HSBC Bank USA, National Associ v. United States Bankruptcy Court for the District of Colorado

FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
NOT FOR PUBLICATION *
October 16, 2019
UNITED STATES BANKRUPTCY APPELLATE PANEL
Blaine F. Bates
OF THE TENTH CIRCUIT Clerk
_________________________________
IN RE HELEN LOUISE MEAD, BAP No. CO-19-001
Debtor.
___________________________________
Bankr. No. 18-10447
HELEN LOUISE MEAD, Chapter 13
Appellant,
v.
HSBC BANK USA, NATIONAL OPINION
ASSOCIATION, AS TRUSTEE FOR
STRUCTURED ADJUSTABLE RATE
MORTGAGE LOAN TRUST 2004-1, and
ETRADE BANK,
Appellees.
_________________________________
Appeal from the United States Bankruptcy Court
for the District of Colorado
_________________________________
Helen Louise Mead, pro se.
Nichol Williams (Joseph DeGiorgio with her on the brief) of Barrett Frappier &
Weisserman, LLP, Denver, Colorado for Appellee HSBC Bank USA, National
Association, as Trustee for Structured Adjustable Rate Mortgage Loan Trust 2004-1.
*
This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, and issue
preclusion. 10th Cir. BAP L.R. 8026-6.
Aaron Waite (Deanna Westfall of Weinstein & Riley, P.S., Broomfield, Colorado, with
him on the brief) of Weinstein & Riley, P.S., Las Vegas, Nevada for Appellee ETrade
Bank.
_________________________________
Before CORNISH, HALL, and LOYD, ** Bankruptcy Judges.
_________________________________
CORNISH, Bankruptcy Judge.
_________________________________
This Court is asked to review the propriety of the Bankruptcy Court’s order which
allowed two mortgage creditors to proceed with state court foreclosure actions. The
subject real estate was Helen Louise Mead’s homestead located near Aspen, Colorado.
Mead claims the real estate had an equity cushion and the automatic stay should not have
been lifted. We disagree and AFFIRM.
I. Factual Background
Helen Louise Mead (the “Debtor”) resides at 8019 Woody Creek Road, Woody
Creek, Colorado (the “Property”). The Debtor executed an adjustable rate promissory
note in the principal amount of $780,000 and a deed of trust encumbering the Property in
favor of Colorado Federal Savings Bank on December 4, 2003. The Debtor received a
loan modification on the principal due on September 25, 2009. 1 HSBC Bank USA,
National Association, as Trustee for Structured Adjustable Rate Mortgage Loan Trust
2004-1 (“HSBC”) is the current holder of the promissory note and first deed of trust. The
Debtor initiated a home equity line of credit with Countrywide Home Loans, Inc. on
**
Honorable Janice D. Loyd, U.S. Bankruptcy Judge, United States Bankruptcy
Court for the Western District of Oklahoma, sitting by designation.
1
Appellees’ Joint App. at 112.
2
April 5, 2006. The line of credit is secured by a second priority deed of trust. ETrade
Bank (“ETrade”) is the current beneficiary of the line of credit agreement and the second
deed of trust.
The Debtor defaulted on her obligations to both HSBC and ETrade. HSBC filed a
foreclosure proceeding in state court. The Debtor filed a chapter 13 petition on January
23, 2018, staying HSBC’s foreclosure. In Schedule A of her petition, the Debtor valued
the Property at $770,000 subject to $1,159,782 in claims including HSBC, ETrade, and a
third priority lien creditor.
HSBC filed its Motion for Relief from Automatic Stay on April 11, 2018, seeking
relief from the stay under 11 U.S.C. § 362(d)(1) and (2) (“HSBC’s Motion”). 2 HSBC
asserted the Debtor’s postpetition arrearages totaled $14,163.96 and the monthly
mortgage payment continued to accrue at $4,721.32 per month. HSBC argued the
Property lacked equity to provide adequate protection under § 362(d)(1), noting the
Debtor’s $770,000 valuation compared to its claim of $738,840.35 and second and third
liens of $338,620 and $75,162, respectively. HSBC also argued it was entitled to relief
from the stay because the Property lacked any equity and was not necessary for an
effective reorganization under § 362(d)(2).
ETrade filed its Motion for Relief from Stay on May 16, 2018, seeking relief under
§ 362(d)(1) and (2) (“ETrade’s Motion”). 3 ETrade asserted the Debtor’s postpetition
2
Appellees’ Joint App. at 65. All future references to “Code,” “Section,” and “§”
are to the Bankruptcy Code, Title 11 of the United States Code, unless otherwise
indicated.
3
Appellees’ Joint App. at 136.
3
arrearages totaled $10,181.40 and the monthly mortgage payment continued to accrue at
$2,545.35 per month. ETrade sought relief under § 362(d)(1) as it was not adequately
protected since the Debtor failed to make any postpetition payments. ETrade also sought
relief under § 362(d)(2) because the Property lacked equity and was not necessary for an
effective reorganization.
The Bankruptcy Court conducted a final evidentiary hearing on HSBC and
ETrade’s Motions on June 21, 2018. 4 At the hearing, the Debtor’s testimony suggested
the $770,000 valuation was no longer applicable, favoring a valuation of over
$1,000,000. The Debtor pointed to the Property’s proximity to the world-renowned
Aspen ski resorts and the exclusivity of being bordered by federal conservation lands.
The Debtor referenced an appraisal report sent to her by HSBC valuing the Property at
$4,189,000, suggesting that amount was closer to the actual value of the Property.
HSBC offered the testimony of a Nationstar Mortgage, LLC employee as
evidence. Nationstar Mortgage, LLC serviced the promissory note on behalf of HSBC.
The employee testified the loan was in default and that the most recent appraisals valued
the Property at $770,000. The witness explained the $4,189,000 valuation, was a
computer-generated value based on recent sales and that it did not represent a true
4
The Bankruptcy Court held a preliminary non-evidentiary hearing on the motions
on May 30, 2018.
4
valuation of the Property. 5 ETrade introduced evidence suggesting the value of the
Property was not more than $1,250,000. 6
The Debtor also testified that there were three rental units on the Property in
addition to her residence, which brought in between $11,000 and $12,000 of rental
income per month. 7 The Debtor argued the Property was necessary for an effective
reorganization because she relied on its rental income to pay her mortgages and living
expenses. However, the Debtor did not introduce any evidence to support finding any
rental income existed. Furthermore, the Debtor suggested her chapter 13 plan of
reorganization would seek to modify claims secured by the Property, her principal
residence, despite § 1322(b)(2)’s anti-modification provision.
The Bankruptcy Court issued its opinion granting both HSBC and ETrade’s
Motions for cause under § 362(d)(1) and (2) on December 20, 2018. 8 The Bankruptcy
Court valued the Property at $770,000, the amount listed in Schedule A. The Bankruptcy
Court found neither HSBC nor ETrade were adequately protected, little to no equity
existed in the Property, and the Property was not necessary for the Debtor’s effective
reorganization.
Section 362(d)(1) findings
The Bankruptcy Court found that while the $770,000 valuation exceeded HSBC’s
claims by $31,159.65, HSBC was entitled to postpetition interest and fees under § 506(b).
5
Tr. at 80, in Appellees’ Joint App. at 374.
6
Id. at 91, in Appellees’ Joint App. at 385.
7
Id. at 64, in Appellees’ Joint App. at 358.
8
Order, in Appellees’ Joint App. at 428.
5
Adding $27,023.08 in postpetition interest to the claim, the Property still had $4,136.57
in equity. However, the Bankruptcy Court found the 0.5% equity cushion did not
adequately protect HSBC and would be erased upon adding additional accrued interest,
costs, and attorneys’ fees to HSBC’s claim. The Bankruptcy Court further found the
Property had no equity to protect ETrade’s second lien and cause existed to grant ETrade
relief from the automatic stay.
Section 362(d)(2) findings
The Bankruptcy Court also considered whether the Property was necessary to the
Debtor’s effective reorganization under § 362(d)(2). The Bankruptcy Court noted, “the
parties agree[d] the Debtor’s ability to effectively reorganize depend[ed] on the Debtor’s
ability to modify her HSBC mortgage pursuant to § 1322.” 9 The Debtor argued that
because she rented several units on the Property, it was transformed from being her
principal residence and no longer subject to § 1322(b)(2)’s anti-modification provision.
The Bankruptcy Court adopted a bright-line test, concluding “§ 1322(b)(2) applies ‘as
long as the debtor principally resides in some portion of the real property.’” 10 Because the
Debtor conceded there was no prospect of reorganization without modifying the
mortgage, the Bankruptcy Court could not find the Property was necessary to an effective
reorganization. The Debtor filed a timely appeal of the Bankruptcy Court’s Order
granting both creditors relief from the automatic stay.
9
Order at 7, in Appellees’ Joint App. at 434.
10
Id. at 10, in Appellees’ Joint App. at 437 (quoting In re Lister, 593 B.R. 587, 592
(Bankr. S.D. Ohio 2018)).
6
II. Jurisdiction & Standard of Review
“With the consent of the parties, this Court has jurisdiction to hear timely-filed
appeals from ‘final judgments, orders, and decrees’ of Bankruptcy Courts within the
Tenth Circuit.” 11 An order granting relief from the automatic stay is a final order for
purposes of appellate review. 12 Neither party in this case elected for these appeals to be
heard by the United States District Court pursuant to 28 U.S.C. § 158(c). Accordingly,
this Court has jurisdiction over this appeal.
A ruling on a motion for relief from the automatic stay is reviewed for abuse of
discretion. 13 “An abuse of discretion . . . may occur when a ruling is premised on an
erroneous conclusion of law or on clearly erroneous fact findings.” 14 The Bankruptcy
Court’s conclusions of law are reviewed de novo. 15 “When an appellate court reviews a
[trial] court’s factual findings, the abuse-of-discretion and clearly erroneous standards are
indistinguishable: A court of appeals would be justified in concluding that a [trial] []
court had abused its discretion in making a factual finding only if the finding was clearly
erroneous.” 16
11
Straight v. Wyo. Dep’t of Trans. (In re Straight), 248 B.R. 403, 409 (10th Cir.
BAP 2000) (first quoting 28 U.S.C. § 158(a)(1), and then citing 28 U.S.C. § 158(b)(1),
(c)(1) and Fed. R. Bankr. P. 8002).
12
Rajala v. Gardner, 709 F.3d 1031, 1034 (10th Cir. 2013) (citing Franklin Sav.
Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 n.3 (10th Cir. 1994)).
13
Franklin Sav. Ass’n, 31 F.3d at 1023 (citing Pursifull v. Eakin, 814 F.2d 1501,
1504 (10th Cir. 1987)).
14
In re JE Livestock, Inc., 375 B.R. 892, 894 (10th Cir. BAP 2007) (citing Kiowa
Indian Tribe v. Hoover, 150 F.3d 1163, 1165 (10th Cir. 1998)).
15
Id. (citing Elder v. Holloway, 510 U.S. 510, 516 (1994)).
16
Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 401 (1990).
7
III. Analysis
The Debtor argues the Bankruptcy Court erred by failing to hold an evidentiary
hearing and by granting HSBC and ETrade relief from the automatic stay. The record
before this Court indicates the Bankruptcy Court held an evidentiary hearing on HSBC
and ETrade’s Motions on June 21, 2018. 17 The Debtor was represented by counsel at the
hearing. The Debtor appears to argue that although she received notice of the evidentiary
hearing, she was not allowed to fully state her case at the hearing. 18
However, the Debtor does not specifically point the Court to instances where she
was denied the opportunity to present her objections. Upon review of the transcript, the
Bankruptcy Court did not deny the Debtor due process. The Debtor was present and
testified at the hearing. On numerous occasions, the Debtor’s counsel attempted to direct
the Debtor to issues related to the valuation of the Property and her objection to HSBC
and ETrade’s Motions. Likewise, the Bankruptcy Court asked only questions relevant to
the issue of stay relief. As the Debtor was adequately afforded due process, we proceed to
the substantive issues on appeal.
17
Tr., in Appellant’s App. at 21.
18
The Debtor refused to discuss the merits of her objection to HSBC and ETrade’s
Motions during the hearing before the Bankruptcy Court and at oral argument before this
Court. Instead, the Debtor alleged a criminal organization is responsible for depressing
the value of her residence and driving her into foreclosure. The Debtor provided no
evidence to the Bankruptcy Court to support these allegations.
8
a. Section 362(d)(1) – Lack of Adequate Protection
Section 362(d)(1) provides the Bankruptcy Court “shall grant relief from the stay
. . . for cause, including lack of adequate protection of an interest in the property . . . .” 19
The primary factor, in considering whether a creditor’s interest is adequately protected
“is the existence of an adequate equity cushion. Most courts find that a creditor’s interest
is adequately protected if the value of its security exceeds the amount of its claim by a
‘sufficient’ amount.” 20 Although equity above the amount of a secured claim is one
means of protecting a creditor’s interest, adequate protection can also come in the form of
periodic payments, a replacement lien, or other such protections determined on a case-by-
case basis. 21
The Debtor contests the Bankruptcy Court’s findings that HSBC and ETrade were
not adequately protected by the $770,000 valuation of the Property. Upon reviewing the
record, the Bankruptcy Court did not err in reaching this valuation and determining the
creditors lacked adequate protection. The Debtor, under penalty of perjury, valued the
Property at $770,000 in her schedules. The only evidence the Debtor presented to
contradict the $770,000 valuation was her testimony and HSBC’s $4,189,000 valuation.
19
11 U.S.C. § 362(d)(1).
20
In re Carson, 34 B.R. 502, 506 (D. Kan. 1983); In re Indian Palms Assocs., 61
F.3d 197, 207 (3d Cir. 1995) (first citing In re Colonial Center, Inc., 156 B.R. 452, 459
(Bankr. E.D. Pa. 1993), and then citing La Jolla Mortg. Fund v. Rancho El Cajon
Assocs., 18 B.R. 283, 289 (Bankr. S.D. Cal. 1982)) (“[I]n determining whether a secured
creditor’s interest is adequately protected, most courts engage in an analysis of the
property’s ‘equity cushion’—the value of the property after deducting the claim of the
creditor seeking relief from the automatic stay and all senior claims.”).
21
3 Collier on Bankruptcy ¶ 362.07 (Richard Levin & Henry J. Sommer eds., 16th
ed. 2019).
9
The Bankruptcy Court found the Debtor’s testimony on the subject of valuation to
be “unpersuasive.” 22 When applying the abuse of discretion standard, appellate courts
must “defer to the trial court’s judgment because of its first-hand ability to view the
witness or evidence and assess credibility and probative value.” 23 We, like the
Bankruptcy Court, fail to find any evidence in the record to support the Debtor’s
testimony. 24 At the oral argument of this appeal, the Court explicitly asked the Debtor to
point to items in the record supporting her claims as to the Property’s value. The Debtor
was unable to direct this Court to any such evidence in the record. Accordingly, we defer
to the Bankruptcy Court’s judgment regarding the Debtor’s credibility and find no abuse
of discretion.
Although it is troubling that HSBC valued the Property at $4,189,000 in a notice
sent to the Debtor, 25 nothing in the record provided to this Court identifies the basis of
that valuation. While the Bankruptcy Court considered the $4,189,000 for the limited
purpose of analyzing HSBC’s use of the figure, it found HSBC never relied on the
valuation and considered it inaccurate. The Court must again defer to the Bankruptcy
Court’s findings that HSBC’s witness was credible as nothing in the record suggests
HSBC relied on the $4,189,000 valuation. As such, the Bankruptcy Court did not err in
discounting the $4,189,000 valuation and valuing the Property at $770,000.
22
Order at 4, in Appellees’ Joint App. at 431.
23
Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (quoting McEwen v. City of
Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991)).
24
Order at 4, in Appellees’ Joint App. at 431 (“Debtor did not produce any other
evidence to corroborate any aspect of her testimony.”).
25
Exhibit 2 at 3, in Appellees’ Joint App. at 206.
10
The Bankruptcy Court also found the Property lacked equity to adequately protect
HSBC and ETrade based on the $765,863.43 balance due to HSBC as of May 2019.
Based on HSBC’s claim amount, the Debtor had $4,136.57 in equity in the Property or a
0.5% equity cushion. The Bankruptcy Court recognized the 0.5% margin of equity was
too thin to adequately protect HSBC. 26 HSBC’s accruing monthly payments and interest
would quickly erode any equity in the Property and leave HSBC undersecured and
ETrade completely unsecured. Furthermore, the Debtor did not propose any additional
means of adequate protection, such as periodic payments. Accordingly, the Bankruptcy
Court did not err in finding HSBC and ETrade were not adequately protected and did not
abuse its discretion in granting relief from the automatic stay under § 362(d)(1).
b. Section 362(d)(2) – Lack of Equity and Not Necessary for Effective
Reorganization
Upon finding the Property lacked sufficient equity to protect HSBC’s interest, the
Bankruptcy Court also considered whether the Property was necessary for the Debtor’s
effective reorganization under § 362(d)(2). Section 362(d)(2) places the burden of
showing that collateral lacks equity on a moving party. Once that burden is met, the
burden of proving a Property is necessary for effective reorganization falls on the party
26
See In re Southerton Corp., 46 B.R. 391, 399 (Bankr. M.D. Penn. 1982) (citing In
re Rogers Dev. Corp. Heritage Sav. & Loan Ass’n v. Rogers Dev. Corp., 2 B.R. 679, 685
(Bankr. E.D. Va. 1980)) (“Where . . . the debtor’s margin of equity is slim, the court is
clearly entitled to consider the rate at which accumulating interest is absorbing the
debtor’s equity cushion.”); In re Liona Corp., N.V., 68 B.R. 761, 767 (Bankr. E.D. Penn.
1987) (7 percent equity cushion will rarely provide adequate protection) (quoting In re
Lemay, 18 B.R. 659, 661 (Bankr. D. Mass. 1982)); In re Tucker, 5 B.R. 180, 183 (Bankr.
S.D.N.Y. 1980) (7.4% equity cushion insufficient to adequately protect creditor).
11
opposing relief from the automatic stay. 27 Such a showing requires that there “be a
reasonable possibility of a successful reorganization within a reasonable time.” 28
Having established the Debtor lacked sufficient equity in the Property, the
Bankruptcy Court considered whether it was necessary for an effective reorganization.
The Debtor testified she needed the Property to effectively reorganize because she lived
there and received income from rental units on the Property. However, the Debtor
indicated she would only be able to successfully reorganize under chapter 13 if the
Bankruptcy Court allowed her to modify the secured claims against the Property in
contravention of § 1322(b)(2). The Debtor argued § 1322(b)(2) did not apply because, in
addition to using it as her residence, she also operated a rental business on the Property.
The Debtor argued this changed the character of the Property from a principal residence
and allowed her to modify claims against the Property. The Bankruptcy Court rejected
this argument, concluding “as long ‘as the debtor principally resides in some portion of
the real property,’” it is her primary residence and § 1322(b)(2) prevented the Debtor
from modifying claims secured by the Property. 29
The text of § 1322(b)(2) provides a plan may “modify the rights of holders of
secured claims, other than a claim secured only by a security interest in real property that
27
11 U.S.C. § 362(g).
28
In re Gindi, 642 F.3d 865, 875 (10th Cir. 2011) (quoting United Sav. Assoc. of
Texas v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988)), rev’d on
other grounds TW Telecom Holdings Inc. v. Carolina Internet Ltd., 661 F.3d 495 (10th
Cir. 2011).
29
Order at 10, in Appellees’ Joint App. at 437 (quoting In re Lister, 593 B.R. 587,
592 (Bankr. S.D. Ohio 2018)).
12
is the debtor’s principal residence.” 30 Neither the Tenth Circuit nor this Court have
addressed the modification of claims secured by a multi-use residence in the context of
§ 1322(b)(2). 31 However, on numerous occasions, the Tenth Circuit has indicated
“§ 1322(b)(2) expressly prohibits modification of the rights of home mortgage lenders.” 32
Applying the express prohibition contained in § 1322(b)(2), the Bankruptcy Court did not
err in holding a debtor may not modify a claim secured by real property that is inclusive
of a debtor’s principal residence.
In this case, the Debtor acknowledged that while there are separate rental units on
the Property, it is also her principal residence. As the Property is the Debtor’s principal
residence, § 1322(b)(2) prohibits her from modifying the claims of any creditors secured
by the Property. We also agree with the Bankruptcy Court that the case cited by the
Debtor, In re Ramirez, is not controlling and is distinguishable. 33 Accordingly, we find no
error in the Bankruptcy Court’s application of § 1322(b)(2) to the present facts. Upon
finding the Debtor could not successfully reorganize without modifying the claims
30
11 U.S.C. § 1322(b)(2).
31
This Court expressly declined to address the issue in In re Picht, 428 B.R. 885,
894 (10th Cir. BAP 2010).
32
Wade v. Bradford, 39 F.3d 1126, 1129 (10th Cir. 1994); In re Woolsey, 696 F.3d
1266, 1279 (10th Cir. 2012) (Ҥ 1322(b)(2) itself prohibits modification of the rights of
the ‘holder of a secured claim’ supported by a lien on the debtor’s home.”).
33
62 B.R. 668, 669 (S.D. Cal. 1986). In Ramirez, the court allowed modification of a
claim secured by a debtor’s principal residence that also included rental units because it
found evidence the lender had actual knowledge of the property’s intended use at the time
it made the loan and took those factors into account when assessing the risk of the loan.
Furthermore, after Ramirez, the Ninth Circuit BAP held § 1322(b)(2) “applies to any
property that is used as the debtor’s principal residence, notwithstanding the fact” the
property may be used for other purposes. In re Wages, 508 B.R. 161, 167 (9th Cir. BAP
2014) (citing In re Macaluso, 254 B.R. 799, 800 (Bankr. W.D.N.Y. 2000)).
13
secured by her principal residence, the Bankruptcy Court had no option but to grant relief
from the automatic stay under § 362(d)(2).
IV. Conclusion
The Debtor, like many others seeking relief under the Bankruptcy Code, is faced
with the difficult situation of losing her home. While the Court is sympathetic to the
Debtor’s situation, our review of the record presented to the Bankruptcy Court does not
suggest the Bankruptcy Court abused its discretion in granting relief from the automatic
stay. The Debtor valued the Property at $770,000 in her schedules and although she
testified, she presented no credible evidence to support her contentions that the true value
exceeded $1,000,000. The $770,000 valuation provided little to no equity to protect the
interests secured by the Property. Furthermore, the Debtor admitted she had no means of
effectively reorganizing absent modifying the claims secured by the Property, which is
directly prohibited by § 1322(b)(2). Accordingly, the Bankruptcy Court did not abuse its
discretion in determining cause existed to grant relief from the automatic stay. Therefore,
we AFFIRM. 34
34
The Debtor filed the Motion to Make Full Unrestricted Public Disclosure of All
Documents in Case #19-1 Immediately Readily Available to Public View and to not
Dismiss this Case on Trivial Technicality, BAP ECF No. 48. Because documents filed on
this Court’s docket are already publicly available and the Debtor receives copies of all
pleadings filed in this appeal, the Debtor’s motion is DENIED.
14