Kittery Point Partners, LLC v. Bayview Loan Servicing, LLC, BAP NO. EP 20-001

• Decision Date: 14 January 2021
• Docket Number: BAP NO. EP 20-005,Adversary Proceeding No. 17-02065-MAF,BAP NO. EP 20-001,Bankruptcy Case No. 17-20316-MAF
• Citation: 623 B.R. 825
• Parties: KITTERY POINT PARTNERS, LLC, Debtor. Kittery Point Partners, LLC, Plaintiff-Appellant, v. Bayview Loan Servicing, LLC, Defendant-Appellee. Kittery Point Partners, LLC, Debtor. Kittery Point Partners, LLC, Appellant, v. Bayview Loan Servicing, LLC, Appellee.
• Court: U.S. Bankruptcy Appellate Panel, First Circuit

623 B.R. 825

KITTERY POINT PARTNERS, LLC, Debtor.

Kittery Point Partners, LLC, Plaintiff-Appellant,

v.Bayview Loan Servicing, LLC, Defendant-Appellee.

Kittery Point Partners, LLC, Debtor.

Kittery Point Partners, LLC, Appellant,

v.Bayview Loan Servicing, LLC, Appellee.

BAP NO. EP 20-001

BAP NO. EP 20-005

Bankruptcy Case No. 17-20316-MAF

Adversary Proceeding No. 17-02065-MAF

United States Bankruptcy Appellate Panel of the First Circuit.

January 14, 2021

George J. Marcus, Esq., and David C. Johnson, Esq., on brief for Appellant.

Andrew W. Sparks, Esq., and Adam R. Prescott, Esq., on brief for Appellee.

Before Godoy, Cabán, and Finkle, United States Bankruptcy Appellate Panel Judges.

Finkle, U.S. Bankruptcy Appellate Panel Judge.

The chapter 11 debtor, Kittery Point Partners, LLC ("KPP"), appeals from: (1) the order entered in the main bankruptcy case overruling its objection to the proof of claim filed by Bayview Loan Servicing, LLP ("Bayview"); and (2) the judgment entered in favor of Bayview in a related adversary proceeding in which KPP sought to have the underlying note and mortgage declared invalid and Bayview's claim disallowed.¹ The crux of KPP's argument before the bankruptcy court was that the note and mortgage were unenforceable due to a lack or failure of consideration. The court concluded, however, that KPP was barred from challenging the validity of the note and mortgage by: (1) a repayment agreement in which KPP explicitly acknowledged the validity of the note, mortgage, and debt, and released all claims against Bayview; and (2) the preclusive effect of a final state court judgment upholding the validity of the note and mortgage.

For the reasons discussed below, we AFFIRM both the order and judgment of the bankruptcy court.

BACKGROUND

I. Pre-Bankruptcy Events

A. The Creation of KPP

James Austin formerly owned property located in Kittery, Maine (the "Property"), which was subject to a first mortgage held by Wells Fargo Bank, N.A. ("Wells Fargo") securing a $550,000 note. On May 26, 2005, Mr. Austin transferred the Property by a quitclaim deed to KPP. KPP was formed on April 21, 2005 by Todd Enright, a financial advisor to Mr. Austin and his wife, for the sole purpose of holding title to the Property. At the time, KPP's only member was Daniel Systo, who was affiliated with Enright.

B. The Note and Mortgage

On March 1, 2005, prior to KPP's formation and acquisition of the Property, Systo executed on behalf of KPP a promissory note in the amount of $600,000 (the "Note") in favor of Middlebury Equity Partners ("MEP"), an entity controlled by Enright, and a mortgage on the Property securing that Note (the "Mortgage"). As consideration for the Note and Mortgage, MEP agreed to disburse $550,000 to Wells Fargo to discharge that lender's first mortgage on the Property and $39,835 to KPP. Although the Note provided that KPP's promise to pay was in exchange "for value received," KPP now insists that no funds were ever advanced, and Wells Fargo's first mortgage was never discharged.

In June 2005, Bayview purchased the Note and Mortgage from MEP for approximately $600,000. In connection with the purchase, MEP executed an Assignment of Mortgage in favor of Bayview, the current holder of the Note and Mortgage.

C. The Delinquency Repayment Agreement

KPP eventually defaulted on its obligations under the Note, and Bayview commenced foreclosure proceedings. A default judgment was entered against KPP in November 2008. Around this time, the Austins became members of KPP and Mrs. Austin became a manager.

In February 2009, KPP entered into a Delinquency Repayment Agreement with Bayview (the "DRA"), executed by Mrs. Austin in her capacity as a manager. The DRA contained a "release" provision, in which KPP explicitly acknowledged the validity of the Note, the Mortgage, and its indebtedness to Bayview as follows:

Borrower [KPP], by his/her signature hereon, agrees to the accuracy of the allegations in this Agreement, as well as to the authenticity and validity of each Loan Document referred to herein, and to the validity of the indebtedness described within those Loan Documents. Borrower further agrees and acknowledges that there are no defenses, set-offs or counterclaims to the indebtedness of Borrower pursuant to the Loan Documents ....

KPP also expressly released Bayview from all claims arising from the loan:

Borrower [KPP] releases Servicer [Bayview] ... from any and all claims, damages or liabilities of any kind existing on the date of this Agreement, which are in any way connected with the Loan, the servicing of the Loan, or events which [led] up to or resulted in the Borrower entering into this Agreement. Borrower waives any rights which Borrower may have under federal or state statute or common law principle which may provide that a general release does not extend to claims which are not known to exist at the time of execution [of this Agreement] ....

In addition, the DRA included a so-called "savings clause," which provided:

Except as expressly adjusted by this Agreement, all of the covenants, agreements, stipulations and conditions in the Loan Documents remain unmodified and in full force and effect. The Security Instrument continues to secure on a first and prior lien basis the due and punctual payments of the note, as modified by this Agreement. None of the Borrower's obligations or liabilities under the security instrument shall be diminished or released by any provisions herein. Nor shall this Agreement in any way impair, diminish, or affect any of the Borrower's rights or remedies in the Security Instrument, whether such rights or remedies arise herein or by operation of law. No oral representations have been made by any party hereto which have not been incorporated into this Agreement. Any inserted terms, changes or additions to this Agreement will immediately render it null and void. Borrower is encouraged to review this Agreement with his/her legal advisor prior to signing it, but by signing below Borrower has voluntarily signed this Agreement.

Thereafter, KPP brought the loan current and Bayview dismissed the foreclosure proceeding. KPP continued to make payments to Bayview until November 2011.

D. The State Court Litigation

1. Commencement of the State Court Action

In August 2011, KPP sued Bayview, its servicer, and Systo in Maine Superior Court (the "State Court Action") seeking a declaratory judgment that the Note and Mortgage were invalid and unenforceable because MEP had not advanced any funds in connection with the Note. KPP later sought to amend its complaint to include additional allegations, including that Bayview: (1) pressured KPP into executing the DRA by initiating the foreclosure action;

(2) knew the Wells Fargo mortgage had not been paid off or otherwise satisfied; and (3) knew the funds it advanced to MEP were misapplied. KPP's motion to amend was denied.

2. The State Court Order Granting Summary Judgment

Bayview moved for summary judgment, arguing that: (1) the express release in the DRA barred KPP from challenging the enforceability and validity of the Note and Mortgage under the doctrines of promissory estoppel and waiver; and (2) KPP was barred from contesting the validity of the Note because Bayview was a holder in due course.

In November 2016, the superior court granted partial summary judgment in favor of Bayview, ruling that the release in the DRA precluded KPP's challenge to the validity and enforceability of the Note and Mortgage due to a lack of consideration (the "State Court S.J. Order"). The superior court found that the release provision was "broad and unambiguous" and that KPP had failed "to address the release or argue that the release is not valid, does not cover the dispute, or is ambiguous." The court also determined that Bayview's efforts to enforce its rights under the loan documents did not constitute duress which would invalidate the release. Nor were the alleged "improprieties and irregularities" surrounding the actions of Enright, Systo, and MEP in connection with the original loan sufficient to nullify the release. The court concluded that "[a]side from the general allegations as to what transpired in connection with the original loan transaction, and speculation as to what Bayview knew or should have known, KPP has failed to generate a disputed issue of material fact or a valid legal theory that would permit the court to set aside the release agreement." Accordingly, the court held that the release was valid and barred KPP's challenge to the enforceability and validity of the Note and Mortgage.²

3. The State Court Final Judgment

KPP appealed the ruling of the superior court to the Supreme Judicial Court of Maine (known as the "Law Court"), but its initial appeal was dismissed due to the interlocutory nature of the State Court S.J. Order. Thereafter, the superior court entered a final judgment in the State Court Action on January 16, 2019 (the "State Court Final Judgment"). KPP moved in the superior court to amend the State Court Final Judgment to acknowledge that the court had not determined the amounts advanced to KPP or owed by KPP under the Note. The superior court denied that motion, stating:

Given the conclusion that the 2009 release bars KPP's action against Bayview, it is self-evident from the [State Court S.J. Order] and the [State Court Final Judgment] that that there is neither a need nor basis for the court to adjudicate "the amount actually due and owing under the $600,000 promissory note at issue in this case." It is also self-evident that there is no basis for proceeding with any further hearing with respect to the same. This action has been finally adjudicated as a matter of law.

KPP appealed the State Court Final Judgment to the Law Court. On November 12, 2019, the Law Court affirmed the State Court Final Judgment, ruling that the superior court "did not err in finding that a release of ‘any and all claims’ executed by KPP in return for Bayview's forbearance in a foreclosure...