Ferrara v. Griffis

• Citation: 551 F.Supp.3d 1
• Decision Date: 29 July 2021
• Docket Number: C.A. No. 20-534-JJM-PAS
• Parties: Stacy B. FERRARA, in her capacity AS TRUSTEE OF the Chapter 7 Bankruptcy ESTATE OF Casey ROBERTS, Plaintiff, v. Eli B. GRIFFIS and Caelah S. Griffis, Defendants.
• Court: U.S. District Court — District of Rhode Island

551 F.Supp.3d 1

Stacy B. FERRARA, in her capacity AS TRUSTEE OF the Chapter 7 Bankruptcy ESTATE OF Casey ROBERTS, Plaintiff,

v.Eli B. GRIFFIS and Caelah S. Griffis, Defendants.

C.A. No. 20-534-JJM-PAS

United States District Court, D. Rhode Island.

Signed July 29, 2021

Steven J. Boyajian, Robinson & Cole LLP, Providence, RI, for Plaintiff.

Gardner H. Palmer, Jr., Law Office of Joseph M. DiOrio, Inc., Providence, RI, for Defendants.

MEMORANDUM AND ORDER

JOHN J. MCCONNELL, JR., Chief United States District Judge.

Plaintiff Stacy B. Ferrara as Trustee of the Chapter 7 Bankruptcy Estate of Casey Roberts seeks a declaration that certain mortgages continue to encumber a property in Jamestown, Rhode Island that Casey Roberts owned as tenants in the entirety with her husband Garret Roberts. Plaintiff claims that these mortgages remained valid whens against Ms. Roberts’ interest in the property despite Mr. Roberts’ bankruptcy that stripped the whens from the property under 11 U.S.C. § 506(d). Defendants Eh B. and Caelah S. Griffis, subsequent purchasers of the Jamestown property, move to dismiss, claiming that when they bought the property it was not subject to the secondary mortgages because the Bankruptcy Court voided them as wholly unsecured.

I. BACKGROUND¹

Casey and Garret Roberts owned real property at 223 Hull Cove Farm Road in Jamestown. Rhode Island ("Property") as tenants by the entirety. The couple granted several mortgages, including to: JP Morgan Chase for $3.4 million that was the first mortgage on the Property ("Senior Mortgage"); Finch Investments Associates, LLC ("Finch") for $125,000 (recorded in 2008); and John Sahagian ("Sahagian") for $150,000 (recorded in 2009) (the latter two together, "the Junior Mortgages").

In 2010, Mr. Roberts filed for Chapter 11 bankruptcy and listed the Property as part of his bankruptcy estate. He declared six liens on the Property. Finch was the fourth lien and Sahagian was the sixth. Both participated in the Mr. Roberts’ bankruptcy, and both were certified as receiving all pleadings in the case.

Mr. Roberts moved to avoid the Junior Mortgages under 11 U.S.C. § 506(d). ECF No. 10-2. This process is known as when stripping, a process by which the court strips the junior liens from the real estate securing the debt where the value of the property is less than the amount owed to the first mortgagee. Finch at first objected to the lien stripping motion and then withdrew its objection. ECF No. 10-3, 10-4, 10-5. The Bankruptcy Court granted the lien stripping motion, holding that the secondary mortgages were "wholly unsecured" and were "avoid[ed] in [their] entirety." ECF No. 10-6 at 3.

Mr. Roberts filed a First Amended Plan of Reorganization ("Plan"). ECF No. 10-7.² Neither Finch nor Sahagian objected to the Plan, and Finch submitted an affidavit in support of the Plan. ECF No. 108 (Finch "fully support[s] the Debtor's efforts to reorganize under Chapter 11 and the Debtors attempt to gain confirmation of the Plan")

The Bankruptcy Court in 2011 entered an Order Confirming the First Amended Plan of Reorganization ("Confirmation Order"). ECF No. 10-1. The Order declared that the Junior Mortgages were unsecured and discharged by the lien stripping process under 11 U.S.C. 506(d) because the Senior Mortgage exceeded the value of the Property.³ The Bankruptcy Court stripped the liens from the Property "in their entirety." ECF No. 10-1 at 4.

Two years later, the Roberts sold the Property to Defendants Elis B. and Caelah S. Griffis for $4.3 million. The Roberts used part of the proceeds to satisfy the Senior Mortgage, but $690,000 profit remained. They did not apply any of the profit to satisfy any of the notes secured by the Junior Mortgages. After the sale, Finch sued Casey Roberts to recover the unpaid debt under the promissory note.

During that litigation. Finch moved for summary judgment on the debt. Finch acknowledged in its motion that the Finch mortgage was no longer in force and effect. ECF No. 10-10 at 4. ("Pursuant to the terms of the Chapter 11 Plan filed by Defendant's husband, the mortgage in question was subsequently "stripped" off the property since it was deemed to be an unsecured loan due to the mortgages ahead of it, which meant that the mortgages, in essence, attached no equity in the property and was subsequently treated as unsecured debt."). Finch received a judgment on the note against Casey Roberts for $243,794.72. ECF No. 10-11 at 2.

In 2016, Casey Roberts filed for Chapter 7 bankruptcy. Plaintiff Stacy B. Ferrara, Trustee of this bankruptcy ("the Trustee"), acquired the Finch and Sahagian debt. The Trustee therefore acquired all the rights – but only the rights – of Finch and Sahagian.

The Trustee filed this suit against the Griffises, the current owners of the Property.⁴ The parties dispute whether the Bankruptcy Court properly discharged the Finch and Sahagian mortgages as to Casey Roberts’ interest in the Property. The Trustee seeks a declaratory judgment stating that the Junior Mortgages are still valid and still encumber the Property.

II. STANDARD OF REVIEW

Defendants move, under Fed. R. Civ. P. 12(b)(6), to dismiss the claims brought against them. The Federal Rules of Civil Procedure require a complaint to set forth "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The complaint must have sufficient factual allegations that plausibly state a claim upon which a court may grant relief. Bell Atl. Corp. v. Twombly , 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). This standard requires more than a recitation of elements and must allow the court to draw a reasonable inference that a defendant is liable. Ashcroft v. Iqbal , 556 U.S. 662, 675, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court must accept a plaintiff's allegations as true and construe them in the light most favorable to the plaintiff. Gargano v. Liberty Int'l Underwriters , 572 F.3d 45, 48 (1st Cir. 2009).

III. DISCUSSION

The Griffises argue that the Bankruptcy Court discharged the Junior Mortgages in Mr. Roberts’ Chapter 11 bankruptcy such that their Property is no longer encumbered by them. The Confirmation Order said unambiguously that the Finch and Sahagian liens were "wholly unsecured and avoided in their entirety."⁵ ECF No. 10-6 at 3. The Trustee argues that Casey Roberts’ interest in the Property was not part of Garret Roberts’ bankruptcy estate because it was not a "claim" as defined by the Bankruptcy Code, and therefore the determination of the secured status of the Junior Mortgages as to Garret Roberts under 11 U.S.C. § 506 did not affect the rights of the creditors as to Casey Roberts’ interest in the Property.

The Court need not address the unresolved issue – whether a bankruptcy court can strip a lien from property owned as tenants by the entirety when only one spouse is before the bankruptcy court - because the Bankruptcy Court Confirmation Order was final and enforceable in accordance with its express terms and may not be collaterally attacked based on principles of judicial estoppel and res judicata. See Payless Wholesale Distribs., Inc. v. Alberto Culver (P.R.) Inc. , 989 F.2d 570, 571 (1st Cir. 1993) (debtor judicially estopped from asserting claim in later proceeding that was not disclosed in bankruptcy case).

Both Finch and Sahagian had notice of Garret Roberts’ Chapter 11 bankruptcy, were certified as receiving all pleadings in the case, and took part in the case. The Trustee's assignors, Finch and Sahagian, failed to challenge the Bankruptcy Court's final Confirmation Order entered ten years ago. Neither Finch nor Sahagian objected to the Confirmation Order declaring that Junior Mortgages were unsecured and discharged "in their entirety" by the lien stripping process. In re DiBerto , 171 B.R. 461, 471 (Bankr. D.N.H. 1994) ("when a creditor has notice and a full opportunity to make its views and objections known during the reorganization and confirmation process, the creditor is bound by the terms of the reorganization plan upon the entry of the confirmation order"). Neither appealed the Bankruptcy Court's final Confirmation Order confirming the Plan. In fact, Finch affirmatively consented to the debtor's motion to strip the Junior Mortgage liens "in their entirety" from the Property. Becaus...