In re Spencer

• Decision Date: 12 September 2006
• Docket Number: No. 06-01512-DD.,06-01512-DD.
• Court: United States Bankruptcy Courts. Fourth Circuit. U.S. Bankruptcy Court — District of South Carolina
• Parties: In re David Pricer SPENCER and Patricia Kiggins Spencer, Debtors.

354 B.R. 758

In re David Pricer SPENCER and Patricia Kiggins Spencer, Debtors.

No. 06-01512-DD.

United States Bankruptcy Court, D. South Carolina.

September 12, 2006.

COPYRIGHT MATERIAL OMITTED

David Pricer Spencer, Hilton Head Island, SC, pro se.

Patricia Kiggins Spencer, Hilton Head Island, SC, pro se.

ORDER OVERRULING DEBTOR'S OBJECTION TO CLAIM

DAVID R. DUNCAN, Bankruptcy Judge.

THIS MATTER is before the Court on David Pricer Spencer's and Patricia Kiggins Spencer's ("Debtors") Objection to Proof of Claim ("Objection") filed by Countrywide Home Loans, Inc ("Countrywide"). Both Countrywide and Debtors attended the hearing held on the Objection on August 17, 2006. Debtors do not dispute that they received funds from Countrywide, used the funds for their benefit, and that they are indebted to Countrywide for the amount borrowed. Debtors contend that (a) Mr. Spencer did not recognize the "HOME EQUITY CREDITLINE AGREEMENT AND DISCLOSURE STATEMENT" ("Disclosure Statement") as a promissory note, and (b) the mortgage was improperly executed and, as a result, the claim should be allowed as a general unsecured claim instead of a secured claim. The issues before the court are (1) whether the Disclosure Statement is a promise to pay, (2) whether an improperly witnessed mortgage is valid between the mortgagor and mortgagee, and (3) whether a recorded mortgage, appearing valid on its face, is effective against a bona fide purchaser and, thus, the Debtors in Possession.

Findings of Fact

1. Debtors filed a petition for relief under Chapter 11 of the Bankruptcy Code on April 13, 2006 and the Debtors remain in possession.

2. Countrywide filed a claim dated May 4, 2006 on or about May 15, 2006 in the amount of $106,093.95 noting a payment arrearage of $4,178.95. Countrywide asserts that it holds a secured claim by virtue of its mortgage lien on Debtors home. Countrywide mistakenly attached to its claim a copy of the Adjustable Rate Note made between Decision One Mortgage and Debtors in the amount of $557,300.00.

3. Debtors filed an Objection to Countrywide's proof of claim on or about June 18, 2006.

4. Countrywide filed an Amended Proof of Claim, on or about July 24 2006, attaching a copy of the "Home Equity Credit Line Agreement and Disclosure Statement" in the amount of $101,915.00, dated February 8, 2005 between Countrywide Home Loans, Inc., and Debtor David P. Spencer.

5. Mr. Spencer is a real estate agent by profession.

6. Mr. Spencer admits that the signature on the Disclosure Statement is his signature.

7. Debtors admit that they signed the mortgage as borrowers.

8. Countrywide admits that the mortgage was improperly witnessed based on the closing attorney's testimony that Kim Miller, who signed as a witness, signed the document at the attorney's office and did not witness the execution of the documents by Debtors.

9. Debtors admit that they received and used the loan proceeds from Countrywide in the amount evidenced by the Disclosure Statement.

10. Mr. and Mrs. Spencer testified at trial. Mr. and Mrs. Spencer are seemingly well educated, were coherent in their testimony and appear to possess above average intelligence.

The Parties' Contentions

Debtors contend (1) that Mr. Spencer did not know that the Disclosure Statement was a promissory note, (2) that they believed the loan to be personal (i.e. unsecured) in nature and did not understand that the Home Equity Line of Credit ("HELOC") loan would require an encumbrance of their home, and (3) that the loan documents were not properly witnessed. The debtors seek a determination that the Countrywide claim is a general unsecured claim. Countrywide contends (i) that the note and mortgage speak for themselves and clearly indicate the documents' effects and the secured nature of the loan, (ii) that the Debtors voluntarily signed the documents and used the proceeds for their personal use, and (iii) that the documents are valid between the parties and valid for purposes of the South Carolina recording statutes.

Conclusions of law

A signed and filed proof of claim constitutes prima facie evidence of the validity and amount of the claim. See Fed. R. Bankr.P. 3001(f); In re Holm, 931 F.2d 620, 623 (9th Cir.1991) quoting 3 Lawrence P. King, Collier on Bankruptcy § 502.02, at 502-22 (15th ed.1991). Once an objection is raised, the objector bears the burden of going forward to produce evidence sufficient to negate the prima facie validity of the filed claim. In re Allegheny Intern., Inc., 954 F.2d 167, 173 (3rd Cir. 1992). If the objector produces evidence sufficient to negate the validity of the claim, the ultimate burden of persuasion remains on the claimant to demonstrate by a preponderance of evidence that the claim deserves to share in the distribution of the Debtors' assets. Id. at 174; Holm, 931 F.2d at 623; 3 Lawrence P. King, Collier on Bankruptcy, § 502.02 at 502-22 (15th ed.1993).

I. Unilateral Mistake of Fact and Execution of Documents

Debtors' first contention is that since Mr. Spencer did not recognize the Disclosure Statement as a promissory note the transaction is not valid. Mr. Spencer testified that he is a real estate agent and fairly experienced with South Carolina real estate transactions, including mortgages and notes. He testified that it was his understanding that mortgages are signed in conjunction with a note, which evidences the loan amount and the terms of repayment. He asserts that there is no promissory note for this transaction. The "HOME EQUITY CREDITLINE AGREEMENT AND DISCLOSURE STATEMENT," is a promissory note. It contains the borrower's promise to pay the lender. Mr. Spencer admits that the signature affixed to the Disclosure Statement is his own. The document provides: "I promise to pay to your order, when and as due, all loans made under this Agreement ...." Mr. Spencer is bound by his promise to pay. South Carolina Law provides:

Every contracting party owes a duty to the other party to the contract and to the public to learn the contents of a document before he signs it. One cannot complain of fraud and misrepresentation in the contents of a document if the truth could have been ascertained by reading it. This rule is subject to the exception that if the party is ignorant and unwary, his failure to read the document may be excused. This exception is, however, very strictly interpreted by the court. In determining whether a party can be classified as ignorant and unwary, an individual's education, business experience and intelligence are all considered.

Burwell v. South Carolina Nat'l Bank, 288 S.C. 34, 340 S.E.2d 786 (S.C.1986). See also Regions Bank v. Schmauch, 354 S.C. 648, 663, 582 S.E.2d 432 (S.C.Ct.App. 2003)("A person signing a document is responsible for reading the document and making sure of its contents"). Sydnor v. Conseco Fin. Servicing Corp., 252 F.3d 302, 306 (4th Cir.2001) Citing Corbett v. Bonney, 202 Va. 933, 938, 121 S.E.2d 476 (1961)("[A] party signing a written contract has a duty `to inform himself of its contents before executing it, ... and in the absence of fraud or overreaching he will not be allowed to impeach the effect of the instrument by showing that he was ignorant of its contents or failed to read it'").

The Supreme Court of Washington held similarly in Skagit State Bank v. Rasmussen when it stated,

A party to a contract which he has voluntarily signed will not be heard to declare that he did not read it, or is ignorant of its contents. One cannot, in the absence of fraud, deceit or coercion be heard to repudiate his own signature voluntarily and knowingly fixed to an instrument whose contents he is in law bound to understand. Where the plaintiff is a person of ordinary understanding and one with more than ordinary experience in land transactions and instruments of conveyance and security, and with time and opportunity both to consult with an attorney and to inspect the instruments before signing, he cannot be heard in law to repudiate his signature. The whole panoply of contract law rests on the principle that one is bound by the contract which he voluntarily and knowingly signs.

Skagit State Bank v. Rasmussen, 109 Wash.2d 377, 745 P.2d 37 (Wash.1987)

There is no allegation or evidence of fraud or overreaching in regards to the actual signing of the documents,¹ The debtors' contention that the claim should be allowed as a general unsecured claim belies any suggestion that Mr. Spencer did not make a promise to repay the funds he borrowed. He made that promise in a signed and dated writing. Additionally, Mr. Spencer and his wife admit to signing the mortgage document. It states, in relevant part,

THIS MORTGAGE dated FEBRUARY 8, 2005, is between DAVID P SPENCER AND PARTRICIA K. SPENCER AS JOINT TENANTS WITH RIGHT OF SURVIVORSHIP.... MORTGAGED PREMISES: In Consideration of the loan hereafter described, [Debtors] hereby mortgage, grant, and convey to MERS and to the successors and assigns of MERS, the premises located at 33 WILLOW OAK RD W, HILTON HEAD ISLAND, BEAUFORT, SOUTH CAROLINA 29928-4408.

Debtors' Exhibit # 1.

Mr. Spencer may have believed at some point in the process that Countrywide would extend credit to him on an unsecured basis. However, the nature of a home equity loan is secured. Mr. and Mrs. Spencer knew, by signing the mortgage, that they were pledging their home as collateral for the loan. Thus, at the time of executing the documents, Mr. and Mrs. Spencer knew they were entering into a lending arrangement with their home as security. Additionally, Mr. and Mrs. Spencer did not rescind the transaction during the three day period following execution of the loan documents as they might have under Regulation Z of the Truth in Lending Act.

II. Improperly Witnessed Mortgage

The next inquiry is whether the mortgage was improperly witnessed and if so, to what effect? S.C.Code Ann. § 30-5-30, states in relevant part,

(B) A deed or other instrument must be signed by the...