Ricchi v. Am. Home Mortg. Servicing, Inc. (In re Ricchi)

• Decision Date: 17 May 2012
• Docket Number: Bankruptcy No. 09–45062/JHW.,Adversary No. 11–1144.
• Citation: 470 B.R. 715
• Parties: In the Matter of Michael J. and Joanne A. RICCHI, Debtors. Michael J. and Joanne A. Ricchi, Plaintiffs v. American Home Mortgage Servicing, Inc., et al., Defendants.
• Court: U.S. Bankruptcy Court — District of New Jersey

470 B.R. 715

In the Matter of Michael J. and Joanne A. RICCHI, Debtors.Michael J. and Joanne A. Ricchi, Plaintiffs

v.American Home Mortgage Servicing, Inc., et al., Defendants.

Bankruptcy No. 09–45062/JHW.

Adversary No. 11–1144.

United States Bankruptcy Court, D. New Jersey.

May 17, 2012.

Brian S. Thomas, Esq., Linwood, NJ, for Michael J. and Joanne A. Ricchi.

Richard A. Carlucci, Esq., Griffith & Carlucci, Ocean City, NJ, for David Hadtke.

Jonathan Scott Goldman, Esq., Blank Rome LLP, Philadelphia, PA, for American Home Mortgage Servicing, Inc.

OPINION

JUDITH H. WIZMUR, Chief Judge.

In this adversary proceeding, we are asked to prioritize two competing mortgages, and to enter default judgment against a title insurer. We are also asked to determine the dischargeability of certain claims asserted against the debtors. The facts as presented at trial support the application of equitable subrogation to subrogate the refinancing lender's mortgage to the positions held by the senior mortgagees before their loans were satisfied from the proceeds of the loan. As to the title insurer, because the proceeding does not arise in or under the bankruptcy case, and is not related to the bankruptcy, the court lacks subject matter jurisdiction over the matter. The causes of action against the title insurer will be dismissed without prejudice. On the issue of the dischargeability of certain claims asserted against the debtors, there is no basis presented in this record to bar the discharge of the claims.

FACTS

The debtors, Michael J. and Joanne A. Ricchi, reside at 13 Glory Road, Marmora, New Jersey. In 2004, the house was encumbered by two mortgages, the first held by GMAC Mortgage, and the second, a small home equity loan, by Ditech.com. In April 2004, the Ricchis executed a mortgage on the property in favor of Mr. Ricchi's parents, Armand and Emily Ricchi (the “Ricchi mortgage”), in the amount of $20,000.¹

In September 2004, the debtors purchased a video store business from David Hadtke, Dr. Charles Hadtke, and John N. Davis III (the “Hadtke group”) for $275,000. The debtors paid $60,000 at closing, and signed a note for $215,000 in favor of the Hadtke group, which note had an adjustable interest rate of 2% above the prime rate as reported by the Wall Street Journal. As collateral, the debtors gave the Hadtke group a security interest in the store's inventory, and executed a mortgage in favor of the Hadtke group against their residence, which was recorded on September 22, 2004.

In August 2005, the debtors, experiencing financial distress, determined to refinance the first two mortgages on their home, which totaled about $165,000 at that point, and to restructure the Hadtke loan.

On August 31, 2005, the debtors executed a note and mortgage in favor of Ameriquest Mortgage Company for $244,000. The proceeds of the loan were used to pay off the GMAC and Ditech loans, and some of the debtors' credit card debts. The Hadtke mortgage was not dealt with at the closing. The debtors received $26,547.42 at settlement, and forwarded the sum of $23,452.98 to the Hadtke group. The debtors and the Hadtke group had agreed to restructure the loan in exchange for the payment noted. The interest rate was revised to a fixed rate of 6.25%, which resulted in a substantial reduction of the amount of the monthly mortgage payment required to be paid by the debtors on account of the Hadtke mortgage.

In connection with the closing, Ameriquest Mortgage Company obtained title insurance on the property from the New Jersey Title Insurance Company. The title agent was New Vision Title Agency, LLC. The commitment issued by the New Jersey Title Insurance Company, effective August 5, 2005, listed among the exceptions only three mortgages of record, held by GMAC, Ditech and the Ricchis.² Neither the commitment letter nor the policy issued by the title insurance company at closing included in the exceptions, or even mentions, the Hadtke mortgage. An invoice from New Vision Title Agency, LLC to Ameriquest indicates a charge for “Srch/Endrs/Overnites” for $425.00, but the record does not reflect whether and when a title search was conducted. In any event, none of the documentation from the New Jersey Title Insurance Company references the Hadtke mortgage. The debtors signed an affidavit of title at closing, drafted and completed by the title agent, which indicated that the only mortgages on the property were those held by GMAC and Ditech.

At trial, Joanne Ricchi testified convincingly that she advised the Ameriquest representative with whom she was dealing, Andrea Gregory, about the junior lien held by the Hadtkes. The extent of knowledge that Ameriquest had about the Hadtke mortgage is not evidenced in this record. No witnesses were produced by Ameriquest. Nor does the record evidence why the title report produced by the title agency did not list the Hadtke mortgage. There is no information in the record about whether that mortgage was improperly recorded, or any other reason why the mortgage did not appear on the title report. ³

On February 13, 2009, Ameriquest Mortgage Company assigned its mortgage to Deutsche Bank National Trust Company, as Trustee for Ameriquest Mortgage Securities Inc. Asset–Backed Pass–Through Certificates, Series 2005–R10 (“Deutsche Bank”). On August 12, 2009, the Hadtke group began foreclosure proceedings against the debtors' home, naming the assignee of Ameriquest as a defendant. American Home Mortgage Servicing, Inc., is the servicer for Deutsche Bank.

On December 30, 2009, the debtors filed a Chapter 13 petition, which listed “Citi/Residential Lending” as the first mortgagee on the property, with a secured claim of $245,000, and the Hadtke group as the second mortgagee, with a mortgage of $160,000. The debtors valued the property at $240,000. The debtors' Chapter 13 plan sought to strip off the mortgage of the Hadtke group, on the ground that there was no value to reach the claim. 11 U.S.C. § 506(a). The Hadtke group objected to the debtors' plan, claiming that it had priority over the Deutsche Bank mortgage because the Hadtke mortgage was recorded before the Deutche Bank mortgage, and no subordination agreement had been entered into by the Hadtke group. American Home Mortgage Servicing, Inc. filed a secured proof of claim on behalf of Deutsche Bank in the amount of $253,634.85.

On February 7, 2011, the debtors filed this adversary proceeding to require American Home Mortgage Servicing, Inc. (“AHMS”) and the Hadtke group to prove the validity and priority of their liens. Count 2 of the complaint proposed that the Hadtke claim be subordinated to that of Ameriquest. The Hadtke group filed a counterclaim against the debtors for failing to inform New Jersey Title Insurance Company (“NJTIC”) of, or to otherwise disclose, the Hadtke mortgage, claiming that their claim was therefore nondischargeable. AHMS also filed a counterclaim against the Ricchis, asserting that the debtors fraudulently failed to disclose the Hadtke mortgage. As well, AHMS filed a crossclaim against the Hadtke group, asserting that the Hadtke group and the debtors conspired to deceive Ameriquest and that the Hadtke mortgage should be subordinated to the Deutsche Bank mortgage. On July 12, 2011, the debtors amended their complaint to include NJTIC as a defendant. The debtors asserted that they were third party beneficiaries of the insurance agreement, that the dispute arose due to the negligence of NJTIC, and that NJTIC should be required to resolve and settle the dispute. AHMS then filed a crossclaim against NJTIC, asserting that the insurance company had failed to defend in bad faith and had thereby breached its contract, and asking the court to declare that AHMS was entitled to coverage, including the costs of litigation. On April 2, 2012, AHMS filed a request for an entry of default against the title insurance company, and a clerk's entry of default was entered on April 4, 2012. Default was also entered against the title insurance company in favor of the debtors.

DISCUSSION

The issues before the court can be broken down into three topics: (1) the subject matter jurisdiction of the court to entertain the cross claims filed by AHMS and the debtors against NJTIC; (2) the right of Deutsche Bank to be subrogated to the positions originally held by GMAC and Ditech; and (3) the nondischargeability of the claims held by AHMS and the Hadtke group against the debtors.

1. Jurisdiction/New Jersey Title Insurance.

Jurisdictional authority of the bankruptcy court extends to matters arising under, arising in, or related to the bankruptcy proceeding. 28 U.S.C. § 1334. See also28 U.S.C. § 157(a). The bankruptcy court has the statutory authority to enter final orders and judgments in those cases arising under Title 11 (i.e. the bankruptcy petition), or proceedings arising under or arising in Title 11, otherwise known as core proceedings. In re Ortiz, 665 F.3d 906, 911 (7th Cir.2011); In re Exide Techs., 544 F.3d 196, 206 (3d Cir.2008). A nonexclusive list of proceedings that Congress determined to be “core” is provided in § 157(b)(2). 28 U.S.C. § 157(b)(2). All matters “related to” the bankruptcy proceeding may be heard by the bankruptcy court, which then has the authority to issue findings of fact and conclusions of law, which are then submitted to the district court for review. 28 U.S.C. § 157(c)(1).

The AHMS's crossclaim against NJTIC appears to be beyond the jurisdictional authority of the bankruptcy court. This is not a core claim under § 157(b)(2). The claim does not arise in or under Title 11. Therefore, the only way that the court can hear this claim is if it is related to the bankruptcy. Related proceedings “ ‘need not necessarily be against the debtor or against the debtor's property,’ but, rather, need only be such that ‘the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy.’ ” In re Exide Techs., 544...