Stephan v. Wells Fargo Bank, N.A. (In re Kirk S. Stephan, LLC)
| Decision Date | 05 February 2014 |
| Docket Number | Case No. 12-17333 (GMB),Civil No. 13-3937 (JBS) |
| Parties | IN RE: Kirk S. Stephan, LLC, Debtor. Kirk S. Stephan, Appellant, v. Wells Fargo Bank, N.A., Appellee. |
| Court | U.S. District Court — District of New Jersey |
Nicholas S. Herron, Esq.
Law Offices of Seymour Wasserstrum
Attorney for Appellant Kirk S. Stephan
Angela C. Pattison, Esq.
Attorney for Wells Fargo Bank, N.A.
I. INTRODUCTION
This action comes before the Court on the debtor's appeal from Bankruptcy Case No. 12-17333, in which the Bankruptcy Court issued an order on May 20, 2013 denying the debtor's motion to preclude distribution to Wells Fargo on debtor's secondmortgage. The Court heard oral argument on February 4, 2014. For the following reasons, the Bankruptcy Court's May 20, 2013 Order is affirmed. Wells Fargo is entitled to distribution on the second mortgage claim.1
II. BACKGROUND
Appellant Kirk S. Stephan filed for Chapter 13 bankruptcy protection on March 22, 2012. Before filing for bankruptcy, Stephan had obtained two mortgages on his residence through Wells Fargo Bank, N.A. ("Wells Fargo"). When he filed the bankruptcy action, the residence had a value of $320,000.00, he owed $386,381.062 on the first mortgage, and he owed $64,088.98 on the second mortgage. He was in default on both mortgages. The second mortgage is the subject of this appeal.
Stephan filed a motion to reclassify the second mortgage as unsecured and to prohibit Wells Fargo from receiving any distributions from the Chapter 13 trustee for the second mortgage. He argued that the second mortgage was unsecuredbecause the value of the first mortgage exceeded the value of the property. Stephan argued that the second mortgage was unenforceable because, under New Jersey state law, N.J. Stat. Ann. § 2A:50-2, the mortgage holder must foreclose on the property before any action to recover a personal judgment can be commenced. Stephan argued that Wells Fargo could not proceed with foreclosure and, thus, had no right to payment.
Wells Fargo objected to this motion on the grounds that the debtor cannot attack the reclassified, unsecured claim as unenforceable where that claim was already deemed allowed in order to invoke § 506(a) of the Bankruptcy Code.
The Bankruptcy Court heard Stephan's motion on May 7, 2013. At the hearing, the Bankruptcy Judge noted that Wells Fargo could not file a foreclosure action because of the automatic stay pursuant to the bankruptcy proceedings, not because Wells Fargo had lost any rights under state law (Hr'g Tr. at 6:6-13); debtor's plan treats the second mortgage as an unsecured claim because of its lack of equity (id. at 11:7-10); and bankruptcy law allows the debtor to treat a secured claim as unsecured, but does not allow the debtor to not pay the unsecured claim (id. at 13:7-15). The Bankruptcy Judge concluded that Wells Fargo's second mortgage should be considered an unsecured claim and that Wells Fargo was entitled to the same distribution as other unsecured creditors. (Id. 11:9-21.)
On May 20, 2013, the Bankruptcy Court issued an order ("May 20, 2013 Order") denying Stephan's motion. The May 20, 2013 Order constitutes a final order of the Bankruptcy Court. This Court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1).
Stephan raises three issues on appeal: whether the Bankruptcy Court erred in failing to make factual determinations and provide a clear basis for its legal conclusions; whether the Bankruptcy Court erred in interpreting New Jersey law; and whether New Jersey law prohibits a second mortgagee from collecting on its note without completing a foreclosure process.
Stephan argues that the Bankruptcy Court "failed to understand that the opportunity to foreclose existed well before the underlying case was filed" and "did not clearly state why the New Jersey statutory deficiency framework could not be adhered to in the bankruptcy." (Appellant Br. at 3-4.) Stephan argues that the Bankruptcy Court "did not make any factual determinations" and "needed to make a finding of value as to the subject property." (Id. at 5.) Stephan argues that the Bankruptcy Court erred in holding that Wells Fargo could share in distributions because the second mortgage is unenforceable due to Wells Fargo's failure to file a foreclosure action.
Wells Fargo argues that there are two questions on appeal: whether the Bankruptcy Court correctly concluded that the Wells Fargo second mortgage claim was derived from the creditor's lien, not the bank's stayed deficiency claim, and whether the Bankruptcy Court made all of the necessary factual findings and fully explained its legal conclusions. Wells Fargo asserts that the Bankruptcy Court "correctly concluded that the New Jersey statute establishing the procedure for foreclosure deficiency actions was inapplicable to the reclassified claim held by Wells Fargo . . . ." (Appellee Br. at 3.)
In Reply, Stephan emphasizes that the Bankruptcy Court "was absolutely silent as to a key factual determination [as to the value of the property] and failed to clearly articulate the legal basis for its holding." (Appellant Reply at 1.) He also asserts that the Bankruptcy Court committed reversible error in failing to acknowledge that Wells Fargo cannot collect upon its note under New Jersey law.
III. ANALYSIS
Bankruptcy Rule 8013 provides that a district court "may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings." Fed. R. Bankr. P. 8013. The Rule further provides that "[f]indings of fact, whether based on oral or documentaryevidence, shall not be set aside unless clearly erroneous, and due regard shall be given to the opportunity of the bankruptcy court to judge the credibility of the witnesses." Fed. R. Bankr. P. 8013. Essentially, the district court must "review the bankruptcy court's legal determinations de novo, its factual findings for clear error and its exercise of discretion for abuse thereof." In re Am. Pad & Paper Co., 478 F.3d 546, 551 (3d Cir. 2007).
Stephan argues that Wells Fargo is not entitled to distribution on the second mortgage because, under New Jersey law, a mortgage holder must first file a foreclosure action before seeking any deficiency. The Bankruptcy Court correctly held that this argument lacks merit.
New Jersey law specifies the "Order of proceedings," mandating that "all proceedings to collect any debt secured by a mortgage on real property, shall be as follows: First, a foreclosure of the mortgage; and Second, an action on the bond or note for any deficiency . . . ." N.J. Stat. Ann. § 2A:50-2. This statute does not apply here. Wells Fargo did not initiate proceedings against Stephan; Stephan filed for bankruptcy and Wells Fargo submitted a proof of claim.
Stephan's filing of a bankruptcy action stayed all proceedings against him, including foreclosure proceedings. Abankruptcy petition "operates as a stay, applicable to all entities, of -- the commencement or continuation . . . of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title . . . ." 11 U.S.C. § 362. The automatic stay "stop[s] all collection efforts, all harassment, and all foreclosure actions." Mar. Elec. Co., Inc. v. United Jersey Bank, 959 F.2d 1194, 1204 (3d Cir. 1991). See also In re Ward, 837 F.2d 124, 126 (3d Cir. 1988) (); Matter of Cappadonna, 154 B.R. 639, 642 (Bankr. D.N.J. 1993) (). Essentially, Wells Fargo could not file a foreclosure action after Stephan filed his bankruptcy petition.
Stephan argues that the Bankruptcy Court "failed to understand that the opportunity to foreclose existed well before the underlying case was filed" and "did not clearly state why the New Jersey statutory deficiency framework could not be adhered to in the bankruptcy." (Appellant Br. at 3-4.) Stephan has cited no law requiring Wells Fargo to file for foreclosure before he filed for bankruptcy and, if Wells Fargo had initiated such a proceeding, Stephan's bankruptcy petition would havestayed it.3 Moreover, the Bankruptcy Court clearly stated at the hearing that the New Jersey statutory deficiency framework could not be adhered to "because [Stephan] filed bankruptcy and there's an automatic stay in place." (Hr'g Tr. 4:15-16.) The Bankruptcy Court also explained that the New Jersey law is (Hr'g Tr. 17:23-18:1.) Stephan erroneously cites Bus. Loan Ctr., Inc. v. Nischal, 331 F. Supp. 2d 301, 308 (D.N.J. 2004) for the proposition that the foreclosure first requirement is substantive, not procedural; Nishcal is inapposite because the Nishcal court held that the foreclosure first requirement was substantive in the context of a conflicts-of-law analysis where application of New Jersey law, instead of Georgia law, would substantially affect the result.
Stephan's bankruptcy petition did not obviate Wells Fargo's rights under state law. See In re DiClemente, Civ. 12-1266 (FLW), 2012 WL 3314840, at *6 (D.N.J. Aug. 13, 2012) (); cf. Butner v. United States, 440 U.S. 48, 56 (1979) (...
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