In re Morgan

• Decision Date: 03 May 2019
• Docket Number: CASE NO. 16-68329- LRC
• Citation: 600 B.R. 725
• Parties: IN RE: Michael Lee MORGAN, Angela Ellen Morgan, Debtors.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

600 B.R. 725

IN RE: Michael Lee MORGAN, Angela Ellen Morgan, Debtors.

CASE NO. 16-68329- LRC

United States Bankruptcy Court, N.D. Georgia, Atlanta Division.

Signed May 3, 2019

Michael Lee Morgan, pro se

Edwin K. Palmer, Decatur, GA, William Russell Patterson, Jr., Ragsdale Beals Seigler Patterson & Gray, Atlanta, GA, for Trustee

ORDER GRANTING TRUSTEE'S MOTION TO APPROVE SETTLEMENT

Lisa Ritchey Craig, U.S. Bankruptcy Court Judge

Before the Court is the Motion to Settle and Compromise Various Controversies and to Transfer the Estate's Interest in Real Property (the "Motion"), filed by Edwin K. Palmer ("Trustee"), as Chapter 7 trustee for the bankruptcy estate (the "Estate") of Michael Lee Morgan and Angela Morgan (the "Debtors"). (Doc. 83). The Court held evidentiary hearings on the Motion on December 20, 2018, and January 16, 2019. As the Motion concerns the administration of the Estate, the Court has subject matter jurisdiction over this matter, and this matter is a core proceeding. See 28 U.S.C. §§ 1334, 157(a), 157(b)(2)(A).

I. BACKGROUND

At the heart of this dispute are the interests in Debtors' residence located at 110 Addison Court, Roswell, Georgia 30097 (the "Property"). The Property was originally owned by Frankie and Herbert Marshall. (Doc. 48, at 11). In 2003, the Marshalls conveyed the Property to themselves and their daughter, Debtor Angela Ellen Morgan, as joint tenants. (Id. at 10). That same year, the Marshalls and Mrs. Morgan entered into an agreement with Countrywide Bank ("Countrywide") whereby Mrs. Morgan would be responsible for monthly mortgage payments between $ 2,200 and $ 3,000. (Id. )Months later, Mr. Marshall received an advertisement from IndyMac Bank F.S.B. ("IndyMac"), offering to refinance the Property under better terms than those offered by Countrywide. (Id. ) On November 25, 2003, the Marshalls executed a security deed with IndyMac (the "Marshall Security Deed"). Due to an apparent oversight by IndyMac, Mrs. Morgan was not made a party to the Marshall Security Deed. However, Mrs. Morgan was apparently aware that her parents refinanced the Property and she began making payments to IndyMac. (Doc. 48, at 12).

On July 11, 2008, IndyMac was closed by the Office of Thrift Supervision and placed in receivership of the Federal Deposit Insurance Corporation ("FDIC"). (See FDIC, Failed Bank Information, Information for IndyMac, F.S.B., and IndyMac Federal Bank, F.S.B., Pasadena, CA, https://www.fdic.gov/bank/individual/failed/indymac.html#Loan%20Custo mers (last visited March 29, 2019)). The FDIC designated Deutsche Bank National Trust Company ("Deutsche") as attorney-in-fact for IndyMac, and on February 5, 2010, Deutsche purportedly assigned the Marshall Security Deed to itself.¹

Mrs. Morgan stopped making mortgage payments in 2008 and on March 6, 2012, Deutsche foreclosed on the Property. At that time, the Property was held by Mrs. Marshall and Mrs. Morgan as joint tenants.² Because Mrs. Morgan was not a party to the Marshall Security Deed, Deutsche only foreclosed on Mrs. Marshall's interest. In 2014, after Mrs. Marshall passed, Mrs. Morgan conveyed her interest in the Property to herself and to her husband, Debtor Michael Morgan, as joint tenants.

On April 7, 2015, Deutsche initiated an action in the Superior Court of Fulton County, Georgia (the "State Court Action"). (Doc. 48, at 6). Deutsche sought to have its lien equitably subrogated to the extent that IndyMac had paid Mrs. Morgan's liability on the note to Countrywide. Deutsche also alleged that it had "advanced at least $ 71,395 in property taxes and hazard insurance for protection of the Property" and was therefore entitled to an equitable lien. (Id. at 13). Debtors responded that the assignment from IndyMac to Deutsche was invalid and, therefore, Deutsche had no interest in the Property. On September 23, 2016, the state court entered a summary judgment order finding that Deutsche was not entitled to equitable subrogation.³ The state court also found that Debtors lacked standing to challenge the assignment from IndyMac to Deutsche. (Id. at 19). Because of an evidentiary error, the state court postponed addressing Deutsche's claim for an equitable lien based on taxes and insurance until trial. However, on October 13, 2016, before the court could hold a trial, Debtors filed for relief under Chapter 7 of the Bankruptcy Code and the State Court Action was stayed.

On September 14, 2017, the Trustee initiated an adversary proceeding to sell the Property free and clear of Deutsche's interest. (Adversary Proceeding No. 17-05239, Doc. 1 (the "Adversary Proceeding")). Deutsche filed an answer, raising a counterclaim for an equitable lien, which alleged that Deutsche had spent $ 90,075 on taxes, insurance, and homeowners' association dues. (Id. , Doc. 5, ¶¶ 8, 13).⁴

The Trustee and Deutsche now propose to settle their disputes in the State Court Action and the Adversary Proceeding (the "Settlement"). (Doc. 83). Under the terms of the Settlement, Deutsche will pay the Trustee $ 245,000; the Trustee will convey the Estate's half interest in the Property to Deutsche; Deutsche and the Trustee will voluntarily dismiss with prejudice the State Court Action and the Adversary Proceeding;⁵ and the Trustee will waive any claim the Estate has against Deutsche, Fidelity National Financial, Inc., and Monica K. Gilroy and the Gilroy Law Firm. (Doc. 83, at 4). Debtors oppose the Settlement and contend that the Trustee has failed to fully investigate the claims listed in Debtors' Schedules.

II. DISCUSSION

When deciding whether to approve a settlement, the bankruptcy court must consider:

(a) The probability of success in the litigation; (b) the difficulties, if any, to be encountered in the matter of collection; (c) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it; (d) the paramount interest of the creditors and a proper deference to their reasonable views in the premises.

Wallis v. Justice Oaks II, Ltd. (In re Justice Oaks II, Ltd.) , 898 F.2d 1544, 1549 (11th Cir. 1990) (quoting Martin v. Kane (In re A & C Prop.) , 784 F.2d 1377, 1381 (9th Cir. 1986) ). "Courts consider these factors to determine ‘the fairness, reasonableness and adequacy of a proposed settlement agreement.’ " Chira v. Saal (In re Chira) , 567 F.3d 1307, 1312–13 (11th Cir. 2009) (quoting Martin v. Kane (In re A & C Prop.) , 784 F.2d 1377, 1381 (9th Cir. 1986) ). The Supreme Court explained that:

[t]here can be no informed and independent judgment as to whether a proposed compromise is fair and equitable until the bankruptcy judge has apprised himself of all facts necessary for an intelligent and objective opinion of the probabilities of ultimate success should the claim be litigated. Further, the judge should form an educated estimate of the complexity, expense, and likely duration of such litigation, the possible difficulties of collecting on any judgment which might be obtained, and all other factors relevant to a full and fair assessment of the wisdom of the proposed compromise.

Protective Comm. for Indep. Stockholders of TMT Trailer Ferry v. Anderson , 390 U.S. 414, 424, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968) ; see also In re Vazquez , 325 B.R. 30, 36 (Bankr. S.D. Fla. 2005) ("The court is neither to ‘rubber stamp’ the trustee's proposals nor to substitute its judgment for the trustee's, but rather to canvass the issues and determine whether the settlement falls below the lowest point in the range of reasonableness." (internal quotation marks and citation omitted)).

A. Probability of Success on the Merits

Debtors insist that the Trustee should initiate a quiet title action challenging Deutsche's interest in the Property and pursue tort claims against Deutsche and other defendants. However, the Trustee is concerned that Debtors lack standing to challenge Deutsche's interest and that the tort claims listed in the Schedules are meritless. Furthermore, as the Trustee explained, the Settlement would protect the Estate from Deutsche's credible claim for an equitable lien against the Property.

1. Debtors' Potential Lack of Standing to Challenge Deutsche's Interest in the Property

Debtors allege that Deutsche did not have authority to assign the Marshall Security Deed from IndyMac to itself under the power of attorney granted to Deutsche by the FDIC. Accordingly, Debtors claim that Deutsche has no interest in the Property. The Trustee notes the existence of case law that holds that, even if an assignment of security deed is invalid, the borrower lacks standing to pursue such a claim because the borrower was neither a party to nor injured by the assignment. See Ames v. JP Morgan Chase Bank, N.A. , 298 Ga. 732, 783 S.E.2d 614 (2016) ; Timbes v. Deutche Bank Nat'l Tr. Co. for Am. Home Mortg. Inv. Tr. 2005-3 , 708 F.App'x 971, 975 (11th Cir. 2017) ; Haynes v. McCalla Raymer, LLC, 793 F.3d 1246, 1252-53 (11th Cir. 2015).

In a Chapter 7 case, the Trustee steps into the debtor's shoes for the purpose of collecting property for the bankruptcy estate, and as such may only pursue claims that could be brought by the debtor himself. See 11 U.S.C. § 541(a)(1) ; Stumpf v. Albracht , 982 F.2d 275, 277 (8th Cir. 1992) ; 5 COLLIER ON BANKRUPTCY ¶ 541.07 (Richard Levin & Henry J. Sommer eds., 16th ed.). Therefore, if Debtors' standing to challenge the assignment is doubtful, the Trustee's decision to settle that claim is reasonable.

The Georgia Supreme Court's analysis in Ames v. JP Morgan Chase Bank, N.A. , 298 Ga. 732, 783 S.E.2d 614 (2016) is instructive here. In Ames , JP Morgan Chase Bank, N.A. ("Chase") was appointed attorney-in-fact for the FDIC, the receiver for Washington Mutual Bank, F.A. ("WaMu"). Id. at 616. Acting as attorney-in-fact, Chase assigned any real estate interest held by WaMu to itself. Id. The Ameses, who had granted WaMu a security deed for their home, were informed that Chase was now their mortgagee and that their home was scheduled...