In re Chase, 07-10963-JMD.

• Decision Date: 03 June 2008
• Docket Number: No. 07-10963-JMD.,07-10963-JMD.
• Citation: 388 B.R. 462
• Parties: In re Joy A. CHASE, Debtor.
• Court: U.S. Bankruptcy Court — District of New Hampshire

388 B.R. 462

In re Joy A. CHASE, Debtor.

No. 07-10963-JMD.

United States Bankruptcy Court, D. New Hampshire.

June 3, 2008.

Krista E. Atwater, Esq., Atwater Law, Rye, NH, for Debtor.

William J. Amann, Esq., Ablitt & Charlton, P.C., Stoneham, MA, for Creditor.

MEMORANDUM OPINION

J. MICHAEL DEASY, Bankruptcy Judge.

I. INTRODUCTION

Joy Chase (the "Debtor") filed an objection (Doc. No. 14) (the "Objection") to Proof of Claim 1 (the "Original Claim") filed by "AMC Mortgage Services, Inc. dba Delaware AMC Mortgage Services, Inc., as loan servicer for Ameriquest Mortgage Company" (the "First Creditor").¹ In the Objection, the Debtor contends that (1) the documentation attached to the Original Claim does not establish a prima facie claim of a security interest in her residence due to the failure to comply with applicable state law regarding the encumbrance of real estate and homesteads; and (2) the Original Claim is contrary to a final ruling by the New Hampshire Supreme Court in Chase v. Ameriquest Mortgage Co., 155 N.H. 19, 921 A.2d 369 (2007), which involved the same claim. On October 5, 2007, the Court ordered CitiResidential Lending Inc., as servicer for WM Specialty Mortgage, LLC (the "Creditor")² to file an amended proof of claim and ordered the parties to file a joint stipulation of facts, all by November 16, 2007. The Debtor was ordered to file any responsive memorandum on or before December 14, 2007. On November 21, 2007, the Creditor filed an amended Proof of Claim 1 (the "Claim"). The parties subsequently filed memoranda of law and the Court held oral argument on January 3, 2008.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and the "Standing Order of Referral of Title 11 Proceedings to the United States Bankruptcy Court for the District of New Hampshire," dated January 18, 1994 (DiClerico, C.J.). This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. FACTS

There is no material factual dispute between the parties. The Debtor and her ex-husband, George Chase, purchased a home at 55 Main Street in Rumney, New Hampshire in August 1996. On or about November 28, 1997, using their home as collateral, they executed a mortgage note and deed to United Companies Lending Corporation in the original principal amount of $71,300.00 (the "Prior Mortgage").³ On or about April 10, 2002, again utilizing the home as collateral, Mr. Chase entered into a mortgage with Ameriquest (hereinafter referred to as "AMC") in the amount of $90,000.00 (the "Current Mortgage").⁴ As part of the mortgage agreement, AMC paid off the Prior Mortgage at the April 2002 closing. The Prior Mortgage was subsequently discharged.⁵

The parties stipulated in the New Hampshire court proceedings and in this Court that Mr. Chase forged the Debtor's name when he executed the Current Mortgage. When AMC commenced foreclosure proceedings in the Spring of 2005, the Debtor sought to enjoin the foreclosure sale. The superior court ruled that the Current Mortgage constituted a charge on the Debtor's homestead and that the doctrines of equitable subrogation and unjust enrichment required the Debtor to pay the holder of the Current Mortgage $74,439.78, the amount of the payoff of the Prior Mortgage. The Debtor appealed that decision to the New Hampshire Supreme Court.

In its decision of February 21, 2007, the New Hampshire Supreme Court reversed the superior court, in part, and held that the Current Mortgage could not constitute a legal charge on the Debtor's interest in her residence for two reasons. Chase, 155 N.H. at 23, 921 A.2d 369. First, the court found that the Current Mortgage did not satisfy the requirement under New Hampshire law, NH RSA 477:3, for the execution of a conveyance of a lien on the Debtor's interest in real estate because she had not signed the document. Id. at 22, 921 A.2d 369. Second, the court held that the Current Mortgage could not constitute a charge on the Debtor's homestead interest because she had not signed the document as required by NH RSA 480:5-a. Id. at 23, 921 A.2d 369. However, the court did uphold the equitable subrogation ruling by the superior court. Id. at 28, 921 A.2d 369. The court found that the superior court had correctly ruled that the First Creditor had established all of the necessary elements of a claim for equitable subrogation to the rights of the holder of the Prior Mortgage. Id. at 27-28, 921 A.2d 369. Therefore, the equitable subrogation claim was determined to be $74,439.78.

The Debtor filed her petition under chapter 13 of the Bankruptcy Code⁶ on May 10, 2007 (the "Petition Date"). In schedule C, the Debtor claimed exemptions for the full value of her home under NH RSA 480:1 ($100,000.00) and NH RSA 511:2(XVIII) ($3,900.00). No timely objections to the exemption claims were filed.

The First Creditor filed the Original Claim on May 30, 2007. In the Original Claim the First Creditor alleged that it held a secured claim on the Debtor's residence in the amount of $138,523.82 and a prepetition secured arrearage in the amount of $49,249.04. The Objection challenged both the amount and the secured status of the Original Claim against her homestead. After the Creditor then filed the Claim, the Claim became the obligation that is the subject of this dispute.

III. DISCUSSION

The Debtor claims that she is not attempting to re-litigate the New Hampshire Supreme Court's Chase decision. Rather she is contesting the Creditor's claim of entitlement to treatment as a secured creditor in this bankruptcy proceeding. The Debtor argues that the Creditor cannot claim status as a secured creditor because it never perfected the equitable subrogation claim awarded to it in the state courts. The Debtor argues that the Chase decision holds that the Current Mortgage is not a charge upon any interest she has in her home and, because the Prior Mortgage is discharged of record, the Creditor's equitable subrogation claim is unperfected. The Debtor contends that the Creditor should have recorded a lis pendens or a copy of one or both of the state court decisions or orders to perfect its equitable subrogation claim. Absent such perfection, the Debtor argues that the Creditor's claim must be treated as an unsecured claim because 11 U.S.C. § 522(h) permits the Debtor, under the circumstances of this case, to exercise the rights of a trustee under 11 U.S.C. § 544(a)(3). The Creditor disputes the Debtor's contention. The Creditor's argument rests on the decision in Chase which equitably subrogated its rights to the holder of the Prior Mortgage, thereby giving it a lien in the same priority as the Prior Mortgage.⁷

A. The Procedural Posture of the Objection

Based upon the undisputed factual record before the Court, the record title in the Grafton County Registry of Deeds on the Petition Date disclosed the discharged Prior Mortgage and the Current Mortgage. As such, the Current Mortgage was the only document of record claiming a lien against the Debtor's residence and it appeared on its face to be properly executed. However, the New Hampshire Supreme Court held that the Current Mortgage did not constitute a charge against the Debtor's interest in her residence, or her homestead, because as a matter of law it had not been executed in accordance with the statutory formalities. Chase, 155 N.H. at 22-23, 921 A.2d 369. Therefore, the Current Mortgage does not properly encumber any of the Debtor's interests in her residence, as a matter of law.

The Debtor's standing to raise the Objection is based on the provisions of § 522(h) which permit a debtor in the circumstances of this case to avoid a transfer of property under § 544 of the Bankruptcy Code if a trustee could do so. Section 544(a) permits a trustee to avoid a transfer of property that is voidable by a hypothetical lien creditor or a bona fide purchaser of property (a "BFP"). The rights and priorities of a trustee as a hypothetical lien creditor or BFP are determined under applicable state law. Robinson v. Howard Bank (In re Kors, Inc.), 819 F.2d 19, 22-23 (2d Cir.1987) (trustee as lien creditor under § 544(a)(1)); In re Cushman Bakery, 526 F.2d 23, 30 (1st Cir.1975) (trustee as BFP under predecessor of § 544(a)(3)).

An objection to a claim is ordinarily a contested matter in bankruptcy court. See Fed. R. Bank. P. 9014.⁸ At the time the Objection was filed, Rule 3007 provided that if an objection to claim included a demand for relief of the kind specified in Rule 7001, it would become an adversary proceeding.⁹ A proceeding to avoid a lien under § 544 of the Bankruptcy Code is an adversary proceeding under Rule 7001(3). Although objections to claims are contested matters, they are, unless the Court orders otherwise, governed by many of the disclosure and discovery rules applicable in adversary proceedings. Fed. R. Bankr.P. 9014. At oral argument, the parties agreed that the Court could consider the matter without converting it to an adversary proceeding as they had agreed to a stipulated factual record and had had an opportunity to brief and argue the legal issues. No party objected to the Court hearing the Objection as a contested matter, all parties had adequate notice of the hearing and the Creditor has not been prejudiced by treating the Objection as a contested matter. Accordingly, the Court shall do so. See Fleet Nat'l Bank v. Valente (In re Valente), 360 F.3d 256, 265 (1st Cir.2004) (holding that, although the matter should have been initiated by a complaint rather than a motion, the debtor was not prejudiced by proceeding as a contested matter).

B. Constructive Notice and Record Title to Real Estate

For purposes of perfecting liens and interests in real estate, New Hampshire is a "race-notice" jurisdiction. Amoskeag Bank v. Chagnon, 133 N.H. 11, 14, 572 A.2d 1153 (1990). In a race-notice jurisdiction,

a purchaser or creditor has the senior claim if he or she records without notice of a...