In re Sandrin

• Citation: 536 B.R. 309
• Decision Date: 28 August 2015
• Docket Number: Case No. 14–21793–HRT
• Parties: In re: Catherine Mary Sandrin, Debtor.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado

536 B.R. 309

In re: Catherine Mary Sandrin, Debtor.

Case No. 14–21793–HRT

United States Bankruptcy Court, D. Colorado.

Signed August 28, 2015

Guy B. Humphries, Denver, CO, for Debtor.

ORDER

Howard R. Tallman, Judge, United States Bankruptcy Court

This matter comes before the Court on Debtor's Motion to Determine Secured Status Pursuant to 11 U.S.C. Section 506 (docket # 33) (the “Valuation Motion”); Creditor Patrick E. Thomas's Objection to the Debtor's Motion to Value Collateral (docket # 39) (the “Valuation Objection”); confirmation of Debtor's Chapter 13 Plan Including Valuation of Collateral and Classification of Claims dated January 22, 2015, (docket # 51) (the “Plan”); and Creditor Patrick E. Thomas's Objection to Confirmation of Debtor's Proposed First Amended Chapter 13 Plan (docket # 44) (the “Confirmation Objection”).

I. BACKGROUND INFORMATION

Catherine Mary Sandrin (“Debtor”) owns property at 2375 S. Columbine Street, Denver, Colorado (the “Residence”). The Residence is a 1,076 square foot single unit home that is the subject of this dispute. Nationstar Mortgage, LLC, holds a first mortgage on the Residence perfected by a deed of trust filed on May 5, 1998. Nationstar's proof of claim indicates it is owed $176,405.20 as of the date of the filing of the petition. Beal Bank also holds a mortgage on the Residence that was recorded on July 18, 2001. Beal Bank's proof of claim indicates it is owed $112,147.40 as of the date of Debtor's bankruptcy petition. On September 29, 2005, the IRS recorded a tax lien on the Residence which reflected 2001 and 2003 tax liability of $15,157.49.

Finally, the Debtor, the Debtor's non-filing spouse, and a related company, Continental Divide Robotics, Inc. (“CDR”), executed a note, payable to Royal Firman III, dated October 26, 2001 (the “Note”). Under the terms of the Note, the Residence would serve as collateral but the Debtor and her husband were not personally obligated for repayment. The Note was subsequently assigned to Patrick E. Thomas (“Thomas”). Thomas's proof of claim lists a total claim of $541,550.76. He claims that $213,467.00 of that total is secured by his lien on the Residence.

In 2004 and 2005, prior to Thomas taking assignment of the Note, the Debtor and her husband filed an individual chapter 11 bankruptcy case and CDR, a business in which Mr. Sandrin held a controlling interest, petitioned for chapter 11 relief.¹ In their individual chapter 11 plan, the Debtor and her husband acknowledged that Royal Firman III (Thomas's predecessor) held a secured claim. Under the terms of that plan, Firman retained his lien on the Residence; was to be paid only under the terms of CDR's confirmed plan; and had no recourse against the Debtor or her husband personally. Thomas claims that only one distribution of $966.46 was paid on the Firman claim under CDR's chapter 11 plan and it was never paid in full as the plan required.

Following assignment of the Firman Note and Deed of Trust to Thomas, he commenced foreclosure proceedings. The state court Rule 120 foreclosure hearing was scheduled for August 29, 2014, but Debtor filed a petition for chapter 13 relief on August 27, 2014.

On October 28, 2014, Debtor filed the Valuation Motion under 11 U.S.C. § 506 to determine the extent of Thomas's secured status. Debtor claims that, as of August 27, 2014, the value of the Residence was $359,000.00. Debtor also claims that Thomas's Deed of Trust is junior to the IRS lien and that, based on this value of the Residence, Thomas is wholly unsecured for purposes of his claim in this bankruptcy proceeding. Debtor further contends that Thomas is not entitled to payment as an unsecured creditor due to the nonrecourse nature of the Note.

In his Valuation Objection, Thomas contends that the Residence's actual value is $450,000.00 as of March 6, 2015. Thomas further objects on grounds that, even if he is wholly unsecured, he is entitled to an unsecured claim irrespective of Debtor's nonrecourse debt. Additionally, Thomas asserts that, if Debtor prevails on her Valuation Motion, she will no longer be eligible for chapter 13 relief and her petition must be dismissed because disallowance of Thomas's secured claim would result in an amount of unsecured debt that would exceed the eligibility limits stated in 11 U.S.C. § 109(e).

Debtors Plan was proposed on January 22, 2015. Thomas objects to confirmation on the grounds that the Plan does not comply with the provisions of chapter 13 and other applicable provisions of the Code as required by 11 U.S.C. § 1325(a)(1), is not feasible, and is not in the best interests of creditors. Thomas further alleges that neither the petition nor the Plan were filed in good faith as required by the Bankruptcy Code.

II. DISCUSSION

A. Standing

As an initial matter, the Debtor has raised the issue of Thomas's standing to enforce the Note on the basis that Thomas transferred the Note to an affiliated company.

Creditors have standing to object to plan confirmation under 11 U.S.C. § 1325. In re Brian Price Lewis, 5 B.R. 575, 576 (Bankr.N.D.Ga.1980). The Bankruptcy Code defines “creditor” as an entity with a pre-petition claim against the debtor. 11 U.S.C. § 101(10)(A). “Claim” is defined as a “right to payment.” 11 U.S.C. § 101(5)(A). To determine whether Thomas has a right to payment the Court turns to state law. In re Miller, 666 F.3d 1255, 1262–63 (10th Cir.2012) (quoting In re Mims, 438 B.R. 52, 56 (Bankr.S.D.N.Y.2010) ).

Under Colorado law, a note may be enforced by a holder who receives possession of an instrument through a negotiation. Colo.Rev.Stat. § 4–3–201(a). The requirement of possession prevents multiple “claimants from qualifying as holders who could take free of the other party's claim of ownership.” Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1213 (Colo.2008). A negotiation occurs when the instrument is transferred “to a person who thereby becomes its holder.” Colo.Rev.Stat. § 4–3–201(a). Holder is defined to mean “[t]he person in possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession.” Colo.Rev.Stat. § 4–1–201(b)(20)(A). If the instrument is payable to an identified person, the statute requires a transfer of possession and indorsement by the holder. Colo.Rev.Stat. § 4–3–201(b). Indorsement is defined as a signature that is “made on an instrument” for purposes of negotiation. Colo.Rev.Stat. § 4–3–204(a). The requirement that the signature be “made on” an instrument may be met by affixing a paper “to the instrument as part of the instrument.” Id.

Royal Firman III, the original holder of the Note, affixed an allonge to the Note reflecting his indorsement to Thomas. Because the allonge was affixed to the Note, Firman's signature constitutes an indorsement for purposes of Colo.Rev.Stat. § 4–3–204(a). At the valuation hearing, Thomas testified that, after Firman indorsed the Note to him, he assigned it to a new venture, Thomas Financial Advisors, LLC, (the “LLC”) that he formed with his son. On March 20, 2015, Thomas's counsel filed with the Court a copy of an assignment transferring the Note from the LLC to Thomas. The purported assignment was not affixed to the Note. Thomas's counsel also filed an affidavit affirming that the original Note and deed of trust are on file in his office.

There is no indorsement either on or affixed to the Note that serves as evidence of a negotiation of the Note from Thomas to the LLC or from the LLC back to Thomas. The purported assignments of the Note to the LLC and back did not constitute negotiations of the Note under Colorado law because the indorsements were not “made on” or “affixed to” the original Note as required by Colo.Rev.Stat. § 4–3–204(a).

As an alternative to negotiation, a note may be enforced by a transferee who receives delivery of the note for the purpose of giving the transferee the right to enforce it. Colo.Rev.Stat. § 4–3–203(a). When a note is transferred, the transferee is vested with “any right of the transferor to enforce the instrument.” Colo.Rev.Stat. § 4–3–204(b). The Court accepts Thomas's oral testimony that he transferred possession of the Note to the LLC. The assignment document Thomas filed with the Court and, more importantly, the affidavit of Thomas's counsel that he is in possession of the original Note as Thomas's agent is evidence that Thomas is in constructive possession of the Note. See In re Miller, 666 F.3d 1255, 1264 n. 9 (10th Cir.2012) (recognizing theory of constructive possession); Georg v. Metro Fixtures Contractors, Inc., 178 P.3d 1209, 1213–14 (Colo.2008) (same). The evidence before the Court, therefore, is that the Note was negotiated from Firman to Thomas and that Thomas is in constructive possession of the Note

In Miller, the note at issue was indorsed in blank. 666 F.3d at 1263. The court held that, under Colorado law, the party seeking to enforce the instrument was required to have possession of it. Id. at 1264 (“physical possession is essential because it constitutes proof of ownership and a consequent right to payment”). That party, however, failed to prove that it had possession of the note. Instead, its counsel told the bankruptcy court that the note had been requested and would be in counsel's office “shortly.” Id. at 1265. That assertion was insufficient to establish possession of the instrument for purposes of negotiation or transfer under the UCC. Id. at 1263–64.

Here, Thomas's counsel submitted a copy of an assignment from the LLC to Thomas and an affidavit affirming that the original Note is on file in counsel's office. Debtor's counsel has not responded to this submission. In the Court's view, Thomas has satisfied his burden of proving that he is the holder of the Note because the allonge affixed to the Note constitutes a negotiation of the Note to Thomas and he is in constructive possession of the Note.² The Court does not read Miller to require a different result considering the...