In re Gregory

• Decision Date: 14 June 2017
• Docket Number: Case No. 10–50237
• Citation: 572 B.R. 220
• Parties: IN RE: Ruby Audeen GREGORY, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Missouri

572 B.R. 220

IN RE: Ruby Audeen GREGORY, Debtor.

Case No. 10–50237

United States Bankruptcy Court, W.D. Missouri.

Signed June 14, 2017

Jason C. Amerine, Castle Law, Jonah W. Lock, Neil S. Sader, The Sader Law Firm, LLC, Kansas City, MO, for Debtor.

Bruce E. Strauss, Merrick Baker Strauss, Lloyd E. Mueller, Office of the U.S. Trustee, Kansas City, MO, for Trustee.

MEMORANDUM OPINION DENYING WELLS FARGO'S MOTION TO ORDER DEBTOR TO DISMISS STATE COURT ACTION AND TO ENFORCE SWORN PROMISE TO SURRENDER PROPERTY TO WELLS FARGO OR OTHERWISE REAFFIRM OR REDEEM COLLATERAL

Cynthia A. Norton, United States Chief Bankruptcy Judge

The court is asked to consider the meaning of the word "surrender" in § 521(a)(2)(A)¹ in an unusual context: where a secured creditor obtains stay relief, fails to timely foreclose, and mistakenly releases its lien, and the debtor who stated she would surrender the real estate attempts to leverage that mistake into a possible windfall. For the reasons stated below, the court denies the creditor's motion to compel the debtor to "surrender" her real estate and to dismiss her state court case against the lender.

Findings of Fact

The court makes the following findings of fact based on stipulated facts and exhibits.²

Description of the Real Estate Involved

At the time Ruby Gregory filed a chapter 13 bankruptcy in 2010, she owned a home in Stanberry, Missouri, known as 317 N. Willow Street, with her daughter, Rita.³ The property at 317 N. Willow is legally described in part as "Tract B."⁴ Ruby and Rita also owned the adjoining property, 313 N. Willow Street, legally described in part as "Tract A."⁵ The property at 313 N. Willow is a lot with an abandoned structure.

Both properties were encumbered by deeds of trust securing a note Ruby executed in favor of Wells Fargo Financial Missouri several years earlier. Rita was not a signatory to the note, although she did sign both deeds of trust. The deeds of trust were properly recorded with the Gentry County, Missouri Recorder of Deeds. But here is where the trouble begins: apparently unbeknownst either to Ruby or to Wells Fargo at the time, the legal descriptions in the deeds of trust had been switched. The deed of trust for 317 N. Willow (Tract B, Ruby's home) listed the legal description for 313 N. Willow (Tract A, the lot); the deed of trust for 313 N. Willow (Tract A, the lot) listed the legal description for 317 N. Willow (Tract B, Ruby's home).

Treatment of the Real Estate in the Chapter 13 Case

In Ruby's chapter 13 bankruptcy case, she listed 317 N. Willow as her street address and claimed the property as her partially exempt homestead.⁶ She valued 317 N. Willow at $95,000, with a mortgage of approximately $100,000 owed to Wells Fargo. She did not list Rita as a co-owner of 317 N. Willow.

Ruby did not specifically schedule any property known as the lot at 313 N. Willow. Ruby did schedule a half-interest with her daughter Rita in property described as "Highway 169 1 Acre." Ruby scheduled the value of this property at $20,000, with a mortgage of $9,900 owed to U.S. Bank. It is not clear whether this second property is actually supposed to be the lot, 313 N. Willow, or whether the reference to U.S. Bank was intended to be Wells Fargo, and the parties unfortunately do not address this discrepancy in their stipulated facts.

In any event, Ruby's chapter 13 plan proposed to retain the property at 317 N. Willow and to cure Wells Fargo's mortgage arrears. With respect to the "Highway 169 1 Acre" property, the plan stated she would surrender it "in lieu of entire debt." The 313 N. Willow property was not addressed in the plan. After several plan amendments⁷ without objection by any creditor or party in interest save the chapter 13 trustee, Ruby's plan was eventually confirmed.⁸

Events Post–Confirmation

Ruby did not complete her plan. After several suspensions of plan payments and motions to dismiss for default,⁹ Ruby's chapter 13 case was dismissed for default in plan payments about two years after the case was filed.

Pending at the time of dismissal was Wells Fargo's motion for relief to lift the stay for cause under § 362(d)(1) as against both 313 and 317 N. Willow.¹⁰ In the motion, Wells Fargo sought a waiver of the Rule 4001(a)(3) stay of execution. Specifically, Wells Fargo alleged it was not adequately protected and would be irreparably harmed if the stay were not lifted to allow it to "seek the return of [the] property." Only the chapter 13 trustee filed a timely response to Wells Fargo's motion, but the court did not rule on the motion since the case was dismissed before Wells Fargo's motion for relief could be heard.

Three weeks after the dismissal, new counsel entered an appearance for Ruby and filed a motion to reinstate the case for the purpose of converting it to a chapter 7. The motion to convert alleged that Ruby had decided to surrender her "home"¹¹ since the payments were higher than she could afford.¹² The court¹³ granted the motion to reinstate ex parte pursuant to local rule¹⁴ and ordered conversion of the case to a chapter 7. The court also set a new deadline for parties to object to Wells Fargo's motion for relief.

Ruby then filed an amended petition and conversion schedules. The amended petition lists a street address of "3526 Highway 169 South, Stanberry, Missouri." Schedule A describes "3526 Highway 169 S." as one acre worth $20,000 secured by a lien of $9,900, owned one-half with daughter Rita. 317 N. Willow and 313 N. Willow are scheduled together with the description as "Lot with Abandoned Structure," valued in aggregate at $30,000, and secured by a lien of approximately $100,000.¹⁵ Ruby claimed "3526 Highway 169 S." as her homestead;¹⁶ no party objected. Rita's interest in the N. Willow properties was not disclosed.

It is Ruby's statement of intention, however, that has become important in the context of this dispute. With respect to 317 N. Willow and 313 N. Willow ("Lot with Abandoned Structure"), Ruby checked the box that said "Property will be ... Surrendered." The separate verification form states: "I declare under penalty of perjury that the above indicates my intention as to any property of my estate securing a debt and/or personal property subject to an unexpired lease."¹⁷

In the meantime, the court entered an order granting Wells Fargo's motion for relief after no party objected. Wells Fargo's counsel filed a certificate of service stating he served the order on First National Bank of Omaha and a mortgage servicer in Florida (neither of whom appear to have any connection with the case); Ruby and Rita were not served. Ruby's chapter 7 trustee¹⁸ filed a no-asset report, and Ruby received her discharge order in due course. In late September 2012, the case was closed.

Events Post Chapter 7

It is not clear from the record how long Ruby continued to live in the home at 317 N. Willow. The parties stipulated that "Ruby maintains" she has not regularly resided at 317 N. Willow since December 2015;¹⁹ inspection records by Wells Fargo's agent attached to the stipulation reflect the house was vacant during inspections conducted in 2014 through sometime in 2015.

In any event, in July 2014, Wells Fargo sent a letter to Ruby addressed to 317 N. Willow with the subject line: "Release of secondary collateral used to secure your loan." The letter stated that Wells Fargo was releasing its lien on its secondary collateral, 313 N. Willow, but retaining its interest in the primary collateral, 317 N. Willow.

Wells Fargo had in fact recorded a "full deed of release" with the Gentry County Recorder of Deeds earlier in June 2014, before it sent the letter. The release states in the header that the property address of the deed of trust being released is 313 N. Willow; the body of the release directs the county recorder to "cancel of record said security instrument" and lists thereafter the legal description of Tract B (the description of 317 N. Willow).²⁰ Notwithstanding the release, many more months passed, during which Wells Fargo appears to have done nothing else to foreclose whatever interest it retained in either N. Willow property.²¹ It is not clear when Wells Fargo discovered the errors in the deeds of trust and deed of release.

Ruby's State Court Action against Wells Fargo

In March 2016, Ruby filed a four-count petition against Wells Fargo and its agent in Gentry County Circuit Court, Case No. GE–CC00033 (the "State Court Action"). The petition alleges generally that Wells Fargo, through its agent, broke into Ruby's home at 317 N. Willow, changed the locks, and damaged the property. Ruby seeks actual and punitive damages, attorney fees, and pre–and post-judgment interest for alleged trespass to land, trespass against chattels, and violations of the Missouri Merchandising Practices Act.²² Ruby also requested a declaratory judgment that she owns 317 N. Willow (and all personal property inside) free and clear of Wells Fargo's interest. She also demanded a jury trial.

Wells Fargo's answer generally denied Ruby's allegations, and asserted thirty-one separately-enumerated affirmative defenses. Wells Fargo also counterclaimed against Ruby and third-party "defendant" Rita.²³ Wells Fargo's counterclaim sought reformation of the legal description in the deeds of trust and deed of release or in the alternative an equitable lien. Notably, Wells Fargo did not request foreclosure of its interest.

The Motion before this Court

It is unclear what transpired in the State Court Action after the counterclaim was filed, but some six months later and more than four years after the bankruptcy case was closed, Wells Fargo moved to reopen the bankruptcy case for the purpose of filing a motion to compel (the "Motion to Compel").²⁴

The Motion to Compel requests various forms of relief. It requests orders (1) requiring Ruby to dismiss the State Court Action; (2) ordering Ruby to refrain from filing any further claims against Wells Fargo relating to the N. Willow properties; (3) ordering Ruby to...