In re Lovato
| Decision Date | 04 August 2021 |
| Docket Number | No. 21-10144-j13,21-10144-j13 |
| Parties | In re: KATHRYN LOVATO, Debtor. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of New Mexico |
Creditor Real Property Financial, PSP ("RPF") seeks relief from the automatic stay under 11 U.S.C. §§ 362(d)(1) and 362(d)(4). See First Amended Motion for Relief from Automatic Stay ("Motion for Relief from Stay" - Doc. 40). The Court held a final evidentiary hearing on the Motion for Relief from Stay on June 4, 2021, heard counsel's closing arguments on June 22, 2021, and took the matter under advisement. Having considered the evidence and counsels' legal argument in light of the relevant case law, the Court finds and concludes that "cause" does not exist to grant relief from the automatic stay under § 362(d)(1), nor has RPF sufficiently demonstrated that Debtor's current bankruptcy filing is part of a scheme to hinder, delay, or defraud RPF involving multiple bankruptcy filings affecting the same real property warranting in rem stay relief under § 362(d)(4). The Court will, therefore, deny the Motion for Relief from Stay.
Debtor's residence is located at 3411 Calle Viejo in Santa Fe, New Mexico (the "Property"). The Property is encumbered by a first mortgage lien in the current amount of approximately $398,000.00. See Exhibit C. In 2007, Debtor obtained a home equity line of credit on the Property and signed a promissory note in the principal amount of $55,000.00 (the "Note"). See Exhibit 2. The Note is secured by a Line of Credit Mortgage on the Property, which is asecond lien on the Property. See Exhibit 3. RPF acquired the Note and Mortgage on the Property in 2015. See Exhibits 2 and 3; Testimony of Michelle Garbus.
Debtor has a second residential property located at 2924 Pueblo Jacona (the "Second Property"). Debtor treats the Second Property as an investment rental property. The Second Property is subject to a first and second mortgage. See Exhibit C.
Debtor filed her first bankruptcy case under chapter 7 of the bankruptcy code on June 18, 2015 as Case No. 15-11626-t7 (the "First Bankruptcy Case"). Debtor scheduled the Property in her First Bankruptcy Case with a value of $350,000.00. See Case No. 15-11626-ty, Doc. 1 - Schedule A. Debtor scheduled the Second Property in her First Bankruptcy Case with a value of $230,000.00 Id. Debtor's Schedule I filed in the First Bankruptcy Case reflects that on the petition date Debtor was not employed and that she received net rental income of $3,753.45 per month. See Case No. 15-11626-t7, Doc. 1 - Schedule I. Debtor anticipated a post-petition decrease in income, reporting that she had been approved for Social Security disability benefits of $768 per month but that her other income will be limited to $1,090 per month. Id. at item 13. Debtor received a chapter 7 discharge in the First Bankruptcy Case on December 15, 2015. Debtor's personal liability under the Note on the Property was discharged in the First Bankruptcy Case.
In 2016, after Debtor received a discharge in the First Bankruptcy Case, Debtor and RPF entered into a Loan Modification Agreement (the "First Loan Modification" - Exhibit 5) to restructure the loan and allow Debtor to stay in the Property. At that time, the unpaid principal balance due under the Note and Mortgage was $23,984.25. See Exhibit 5. To obtain the FirstLoan Modification, Debtor completed a Borrower Financial Statement ("First BFS"). See Exhibit 4. The First BFS has a space to identify "Other Real Estate" and "Rents Received." Id. Debtor wrote "-0-" in the spaces for those items and did not disclose the Second Property. Id. Debtor testified that she did not disclose the Second Property because at some point she had a buyer for the Second Property, but that she later changed her mind and retained the Second Property. The timing of the possible sale of the Second Property is not clear from Debtor's testimony. Debtor did not make any payments under the First Loan Modification. Debtor suffered from some mental health issues following the death of one of her daughters. After entering into to First Loan Modification Debtor lost her job, started receiving disability benefits, and went to counseling to help cope with her depression.
RPF filed a complaint to foreclose its interest in the Property in 2016 (the "Foreclosure Action"). After initiating the Foreclosure Action, RPF continued to work with the Debtor in an effort to allow Debtor to stay in her home. Debtor and RPF entered into a second Loan Modification Agreement (the "Second Loan Modification" - Exhibit 7) on March 14, 2018. At that time the unpaid principal balance due under the Note and Mortgage was $32,641.50. Id. The Second Loan Modification recites that the loan has been in default due to non-payment of installment payments from June 15, 2016 to March 14, 2018. Debtor completed another Borrower Financial Statement ("Second BFS") in connection with the Second Loan Modification. See Exhibit 6. Debtor did not disclose the Second Property or any rents received from the Second Property on the Second BFS. The spaces on the Second BFS for "Other Real Estate" and "Rents Received" are blank. Id. Debtor and RPF entered into the Second Loan Modification so that Debtor could stay in the Property. In negotiating the Second LoanModification, Debtor and RPF agreed that Debtor's daughter, who resided in the Property, would start paying rent to Debtor which would help Debtor afford to make the payments under the Second Loan Modification. Debtor defaulted under the Second Loan Modification after making one payment. See Exhibit 8.
A trial in the Foreclosure Action was scheduled for February 10, 2021.
On February 9, 2021, the day before the scheduled foreclosure trial, Debtor filed the current bankruptcy case under chapter 13 of the Bankruptcy Code (the "Second Bankruptcy Case"). The trial in the Foreclosure Action did not occur because Debtor filed the Second Bankruptcy Case. Debtor did not appear at the scheduled foreclosure trial. Debtor testified that she did not know about the scheduled foreclosure trial but that she filed the Second Bankruptcy Case to try to save her home and to keep her business going. Debtor runs a childcare service from her home and filed the Second Bankruptcy Case in an effort to keep her home and to keep her business going. Schedule I filed in the Second Bankruptcy Case shows that she is self-employed as a home childcare provider, and that she receives combined net rental income and income from operating a business of $4,050.00 per month plus monthly social security benefits of $885.00. See Doc. 1.
Debtor scheduled the Property in the Second Bankruptcy Case with a value of $390,000.00. See Exhibit C. Debtor testified that she purchased the Property for $412,000.00, and that she had some real estate agents look at the Property who advised her she would not be able to sell the Property now for what she purchased it because of the KITEC plumbing. Debtor scheduled the Second Property in the Second Bankruptcy Case with a value of $350,000.00. See Exhibit C. Debtor scheduled RPF's claim in the amount of $37,147.31. See Exhibit D. RPF fileda proof of claim asserting a secured claim against the Property in the amount of $75,855.15. See Claim No. 9-1. A large portion of the claim is attributable to attorney's fees incurred by RPF. Id.
Debtor filed a chapter 13 plan (the "Plan") with the petition. See Doc. 5. Debtor's Plan values the Property at $390,000.00 and proposes to strip off RPF's second mortgage as wholly unsecured. Id.
Debtor obtained homeowner's insurance on the Property but did not name RPF as an additional insured. See Exhibit 10. The policy initially insured the Property for $533,000.00, was then reduced to $317,000.00, and ultimately cancelled by the customer. Id. A second policy that Debtor obtained insured the Property for $382,000.00, but that policy was cancelled by the insurance company. See Exhibit 11. RPF received notice of the cancellation and, as a result, obtained forced-place insurance on the Property to protect its interest. See Exhibit 12. Debtor testified that she had difficulty obtaining insurance because the Property has KITEC plumbing and that the insurance company dropped her because KITEC plumbing was too great a risk.
RPF's appraiser appraised the Property as of February 9, 2021 with a value of $505,000.00. See Exhibit 1, p. 4. The appraiser made an "extraordinary assumption" that the Property is "free of unknown defects such as KITEC plumbing etc." See Exhibit 1, p. 18. In fact, the Property has KITEC plumbing, which would have a material negative affect on its value. Debtor has already spent at least $10,000.00 in plumbing repairs to the Property caused by defective pipes in just one area of the Property. Debtor reports that plumbing professionals who have done repairs on the Property recommend replacing all KITEC pipes in the Property. The evidence before the Court is insufficient for the Court to determine the value of the Property.
Under § 362(d)(1), relief from the automatic stay may be granted "for cause, including the lack of adequate protection of an interest in property . . . ." RPF did not assert in its Motion that it lacks adequate protection.2 To the contrary, RPF believes the Property is worth much more than Debtor claims, so that RPF's second lien position is fully secured.
RPF contends that "cause" exists to grant relief from the automatic stay based on Debtor's alleged bad faith in filing this chapter 13 case on the eve of the foreclosure trial. RPF argues further that Debtor's valuation of the Property in the Second Bankruptcy Case evidences Debtor's bad faith in filing her chapter 13 case....
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