In re Vandenbosch
| Decision Date | 30 April 2009 |
| Docket Number | Bankruptcy No. GG 03-14425.,Adversary No. 05-81523. |
| Citation | 405 B.R. 253 |
| Parties | In re David H. VANDENBOSCH and Anne M. Vandenbosch, Debtors. Jeff A. Mover, Trustee, Plaintiff, v. Richard Edlund and Evangeline Edlund, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
Andrew J. Gerdes, Esq., East Lansing, MI, and Mitchell J. Hail, Esq., Wyoming, MI, for Plaintiff, Jeff A. Moyer, Chapter 7 Trustee.
Edward A. Newmyer, Esq., Muskegon, MI, and Edward A. Grafton, Esq., Grand Haven, MI, for Defendants, Richard and Evangeline Edlund.
In 1998, Richard and Evangeline Edlund (the "Edlunds") sold property located at 2331 McCracken, Muskegon, Michigan (the "Property") to David and Anne Vandenbosch (the "Debtors") on land contract. After the Debtors filed their chapter 7 case in November 2003, Jeff A. Moyer ("Trustee"), the duly appointed trustee, filed this adversary proceeding seeking specific performance of the land contract. The Trustee asserts that the Debtors satisfied their obligations under the land contract when they obtained a loan which paid off prior loans for which the Edlunds were the sole obligors. The Trustee also seeks avoidance and recovery of a mortgage on the Property that was purportedly granted by the Debtors to the Edlunds. The Trustee alleges that this mortgage contained an incorrect legal description of the Property and is therefore avoidable by the Trustee under 11 U.S.C. § 544.1
The court has subject matter jurisdiction over this bankruptcy case and this adversary proceeding. 28 U.S.C. § 1334. The case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a) and L.R. 83.2(a) (W.D.Mich.). This adversary proceeding is a core proceeding because it involves administration of the estate, 28 U.S.C. § 157(b)(2)(A), and a determination of the validity, priority and extent of liens, 28 U.S.C. § 157(b)(2)(E). This opinion constitutes the court's findings of fact and conclusions of law. See FED. R. BANKR.P. 7052.
In 1998, the Edlunds, longtime family friends of the Debtors, agreed to help the Debtors acquire a new home. To accomplish this, on September 3, 1998, the Edlunds purchased the Property for $87,900. The Edlunds made a cash down payment of $10,300 for the Property, and obtained a loan for the balance of the purchase price, $77,600 ("Loan 1"), from Muskegon Commerce Bank (the "Bank"). To secure repayment of Loan 1, the Edlunds granted the Bank a mortgage on the Property. (Exh. 3.) The Debtors' names did not appear on the warranty deed received by the Edlunds. The Debtors were not obligated to the Bank under Loan 1 and their names are absent on the note or mortgage executed in connection with the loan.
On the same day the Edlunds purchased the property, they sold the Property to the Debtors on land contract for $88,369. (Exh. 5.) The Debtors paid $10,699 of the purchase price in cash. Pursuant to the terms of the land contract, the remainder of the purchase price, $77,700, was to be paid by the Debtors in 60 monthly installment payments of $625.60 each. The balance of the purchase price was to be paid as a balloon payment on September 3, 2003. The land contract further provided:
Upon full final payment of principal and interest of this Contract within the time and the manner required by this Contract, together with all other sums chargeable against the [Debtors], and upon full performance of the covenants and agreements of the [Debtors], the [Edlunds] shall convey the [Property] to the [Debtors] ... by warranty deed....
(Exh. 5.) The land contract did not contain a future advance clause and was the only written evidence presented at trial reflecting the agreement between the parties. Although the land contract specifically provided that it may only be amended by written agreement, the contract was never modified in writing. A Memorandum of Land Contract was recorded on November 2, 1998. (Exh. 6.)
Rather than making monthly payments to the Edlunds as contemplated under the land contract, the Debtors made monthly payments directly to the Bank. (Tr. 78-79; 109; 121.) The Bank applied the payments to reduce the amount owed by the Edlunds required by Loan 1.
On May 1, 2000, the Edlunds borrowed an additional $42,000 from the Bank to make improvements to the Property ("Loan 2"). To secure this loan, the Edlunds granted the Bank another mortgage on the Property. (Exh. 7.) Again, the Debtors were not indebted to the Bank under Loan 2 and their names did not appear on either the promissory note or mortgage. Regardless, the Debtors agreed to make payments on Loan 2 directly to the Bank. Although the land contract did not contain a future advance clause, David Vandenbosch testified that the parties had an oral agreement that the amount due under the land contract would increase if the Edlunds took out additional loans to improve the Property. (Tr. at 79.)
In March 2001, at the request of the Debtors, the Edlunds contacted the Bank to inquire about refinancing Loans 1 and 2 to reduce the monthly payments. Thereafter, on March 16, 2001, the Edlunds executed a new promissory note and mortgage in the amount of $129,405.83 ("Loan 3"). (Exh. 9.) This refinanced loan resulted in the discharge of the two prior mortgages that secured Loans 1 and 2. The Edlunds received no money from this transaction and, because the Debtors' names did not appear on the promissory note or mortgage, the Debtors again were not liable to the Bank for repayment of Loan 3. Regardless, the Debtors continued to make their monthly land contract payments directly to the Bank. The Bank applied these payments to reduce the amount owed by the Edlunds under Loan 3. There is no dispute that the parties, based upon their oral understanding, consistently treated the amount outstanding under the Edlunds' loans owed to the Bank as the remaining balance due under the land contract. (Tr. at 121.)
In August 2001, David Vandenbosch approached the Bank and requested that the Debtors be made the primary obligors on the debt secured by the Property. At trial, David Vandenbosch explained that he made this request because the Debtors had been paying on the Edlunds' loans for years. By becoming primarily liable on the debt, David Vandenbosch believed that he could absolve the Edlunds from their debt to the Bank while also establishing credit for himself. (Tr. at 80-81.) Accordingly, on August 8, 2001, the Debtors executed a Consumer Loan Agreement with the Bank in the amount of $135,342.41 ("Loan 4"). (Exh. 11.) Unlike the prior loans, the Debtors were the primary borrowers on Loan 4 and were directly responsible for making payments to the Bank. The Edlunds co-signed Loan 4. The loan agreement provided that Debtors, as borrowers, and the Edlunds, as co-signers, were "jointly and individually obligated to pay all amounts" required by Loan 4. (Exh. 11.)
In connection with Loan 4, the Debtors, the Bank, and the Edlunds executed a hypothecation agreement.2 (Exh. 12.) Under the hypothecation agreement, the Edlunds assigned the Bank "all [their] right, title and interest to, and grant[ed] [the Bank] a security interest in the property described in" the "Mortgage, Deed of Trust, Trust Deed, or Security Deed" dated March 16, 2001, i.e., the mortgage executed by the Edlunds in connection with Loan 3.3 (Exh. 12.)
At trial, both David Vandenbosch and Richard Edlund testified that Loan 4 paid off Loan 3 and satisfied the Edlunds' primary obligation owed to the Bank. (Tr. at 94 & 124.) Richard Edlund also testified that he believed Loan 4 fully paid off the remaining balance on the land contract. (Tr. at 111-12.) However, David Vandenbosch testified that he did not believe that Loan 4 paid off the land contract. (Tr. at 81.) He believed that Loan 4 simply made the Debtors the primary borrowers so they could establish credit. (Tr; at 81.) Because the Edlunds had co-signed Loan 4, David Vandenbosch also understood that the Edlunds would be liable for the loan if the Debtors defaulted. (Tr. at 82.) Regardless of the parties' subjective beliefs about the effect of Loan 4 on the underlying land contract, the land contract was never discharged or recorded as satisfied with the Register of Deeds. It is also undisputed that the Edlunds did not convey legal title to the Debtors at this time.
On October 11, 2002, the Debtors refinanced their loan with the Bank by executing a new loan agreement in the amount of $135,389.37 ("Loan 5"). (Exh. 17.) In the loan documents executed for Loan 5, the Debtors again signed as borrowers and Richard Edlund again signed as a co-signor. According to the loan agreement, the collateral for Loan 5 was a real estate mortgage on the Property dated August 8, 2001. No such mortgage has ever been produced or documented, and this purported mortgage was never recorded with the Register of Deeds.
On October 3, 2003, the Bank filed a state court complaint against the Debtors and the Edlunds based on the Debtors' alleged default on a car loan they had obtained from the Bank. (Exh. D.) David Vandenbosch explained that a provision in the car loan documents allowed the Bank to accelerate any and all of the Debtors' loans with the Bank upon the Debtors' default under any of the loans. Accordingly, the Bank accelerated Loan 5 and included it in the state court action.
In November 2003, the Edlunds paid $135,000 to the Bank to settle the state court action. The Debtors then executed a promissory note in the amount of $155,000 in favor of the Edlunds ("Loan 6"). (Exh. 21.) The promissory note included the Debtors' obligation to repay the Edlunds $135,000 for the state court settlement, and an additional $20,000 the Edlunds had expended between November 2002 and November 2003 to improve the...
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