Cromwell v. Countrywide Home Loans, Inc. (In re Cromwell)

• Decision Date: 27 September 2011
• Docket Number: Adversary No. 09–1070.,Bankruptcy No. 08–15944–WCH.
• Citation: 461 B.R. 99
• Parties: In re Douglas CROMWELL, Jr. and Mary Cromwell, Debtors.Douglas Cromwell Jr. and Mary Cromwell, Plaintiffs, v. Countrywide Home Loans, Inc. and Mortgage Electronic Registration Systems, Inc., Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

461 B.R. 99

In re Douglas CROMWELL, Jr. and Mary Cromwell, Debtors.Douglas Cromwell Jr. and Mary Cromwell, Plaintiffs,

v.Countrywide Home Loans, Inc. and Mortgage Electronic Registration Systems, Inc., Defendants.

Bankruptcy No. 08–15944–WCH.

Adversary No. 09–1070.

United States Bankruptcy Court, D. Massachusetts,Eastern Division.

Sept. 27, 2011.

Kenneth D. Quat, Quat Law Offices, Cambridge, MA, Richard L. Blumenthal, Silverman & Kudisch, P.C., Newton, MA, for the Debtors.

Matthew G. Lindenbaum, Natalie F. Langlois, Goodwin Proctor LLP, Boston, MA, for the Defendants.

John T. Precobb, Orlans Moran PLLC, Boston, MA, for Countrywide Home Loans, Inc.Amy N. Azza, Orlans Moran PLLC, Boston MA, for Countrywide Home Loans Servicing, L.P.

MEMORANDUM OF DECISION

WILLIAM C. HILLMAN, Bankruptcy Judge.I. INTRODUCTION

The matters before the Court are the Second Amended Complaint (the “Complaint”) filed by Douglas Cromwell, Jr., and Mary Cromwell (collectively, the “Debtors”) against Countrywide Home Loans, Inc. (“Countrywide”) and Mortgage Electronic Registration Systems, Inc. (“MERS”) (jointly, the “Defendants”) alleging violations of the Massachusetts Consumer Credit Cost Disclosure Act ¹ (the “CCCDA”), as well as the Debtors' Objection to Proof of Claim filed by Countrywide Home Loans, Inc. (the “Objection to Claim”) and the Objection to Confirmation of Second Amended Chapter 13 Plan (the “Objection to Confirmation”) filed by Countrywide. Through their Complaint, the Debtors seek, inter alia, rescission of a refinancing transaction and a declaration that the mortgage granted by them to MERS, as nominee for Countrywide, is void and that they have no tender obligation as a condition to effectuate the rescission.² In the Objection to Claim, they, in turn, contend that Countrywide's claim is now unsecured in light of the Debtors' purported rescission. The Defendants dispute the Debtors' allegations in the Complaint and object to the Debtors' Chapter 13 plan on the basis that they propose to treat Countrywide's claim as unsecured. For the reasons set forth below, I will enter judgment in favor of the Debtors and order them to file a fee application within thirty days, sustain the Objection to Claim, and overrule the Objection to Confirmation. ³

II. BACKGROUND

In 1985, the Debtors inherited certain real property located at 27 Irving Street in Winchester, Massachusetts (the “Property”) from Douglas Cromwell, Sr., free and clear of any encumbrances.⁴ The Property contains a single family home which has been the Debtors' principal residence since they inherited it.⁵ They reside there with their two children and, until his death in June, 2010, Douglas' mentally impaired uncle, Durant Cromwell. ⁶

Between September 19, 1991, and January 17, 2006, the Debtors executed thirteen mortgages with respect to the Property.⁷ Although the parties did not indicate whether each of these transactions refinanced and discharged prior existing mortgages or resulted in multiple mortgages, as of the petition date, the Debtors disclosed the existence of only two mortgages on the Property: a first mortgage held by MERS, as nominee for Countrywide, and a second mortgage held by “American General Finance.” ⁸ The Debtors executed the note (the “Note”) to in favor of Countrywide in the original principal amount of $300,000 and granted a first mortgage (the “Mortgage”) to MERS, as nominee of Countrywide, to secure the obligation on December 23, 2005.⁹ The purpose of this transaction was to refinance and discharge an existing obligation secured by a mortgage granted to New Century Mortgage Corporation (“New Century”) in October, 2003.¹⁰ From the total proceeds of the Countrywide refinancing transaction, $264,960.08 was used to pay off the existing balance owed to New Century, while the Debtors used the balance to pay various other debts “incurred primarily for personal, household, or family purposes, and to make repairs to the Property.” ¹¹

Unable to keep up with the payments due under the Note, the Debtors entered into two loan modification agreements with Countrywide.¹² The first, dated March 16, 2007, increased the unpaid principal balance to $317,721.93.¹³ The second, dated December 5, 2007, again increased the unpaid principal balance to $334,295.15.¹⁴ The parties stipulated that the Debtors made only nine regular monthly payments and last made a payment on September 16, 2008.¹⁵

On August 8, 2008, the Debtors filed a joint Chapter 13 petition.¹⁶ On Schedule A—Real Property (“Schedule A”), the Debtors listed the Property as having a current value of $388,600, subject to secured claims in the amount of $350,117.45.¹⁷ The Debtors disclosed secured claims in the amount of $334,200.15 and $13,866.69 owed to Countrywide and American General Finance, respectively, on Schedule D.¹⁸ Schedule D also reflected secured claims held by the Town of Winchester for unpaid property taxes in the amount of $1,052.25 and water and sewer charges in the amount of $998.36.¹⁹ On their original Schedule C—Property Claimed as Exempt (“Schedule C”), the Debtors claimed an exemption in the Property pursuant to Mass. Gen. Laws ch. 188, § 1 in the amount of $39,534.80 (the “Homestead Exemption”), which appears to be the approximate amount of equity that remained in the Property as of the petition date.²⁰ The Debtors also listed a priority federal tax claim in the amount of $318.80 on Schedule E—Creditors Holding Unsecured Priority Claims (“Schedule E”), and general unsecured claims totaling $68,887.71 on Schedule F—Creditors Holding Unsecured Nonpriority Claims (“Schedule F”).²¹ The Debtors did not list any claims against Countrywide or MERS on their Schedule B—Personal Property (“Schedule B”).

The meeting of creditors held was held pursuant to 11 U.S.C. § 341(a) on September 23, 2008, as scheduled and concluded the same day. On October 3, 2008, Countrywide filed a proof of claim indicating that, as of the petition date, the total amount of the secured claim was $359,110.65 with a prepetition arrearage of $25,431.01.²² Initially, the Debtors proposed to cure the prepetition arrearage on Countrywide's claim through their Chapter 13 plan while maintaining their regular post-petition payments. Shortly after Countrywide filed a motion seeking relief from the automatic stay, however, the Debtors' position with respect to the claim abruptly changed.

On January 21, 2009, the Debtors, through counsel, sent written notification to the Defendants' counsel of their election to rescind the Countrywide refinancing transaction.²³ On the same date, the Debtors filed the Objection to Claim, contending that, in light of their purported rescission, Countrywide held only an unsecured claim.²⁴ The Defendants disputed the validity of the Debtors' rescission, and to date, have neither taken any action to terminate the security interest nor return any money or property to the Debtors.²⁵ As a result, the Debtors commenced the present adversary proceeding on February 20, 2009, asserting that they can rescind the Countrywide refinancing transaction because they were not provided with the correct number of copies of the Notice of Right to Cancel (the “NORC”) under the CCCDA (“Count I”), and that the NORC provided to them at the closing did not adequately disclose their rescission rights because it used the wrong statutory form (“Count II”). Ultimately, the Objection to Claim was consolidated with this adversary proceeding.

Three days after the commencement of the adversary proceeding, the Debtors filed a “Notice of Amendment to Schedule B; Schedule C; Schedule D; Schedule F; Schedule I; and Schedule J,” (the “Notice of Amendment”) and a further amended Chapter 13 plan.²⁶ In summary, the Debtors amended these schedules to reflect their new position with respect to their purported rescission by disclosing their CCCDA claim on Schedule B, reclassifying the debt owed to Countrywide as a secured claim on Schedule D to an unsecured claim on Schedule F, and treating it as a general unsecured creditor in their amended Chapter 13 plan.²⁷ Additionally, the Debtors sought to amend Schedule C to increase their Homestead Exemption to the full $500,000 provided under Massachusetts law.²⁸ Notably, the certificate of service for the notice of amendment indicated that it was “served via ECF upon the following: Carolyn Bankowski, Chapter 13 Trustee, Office of the United States Trustee, and all other parties and entities that receive notice in this matter by ECF,” without specifically listing the names or addresses of all those served. ²⁹ Nonetheless, the ECF system reflects that Countrywide received electronic service of the Notice of Amendment through its counsel.

Between May 17, 2010, and September 10, 2010, the parties each sought judgment in the adversary proceeding by filing various motions for partial summary judgment. At the same time, the Debtors filed a motion to certify the following questions of law to the Supreme Judicial Court of Massachusetts (the “Motion to Certify Question”):

When a consumer prevails in establishing the right to rescind a mortgage loan transaction pursuant to G.L. c. 140D, § 10(a) and 209 CMR 32.23(1), is the security interest voided by operation of law without regard to any obligation which the consumer may have pursuant to G.L. c. 140D, § 10(b) and 209 CMR 32.23(4)(c) to tender money and property to the creditor? Alternatively, does a successful rescission action provide the trial court with equitable discretion to void the security interest irrespective of any tender obligation which the consumer may have? ³⁰

After numerous continuances at the request of the parties, I finally heard the cross-motions for summary judgment and Motion to Certify Question on December 8, 2010. At the conclusion of oral arguments, I granted Countrywide summary judgment on Count III of the Complaint with the consent of the Debtors, but denied both parties summary judgment with respect to all...