Payne v. First Cmty. Bank (In re Payne)
| Decision Date | 23 December 2014 |
| Docket Number | Bankruptcy No. 02–22927.,Adversary No. 14–5006. |
| Citation | 523 B.R. 560 |
| Court | U.S. Bankruptcy Court — Eastern District of Tennessee |
| Parties | In re Joseph C. PAYNE, Sr. and Brenda G. Payne d/b/a J & J Marine Sales & Service, Debtors. Joseph C. Payne, Sr. and Brenda G. Payne d/b/a J & J Marine Sales & Service, Plaintiffs, v. First Community Bank d/b/a Peoples Community Bank and Steven C. Huret, in his capacity as Substitute Trustee, Defendants. |
OPINION TEXT STARTS HERE
Mark S. Dessauer, Esq. Hunter, Smith & Davis, LLP, Kingsport, TN, Attorney for Plaintiffs.
Steven C. Huret, Esq. Robert L. Arrington, Esq. Wilson Worley P.C., Kingsport, TN, Attorneys for Defendants.
More than eleven years after their chapter 11 plan was confirmed and their bankruptcy case closed, the Debtors Joseph and Brenda Payne have reopened the case in an effort to avoid the deed of trust held by People's Community Bank in their residence, and to modify their completed plan to treat the Bank as unsecured. At issue primarily is whether the parties intended in the confirmed plan to substitute the Debtors' commercial property as the Bank's collateral in place of the Debtors' residence, as the Debtors claim, or whether the plan contains a scrivener's error, as the Bank responds. If the Debtors are correct, the Bank is now unsecured because the Debtors' commercial property was foreclosed upon by another creditor in 2004. In the event that the court decides against the Debtors on the primary issue, the Debtors have also raised two state law objections to the Bank's efforts to foreclose on the Debtors' residence, namely, that the Bank does not have a note to enforce and the Bank's deed of trust is no longer valid because it was not enforced within 10 years of the debt's maturity as required by Tenn.Code Ann. § 28–2–111. For the reasons discussed, the court rejects all of the Debtors' claims. The Bank's deed of trust on the Debtors' residence is enforceable and may not be avoided by the Debtors. The following constitutes the court's findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. This is a core proceeding. See28 U.S.C. § 157(b)(2)(A), (K), (L) and ( O).
The Debtors filed a voluntary petition for bankruptcy relief under chapter 11 on September 3, 2002. At the time of their bankruptcy filing, the Debtors owned two primary parcels of real property. One was their residence located at 229 Boone Ridge Road, Kingsport, Tennessee (the “Boone Ridge Property”) and the other was their business located at 140 Spurgeon Lane, Blountville, Tennessee (the “Spurgeon Lane Property”), where the Debtors did business as J & J Marine Sales & Service.
In connection with the operation of their business, the Debtors obtained a number of loans from the Bank that were secured by their Boone Ridge Property. The first was on January 27, 1997, when the Debtors executed a promissory note in favor of the Bank for an open-end credit line in the amount of $150,500, with a maturity date of January 15, 1998 (the “1997 Note”). The 1997 Note recited that the purpose of the loan was “Business: Working Capital, Line of Credit,” and that security for the note was “Deed of Trust Dated January 27, 1997 On Property Located In The 18th Civil District of Sullivan County, TN.” The referenced deed of trust listed the street address of the Boone Ridge Property as the property conveyed in trust, and identified Joseph and Brenda Payne d/b/a J & J Marine Sales & Service at their Spurgeon Lane Property business address as the Grantors. The Bank first recorded the deed of trust in the Sullivan County Register's Office in Blountville, Tennessee on February 6, 1997, but subsequently re-recorded the instrument on August 13, 2002, to include a legal description of the Boone Ridge Property.
On February 5, 1998, the Debtors executed a second promissory note in favor of the Bank in the amount of $147,798.18, with the loan's stated purpose being for “Business: Term Out Line of Credit” (the “1998 Note”). Unlike the 1997 Note that had required payments of monthly interest only during its approximate one-year term, the 1998 Note contained a ten-year maturity and required 120 monthly payments of $1,925.49. The 1998 Note referenced the recorded deed of trust on the Boone Ridge Property as collateral, and did not indicate whether it was a new loan or a renewal of a previous loan. However, on the same day the 1998 Note was made, the 1997 Note was stamped “paid” in the amount of $146,793.29.
Four years later, the Debtors refinanced the 1998 Note, executing a third promissory note in favor of the Bank on February 26, 2002, in the amount of $112,581.01 (the “2002 Note”). As had the two prior notes, the 2002 Note listed the deed of trust on the Boone Ridge Property as the security for the debt. The 2002 Note obligated the Debtors to make 60 monthly payments of $1,366 and one final balloon payment of $68,460.01 on March 28, 2007.
When the Debtors filed their chapter 11 petition on September 3, 2002, they scheduled the Bank as a secured creditor with a claim of $109,949.44, collateralized by the Boone Ridge Property valued at $369,000. According to the Debtors' schedules, the Bank's lien on the Boone Ridge Property was in third place, behind Bank to Tennessee's first lien in the amount of $65,000 and a second lien in the amount of $75,000 held by Hurshel Bowers. The Bank was also scheduled as a secured creditor on two additional obligations of the Debtors, one for $17,600 and the other for $44,861.77, respectively secured by a forklift valued at $15,000 and a 2000 Blazer bass boat and trailer valued at $11,800.1 As to their Spurgeon Lane Property, the Debtors scheduled the property at a value of $400,000, securing a debt to Robert Thompson in the amount of $400,915.90. Lastly of significance, the Debtors listed three statutory liens, the first held by the Internal Revenue Service in the amount of $8,536 and the second held by the State of Tennessee Department of Revenue in the amount of $110,000, with both attached to all of the Debtors' real and personal property. The third statutory lien was held by the Sullivan County Clerk for property taxes in the amount of $2,171 on the Boone Ridge Property.
On November 4, 2002, the Debtors filed their first disclosure statement and plan of reorganization. In their plan the Debtors proposed to pay in full all of the mortgage debts on their real property, but cram down the two smaller secured obligations owed to the Bank, the $17,600 and $44,861.77 debts, to the scheduled values of the personal property securing each debt, $15,000 and $11,800 respectively. The plan placed each of the three secured debts to the Bank in separate classes, with the debt secured by the forklift in Class 5, the debt secured by the boat and trailer in Class 6, and the debt on the 2002 Note secured by the Boone Ridge Property in Class 12. The Class 5 and 6 claims were to be paid the value of their collateral over a period of 60 months with 6% interest. Class 12 was to be paid in full with 8% interest by monthly payments amortized over a thirty-year period, but with a ten-year maturity. 2 As to this last class, the plan provided that a loan modification agreement would be executed to reflect the modified terms of the 2002 Note.
Because the Debtors' bankruptcy case was a small business case, the court conditionally approved the disclosure statement without the necessity of a hearing by order entered November 6, 2002, which also set deadlines for objections, scheduled a confirmation hearing and directed Debtors' counsel to serve the plan, the disclosure statement, and a ballot on all creditors. On November 8, 2002, Debtors' counsel, who at that time was Charles Pope, filed a certificate of service evidencing that he had complied with the order, although it appears from the attachments to the certificate that what he actually served was a First Amended Disclosure Statement and a First Amended Plan.3 These new documents contained only minor changes not pertinent to the Bank's claims, and otherwise set forth the same payment proposal for the Bank's claims.
The Bank was represented in the Debtors' bankruptcy case by the law firm of Bearfield & McClellen, the firm the Bank regularly used for matters relating to workouts, foreclosures and bankruptcies. Rick Bearfield, the firm's senior attorney, and his associate Jason Blackburn worked on the case. On December 12, 2002, the firm filed an objection to the First Amended Plan on behalf of the Bank. Specifically, the Bank objected to the Debtors' proposal to cram down the two loans secured by personal property because the loans were also “secured by a deed of trust on the Debtors' residence” by virtue of “a cross-collateralization provision in the deed of trust.” Because the proposed plan did not treat the Bank as a fully secured creditor on all three of its claims totaling $176,039.36, the Bank asserted that the plan failed to comply with 11 U.S.C. § 1129(a)(7)(A)(ii). The objection, however, mistakenly recited that the Bank's deed of trust was “on real property at 140 Spurgeon Lane, Blountville, Tennessee 37617,” rather than the Boone Ridge Property.
A hearing on final approval of the disclosure statement and confirmation of plan along with five objections from creditors was held on December 17, 2002. Mr. Pope and counsel for the objecting creditors, including the Bank, announced that agreements had been reached to resolve all objections and that upon the filing and service of a further amended plan incorporating those agreements, the objections would be withdrawn. Accordingly, the court directed Mr. Pope to file and serve such an amended plan with a notice providing for any further objections.
On December 23, 2002, the Debtors filed that plan, entitled “Modifications to Amended Plan of Reorganization” (the “Modified Plan”). The Modified Plan states in the preamble on the first page that modifications to...
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