# Hopkins v. Freedom Mortgage Corporation

> United States Bankruptcy Court, D. Idaho · August 13, 2019

URL: https://www.frixlaw.com/law-library/cases/10457306

## Case

- **Court:** United States Bankruptcy Court, D. Idaho
- **Decided:** August 13, 2019
- **Opinion:** 100trialcourt
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

- No negative treatment found by the automated citator. That is not the same as a confirmation that the case is good law; read the citing cases.
- Full citator and citing cases: https://www.frixlaw.com/law-library/cases/10457306

## How later opinions describe it (automated extraction)

- 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.”

## Opinion text

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

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/10457306. Public record. Not legal advice.