In re McFadden, C/A No. 10-03899-DD

• Decision Date: 09 May 2012
• Docket Number: C/A No. 10-03899-DD
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re: Celestine McFadden, Debtor.

IN RE: Celestine McFadden, Debtor.

C/A No. 10-03899-DD

UNITED STATES BANKRUPTCY COURT DISTRICT OF SOUTH CAROLINA

Dated: May 9, 2012

Chapter 7
ORDER

This matter is before the Court on a Motion for Relief from Stay ("Motion") filed by Saxon Mortgage Services, Inc. as servicer for The Bank of New York Mellon as successor indenture Trustee under NovaStar Mortgage Funding Trust, Series 2006-1, its successors and/or assigns ("Saxon") on October 27, 2010 and an Objection to Claim ("Claim Objection") of the Bank of New York Mellon, as successor indenture Trustee under NovaStar Mortgage Funding Trust, Series 2006-1 ("BONYM"), filed by John R. Cantrell, Special Counsel for the chapter 7 trustee, Kevin Campbell ("Trustee"), on March 10, 2011. Trustee also filed a Motion in Limine on December 19, 2011 with regard to certain record custodian affidavits on Saxon's pre-trial exhibit list.¹ Trustee responded to Saxon's Motion on January 18, 2011. BONYM responded to Trustee's Claim Objection on May 11, 2011 and replied to Trustee's Objection to Saxon's Motion on the same date. After a lengthy discovery period, a hearing on all matters was held on December 21, 2011, January 25, 2012, and February 17, 2012. At the conclusion of the hearings, the Court took several matters under advisement, including the admission of several exhibits offered by Saxon. The Court now issues this Order.

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FINDINGS OF FACT

Celestine McFadden ("Debtor") filed a chapter 13 petition on June 1, 2010. At that time, she was represented by Mr. Cantrell. A chapter 13 plan was filed on June 15, 2010, which contained statements that the debt to BONYM was listed as disputed in Debtor's schedules and that Debtor reserved the right to dispute the debt "both as to amount and validity if creditor is unable to prove amounts due or legal ownership of this loan." Debtor also filed an Objection to Claim of BONYM on August 9, 2010. An objection to confirmation of the chapter 13 plan was filed by BONYM on July 12, 2010, and a joint statement of dispute was filed on August 16, 2010. A status hearing was held on August 26, 2010, at which Judge Waites ordered Mr. Cantrell to file an adversary proceeding contesting BONYM's interest by September 3, 2010, the end of the following week. On September 3, Mr. Cantrell filed correspondence with the Court, indicating that while he understood he was supposed to have filed an adversary complaint by that date, Debtor had not yet retained him to do so. The correspondence also indicated that Debtor had experienced a significant loss in income and that Mr. Cantrell and Debtor were evaluating her options. On September 14, 2010, Mr. Cantrell filed a Motion to Approve Retainer Agreement and Motion for Expedited Hearing, requesting that the Court approve a retainer agreement for his compensation on an expedited basis. The Motion to Approve Retainer Agreement was denied by Judge Waites on September 16, 2010. During the chapter 13 case, Mr. Cantrell, on behalf of Debtor, raised several of the same arguments being presented in the instant proceedings. After an apparent breakdown in the attorney-client relationship, Mr. Cantrell was relieved as counsel for Debtor on October 5, 2010. Debtor's case was converted to chapter 7 on October 12, 2010, and Debtor proceeded pro se.

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Kevin Campbell, the chapter 7 trustee ("Trustee"), filed an Application to Employ John R. Cantrell as Special Counsel on January 7, 2011, and Mr. Cantrell's employment was authorized on January 26, 2011. Mr. Cantrell filed the Trustee's Objection to Saxon's Motion eight days prior to the authorization of his employment by the Court and filed the Trustee's Claim Objection over a month after the Trustee's Application to Employ Special Counsel was granted.

In December 2005, Debtor obtained a loan from Loanleaders of America, Inc. ("Loanleaders") in the amount of $189,000 in order to purchase a home in Goose Creek, South Carolina and executed a note and mortgage, granting Loanleaders a security interest in the home. On December 26, 2005, Loanleaders transferred the note to Novastar Mortgage, Inc. ("Novastar"), as evidenced by an allonge attached to the note and dated December 26, 2005. Pursuant to a Sale and Servicing Agreement dated April 1, 2006, the mortgage was pooled with numerous other mortgages and deposited into a trust ("Trust"), with JPMorgan Chase Bank, NA ("JPMorgan Chase") as indenture trustee and US Bank as custodian. At that time, Novastar was the servicer of the mortgage. In October 2006, JPMorgan Chase, pursuant to a Resignation and Assumption Agreement, transferred its trust business to The Bank of New York ("BONY")² ; thereafter, BONY was the indenture trustee for the Trust. In October 2007, Novastar sold its servicing rights to Saxon Mortgage Services, Inc. ("Saxon"), and Saxon became the servicer for all mortgages in the Trust.

The pleadings filed by Trustee's counsel are lengthy, but essentially Trustee's counsel argues that for a variety of reasons, BONYM lacked standing to file a proof of claim and Saxon lacked standing to pursue a Motion for Relief from Stay. At the hearings, Trustee's counsel

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made evidentiary objections to almost every exhibit Saxon attempted to introduce. The Court's rulings on Trustee's counsel's evidentiary objections, including those objections set forth in his Motion in Limine, as well as its findings with respect to Saxon's Motion and Trustee's Claim Objection, are set forth below.

CONCLUSIONS OF LAW

I. BONYM's Proof of Claim

BONYM filed its first proof of claim on June 17, 2010, and amended the proof of claim twice, on June 23, 2010 and August 31, 2010. The original proof of claim, filed on June 17, 2010, indicated that the arrearage owed was $46,820.43 and the total amount of the secured claim was $228,980.77. Attached to the proof of claim are the initial note and mortgage signed by Debtor on December 26, 2005 along with an attached prepayment addendum and adjustable rate and planned unit development riders, a certification of recordation from the Berkeley County Register of Deeds, and Debtor's chapter 13 plan. No allonges were attached to the note. The first amended proof of claim, filed on June 23, 2010, stated the same arrearage and total secured claim amounts. Attached to the first amended proof of claim are two invoices from Saxon's previous counsel relating to the foreclosure of Debtor's residence. The final proof of claim, filed on August 31, 2010, provided an arrearage amount of $50,133.28 and a total secured claim amount of $228,630.62. Attached to the second amended proof of claim are Debtor's chapter 13 plan, the note and mortgage Debtor signed on December 26, 2005, along with a prepayment addendum and adjustable rate and planned unit development riders and an allonge signed without recourse by Loanleaders and payable to the Order of Novastar Mortgage, an assignment of mortgage from Mortgage Electronic Registration Systems, Inc. ("MERS") as

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nominee for Loanleaders to BONYM dated February 17, 2009, invoices from Saxon's previous counsel, and an escrow analysis spreadsheet.

BONYM's proofs of claim were flawed. BONYM amended its proof of claim three times over a period of almost three months, but not once did it attach documentation sufficient to support its proof of claim. For example, the documentation attached to the proof of claim included copies of the note and mortgage made prior to the indorsements that were established at trial. BONYM's repeated failure to attach sufficient supporting documentation to its proof of claim evidences BONYM's poor document practices. Prior counsel for BONYM merely printed copies of electronic images of the note and mortgage that were maintained in its document retrieval system and not updated as indorsements were added. These practices opened the door for Trustee's objections. While, as discussed at length below, BONYM presented evidence at trial and established its claim, the long delays and squandered time resulting from these practices rest squarely with former counsel for BONYM.

II. Trustee's Duties

Trustee and his counsel are complicit in the delay, and their strategy and purpose have been lost on the Court. The Court first reviews a chapter 7 trustee's duties regarding claims and explores Trustee's counsel's compliance with the scheduling orders entered by the Court in this case. 11 U.S.C. § 704(a) sets forth the duties of a trustee in a chapter 7 case and provides, in relevant part, "The trustee shall - (5) if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper." 11 U.S.C. § 704(a)(5) (emphasis added). "A trustee, while having the right to investigate claims without court authority, must exercise this right judiciously. The trustee cannot engage in fishing expeditions when no purpose would be served." In re Riverside-Linden Inv. Co., 85 B.R. 107, 111 (Bankr. S.D. Cal.

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1988) (referring to Fed. R. Bankr. P. 1001, which states, "These rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding."), aff'd, 99 B.R. 439 (B.A.P. 9th Cir. 1989), aff'd, 925 F.2d 320 (9th Cir. 1991). See also In re Acadiana Elec. Serv., Inc., 66 B.R. 164, 168 (Bankr. W.D. La. 1986) ("The trustee's duty is to recover money to distribute to creditors. He is not concerned with abstract concepts of justice when there is no possibility of recovery for the estate.").

The procedural history of this litigation is tortured. The parties were first instructed by the Court to submit an exhibit and witness list and a stipulation of facts not in dispute in the Court's initial Order Setting Discovery Schedule entered January 20, 2011. A consent order extending the discovery schedule was entered on April 14, 2011, which extended the deadline for filing witness and exhibit lists. That Order, signed by both parties, states that a joint pretrial brief was due on July 11, 2011 and provides, "The...