In re Wright

• Decision Date: 28 December 2012
• Docket Number: No. 09–BK–32244–SSC.,09–BK–32244–SSC.
• Parties: In re Timothy Ray WRIGHT, Debtor.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Arizona

486 B.R. 491

In re Timothy Ray WRIGHT, Debtor.

No. 09–BK–32244–SSC.

United States Bankruptcy Court,

D. Arizona.

Dec. 28, 2012.

Howard C. Meyers, Burch & Cracchiolo, P.A., Phoenix, AZ, Fay Marie Waldo, Andante Law Group of Daniel E. Garrison, Scottsdale, AZ, for Debtor.

Renee Sandler Shamblin, Office of the U.S. Trustee, Phoenix, AZ, for U.S. Trustee.

MEMORANDUM DECISION RE: DEBTOR'S OBJECTION TO MIDFIRST BANK'S PROOF OF CLAIM

SARAH SHARER CURLEY, Bankruptcy Judge.

I. INTRODUCTION

This matter comes before the Court on the Debtor's “Fifth Omnibus Objection to MidFirst Bank's Proof of Claim” (“Claim Objection”) filed on January 25, 2012. MidFirst Bank, a Federally Chartered Savings Association (“MidFirst”) filed a Response on March 7, 2012. An initial hearing on the matter was held on March 7, 2012. MidFirst filed a Supplemental Response on April 16, 2012, and an additional hearing was held on May 8, 2012. An evidentiary hearing was conducted on August 30, 2012. At the conclusion of the hearing, the matter was deemed under advisement.

In this Memorandum Decision, the Court has set forth its findings of fact and conclusions of law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure. The issues addressed herein constitute a core proceeding over which this Court has jurisdiction. 28 U.S.C. §§ 1334(b) and 157(b) (West 2012). ¹

II. FACTUAL BACKGROUND

The Court must determine whether the Debtor's Objection to MidFirst's proof of claim should be sustained. For the reasons stated hereinafter, the answer is yes. This decision is predicated on a thorough analysis of the record, the facts, and the law, and not any pixie dust supplied by the Debtor and his counsel.² Ultimately, this is a cautionary tale woven from wealth and its loss, a proof of claim that was lost in the paperwork, and hazy memories of years past.

At the time of filing the bankruptcy petition, the Debtor owned over 240 units of rental housing on 160 separate parcels of real property.³ On the schedules filed with the Court, the Debtor listed real estate assets having an aggregate value of $36,391,900.00, with liens encumbering said assets in the aggregate amount of $43,219,529.48.⁴ The Debtor listed personal property assets with an estimated value of $1,086,588.61, and general unsecured claims in the amount of $214,217.92.⁵ Thus, the Debtor could be described as a real estate investor, who utilized the income received from his numerous rental properties to subsidize a lifestyle of comfort until the value of his real estate assets dramatically declined in value.

The Debtor listed MidFirst as a secured creditor concerning several parcels of real estate. On June 15, 2007, MidFirst provided a loan of $1,400,000.00 to refinance the obligations on the property located at 5195 E. Camelback Road, Phoenix, Arizona (“Camelback Property”), which loan was secured by a deed of trust on the Camelback Property.⁶ At the time of filing, the Debtor estimated the Camelback Property had a value of $760,000, with an estimated unsecured deficiency claim of $686,600.00.⁷ According to the parties, the amount due to the secured creditor on the petition date was $1,447,121.00. ⁸

On July 18, 2007, the Debtor purchased property located at 6988 E. Paradise Ranch Road, Paradise Valley, AZ (“Paradise Ranch Property”), and MidFirst provided a loan in the amount of $1,547,000.00 to purchase the Paradise Ranch Property. The Paradise Ranch Property loan was secured by a deed of trust on the Properties. At the time of filing, the value of the Paradise Ranch Property was $975,000 with an estimated secured unsecured deficiency claim of $643,944.00.⁹ The parties have agreed that the amount due on the petition date was $1,629,742.00.¹⁰

A. CASH COLLATERAL ISSUE

On January 14, 2012, MidFirst filed an objection to the Debtor's use of cash collateral (“Cash Collateral Objection”).¹¹ In the Cash Collateral Objection, MidFirst attached the loan documents executed by the Debtor concerning the Camelback Property. In those documents, the Debtor represented that he was obtaining the loan “to refinance ... [the] residence located at 5195 E. Camelback Road,” that “[T]he loan was not made for any business purpose,” and that “the loan documents [did] not contemplate that the Camelback Property would be rented.” ¹² Because the parties did not contemplate that the Camelback Property would be rented, no assignment of rents was provided by the Debtor.¹³ The Debtor, however, improperly converted the Camelback Property to a multifamily rental property.¹⁴

As a result of the Debtor's conversion of the Camelback Property to a rental property, the Debtor argued that the Debtor could assert his strong arm powers to recover any rents generated from the Property.¹⁵ The Debtor argued that “... secured creditors generally documented their loans to the Debtor as residential loans using simple consumer deed of trust forms.” ¹⁶ As to MidFirst, the Debtor asserted that it had no assignment of rents provision as to the Camelback Property and, as a result, no perfected security interest in rents.¹⁷ A hearing was held on this specific issue on April 29, 2010, during which the Court preserved the issue, noting that if the Debtor wished to assert its strong arm powers to receive rents for the bankruptcy estate, he needed to do so in an adversary proceeding. ¹⁸ The Court subsequently entered an order that the Debtor could pursue his claims under Section 544, Subsections (a)(1)-(a)(3) in an adversary proceeding.¹⁹

B. MOTION FOR RELIEF FROM STAY

On January 28, 2010, MidFirst filed a Motion for Relief from the Automatic Stay (“Stay Relief Motion”), in which MidFirst requested relief to pursue its rights and remedies under Arizona law as to both Properties.²⁰ MidFirst alleged in the Stay Relief Motion that there was no equity in either Property, that the real estate taxes had not been paid since 2009 as to either Property, and that the Debtor had improperly converted the prepetition rents that he had received from the Properties.²¹ Because of the Debtor's prepetition defaults under the loan documents, MidFirst had accelerated the principal balance due and owing on each loan, and had commenced non-judicial trustee's sales of both Properties. The trustee sales were stayed by the filing of the Debtor's bankruptcy petition.²²

In the Motion, MidFirst requested relief from the automatic stay under § 362(d)(1) and (d)(2). Beginning at Page 4 of the Stay Relief Motion, Counsel for MidFirst presented authority for vacatur of the stay not limited to in rem relief.²³ At Page 6, Lines 12–14, Counsel urged that relief be granted because “simply stated, the Debtor cannot meet his burden to demonstrate that MidFirst's interests are being adequately protected. Therefore, MidFirst is entitled to immediate stay relief for cause pursuant to § 362(d)(1).” ²⁴ MidFirst also asserted that stay relief should be granted under § 362(d)(2), since the Debtor had no equity in the Properties. ²⁵ The Stay Relief Motion also stated that the Properties were not part of any single development, and that each Property was a “stand alone” asset to be independently evaluated as to whether it was necessary for the Debtor's reorganization.²⁶

In the conclusion of the Stay Relief Motion, MidFirst stated that “all applicable stays and injunctions, including the automatic stay under Bankruptcy Code § 362(a), be vacated, terminated, and annulled so that MidFirst may exercise all of its rights and remedies with respect to each of the Properties ...” ²⁷ The Debtor filed an objection to the Stay Relief Motion, focusing on the necessity of the Properties for an effective reorganization.²⁸ The Debtor stated that MidFirst had acknowledged that the Camelback Property would become a multi-family rental at the closing of the loan between the Debtor and MidFirst.²⁹

The Court conducted a preliminary hearing on the Stay Relief Motion on March 17, 2010, at which counsel for the Debtor and MidFirst appeared.³⁰ The Court directed that the first half and second half of the 2009 real estate taxes as to the Properties be paid by the Debtor by certain dates or the automatic stay would be vacated. The Court also set a final hearing, if necessary, on the Stay Relief Motion for May 12, 2010.³¹

On March 24, 2010, MidFirst uploaded an “Agreed Order” granting relief from the stay.³² The proposed order granted the Stay Relief Motion in all respects. The proposed order also stated that

“MidFirst seeks relief from all applicable stays and injunctions, including without limitation, the automatic stay of § 362(a), so that MidFirst may enforce all of its rights, liens, and remedies against the Properties ...” ³³

In the ordering paragraphs, there was the following language:

“All stays and injunctions in this case, including the automatic stay of Bankruptcy Code § 362(a), with respect to the Properties shall be, and hereby are vacated, terminated, and annulled ... ³⁴

MidFirst is immediately entitled to enforce all of its rights and remedies in connection with the properties, including, without limitation, any acts which MidFirst may undertake or direct to obtain possession and control of the Properties pursuant to its loan and security documents entered into with the Debtor, and applicable state and federal law.” ³⁵

The Court executed and entered the proposed order without any changes. ³⁶

C. DEBTOR'S PLAN OF REORGANIZATION

On April 9, 2010, the Debtor filed his Plan of Reorganization.³⁷ At Page 12 of the Plan, under definitions, concerning what a secured creditor could recover after a vacatur of the automatic stay, the Debtor stated that a secured creditor could recover a “deficiency claim” “subject to applicable state law.” ³⁸ Thus, the Debtor contemplated that a secured creditor would have the ability to pursue a deficiency claim against him, provided that Arizona state law accorded such a right.

On May 26, 2010, the Court conducted a hearing on the disclosure statement concerning this Plan....