In re Justin E. Bosley And Patricia E. Bosley

• Court: U.S. Bankruptcy Court — District of Vermont
• Writing for the Court: COLLEEN A. BROWN, Bankruptcy Judge.
• Citation: In re Justin E. Bosley And Patricia E. Bosley, 446 B.R. 79 (Bankr. Vt. 2011)
• Decision Date: 18 February 2011
• Docket Number: Bankruptcy No. 09–10449.,Adversary No. 09–1038.
• Parties: In re Justin E. BOSLEY and Patricia E. Bosley, Debtors.Justin & Patricia E. Bosley and Jan M. Sensenich, Plaintiffs,v.BAC Home Loan Servicing L.P. f/k/a Countrywide Home Loans Servicing LP, Defendant.

446 B.R. 79

In re Justin E. BOSLEY and Patricia E. Bosley, Debtors.Justin & Patricia E. Bosley and Jan M. Sensenich, Plaintiffs,

v.BAC Home Loan Servicing L.P. f/k/a Countrywide Home Loans Servicing LP, Defendant.

Bankruptcy No. 09–10449.

Adversary No. 09–1038.

United States Bankruptcy Court, D. Vermont.

Feb. 18, 2011.

Todd Taylor, Esq., for Justin & Patricia E. Bosley.Jan M. Sensenich, Esq., White River Junction, VT, Chapter 13 Trustee.Douglas J. Wolinsky, Esq., Burlington, VT, Kevin Michael Henry, Esq., Dallas, TX, Shawn Michael Masterson, Esq., Pawtucket, RI, for BAC Home Loan Servicing L.P. f/k/a Countrywide Home Loans Servicing LP.

MEMORANDUM OF DECISION Granting Summary Judgment to the Debtors on the Issue of Equitable Subrogation, Denying the Debtors' Request for Attorney's Fees and Costs, Setting Briefing Schedule and Oral Argument on Inquiry Notice Issue, and Deferring Decision on Remaining Summary Judgment Issues

COLLEEN A. BROWN, Bankruptcy Judge.

The Plaintiffs filed the instant adversary proceeding seeking an order declaring that, because the unrecorded mortgage on the Debtors' real property was unperfected, it is avoidable and does not constitute a valid lien. ¹ The Defendant filed an amended answer seeking an order declaring that the mortgage is valid and enforceable and raising the affirmative defense of equitable subrogation. The Debtors and the Defendant have filed cross-motions for summary judgment as to whether the Defendant is entitled to equitable subrogation and whether the Chapter 13 Trustee may avoid the mortgage. The Debtors also seek summary judgment as to whether, if the lien is avoidable, the general unsecured creditors are entitled to receive the entire amount of the avoided lien, and request an award of attorney's fees and costs.

For the reasons set forth below, the Court finds that the Debtors are entitled to judgment as a matter of law that the principle of equitable subrogation does not apply to the Defendant's unrecorded mortgage, and that the record is insufficient for the Court to determine if the unrecorded mortgage is avoidable. Therefore, the Court first grants the Debtors' motion for summary judgment and denies the Defendant's cross-motion for summary judgment on the issue of equitable subrogation. Second, the Court defers a ruling on the issue of whether the unrecorded mortgage may be avoided until the parties supplement the record as described below, and will address the question of whether the general unsecured creditors must be paid the entire amount of the lien after it determines if the Trustee may avoid it. Lastly, the Court denies the Debtors' request for an award of attorney's fees and costs.

Jurisdiction

This Court has jurisdiction over this adversary proceeding and the instant motions for summary judgment pursuant to 28 U.S.C. §§ 157 and 1334 and declares them to be core proceedings under 28 U.S.C. § 157(b)(2)(K).

Procedural History

On April 20, 2009, Justin and Patricia E. Bosley (the “Debtors”) filed a voluntary Chapter 13 petition. The Debtors and Jan M. Sensenich, the Chapter 13 Trustee (the “Trustee”) (collectively, the “Plaintiffs”) filed a complaint to initiate this adversary proceeding on November 1, 2009 (doc. # 1). BAC Home Loans Servicing LP f/k/a Countrywide Home Loans Servicing LP (the “Defendant”) filed an answer on December 1, 2009 (doc. # 3), and filed an amended answer on April 9, 2010 (doc. # 11). The Debtors, the Trustee, and the Defendant filed a stipulated joint pre-trial statement on July 21, 2010 (doc. # 17), including a joint statement of undisputed facts. The Debtors filed a motion for summary judgment on September 26, 2010 (doc. # 21), and the Defendant filed its opposition and cross-motion for summary judgment on October 25, 2010 (doc. # 22).

Undisputed Material Facts

Based upon the parties' stipulation of undisputed facts (doc. # 17, pp. 2–3) and the record in this proceeding, the Court finds the following facts to be material and undisputed:

1. The Debtors are the owners of real property located at 299 West Berkshire Road, Enosburg, Vermont (the “Property”).

2. On May 4, 2004, the Debtors executed and delivered to CitiFinancial, Inc., a mortgage deed to the Property to secure a debt in the amount of $110,109.33 (the “CitiFinancial loan”). The mortgage deed was recorded on May 7, 2004, in the Town of Enosburg Land Records.

3. On June 4, 2006, the Debtors entered into two mortgage loans with Countrywide Home Loans (“Countrywide”). The first loan was in the amount of $112,000, and the second loan was in the amount of $21,000. Each of the loans was secured by a separate mortgage deed to the Property.

4. Approximately $109,617 of the proceeds of the $112,000 Countrywide loan was used to pay the balance due on CitiFinancial loan.

5. On June 30, 2006, the Countrywide mortgage deed securing the $21,000 loan was recorded in the Town of Enosburg Land Records.

6. On November 17, 2006, the Debtors executed and delivered to Vermont Community Loan Fund (“VCLF”) a mortgage deed, which included the following language:

[t]his is a third (3rd) mortgage and is subordinate to prior liens to Country Wide [sic] Home Loans, in the original amounts of $112,000 and $21,000 respectively, dated June 14, 2006 and recorded in Book 107 Pages 545–549 of the Town of Enosburg Land Records.

7. On November 22, 2006, the VCLF mortgage deed was recorded in the Town of Enosburg Land Records.

8. On October 2, 2008, the VCLF recorded a discharge of its mortgage deed.

9. On April 20, 2009, the Debtors filed the instant bankruptcy case.

10. As of the bankruptcy filing date, the mortgage deed securing the $112,000 Countrywide loan had not been recorded.

Summary Judgment Standard

Summary judgment is proper if the record shows no genuine issue as to any material fact such that the moving party is entitled to judgment as a matter of law. See Fed.R.Civ.P. 56; Fed. R. Bankr.P. 7056; see also Bronx Household of Faith v. Bd. of Educ. of the City of New York, 492 F.3d 89, 96 (2d Cir.2007). The moving party bears the burden of showing that no genuine issue of material fact exists. See Vermont Teddy Bear Co. v. 1–800 Beargram Co., 373 F.3d 241, 244 (2d Cir.2004). A genuine issue exists only when “the evidence is such that a reasonable [trier of fact] could return a verdict for the nonmoving party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). The substantive law identifies those facts that are material; only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment. See Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Factual disputes that are irrelevant or unnecessary are not material. Id. In making its determination, the court's sole function is to determine whether there is any material dispute of fact that requires a trial. Id. at 249, 106 S.Ct. 2505; see also Palmieri v. Lynch, 392 F.3d 73, 82 (2d Cir.2004). In determining whether there is a genuine issue of material fact, a court must resolve all ambiguities, and draw all inferences, against the moving party. See Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of New Jersey, Inc., 448 F.3d 573, 579 (2d Cir.2006). If the nonmoving party does not come forward with specific facts to establish an essential element of that party's claim on which it has the burden of proof at trial, the moving party is entitled to summary judgment. See Celotex Corp., 477 U.S. at 323–25, 106 S.Ct. 2548 (“One of the principal purposes of the summary judgment rule is to isolate and dispose of factually unsupported claims or defenses ... the burden on the moving party may be discharged by ‘showing’—that is, pointing out to the district court—that there is an absence of evidence to support the nonmoving party's case”); see also Tufariello v. Long Island R. Co., 458 F.3d 80, 85 (2d Cir.2006).

Discussion

The parties seek summary judgment on three issues: 1) whether the Defendant is entitled to equitable subrogation; 2) whether the Chapter 13 Trustee may avoid the mortgage; and 3) whether, if the lien is avoidable, the general unsecured creditors are entitled to receive a sum equal to the entire amount of the avoided lien.

1. Equitable Subrogation

None of the material facts regarding the equitable subrogation claim are in dispute. Therefore, summary judgment is proper on this issue.

The Defendant argues that it is entitled to be equitably subrogated to the CitiFinancial mortgage because a portion of the proceeds of Countrywide's $112,000 loan were used to satisfy the outstanding CitiFinancial loan ( see Undisputed Material Facts ¶ 4, supra ). The Debtors counter that, as a matter of law, they are entitled to a judgment declaring that the principle of equitable subrogation does not cure the Defendant's failure to record its mortgage deed. The Debtors are correct.

This Court has previously explained the circumstances under which the principle of equitable subrogation applies:

Equitable subrogation arises in equity to prevent fraud or injustice and usually arises when (1) the paying party has a liability, claim or fiduciary relationship with the debtor; (2) the party pays to fulfill a legal duty or because of public policy; (3) the paying party is a secondary debtor; (4) the paying party is a surety; or (5) the party pays to protect its own rights or property.

In re Hutchins, 400 B.R. 403, 413 (Bankr.D.Vt.2009) (quoting

Lawlor v. Chittenden Trust Co. (In re Lawlor), 2005 Bankr.LEXIS 2935, 2005 WL 4122833, *2 (Bankr.D.Vt. Dec.15, 2005)). “This equitable doctrine, which has as its goal the advancement of justice and the prevention of injustice, is used ‘only in extreme cases bordering on if not reaching the level of fraud.’ ” Id. (citing Rouse v. Chase Manhattan Bank, U.S.A. (In re Brown), 226 B.R. 39, 44 (W.D.Mo.1998)). In...