Whitcomb v. Lane (In re Whitcomb)
| Decision Date | 20 March 2019 |
| Docket Number | CASE NO: 17-31692,ADVERSARY NO. 17-3199 |
| Citation | 599 B.R. 908 |
| Parties | IN RE: Gail Thomas WHITCOMB, Debtor Gail Thomas Whitcomb, et al., Plaintiffs v. Paull & Partners-Locke Lane, et al., Defendants |
| Court | U.S. Bankruptcy Court — Southern District of Texas |
Reese W. Baker, Baker & Associates LLP, Houston, TX, for Plaintiff.
H Miles Cohn, Crain, Caton & James, PC, Houston, TX, for Defendant.
Jarett LaRochelle, Houston, TX, pro se.
Gail Thomas Whitcomb filed a lawsuit in state court against Paull & Partners-Locke Lane to (i) enjoin the defendants from foreclosing on his alleged homestead based upon an unpaid loan balance owed to Paull & Partners by Whitcomb, (ii) declare Paull & Partners' lien on the property void, and (iii) assert other related causes of action. Whitcomb removed the state court lawsuit to this Court after he filed bankruptcy.
Paull & Partners moved for summary judgment on Whitcomb's claims, arguing that:
Having resolved certain contested issues of fact as outlined below, the Court now grants Paul & Partners' motion for summary judgment in part and denies it in part.
Gail and Patricia Whitcomb purchased a home at 3011 Locke Lane (the "Property") in 2003. (ECF No. 20 at 4). The Whitcombs financed the purchased of the Property with two loans: one from Cadence Bank, N.A. secured by a deed of trust, and a second from Gail Whitcomb's Grandmother, Geraldine Whitcomb, who was listed as a co-owner of the Property. (ECF No. 20 at 5). Eventually, Mr. Whitcomb's Grandmother released her deed of trust and transferred her interest in the Property to the Whitcombs. (ECF No. 20 at 5).
The Whitcombs experienced financial difficulties in 2014 and modified their loan with Cadence Bank. (ECF No. 20-5 ). The relief from the loan modification was short lived, and the Whitcombs struggled to pay property taxes on their home. (ECF No. 20 at 5). The Whitcombs turned to a tax lien lender, which loaned the Whitcombs the money to pay off the tax liens against the Property. (ECF No. 20 at 5). The terms of the tax loan subrogated the taxing authority's interest in the Property to the tax lien lender. (ECF No. 20 at 5). Despite their attempts to obtain financial relief, the Whitcombs were left with the same financial issues they began with. (ECF No. 20 at 5).
Much of the Whitcombs financial difficulties can be traced to a family dispute that arose when Mr. Whitcomb's Grandmother passed away. (See Case No. 17-03029; ECF No. 9 at 2 ). After Geraldine Whitcomb's death, Mr. Whitcomb and his aunt, Jeriann Kolber, clashed over control of the estate's significant assets. (See Case No. 17-03029; ECF No. 9 at 2 ). After engaging in significant litigation, the parties entered into a global settlement agreement which required binding arbitration to resolve any future disputes. (Case No. 17-03029; ECF No. 9 at 2 ). One such dispute arose between the Whitcombs and Kolber in 2013 and the arbiter awarded Kolber a significant victory. (Case No. 17-03029; ECF No. 9 at 3 ). Beginning in 2015, Mr. Whitcomb believed he could vindicate his rights and claim to his mother's estate by attempting to overturn the arbitration award through additional litigation. (See Case No. 17-03029; ECF No. 9 at 3 ). Mr. Whitcomb's efforts proved both costly and unsuccessful.
In 2015, the Whitcombs contacted Paull & Partners, LLC to obtain a loan based on the Property's equity. (ECF No. 22 at 2). Paull & Partners' business is based on providing loans to "house flippers" to facilitate the renovation and resale of residential homes and properties. (August 30, 2018 Hearing at 9:49 a.m.). Paull & Partners alleges that it only provides loans to companies and does not provide home equity loans to individuals. (August 30, 2018 Hearing at 9:49 a.m.).
Whitcomb formed a Texas limited liability corporation named Waterdog 77019 on August 30, 2015. Waterdog's certificate of formation and company agreements named Mr. Whitcomb the sole member. On September 1, 2015, the Whitcombs transferred their interest in the Property to Waterdog through a special warranty deed. (ECF No. 22 at 2).
The parties dispute the reason for Waterdog's formation. The Whitcombs claim that Waterdog was formed at the insistence of Paull & Partners or its agents as a prerequisite for funding the home equity loan. (ECF No. 22 at 2). Paull & Partners concedes to knowing that Waterdog was a recently formed LLC, but portrays the formation of an LLC for the purpose of home acquisition as a commonly accepted practice in the house flipping industry. (August 30, 2018 Hearing at 9:58 a.m.).
Shortly after Waterdog's formation, the loan closed on September 4, 2015. Pursuant to the terms of the loan, Paull & Partners provided $ 800,000.00 to Waterdog. (ECF No. 20 at 6). In exchange, Mr. Whitcomb signed a promissory note and deed of trust, in his capacity as Waterdog's managing member. (ECF No. 20 at 6). Mr. Whitcomb also signed a personal guaranty as a requisite for funding the loan. (ECF No. 20 at 6). The funds of the loan paid Cadence $ 443,729.45 to release its purchase money mortgage on the Property and $ 45,406.54 to release the tax relief agency's interest in the Property. (ECF No. 20 at 6). The remaining $ 310,864.01 of loan proceeds remained with Waterdog.
After the initial loan from Paull & Partners, the Property incurred $ 5,947.54 in homeowner's association assessments. (ECF No. 20 at 6). Waterdog contacted Paull & Partners in December 2015 to obtain a loan modification and extension. (ECF No. 20 at 6). The parties agreed to increase the outstanding principal of the loan by $ 75,000.00. (ECF No. 20 at 6). As part of the extension, Mr. Whitcomb signed a non-homestead affidavit, which stated that Waterdog was the sole owner of the home and would not claim a homestead exemption over the Property. (ECF No. 20 at 6). The $ 75,000.00 was used to pay off the homeowner's association assessment, but Paull & Partners retained the remainder to pay off pending interest payments due under the loan. (ECF No. 20 at 6).
Without Paull & Partners' knowledge, Waterdog deeded the property back to the Whitcombs on July 26, 2016. (ECF No. 20 at 7). The Whitcombs claim to have executed this transfer to claim a homestead exemption on the Property and reduce their property tax assessments. (ECF No. 22 at 4).
The Waterdog loan went into default after the Whitcombs failed to make required payments. In December 2016, Paull & Partners gave notice of their intent to foreclose on the property. (ECF No. 20 at 7). The Whitcombs filed suit in state court and obtained a temporary injunction on February 2, 2017, which prevented Paull & Partners from foreclosing on the Property under the Waterdog Deed of Trust. (ECF No. 20 at 7 ). Mr. Whitcomb filed for bankruptcy and this suit was removed to this Court on March 31, 2017 as part of Mr. Whitcomb's personal bankruptcy proceeding. (ECF No. 22 at 4).
The Whitcombs allege that they have continuously occupied the Property since 2003 and maintained the Property as their homestead throughout that time. (ECF No. 22 at1). The Whitcomb's suit against Paull & Partners alleges that the transfer of the Property from the Whitcombs to Waterdog was a pretended sale with a condition of defeasance that is void under the Texas Constitution. (ECF No. 22 at 5). Without a valid sale to Waterdog, the Whitcombs argue that Paull & Partners has no lien or interest in the Property. (ECF No. 22 at 5).
Paull & Partners filed a motion for summary judgment, arguing that the Property lost its homestead character upon transfer to Waterdog and that the transfer is not a pretended sale under Texas law, based on the Whitcombs' intent to convey title. (ECF No. 20 at 8–12 ). Alternatively, Paull & Partners claims that if the transaction is a pretended sale, they are subrogated to the rights of the creditors whose liens were extinguished using the loan proceeds of its loan to Waterdog. (ECF No. 20 at 13–14 ).
Concurrent with the motions for summary judgment, the Trustee filed an objection to Mr. Whitcomb's claimed homestead exemption to the Property. (Case No. 17-31692; ECF No. 156 ). The Trustee seeks to limit Mr. Whitcomb's homestead exemption to $ 160,375.00 under 11 U.S.C. § 522(p)(1)(A) because he acquired the Property from Waterdog within 1215 days before filing his bankruptcy petition.
On August 30, 2018, the Court held an evidentiary hearing and oral arguments to determine the following disputed issues of fact:
(ECF No. 24 at 2 ). At the conclusion of testimony, the Court issued a preliminary ruling. The Court held the transaction did not fit within the traditional pretended sale paradigm because it was not done at Paull & Partners' insistence. (August 30, 2018 Hearing at 11:30 a.m.). However, the evidence also demonstrated that the Whitcombs intended to reclaim the Property in their own names. (August 30, 2018 Hearing at 11:30 a.m.). Having resolved the contested issues of fact, Paull & Partners' motion is ripe for judgment. The Court requested additional briefing regarding whether a pretended sale may exist without a duty of inquiry from the...
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