Opinion
Case No. 04-52744.
June 12, 2007
OPINION DENYING NATIONAL CITY HOME LOAN SERVICES, INC.'S MOTION FOR RECONSIDERATION
On May 15, 2007, the Court heard argument from both parties on the Trustee's Objection to Claim No. 4 filed by National City Home Loan Services ("HLS"). The Court granted the Trustee's objection to HLS's proof of claim but denied the Trustee's objection to the extent that it sought disgorgement of funds that were paid to HLS during the Chapter 13 proceeding. HLS then filed a Motion for Reconsideration. For the reasons set forth below, this Court DENIES HLS's Motion for Reconsideration.
I. FACTUAL BACKGROUND
On or about June 29, 2000, Debtor Kristine R. Gerathy ("Ms. Gerathy") executed an adjustable rate note (the "Note") in favor of First Franklin Financial Corporation in the principal amount of $142,000.00. The note was secured by a mortgage taken on the same date (the "Mortgage") on property located at 2396 W. Wardlow Road, Highland, Michigan 48357-3344. First Franklin Financial Corporation assigned the Note and Mortgage to National City Home Loan Services, Inc. ("HLS") via a Corporate Assignment of Mortgage dated July 7, 2000. The Mortgage was then discharged pursuant to a Discharge of Mortgage dated June 2, 2001, which was apparently filed in error.
On April 30, 2004, the Debtors filed a voluntary petition for relief under Chapter 13. On Schedule D, the Debtors list Home Loan Services as having a $139,365 mortgage on the Property. On May 24, 2004, HLS filed a Proof of Claim, listing a secured claim of $142,352.52. No one objected to HLS's Proof of Claim in the Chapter 13 case. On September 17, 2004, the Court entered an Order Confirming Plan. The Order Confirming Plan states, [a]ll filed claims to which an objection has not been filed are deemed allowed pursuant to 11 U.S.C. § 502(a) . . ."
On January 20, 2006, the case was converted to a Chapter 7. On March 15, 2006, the chapter 7 Trustee became aware of the discharge of the mortgage. See, Trustee's Reply Brief, p. 5. On March 30, 2007, the Trustee filed an objection to HLS's Proof of Claim under § 502(d) and Fed.R.Bankr.P. 3007 and 9014, and L.B.R. 3001-1 (E.D.M.) for purposes of determining the allowance of the claim. HLS's proof of claim (#4) was filed as a secured claim in the amount of $142,352.52.
On May 15, 2007, the Court, after hearing argument from both parties, granted the Trustee's objection to HLS's proof of claim but denied the Trustee's objection to the extent that it sought disgorgement of funds that were paid to HLS during the Chapter 13 proceeding. In so holding, the Court found that the mortgage was discharged on June 7, 2001. Since the mortgage had been discharged, there was no mortgage to avoid, and the Trustee did not have to utilize the provisions of 11 U.S.C. § 544 to avoid the lien. The Court also found that this matter was similar to the case of In re Shaffer, 48 B.R. 952 (Bankr. N.D. Ohio 1985) and, therefore, res judicata did not bar the Trustee from re-litigating the allowance of HLS's claim. On May 18, 2007, the Order Granting Trustee's Objection to Claim No. 4 filed by National City Home Loan Services was entered by the Court.
II. ANALYSIS
Under Local Rule 9024-1, a motion for reconsideration should be granted if the movant demonstrates that the Court and the parties have been misled by a palpable defect and that a different disposition of the case would result from a correction of such palpable defect. A motion that merely presents the same issues already ruled upon by the Court, either expressly or by reasonable implication, shall not be granted.
In its Motion for Reconsideration, HLS argues that the Order entered by the Court is erroneous because HLS retained an unperfected lien that encumbered the subject property at the time of the filing of Debtors' bankruptcy case. HLS argues that this unperfected lien makes HLS a secured creditor unless the Trustee brings an adversary proceeding to avoid the lien under 11 U.S.C. § 544. HLS further argues that the Trustee has missed the statute of limitations period set forth in 11 U.S.C. § 546(a)(1), and the Trustee is now barred from challenging the secured status of HLS's claim. Therefore, HLS contends that the Trustee cannot prevail on a 11 U.S.C. § 502(d) objection to claim because he missed the statute of limitations period for first obtaining a determination in his favor on the underlying avoidance action.
Issue One: Does an equitable mortgage exist between HLS and the Debtor?
In bankruptcy cases, property rights are defined by state law. Butner v. United States, 440 U.S. 48, 55 (1979). In Michigan, a mortgage of lands is a "conveyance" within the meaning of recording laws. Balen v. Mercier, 42 N.W. 666 (Mich. 1889). The reason for the laws requiring the recording of a mortgage is to give notice to third persons. Michigan Fire Marine Ins. Co. v. Hamilton, 279 N.W. 884, 885 (Mich. 1938). A mortgage, however, is still binding between the parties even if it is not recorded. Bacon v. Northwestern Mut. Life Ins. Co., 131 U.S. 258, 262-3 (1889).
Under Michigan law, equitable mortgages are enforceable against the original parties involved. Winshall v. Mazzetti (In re Mazzetti), 22 B.R. 538, 539 (Bankr. E.D. Mich. 1982). If a "discharge of a mortgage was placed upon the record by mistake . . . [t]he mortgage, then, appears to be an existing lien as between the parties, and those in privity with them . . ." Ferguson v. Glassford, 35 N.W. 820, 827 (Mich. 1888). The parties agree that an equitable mortgage exists between the Debtor and HLS.
The Trustee states that, ". . . the Mortgage was mistakenly discharged and an equitable mortgage existed as between Ms. Gerathy and the mortgagee . . ." Trustee's Objection to Claim, ¶ 9. The Trustee does maintain that any equitable mortgage would be invalid against the Trustee.
Issue Two: Does an equitable mortgage exist between HLS and the chapter 7 Trustee?
This Court finds that equitable mortgages are not enforceable against subsequent bona fide purchasers. Mazzetti, 22 B.R. at 539. Under § 544(a)(3), a trustee, without regard to any knowledge, has the status of a bona fide purchaser. Section 544(a)(3) states,
(a) The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by —
(3) a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
"Since under Michigan law, the alleged equitable lien would be invalid as against a bona fide purchaser, it is invalid as against the trustee in bankruptcy." Mazzetti, 22 B.R. at 540; In accord, McCannon v. Marston (In re Hotel Associates, Inc.), 10 B.R. 668, 670 (Bankr. E.D. Pa. 1981) ("the trustee in bankruptcy may avoid as a bona fide purchaser `without regard to any knowledge of the trustee or of any creditor.' Implicit in this status is his ability to avoid the equitable interest of the plaintiff."); Turner v. Emmons Wilson, Inc. (In re Minton Group, Inc.), 28 B.R. 774, 788 (Bankr. S.D.N.Y. 1983); Leonard v. Lyens (In re Hastings), 4 B.R. 292, 293 (Bankr. D. Minn. 1980) Therefore, this Court finds that there is no equitable mortgage between HLS and the chapter 7 Trustee.
Issue Three: Is the Trustee barred from objecting to the secured status of a claim because he failed to file an adversary proceeding (i.e. does a claim for relief under § 544 require an adversary proceeding)?
As stated above, the Court concludes that an equitable mortgage is not enforceable against the chapter 7 Trustee. This conclusion, in and of itself, does not resolve the motion for reconsideration. HLS argues that its mortgage is a valid "unperfected lien" and that, even if its mortgage is avoidable, the Trustee's failure to file an adversary proceeding under Fed.R.Bankr.P. 7001(2) precludes the Trustee from avoiding the lien through the claims objection process. HLS argues that the Trustee could not object to the secured status of the claim absent a prior determination, made through an adversary proceeding, that the lien could be avoided. HLS argues that this Court's holding that no adversary proceeding is required is palpable defect.
Fed.R.Bankr.P. 7001(2) states:
An adversary proceeding is governed by the rules of this Part VII. The following are adversary proceedings:
On the facts of this case, the Court rejects HLS's argument. The claims process is governed by 11 U.S.C. § 502. 11 U.S.C. § 502(d) states,
(d) Notwithstanding subsections (a) and (b) of this section, the court shall disallow any claim of any entity from which property is recoverable under section 542, 543, 550, or 553 of this title or that is a transferee of a transfer avoidable under section 522(f), 522(h), 544, 545, 547, 548, 549, or 7249a) of this title, unless such entity or transferee has paid the amount, or turned over any such property for which such entity or transferee is liable under section 522(I), 542, 543, 550, or 553 of this title.
There is a split of authority on the issue of whether an objection to claim under § 502(d) must be preceded by an adversary proceeding. See, In re Marketing Associates of American, Inc., 122 B.R. 367, 369 (E.D. Mo. 1991) ("the plain meaning of Section 502(d) mandates that the Trustee first must timely bring his preference action in order to invoke that provision"); Contra, In re Mid Atlantic Fund, Inc., 60 B.R. 604, 609-610 (S.D.N.Y. 1986) (statute of limitations for bringing preference action did not preclude trustee from relying defensively on claims disallowance provisions.) In the Mid Atlantic case, the court reasoned that 11 U.S.C. § 502 set no time limitation on a Trustee's ability to object to a claim, and the statute of limitations set forth in 11 U.S.C. § 546(a) could not limit the Trustee's right to object to a claim. The Mid Atlantic court did acknowledge that the failure to bring an adversary proceeding would limit the Trustee to offsetting the claim or avoiding the lien. The court stated:
11 U.S.C. § 546(a) states,
(a) An action or proceeding under section 544, 545, 547, 548 or 553 of this title may not be commenced after the earlier of —
(1) the later of —
(A) 2 years after the entry of the order for relief; or
(B) 1 year after the appointment or election of the first trustee under section 702, 1104, 1163, 1202, or 1302 of this title if such appointment or such election occurs before the expiration of the period specified in subparagraph (A); or
(2) the time the case is closed or dismissed.
a trustee is limited under Code § 502(d) to offsetting the claim asserted by the creditor. When, as here, the creditor also received a preference beyond that amount, the trustee remains unable to recover the additional preference without the commencement of an action or adversary proceeding, which commencement is barred by the statute of limitations. When Code § 502(d) is used to disallow the claim of a secured creditor, the lien of the creditor becomes void.
Mid Atlantic Fund, Inc., 60 B.R. at 611 (footnotes omitted). This Court follows the reasoning of the court in the Mid Atlantic case and holds that 11 U.S.C. § 502(d) allows the Trustee to object to the "secured" status of HLS's claim without first bringing an adversary proceeding.
It is undisputed in this case that HLS's mortgage was discharged on June 2, 2001. Under both state law and 11 U.S.C. § 544(a)(3), a mortgage discharge is enforceable by a third party or a bona fide purchaser regardless of the circumstances surrounding the recording of the discharge. Ferguson, 35 N.W. at 826-7. The Trustee in this case did not bring an adversary proceeding to avoid the mortgage because there was no mortgage to avoid. Certainly, in an abundance of caution, the Trustee could have filed an adversary proceeding, but given the existence of the discharge, this Court holds that the Trustee did not have to file an adversary proceeding prior to objecting to the secured status of HLS's claim. The Trustee is not attempting to recover money or property from HLS. The Trustee is simply preserving the value of the nonexistent mortgage for the benefit of the estate.
The Trustee also argues that 11 U.S.C. § 502(j) provides authority for the Trustee to object to a claim. 11 U.S.C. § 502(j) states:
(j) A claim that has been allowed or disallowed may be reconsidered for cause. A reconsidered claim may be allowed or disallowed according to the equities of the case. Reconsideration of a claim under this subsection does not affect the validity of any payment or transfer from the estate made to a holder of an allowed claim on account of such allowed claim that is not reconsidered, but if a reconsidered claim is allowed and is of the same class as such holder's claim, such hold may not receive any additional payment or transfer from the estate on account of such holder's allowed claim until the hold of such reconsidered and allowed claim receives payment on account of such claim proportionate in value to that already received by such other holder. This subsection does not alter or modify the trustee's right to recover from a creditor any excess payment or transfer made to such creditor.
Case law holds that a motion seeking reconsideration of the allowance or disallowance of a claim may be brought at any time. U.S. V. Zieg, 206 B.R. 974, 978 (D. Neb. 1997); In re Resources Reclamation Corp. Of America, 34 B.R. 771, 773 (9th Cir.B.A.P. 1983).
Courts may reconsider claims "for cause". Factors that courts looks at in determining whether to grant a Motion for Reconsideration are:
(1) whether granting the delay will prejudice the debtor or other creditor;
(2) the length of the delay and its impact on efficient court administration;
(3) whether the delay was beyond the reasonable control of the person whose duty it was to perform;
(4) whether the creditor acted in good faith;
(5) whether clients should be penalized for their counsel's mistake or neglect; and
(6) whether the claimant has a meritorious claim.
Resources Reclamation Corp., 34 B.R. at 774 citing In re Magouirk, 693 F.2d 948 (9th Cir. 1992).
This Court finds that 11 U.S.C. § 502(j) does allow the Trustee to seek reconsideration of the secured status of HLS's claim. Section 502(j) provides an equitable remedy for challenging the status of a claim which was previously allowed or disallowed. While none of the factors set forth above have any direct applicability in this case, it is an inequitable result to allow HLS to be treated as a secured creditor when its claim is clearly an unsecured claim. The fact that during Debtors' chapter 13 case, Debtors, HLS and the Chapter 13 Trustee treated HLS's claim as a secured claim cannot and should not prevent the Chapter 7 Trustee from seeking reconsideration of the treatment of the claim. One of the duties of the Chapter 7 Trustee is, "if a purpose would be served, examine proofs of claims and object to the allowance of any claim that is improper". 11 U.S.C. § 704(a)(5). In the instant case, unsecured creditors will be severely prejudiced if the Chapter 7 Trustee is required to treat HLS's claim as a secured claim. The Trustee has an obligation to object to the claim to insure proper distribution of the assets of the estate.
III. CONCLUSION
For the above-stated reasons, this Court DENIES HLS's Motion for Reconsideration.
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(2) a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d);