ROBERT A. GORDON, Bankruptcy Judge.
The Debtor commenced this case on March 14, 2018.
On April 24, 2018, Wells Fargo Bank, N.A. (Wells Fargo) filed an Objection to the Debtor's Plan (Dkt. No. 39). Wells Fargo asserted in the Objection that it was the holder of the Indemnity Deed of Trust (IDOT) secured by Hunt Crossing and that, among other things, there was a pre-petition arrearage of $757,672.70 owed on the underlying indebtedness. Wells Fargo therefore requested that confirmation of the Plan be denied.
On May 1, 2018, the Debtor filed an Amended Schedule D (Dkt. No. 40). Now the Debtor asserted that the total indebtedness secured by Hunt Crossing was in the amount of $1.7 million, but he reduced the value of the collateral (and hence the value of the secured claim, in his opinion) to only $900,000. The Debtor persisted in listing the claim as disputed and the creditor as "unknown".
On May 10, 2018, Wells Fargo filed its Proof of Claim (POC). The POC asserted a total indebtedness of $1,765,680.27 and a total pre-petition arrearage of $739,698.87, and supplied a relatively substantial, detailed accounting with the POC. On June 20, 2018, Wells Fargo filed a Motion for Order Granting Relief from Automatic Stay and Co-Debtor Stay that prayed for relief from the automatic stays of 11 U.S.C. §§ 362(a) and 1301(a)
Debtor filed his response to the Lift Stay Motion on July 5, 2018 and, beyond a standard litany of admissions and denials as to the substance of each separate paragraph, the Debtor also included a section entitled, "Defenses" (Dkt. No. 57). That section included the assertions that, (a) Hunt Crossing was necessary for the Debtor's "proper reorganization" and (b) the IDOT and the Note were "not enforceable under applicable law", without any further elaboration. Thereafter, on July 24, 2018, the Debtor filed an Objection to Claim 2-1 (Claim Objection) directed at the POC (Dkt. No. 61). The Claim Objection was based upon the proposition that because the Debtor had previously received a discharge in Case No. 15-22234, the filing of the POC violated the statutory injunction of Section 524(a) and was in contempt of the discharge order. The Claim Objection therefore prayed that the POC be disallowed.
A hearing on the Lift Stay Motion was held on July 27, 2018 (Dkt. No. 68). At that time, Counsel for Wells Fargo proffered that the Debtor still had not made any post-petition payments, that there was no equity for the estate in Hunt Crossing, and noted other compelling particulars of the debt, including the relatively enormous prepetition arrears. In turn, Counsel for the Debtor proffered that (a) the Debtor was a real estate agent who was (somewhat curiously) starting a new health care business, (b) the Debtor believed there was a "problem" with the note, but that the precise nature of the problem was "complicated" and therefore the Debtor was not prepared to explain it that day, but he believed the total indebtedness was "too high" and (c) therefore the Debtor had filed the Claim Objection a few days before, but he was not trying to "wipe out" Wells Fargo's lien and instead wanted the Court to adjust the indebtedness down to the value of Hunt Crossing to be able to then secure a loan modification. The Court permitted the parties thirty (30) days to conduct discovery and scheduled a hearing for October 22, 2018 on the Claim Objection, while rescheduling the hearing on the Lift Stay Motion for October 26, 2018.
On October 5, 2018, Wells Fargo filed a Motion for Summary Judgment (SJ Motion) (Dkt. No. 72) as to its Lift Stay Motion. Filed as a companion to the SJ Motion was a Motion to Deem Requests for Admission Admitted (Admissions Motion) that requested the Court to deem admitted by the Debtor, the uncontested and unanswered requests for admission served upon him by Wells Fargo.
On October 25, 2018, the Debtor filed a Motion to Strike Relief [sic] from Stay (Motion to Strike) (Dkt. No. 84). The Motion to Strike first averred that the underlying Note had been materially altered by Wells Fargo's decision, "not to add the unpaid interest to the unpaid principal" as allegedly required by the Note. (Motion to Strike ¶6). It was apparently also asserted that Wells Fargo's alteration was fraudulent and that both the Note and IDOT obligations had therefore been discharged and nullified to the benefit of the Debtor.
At the November 14, 2018 hearing, Counsel for Wells Fargo noted that the Debtor still had not made any of the eight post-petition payments that had come due on the Note, there was no equity in the Property, and in addition to the other seemingly insurmountable roadblocks to a realistic reorganization identified at the last hearing, the Plan provided no means for treating the massive pre-petition arrears owed to Wells Fargo. (November 14, 2018 Transcript at 4-5). In response, Counsel for the Debtor asserted that the underlying "accounting" for the indebtedness was "off" because the Note's "Pick-a-Payment" provision had not been applied in the correct manner by Wells Fargo and therefore the monthly principal and interest payments (or perhaps the total amounts due) were somehow skewed in a prejudicial way. (Id. at 5).
The Debtor's Objection to Claim 2-1 (Second Objection) was filed on November 19, 2018 (Dkt. No. 97) and it again raised the frivolous assertion that because the indebtedness included in the POC had been discharged, the POC was filed in contempt and was "unenforceable".
Then, the night before the scheduled hearing and one month after the prior hearing, the Debtor filed an Objection to Relief from Stay (Lift Stay Objection) (Dkt. No. 102) that asserted relief from the automatic stay should be denied for the following reasons:
On the same day, the Debtor filed a "Supplement" to the Lift Stay Objection at Dkt. No. 103. However, that paper repeated verbatim the text of the Lift Stay Objection, albeit in larger font print.
Loan administration manager and custodian of the records, Alan Flowers, II, testified first for Wells Fargo at the December 14, 2018 hearing. In summary, Mr. Flowers testified on direct that (a) the accounting submitted in support of the POC was accurate, (b) the last payment in good funds received by Wells Fargo from the Debtor was made on November 16, 2010 in the amount of $28,410.45, (c) the proceeds of that payment were disbursed over four months' worth of payments due and that a portion of unpaid interest for that period ($1,299.80) had been added to the loan's principal balance, (d) Wells Fargo had attempted to credit a prior payment tendered by the Debtor on June 8, 2010 but that check had been returned for insufficient funds, (e) the Debtor had not made any payments since he filed this case and (f) the "Pick-a-Payment" provision in the Note allows the Debtor to make a smaller monthly payment than is required in a given month, and if that occurs, an obligation is triggered on the part of Wells Fargo to add any unpaid interest to the total, unpaid principal balance. On cross-examination, Debtor's Counsel sought to establish that, (1) the last payment prior to the November 16, 2010 payment had been made on June 8, 2010 and (2) as there were periods when months passed consecutively without any monthly payments made by the Debtor, and as Wells Fargo had not applied all of the unpaid interest for those months to the principal balance, the principal balance was not inflated enough and therefore Wells Fargo had unilaterally altered the Note in a material way, and thereby negated the instrument.
The Debtor then testified and on direct examination, made the points that (a) Wells Fargo's foreclosure notice identifies July 2010 as the month of his last payment and (b) the foreclosure proceeding had been filed on August 2, 2013.
At the conclusion of the December 14, 2018 hearing, the Court allowed Wells Fargo further time to respond in writing to the Debtor's resurrected limitations argument and Wells Fargo did so on December 28, 2018 (Dkt. No. 105).
On January 14, 2019, a hearing was held on the Second Objection to Wells Fargo's POC. Debtor's Counsel again argued that the amount of the POC was erroneously stated because a large part of the claim had been discharged in 2017. Counsel also asserted that the alleged three-year limitations period applied to the enforcement of the POC, which had been filed more than three years after the default, as yet another separate "civil action", and thus, the POC should be disallowed. With that, the hearings came to a close.
The Debtor has raised several grounds, collectively as quaggy as a mud bog, in both objecting to the POC and defending the Lift Stay Motion. Affording the Debtor's shifting, scattered and confusing presentation every benefit of every doubt, his contentions are:
On May 15, 2014, the Maryland General Assembly approved identical bills (House Bill 274 and Senate Bill 708) entitled "Residential Property — Statute of Limitations for Certain Specialties and Motion for Certain Deficiency Judgments". See 2014 Maryland Laws Ch. 592 (H.B. 274). H.B. 274 amended Md. CJP §5-102(a) which sets a twelve-year statute of limitations for specialties, with instruments under seal generally included under that umbrella. Section 1 of H.B. 274, among other things, added a new subsection, Md. CJP §5-102(c)(2), that excludes from the twelve-year statute of limitations:
Thus, H.B. 274 limits the enforcement of a deed of trust or a promissory note under seal, and secured by owner-occupied residential property, to the general, three-year statute of limitations set forth in Md. CJP §5-101. For those who have worked in this area for any appreciable amount of time before the Great Recession, this change is powerful and significant.
However, in Maryland, "statutes will not be construed as operating retroactively so as to bar the enforcement of rights existing at the time they were passed, but prospectively so that the period prescribed will as to such rights begin to run at the time when the statute takes effect". Taggart v. Mills, 180 Md. 302, 306, 23 A.2d 832, 834-35 (1942) (quoting Ireland v. Shipley, 165 Md. 90, 166 A. 593 (1933)). In keeping with this general rule, H.B. 274 Section 7 specifically provided that the amendment shall take effect on July 1, 2014 and, per Section 3, the amendment "shall be construed to apply prospectively to any cause of action that arises on or after the effective date of this Act". 2014 Maryland Laws Ch. 592 (H.B. 274). The General Assembly thus made clear its intention for the amendment to be forward looking and, as a final courtesy, expressly addressed the situation where a cause of action, such as Wells Fargo's, had already accrued. Section 4 of the Act, instructs that actions arising "before July 1, 2014 must be filed within 12 years after the date the action accrues or before July 1, 2017, whichever occurs first". The prospective nature of the amendment was recognized in Mortgage Guaranty Insurance, Co. v. Whitaker, 2018 WL 816823, at *4 (D. Md. Feb. 9, 2018), where the Court held:
2018 WL 816823, at *4.
Based upon the foregoing, the Debtor's contention that the amendment shortened the applicable limitations period from twelve years to three and that Wells Fargo's foreclosure is therefore barred, is without merit. The Debtor testified that he defaulted on the Note and IDOT in July 2010.
The Debtor also contends that the filing of the Lift Stay Motion (and the POC) constitutes the commencement of a "civil action," that it is likewise time-barred by the amendment and therefore Wells Fargo may not "enforce" the indebtedness and lien in this Court by seeking stay relief. It would be a strange result indeed to conclude that Wells Fargo (or any other similarly situated lienholder) cannot take necessary steps in the bankruptcy court to permit the foreclosure of residential real estate because of the limitations amendment, when the Maryland legislature expressly says Wells Fargo can foreclose in light of the amendment's prospective application. Assuming no conflict of law, the mere filing of a bankruptcy case cannot be utilized to negate an express legislative directive. The question of how the amendment should apply is purely one of state law; the default and accrual happened well before this bankruptcy case was filed and the default and accrual are the relevant state law trigger points. To hold that Wells Fargo must now forego its accrued state law rights because of the bankruptcy "hoops" it must jump through as a result of the filing of an essentially frivolous Chapter 13 case would not be in keeping with the mandated prospective application of the amended limitations provision. It would be more like an artificial road-block, erected to pervert the legislative's will.
The Lift Stay Motion is, in this instance, no more than a necessary formality that must be adhered to before the foreclosure action can proceed. See Veal v. Am. Home Mortg. Servicing, Inc. (In re Veal), 450 B.R. 897, 914 (B.A.P. 9th Cir. 2011) (observing that stay relief motions are "primarily procedural"). The narrow question presented by the Lift Stay Motion is whether reorganization is possible. Section 362(d)(2)(B). See Colvin v. Amegy Mortg. Co., 507 B.R. 169, 184 (W.D. Tex. 2014) (discussing the limited and summary nature of stay relief hearings which do not involve full adjudication on merits of claims, defenses, or counterclaims); In re Hurst, 409 B.R. 79, 83 (Bankr. D. Md. 2009) (same). In that respect, this contested matter, see, Rule 9014, retains its ancient character as a summary proceeding. See Estate Const. Co. v. Miller & Smith Holding Co., 14 F.3d 213, 219 (4th Cir. 1994) ("Hearings to determine whether the stay should be lifted are meant to be summary in character.").
While legitimate state law defenses could be raised, the purpose here is not to enforce substantive claims to a final judgment (as would be the case in an adversary proceeding) but rather is simply to weigh the overall facts and circumstances to determine whether Wells Fargo may carry on with the foreclosure action or the Debtor should be granted the automatic stay's continued protection. See Hurst, 409 B.R. at 83 (cautioning that court may consider counterclaims that strike at core of movant's secured interest, but any such decision is preliminary, pending an adversary proceeding and such determinations are not preclusive to later proceedings). Viewed another way, the Maryland legislature could not, consistent with the Supremacy Clause, fix a limitations period for the filing of a motion under Section 362(d). Now having determined that the limitations amendment cannot apply retroactively to the previously filed foreclosure, it would make no sense to hold that the same amendment bars the pending Lift Stay Motion. The accrual of the right to foreclose, and the pending foreclosure action, both act as Wells Fargo's place markers for statute of limitations purposes and since the amendment must be applied prospectively, the foreclosure proceeding must be permitted to move forward.
Debtor also contends that "[i]f the witness signature and seal are missing on an instrument, the statute of limitations is reduced to three years". (Motion to Strike ¶11; Dkt. No. 84). It is true that the Note lacks witness signatures; however, the Note does include a "(Seal)" next to the Debtor's signature, and the same is true of the IDOT.
Wellington Co., 180 Md. App. at 587, 952 A.2d at 335. Applying that logic, the lower court held that the note in question was not under seal and therefore found that the limitations period was three years. The Wellington Court, however, did not rely upon the lower court's reasoning or, more significantly, affirm its decision. Rather, it reversed and found that the statute of limitations was 12 years in part because the deed of trust was under seal and it provided a separate enforcement freeway, albeit to the same destination. Wellington, therefore, does not aid the Debtor.
In this case, all of the signatures on the Note and IDOT are expressly made under "Seal", with the key word in parenthesis. (See Creditor Exh. 1). This is sufficient to place the documents under seal.
The next contention of the Debtor is baffling. According to the Debtor, the Note and IDOT were discharged in the Debtor's prior Chapter 7 bankruptcy and Wells Fargo's attempt to enforce them in this case against Hunt Crossing, in part through the POC, violates Section 524(a)'s discharge injunction. Debtor's Counsel was told repeatedly that this contention is completely is frivolous and that assessment has not changed. Johnson v. Home State Bank, supra, held,
501 U.S. at 84; accord Dewsnup v. Timm, 502 U.S. 410, 418 (1992) (liens on real estate pass through bankruptcy unaffected).
Barring a non-frivolous challenge from the Debtor, Wells Fargo had every right to enforce its claim and lien in this case. In the unlikely event that the Debtor had the ability to pay the debt, and thereby retain Hunt Crossing through a confirmed plan, he would have to pay the full balance due, including the $700,000 + arrearage. See 11 U.S.C. §1322(b)(2). Hence, the filing of the POC was not only legitimate, it was necessary to that end as a claim must be filed in order for Wells Fargo to be paid though the Plan. And since the Debtor's prior discharge of personal liability had no impact whatsoever on the lien against Hunt Crossing, Wells Fargo was absolutely entitled to take steps — in this instance, prosecute the Lift Stay Motion — to resume the long-ago filed foreclosure action. The Debtor's contention that Wells Fargo's attempted enforcement of the indebtedness due against Hunt Crossing is inappropriate, and indeed, contemptuous, is completely frivolous in light of the facts of this case and settled law. Accordingly, there is no reason to either deny the Lift Stay Motion, or sustain the Second Objection, on that basis.
The Debtor's contention that Wells Fargo materially altered the Note by misapplying the "Pick-a-Payment" provision is equally as meritless as the prior contentions already examined. On February 14, 2008, the Debtor executed the Note.
(Note ¶4(E)).
First and foremost, it cannot be over-emphasized that MD CL §§3-407(b), relied upon by the Debtor, requires a fraudulent material alteration in order for the particular instrument to be nullified. Thus, no matter how Paragraph 4(E) is interpreted, or the "off-loading" of unpaid interest viewed, the question of nullification cannot even be addressed without the presence of fraud. Yet, the Debtor neither made allegations, nor offered evidence, that Wells Fargo fraudulently altered the Note. Hence, the consideration of the Note's mechanics — how unpaid interest should be applied — becomes a virtual, academic exercise. Nevertheless, the frayed ends of the Debtor's contentions should be firmly tied so confusion going forward will be kept to a minimum, if not eliminated entirely.
At bottom, the Debtor's assertion is that Wells Fargo was "pigeon-holing" his massive unpaid interest accrual in a manner different from how he believed it should be categorized. During cross-examination, Mr. Flowers explained how the clause operates.
Transcript of December 14, 2018 hearing at pp. 23-24.
Mr. Flowers explanation — that interest is deferred only when some monthly payment is made — is in line with the express language of Paragraph 4(E) ("From time to time, my monthly payments may be insufficient..."). Paragraph 4(A) requires the borrower to pay principal and interest every month, however, when an "insufficient" payment is made — a payment of "less than", as opposed to "none of", the total monthly principal and interest due — then, the interest is deferred to the principal and will thereafter incur interest at the same rate as the principal. Paragraph 4(E) tellingly refers to only deferred interest and makes no provision for "deferred principal". Mr. Flowers explanatory testimony as to the requisite circumstances for interest deferral was unrebutted and is fully consistent with the language of paragraph 4.
The Debtor would have this Court conclude that the principal balance should be expanded by at least an additional $300,000 and because Wells Fargo did not account for unpaid interest that way, the Note and IDOT should be nullified. But frankly, without a rehabilitation plan that could somehow solve the problem, how the unpaid sums were stockpiled does not matter. And the Debtor most assuredly does not have such a plan. Accordingly, and especially without a scintilla of evidence of fraud, the Debtor's contentions are frivolous and provide no basis to deny the Lift Stay Motion or sustain the Second Objection.
Debtor contends that Wells Fargo did not give proper notice of changes in payment as required by Rule 3002.1(b). The Rule provides:
Failure to provide the notice as required may result in the lienholder being precluded from presenting the omitted information as evidence, or suffering other appropriate relief, including the imposition of attorney's fees and costs, caused by the failure. Rule 3002.1(i). However, the Debtor has not identified either any violation of the Rule on the part of Wells Fargo, or any alleged harm caused as a result of the non-existent impropriety. And it must be noted that even if the Debtor did identify a rule violation, it would be tough to reason why such an event would make a difference in light of the Debtor's failure to make any post-petition payments. Accordingly, the Court concludes there is no basis for finding a violation of Rule 3002.1(b) and no sanctions will be imposed. See In re Tollios, 491 B.R. 886, 892 (Bankr. N.D. Ill. 2013) (declining to impose sanctions where the failure to file and serve notice per Rule 3002.1(b) did not harm debtors and had no impact on the debtors' case).
The Debtor has not made a payment under the Note since 2010 and his assertions as to why the Wells Fargo should not be permitted to enforce the obligation against Hunt Crossing are frivolous. Under the circumstances the Court concludes that Wells Fargo's Lift Stay Motion should be granted and that its request for in rem relief in the form of an equitable servitude is completely justified. This is so because
Accordingly, the Lift Stay Motion will be granted and an equitable servitude will be afforded for a period of three hundred sixty-five (365) days from the entry of the Order memorializing the ruling included in this Opinion.
In conclusion, (a) the Co-Debtor Response will be denied as the deficiency relied upon was cured by Wells Fargo (Dkt. No. 77), (b) the Admissions Motion will be denied for the reasons explained above, (b) the SJ Motion will likewise be denied, (c) the Second Motion to Strike will be denied, (d) the Second Objection will be overruled, (e) the POC will be allowed and the Lift Stay Motion will be granted with an in rem bar against re-filing of 365 days from the entry of the Order memorializing this ruling.
Under the circumstances of this case, and with knowledge of the Debtor's sloth-like, but eventual, responses to discovery, including his response to the request for admissions, I concluded it would be best not to hold the Debtor to the admissions that would otherwise be established but to instead accept the Debtor's late responses intended to contest crucial facts pending the evidentiary hearing eventually held. Although the Debtor's defenses have been confirmed to be completely frivolous, the Court still concludes it was better to arrive at that conclusion through live testimony, as opposed to the sterile SJ Motion.
