Hopkins v. Freedom Mortgage Corporation

UNITED STATES BANKRUPTCY COURT

DISTRICT OF IDAHO

In Re:

Bankruptcy Case

Dwight Lee Lemmons,

No. 16-40776-JMM

Debtor.

R. Sam Hopkins, Trustee,

Plaintiff,

v.

Freedom Mortgage Corp., a New Jersey

corporation and Chicago Title Adv. Case No. 18-8022-JMM

Insurance Co., an Idaho corporation,

and Mortgage Electronic Registration

Systems, Inc., solely as nominee for

Freedom Mortgage Corp., a New Jersey

corporation,

Defendants.

MEMORANDUM OF DECISION

Appearances:

Heidi Buck Morrison, RACINE OLSON, PLLP, Pocatello, Idaho, Attorney for

Plaintiff.

Loren Ipsen, ELAM & BURKE, P.A., Boise, Idaho, Attorney for Defendants.

MEMORANDUM OF DECISION ̶ 1

Introduction

In its adversary complaint, the chapter 71 trustee, R. Sam Hopkins (“Plaintiff”),

seeks to avoid the post-petition lien of creditor Freedom Mortgage Corporation

(“Freedom”) and to recover the property for the benefit of the estate. Dkt. No. 1. On

June 19, 2019, Plaintiff filed a motion for summary judgment, to which Defendants filed

an opposition, after which the matter was fully briefed. Dkt. Nos. 48, 53, 55–57, and 59.

The Court conducted a hearing on the motion on July 18, 2019, and thereafter took the

matter under advisement. Having now considered the briefing and oral argument

presented, as well as the applicable law, the Court issues the following decision which

resolves the motion. Fed. R. Bankr. P. 7052; 9014.

Undisputed Facts

Debtor Dwight L. Lemmons (“Debtor”) and his late wife, Estella, owned a parcel

of real property located at 1252 North Hayes in Pocatello, Idaho (the “Property”). In July

2016, the Property was refinanced via a promissory note in the principal amount of

$84,084 (“July Note”), which was secured by a deed of trust in favor of Freedom and

naming Chicago Title as trustee and Mortgage Electronic Registration Systems, Inc.

(“MERS”) as the nominee beneficiary for Freedom (“July DOT”). Dkt. No. 1 at Exs. A,

1 Unless otherwise indicated, all chapter and section references are to the Bankruptcy Code, 11 U.S.C.

§§ 101-1532, all rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037, and

all “Civil Rule” references are to the Federal Rules of Civil Procedure.

MEMORANDUM OF DECISION ̶ 2

B. Both were executed on July 6, 2016, and the July DOT was recorded in Bannock

County, Idaho, on July 13, 2016. Id.

On August 22, 2016, Debtor filed a chapter 7 petition.2 BK Dkt. No. 1. In his

schedules, he listed the Property3 as an asset, and indicated Freedom was a secured

creditor as to that asset. Id. Freedom was notified of the bankruptcy upon being sent a

notice of the date set for the meeting of creditors. BK Dkt. No. 13.

On December 6, 2016, post-petition, Debtor refinanced the July Note by obtaining

a loan from Freedom in the principal sum of $84,389 (“Dec. Note”), and securing the

debt with a deed of trust in favor of Freedom and again naming Chicago Title as trustee

and MERS as nominee beneficiary (“Dec. DOT”). Dkt. No. 1 at Ex. C. That trust deed

was recorded on December 15, 2016. Id. In connection with the Dec. Note, Debtor

indicated that “no bankruptcy proceeding has been filed or currently exists involving any

owner except as cited in the Title, nor does any owner intend to file for bankruptcy.”

Dkt. No. 57-4 at ¶ 6. A deed of reconveyance was recorded on December 28, 2016,

satisfying the lien established by the July DOT. Id. at Ex. D.

On May 8, 2018, Plaintiff commenced this adversary proceeding against

Defendants. Dkt. No. 1. Less than two weeks later, on May 20, 2019, Debtor refinanced

2 In re Lemmons, 16-40776-JMM. Debtor’s wife, Estella, was not a joint debtor in the bankruptcy case,

and she passed away on March 5, 2019. Dkt. No. 48-4.

3 Estella quitclaimed her interest in the Property to herself and the Debtor jointly on April 11, 2013. Dkt.

No. 48-2 at Ex. E.

MEMORANDUM OF DECISION ̶ 3

the Property yet again. He executed a deed of trust in favor of Wintrust Mortgage,

naming MERS as nominee beneficiary and Fidelity National Title Insurance Company as

the trustee. Dkt. No. 59 at Ex. A. On June 18, 2019, a deed of reconveyance was

recorded which indicated the Dec. DOT had been paid in full. Id. at Ex. B. The

bankruptcy case has remained open from the petition date through the present, thus both

refinances and reconveyances occurred post-petition and while the Property was still part

of the bankruptcy estate.

Plaintiff now seeks to avoid Freedom’s lien created by the Dec. DOT.

Analysis and Disposition

A. Summary Judgment Standard

The Ninth Circuit Bankruptcy Appellate Panel recently summarized the standard

to be applied to motions for summary judgment:

Summary judgment should be granted when there are no genuine issues of

material fact and when the movant is entitled to prevail as a matter of law.

Civil Rule 56(a) (made applicable in adversary proceedings by Rule 7056).

In resolving a summary judgment motion, the court does not weigh

evidence, but rather determines only whether a material factual dispute

remains for trial. Covey v. Hollydale Mobilehome Estates, 116 F.3d 830,

834 (9th Cir. 1997). A material fact is one that, “under the governing

substantive law ... could affect the outcome of the case.” Caneva v. Sun

Cmtys. Operating Ltd. P'ship (In re Caneva), 550 F.3d 755, 760 (9th Cir.

2008). “A genuine issue of material fact exists when ‘the evidence is such

that a reasonable jury could return a verdict for the nonmoving party.’” Id.

at 761 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106

S.Ct. 2505, 91 L.Ed.2d 202 (1986)).

In re Hurley, 601 B.R. 529, 534 (9th Cir. BAP 2019); Herrera v. Scott (In re Scott), 588

B.R. 122, 128 (Bankr. D. Idaho 2018).

MEMORANDUM OF DECISION ̶ 4

B. Avoidance Under § 549

Section 549 of the Code governs post-petition transactions. It provides, as

relevant here, that a trustee may avoid a transfer of estate property that occurs after the

commencement of the case and that is not authorized by the Code or the court. § 549(a).

The trustee4 must prove “a transfer (1) of estate property; (2) that occurred after the

commencement of the case; and (3) that was not authorized by statute or the court.”

Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 728 (9th Cir. BAP

2008). However, post-petition transfers to subsequent good faith purchasers without

knowledge of the bankruptcy case who give fair equivalent value may not be avoided.

§549(c).

In Hopkins v. Suntrust Mortg., Inc. (In re Ellis), 441 B.R. 656 (Bankr. D. Idaho

2010), this Court considered a motion for avoidance under nearly identical facts. In that

case, the debtors refinanced their debt secured by a deed of trust about a month after

filing their bankruptcy petition, using the same mortgage company as they had for the

pre-petition deed of trust. They did not seek permission of the trustee or the Court, and

the trustee sought to avoid the transfer under § 549(a).

The Court concluded the creation of the post-petition lien constituted a “transfer”

of estate property within the meaning of § 549, as § 101(54) specifically includes the

creation of a lien within the definition of “transfer.” Id. at 661. Because the debtors in

4 Rule 6001 allocates the burden of proof to the trustee.

MEMORANDUM OF DECISION ̶ 5

Ellis transferred a new mortgage to their lender post-petition, without the authorization of

the trustee or the court, the requirements for avoidance of the transfer under § 549(a)

were met. Id. at 663.

The same is true here. Debtors’ post-petition refinance of their pre-petition debt

secured by the deed of trust resulted in the transfer of a new deed of trust and

accompanying lien to Freedom, and was done without trustee or court authorization.

Decl. of R. Sam Hopkins, Dkt. No. 48-2 at ¶ 7. Accordingly, under § 549(a) and Ellis,

the elements necessary for lien avoidance have been demonstrated.

As noted above, the Code provides a defense when subsequent transferees are

good faith purchasers without knowledge of the bankruptcy case who give fair equivalent

value. § 549(c). However, as in Ellis, Freedom was the mortgage company for the pre-

petition transaction, and as such received notice of the Debtor’s bankruptcy. Indeed,

Freedom is listed as a secured creditor on schedule D, and is included on the creditor

matrix. Dkt. No. 1. As such, “[b]ecause it had actual, pre-lien-creation knowledge of the

commencement of Debtor[’s] bankruptcy case, [Freedom] does not qualify as a good

faith transferee under § 549(c).” Ellis, 441 B.R. at 665.

The Court concludes that no material facts are in dispute, and the elements for lien

avoidance under § 549(a) have been met. Thus, summary judgment is properly granted

on the lien avoidance issue. However, in addition to avoidance, Plaintiff’s complaint

seeks recovery for the benefit of the estate.

MEMORANDUM OF DECISION ̶ 6

C. Recovery Under § 550

Section 550 of the Code provides:

to the extent that a transfer is avoided under section … 549 … of this title,

the trustee may recover, for the benefit of the estate, the property

transferred, or, if the court so orders, the value of such property, from

… the initial transferee of such transfer or the entity for whose benefit such

transfer was made[.]

As pointed out in Ellis, § 550 is designed to place the bankruptcy estate in the

financial condition that it would have been in had the avoided transfer not occurred.

Ellis, 441 B.R. at 666 (citing USAA Fed. Sav. Bank v. Thacker (In re Taylor), 599 F.3d

880, 890 (9th Cir. 2010)). In Ellis, this Court observed that had the debtors not

transferred the lien to the mortgage company, and due to the relinquishment of its pre-

petition liens on the property, debtors' residence would have been available to

the bankruptcy estate for liquidation and distribution to their creditors. The Court was

not persuaded by the mortgage company’s argument that it would not have released the

liens had it known of the bankruptcy filing, and thus to place the property back in its pre-

petition condition, the original liens must be reinstated. It held that “[w]here transferees

have pre-transfer knowledge of the bankruptcy case, such as here, the Court declines to

exercise its discretion to favor the interests of a wrong-doing transferee over those of the

other creditors of the bankruptcy estate.” Id. at 667. This Court sees no reason to deviate

from that holding.

During oral argument on the motion, Freedom contended that because Debtor and

his wife refinanced the mortgage a second time following the bankruptcy filing, then

MEMORANDUM OF DECISION ̶ 7

Plaintiff must bring that subsequent transferee into this adversary proceeding in order to

apportion full relief. In essence, because the lien established by the Dec. DOT was

satisfied and extinguished by virtue of the trust deed executed in May 2019 along with

the accompanying the deed of reconveyance, Freedom argues that it has no lien to avoid,

and thus summary judgment may not be entered against it. The Court disagrees.

Once the trustee establishes a prima facie case for avoidance under § 549, to the

extent the transfer is avoided, §§ 550(a)(1) and (a)(2) permit the trustee to recover the

property transferred or the value of such property from the initial transferee or any

subsequent transferee, bearing in mind that the trustee is limited to a single satisfaction of

the transfer under § 550(e).

The Ninth Circuit Bankruptcy Appellate Panel (“BAP”) has held that a trustee

need not avoid a transfer from the initial transferee under § 549 before seeking to recover

from a subsequent transferee under § 550. To hold otherwise “conflates [the Code’s]

avoidance and recovery sections.” In re AVI, Inc., 389 B.R. at 734. In so holding, the

BAP stated that “a trustee who demonstrates that a transfer is avoidable ‘may seek to

recover against any transferee, initial or immediate, or an entity for whose benefit the

transfer is made.’” Id.; see also Matter of Walldesign, Inc., 872 F.3d 954, 962 (9th Cir.

2017) (When a trustee has proven the avoidability of a transfer, the Ninth Circuit has

interpreted § 550(a) to provide trustees “an absolute right of recovery against the ‘initial

MEMORANDUM OF DECISION ̶ 8

transferee’ and any ‘entity for whose benefit such transfer was made.’”) (quoting

Danning v. Miller (In re Bullion Reserve of N. Am.), 922 F.2d 544, 547 (9th Cir. 1991)).5

In this case, the Plaintiff in his complaint and motion established that avoidability

is appropriate. The unilateral act of Defendants agreeing to release the lien after the

complaint was filed, without more, does not relieve it of its liability under § 550.

Accordingly, because Plaintiff has shown that the Dec. DOT is avoidable, it may seek to

recover from Freedom, the initial transferee, or Wintrust Mortgage, the immediate

transferee. Nothing in the Code or case law requires him to seek recovery from all

transferees. Moreover, even though trustees “‘[t]heoretically’ can recover

from subsequent transferees as well, subsequent transferees who accepted the property

‘for value, in good faith, and without knowledge’ of the voidability of the transfer may

avail themselves of the ‘good faith’ defense of section 550(b).” Walldesign, 872 F.3d at

962.

Because the Plaintiff has demonstrated the avoidability of the transfer to

Defendant by virtue of the Dec. DOT, he is entitled to recover from Freedom either the

property or the value of the property transferred under § 550. In his complaint, Plaintiff

specifically seeks to recover the property, and makes no demand for the value of the lien.

See Dkt. No. 1 at ¶ 21. However, the failure to pray for relief in the alternative is not

5 The cited cases involve fraudulent transfers, but the Code does not differentiate between the bases for

avoidance when permitting recovery under § 550.

MEMORANDUM OF DECISION ̶ 9

prejudicial to the Plaintiff here. Section 550 provides that the trustee may recover the

property, “or, if the court so orders, the value of such property.” (emphasis added).

Thus, the bankruptcy court may award the trustee (1) the actual property, or

(2) the value of the property. The statute does not explain when a court

should award the trustee recovery of the actual property and when it should,

in the alternative, award the trustee recovery of the value of the property.

The statute states only that a court must issue a “single satisfaction.” 11

U.S.C. § 550(d). Bankruptcy courts have discretion whether to award

recovery under § 550, even when the transferred property is a lien. E.g.,

Rodriguez v. Drive Financial Services, LP (In re Bremer), 408 B.R. 355,

359 (B.A.P. 10th Cir. 2009). If a bankruptcy court permits the trustee

recovery, the court has discretion whether to award the trustee recovery of

the property transferred or the value of the property transferred. Id.

In re Taylor, 599 F.3d 880, 890 (9th Cir. 2010).

Because the Code clearly provides this Court discretion to determine the form of

relief Plaintiff may recover, the Court may award the value of the lien rather than the

property itself, despite the adversary complaint not specifically seeking such relief.

Having determined that it may award the value of the transfer, the Court must next

consider what that value is. The Code provides no guidance on what value the Court

should place on the transfer. However, the Court has considered this issue in prior cases,

and concluded that it “ordinarily determines the value of the property to be the value at

the time of the transfer, but has discretion on how to value the property so as to put the

estate in its pretransfer position.” In re Parker, No. AP 16-8004-JDP, 2016 WL

6783222, at *5 (Bankr. D. Idaho Nov. 15, 2016) (citing Joseph v. Madray (In re Brun),

360 B.R. 669, 674 (Bankr. C.D. Cal. 2007); Riske v. The David Austin Seitz Irrevocable

Tr. (In re Seitz), 400 B.R. 707, 722 (Bankr. E.D. Mo. 2008) (noting that, typically,

MEMORANDUM OF DECISION ̶ 10

“courts equate ‘value’ with the fair market value of the subject property at the time of the

transfer.”)). In this case, the Dec. Note and Dec. DOT attached to the complaint indicates

the value of the lien was $84,389. Dkt. No. 1 at Ex. B. It is this value that the Court

concludes Freedom must turn over to Plaintiff pursuant to § 550.

D. Defenses

In its briefing and during oral argument, the Defendants raise a number of

defenses. Dkt. No. 55. For example, they contend Debtors were untruthful in their

documents supporting the Dec. Note and Dec. DOT in which they indicated they had not

filed for bankruptcy. However, Defendants readily overlook the fact that they received

actual notice of the bankruptcy filing, as they were included on the creditor matrix and

were notified of the meeting of creditors. Additionally, Defendants could have easily

protected their interest by a PACER search which would have revealed Debtor’s

bankruptcy filing. As this Court noted in Ellis, “Section 550 is more protective of the

estate than of transferees, and the Court is not inclined to allow Suntrust to benefit from

an unauthorized post-petition transfer when it could have so easily protected its

interests.” 441 B.R. at 667.

Next, Defendants argue that avoidance will deprive Debtor of his homestead and

leave him homeless. The Court understands Defendants’ concern, because, practically

speaking, unauthorized transfers by debtors in bankruptcy are a risky endeavor, as they

may jeopardize their homestead exemption as well as their ability to retain their home.

For example, in Ellis, after the trustee avoided the lien and recovered the property for the

MEMORANDUM OF DECISION ̶ 11

benefit of the bankruptcy estate, the trustee sold the home over the debtors’ objection.

See In re Ellis, 08-41299-JDP at Dkt. Nos. 55, 69. Nevertheless, despite these potential

risks to Debtor, Defendants do not have standing to assert his interests in this action.

Debtor has bankruptcy counsel who will see to his representation.

Defendants also argue that Debtor’s late wife’s estate must be joined into this

proceeding. The Court disagrees. Avoidance under § 549 invokes a rather narrow focus.

As the BAP wrote, § 549 “focuses on the transfer and contains nothing that defines the

proper defendant. Avoidability is an attribute of the transfer and not the party.” In re

AVI, Inc., 389 B.R. at 733 (citing Kendall v. Sorani (In re Richmond Produce), 195 B.R.

455, 463 (N.D. Cal. 1996). Whether or not other parties may be affected by the

unauthorized post-petition transfer is irrelevant to whether such transfer may be avoided.

Defendants further suggest that the Court should exercise its equitable powers

under § 105 to accord Defendants some relief, largely because the Dec. Note and DOT

netted Debtor very little gain, but will cost Defendants considerably. The Defendants in

Ellis similarly advanced pleas for equitable relief, and, as noted above, this Court rejected

those arguments, holding that “[w]here transferees have pre-transfer knowledge of the

bankruptcy case, such as here, the Court declines to exercise its discretion to favor the

interests of a wrong-doing transferee over those of the other creditors of the bankruptcy

estate.” Ellis, 441 B.R. at 666. Because the facts of Ellis are so similar to those

presented here, this Court declines to divert from that holding.

MEMORANDUM OF DECISION ̶ 12

Defendants further contend that the Court should use its equitable powers to

reinstate the pre-petition deed of trust. However, this Court likewise considered this

argument in Ellis, and rejected it, concluding that § 105(a) is limited to implementation of

specific provisions of the Code. 441 B.R. at 666. And because § 550 is “limited to the

recovery of transferred property, use of the Court’s equitable powers to reinstate

Suntrust’s mortgages in this context would not implement the provisions of § 550.” Id.

Finally, Defendants contend that Freedom should be entitled to remain a secured

creditor following this decision. While the Court recognizes that the lender in Ellis ended

up as an unsecured creditor, the Court concludes this issue is not before the Court today,

and declines to address it at this juncture.6

/ / / / /

/ / / / /

6 Defendants may be entitled to other remedies, but consideration of such is not before the Court pursuant

to this adversary complaint.

MEMORANDUM OF DECISION ̶ 13

Conclusion

The Court concludes there are no material facts in dispute, and they demonstrate,

as a matter of law, that the post-petition deed of trust executed by Defendants is

avoidable, and Plaintiff is entitled to recovery under § 550. Accordingly, summary

judgment is granted in favor of Plaintiff. Moreover, because of the subsequent deed of

trust executed by Debtors, the Court, in its discretion, concludes that Plaintiff should

recover the value of the lien, in the amount of $84,389, as opposed to the property itself.

A separate order will be entered.

LE DATED: August 13, 2019

y I s } |

i 8 JOSEPH M. MEIER

“Rico CHIEF U. S. BANKRUPTCY JUDGE

MEMORANDUM OF DECISION -— 14