In re Ronald G. Anderson And Sandra M. Anderson, 11–22650.

• Decision Date: 29 September 2011
• Docket Number: No. 11–22650.,11–22650.
• Citation: 458 B.R. 494
• Parties: In re Ronald G. ANDERSON and Sandra M. Anderson, Debtors.
• Court: U.S. Bankruptcy Court — Eastern District of Wisconsin

458 B.R. 494

In re Ronald G. ANDERSON and Sandra M. Anderson, Debtors.

No. 11–22650.

United States Bankruptcy Court, E.D. Wisconsin.

Sept. 29, 2011.

Christine Wolk, Christine Wolk Attorney at Law, Oshkosh, WI, for Debtors.

AMENDED MEMORANDUM DECISION ON OBJECTION TO CONFIRMATION OF PLAN

MARGARET DEE McGARITY, Bankruptcy Judge.

The debtors filed a chapter 13 petition and plan on March 1, 2011. American Home Mortgage Servicing, Inc., as servicing agent for Federal National Mortgage Association, opposed confirmation on the grounds, inter alia, the plan violated its rights under 11 U.S.C. § 1325(a)(5)(B), and sought to modify the terms of the mortgage secured by the debtors' principal residence in violation of 11 U.S.C. § 1322(b)(2). The debtors responded to the objection by opposing the creditor's standing as holder of the mortgage only, which encompassed no right to enforce personal liability on the non-signers of a note that exceeded the value of the property. Both parties submitted briefs in support of their respective positions.

This is a core proceeding under 28 U.S.C. § 157(b)(2)(L), and the Court has jurisdiction under 28 U.S.C. § 1334. This decision constitutes the Court's findings of facts and conclusions of law pursuant to Fed. R. Bankr.P. 7052. For the reasons stated, the objection to confirmation is sustained.

BACKGROUND

The material facts are not in dispute. During all relevant times, the debtors' primary residence was a house on approximately 20 acres owned by Ms. Anderson in Wautoma, Wisconsin. The debtors filed a previous chapter 13 case in 2002. In an effort to pay off a maturing mortgage on their homestead with a different lender, and to successfully complete that plan, they sought financing through two gentlemen by the names of Christopher Proulx and Shawn Wahle. The debtors have designated the resulting transaction a “foreclosure rescue scam” with predictably convoluted transactions. At the closing, Ms. Anderson sold her home to Mr. Proulx for $119,250, the latter having financed the purchase through a $95,400.00 mortgage with New Century Mortgage Corporation (WB–11 Residential Offer to Purchase dated October 20, 2005; U.S. HUD Settlement Statement dated December 27, 2005). The original Residential Offer to Purchase included both the homestead and an adjacent parcel Although the offer was later amended to remove the extra acres from the purchase, they were included in the deed and mortgage. At the same closing, Mr. Proulx gave Ms. Anderson a “seller carryback” ¹ promissory note and mortgage on the property in the amount of $17,887.50, which the county refused to record because the mortgage document was not legible. (Promissory Note dated December 7, 2005; Mortgage dated December 27, 2005; Letter from Nations Title Agency of Minnesota, Inc., dated August 24, 2006). Mr. Proulx also signed a note to the Andersons for $23,860.00. (Note dated December 7, 2005). The debtor's first mortgage of $39,915.83 and delinquent real estate taxes of $7,152.96 were paid in full, and after rather exorbitant closing costs and settlement charges were assessed, Ms. Anderson received proceeds of $43,091.45. (U.S. HUD Settlement Statement dated December 27, 2005). A portion of the proceeds was used to pay off the chapter 13 plan and the debtors received a discharge on February 10, 2006. Another portion of the proceeds was split with Messrs. Proulx and Wahle for their assistance.

On March 13, 2007, Mr. Proulx refinanced his New Century mortgage for a $116,000.00 loan with American Brokers Conduit. The note provided for payments of interest only at 7.25% for 120 months and a maturity date of April 1, 2037. In August 2007, he sold off the land that was not supposed to be part of the transaction with Ms. Anderson to Jack Scimeca and retained the $57,000 proceeds for himself. American Home Mortgage Servicing, Inc., eventually released its interest in this parcel. (Partial Release of Mortgage dated June 1, 2009). In March 2007, before this transfer to Mr. Scimeca, the entire property was appraised at $145,000. (EMT Appraisals' estimate of value dated March 1, 2007). The current value of the property remains in dispute and will not be determined by the Court at this time, but it appears that both sides agree that the value is less than the amount owed on the note and set by the judgment of foreclosure.

On February 27, 2008, American Home Mortgage Servicing, Inc., the holder ² of the note and assignee of the mortgage, commenced a foreclosure action ³ against Mr. Proulx, naming the debtors as “Unknown Tenants.” The debtors answered the complaint alleging, inter alia, that their interest in the property was paramount to American Home's.

Ms. Anderson subsequently settled her dispute with Mr. Proulx. On October 19, 2009, Ms. Anderson released her alleged claims against Mr. Proulx in exchange for a quit claim deed to the property not owned by Mr. Scimeca. The Andersons, as unnamed tenants, and American Home stipulated to entry of a judgment of foreclosure on July 1, 2010, and on July 7, 2010, the state court entered a judgment. (Waushara County Circuit Court Case No. 08 CV 60, Findings of Fact, Conclusions of Law and Summary Judgment, dated July 7, 2010). As of the date of the state court proceedings, $149,725.19 was due on the mortgage.

The debtors filed a chapter 13 petition and plan on March 1, 2011, proposing to pay American Home Mortgage Servicing, Inc., $316.32 monthly for 36 months and then approximately $34,200.43 in a balloon payment at the end of the 36 month period, for a total payment of $40,000.00 amortized over 15 years at 5% interest per year. This provision is in essence a cramdown to the value of the property retained by the debtors. American Home, as servicing agent for Federal National Mortgage Association, opposed confirmation on the grounds, inter alia, the plan violated 11 U.S.C. § 1325(a)(5)(B) and sought to modify the terms of the mortgage secured by the debtors' principal residence in violation of 11 U.S.C. § 1322(b)(2). While arguing in support of their plan, the debtors also reserved an objection to American Home's standing to oppose confirmation. Both parties submitted briefs in support of their respective positions.

ARGUMENTS

According to the debtors, 11 U.S.C. § 1322(c)(2) does not prohibit them from modifying what they describe as a predatory interest-only mortgage. Although they took back the real estate subject to the security interest of American Home, they were never a party to the note, and they did not have standing to challenge the terms of the note in the state court foreclosure proceedings. While they agree they are subject to the mortgage, they are not liable on the note. Because the terms of the note only bind the signors of the note, the debtors' obligation to pay only arises from the lien, which can have no more value than the collateral secured by it. See Mitchell Bank v. Schanke, 2004 WI 13, ¶ 42, 268 Wis.2d 571, 676 N.W.2d 849 (“ ‘In Wisconsin, the cause of action on a note evidencing an indebtedness and the cause of action to foreclose the mortgage on real estate that secures the indebtedness are distinct.’ ” (quoting Bank of Sun Prairie v. Marshall Dev. Co., 2001 WI App 64, ¶ 12, 242 Wis.2d 355, 626 N.W.2d 391)). They should thus be allowed to “cram down” the mortgage judgment lien on the property and pay only the value of the secured portion through their plan.

Additionally, American Home may not enforce the security agreement until it verifies that it is servicing the mortgage on behalf of Fannie Mae.⁴ The debtors further contend that they are entitled to the same relief afforded the debtor in In re Walker, 405 B.R. 300 (Bankr.E.D.Wis.2009), wherein the defrauded debtor was entitled to set aside the contract and the parties' interests were restored to the state preceding the fraud.

American Home argues the Rooker–Feldman and res judicata doctrines bar the debtors from challenging its standing to oppose confirmation of the plan because the state court has entered a judgment of foreclosure. See Long v. Shorebank Dev. Corp., 182 F.3d 548 (7th Cir.1999); In re Agard, 444 B.R. 231 (Bankr.E.D.N.Y.2011); In re Ward, 423 B.R. 22 (Bankr.E.D.N.Y.2010). American Home is the assignee of record and holder of the note, which is endorsed in blank. See Wis. Stat. §§ 401.201(20), 403.205(2). Therefore, the argument continues, American Home may enforce the note by filing a proof of claim and objecting to confirmation of the debtors' proposed plan.

American Home points out that the mortgage was accelerated by default when the foreclosure judgment was entered, and the plan's proposal to modify its mortgage violates the anti-modification provision of 11 U.S.C. § 1322(b)(2). Under controlling law, see Matter of Clark, 738 F.2d 869 (7th Cir.1984); Bank of Commerce v. Waukesha County, 89 Wis.2d 715, 279 N.W.2d 237 (1979), its note and mortgage remain intact and enforceable in this case. Section 1322(b)(2) does not require that the debtors be in privity with American Home. Even though she held a note from Mr. Proulx, Ms. Anderson released all claims against him and took back the property with actual knowledge of American Home's mortgage.

DISCUSSION

In the case at bar, the debtors have set forth in Schedule C that the property is their homestead, and the debtors reside on the property; therefore, the property is the debtors' principal residence. There is no question that Fannie Mae holds a lien on the property and that it has no other collateral securing the first lien note. The issue here—whether a chapter 13 debtor with no personal liability on an accelerated loan on a principal residence may strip the mortgage down to the value of the real estate—presents two competing bankruptcy principles.

Bankruptcy Principle No. 1: The Anti–Modification Exception of Nobelman v. Am. Sav. Bank.

One the one hand, section 1322(b)(2) prohibits the modification of a claim that is secured only by...