Zumbrink v. Beam ( 2019 )

[Cite as Zumbrink v. Beam, 2019-Ohio-2347.]
IN THE COURT OF APPEALS OF OHIO
SECOND APPELLATE DISTRICT
DARKE COUNTY
:
:
SCOTT ZUMBRINK, DARKE COUNTY : Appellate Case No. 2019-CA-1
TREASURER :
: Trial Court Case No. 2017-CV-21
Plaintiff-Appellee :
: (Civil Appeal from
v. : Common Pleas Court)
:
BRUCE BEAM, et al. :
Defendant-Appellant
...........
OPINION
Rendered on the 14th day of June, 2019.
...........
MARGARET B. HAYES, Atty. Reg. No. 0093662, Darke County Prosecutor’s Office,
Darke County Courthouse, 3rd Floor, 504 South Broadway, Greenville, Ohio 45331
Attorney for Plaintiff-Appellee
RANDALL E. BREADEN, Atty. Reg. No. 0011453, 414 South Walnut Street, Greenville,
Ohio 45331
Attorney for Defendants-Appellants
.............
-2-
FROELICH, J.
{¶ 1} Bruce and Carol Beam appeal from a judgment of the Darke County Court of
Common Pleas, which ordered, under the doctrine of cy pres, that the remaining proceeds
from the sale of the Beams’ foreclosed property be distributed to the Darke County
Foundation, Inc., with net earnings to be used to provide legal services for indigent
persons in Darke County. For the following reasons, the trial court’s judgment will be
reversed and the case remanded for further proceedings.
I. Factual and Procedural History
{¶ 2} In January 2018, the Darke County Treasurer filed a complaint for foreclosure
against the Beams (the homeowners) and Associates Home Equity Services, Inc. (the
mortgagee by assignment), due to the Beams’ alleged failure to pay real estate taxes,
assessments, charges, and penalties on their real property. All named parties were
served with the complaint. In their answer, the Beams stated that they were granted a
discharge in bankruptcy in January 2013 regarding the amounts alleged in the complaint.
The Beams attached a copy of the order of the bankruptcy court granting a discharge.
Associates Home Equity Services did not respond to the complaint.
{¶ 3} The Darke County Treasurer subsequently sought summary and default
judgment on the claim. The trial court granted the motion and, three days later, issued
a judgment and decree of foreclosure. The court found that the Darke County Treasurer
was owed $2,967.07 for real estate taxes and assessments, and it ordered the property
sold. The judgment stated that the proceeds of the sale would be paid in the following
order of priority: (1) to the clerk of courts for costs of the action, (2) to the Darke County
Treasurer for taxes and assessments, and (3) to the Sheriff to await further orders of the
-3-
court.
{¶ 4} The property sold for $31,000. In its confirmation of sale, the court ordered
a total of $5,146.15 to be distributed to the clerk of courts, sheriff, treasurer, recorder, and
auditor for the unpaid real estate taxes and expenses and for expenses related to the
action and the sale. The court ordered that the remaining $25,853.85 be held by the
clerk of courts pending further order by the court.
{¶ 5} Approximately two months later, the Darke County Treasurer filed a “motion
to vacate sale,” because First Union National Bank of Delaware, the original mortgagee,
had not been named in the complaint. The Darke County Treasurer indicated that First
Union should have been named as a party due to an issue regarding the assignment of
mortgage. The Darke County Treasurer asked the trial court to vacate the sale, return
the deposit to the buyer, and allow the Treasurer to file an amended complaint. The
Treasurer did not expressly ask the trial court to vacate the judgment and decree of
foreclosure, which was a separate final appealable order, although such a request was,
perhaps, implicit in the motion to vacate sale.
{¶ 6} The record does not contain a ruling on the motion to vacate sale.
Nevertheless, on October 26, 2017, the Darke County Treasurer filed an amended
complaint, adding First Union. The parties-defendants again were served by certified
mail; neither First Union nor Associates Home Equity Services responded to the amended
complaint. After the time for answering had expired, the Darke County Treasurer
apparently asked the trial court to enter judgment and confirm the prior sale.1
1
No motion is in the record, but the trial court’s amended judgment entry states that “[t]his
cause came to be heard upon the Motion of Plaintiff and upon return of the Sheriff of the
sale made under this Court’s prior Order of Sale dated April 20, 2017.”
-4-
{¶ 7} On April 4, 2018, the trial court issued an amended judgment entry and
confirmed the prior sale. After the distribution of some of the proceeds to designated
county agencies, $24,457.81 was to be held by the clerk of courts pending further order
of the court. On August 15, 2018, the court, sua sponte, filed a second amended
judgment entry, correcting the amount of costs due to the clerk of courts and the amount
of real estate taxes and assessments due to the Darke County Treasurer; the remaining
sum was amended to $24,699.28.
{¶ 8} On October 10, 2018, the trial court filed an entry notifying the parties and
the Chapter 7 bankruptcy trustee of its intent to “distribute the net sale proceeds, less any
further costs, among interested parties or to apply the cy pres doctrine.”2 The court
invited the parties to file “objections, demands and/or responses” by November 1, 2018.
The court indicated that it would then issue “such orders of distribution as it determines
just.”
{¶ 9} In response, the Beams filed an application seeking the distribution of all of
the remaining proceeds to them. They argued that (1) their mortgage indebtedness was
discharged in bankruptcy, (2) they had claimed a homestead exemption in the sum of
$43,250 on the real property at issue, (3) they would receive the entire net proceeds by
virtue of their homestead exemption even if the bankruptcy case were reopened, (4) the
bank failed to file a response in the foreclosure action and thus waived any claim to the
2 The entry indicates that it was hand-delivered to counsel for the Darke County
Treasurer, emailed to counsel for the Beams, and mailed to CT Corporation Systems as
agent for Associates Home Equity Services, Inc., to Prentice-Hall Corporation System as
agent for First Union Bank of Delaware, to First Union Bank of Delaware care of Orion
Financial Group (POA), and to David Mikel, the Chapter 7 bankruptcy trustee.
-5-
net proceeds, and (5) they were the title owners of the foreclosed property prior to the
sale and therefore are the rightful owners of any net sale proceeds remaining. The
Beams supported their application with bankruptcy court records reflecting the property
for which they claimed an exemption and the order of discharge. The Beams’ response
was served on all who had received the court’s notice.
{¶ 10} Neither the bankruptcy trustee nor any other party responded to the court’s
notice.
{¶ 11} On December 21, 2018, the trial court ordered the proceeds to be paid to
the clerk of courts in the amount of any remaining court costs and the balance distributed
to the Darke County Foundation, Inc., with the proceeds to be held in trust in perpetuity,
with net earnings to be distributed to an appropriate legal aid society or similar legal
services entity. The court reasoned:
The Court finds that all liens have been paid; that the former owners
received a discharge of their mortgage indebtedness in 2013 by way of a
Chapter 7 bankruptcy; and that lienholders abandoned or did not assert any
claims due to the bankruptcy discharge. Further, it appears inequitable for
the former owners to receive the benefit of both (1) a discharge of their
indebtedness from the bankruptcy; (2) cost-free housing for numerous
years; and (3) the equity in the real estate which did not exist before their
mortgage discharge was granted.
The cy pres doctrine evolved as a solution for courts to correct
inequities which were caused by the passage of time and where other
appropriate uses for funds exist. As demonstrated by the attached, based
-6-
on the Court’s notice of its daily docket management, and based on its
knowledge of services provided by the Miami Valley Volunteer Lawyer
Project, the Court finds that other laudable uses exist which can be served
by the funds being held by the Clerk, especially as such needs relate to
representation of indigent persons in this community. * * *
Attached to the court’s entry was an information sheet prepared by the Ohio Legal
Assistance Foundation, entitled “Cy Pres: How the Courts Can Help Legal Aid.” The
document provided statistical information about the types of legal aid cases, the number
of Ohioans eligible for legal aid, funding for legal aid, and people helped by legal aid.
The document encouraged directing residual funds from class action lawsuits to civil legal
aid organizations.
{¶ 12} The Beams appeal from the trial court’s judgment.
II. Court’s Distribution of the Sale Proceeds
{¶ 13} In their sole assignment of error, the Beams claim that the “trial court erred
to the prejudice of Appellants by using the doctrine of cy pres to pay over to the Darke
County Foundation, Inc. the residual tax foreclosure sale proceeds when such charitable
foundation is not entitled to the same as a matter of law or equity.”
{¶ 14} Foreclosure proceedings are governed by equity and statute. Wells Fargo
Bank, N.A. v. Young, 2d Dist. Darke No. 2009 CA 12, 2011-Ohio-122, ¶ 29.
It is well-recognized that actions in foreclosure arise in equity. See Kerr [v.
Lydecker, 51 Ohio St. 240, 248, 37 N.E. 267 (1894)]; [Union Trust Co. v.]
Lessovitz, [122 Ohio St. 406, 171 N.E. 849 (1930)] (concluding that the right
of subrogation and priority of liens were chancery issues for purposes of
-7-
Section 6, Article IV, of the Ohio Constitution of 1912). Moreover, civil
actions that were recognized as equitable actions before the adoption of the
Code of Civil Procedure remained equitable in nature after the General
Assembly enacted statutes providing an equitable remedy. See Wagner
v. Armstrong (1916), 93 Ohio St. 443, 113 N.E. 397 (holding that statutory
claim for partition was appealable as chancery case).
Young at ¶ 40. Nevertheless, the trial court must comply with the statutory requirements,
as set forth by the Ohio legislature, for conducting foreclosure proceedings. See id. at
¶ 45 (“The result of the legislative action was to recognize one foreclosure method under
equity and statute — foreclosure with judicial sale of the mortgaged property.”)
{¶ 15} R.C. Chapter 5721 addresses foreclosure proceedings due to tax
delinquency. R.C. 5721.19(D) sets forth the order of distribution of the proceeds of the
sale upon confirmation of a sale by a court. R.C. 5721.20 further indicates that any
residue of money from the sale belongs to the owner of the property at the time of
foreclosure, and it provides a procedure if the money is unclaimed. It states:
* * * [A]ny residue of moneys from the sale or foreclosure of lands remaining
to the owner on the order of distribution, and unclaimed by such owner
within sixty days from its receipt, shall be paid into the county treasury and
shall be charged separately to the county treasurer by the county auditor,
in the name of the supposed owner. The treasurer shall retain such excess
in the treasury for the proper owner of such lands upon which the
foreclosure was had, and upon demand by such owner, within three years
from the date of receipt, shall pay such excess to the owner. If the owner
-8-
does not demand payment of the excess within three years, then the excess
shall be forfeited to the delinquent tax and assessment collection fund
created under section 323.261 [sic] of the Revised Code, or in counties that
have established a county land reutilization corporation fund under section
323.263 [sic] of the Revised Code, to the county land reutilization
corporation fund.
R.C. 5721.20. We find no authority that allows the trial court to depart from this statutory
procedure and to rely on equitable principles to distribute the proceeds of the tax
foreclosure sale.
{¶ 16} We further find no basis for the trial court’s application of the doctrine of cy
pres, in particular, in this case. The doctrine of cy pres is an equitable doctrine stemming
from trusts and estates law. E.g., In re Polyurethan Foam Antitrust Litigation, 178
F. Supp. 3d 621, 622-623 (N.D.Ohio 2016). “In the law of trusts it refers to a rule of
construction used by courts of equity to effectuate the intention of a charitable donor ‘as
near as may be’ when it has become impossible or impractical by reason of changing
conditions or circumstances to give literal effect to the donor’s intention.” Cheney v.
State Council of Ohio Junior Order United Am. Mechanics 1959, 11 O.O.2d 112, 162
N.E.2d 242, 244 (P.C.1959); see also, e.g., Daloia v. Franciscan Health Sys. of Cent.
Ohio, Inc., 79 Ohio St. 3d 98, 679 N.E.2d 1084 (1997).
{¶ 17} In addition to its role in trust and estate law, the doctrine has been extended
to class action suits in which the distribution to the class is not feasible. In re Polyurethan
Foam Antitrust Litigation at 623. “Rather than see money escheat to the state or revert
to the defendant, cy pres distributes unclaimed funds to a third-party charity.” Id.
-9-
Despite this extension, the applicability of the doctrine of cy pres remains quite limited.
We have found no authority – and the parties do not direct us to any – that expands the
use of the cy pres doctrine to other contexts.
{¶ 18} Finally, any “inequity” that benefits the Beams was due to the inaction of
other interested parties, not the actions of the Beams. According to the preliminary
certificate of title attached to the complaint, in January 2001, the Beams borrowed
$70,300 from First Union Bank of Delaware, which was secured by a mortgage on the
Beams’ real property. On August 30, 2001, First Union, through Orion Financial Group,
executed an assignment of mortgage to Associates Home Equity Services. The Beams’
documentation indicated that they filed a Chapter 7 bankruptcy action in September 2012.
During the bankruptcy proceeding, the Beams stated that their real property was worth
$62,580, and they claimed a homestead exemption of $43,250; the home was not sold
during the bankruptcy proceeding. The Beams were granted a discharge in bankruptcy
on January 14, 2013.
{¶ 19} It is well established that, when a bankruptcy court discharges the debtor’s
personal liability on a note in a Chapter 7 bankruptcy proceeding, the discharge does not
extinguish the mortgage interest in the property. E.g., Johnson v. Home State Bank, 501
U.S. 78, 111 S. Ct. 2150, 115 L. Ed. 2d 66 (1991); Deutsche Bank Natl. Trust Co. v. Holden,
147 Ohio St. 3d 85, 2016-Ohio-4603, 60 N.E.3d 1243, ¶ 26 (mortgage interest survives
the discharge in a Chapter 7 bankruptcy of the underlying debt that the mortgage
secures). As stated by the Johnson court:
A mortgage is an interest in real property that secures a creditor’s right to
repayment. But unless the debtor and creditor have provided otherwise,
-10-
the creditor ordinarily is not limited to foreclosure on the mortgaged property
should the debtor default on his obligation; rather, the creditor may in
addition sue to establish the debtor’s in personam liability for any deficiency
on the debt and may enforce any judgment against the debtor’s assets
generally. A defaulting debtor can protect himself from personal liability by
obtaining a discharge in a Chapter 7 liquidation. However, such a
discharge extinguishes only “the personal liability of the debtor.” Codifying
the rule of Long v. Bullard, 117 U.S. 617, 6 S. Ct. 917, 29 L. Ed. 1004 (1886),
the Code provides that a creditor’s right to foreclose on the mortgage
survives or passes through the bankruptcy.
(Citations omitted.) Johnson at 82-83. See also Holden at ¶ 33 (bank had standing to
pursue foreclosure in rem where bankruptcy court relieved debtor’s obligation on the note,
but bank stated that it was seeking only to enforce its security interest against the
property.)
{¶ 20} According to the record before us, First Union was the original mortgagee,
and it either assigned or attempted to assign its mortgage to Associates Home Equity
Services.3 The record shows that the foreclosure complaint was sent by certified mail to
the statutory agents of both companies (CT Corporation System as statutory agent for
Associates Home Equity Services, and Prentice-Hall Corporation as statutory agent for
First Union) and to First Union care of Orion Financial Group (its alleged attorney in fact
at the time of the assignment); the certified mail receipts were returned signed. Neither
3Whether First Union properly assigned the mortgage to Associates Home Equity
Services is not before us and is not relevant to this appeal.
-11-
Associates Home Equity Services nor First Union Bank of Delaware filed an answer or
otherwise responded to the complaint or subsequent confirmation entry, and neither
company claimed any interest in the Beams’ property. If the Beams had defaulted on
their mortgage obligation prior to this tax foreclosure action, the mortgagee could have
pursued an in rem foreclosure action against the Beams’ property; it did not. Nor did
Associates Home Equity Services or First Union participate in this tax foreclosure action.
{¶ 21} Finally, we note that the Chapter 7 bankruptcy trustee was served with the
court’s notice and the Beams’ response, which requested the return of the remaining
proceeds to them. The bankruptcy trustee also did not respond to the court’s notice or
otherwise express an interest in the proceeds from the tax foreclosure sale.
{¶ 22} Accordingly, we find no authority or basis to apply equitable principles to
bypass the Revised Code’s procedures regarding foreclosures due to tax delinquencies.
{¶ 23} The Beams’ assignment of error is sustained.
III. Conclusion
{¶ 24} The trial court’s judgment will be reversed, and the matter will be remanded
for further proceedings.
.............
HALL, J., concurs in judgment and writes separately:
{¶ 25} I agree that the trial court could not apply the cy pres doctrine to distribute
the residue of proceeds from the sale of real estate in this property tax foreclosure case.
There is no authority for doing so. In my opinion, that is the holding of our decision. I
believe the remainder of the majority opinion, and of this concurring opinion, is dicta.
{¶ 26} I write separately, however, to indicate that on this record I disagree with a
-12-
notion in ¶ 15 of the majority opinion that R.C. 5721.20 requires the residue from the sale
to be paid to the owner (the Beams). In that regard, the Beams filed a “no asset”
bankruptcy petition in 2012. (Doc. #34) Apparently the bankruptcy trustee, believing the
real property was mortgaged and the Beams had no equity in the property, abandoned
the property and did not require its sale to satisfy unsecured creditors. According to the
County Treasurer’s brief, the Beams also abandoned the property, and it was vacant for
five years. In my opinion, the foreclosure action was strictly in rem, the Beams were
parties only because they were the titled owners, not because they had an equitable
interest and not because they had any enforceable personal obligation related to the
property.
{¶ 27} I also disagree with the comment in ¶ 18 that any “inequity” noted by the
trial court was due to “inaction of other interested parties.” In my opinion, it is as likely as
not that the proper “other parties” were not adequately served or notified of the
proceeding. Publically available online governmental records reveal that First National
Bank of Delaware no longer exists. That institution changed its name to Wachovia Bank
of Delaware, National Association, in January 2002, about one year after the Beams’
mortgage. In 2010, that surviving institution was acquired by and merged into Wells Fargo
Bank, National Association. That is probably why the initial attempted certified mail
service to First Union at 920 King St., Wilmington, Delaware 19801 was “not deliverable
as addressed unable to forward.” (Doc. #30). Additionally, that is probably why our court
of appeals docket contains a returned clerk’s office envelope, postmarked January 14,
2019, probably for sending the App.R. 11(B) notice filed at about that time, addressed to
First Union National Bank of Delaware in Wilmington, Delaware, which was stamped
-13-
“return to sender attempted not known unable to forward.” On the envelope, someone
unknown crossed out the First Union name and address and wrote “Wells Fargo Bank
100 W 10th St. Wilmington DE 19801.”
{¶ 28} Moreover, the purported certified mail services in this case to support the
inclusion of First Union Bank of Delaware are two October 2017 signed return receipts,
one to First Union National Bank “C/O Orion Financial Group, Inc.” in Southlake, Texas
(Doc. #29) and the other to Prentice Hall Corporation “Registered Agent for First Unio”
(sic) in Wilmington, Delaware. Presumably Orion was included because the Preliminary
Certificate of Title attached to the complaint (Doc. #1) indicated that Orion, purportedly as
attorney in fact for First Union, assigned the First Union mortgage to Associates Home
Equity Services, Inc., but there is no power of attorney of record to verify its authority. So
whether or not Orion was or still is an agent of First Union, or its successors, is unknown.
There is also nothing in the record to indicate why or how Prentice Hall was named as a
“registered agent.” Either way, suffice it to say that either of those companies receiving
mail in 2017 for “First Union Bank of Delaware,” a company that at that time had not
existed for 15 years, might not reasonably be expected to promptly get that mail to a
proper party.
{¶ 29} Assuming that Associates Home Equity, Inc. is actually the interested
assignee of the mortgage, there is a similar question about service of process. The
original certified mailing to “Associates Home Equity Services, Inc.”, to an address in
Irving, Texas, was returned “attempted not known unable to forward.” (Doc. #10).
Publically available online government records indicate Associates Home Equity
Services, Inc. was a mortgage service company which merged with and into “Citifinancial
-14-
Mortgage Company, Inc.” in January 2002. “Citifinancial Mortgage Company, Inc.” then
merged in 2006 with and into “Citimortgage, Inc.,” the surviving company. The record in
this case indicates Associates Home Equity Services, non-existent since 2002, was
served by a certified mail to “CT Corporation System, Agent fo[r] Associates Home Equity
Services” at an address in Columbus, Ohio. The record does not indicate what information
was relied upon for mailing to CT Corporation. In addition, in our court of appeals docket
is a returned clerk’s office envelope postmarked January 16, 2019, probably for sending
the App.R. 11(B) notice filed at about the same time, addressed to “Associates Home
Equity Services, Inc.” in Irving, Texas, which is stamped “return to sender attempted not
known unable to forward.” In the absence of information about whether CT Corporation
is still, or ever was, a service agent for Associates Home Equity Services, Inc., I question
whether that company, receiving mail in 2017 for Associates Home Equity Services, a
company that at that time had not existed for 15 years, could reasonably be expected to
promptly get that mail to a proper party.
{¶ 30} Indeed the actual holder of a mortgage could and should take steps to
protect its interest by recording appropriate assignments or otherwise documenting a
successor organization. And perhaps the surviving companies here did actually receive
notice of the proceedings and elected not to participate. But it is more than curious to me
that, although the Beams have submitted some documentation of their September 7,
2012 Chapter 7 Bankruptcy Petition and their October 14, 2013 discharge papers, they
have not submitted their matrix of creditors which would include to whom they were
paying, or not paying, their mortgage in 2012. If their bankruptcy listed a creditor related
to the mortgage as anyone other than First Union National Bank of Delaware or
-15-
Associates Home Equity Services, Inc., then in my opinion they have improperly taken
advantage of the fact that the proper interested parties have not been named or served.
Again, perhaps the Beams did properly discharge a debt by naming one or both of those
parties. But I suspect that from 2002, when both companies changed names, until 2012,
when they filed bankruptcy, the Beams’ mortgage payments were not sent to entities that
no longer existed. In that respect, I believe the trial court was on the right track in
reviewing the equities of the situation, even though it reached an incorrect result.
{¶ 31} I further believe, as did the trial court, that perhaps the trustee in bankruptcy
is the real party in interest in regard to this found additional asset, and even if ultimately
the “found” proceeds are ordered to be distributed to the Beams, perhaps they have an
obligation to report this newly discovered asset, arguably in existence at the time of the
bankruptcy, to the bankruptcy court. The Beams asserted in the trial court that they have
a homestead exemption of $43,250 under R.C. 2329.66 (A)(1) and “[e]ven if the
Applicant’s bankruptcy case was reopened, they would receive the entire net proceeds”
from the sale. (Doc. #35). First, their address in the bankruptcy petition is 900 Lime Ave.,
Union City, Ohio, not the property address of 11675 Ohio-Indiana State Line Road. A
homestead exemption only applies to property that one “uses as a residence.” But also a
homestead exemption would not shield the real estate from a recorded lien. In my opinion,
whether or not the Beams’ contention is accurate that they can apply a homestead
exemption to the entirety of the proceeds is a matter for the bankruptcy court to decide or
in which it may waive its interest.
{¶ 32} In the end, I am of the opinion that the Beams have not yet demonstrated
they should receive a windfall for proceeds that should have gone to lienholders or the
-16-
bankruptcy trustee or to creditors. I therefore disagree with the conclusion that the trial
court was attempting to bypass the Revised Code procedures regarding tax delinquency
foreclosure procedure. Finally, I agree only with the holding of our case which is that the
cy pres doctrine cannot be used to award the residual proceeds to the Darke County
Foundation.
TUCKER, J., concurring:
{¶ 33} I agree with Judge Hall’s conclusion regarding the scope of our holding.
The trial court, upon remand, must determine the proper disposition of the $24,699.28
which remains after the sale of the real estate. The trial court may consider Judge
Froelich’s and Judge Hall’s comments, but, in the first instance, this is the trial court’s
determination.
Copies sent to:
Margaret B. Hayes
Randall E. Breaden
Hon. Jonathan P. Hein