In re Motta

• Decision Date: 15 January 2010
• Docket Number: Bankruptcy No. 08-31361-HJB.,Adversary No. 08-3041-HJB.
• Citation: 423 B.R. 393
• Parties: In re Daniel MOTTA, Annelee Motta, Debtors. David W. Ostrander, Chapter 7 Trustee, Plaintiff, v. Antonio J. Andre, Phyllis J. Andre, Daniel Motta, and Annelee Motta, Defendants.
• Court: U.S. Bankruptcy Court — District of Massachusetts

423 B.R. 393

In re Daniel MOTTA, Annelee Motta, Debtors David W. Ostrander, Chapter 7 Trustee, Plaintiff, v. Antonio J. Andre, Phyllis J. Andre, Daniel Motta, and Annelee Motta, Defendants.

Bankruptcy No. 08-31361-HJB.

Adversary No. 08-3041-HJB.

United States Bankruptcy Court, D. Massachusetts, Western Division.

January 15, 2010.

COPYRIGHT MATERIAL OMITTED

Elizabeth D. Katz, Ostrander Law Office, Northampton, MA, for Plaintiff.

Warren R. Thompson, Law Office of Warren R. Thompson, Palmer, MA, for Defendants.

Daniel Motta, Ludlow, MA, pro se.

Annelee Motta, Ludlow, MA, pro se.

MEMORANDUM OF DECISION

HENRY J. BOROFF, Bankruptcy Judge.

Before the Court is a Motion for Summary Judgment (the "Summary Judgment Motion") filed by David Ostrander, the Chapter 7 trustee (the "Trustee") in the underlying bankruptcy case filed by Daniel and Annelee Motta (the "Debtors") and the plaintiff in the present adversary proceeding filed against the Debtors and Antonio and Phyllis Andre (the "Andres"). Through his adversary proceeding, the Trustee seeks, inter alia, a ruling that the Andres' purported security interest in the Debtors' real property may be avoided by the Trustee pursuant to § 544(a)(3) of the United States Bankruptcy Code¹ and preserved for the benefit of the Debtors' bankruptcy estate under § 551. The Summary Judgment Motion requires the Court to determine whether a note and unrecorded mortgage signed by the Debtors in favor of the Andres discharged a prior note and recorded mortgage, rendering both mortgages either avoidable by or unenforceable against the Trustee.

I. FACTS AND TRAVEL OF THE CASE

In 1997, the Debtors obtained a loan from the Andres to purchase their primary residence located in Ludlow, Massachusetts (the "Property"). That loan was memorialized in a $100,000 note signed by the Debtors and the Andres on October 20, 1997 (the "First Note").² To secure payment of the note, a mortgage on the Property was also executed in favor of the Andres (the "First Mortgage"). The First Mortgage was properly recorded in the Hampden County Registry of Deeds (the "Registry"). Under the terms of the First Note and Mortgage, the Debtors were obligated to the Andres in the amount of $100,000 plus annual interest at a rate of 7 percent. The Debtors were required to pay under the First Note the sum of $1,000 per month for ten years, with a $28,881.33 balloon payment due at the end of that ten-year period.

From November 1997 through August 2006, the Debtors remained current on their payments; thereafter, they defaulted on the First Note. Following the Andres' formal demands for payment and the commencement of foreclosure proceedings in August 2007, the Debtors made a lumpsum payment to the Andres to become current on the monthly payments due under the First Note. The Debtors indicated to the Andres, however, that they would not be able to make the balloon payment due at the end of October.

According to Antonio's deposition testimony,³ he was reluctant to extend the time for payment of the remainder owed on the First Note, and told the Debtors that they would have to find financing elsewhere in order to make the balloon payment. Antonio Andre Dep. 19:4-19:13, July 1, 2009. Ultimately, however, the Andres agreed to accept a new note that would spread payment of the balance of the First Note over approximately three years (the "Second Note"). The principal balance under the Second Note was $29,364.50—representing the amount of the balloon payment due under the First Note plus interest accrued through January 2008, when the Debtors' first payment under the Second Note was due. The Second Note also provided for a higher annual interest rate (10 percent) and required the Debtors to make 34 monthly payments of $995.35. In conjunction with the Second Note, the Debtors and the Andres also executed a Second Mortgage, which referred to and recited the terms contained within the Second Note. The Second Mortgage was not recorded in the Registry.

At his deposition, Antonio testified that an attorney hired by the Debtors ("Attorney Graham") prepared the Second Note and Mortgage. Antonio Dep. 22:8-12.⁴ According to Antonio, he told Attorney Graham that he would like to have the Second Mortgage recorded, but was told by her that "it doesn't have to be recorded, it's recorded already." Antonio Dep. 23:15-22. He further testified that a release of the First Mortgage was not drafted and that he never told the Debtors such a release would be recorded, because, he said, it "would be kind of foolish to sign a release if it was not paid up." Antonio Dep. 23:9-13; 23:23-24:10; 44:9-12.

On September 19, 2008, the Debtors filed a voluntary petition (the "Petition") under Chapter 7 of the Bankruptcy Code. On Schedule A-Real Property, filed in connection with the Petition, the Debtors disclosed their ownership interest in the Property, estimating its fair market value at $200,000. On Schedule D-Secured Creditors, the Debtors listed the Andres as creditors holding a $45,856 claim secured by a mortgage on the Property.

On October 9, 2008 the Andres filed a proof of claim (the "Proof of Claim") in the Debtors' bankruptcy case, asserting a secured claim against the Debtors in the amount of $20,754.60. In support, the Andres attached a copy of the Second Note and Mortgage to the Proof of Claim. At the October 16, 2008 meeting of creditors held pursuant to § 341 of the Code (the "341 Meeting"), the Trustee questioned the Debtors regarding the debt owed to the Andres and learned for the first time that there had been a prior note and mortgage. In the Complaint, the Trustee says the Debtors testified at the 341 Meeting that Antonio told them the First Mortgage would be "removed" and the Second Mortgage recorded. Compl. ¶ 18.

Thereafter, the Trustee discovered that the First Mortgage remained on record at the Registry and the Second Mortgage was never recorded. On December 2, 2008, he filed the present adversary against the Debtors and the Andres. The Andres, but not the Debtors, filed an answer to the Complaint, and default has since entered against the Debtors. On September 29, 2009, the Trustee filed his Summary Judgment Motion, to which the Andres' objected. After a hearing on the Summary Judgment Motion, the Court took the matter under advisement.

II. POSITIONS OF THE PARTIES

Through Count I of the Complaint and in his Summary Judgment Motion, the Trustee seeks avoidance of the Second Mortgage and preservation of the mortgage for the benefit of the Debtors' bankruptcy estate, pursuant to §§ 544(a) and 551 of the Bankruptcy Code.⁵ The Trustee argues that the Second Mortgage is voidable as an unrecorded security interest in the Property and further maintains that the First Note and Mortgage are unenforceable, as the Second Note and Mortgage operated as a novation of the Debtors' original obligation.

According to the Trustee, since the Second Mortgage was not recorded at the time the Petition was filed, it is avoidable under § 544(a) and preserved for the bankruptcy estate under § 551. Since under § 544(a)(3) of the Code, the Trustee is granted the status of a bona fide purchaser as of the commencement of the case and may avoid transfers that are invalid against such purchasers under relevant state law, and since under Massachusetts law, unrecorded mortgages are invalid against bona fide purchasers without knowledge of the mortgage, the Trustee says there are no disputes of material fact and the Second Mortgage must be avoided as a matter of law.

In addition, despite the fact that no release or discharge of the First Mortgage was recorded, the Trustee says that novation may be inferred from the parties' conduct. According to the Trustee, the very fact that the Andres signed the Second Note and Mortgage evidences their intent to extinguish the Debtors' obligations under the First Note and Mortgage. The Trustee also contends that the fact that the Andres attached the Second Note and Mortgage to their Proof of Claim demonstrates their belief that the Debtors' obligations under the First Note and Mortgage were discharged.

The Andres do not take issue with the contention that an unrecorded mortgage is unenforceable against a bona fide purchaser without knowledge and may be avoided by a bankruptcy trustee under § 544(a). Instead, they maintain that the Trustee's argument fails because the First Mortgage, which remains of record, was never discharged. The Andres say that the Trustee has failed to adequately demonstrate that the Andres ever intended the Second Note and Mortgage to discharge the Debtors' obligations under the First Note and Mortgage. Thus, they argue, there could not have been a novation, because there was never an agreement that the First Note and Mortgage were satisfied. The Andres interpret Massachusetts case law, primarily as articulated in Pomroy v. Rice, 33 Mass. 22, 16 Pick. 22 (1834), Financial Acceptance Corp. v. Garvey, 380 N.E.2d 1332, 6 Mass.App.Ct. 610 (1978), and Piea Realty Co. v. Papuzynski, 172 N.E.2d 841, 342 Mass. 240 (1961), as providing that the execution of a new note and mortgage does not constitute payment of the original note and discharge the original mortgage when the underlying debt has not been paid. Because the Debtors never paid the underlying obligation in full, the Andres say the First Mortgage has not been discharged and remains as security for the amount due under the Second Note.

In response, the Trustee says that the Financial Acceptance and Piea Realty cases are factually distinguishable. The Trustee argues that the court's holding in Financial Acceptance relied on the presence of a "dragnet" clause in the mortgage at issue there, a provision intended to secure payment of present and future obligations. Since the First Mortgage does not contain a similar clause, the Trustee says it cannot secure the subsequent obligations incurred by the Debtors when they signed the Second Note. Fur...