mr. Shkor executed a promissory note for $4.05 million dated April 28, 2017 (the "2017 Capital Bank Loan"), which was secured by a deed of trust in favor of Capital Bank. Id. at ¶ 12. On May 26, 2017, Mr. Shkor, on behalf of two of his D.C. limited liability companies, took out a loan for $1,262,500 from Cornerstone (the "Cornerstone Loan"), which was secured, at least in part, by a second deed of trust against the Property. Id. at ¶ 13. The Cornerstone Loan provided for additional security with two other deeds of trust on other properties located at 1753 Willard Street and 1900 Biltmore Street which were executed by Mr. Shkor – however, neither additional deed of trust was recorded. Mem. Supp. Mot. Partial Summ. J. at 4, ECF No. 47-1.

A year later, in April 2018, Mr. Shkor sought to borrow $2.0 million from Capital Bank secured by the Property, this time in the form of a home equity line of credit which would pay off the remaining existing balance of the 2017 Capital Bank Loan (the "2018 Capital Bank Loan"). In Support of the Capital Bank Partial Motion, Plaintiff alleges that the intent of Mr. Shkor and Plaintiff was for the new loan to replace the 2017 Capital Bank Loan but for the Plaintiff to retain a first position priority on the Property. In support of this position, Plaintiff points to paragraph 9 of Schedule B-I of the title commitment letter from Old Republic National Title Insurance Company ("Old Republic") to Capital Bank which required, in part, prior to issuance of a title insurance policy:

SATISFACTION AND/OR RELEASE of Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing from MATTHEW E. SHKOR, to JACOB A GINSBERG, ESQUIRE and BENJAMIN SMITH, ESQUIRE, Trustees, securing CORNERSTONE CAPITAL, LLC, repayment of the sum of $1,262,500.00, which Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing was dated May 26, 2017, and recorded June 23, 2017, among the Land Records for the District of Columbia as Instrument No. 2017068787.

Mot. Partial Summ. J., Ex. N at 7, ECF No. 47-16; see also Mot. Summ. J., Ex. 4 at 6, ECF No. 49-3. The title insurance policy was issued on April 18, 2018 by Old Republic, without a specific reference to the Cornerstone Loan except, arguably, a tangential reference in the internal "Request to Issue Excess Risk Policy" coversheet dated April 16, 2018 wherein on question 4, "Will be able to obtain priority?", the form is marked "yes." Mot. Partial Summ. J., Ex. O at 7, ECF No. 47-17. Plaintiff also points to internal notations made by bank employees on a March 13, 2018 title report when evaluating Mr. Shkor's loan request where the handwritten note "Payoff or Release Needed" is indicated next to the Cornerstone loan on a title report. See Mot. Partial Summ. J., Ex. M at 3, ECF No. 47-15; see also Mot. Partial Summ. J., Ex. H at 4-6, ECF No. 47-10 (excerpt from deposition of Earl Edward Wise, III discussing the March 13, 2018 title report). In total, these documents provide support for Capital Bank's position that it intended for the 2018 Capital Bank Loan to retain first priority on the Property.

In addition to the written evidence provided, Capital Bank's argument also relies on an April 10, 2018 email exchange between Mr. Shkor and Mark Schuman of Cornerstone Capital1 in which Mr. Shkor requests "that [he] be allowed to complete [the Capital Bank] refi, 100% proceeds going to pay down [the Cornerstone Capital Loan] ... [Cornerstone Capital is] still significantly secured, and the line will be reduced by 400k ..." Am. Compl. to Determine the Priority of Liens, Ex. A at 3, ECF No. 17-2. In a responsive email, there is a reference to a "pay down by $400,00." Id. at 2. These emails are supplemented by the affidavit of Mr. Shkor which states that "Cornerstone had agreed to release its lien on the Property" for payment of the net proceeds as evidenced by August 17, 2018 emails again referencing the "refi" of Mr. Shkor's house with excess funds being wired to Cornerstone for "paydown" of their loan. Mem. Opp'n to Mot. Summ. J., Ex. C Aff. Matthew E. Shkor, ECF No. 54-4.

In contrast, in support of the Cornerstone Motion, the Defendant argues that while they agreed to accept partial payment from the 2018 Capital Bank Loan, it was only to lower Mr. Shkor's outstanding balance and there was never an agreement to subordinate or accept less than full payment for their balance due. In support, Capital Bank points to the closing documents for the Capital Bank Loan and the lack of any written specific subordination agreement or similar documents. Cornerstone argues the failure of Capital Bank to request, much less obtain, a payoff statement or written subordination agreement prior to closing on the 2018 Capital Bank Loan supports its position that Capital Bank did not intend to retain its first position on the Property after closing. Mem. Supp. Mot. Summ. J. at 5-6, ECF No. 49-2.

Standard Title Group, LC ("Standard Title") was the settlement agent for the 2018 Capital Bank Loan. Mem. Supp. Mot. Partial Summ. J. at 5, ECF No. 47-2. To pay off the amount remaining on the 2017 Capital Bank Loan, at closing Standard Title transferred $1,583,473.95 to Capital Bank, which in turn released its first position deed of trust and recorded a new deed of trust for the 2018 Capital Bank Loan on April 24, 2018. Id. However, upon instruction and assignment by Mr. Shkor, the remaining proceeds of the loan, $394,948.58, were wired not to Mr. Shkor but to Cornerstone for the "pay down". Id. Cornerstone applied the payment towards Mr. Shkor's balance but did not release their deed of trust on the Property. It is the priority of these remaining deeds of trust that is the key issue in this case – whether the facts and law support a strict application of the documents leading to the priority of the Cornerstone Loan or whether there is a legal or equitable basis to subordinate the Cornerstone deed of trust to the 2018 Capital Bank Loan deed of trust. Despite these key events happening in 2018, the question of the lien priority was not raised between the parties until over two and a half years later when, on or about December 11, 2020 Capital Bank was informed of Cornerstone's intent to foreclose on the Property. Am. Compl. to Determine the Priority of Liens at ¶ 28, ECF No. 17-1.

On January 5, 2021, Capital Bank filed a complaint and motion for temporary restraining order against Cornerstone, the trustees on the Cornerstone deed of trust, and Mr. Shkor in the Superior Court of the District of Columbia seeking a declaratory judgment determining the priority of liens on the Property. Notice of Removal, ECF No. 1-1. On February 5, 2021, Mr. Shkor filed a petition for relief under chapter 7 and on May 6, 2021, filed the Notice of Removal (ECF No. 1) removing the Superior Court action to this Court. Prior to removal, in the Superior Court the Plaintiff voluntarily withdrew the motion for a temporary restraining order and Cornerstone filed an answer. However, once notice of Mr. Shkor's bankruptcy case was filed, there was little further progress in the Superior Court case. After removal, on June 15, 2021, Capital Bank filed its Amended Complaint to Determine the Priority of Liens (ECF No. 17) (the "Complaint"), which, inter alia , added the chapter 7 trustee Bryan Ross as an additional defendant. On July 20, 2021, Cornerstone filed a Motion to Dismiss the Adversary Proceeding (ECF No. 26) (the "Motion to Dismiss") arguing that Capital Bank's failure to ensure that it retained first lien priority prior to executing the 2018 Capital Bank Loan rendered the relief sought in the Complaint unfounded. On September 1, 2021, after the Motion to Dismiss was fully briefed, the Court held a hearing on September 1, 2021 and at the conclusion of the hearing the Court denied the Motion to Dismiss. See Order Denying Mot. to Dismiss, ECF No. 32.

On February 11, 2022, Capital Bank filed the Capital Bank Partial Motion arguing that the Court should determine that it retains its first-priority lien position on the Property following its payoff of the 2017 Capital Bank Loan under the equitable doctrine of replacement of mortgages. See Mem. Supp. Mot. Partial Summ. J., ECF No. 47-2. On the same day, Cornerstone filed the...

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