Cowin v. Countrywide Home Loans, Inc. (In re Cowin), Civil Action No. H–13–1767.

• Court: U.S. District Court — Southern District of Texas
• Writing for the Court: LEE H. ROSENTHAL, District Judge.
• Citation: Cowin v. Countrywide Home Loans, Inc. (In re Cowin), 538 B.R. 721 (S.D. Tex. 2015)
• Decision Date: 29 September 2015
• Docket Number: Civil Action No. H–13–1767.
• Parties: In re Charles Phillip COWIN Debtor. Charles Phillip Cowin, Appellant, v. Countrywide Home Loans, Inc., et. al., Appellees.

538 B.R. 721

In re Charles Phillip COWIN Debtor.

Charles Phillip Cowin, Appellant

v.Countrywide Home Loans, Inc., et. al., Appellees.

Civil Action No. H–13–1767.

United States District Court, S.D. Texas, Houston Division.

Signed Sept. 29, 2015.

Kevin Leroy Colbert, The Law Office of Kevin L. Colbert, JD LLM PLLC, Richard L. Fuqua, II, Fuqua & Assoc., Houston, TX, William J. Arland, Arland & Associates, Sante Fe, NM, for Debtor.

Donald Louis Wyatt, Jr., Wyatt Gracey P.C., The Woodlands, TX, for Appellant.

Joshua J. Bennett, Carter Stafford et al, Michael J. Mckleroy, Jr., Akerman LLP, Robert Frank Maris, Maris & Lanier P.C., Dallas, TX, for Appellees.

MEMORANDUM OPINION AND ORDER

LEE H. ROSENTHAL, District Judge.

The bankruptcy debtor, Charles Cowin, a real-estate developer, appeals from the findings and conclusions the bankruptcy court issued after a six-day adversary proceeding. The plaintiffs in that proceeding, Countrywide Home Loans, Inc. (“Countrywide”), Deutsche Bank National Trust Company (“Deutsche Bank”), Chase Home Finance, LLC (“Chase”), Wells Fargo Bank, N.A. (“Wells Fargo”), and WMC Mortgage Corporation (“WMC”), held mortgages in three Houston properties. The plaintiffs alleged that Cowin was involved in transactions designed to deprive them of their securities interests in, and any of the foreclosure sale proceeds from, the properties. The plaintiffs asserted claims under the Texas Theft Liability Act (“TTLA”), Tex. Civ. Prac. & Rem. Code § 134 et seq. , Chapter 12 of the Texas Civil Practice & Remedies Code, and the Texas Uniform Fraudulent Transfer Act (“TUFTA”), Tex. Bus. & Comm. Code § 24 et seq. The bankruptcy court found and concluded that Cowin was liable and that these debts were nondischargeable under 11 U.S.C. § 523(a)(4) and (a)(6). Cowin settled with Chase, Wells Fargo, and WMC. Countrywide and Deutsche Bank remain as appellees.

Based on the record and the applicable law, the court affirms the bankruptcy court's findings and conclusions. The reasons are set out below.

I. Background

Cowin's real-estate business included acquiring tax-transfer liens that originate when, “[o]n January 1 of each year, a tax lien attaches to property to secure the payment of all taxes, penalties, and interest ultimately imposed for the year on the property....” Tex. Tax Code § 32.01(a). “The lien exists in favor of each taxing unit having power to tax the property.” Id. A lender may pay the taxes on the property owner's behalf. Id. § 32.06(a–1). Once the lender satisfies the property owner's outstanding “taxes, penalties, and interest,” the taxing unit transfers its tax lien to the lender, explaining the term, “tax-transfer lien.” Id. § 32.06(b).

The Texas Tax Code regulates the contracts that govern these arrangements. Among other things, the Code specifies that the contracts between the lender paying the property taxes and the property owner, secured by a deed of trust, “shall provide” terms in the event of foreclosure. Id. § 32.065(b).¹ The Code also prohibits the lender from starting foreclosure proceedings within one year of the tax lien transfer, unless the contract provides otherwise. Id. § 32.06(i).

In the event of foreclosure, tax liens take priority over most other liens, including purchase-money mortgage liens. Id. § 32.05. After a foreclosure sale, junior liens are extinguished and any surplus funds are paid to the junior lienholders in seniority order. See, e.g., Conversion Props., LLC v. Kessler, 994 S.W.2d 810, 813 (Tex.App.-Corpus Christi 1999, rev. denied) (“If there are surplus proceeds generated by the foreclosure sale after paying the trustee's fees and expenses and the existing indebtedness secured by the foreclosed lien, they are distributed to inferior lienholders ....”); Tex. Tax Code § 32.06(j).

The bankruptcy court found that Cowin had developed a “scheme” to benefit from the priority status Texas law gives tax-transfer liens. (Docket Entry No. 3, Ex. 20 at p. 14). The bankruptcy court's findings described the “scheme” in detail, setting out Cowin's history of acquiring tax-transfer liens.

Cowin made at least 19 tax-transfer loans between 2004 and 2006. (Id. at 16). He lent the money in his own name and put into place deeds of trust securing loans that specified the order of distributing proceeds in the event of foreclosure sale. The deeds of trust listed the order as follows:

(a) expenses of foreclosure, including a commission to Trustee of 5% of the bid; (b) to Beneficiary, the full amount of principal, interest, attorneys' fees, and other charges due and unpaid; (c) any amounts required by law to be paid before payment to Grantor; and (d) to Grantor, any balance.

(Id. at 17).

In 2006, Cowin began lending money through two limited-liability corporations rather than in his own name. (Id. ). The first corporation, Woodway Campton, Ltd. (“WCL”), was a Texas real-estate company with two shareholders, Cowin and Woodway Campton GP, Inc. Cowin was Woodway Campton GP's only shareholder. The bankruptcy court found that Cowin “owned and controlled” WCL. (Id. at 7). The second corporation, Dampkring, LLC, had one member and manager, Brien West, a friend of Cowin's son. The bankruptcy court found that West was a “figurehead” and that Cowin controlled Dampkring. (Id. ). The basis for this finding included West's testimony that Dampkring was not his idea, that he had no experience with tax-transfer liens, and that he played little role in Dampkring's day-to-day operations. (Id. at 7–8).

Cowin used these corporations to loan money to Allan and Nancy Groves, two of his business associates, for them to use to pay the outstanding taxes on properties they had purchased at foreclosure sales. In exchange for lending them money to pay the taxes, Cowin obtained a tax-transfer lien. (Id. at 15). The plaintiffs held mortgages on the properties the Groveses bought. (Id. at 14).

Cowin and the Groveses entered into a contract providing for loan repayment and securing the loans with a deed of trust. (Id. at 14–15). The deeds of trust named G.P. Matherne, another one of Cowin's business associates, as the trustee. (Id. at 6). The Groveses intentionally defaulted on the loans, and Cowin instructed Matherne to foreclose. (Id. at 10 & n. 10, 12 & n. 12, 14).

Cowin and the Groveses kept all the proceeds from foreclosure sales, paying nothing to the preexisting lienholders. The bankruptcy court found that Cowin had changed the text of the deeds of trust securing the tax-transfer loans he made between 2004 and 2006. (Id. at 17). In contrast to the pre–2006 deeds, the revised deeds ensured that proceeds from the foreclosure sales would go first toward paying Matherne's commission, next toward paying Cowin's tax-transfer loan, and last to the Groveses. The deeds of trust did not provide for any distribution to the preexisting lienholders who, by law, were due any surplus proceeds remaining after the senior lien was satisfied. See, e.g., Conversion Props., 994 S.W.2d at 813. The revised deeds provided that, in the event of foreclosure, proceeds from the foreclosure sale would be distributed in this order:

(a) expenses of foreclosure, including a commission to Trustee of 5% of the bid; (b) to Beneficiary, the full amount of principal, interest, attorneys' fees, and other charges due and unpaid; (c) to Grantor, any balance.

(Id. ).

The three Houston properties at issue were covered by tax-transfer loans and deeds of trust containing this revised language. Countrywide held the mortgage on the first property, located at 3311 Yupon Street; WMC held the mortgage on the second, located at 3231 Allen Parkway; and Chase held the mortgage on the third, located at 6007 Memorial Drive. (Id. at 5).

The bankruptcy court's findings and conclusions about each property are discussed in turn.

A. The Countrywide Property at 3311 Yupon Street

Erne Jackson borrowed $638,350 from American Brokers Conduit (“ABC”) to purchase this property in 2006. (Id. at 9). A mortgage secured the loan in favor of Mortgage Electronic Registration Systems, Inc. (“MERS”), as ABC's nominee.² (Id. ). The deed was recorded in the Harris County, Texas real-property records. (Id. ). IMPAC Secured Assets Corp. acquired title to the deed, authorizing Deutsche Bank to serve as the trustee and Countrywide to act as the mortgage servicer. (Id. ). The transfer was recorded with MERS but was not recorded in the real-property records. (Id. ).

Alan Groves, acting through his company Texas Realty Holdings, LLC (“TRH”), purchased the property at a foreclosure sale on August 7, 2007. (Id. at 9–10). TRH took title to the property subject to IMPAC's mortgage. (Id. at 10). On August 23, 2007, TRH borrowed approximately $15,000 from Dampkring to pay the outstanding property taxes on the property, plus $750 in transfer costs and attorney fees. (Id. ). TRH and Dampkring entered into a contract for TRH to repay the $15,750, including paying the $750 by September 5, 2007—13 days after the loan was made. (Id. ). The contract secured the loan with a deed of trust naming Matherne as the trustee. (Id. ).

TRH defaulted, paying neither the $750 by September 5 nor paying toward the $15,000. (Id. ). Cowin directed Matherne to initiate foreclosure proceedings. (Id. ). On December 4, 2007, the property was sold at foreclosure for $118,000. (Id. at 11). Matherne received $1,000 from the foreclosure sale. (Id. ). The $15,000 debt—which Dampkring had since transferred to Terra Development, a corporation controlled by Cowin's business associate Robert Morrow—was also paid. (Id. at 10–11). In accordance with the deed of trust, the remaining amount went to TRH. (Id. at 11). Neither Countrywide (the mortgage servicer) nor Deutsche Bank (the trustee) received any of the money, despite the preexisting mortgage. (Id. ).

B. The WMC Property Located at 3231 Allan Parkway

Matthew Parker borrowed $232,000 from WMC to purchase this property in 2006 and took out a mortgage secured by a deed of trust. (Id. ). The deed was recorded in...