Umpqua Bank v. Burke (In re Burke)
| Decision Date | 25 November 2019 |
| Docket Number | Adv. No. 1:17-ap-1035,BAP No. NC-18-1260-STaB |
| Parties | In re: CAROLYN L. BURKE, Debtor. UMPQUA BANK, Appellant, v. CAROLYN L. BURKE, Appellee. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
NOT FOR PUBLICATION
MEMORANDUM*Argued and Submitted on June 20, 2019 at Sacramento, California
Appeal from the United States Bankruptcy Court for the Northern District of California
Appearances: George C. Lazar of Fox Johns Lazar Pekin & Wexler APC argued for Appellant.**
Before: SPRAKER, TAYLOR, and BRAND, Bankruptcy Judges.
In 2009, Carolyn L. Burke received a chapter 71 discharge and left bankruptcy unencumbered by personal liability under a guaranty payable to Umpqua Bank. But Umpqua's guaranty-claim was secured by a lien against her home, this lien survived discharge, and Umpqua had the right to recover payment on the guaranty from the post-petition sale of its collateral.
So, Ms. Burke emerged from bankruptcy in a new relationship with Umpqua, the housing crisis that confronted Ms. Burke and so many others in 2009 abated, California real estate generally recovered value, and we hope that Ms. Burke benefitted appropriately from the fresh start promisedby bankruptcy discharge.
Eight years passed.
In 2017, Ms. Burke sold her home. But, as a result of error, Umpqua submitted a demand into escrow that was approximately $250,000 too low. Thus, when the sale closed, Umpqua got a small payment, and Ms. Burke received a substantially enhanced payment—at Umpqua's expense.
Because the demand bound Umpqua as a matter of California law, Umpqua's trust deed was reconveyed. And because of her bankruptcy discharge, it cannot sue Ms. Burke on the guaranty. Umpqua is left with a singular and merely potential remedy: an unjust enrichment claim under California law. We are not required to determine the ultimate question of whether unjust enrichment exists under these facts; the only question we must answer is whether Ms. Burke's 2009 bankruptcy discharge bars Umpqua from bringing an unjust enrichment action. The bankruptcy court concluded that the discharge creates such a bar; on de novo review we conclude that it does not.
Accordingly, we REVERSE.
The facts relevant to this appeal are few and undisputed. In 2007, Umpqua loaned $194,000.00 to AWS, LLC. Ms. Burke guaranteed repayment and secured her obligations under the guaranty through a deed of trust against her residence in Sonoma, California (the "Home").
In 2009, Ms. Burke filed a chapter 7 bankruptcy petition. Her bankruptcy schedules reflected that the Home was over encumbered and that Umpqua held a third priority lien. She received her discharge in late 2009.
In 2017, Ms. Burke sold the Home. After payment of senior liens, approximately $351,000 remained available to pay Umpqua's approximately $231,000 claim. But Umpqua, through alleged clerical error, submitted a demand into escrow of only $3,061.23. Before it discovered or was able to correct the demand, escrow relied on it, completed the transaction, and reconveyed Umpqua's trust deed. Ms. Burke, thus, received $348,874.80 in sale proceeds.
Umpqua promptly obtained an order reopening Ms. Burke's bankruptcy case and filed an adversary complaint seeking a declaratory judgment that the filing of an unjust enrichment action in state court would not violate Ms. Burke's chapter 7 discharge. It then moved for summary judgment; Ms. Burke did not actively oppose or appear for either of the summary judgment hearings.
At the first hearing, the bankruptcy court orally denied the motion, stated an intent to sua sponte grant summary judgment in Ms. Burke's favor, but allowed Umpqua to file supplemental briefing. At the second hearing, the bankruptcy court relied on the undisputed facts and concluded that Umpqua's prepetition claim "encompassed" both itssecured claim against the Home as well as any contingent unjust enrichment claim. It, therefore, concluded that Ms. Burke's discharge prohibited Umpqua from seeking to collect personally against her on an unjust enrichment theory.
The bankruptcy court entered judgment in Ms. Burke's favor, and Umpqua timely appealed.
The bankruptcy court had jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(I). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court err when it determined that the discharge prevented Umpqua from filing a state court unjust enrichment action against Ms. Burke?
We review the bankruptcy court's grant or denial of summary judgment de novo. Fresno Motors, LLC v. Mercedes Benz USA, LLC, 771 F.3d 1119, 1125 (9th Cir. 2014). We also review the interpretation of state and federal law de novo. Cmty. Bank of Ariz. v. G.V.M. Tr., 366 F.3d 982, 984 (9th Cir. 2004); Collect Access LLC v. Hernandez (In re Hernandez), 483 B.R. 713, 719 (9th Cir. BAP 2012). Under de novo review, "we consider a matter anew, as if no decision had been made previously." Francis v. Wallace (In re Francis), 505 B.R. 914, 917 (9th Cir. BAP 2014).
Summary judgment is appropriate when "there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a) (). Here there are no factual disputes, and we, thus, apply the law to these undisputed facts.
On de novo review, we must determine the existence and nature of Umpqua's unjust enrichment claim; we do so under nonbankruptcy law. See Butner v. United States, 440 U.S. 48, 54-55 (1979); Bechtold v. Gillespie (In re Gillespie), 516 B.R. 586, 591 (9th Cir. BAP 2014). Then, we must determine when the claim arose and whether it was discharged in 2009. Bankruptcy law answers these questions.
A. The Bankruptcy Code broadly defines "claim" and may allow for discharge of litigation claims even if not yet ripe for adjudication.
Bankruptcy proceedings are intended to give debtors a "fresh start." Goudelock v. Sixty-01 Ass'n of Apartment Owners, 895 F.3d 633, 637 (9th Cir. 2018) (citing Grogan v. Garner, 498 U.S. 279, 286 (1991)); Dept. of Health Servs. v. Jensen (In re Jensen), 995 F.2d 925, 928 (9th Cir. 1993). And this is principally achieved by the bankruptcy discharge, which frees an individual debtor from personal liability for most claims arising prepetition. See 11 U.S.C. § 727(b); see also Johnson v. Home State Bank, 501 U.S. 78, 83 (1991) (citing 11 U.S.C. § 524(a)(1)). It also enjoins creditors fromcommencing or continuing an action to collect on a discharged debt as a personal liability of the debtor. 11 U.S.C. § 524(a)(2).
The Code defines a debt as "liability on a claim." 11 U.S.C. § 101(12). The definition of claim includes a: "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured." 11 U.S.C. § 101(5)(A). The term also broadly includes a "right to an equitable remedy for breach of performance." 11 U.S.C. § 101(5)(B).
This definition, thus, encompasses a debtor's prepetition obligations no matter how remote or contingent. Goudelock, 895 F.3d at 638 ). Indeed, a claim may exist for bankruptcy and discharge purposes long before a cause of action accrues under nonbankruptcy law. In re SNTL Corp., 571 F.3d at 839 (citing Cool Fuel, Inc. v. Bd. of Equalization (In re Cool Fuel, Inc.), 210 F.3d 999, 1007 (9th Cir. 2000)). It is only necessary that the creditor be able to fairly or reasonably contemplate the claim's existence as of the petition date. In re SNTL Corp., 571 F.3d at 839.
B. Umpqua's guaranty claim was discharged, it retained an in rem claim that survived discharge and allowed recovery from proceeds of the Home, but its erroneous demand into escrow extinguished its ability to obtain recovery on account of its in rem rights.
Ms. Burke's discharge freed her from any personal liability arisingunder the guaranty. See Johnson, 501 U.S. at 82-83 (citing 11 U.S.C. § 524(a)(1)). But Umpqua retained an in rem claim based on the deed of trust, and its right to pursue collection against the Home passed through the bankruptcy unaffected by the discharge. Id. at 83.
Many years postdischarge, when Ms. Burke sold the Home, Umpqua had the opportunity (and right) to collect on its in rem claim. California Civil Code § 2943 governed the process, and Umpqua, thus, responded to the escrow company's written request for a payoff demand. Cal. Civ. Code § 2943(c); Cathay Bank v. Fidelity Nat. Title Ins. Co., 46 Cal. App. 4th 266, 270 (1996).
But its demand erroneously said it was only owed $3,061.23, and, under California law, the escrow company was entitled to rely on it. Cal. Civ. Code § 2943(d)(1). As such, the erroneous payoff demand statement established "the amount necessary to pay the obligation in full." Id.; see also Cal. Nat. Bank v. Havis, 120 Cal. App. 4th 1122, 1134 (2004). Upon payment of this amount and the close of escrow, Umpqua's rights and interests under the deed of trust were automatically extinguished as a matter of law. See Cal. Civ. Code § 2943(d)(1).
California law provides a creditor with a statutory remedy for an error in a beneficiary's demand. Under California Civil Code § 2943(d)(3), the beneficiary may recover debt not included in its beneficiary's demand "as an unsecured obligation of the obligor pursuant to the terms of the"document creating the debt. Cal. Civ. Code § 2943(d)(3). For the dissent, this is conclusive. It reads Umpqua's cause of action as one on the guaranty and governed by California Civil Code § 2943(d)(3). Umpqua, however, acknowledges that it cannot pursue Ms. Burke under either the guaranty, its trust deed, or California Civil Code § 2943(d)(3);...
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