D. BROCK HORNBY, District Judge.
The United States District Court for the District of Maine finds that this case involves a question of law of the State of Maine that may be determinative of the cause and that there are no clear controlling precedents thereon in the decisions of the Maine Supreme Judicial Court sitting as the Law Court.
Accordingly, this court hereby
As required by Me. R. App. Proc. 25(b), the style of the case is William H. Howison, in his capacity as Chapter 7 Trustee of the Bankruptcy Estate of John B. and Susan E. Everest, Appellant, v. Bank of America, N.A. and Maine Revenue Services, Appellees. I respectfully suggest that the Trustee be treated as the appellant before the Law Court.
The "statement of facts showing the nature of the case and the circumstances out of which the question of law arises," see Me. R. App. Proc. 25(b), is attached as Appendix A and is reproduced verbatim from my Decision and Order of June 2, 2014.
The "question or questions of law to be answered," see Me. R. App. Proc. 25(b), is attached as Appendix B and is reproduced verbatim from the Decision and Order of June 2, 2014, Exhibit A.
The reason for the certification appears in the remainder of my Decision and Order of June 2, 2014, and the entire document is attached as Appendix C.
The Clerk is hereby
Susan E. Everest ("Everest") owned real estate in Kennebunk, Maine. On February 17, 2009, as holder of a second mortgage that Everest had granted on the premises, Bank of America
Everest and her husband then filed a petition for relief under Chapter 7 of the United States Bankruptcy Code with the Bankruptcy Court of this District on July 23, 2010, and a Trustee was appointed for the case. Neither Everest nor the Trustee ever exercised the equity of redemption on the second mortgage foreclosure, and it has expired. But Bank of America failed to conduct a public sale of the premises (more precisely, of the mortgagor's equity of redemption under a first mortgage, as I explain later).
On August 10, 2010, People's United Bank ("Peoples United"), the holder of a first mortgage that Everest had granted earlier on the same parcel, obtained a relief from stay from the Bankruptcy Court so that it could proceed with its own state court foreclosure action on the premises. On October 29, 2010, Peoples United began its foreclosure lawsuit in Maine District Court, naming Everest as a defendant and Maine Revenue Services and second mortgagee Bank of America as parties-in-interest. All were properly served with process and both Everest and Bank of America defaulted. On March 22, 2011, the Maine District Court entered a Foreclosure Judgment on Peoples United's first mortgage. That Judgment stated that the proceeds of a foreclosure sale of the real estate were to be paid (after deducting costs of the sale) first to Peoples United to the extent of its debt, then to Maine Revenue Services for tax liens,
The Trustee learned of the impending foreclosure sale from this foreclosure in late June 2011. Although the Trustee had previously abandoned the bankruptcy estate's interest in the premises (August 30, 2010) and the bankruptcy case had been closed (November 2, 2010), on July 7, 2011, the Trustee filed motions in the Bankruptcy Court to reopen the bankruptcy case and to revoke his abandonment of the property. The Bankruptcy Court did reopen the case and on July 20 granted the Trustee's motion to revoke abandonment.
On July 21, 2011, Bank of America purchased Peoples United's interest in Everest's first mortgage debt and obtained an assignment of the Peoples United loan and first mortgage documents and the Peoples United Foreclosure Judgment. Appellate Designation, Loan Sale Agreement, Exhibit N (ECF No. 1-6); Appellate Designation, Assignment of Mortgage, Exhibit O-1 (ECF No. 1-6); Appellate Designation, Assignment of Judgment, Exhibit O-2 (ECF No. 1-6). Peoples United postponed the scheduled foreclosure sale.
Next, the Trustee appeared in the Peoples United foreclosure lawsuit by filing a motion to substitute party, namely, the Trustee in place of Everest. The Maine District Court granted that motion on August 25, 2011.
Then, on September 29, 2011, Bank of America filed a motion seeking to substitute itself in place of Peoples United as the plaintiff in that foreclosure lawsuit. The Maine District Court granted that motion. Bank of America also moved for relief from the Peoples United Foreclosure Judgment pursuant to M.R. Civ. P. 60(b), with the stated intention of dismissing the Peoples United foreclosure case. The Trustee filed an objection to that motion, stating that Bank of America had failed to provide evidence that would support its requested relief under Rule 60(b). On January 31, 2012, the Maine District Court denied Bank of America's Rule 60(b) Motion, stating
Appellate Designation, Order on Bank of America's Motion to Substitute Party and Bank of America's Motion to Vacate Foreclosure Judgment at 20 (ECF No. 1-6). Bank of America appealed and the Law Court dismissed the appeal as untimely.
No public sale under either foreclosure judgment has ever taken place.
Those are the facts material to the state law question of who gets the surplus proceeds.
On July 3, 2012, the Trustee filed a motion in this District's Bankruptcy Court seeking authority to sell the premises free and clear of liens, claims, interests and encumbrances pursuant to § 363 of the Bankruptcy Code. Bank of America filed an objection to the Sale Motion. The Trustee then commenced an Adversary Proceeding pursuant to Fed. R. Bankr. P. 7001(9) to determine the relative rights of the parties in the Property. On August 15, 2012, the Bankruptcy Court consolidated the Sale Motion with the Adversary Proceeding. The Trustee now concedes that he lacks authority to sell the premises himself, Trustee's Reply Br. 2-4 (ECF No. 11), but maintains that he can compel Bank of America to sell the premises under the first mortgage foreclosure. If successful here, the Trustee says that he will pursue that option either in the Bankruptcy Court or in the Maine District Court.
The parties agreed to proceed on a stipulated record before the Bankruptcy Court and submitted briefs to outline their positions. On November 12, 2013, the Bankruptcy Court announced its findings and conclusions on the record in open court as follows:
Adversary Proceeding No. 12-02034 (Bankr. D.Me.), Tr. of Hr'g Nov. 12, 2013 at 5-6 (ECF No. 52). On November 13, 2013, the Bankruptcy Court entered judgment in favor of Bank of America. The Trustee filed a timely notice of appeal.
For the purposes of these proceedings, the parties have stipulated that the value of the premises is $709,700, an amount sufficient to result in proceeds being paid to the Trustee for Everest's creditors if the Peoples United Judgment awards her any amount after Peoples United's secured obligation and Maine Revenue Services' tax lien are paid in full (but not enough to result in proceeds for the Trustee if Bank of America is paid). The parties have also filed additional stipulations in bankruptcy court and at my request a more complete record of the state court proceedings.
Where
does the junior mortgagee who failed to appear in the second lawsuit and is not named as a distributee in the resulting judgment have any right under Maine law to excess proceeds from that foreclosure sale in any manner, either directly, or through a lien on the mortgagor's interest, or on some other basis; or do the excess proceeds belong exclusively to the debtor/mortgagor (now succeeded by the trustee in bankruptcy)? (If the junior mortgagee has a right to share in the proceeds, the nature of such a right will affect this federal court's determination whether the mortgagor/debtor's intervening bankruptcy filing has impaired that right, as it would, for example, if the only right were to a deficiency judgment on the underlying Note, as contrasted with a lien.)
This bankruptcy appeal presents a puzzling question of how sale proceeds should be distributed under Maine mortgage statutory foreclosure law and foreclosure judgments, given the following chronology. The facts are stipulated and/or a matter of judicial record. I heard oral argument on May 8, 2014.
In the beginning, a second mortgagee foreclosed its second mortgage on a parcel of Maine real estate through the judicial foreclosure process. The judgment of foreclosure and order of sale stated that the second mortgagee was to sell the premises and disburse the proceeds. The mortgagor did not exercise her equity of redemption within the statutory 90 days. But the second mortgagee failed to conduct a foreclosure sale following the expiration of the redemption period.
Next, the first mortgagee foreclosed its first mortgage on the same parcel through the judicial foreclosure process. The first mortgagee served its foreclosure complaint on the mortgagor as a defendant, and on the second mortgagee and Maine Revenue Services (holder of a state tax lien) as parties-in-interest. Both the mortgagor and the second mortgagee defaulted in that judicial proceeding, but Maine Revenue Services appeared. The resulting foreclosure decree directed payment to the first mortgagee, then Maine Revenue Services, and ordered any sale surplus thereafter to go to the defendant (the mortgagor) and any "other party appearing in this action." The second mortgagee had not appeared. Maine courts rejected the second mortgagee's belated attempt to amend the language of that foreclosure decree.
The second mortgagee next purchased the first mortgagee's interest. As of yet, no foreclosure sale has occurred pursuant to the second decree, but the parties agree that there will be a surplus after the first mortgagee and Maine Revenue Services are paid (even after costs and expenses).
The question is, does the surplus that will result from the public sale pursuant to foreclosure of the first mortgage go to the mortgagor or to the second mortgagee?
Susan E. Everest ("Everest") owned real estate in Kennebunk, Maine. On February 17, 2009, as holder of a second mortgage that Everest had granted on the premises, Bank of America
Everest and her husband then filed a petition for relief under Chapter 7 of the United States Bankruptcy Code with the Bankruptcy Court of this District on July 23, 2010, and a Trustee was appointed for the case. Neither Everest nor the Trustee ever exercised the equity of redemption on the second mortgage foreclosure, and it has expired. But Bank of America failed to conduct a public sale of the premises (more precisely, of the mortgagor's equity of redemption under a first mortgage, as I explain later).
On August 10, 2010, People's United Bank ("Peoples United"), the holder of a first mortgage that Everest had granted earlier on the same parcel, obtained a relief from stay from the Bankruptcy Court so that it could proceed with its own state court foreclosure action on the premises. On October 29, 2010, Peoples United began its foreclosure lawsuit in Maine District Court, naming Everest as a defendant and Maine Revenue Services and second mortgagee Bank of America as parties-in-interest. All were properly served with process and both Everest and Bank of America defaulted. On March 22, 2011, the Maine District Court entered a Foreclosure Judgment on Peoples United's first mortgage. That Judgment stated that the proceeds of a foreclosure sale of the real estate were to be paid (after deducting costs of the sale) first to Peoples United to the extent of its debt, then to Maine Revenue Services for tax liens,
The Trustee learned of the impending foreclosure sale from this foreclosure in late June 2011. Although the Trustee had previously abandoned the bankruptcy estate's interest in the premises (August 30, 2010) and the bankruptcy case had been closed (November 2, 2010), on July 7, 2011, the Trustee filed motions in the Bankruptcy Court to reopen the bankruptcy case and to revoke his abandonment of the property. The Bankruptcy Court did reopen the case and on July 20 granted the Trustee's motion to revoke abandonment.
On July 21, 2011, Bank of America purchased Peoples United's interest in Everest's first mortgage debt and obtained an assignment of the Peoples United loan and first mortgage documents and the Peoples United Foreclosure Judgment. Appellate Designation, Loan Sale Agreement, Exhibit N (ECF No. 1-6); Appellate Designation, Assignment of Mortgage, Exhibit O-1 (ECF No. 1-6); Appellate Designation, Assignment of Judgment, Exhibit O-2 (ECF No. 1-6). Peoples United postponed the scheduled foreclosure sale.
Next, the Trustee appeared in the Peoples United foreclosure lawsuit by filing a motion to substitute party, namely, the Trustee in place of Everest. The Maine District Court granted that motion on August 25, 2011.
Then, on September 29, 2011, Bank of America filed a motion seeking to substitute itself in place of Peoples United as the plaintiff in that foreclosure lawsuit. The Maine District Court granted that motion. Bank of America also moved for relief from the Peoples United Foreclosure Judgment pursuant to M.R. Civ. P. 60(b), with the stated intention of dismissing the Peoples United foreclosure case. The Trustee filed an objection to that motion, stating that Bank of America had failed to provide evidence that would support its requested relief under Rule 60(b). On January 31, 2012, the Maine District Court denied Bank of America's Rule 60(b) Motion, stating
Appellate Designation, Order on Bank of America's Motion to Substitute Party and Bank of America's Motion to Vacate Foreclosure Judgment at 20 (ECF No. 1-6). Bank of America appealed and the Law Court dismissed the appeal as untimely.
No public sale under either foreclosure judgment has ever taken place.
Those are the facts material to the state law question of who gets the surplus proceeds.
On July 3, 2012, the Trustee filed a motion in this District's Bankruptcy Court seeking authority to sell the premises free and clear of liens, claims, interests and encumbrances pursuant to § 363 of the Bankruptcy Code. Bank of America filed an objection to the Sale Motion. The Trustee then commenced an Adversary Proceeding pursuant to Fed. R. Bankr. P. 7001(9) to determine the relative rights of the parties in the Property. On August 15, 2012, the Bankruptcy Court consolidated the Sale Motion with the Adversary Proceeding. The Trustee now concedes that he lacks authority to sell the premises himself, Trustee's Reply Br. 2-4 (ECF No. 11), but maintains that he can compel Bank of America to sell the premises under the first mortgage foreclosure. If successful here, the Trustee says that he will pursue that option either in the Bankruptcy Court or in the Maine District Court.
The parties agreed to proceed on a stipulated record before the Bankruptcy Court and submitted briefs to outline their positions. On November 12, 2013, the Bankruptcy Court announced its findings and conclusions on the record in open court as follows:
Adversary Proceeding No. 12-02034 (Bankr. D.Me.), Tr. of Hr'g Nov. 12, 2013 at 5-6 (ECF No. 52). On November 13, 2013, the Bankruptcy Court entered judgment in favor of Bank of America. The Trustee filed a timely notice of appeal.
For the purposes of these proceedings, the parties have stipulated that the value of the premises is $709,700, an amount sufficient to result in proceeds being paid to the Trustee for Everest's creditors if the Peoples United Judgment awards her any amount after Peoples United's secured obligation and Maine Revenue Services' tax lien are paid in full (but not enough to result in proceeds for the Trustee if Bank of America is paid). The parties have also filed additional stipulations in bankruptcy court and at my request a more complete record of the state court proceedings.
The Maine statutes controlling judicial foreclosure by civil action lay out a number of requirements. In foreclosure of a second mortgage by civil action, first mortgagees are not to be joined and are not affected by the proceedings, but they are to be given notice of the proceedings.
The statutes specify some material differences for foreclosing a first mortgage. Like any judicial foreclosure, the lawsuit is to be "commenced in accordance with the Maine Rules of Civil Procedure," and "[s]ervice of process on all parties and all proceedings must be in accordance with the Maine Rules of Civil Procedure." 14 M.R.S.A. § 6321. But unlike a junior mortgage foreclosure, a first mortgage foreclosure lies "against all parties in interest," and parties in interest are defined to include the mortgagor and other mortgagees, including junior mortgagees.
The Maine statute provides that after expenses, proceeds must be distributed "in accordance with the provisions of the judgment," 14 M.R.S.A. § 6324, and that "[a]ny surplus must be paid to the mortgagor, the mortgagor's successors, heirs or assigns in the proceeding."
Can Bank of America nevertheless succeed to Everest's newly found surplus rights because of its earlier foreclosure of its second mortgage? The bankruptcy court concluded that it could, reasoning that Bank of America had a lien on the proceeds-to-come as a result of that earlier foreclosure without sale.
I think it is a close question whether that conclusion follows under Maine law. The parties have cited no Maine cases recognizing such a lien (i.e., distinct from the lien that Bank of America had merely by virtue of its second mortgage). Moreover, permitting a "look behind" the distribution priorities that the later final judgment clearly established would create its own uncertainties. If there was error in the assignment of priorities in that judgment, the place to attack that error was in that state foreclosure proceeding, something that Bank of America attempted and that the state courts thwarted. "When in two actions inconsistent final judgments are rendered, it is the latter, not the earlier, judgment that is accorded conclusive effect in a third action under the rules of res judicata." Restatement (Second) of Judgments § 15. In reviewing this "last-in-time rule," then-Professor Ruth Bader Ginsberg explained:
Ruth B. Ginsberg,
It is worth considering what would have happened if Bank of America had conducted the mandated public sale after foreclosure of the second mortgage pursuant to the first judgment. If Bank of America had done so, it would have sold subject to Peoples United's first mortgage and what it would have sold would have been the equity of redemption on that first mortgage. Regardless of how little money that public sale might have generated for the benefit of Bank of America, if the sale were to a third party, Bank of America would have no rights to the pending surplus now set to arise out of the first mortgage foreclosure. (If Bank of America had not collected its entire debt, it might have obtained a deficiency judgment on the Note, but that would not help it in this bankruptcy proceeding.) On the other hand, if Bank of America had itself purchased as highest bidder at that hypothetical sale, then it would have purchased the right to redeem Peoples United's first mortgage and would presumably have been considered the mortgagor thereafter under both the statute and the Foreclosure Judgment.
So the status is that Everest's possessory interest has terminated, Bank of America neither purchased Everest's equity of redemption itself nor sold it to a third party, Bank of America failed to pursue its interests as a creditor during the later foreclosure of the first mortgage, and the statute and the first mortgage foreclosure judgment ostensibly give Everest, and therefore the Trustee, surplus proceeds.
If we overlook Bank of America's failure to conduct a public sale on the second mortgage foreclosure and its unexcused default in the first mortgage foreclosure proceedings, the bankruptcy court's decision has the appeal of fairness. After all, the validity of the debt to Bank of America is unquestioned, and payment of surplus to Everest or the Trustee is an unexpected windfall to them, arising solely out of Bank of America's missteps.
There is treatise language that tends towards the bankruptcy court's outcome. 1 G. Nelson and D. Whitman,
For the reasons stated, I tend to disagree with the bankruptcy court and therefore to vacate and remand. But as I have also stated, the Maine Law Court should have the opportunity to determine this unsettled state law question, and therefore I will certify the question to the Law Court, because it not only "may be," but is "determinative of the cause."
In accordance with Me. R. App. P. 25(b), I propose to state the "facts showing the nature of the case and the circumstances out of which the question of law arises" by using the
Where
does the junior mortgagee who failed to appear in the second lawsuit and is not named as a distributee in the resulting judgment have any right under Maine law to excess proceeds from that foreclosure sale in any manner, either directly, or through a lien on the mortgagor's interest, or on some other basis; or do the excess proceeds belong exclusively to the debtor/mortgagor (now succeeded by the trustee in bankruptcy)? (If the junior mortgagee has a right to share in the proceeds, the nature of such a right will affect this federal court's determination whether the mortgagor/debtor's intervening bankruptcy filing has impaired that right, as it would, for example, if the only right were to a deficiency judgment on the underlying Note, as contrasted with a lien.
14 M.R.S.A. § 6321.
(footnotes omitted). The Restatement (Third) of Property: Mortgages § 7.4 (1997), states the same rule, that "the surplus is applied to liens and other interests terminated by the foreclosure in order of their priority and the remaining balance, if any, is distributed to the holder of the equity of redemption." Therefore, "the claim of the holder of the foreclosed equity of redemption to the surplus is subordinate to the claims of all other holders of liens and interests terminated by the foreclosure."
But
