In re Kaid

• Decision Date: 29 May 2012
• Docket Number: No. 11–68941.,11–68941.
• Citation: 67 Collier Bankr.Cas.2d 1566,472 B.R. 1
• Parties: In re Kalid M. KAID, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

472 B.R. 1

67 Collier Bankr.Cas.2d 1566

In re Kalid M. KAID, Debtor.

No. 11–68941.

United States Bankruptcy Court,

E.D. Michigan,

Southern Division.

May 29, 2012.

Afan Bapacker, Dearborn, MI, for Debtor.

Opinion Sustaining In Part And Denying In Part Debtor's Objection To Proof Of Claim of Flagstar Bank, FSB

PHILLIP J. SHEFFERLY, Bankruptcy Judge.

Introduction

Flagstar Bank, FSB (“Flagstar”) filed a proof of claim in the Debtor's Chapter 13 case in the amount of $520,160.20. The Debtor filed an objection, first arguing that Flagstar is not the holder of any claim against the Debtor. In the alternative, the Debtor argues that if Flagstar does hold a claim against him, the claim should only be allowed in an amount that is substantially less than the amount set forth in Flagstar's proof of claim. For the reasons set forth in this opinion, the Court holds that Flagstar does hold a claim against the Debtor, but sustains the Debtor's objection to the amount of the proof of claim and allows Flagstar's claim in a reduced amount.

Jurisdiction

This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a).

Facts

The following facts are undisputed.

Michigan & Lonyo Ultimate Service Center, Inc. (“Michigan & Lonyo”) owned and operated a gas station and service center located at 8258 Michigan Avenue, Detroit, Michigan. On June 30, 2005, Flagstar made a loan to Michigan & Lonyo in the amount of $807,500.00 (“Michigan & Lonyo Loan”). The Michigan & Lonyo Loan was evidenced by an agreement (“Business Loan Agreement”), a promissory note (“Promissory Note”), a mortgage (“Mortgage”) on Michigan & Lonyo's real property (“Michigan Avenue Property”), and various other documents. The Business Loan Agreement also required the execution and delivery of three separate personal guaranties of the loan. Kalid Kaid (“Debtor”) signed one of the guaranties (“Guaranty”).

When Michigan & Lonyo defaulted on the Promissory Note, Flagstar took a number of actions. On April 7, 2010, Flagstar filed a lawsuit against the Debtor in Wayne County Circuit Court to enforce the Guaranty. While that lawsuit was pending, Flagstar entered into an Agreement of Purchase and Sale of Notes and Loan Documents (“AFT Agreement”) on August 12, 2010 pursuant to which Flagstar agreed to sell to AFT Investments, LLC (“AFT”) a bundle of various loans that it had made, including the Michigan & Lonyo Loan. The AFT Agreement allocated a specific amount of AFT's purchase price to each loan in the bundle, and also fixed a “Maximum Foreclosure Amount” for each loan. As for the Michigan & Lonyo Loan, the AFT Agreement expressly stated that the loan documents being sold by Flagstar to AFT “specifically exclude” the Debtor's Guaranty of the Michigan & Lonyo Loan. The AFT Agreement further provided that Flagstar “is not selling, assigning or otherwise conveying to [AFT] the right to pursue a deficiency judgment or other claim” against the Debtor under the Guaranty. Three separate amendments to the AFT Agreement were later made by Flagstar and AFT. On December 27, 2010, Flagstar and AFT closed the sale of the loans described in the AFT Agreement. The Michigan & Lonyo Loan, as well as the other loans bundled together in the AFT Agreement, were sold by Flagstar to AFT at the closing, but Flagstar retained all of its rights against the Debtor under the Guaranty. The Debtor was not a party to the AFT Agreement nor to any of its amendments.

After the AFT Agreement was made on August 12, 2010, but before it closed on December 27, 2010, Flagstar continued to prosecute its lawsuit against the Debtor to enforce the Guaranty. On October 4, 2010, the Wayne County Circuit Court granted Flagstar's motion for summary disposition against the Debtor and granted Flagstar a judgment (“Judgment”) against the Debtor in the amount of $830,303.39, plus interest, costs and attorney fees, based upon the Guaranty.

On February 22, 2011, the Debtor filed a motion in the Wayne County Circuit Court to set aside the Judgment. The Debtor's motion asserted that Flagstar's sale of the Michigan & Lonyo Loan to AFT on December 27, 2010 precluded Flagstar from enforcing the Judgment against the Debtor. Specifically, the Debtor argued that a guaranty of a promissory note cannot be separated from the promissory note, and that once a promissory note is assigned, a guaranty of that promissory note passes as a matter of law to the purchaser of the promissory note. As a result, the Debtor argued, when Flagstar sold the Michigan & Lonyo Loan to AFT, the Guaranty necessarily, and by operation of law, followed the Promissory Note into AFT's hands. Therefore, according to the Debtor, Flagstar could no longer enforce the Judgment against the Debtor.

On March 18, 2011, the Wayne County Circuit Court held a hearing on the Debtor's motion to set aside the Judgment. According to the transcript, after hearing arguments from counsel for the Debtor and counsel for Flagstar, the Court denied the Debtor's motion. The Wayne County Circuit Court held that even if the Debtor was correct in arguing that an assignment of a promissory note ordinarily has the effect of assigning a guaranty of that promissory note to the assignee, that argument did not provide a basis to grant the Debtor any relief from the Judgment, which the court found was properly entered. Although the Wayne County Circuit Court did not find that there was any basis to set aside the Judgment, it did observe at the hearing that Flagstar's separation of the Debtor's Guaranty from the Promissory Note should not enable Flagstar to obtain a double recovery, or to recover more than it was owed on the Promissory Note. No appeal was taken from the decision of the Wayne County Circuit Court to deny the Debtor's motion to set aside the Judgment.

AFT, as the holder of the Promissory Note, then proceeded to foreclose the Mortgage on the Michigan Avenue Property that secured the Promissory Note. On July 27, 2011, a foreclosure sale of the Michigan Avenue Property was conducted. AFT successfully bid $752,527.40 and obtained a sheriff's deed to the Michigan Avenue Property.

On November 8, 2011, the Debtor filed this Chapter 13 case. On January 25, 2012, Flagstar filed a proof of claim in the amount of $520,160.20. Flagstar's proof of claim states that the basis for its claim is “Breach of Guaranty.” An addendum attached to Flagstar's proof of claim also states that the proof of claim is based upon the Guaranty. The addendum contains a calculation showing the “total amount of the balance owing” on the Promissory Note in the amount of $520,160.20. Neither the proof of claim nor the addendum mention the Judgment.

On February 22, 2012, the Debtor filed an objection to Flagstar's proof of claim. The objection first argues that Flagstar does not hold the right to enforce the Guaranty because Flagstar sold the Michigan & Lonyo Loan to AFT. The objection next argues that in the event that Flagstar is the holder of a claim against the Debtor based upon the Guaranty, the amount of that claim is much less than the amount set forth in Flagstar's proof of claim because the Debtor is entitled to a credit against the Guaranty for the amount of AFT's bid at the foreclosure sale. Flagstar filed a response that argues that the AFT Agreement expressly excluded the Guaranty from the sale of the Michigan & Lonyo Loan to AFT and, therefore, Flagstar is the proper holder of the Guaranty and entitled to enforce it against the Debtor. Further, the response argues that the Debtor is not entitled to a credit on the Guaranty for the amount bid at the foreclosure sale by AFT, but is only entitled at most to a credit for the amount of the purchase price allocated by the AFT Agreement to the Michigan & Lonyo Loan.

On March 27, 2012, the Court held a preliminary hearing on the Debtor's objection to Flagstar's proof of claim. The Court required the Debtor and Flagstar to file briefs setting forth the law in support of their respective positions, set deadlines to file the briefs, and adjourned the hearing on the Debtor's objection to Flagstar's proof of claim to May 8, 2012. The Debtor and Flagstar each timely filed a brief. The Debtor's arguments in his brief were essentially unchanged, albeit more fully developed. Flagstar, on the other hand, raised several new arguments in its brief in addition to those that it previously made. First, although its proof of claim states that it is based on “Breach of Guaranty,” Flagstar now argues that it is the Judgment that is the basis for and is dispositive of Flagstar's proof of claim. Flagstar's second new argument is that because the Wayne County Circuit Court denied the Debtor's motion to vacate the Judgment, the Debtor is barred by principles of collateral estoppel and the application of the Rooker–Feldman doctrine from asserting that the Guaranty could not be separated from the Promissory Note. Flagstar's third new argument asserts that the Debtor is estopped from objecting that Flagstar does not hold any claim because the Debtor listed Flagstar as a creditor on his schedules. Flagstar's final new argument is that the Debtor is not entitled to any credit against the Judgment because the Debtor has not made any payments on the Judgment. At the conclusion of the hearing, the Court took the matter under advisement. The Debtor's objection to Flagstar's proof of claim is now ripe for decision.

The Claims Allowance Process

Section 502 of the Bankruptcy Code governs the allowance of claims in a bankruptcy case. Under § 502(a), a proof of claim that is filed under § 501 of the Bankruptcy Code is deemed allowed, unless a party in interest objects. Section 502(b) provides that if an objection to a claim is made, the court shall, after notice and a hearing, determine the amount of the claim, and shall allow such claim in such amount except to the extent that one of the grounds for disallowance...