John O. Desmond, Chapter 7 Tr. of Harborhouse of Gloucester, LLC v. Raymond C. Green, Inc. (In re Harborhouse of Gloucester, LLC)

• Decision Date: 07 February 2014
• Docket Number: Adversary No. 11–1351.,Bankruptcy No. 10–23078–HJB.
• Citation: 505 B.R. 365
• Court: U.S. Bankruptcy Court — District of Massachusetts
• Parties: In re HARBORHOUSE OF GLOUCESTER, LLC, Debtor. John O. Desmond, Chapter 7 Trustee of Harborhouse of Gloucester, LLC, Plaintiff, v. Raymond C. Green, Inc., as Trustee of Raymond C. Green Trust and Connect Plus International Corporation, Defendants.

505 B.R. 365

In re HARBORHOUSE OF GLOUCESTER, LLC, Debtor.
John O. Desmond, Chapter 7 Trustee of Harborhouse of Gloucester, LLC, ¹ Plaintiff,
v.
Raymond C. Green, Inc., as Trustee of Raymond C. Green Trust and Connect Plus International Corporation, Defendants.

Bankruptcy No. 10–23078–HJB.
Adversary No. 11–1351.

United States Bankruptcy Court,
D. Massachusetts,
Eastern Division.

Signed Feb. 7, 2014.

[505 B.R. 366]

Mark W. Corner, Kristin M. McDonough, Riemer & Braunstein LLP, Boston, MA, for Plaintiff.

Michael Lane, John M. McAuliffe, McAuliffe & Associates, P.C., Newton, MA, for Defendants.

Connect Plus International Corporation, Beverly, MA, pro se.

AMENDED MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.

Before the Court are cross-motions for summary judgment filed by the plaintiff in this adversary proceeding (the Chapter 7 trustee in the underlying bankruptcy case) (the “Trustee”) and the defendant Raymond C. Green, as the trustee of Raymond C. Green Trust (“Green”). The Trustee has asked this Court to disallow the secured claim asserted by Green against property of the bankruptcy estate on the grounds that Green is not entitled to enforce

[505 B.R. 367]

either the note on which his claim is based or the mortgage which secures payment of the note. By his cross-motion, Green seeks a ruling to the contrary. Because the original promissory note has been lost, the Court must determine whether, under Massachusetts law, the holder of a lost note affidavit may stand in the shoes of the original holder of the note or, alternatively, assert the rights under the mortgage that secures its payment.

I. FACTS AND TRAVEL OF THE CASE

Harborhouse of Gloucester, LLC, the debtor in the underlying bankruptcy case (the “Debtor”), was formed in 2003. In August 2004, the Debtor acquired real property (the “Property”) from Timothy A. Murphy, consisting of a restaurant and two residential apartments located at 90 Rantoul Street, Beverly, Massachusetts. In exchange for title to the Property, the Debtor paid $1.00 and assumed the encumbrances of record.

At the time of the conveyance, the Property was encumbered by a duly recorded mortgage and security agreement (the “Mortgage”) executed by Murphy in December 1999 in favor of Philip J. Hansbury, as trustee of the 90 Rantoul Real Estate Trust (“Hansbury”). The Mortgage was intended to secure Murphy's obligations under a contemporaneous promissory note (the “Note”) in the original principal amount of $360,000.00.

On May 15, 2006, Hansbury purported to assign the note to Connect Plus International Corporation (“CPIC”).² However, at some time prior thereto, the original Note had been lost. In connection with the conveyance from Hansbury to CPIC, Hansbury executed an affidavit (the “Lost Note Affidavit”) stating that: (1) a full and complete copy of the Note was attached to the affidavit; (2) Hansbury was the holder of the Note and had not transferred the Note or otherwise forgiven or discharged the Note or the obligation, but the Note had been lost or misplaced; (3) the current outstanding balance of the Note was in the amount of $360,000.00, exclusive of interest, penalties, and other charges; and (4) Hansbury was transferring the Note and all rights thereunder to CPIC for total consideration of $460,000.00. Attached to the Lost Note Affidavit were: (1) a copy of the Note; (2) an allonge to the Note purporting to transfer rights under the Note to CPIC; and (3) an assignment of the Mortgage to CPIC.

On March 9, 2007, CPIC purported to assign the Note and Mortgage to Green as security for a $150,000.00 loan by Green to CPIC. On that date, Lockwood, on behalf of CPIC, executed an assignment of the Mortgage and an allonge to the Note transferring CPIC's rights under both to Green. According to the allonge, the outstanding balance on the Note at the time of transfer to Green was $602,557.73.³

On December 1, 2010, the Debtor filed for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code” or “Code”) ⁴, and the case was converted

[505 B.R. 368]

to one under Chapter 7 on November 30, 2011. Green filed a proof of claim in the Chapter 11 case, asserting a claim against the Debtor in the amount of $795,926.56 under the Note, secured by the Mortgage on the Property. The Massachusetts Department of Revenue (the “MDOR”) also filed a proof of claim, asserting a claim of $248,151.67 secured by a lien on the Property.

On May 30, 2012, the Trustee filed a motion requesting approval of the sale of the Property free and clear of all liens, claims, interests, and encumbrances (the “Sale Motion”) and served a copy of both the Sale Motion and notice of hearing on Green and Green's counsel. The Sale Motion was granted, without objection, on June 21, 2012, and the Property sold free and clear of liens for $245,000.00. The proceeds of the sale, however, remained subject to the disputed secured claims of both Green and the MDOR.

On December 16, 2011, well prior to the sale, this adversary proceeding was initiated by the Trustee, objecting to the validity, extent, and priority of Green's secured claim.⁵ In the six-count amended complaint (the “Complaint”), the Trustee maintains that neither CPIC nor Green had or currently has a right to enforce the Note.⁶ The adversary proceeding progressed in fits and starts as the Trustee struggled to determine whether and to what extent the avoidance of the Green lien would be of benefit to the administrative solvency of the estate in light of the MDOR lien. In any event, however, the current Trustee has been substituted as plaintiff and has adopted the positions of the former Chapter 7 trustee. See, supra n. 1. The cross-motions for summary judgment have now been argued and are ready for disposition.

II. POSITIONS OF THE PARTIES

The core argument raised by the Trustee for summary judgment on Counts I and III is that Green has no enforceable secured claim against the Property because he did not possess the Note at the time of its loss. The Trustee maintains that, under MGL ch. 106, § 3–309(a) (“§ 3–309(a)”), a claimant relying on a lost note affidavit must have had possession of the note at the time of the loss in order to enforce it. And, as a corollary, the Trustee concludes that Green's inability to enforce the Note also precludes his enforcement of the Mortgage, arguing that the Mortgage is not independently enforceable and secures no obligations other than those represented by the (unenforceable) Note.

[505 B.R. 369]

Green insists that § 3–309(a) should not be interpreted in the manner asserted by the Trustee, and that he is entitled to enforce the Note under that section as the holder of the Lost Note Affidavit, stepping into the shoes of the original note holder. And even if he is unable to enforce the Note, Green says, he is at least the holder of an enforceable underlying claim. Moreover, he adds, even if he is unable to enforce the Note or the underlying claim under Massachusetts law, he still has the power to enforce the Mortgage, which mortgage entitles him to the proceeds from the sale of the Property. And finally, in the event the Court grants the Trustee summary judgment, Green requests that he be given leave to join or substitute Hansbury as a party to this action.⁷

III. DISCUSSIONA. Summary Judgment Standard

In order to succeed on a motion for summary judgment, a party must establish “ ‘that there is no genuine dispute as to any material fact’ and that it ‘is entitled to judgment as a matter of law.’ ” OneBeacon Am. Ins. Co. v. Commercial Union Assur. Co. of Can., 684 F.3d 237, 241 (1st Cir.2012) (quoting Fed.R.Civ.P. 56(a)).⁸ Here, the parties agree on the facts material to the outcome of their competing motions for summary judgment, and the only remaining questions are issues of law.

B. Enforcement of a Note by a Transferee of a Lost Note Affidavit

There appears to be no dispute that the Note is (or perhaps better said, “was”) a negotiable instrument. The treatment of such instruments is governed in Massachusetts by MGL Chapter 106. MGL ch. 106, § 3–102 (“[t]his Article shall apply to negotiable instruments”).⁹

Section 3–301 provides that a person may enforce an instrument if that person is “(i) the holder of the instrument, (ii) a nonholder in possession of the instrument who has the rights of a holder, or (iii) a person not in possession of the instrument who is entitled to enforce the instrument pursuant to section 3–309.” MGL ch. 106, § 3–301. “Massachusetts law defines both a ‘holder’ and a ‘nonholder,’ in part, as an individual who currently possess a negotiable

[505 B.R. 370]

instrument; the difference being that a holder possesses a ‘negotiated negotiable instrument,’ whereas a nonholder possesses a ‘non-negotiated negotiable instrument.’ ” Dudley v. S. Va. Univ. (In re Dudley), 502 B.R. 259, 275 (Bankr.W.D.Va.2013).¹⁰ The requirements for enforceability under § 3–301 share the common requirement that the person seeking to enforce the negotiable instrument must have had actual possession of the instrument at one time, with the sole exception to the current possession requirement being a person entitled to enforce a lost or destroyed instrument under § 3–309. Id. at 275–6;MGL ch. 106, § 3–301.

At the time of the hearing, Green stipulated that he was not currently in possession of the Note, and never had been, as it was lost by Hansbury even before the purported assignment from him to CPIC. The Trustee argues that since Green was never in possession of the Note, he cannot be a “person entitled to enforce” under § 3–301 and § 3–309(a). But Green says that, as the holder of the Lost Note Affidavit by assignment, he is a person entitled to enforce the Note.

Section 3–309(a) permits a person to enforce a lost, destroyed or stolen instrument through secondary evidence under the following conditions:

(i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss...