In re Apponline.Com, Inc., Bankruptcy No. 800-84686-478.

• Decision Date: 15 October 2002
• Docket Number: Bankruptcy No. 800-84686-478.,Bankruptcy No. 800-84687-478.,Adversary No. 801-8366-478.,Bankruptcy No. 800-85007-478.,Bankruptcy No. 800-45195-478 to 801-45202-478.
• Citation: 284 B.R. 181
• Parties: In re APPONLINE.COM, INC., et al., Debtors. Prudential Securities Credit Corp., LLC, Plaintiff, v. Stewart Title Guaranty Company, Mortgage.com, Inc., d/b/a Online Capital, Don DeFoor, Esq., Kelly J. Carruth, Pamela Carruth and Larry Q. Koon, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of New York

284 B.R. 181

In re APPONLINE.COM, INC., et al., Debtors Prudential Securities Credit Corp., LLC, Plaintiff, v. Stewart Title Guaranty Company, Mortgage.com, Inc., d/b/a Online Capital, Don DeFoor, Esq., Kelly J. Carruth, Pamela Carruth and Larry Q. Koon, Defendants.

Bankruptcy No. 800-84686-478.

Bankruptcy No. 800-84687-478.

Bankruptcy No. 800-85007-478.

Bankruptcy No. 800-45195-478 to 801-45202-478.

Adversary No. 801-8366-478.

United States Bankruptcy Court, E.D. New York.

October 15, 2002.

Thacher Proffitt & Wood, by Jean E. Burke, John P. Doherty, White Plains, NY, for Plaintiff.

White Fleischner & Fino, LLP, by Gil M. Coogler, New York City, for Defendant.

Herrick Feinstein LLP, by Paul Rubin, New York City, for Defendants Stewart Title Guaranty Company, Mortgage.com, Inc. d/b/a Online Capital, Kelly J. Carruth, Pamela Carruth & Larry Q. Coon.

Kramer Levin Naftalis & Frankel, LLP, by P. Bradley O'Neill, New York City, for Alan Jacobs.

MEMORANDUM DECISION ON MOTION FOR SUMMARY JUDGMENT

DOROTHY EISENBERG, Bankruptcy Judge.

Before the Court is a motion by the plaintiff, Prudential Securities Credit Corp., LLC ("Prudential" or "Plaintiff"), seeking partial summary judgment against defendant Don DeFoor, Esq. ("DeFoor" or "Defendant") on the grounds of negligence per se based on alleged violation of the Georgia "Good Funds" statute, see Ga.Code Ann. 44-14-13(c). Also pending is a cross-motion for summary judgment by defendant DeFoor seeking dismissal of Plaintiff's complaint. The Court heard oral arguments for both sides on this motion on June 11, 2002 and the Court granted both parties permission to submit additional papers on or before June 21, 2002. The Court has considered thoroughly all submissions, evidence, and arguments relating to this matter, and the decision rendered herein reflects such consideration. The following constitutes the Court's findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

FACTS

Island Mortgage Network, Inc. ("Island Mortgage") is a mortgage broker that originated mortgage loans and was regularly engaged in the sale of notes and mortgages in the secondary mortgage market. National Settlement Services, Inc. ("National Settlement") assisted Island Mortgage in the settlement process of mortgage closings. National Settlement is a Delaware Corporation which is a wholly-owned subsidiary of Action Abstract, Inc. ("Action Abstract"). Action Abstract is a New York Corporation, and is wholly owned by Robert Knickman, a director of AppOnline.com ("AppOnline"), one of the Debtors in this Court. National Settlement's registered office is at 1209 Orange Street, Wilmington, Delaware. As of June 8, 2000, National Settlement was not registered to do business with the Secretary of State of Georgia. As of June 8, 2000, Island Mortgage was a lender approved by the United States Department of Housing and Urban Development ("HUD"), and was authorized to conduct business in the state of Georgia.

In June 2000, Kelly Carruth, Pamela Carruth and Larry Koon ("Borrowers"), took out a loan to be funded by Island Mortgage ("Carruth-Koon Loan") in the amount of $98,853 in connection with a real estate transaction involving the purchase of a parcel of property located at 34 Fortuna Court, Douglasville, Georgia ("Property"). Defendant DeFoor was designated by Island Mortgage as the settlement agent for this loan closing.

On June 6, 2000, National Settlement, on behalf of Island Mortgage, issued an uncertified check payable to DeFoor in the amount of $98,853 to fund the Carruth-Koon Loan (the "June 6th Check"). Two days later, on June 8, 2000, the closing on the purchase of the Property took place. Borrowers made and executed a promissory note ("Note") in the amount of $98,000 secured by a mortgage on the Property in favor of Island Mortgage. Despite receiving the June 6th Check in an amount sufficient to cover the amount of the note and other closing costs two days prior to the closing, DeFoor had not presented the June 6th Check for payment or deposit as of June 8, 2000.

At the closing, DeFoor disbursed settlement funds on behalf of Island Mortgage and executed a HUD-1 Settlement statement in which he certified that: "[t]he HUD-1 Settlement Statement which I have prepared is a true and accurate account of the funds which were (I) received, or (ii) paid outside closing, and the funds received have been or will be disbursed by the undersigned as part of the settlement of this transaction." (Exh. 3 to Doherty Affidavit). In addition, Stewart Title Guaranty Company issued a title policy to "Island Mortgage Network, Inc" insuring the mortgage at the closing. Neither the HUD-1 Settlement Statement nor the Note and Mortgage loan package disclosed the fact that Island had not funded the Carruth-Koon Loan. In fact, DeFoor's Settlement Statement provided to HUD is inaccurate. He did not receive funds outside of the closing, and those funds were not the funds that were disbursed by him as part of the settlement of that transaction. They were funds distributed from his escrow account funded by other unknown parties.

Shortly after the Carruth-Koon closing, DeFoor forwarded a "loan package" for the Carruth-Koon Loan to Island Mortgage, which included the original executed Note and Mortgage and the HUD-1 Settlement Statement. On or about June 20, 2000, Plaintiff purchased the Carruth-Koon loan, including, without limitation, the Note and Mortgage the Borrowers had executed.

A careful review of the June 6th Check does not reveal the exact date that DeFoor deposited the check, but it does reflect that the June 6th Check was stamped with the date of June 15, 2000, and June 16, 2000. (Exh. 4 to Doherty Affidavit). The June 6th Check also reveals that it was stamped with the legend "Payment Stopped" and "Do Not Present Again." On June 19, 2000, DeFoor received notice from Island that it had stopped payment on the June 6th Check due to a "funding number mix-up" (see ¶ 6 DeFoor Affidavit). Thereafter, on June 19, 2000, National Settlement issued another uncertified check payable to DeFoor in the amount of $90,853.18 (the "June 19th Check"). The earliest discernable date stamped on the June 19th Check is June 22, 2000. The June 19th Check was also stamped with the legend "Payment Stopped" and "Do Not Present Again." (Exh. 4 to Doherty Affidavit).

Based on a review of the June 6th Check, the Court concludes that it was not deposited by DeFoor until at least seven (7) days after the closing and distribution of funds for the Carruth-Koon Loan.

On October 12, 2001, Prudential commenced this adversary proceeding against Stewart Title Guaranty Company, Mortage.com., Inc., d/b/a Online Capital, Defoor, Kelly Carruth, Pamela Carruth and Larry Koon seeking, inter alia: 1) entry of a declaratory judgment that Prudential is the holder in due course of the Carruth-Koon promissory note purchased from Island Mortgage and therefore that Prudential has rights in the note and is entitled to all the proceeds from the note free from any claims the defendants have or will assert; and 2) damages from DeFoor for negligently and/or fraudulently closing the loan that Prudential purchased by closing the loan (and more specifically, disbursing loan proceeds) prior to receiving good funds from the lender.

On April 15, 2002, Prudential filed a Motion for Partial Summary Judgment against DeFoor on the grounds of negligence per se as DeFoor's actions at the Carruth-Koon closing were in violation of Ga.Code Ann. 44-14-13(c) (the "Georgia Good Funds Statute"). On May 4, 2002, DeFoor filed a Cross-Motion for Summary Judgment dismissing Prudential's complaint and submitted a Memorandum of Law in support. On June 4, 2002, Prudential submitted a Reply Memorandum of Law in Support of Motion for Partial Summary Judgment and in Opposition to DeFoor's Cross-Motion for Summary Judgment. On June 7, 2002, DeFoor submitted a Reply Affirmation in Support of its Cross-Motion for Summary Judgment to which Prudential submitted Supplemental Memorandum of Law in Support of its Partial Summary Judgment Motion.

DISCUSSION

As a preliminary matter, the Court is aware that Prudential has several pending adversary proceedings in which it asserts it is a holder in due course of mortgage notes purchased from Island Mortgage. Some of these adversary proceedings also involve allegations that certain defendants violated "Good Funds" statutes existing in certain states. In addition, other parties have either purchased or financed mortgage notes from Island Mortgage where Island Mortgage has failed to provide the initial funding, and various adversary proceedings are pending in this Court to determine the rights of these parties. Some of these adversary proceedings also involve "Good Funds" statutes existing in various other states. Given that each adversary proceeding pending in this Court involving these issues turn on their own unique set of facts and circumstances, the findings contained in this decision may or may not be binding in any other adversary proceeding unless this Court specifically makes such findings.

The "purpose of summary judgment is to `pierce the pleadings and to assess the proof in order to see whether there is a genuine need for trial'." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986) (quoting Fed.R.Civ.P. 56 advisory committee's note). The Court "must determine whether there is a genuine issue of material fact and whether the moving party is entitled to judgement as a matter of law." Warren v. Crawford, 927 F.2d 559, 561 (11th Cir.1991) (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986)). In the case at bar, as both parties seek summary judgment and as confirmed to the Court at oral argument that there are no disputed issues of material fact, the Court can decide the issues presented as a matter of law.

DeFoor's...