In re Larkin

• Decision Date: 30 March 2012
• Docket Number: No. 11–29628–EPK.,11–29628–EPK.
• Citation: 468 B.R. 431
• Parties: In re Lynne Ann LARKIN, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of Florida

468 B.R. 431

In re Lynne Ann LARKIN, Debtor.

No. 11–29628–EPK.

United States Bankruptcy Court, S.D. Florida,West Palm Beach Division.

March 30, 2012.

Barry S. Balmuth, Esq., West Palm Beach, FL, for Debtor.

Michael R. Bakst, West Palm Beach, FL, for Trustee.

Office of the U.S. Trustee, Miami, FL.

ORDER DENYING MOTION TO APPROVE STIPULATION TO COMPROMISE CONTROVERSY

ERIK P. KIMBALL, Bankruptcy Judge.

In this case, the chapter 7 trustee seeks an order approving a settlement with the mortgage lender holding a lien on the debtor's homestead. Under the proposed settlement, the bankruptcy estate would receive $10,000 and the estate would waive not only the counterclaim brought by the debtor against the lender in the lender's pre-petition foreclosure action but all of the debtor's defenses raised in that foreclosure action. The trustee and mortgage lender argue that the debtor's defenses are property of the estate and may be waived by the trustee through the proposed settlement, thereby precluding the debtor from raising the defenses in the foreclosure action. The debtor argues that her defenses are not property of the estate and that the trustee cannot waive them on her behalf. The debtor also argues, belatedly, that her counterclaim against the lender is a component of her homestead and is itself exempt from administration. As more fully discussed below, the Court rules that the debtor's counterclaim against the lender is property of the estate, not exempt from administration in this case, and may be settled by the trustee, but that the debtor's defenses may not be waived by the trustee on her behalf, and so the proposed settlement between the trustee and the mortgage lender will be disapproved.

This matter came before the Court upon the Motion to Approve Stipulation to Compromise Controversy [ECF No. 43] (the “Motion”) filed by chapter 7 trustee Michael R. Bakst (the “Trustee”) and the Response/Partial Objection to Trustee's Motion to Approve Stipulation to Compromise Controversy with Wells Fargo [ECF No. 46] (the “Objection”) filed by Lynne Ann Larkin (the “Debtor”). The Trustee seeks approval of the Stipulation to Compromise Controversy (the “Stipulation”) entered into by the Trustee and Wells Fargo Bank, N.A. (“Wells Fargo”), attached to the Motion. Following a January 19, 2012 hearing on the Motion, the Court entered its Order Setting Briefing Deadline [ECF No. 70] and its Order Granting Debtor's Motion to Extend Time for the Debtor to Submit Brief [ECF No. 83]. Wells Fargo filed a brief [ECF No. 85] which was joined in by the Trustee [ECF No. 87]. The Debtor filed an initial brief [ECF No. 89] and an amended brief [ECF No. 91].

The Court considered the Motion, the Objection, the briefs filed by the parties, and the arguments advanced by counsel for the Trustee, Wells Fargo and the Debtor at the hearing.

In July of 2010, Wells Fargo commenced a foreclosure action against the Debtor in the Circuit Court of the Nineteenth Judicial Circuit in and for Indian River County, Florida styled Wells Fargo Bank, N.A., Successor by Merger to Wells Fargo Home Mortgage, Inc. v. Lynne A. Larkin, et al., Case No. 31–2010–CA–073527 (the “State Court Action”). In response, the Debtor filed her Answer and Counterclaim [ECF No. 48–1] in which she raises numerous defenses (the “Defenses”) and a counterclaim (the “Counterclaim”) against Wells Fargo. The Counterclaim seeks unspecified damages in excess of $15,000.00.

On July 15, 2011, the Debtor filed a voluntary petition commencing the above-captioned chapter 7 case. The Debtor listed the Counterclaim as an asset on her Schedule B and listed her home (the “Homestead Property”), the subject of the State Court Action, as exempt pursuant to 11 U.S.C. § 522(b)(3) and Art. X, § 4(a)(1), Fla. Const.

The Trustee seeks approval of the Stipulation, which presents a complete settlement of the State Court Action. Under the Stipulation, the bankruptcy estate would receive $10,000 and the estate would waive the Defenses and the Counterclaim. The result is that Wells Fargo would be permitted to foreclose on the Debtor's Homestead Property and the Debtor would be left with no ability to respond in the State Court Action.

Paragraph 3 of the Stipulation states: “[The Trustee and Wells Fargo] have agreed to settle their dispute in connection with the said cause of action for the sum of ten thousand and no/100 ($10,000.00) (the ‘Settlement Amount’).” (emphasis in original). Paragraph 6 of the Stipulation states, in pertinent part:

[I]n consideration for the settlement herein outlined ... the Trustee releases, acquits and forever discharges Wells Fargo ... from all claims, counterclaims, avoidance actions, demands, debts, damages, agreement covenants, suits contracts, obligations, liabilities, accounts, offsets, defenses, rights, actions, and causes of action ... relating in any way to any defenses or claims made by the Debtor ... in the [State Court Action].

(emphasis supplied).

In her initial Objection, the Debtor objected to the Motion only to the extent the Trustee seeks approval of Paragraph 6 of the Stipulation, and then only to the extent the Stipulation waives “any defenses available to the Debtor in the [State Court Action] ... which do not seek monetary relief and only seek a denial of foreclosure.” The Debtor stated in her Objection that “[t]o the extent the Stipulation proposes to settle the counterclaim seeking money damages to the mortgage foreclosure brought by WELLS FARGO, Debtor has no objection.” In the Objection, the Debtor argues that the Defenses are not property of the bankruptcy estate and thus cannot be waived by the Trustee. In her brief, the Debtor argues for the first time that the Counterclaim is itself an exempt asset and that the Trustee's compromise and waiver of the Debtor's Defenses and the Counterclaim constitutes unlawful conversion of her Homestead Property.

Wells Fargo and the Trustee contend, pursuant to sections ¹ 541(a)(1) and 558, that the Debtor's rights in the State Court Action, including the Defenses and the Counterclaim, are property of the bankruptcy estate and that the Trustee may waive or otherwise settle the Defenses and the Counterclaim in a manner binding on the Debtor. Wells Fargo and the Trustee also argue that the Defenses are “more in the nature of counterclaims that the state court can treat as such, and that the Trustee can settle without question.”

The commencement of a bankruptcy case creates an estate comprising substantially all legal and equitable interests of the debtor in property as of the petition date. 11 U.S.C. § 541(a)(1). Pursuant to section 704(a)(1), the chapter 7 trustee serves to “collect and reduce to money the property of the estate” for distribution to creditors under section 726. “Generally speaking, a pre-petition cause of action is the property of the Chapter 7 bankruptcy estate, and only the trustee in bankruptcy has standing to pursue it.” Parker v. Wendy's Int'l, Inc., 365 F.3d 1268,1272 (11th Cir.2004) (citations omitted). As with other pre-petition claims, a debtor's pre-petition counterclaims are property of the estate. In re Sims, 2009 WL 4255555, at *2 (Bankr.D.Kan. Nov 25, 2009). Such counterclaims remain property of the estate, and the trustee has exclusive standing to pursue them, unless abandoned pursuant to section 554.² In re Sims, 2009 WL 4255555 at *2.

Wells Fargo and the Trustee cite two decisions and a Bankruptcy Code provision to support their contention that a debtor's pre-petition defenses are property of the bankruptcy estate: Pahiakos v. Martin, 957 So.2d 74 (Fla. 4th DCA 2007); Martin v. Pahiakos, 490 F.3d 1272 (11th Cir.2007); and section 558. The decisions of the Florida 4th District Court of Appeal and the 11th Circuit Court of Appeals (the “Martin Cases”), which involve the same parties, are distinguishable from the instant case. The debtor in the Martin Cases was a defendant in state court litigation who defaulted, resulting in entry of a pre-petition default judgment. Pahiakos v. Martin, 957 So.2d at 75. Subsequently, the debtor filed a motion in the state court to quash service of process and vacate the default judgment. Martin v. Pahiakos, 490 F.3d at 1274. After the debtor filed for bankruptcy protection, the trustee and the judgment creditor entered into a settlement agreement providing that the debtor's defenses in the state court litigation were property of the estate pursuant to section 541(a)(1). Pahiakos v. Martin, 957 So.2d at 75. As part of the settlement, the trustee waived the debtor's sufficiency of process defense. Martin v. Pahiakos, 490 F.3d at 1274. The debtor subsequently filed a motion in state court for relief from the default judgment, again arguing that service of process was not sufficient. Concurrently, the judgment creditor sought an order from the bankruptcy court enjoining the debtor from proceeding in the state court action. Id. at 1275. In reversing an order granting the debtor relief from the default judgment, the Florida 4th District Court of Appeal held that the debtor's defenses were property of the estate and were waived by the trustee. Pahiakos v. Martin, 957 So.2d at 76. The 11th Circuit Court of Appeals ruled that the debtor's defenses were waived by the trustee and that the debtor was barred by the doctrine of res judicata from re-litigating this issue. Martin v. Pahiakos, 490 F.3d at 1277. Importantly, the Martin Cases are premised on the fact that the bankruptcy court approved the settlement agreement, which stipulated that the debtor's defenses were property of the estate, after notice to the debtor and the debtor failed to object. See Pahiakos v. Martin, 957 So.2d at 76; Martin v. Pahiakos, 490 F.3d 1272. Thus, the Martin Cases stand for the narrow proposition that a debtor, properly noticed, who fails to object to a settlement agreement entered into by the trustee that waives his pre-petition defenses, which settlement...