Kohout v. Nationstar Mortg., LLC (In re Kohout), Case No.: 10–60999

• Decision Date: 10 November 2016
• Docket Number: Case No.: 10–60999,Adv. Pro. No.: 15–80004
• Citation: 560 B.R. 399
• Parties: In re: Kevin J. Kohout and Susan R. Kohout, Debtors. In re: Kevin J. Kohout and Susan R. Kohout, Plaintiffs, v. Nationstar Mortgage, LLC, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of New York

560 B.R. 399

In re: Kevin J. Kohout and Susan R. Kohout, Debtors.In re: Kevin J. Kohout and Susan R. Kohout, Plaintiffs,

v.Nationstar Mortgage, LLC, Defendant.

Case No.: 10–60999

Adv. Pro. No.: 15–80004

United States Bankruptcy Court, N.D. New York.

Signed November 10, 2016

THE LAW OFFICES OF STEVEN R. DOLSON, PLLC, Steven R. Dolson, Esq., Attorneys for Plaintiffs Kevin J. Kohout and Susan R. Kohout, 126 North Salina Street, Suite 3B, Syracuse, New York 13202

SANDELANDS EYET LLP, Laurence P. Church, Esq., Attorneys for Defendant Nationstar Mortgage, LLC, 1545 U.S. Highway 206, Suite 304, Bedminster, NJ 07921

MEMORANDUM–DECISION AND ORDER

DIANE DAVIS, United States Bankruptcy Judge

Plaintiffs Kevin J. Kohout and Susan R. Kohout ("Debtors") commenced this adversary proceeding seeking a judgment to declare the mortgage lien held by Defendant Nationstar Mortgage LLC ("Nationstar") void by operation of 11 U.S.C. § 506(d).¹ The parties have stipulated to all material facts and agree that the question to be decided by the Court is purely a question of law. Pending before the Court for determination are the parties' competing motions for summary judgment pursuant to Federal Rule of Civil Procedure ("FRCP") 56, made applicable to this adversary proceeding by virtue of Federal Rule of Bankruptcy Procedure ("FRBP") 7056. (ECF Adv. Pro. Nos. 13 & 14.)

JURISDICTION

The Court has jurisdiction of this case and adversary proceeding pursuant to 28 U.S.C. §§ 157(a), (b)(1), and 1334(b). This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(k). This Memorandum–Decision and Order constitutes the Court's findings of fact and conclusions of law to the extent required by FRBP 7052.

FACTS

The following facts are derived from the parties' Joint Statement of Facts ("JS") filed pursuant to Local Bankruptcy Rule 7056–1 on March 18, 2016. (ECF Adv. Pro. No. 13.)² On April 14, 2010, Debtors filed a joint Voluntary Petition for Chapter 13 relief (ECF No. 1; JS ¶ 3), wherein Debtors listed a secured debt owed to Resmae Mortgage Corporation ("Resmae") in the amount of $ 106,810.00. (JS ¶ 4.) On or about January 26, 2007, Debtors became obligated to Resmae pursuant to a Promissory Note in the amount of $ 106,250.00 (the "Note"), which was secured by a Mortgage executed in favor of Mortgage Electronic Registration Systems, Inc. ("MERS"), as nominee for Resmae, on the same date and for the same principal amount (the "Mortgage") (the loan evidenced by the Note and Mortgage is referred to herein as the "Mortgage Loan"). (JS ¶¶ 20–21.) The Mortgage was recorded in the Office of the Delaware County Clerk on February 26, 2007, as a first priority mortgage lien on Debtors' residence located at 16200 Main Street, a/k/a 16200 State Highway 23, Davenport, New York 13750 (the "Property"). (JS ¶ 21.) On June 2, 2009, the Mortgage was assigned by MERS, as nominee for Resmae, to Wells Fargo Bank, N.A. ("Wells Fargo"), as Trustee for the Lehman ABS Mortgage Loan Trust Mortgage Pass–Through Certificates, Series 2007–1, by way of an Assignment of Mortgage that was recorded in the Delaware County Clerk's Office on July 29, 2009. (JS ¶ 22.)

On April 14, 2010, Debtors filed a Chapter 13 Plan, which identified mortgage arrears of $ 14,000.00 due and owing to Resmae and required Debtors to make ongoing post-petition mortgage payments directly to Resmae (the "Plan"). (ECF No. 2; JS ¶¶ 5–6.) On June 14, 2010, Bridgefield Mortgage Corporation (f/k/a/ Resmae) (hereinafter "Bridgefield") filed Proof of Claim Number 13 ("Claim 13") in Debtors' main bankruptcy case alleging a debt due of $ 127,123.67 secured by the Property, inclusive of an arrearage claim in the amount of $ 19,665.63. (JS ¶ 8.) On August 4, 2010, the Court issued an Order Confirming Debtors' Plan without objection. (ECF No. 11.) On September 16, 2010, Aurora Bank, FSB ("Aurora") filed a transfer of claim other than for security in Debtors' main bankruptcy case, transferring Claim 13 from Bridgefield to Aurora. (ECF No. 12; JS ¶ 12.) On October 14, 2010, the Chapter 13 Trustee filed a Notice of Claims Filed in Debtors' main bankruptcy case, which included Claim 13. (ECF No. 15; JS ¶ 9.)

On December 3, 2010, Debtors filed an objection to Claim 13 on the bases that the original claimant, Bridgefield, failed to include supporting documentation as required by FRBP 3001(d) proving that it held a secured interest in the Property and, further, that the arrearage amount was overstated. (ECF No. 20; JS ¶ 10.) On January 27, 2011, upon proof of proper service by Debtors upon Bridgefield and Aurora, the Court issued an Order disallowing Claim 13 (the "Claim Disallowance Order") on default that provided that Claim 13 should not "share in any dividends paid to creditors" in Debtors' case. (ECF No. 26.) The Claim Disallowance Order specifically stated, inter alia, that "[n]o opposition was filed and no hearing was held." (JS ¶ 11.)

On April 25, 2011, Aurora filed a motion for relief from stay in Debtors' main bankruptcy case (ECF No. 30; JS ¶ 13), but it withdrew the same on July 22, 2011 (ECF No. 35; JS ¶ 14). On May 21, 2012, Debtors filed an Amended Summary of Schedules in their main bankruptcy case, which listed secured liabilities totaling $ 120,203.20. (ECF No. 48; JS ¶ 15.) On June 29, 2012, the Mortgage was further assigned by Aurora to Nationstar by way of an Assignment of Mortgage. (JS ¶ 24.) On July 15, 2012, a transfer of claim other than for security was filed in Debtors' main bankruptcy case, transferring Claim 13 from Aurora to Nationstar. (ECF No. 50; JS ¶ 16.) On June 9, 2015, the Court issued an Order discharging Debtors in their main bankruptcy case. (ECF No. 86; JS ¶ 19.)

Nationstar is currently in possession of the original Note, endorsed in blank. (JS ¶ 25.) Nationstar's business records reflect that Debtors defaulted on the Mortgage Loan by failing to tender the monthly mortgage payment due June 1, 2009, and each payment due thereafter. (JS ¶ 26.) Nationstar's business records also reflect that the default has not been cured and there remains an unpaid principle balance of $ 108,792.20 due on the Mortgage Loan, together with interest, escrow advances, corporate advances, costs and fees. (JS ¶ 27.) The parties agree that Claim 13 is not based on either a domestic support obligation or on reimbursement or contribution of any entity of a kind described in 11 U.S.C. § 502(e).

ARGUMENTS

Debtors' argument is based on a straightforward textual reading of § 506(d), for which Debtors find support in Ninth Circuit Court of Appeals precedent in the case of HSBC Bank USA, N.A. v. Blendheim (In re Blendheim) , 803 F.3d 477 (9th Cir. 2015) (holding that the bankruptcy court properly voided a creditor's lien under § 506(d) where the creditor timely filed its proof of claim and received timely service of the debtors' claim objection but did not contest the disallowance of its claim, based on the rational that under § 506(d), if a creditor's claim has not been "allowed" in the bankruptcy proceeding, then a lien securing the claim is void). Debtors contend that Beneficial's first priority mortgage lien is void pursuant to § 506(d) because Beneficial does not hold an "allowed secured claim" following this Court's issuance of the Claim Disallowance Order, which Beneficial did not appeal or, until now, otherwise seek to undo.³ Further, because the parties have stipulated that the exceptions to § 506(d) do not apply in this case, Debtors assert that they are entitled to judgment as a matter of law.

Nationstar conversely argues that case law and longstanding bankruptcy tenets do not support this overly literal reading of § 506(d) and that proper application of this Bankruptcy Code section commands judgment in its favor because Debtors cannot substantively challenge Nationstar's valid and properly perfected first priority mortgage lien. Nationstar directs the Court's attention to a line of cases handed down by the United States Courts of Appeals for the Fourth, Seventh, and Eighth Circuits wherein the circuit courts respectively concluded that bankruptcy courts may not use § 506(d) to void liens of creditors whose underlying claims have been disallowed on the sole basis that their proofs of claim were untimely filed. Shelton v. CitiMortgage, Inc. (In re Shelton) , 477 B.R. 749 (8th Cir. BAP 2012) ; Hamlett v. Amsouth Bank (In re Hamlett) , 322 F.3d 342 (4th Cir. 2003) ; In re Tarnow , 749 F.2d 464 (7th Cir. 1984). These circuit courts reasoned that voiding liens merely because the creditor did not timely file a claim violates the longstanding principle that valid liens pass through bankruptcy unaffected. Employing a similar rationale, Nationstar asserts that it would be nonsensical to apply § 506(d) to penalize a secured creditor whose lien is unquestionably valid under state law by voiding such lien where the creditor chose to participate in the debtor's bankruptcy case by filing a timely proof of claim but then inadvertently failed to defend the same. Just as § 506(d) has been held to be inoperative where a creditor's claim is disallowed on the basis of untimeliness, Nationstar contends that it must also be held to be inoperative where a claim is disallowed on a default basis because of a procedural deficiency rather than either on the merits as provided under § 502 or on account of a substantive defect regarding the creditor's lien.

Under Nationstar's interpretation of § 506(d), the phrase "allowed secured claim" must be construed more narrowly. In support of its interpretation that § 506(d)'s lien avoidance mechanism requires a prerequisite ruling regarding either the claimant's rights or the underlying lien itself, Nationstar cites, among others, the bankruptcy court case of In re Oudomsouk , 483 B.R. 502 (Bankr. M.D. Tenn. 2012) (denying the debtor § 506(d) lien avoidance relief where the creditor's claim was disallowed on default but where there was "no attack ... of the traditional type tied to existence, legitimacy,...