Wolters v. Fsb

• Decision Date: 01 June 2010
• Docket Number: No. 1:10-cv-86.,1:10-cv-86.
• Citation: 429 B.R. 587
• Parties: Mark E. WOLTERS, Appellant,v.FLAGSTAR BANK FSB, Great Lakes Mortgage & Investment, Inc., Everhome Mortgage Company, Inc., Mortgage Electronic Registration Systems, Inc., and Federal National Mortgage Association, Appellees.
• Court: U.S. Bankruptcy Court — Western District of Michigan

429 B.R. 587

Mark E. WOLTERS, Appellant,v.FLAGSTAR BANK FSB, Great Lakes Mortgage & Investment, Inc., Everhome Mortgage Company, Inc., Mortgage Electronic Registration Systems, Inc., and Federal National Mortgage Association, Appellees.

No. 1:10-cv-86.

United States Bankruptcy Court,

W.D. Michigan,

Southern Division.

June 1, 2010.

COPYRIGHT MATERIAL OMITTED

Mark E. Wolters, Muskegon, MI, pro se.

Robert A. Stariha, Stariha Law Offices PC, Fremont, MI, for appellant.

Thomas G. King, Kreis Enderle Hudgins & Borsos PC (Kalamazoo), Kalamazoo, MI, for appellees.

OPINION and ORDER

PAUL L. MALONEY, Chief Judge.

Overruling the Debtor's Appeal of the Bankruptcy Court's Dec. 3, 2009 Ruling: Affirming Rejection of Debtor's Objection to an Equitable Claim of Creditor-Mortgagee Flagstar Bank

During the relevant time period, debtor-appellant Mark E. Wolters (“Wolters”) and his former wife (“the owners”) owned a house and the underlying parcel of real property at 4349 Pillon Road in Muskegon, Michigan (“the residence parcel”), as well as a vacant adjacent parcel which they also used as part of their homestead (“the vacant parcel”). When Wolters and his then-wife sought to refinance their mortgage debt, the legal description on the new mortgage documents was that of the vacant parcel alone, not that of both the residence parcel and vacant parcel. It is undisputed that both the owners and new-mortgage lender Flagstar Bank FSB (creditor-appellee “Flagstar”) all believed, intended, and expected that the legal description of the mortgaged property which was attached to the Mortgage would include both the residence parcel and the vacant parcel. The error in the legal description of the real property remained undiscovered by the owners and lender Flagstar until well after Wolters filed for Chapter 7 bankruptcy in the Western District of Michigan.

In the schedules which Wolters filed in his Chapter 7 bankruptcy case, he listed Flagstar's debt as being fully secured by both the residence parcel and the vacant parcel pursuant to the Mortgage (Appellees' Exhibit 1). After Wolters filed the bankruptcy petition, Flagstar obtained relief from the automatic stay in order to foreclose on the mortgage. Flagstar completed foreclosure of the mortgage with a bid for the full amount of the owners' indebtedness.

Flagstar recounts the procedural history of the case below as follows:

[t]he Debtor's Chapter 7 case below was filed only in the name of Mark E. Wolters, with his former wife not participating as a joint debtor in the bankruptcy. In fact, during the pendency of the bankruptcy, but more than six months after the Debtor's Chapter 7 bankruptcy had been filed, Mr. and Mrs. Wolters were divorced and Mrs. Wolters, as part of the divorce, conveyed her one-half interest in the Residence Parcel to the Debtor.

Pursuant to 11 U.S.C. § 541(a)(5)(B), because this conveyance occurred more than six months after the filing of the Chapter 7 bankruptcy [petition] the undivided one-half interest in the Residence Parcel conveyed to the Debtor by his ex-wife did not become an asset of the bankruptcy estate.

Given the fact that an undivided one-half interest in the Residence Parcel was not an asset of the estate, the Trustee could not assert his “bona fide purchaser for value without notice claim” as to that interest[,] and as a result the Trustee's Adversary Proceeding resulted in an Order from the Bankruptcy Court determining that [only] the Trustee's interest as to an undivided one-half interest of the Residence Parcel (the Debtor's portion on the date of the filing of the bankruptcy) was senior to any Mortgage claim by Lender.

That ruling voided any claim that Appellees had as a secured creditor on the undivided one-half interest in the Residence Parcel based upon the fact that a bona-fide Purchaser for value without notice would prevail over an equitable mortgage claimant, but did not in any way affect any claim of equitable mortgage as to the other one-half interest in the Residence Parcel (the interest formerly owned by the Debtor's former spouse and deeded to the Debtor after the date of the filing of the bankruptcy). ( See Exhibit 2)

The Trustee then proposed a sale of the undivided one-half interest of the Residence Parcel and at the sale the Lender [appellee Flagstar] was the successful bidder with a bid in the amount of $87,000.

[T]he Lender did not previously believe it had a secured claim as to only an undivided one-half interest of the Residence Parcel [but rather to a full interest in the Residence Parcel]. [Moreover,] the Trustee now had funds from which to pay unsecured claims. [Therefore], the Lender filed a Proof of Claim asserting [its] unsecured claim.

The Lender's Proof of Claim was deemed to be a late-filed claim (filed after the claims bar date) and only allowed to be paid after payment of all other claims, including administrative claims, Trustee's fees and other unsecured claims pursuant to 11 U.S.C. § 501(a) and 11 U.S.C. § 726(a)(3). The Trustee has estimated that after the payment of all other claims in the bankruptcy but before the return of any funds to the Debtor (pursuant to 11 U.S.C. § 726(a)(6)), there will remain approximately $15,000 to $20,000 from the proceeds of the sale of the Estate's interest in the Residence Parcel.

The Trustee then sought to close the estate and make payment of the claims. The Debtor then filed an objection to the Lender [Flagstar]'s claim, asserting that, because at the foreclosure sale ... the Lender bid the amount of $204,434.39 (the full amount of the mortgage debt owed to it at the time), the Lender was not entitled to file Proof of Claim. The Debtor asserted that, based upon the bid at the foreclosure sale, the entire indebtedness had been extinguished and paid[,] leaving no debt to support a claim.

Appellee Flagstar's Brief at 3-5 (some paragraph breaks added, italics in original, boldface added). Mortgagee Flagstar criticizes debtor Wolters' objection to the claim as follows:

The assertion [that Flagstar could not file a claim because it had bid at foreclosure sale the full amount of the mortgage owed it] was made even though the Debtor acknowledges that the foreclosure sale and Lender's bid at the foreclosure sale were the result of a mutual mistake of fact whereby both the Debtor (Appellant) and the Lender (one of the Appellees) believed that the foreclosure sale was the sale of both the Residence Parcel and the Vacant Parcel. The Debtor now seeks to use this mutual mistake of fact as a sword to have returned to him $15,000 to $20,000 in proceeds paid to the Trustee for the purchase of the estate's one-half interest in the Residence Parcel instead of having it paid to Lender [Flagstar] to partially pay an indebtedness that the Debtor readily admits that he incurred.

Appellee Flagstar's Brief at 5. Flagstar accurately states the relevant issue before the bankruptcy judge, and recounts the crux of the judge's oral ruling as follows:

The only issue before the [Bankruptcy] Court at the December 3, 2009 hearing was the Debtor's objection to the claim filed by the Lender and whether the $15,000 to $20,000 that is estimated to remain in the bankruptcy estate after payment of all other creditors and administrative expenses is paid to the Lender pursuant to 11 U.S.C. § 726(a)(3) or returned to the Debtor pursuant to 11 U.S.C. § 726(a)(6).

At the hearing ... the Bankruptcy Court indicated that ... it had ... authority over the surplus or the proceeds that are available for distribution and was not ruling on other issues. See: Transcript, Page 22. The Bankruptcy Court in ruling on the [debtor's] objection to the [claim] stated as follows:

THE COURT: Alright. I'm going to overrule the objection to the claim. And the reason I'm going to overrule the objection to the claim is that we could have had an adversary proceeding to determine, you know, there was a mistake, a mutual mistake effect [sic, should be “of fact”], but there isn'[t] any factual controversy. There was a mutual mistake [of fact]. And it seems to me that the foreclosure sale bid, which it really got rid of the deficiency, was premised on both parties' mistake of what was going on.

It also seems inequitable to me that the-because of that mistake, that the Debtor would be able to get the surplus, in effect, the surplus from the bankruptcy estate, which is largely the product of the sale of this real estate as a consequence of the avoidance and preservation under 544 and 550 and perhaps 551, I guess, for the preservation of the lien. And it just would be, in my opinion, inequitable and not really factually supported.

And so those are the reasons that I'm going to overrule your objection to the claim. The claim will be allowed as an untimely claim and paid in accordance with [11 U.S.C. § ] 726 ¹,

unless there is an appeal.

Transcript at Pages 19-20. The Court went on to state at a later point:

But the point, my point is, is the deficiency that they-in essence, the mutual mistake deprived them of the ability to assert the deficiency. And the facts they would need to show, seems to me, to establish that there is a mutual mistake.

Transcript at Page 21. As a result of the foregoing factual findings, the Bankruptcy Court ruled ... that ... it would be inequitable for the Court to deny the claim based upon the Debtor's argument that the mutual mistake resulting in the bid at the foreclosure sale somehow extinguished the debt.

Appellee Flagstar's Brief at 5-6.

Again, Creditor Flagstar alleges that at the time of the foreclosure sale, both the owners and Flagstar still believed that the legal description of the mortgage property which was attached to the mortgage covered both the residence parcel and the vacant parcel. Debtor Wolters does not contest this allegation, so the court treats it as true. See Mack v. State Farm Mut. Auto. Ins. Co., 210 F.3d 375, 2000 WL 52888, *5 (7th Cir. Jan. 21, 2000) (“State Farm stated that it believed that Reeves was the best...