Wells Fargo Bank N.A. v. United States Bankruptcy Court for the Eastern District of Oklahoma

FILED
U.S. Bankruptcy Appellate Panel
of the Tenth Circuit
October 22, 2015
Blaine F. Bates
NOT FOR PUBLICATION Clerk
UNITED STATES BANKRUPTCY APPELLATE PANEL
OF THE TENTH CIRCUIT
IN RE TIMMY DEWAYNE JESTER, BAP No. EO-15-002
also known as Tim D. Jester, and
REBECCA JO JESTER, also known as
Becky Jo Jester, formerly known as
Rebecca Jo Hillsberry, formerly known
as Becky Jo Hillsberry,
Debtors.
TIMMY DEWAYNE JESTER and Bankr. No. 11-80627
REBECCA JO JESTER, Chapter 7
Appellants,
v. OPINION *
WELLS FARGO BANK N.A.,
Appellee.
Appeal from the United States Bankruptcy Court
for the Eastern District of Oklahoma
Before THURMAN, JACOBVITZ, and HALL, Bankruptcy Judges.
HALL, Bankruptcy Judge.
Filing bankruptcy will delay the foreclosure of a debtor’s home, but it will
not prevent it. If a debtor wants to keep his home from foreclosure, he must come
to terms with the mortgagee.
Timmy and Rebecca Jester, pro se, appeal the bankruptcy court’s order that
*
This unpublished opinion may be cited for its persuasive value, but is not
precedential, except under the doctrines of law of the case, claim preclusion, and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.
denied his motion to reopen their Chapter 7 bankruptcy case. Mr. Jester had
sought to reopen their case in order to, inter alia, file claims against Wells Fargo
Bank N.A. (“Wells Fargo”) for alleged violations of the automatic stay and the
discharge injunction based mainly on: 1) its failure to dismiss a prepetition state
foreclosure action upon being notified of their bankruptcy filing; 2) its
misapplication of postpetition payments; and 3) its filing of a foreclosure action
and obtaining a judgment against them postdischarge. After hearing oral
arguments and reviewing the record and applicable law, we affirm the bankruptcy
court’s decision to deny the motion to reopen.
I. Factual Background 1
Timmy and Rebecca Jester (collectively “Debtors”) filed a no-asset,
Chapter 7 case on April 29, 2011. They claimed their residence (the “Property”)
exempt and stated an intent to reaffirm the debt on it,2 but no reaffirmation
agreement was ever filed.3 They received a discharge on July 27, 2011, and their
case was closed on August 11, 2011.
Prepetition, Wells Fargo had initiated a foreclosure action on the Property
in state court against Debtors and Mr. Jester’s former wife on February 23, 2011
(the “2011 Foreclosure Action”). After their bankruptcy case closed, Mr. Jester
executed a loan modification agreement with Wells Fargo (the “Modification
1
All references to Appellants’ Appendix are to the third appendix they filed
on March 30, 2015 (“Appellants’ App.”). Because Appellants did not
consistently consecutively paginate their appendix, page number references are to
the PDF page numbers as they appear in the appellate record. Thus, the reference
“App. at 147” refers to page 147/273 of the PDF document in the record, as
opposed to Appellants’ designation of page 142. Page number references to
Appendix of Appellee Wells Fargo Bank, NA (“Appellee’s App.”) are to the
bates-stamp.
2
Form B8 at 2, in Appellants’ App. at 29.
3
According to Debtors’ former counsel, Jeremy Mix, Wells Fargo was
unwilling to negotiate with or provide him with a reaffirmation agreement
because Debtors were over $9,777 in arrears on their mortgage and had not made
a payment since August 2010. Mix’s Objection to Motion to Reopen Case at 1, in
Appellee’s App. at 4.
Page 2 of 20
Agreement”).4 The Modification Agreement provided, in pertinent part, that:
1. Borrower filed for relief under Chapter [7] . . . on 04/29/2011.
2. At the Borrowers request, the borrower and counsel for both
parties agree to address the defaulted amount by means of a loan
modification.
3. Borrower received the consent of the United States Bankruptcy
Court or equivalent, to modify the mortgage . . . [which]
Borrower received or will receive a discharge of . . . on or about
07/27/11.
***
5. Borrower, during the course of the bankruptcy case . . . , did not,
and does not intend to reaffirm the debt.
6. Borrower desires to retain the Property securing the Note, and
acknowledges that Lender’s security interest and lien are still
valid and enforceable.
7. Borrower acknowledges and understands that [he] is not
obligated to enter into this Agreement, and that [he] is entering
into this Agreement at Borrower’s request, voluntarily and with
no coercion or pressure from Lender, for the sole purpose of
retaining the Property. Borrower understands that [he] has no
personal obligation to repay the debt secured by the Property if
said debt is discharged in bankruptcy without a valid
reaffirmation agreement.
***
10. Borrower desires to retain the Property securing this debt, and
Lender has agreed to such request, in exchange for payment to
Lender of the debt secured by the Property in the manner
specified herein . . . . Borrower and Lender jointly agree [inter
alia] as follows:
***
4. [C]osts and expenses, together with accrued interest,
in the total amount of $12,791.87 have been added
to the . . . Note . . . and that as of 10/01/2011, . . .
[the unpaid principal balance on the Note] is
$147,702.34.
5. [I]nterest will be charged on the unpaid principal
balance at the yearly rate of 4.500% beginning
10/01/2011. The Borrower shall make monthly
4
Modification Agreement, in Appellants’ App. at 209-12. The agreement
was made effective on August 23, 2011 and signed by Mr. Jester on October 6,
2011.
Page 3 of 20
payments of . . . $748.39 . . . beginning on
11/01/2011 and . . . thereafter on the same day of
each succeeding month until [the Note is paid in
full] . . . .
***
9. If Borrower fails to pay . . . the amount due and
owing or to pay any monthly payment . . . ,
Borrower shall surrender the Property to Lender. If
Borrower fails or refuses to surrender the Property
to Lender, Lender may exercise any and all
remedies to recover the Property . . . pursuant to its
security interest and lien and applicable law. 5
Shortly after the Modification Agreement was executed, Wells Fargo filed a
Release of Notice of Pending Action and the 2011 Foreclosure Action was
dismissed on November 3, 2011. 6
Debtors stopped making payments on the Property in November 2011. 7
Wells Fargo filed a foreclosure petition against Debtors in Wagoner County
District Court on July 6, 2012 (the “2012 Foreclosure Action”). 8 Although
Debtors contested the foreclosure, summary judgment in favor of Wells Fargo and
against Debtors was entered on October 8, 2014 (the “Foreclosure Judgment”). 9
Timmy Jester filed a motion to reopen the Debtors’ bankruptcy case on
October 28, 2014 (the “Motion”). The bankruptcy court succinctly summarized
5
Modification Agreement at 1-4, in Appellants’ App. at 209-12.
6
Release of Notice of Pending Action, in Appellants’ App. at 196; Motion to
Reopen Case at 30, in App. at 62.
7
Unofficial Tr. of Dec. 10, 2014 Hrg. at 6, in Appellee’s App. at 20 (“Court:
When was the last time you paid the payment in this case, Mr. Jester? Timmy
Jester: November 2011”).
8
Objection of Wells Fargo Bank, NA, Successor by Merger to Wells Fargo
Home Mortgage, Inc., to Debtor’s Motion to Re-open Case (“Wells Fargo’s
Objection to Motion to Reopen”) at 1, ¶ 2, in Appellee’s App. at 6; Ex. A, On
Demand Court Records (“2012 Foreclosure Action Dkt”) at 1, in Appellee’s App.
at 9.
9
2012 Foreclosure Action Dkt at 3, in Appellee’s App. at 11. The
Foreclosure Judgment itself was not presented to the bankruptcy court nor
included in the appellate record.
Page 4 of 20
the Motion as follows:
The Motion requests that this Court reopen Debtor’s bankruptcy case so
that he can file an adversary proceeding against Wells Fargo Bank, his
bankruptcy attorney Jeremy S. Mix, and attorneys Ben Callicoat and
Cliff Baker. He alleges that Wells Fargo violated the automatic stay
and discharge injunction by foreclosing on his mortgage, and he alleges
a multitude of violations of various state and federal laws. He wants .
. . Wells Fargo [held] in contempt, and [] punitive damages [assessed]
against it. He alleges violations of federal law, including the Truth in
Lending Act, the Real Estate Settlement Procedures Act, and the
Federal Discovery Code.. He also alleges violations of Oklahoma law,
including violations of the Oklahoma Constitution, the Oklahoma
Discovery Code, and Oklahoma lien laws. Other allegations include
intentional infliction of emotional distress, fraud, robo-signing, and
misapplication of payments. . . . Essentially, he wants this Court to set
aside the state foreclosure action and release the lien on his home,
asserting that his debt to Wells Fargo was discharged in bankruptcy and
the attempt to foreclose on the mortgage post-discharge is a violation
of the automatic stay and discharge injunction. 10
The Trustee, Wells Fargo, and Debtors’ bankruptcy attorney (Jeremy Mix) filed
objections to the Motion. They countered that reopening the case was futile.
A hearing on the Motion was held on December 10, 2014. 11 The
bankruptcy court issued an order denying the Motion on December 30, 2014,
concluding that: 1) there was no violation of the automatic stay or discharge
injunction by Wells Fargo; and 2) there was no relief that it could provide to
Debtors.12 Additionally, the bankruptcy court found that it had no authority to set
aside the mortgage lien or review a final, state court judgment. 13 This appeal
followed.
II. Appellate Jurisdiction and Standard of Review
This Court has jurisdiction to hear timely filed appeals from “final
judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,
10
Order Denying Motion to Reopen at 2-3, in Appellants’ App. at 148-49.
11
Unofficial Tr. of Dec. 10, 2014 Hrg., in Appellee’s App. at 15-21.
12
Order Denying Motion to Reopen, in Appellants’ App. at 147-51.
13
Id. at 4, in Appellants’ App. at 150.
Page 5 of 20
unless one of the parties elects to have the district court hear the appeal. 14
Debtors timely filed a notice of appeal15 from the Order Denying Motion to
Reopen, a final order.16 The parties have consented to this Court’s jurisdiction by
not electing to have this appeal heard by the United States District Court for the
Eastern District of Oklahoma. This Court, therefore, has appellate jurisdiction
over this appeal.
This Court reviews a bankruptcy court’s decision on a motion to reopen a
closed case under 11 U.S.C. § 350(b)17 for an abuse of discretion. 18 “Under the
abuse of discretion standard: ‘a trial court’s decision will not be disturbed unless
the appellate court has a definite and firm conviction that the lower court made a
clear error of judgment or exceeded the bounds of permissible choice in the
circumstances.’”19 “Whether a party’s actions have violated the automatic stay is
a question of law which is reviewed de novo.”20 “Whether a creditor’s actions
violated the discharge injunction is also a question of law subject to de novo
14
28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8001(e) (now at
Fed. R. Bankr. P. 8005, effective Dec. 1, 2014); 10th Cir. BAP L.R. 8001-3 (now
at 10th Cir. BAP L.R. 8005-1, effective Dec. 1, 2014).
15
This Court construes the initial Notice of Appeal, filed within 14 days of
the order appealed from, as filed on behalf of both Timmy and Rebecca Jester
even though it was signed only by Mr. Jester. See Fed. R. App. P. 3(c)(2) (“A pro
se notice of appeal is considered filed on behalf of the signer and the signer’s
spouse and minor children (if they are parties), unless the notice clearly indicates
otherwise.”).
16
In re Riazuddin, 363 B.R. 177, 182 (10th Cir. BAP 2007) (order denying
motion to reopen was a final order for purposes of 28 U.S.C. § 158(a)).
17
All future references to “Code,” “Section,” and “§” are to the Bankruptcy
Code, Title 11 of the United States Code, unless otherwise indicated.
18
In re Woods, 173 F.3d 770, 778 (10th Cir. 1999); Redmond v. Fifth Third
Bank, 624 F.3d 793, 798 (7th Cir. 2010).
19
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)).
20
Diviney v. Nationsbank of Texas, N.A. (In re Diviney), 225 B.R. 762, 769
(10th Cir. BAP 1998) (quoting Barnett v. Edwards (In re Edwards), 214 B.R. 613,
618 (9th Cir. BAP 1997)).
Page 6 of 20
review.”21 Likewise, we review the application of the Rooker-Feldman doctrine
de novo.22 De novo review requires an independent determination of the issues,
giving no special weight to the bankruptcy court’s decision. 23
III. Analysis
The main issue in this appeal is whether the bankruptcy court abused its
discretion in denying Debtors’ motion to reopen their bankruptcy case to file
claims against Wells Fargo. Resolution of this issue requires us to determine
1) whether Wells Fargo violated the automatic stay or discharge injunction, and
2) whether the bankruptcy court could provide Debtors with the requested relief
of releasing the mortgage lien on the Property and permanently enjoining Wells
Fargo from asserting any claims against the Property.24 We answer these
questions in the negative and affirm the bankruptcy court’s decision.
A. The bankruptcy court correctly concluded that Wells Fargo did not
violate the automatic stay or discharge injunction.
1. No automatic stay violation
Section 362(a) of the Bankruptcy Code automatically imposes a stay of a
number of actions immediately upon the filing of a bankruptcy petition. 25 Among
other activities, while the automatic stay is in effect, creditors may not commence
or continue an action against the debtor that was or could have been commenced
before the filing of the bankruptcy case.26 Nor are creditors allowed to collect or
21
Santander Consumer, USA, Inc. v. Houlik (In re Houlik), 481 B.R. 661, 668
(10th Cir. BAP 2012).
22
In re Miller, 666 F.3d 1255, 1260 (10th Cir. 2012).
23
Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991).
24
Motion, Prayer ¶¶ 4 and 8 at 66-67, in Appellants’ App. at 97-98. The
remaining prayers were for monetary damages.
25
11 U.S.C. § 362(a).
26
11 U.S.C. § 362(a)(1). The 2011 Foreclosure Action was filed prepetition,
(continued...)
Page 7 of 20
enforce a prepetition claim.27 “A debtor alleging a [willful] violation of the
automatic stay has the burden to demonstrate, by a preponderance of the evidence,
that a violation of the automatic stay has occurred, that the violation was willfully
committed and that the debtor suffered damage as a result of the violation.” 28
Debtors claim that Wells Fargo violated the automatic stay by 1) failing to
dismiss the 2011 Foreclosure Action upon receiving notice of Debtors’
bankruptcy filing, 2) negotiating the Modification Agreement and coercing Mr.
Jester to sign it, and 3) harassing them by phone and mail while aware of their
bankruptcy.29 Like the bankruptcy court, we see no violation of the automatic
stay based on these allegations. First, there is no affirmative duty to dismiss a
prepetition foreclosure action upon learning the defendant filed a bankruptcy
petition.30 The automatic stay prevents prosecution of the foreclosure action, but
does not require its dismissal. In other words, the creditor must refrain from any
activity that would move the case forward in the legal process. In this case, there
is nothing in the record to indicate that Wells Fargo took any action to continue
the 2011 Foreclosure Action while the automatic stay was in effect. Thus, the
bankruptcy court correctly concluded that Wells Fargo’s failure to dismiss the
2011 Foreclosure Action upon notice of Debtors’ bankruptcy filing did not
constitute an automatic stay violation.
26
(...continued)
thus its commencement did not violate the automatic stay.
27
11 U.S.C. § 362(a)(2)-(6).
28
Kline v. Tiedemann (In re Kline), 424 B.R. 516, 524 (Bankr. D. N.M. 2010)
citing Johnson v. Smith (In re Johnson), 501 F.3d 1163, 1172 (10th Cir. 2007);
see also In re Scroggin, 364 B.R. 772, 780 (10th Cir. BAP 2007).
29
Appellants’ Br. at 15; Appellants’ Reply Br. at 3.
30
In re Long, No. 07-60011, 2009 WL 981134 at *5 (Bankr. D. Mont. Jan. 9,
2009) (obligation to “discontinue” collection proceedings permits staying rather
than dismissing the proceeding if proceeding was commenced prepetition).
Page 8 of 20
Second, the automatic stay of any action other than an action against
property of the estate terminates upon the earliest of: (A) the time the case is
closed; (B) the time the case is dismissed; or (C) in an individual Chapter 7 case,
the time a discharge is granted or denied.31 In this case, the earliest of the
identified events was the granting of Debtors’ Chapter 7 discharge on July 27,
2011. The Modification Agreement was entered after the automatic stay had
terminated.32 Thus, its entry did not constitute an automatic stay violation. 33
As for the harassing phone calls and mail, there is no evidence in the record
detailing them.34 Even if they occurred, they appear to have been made in 2013
and 2014, well after the automatic stay had terminated.35 Accordingly, these
contacts could not constitute automatic stay violations. In sum, the bankruptcy
court correctly concluded that Wells Fargo did not violate the automatic stay.
31
11 U.S.C. § 362(c)(2). The automatic stay remains in place as to property
of the estate until the property is no longer property of the estate. See 11 U.S.C.
§ 362(c)((1).
32
Because there is nothing in the record detailing the negotiation of the
Modification Agreement, our stay violation analysis is limited to its entry date.
33
In re Houlik, 481 B.R. 661, 669-70 (10th Cir. BAP 2012) (no automatic
stay violation where stay had terminated prior to repossession of truck). See also
Kline v. Deutsche Bank Nat’l Trust Co. (In re Kline), 472 B.R. 98, 103-04 (10th
Cir. BAP 2012), aff’d, 514 F.App’x 810 (10th Cir. 2013) (“[A]ny actions
Defendants took after . . . dismissal of Debtor’s case, by definition, do not
constitute stay violations.”). Because the Modification Agreement was executed
postdischarge, we will address Debtors’ complaints regarding it in the discharge
injunction section.
34
None of the letters mentioned in the Motion were presented to the
bankruptcy court. Factual allegations in the Motion are not evidence. Collins v.
Jackson Pub. Sch. Dist., 609 F.App’x 792, 795 (5th Cir. 2015) (“Arguments in
briefs, like allegations in a complaint, are assertions, not evidence.”); Tibbs v.
City of Chicago, 469 F.3d 661, 663 n.2 (7th Cir. 2006) (mere allegations of a
complaint are not evidence) (citations omitted).
35
See Motion, in Appellants’ App. at 58 (“Wells Fargo Bank N.A. kept
calling Mr. Jester . . . to send more information for a new [l]oan
[m]odification.”), 66 (Wells Fargo representative, Adriann Rey, repeatedly called
Mr. Jester), 92 (“Wells Fargo Bank N.A. repeatedly called Mr. Jester in 2013 and
2014 . . . .”).
Page 9 of 20
2. No violation of the discharge injunction
Section 524(a)(2) provides that a discharge “operates as an injunction
against the commencement or continuation of an action, the employment of
process, or an act, to collect, recover or offset any such debt as a personal
liability of the debtor, whether or not discharge of such debt is waived . . . .” 36
The discharge injunction does not constitute a blanket prohibition against all
actions undertaken by creditors after the entry of discharge. Actions to collect
against the debtor personally are enjoined. In contrast, in rem actions, which
include actions to enforce a lien against encumbered property, are not prohibited
by the discharge injunction.37 The debtor bears the burden of proving that the
creditor willfully violated the discharge injunction by clear and convincing
evidence. 38
a. The Modification Agreement did not violate the
discharge injunction.
Debtors claim that Wells Fargo violated the discharge injunction by
attempting to collect a discharged debt through the Modification Agreement,
which was invalid because it was not approved by the bankruptcy court. They
further claim that Wells Fargo coerced them into signing the Modification
Agreement. Debtors’ arguments here are unpersuasive.
While it is understandable that Debtors felt that they had no choice but to
36
11 U.S.C. § 524(a)(2).
37
Johnson v. Home State Bank, 501 U.S. 78, 84 (1991) (“[A] bankruptcy
discharge extinguishes only one mode of enforcing a claim -namely, an action
against the debtor in personam—while leaving intact another -namely, an action
against the debtor in rem”); Chandler Bank of Lyons v. Ray, 804 F.2d 577, 579
(10th Cir. 1986) (per curiam) (discharge injunction does not preclude in rem
actions by secured creditors); 3 Hon. William L. Norton Jr. & William L. Norton
III, Norton Bankr Law & Prac. § 58:4 (3d ed. 2015) (“[Section] 524 does not bar
the creditor from enforcing a valid, prebankruptcy lien or security interest against
property that has been retained . . . by the debtor after discharge.”).
38
Otero v. Green Tree Servicing, LLC (In re Otero), 498 B.R. 313, 319
(Bankr. D. N.M. 2013).
Page 10 of 20
sign the Modification Agreement to avoid foreclosure based on prepetition
defaults, the record is devoid of facts suggesting that Mr. Jester’s execution of the
Modification Agreement was anything but voluntary.39 The agreement itself
contains several provisions indicating voluntariness. Paragraph 2 of the
agreement states the loan modification was at Debtors’ request.40 Paragraph 7
states:
Borrower acknowledges and understands that he/she is not obligated
to enter into this Agreement, and that he/she is entering into this
Agreement at Borrower’s request, voluntarily and with no coercion
or pressure from Lender, for the sole purpose of retaining the
Property. Borrower understands that he/she has no personal
obligation to repay the debt secured by the Property if said debt is
discharged in bankruptcy without a valid reaffirmation agreement. 41
And contrary to Debtors’ assertion, court approval of the Modification
Agreement was not required because it is not a reaffirmation agreement that
requires court approval. A reaffirmation agreement is a contract between a debtor
and a creditor where the debtor agrees to reassume the in personam liability of a
dischargeable debt in order to keep the property for which the debt was incurred
while making periodic payments on that property.42 The Modification Agreement
repeatedly provided that it does not revive or create any personal liability on a
discharged debt. Paragraph 10.3 states:
Borrower and Lender acknowledge and agree that this Modification
Agreement does not affect the discharge of the Borrower’s personal
39
A Wells Fargo representative telling them that they would lose their home
if they did not sign the agreement is not coercion, but simply a statement of fact.
40
Modification Agreement at 1, in Appellants’ App. at 209 (“At the
Borrowers [sic] request, the borrower and counsel for both parties agree to
address the defaulted amount by means of a loan modification.”). This comports
with this Court’s general understanding that borrowers must apply for a loan
modification.
41
Id.42
In re Schott, 282 B.R. 1, 7 (10th Cir. BAP 2002). A reaffirmation
agreement must be made before the granting of the debtor’s discharge. 11 U.S.C.
§ 524(c)(1). The Modification Agreement was executed postdischarge, which is
another indication it was not an reaffirmation agreement.
Page 11 of 20
liability on the debt. 43
Paragraph 10.6 states:
Notwithstanding any monthly payments hereunder, Borrower
understands that (1) Lender’s sole recourse is the enforcement of its
security interest in the Property and any action which may exist in
relation to the Property itself and that (2) nothing in this Agreement
revives or purports to revive any debt, or create any personal liability
or obligation for a debt that was discharged in bankruptcy. 44
Paragraph 10.11 states:
NOTHING CONTAINED HEREIN SHALL BE CONSTRUED TO
BE A WAIVER OF THE BORROWER’S DISCHARGE, AN
ATTEMPT TO COLLECT AGAINST THE BORROWER
PERSONALLY, OR AN ATTEMPT TO REVIVE PERSONAL
LIABILITY. 45
The Modification Agreement was a contract where Debtors agreed to make
periodic payments in exchange for Wells Fargo’s forbearance of its right to
foreclose on its lien.46 Because the Modification Agreement did not attempt to
make Debtors personally liable for the discharged mortgage debt, the bankruptcy
court correctly concluded that the Modification Agreement did not constitute a
violation of the discharge injunction. 47
43
Modification Agreement at 2, in Appellants’ App. at 210.
44
Id.45
Id. at 4, in App. at 211.
46
Paragraph 10.2 of the agreement states, “Borrower and Lender agree that
the consideration for this Agreement is Lender’s forbearance from presently
exercising its rights and pursuing its remedies under the Security Instrument as a
result of the Borrower’s default of its obligations thereunder.” Id. at 2, in App. at
210.
47
See Bates v. CitiMortgage, Inc. (In re Bates), 517 B.R. 395, 400 (Bankr.
D. N.H. 2014) (loan modification agreement with similar language did not violate
discharge injunction; it was a contact permitted postdischarge under § 524(j)).
Section 524(j) excepts from the discharge injunction acts by creditors if “(1) such
creditor retains a security interest in real property that is the principal residence
of the debtor; (2) such act is in the ordinary course of business between the
creditor and the debtor; and (3) such act is limited to seeking or obtaining
periodic payments associated with a valid security interest in lieu of pursuit of in
rem relief to enforce the lien.” Wells Fargo did not argue to the bankruptcy court,
(continued...)
Page 12 of 20
b. Filing an in rem action and obtaining an in rem
judgment did not violate the discharge injunction.
Debtors claim that Wells Fargo violated the discharge injunction by filing
the 2012 Foreclosure Action and obtaining judgment against them. As an initial
matter, we note that neither the foreclosure petition nor the Foreclosure Judgment
were presented to the bankruptcy court or to this Court, which made it difficult
for this Court to determine the exact nature of the state action. The 2012
Foreclosure Action docket sheet, however, sufficiently supports the bankruptcy
court’s conclusion that Wells Fargo had filed an in rem foreclosure action. 48 The
docket sheet indicated the “Offense or Cause” as “Foreclosure.”49 Additionally,
at oral arguments, Debtors conceded that the Foreclosure Judgment was in rem
only. Because the discharge injunction does not preclude in rem actions by
secured creditors, the bankruptcy court correctly concluded that commencing the
2012 Foreclosure Action and obtaining the Foreclosure Judgment did not
constitute violations of the discharge injunction. 50
c. The alleged misapplication of postpetition payments
47
(...continued)
and does not argue on appeal, that its conduct in connection with the Modification
Agreement was protected by § 524(j), Accordingly, we need not consider
whether § 524(j) applies. Venture Bank v. Lapides, 800 F.3d 442, 447 n. 3 (8th
Cir. 2015) (appellate court refused to consider whether § 524(j) exception applied
because bank did not raise it below or on appeal).
48
2012 Foreclosure Action Dkt. at 1-4 , in Appellee’s App. at 9-12.
49
Id. at 1, in Appellee’s App. at 9; see In re Weinhold, 393 B.R. 623, 631
(Bankr. E.D. Wis. 2008) (a foreclosure action is generally an in rem proceeding);
Sooner Fed. Sav. & Loan Ass’n v. Oklahoma Cent. Credit Union, 790 P.2d 526,
530 n.18 (Okla. 1989) (“As a general rule, a decree of foreclosure is in rem . . .
.”); Bank of Wilson v. Hartman, 785 P.2d 338 (Okla. Civ. App. 1989) (an action
in foreclosure is in rem).
50
Chandler Bank of Lyons v. Ray, 804 F.2d 577, 579 (10th Cir. 1986) (per
curiam) (discharge injunction does not preclude in rem actions by secured
creditors); 3 Hon. William L. Norton Jr. & William L. Norton III, Norton Bankr
Law & Practice § 58:4 (3d ed. 2015) (“[Section] 524 does not bar the creditor
from enforcing a valid, prebankruptcy lien or security interest against property
that has been retained . . . by the debtor after discharge.”).
Page 13 of 20
did not constitute a violation of the discharge
injunction.
Debtors claim that Wells Fargo violated the discharge injunction by not
properly crediting postpetition payments under the Modification Agreement as
required by § 524(i).51 They also claim that “[Wells Fargo] charged [them]
$13,000 in late fees and appraisal fees that were discharged in Bankruptcy.” 52
Section 524(i) provides:
The willful failure of a creditor to credit payments received under a
plan confirmed under this title, unless the order confirming the plan
is revoked, the plan is in default, or the creditor has not received
payments required to be made under the plan in the manner required
by the plan (including crediting the amounts required under the plan),
shall constitute a violation of an injunction under subsection (a)(2) if
the act of the creditor to collect and failure to credit payments in the
manner required by the plan caused material injury to the debtor. 53
The Modification Agreement was not a plan confirmed under the Code, thus
§ 524(i) does not apply.
As to Debtors’ claim that $13,000 was added to a discharged debt, it is
based on paragraph 10.4 of the Modification Agreement, which states that:
Borrower acknowledges that the Lender has incurred, paid, or
otherwise advanced taxes, insurance premiums, and other expenses
necessary to protect or enforce its security interest in the Note and
Security Instrument and that such costs and expenses, together with
accrued interest, in the total amount of $12,791.87 have been added
to the indebtedness under the terms of the Note and Security
Instrument, and that as of 10/01/2011, . . . [the Unpaid Principal
Balance] is [] $147,702.34. 54
Because these charges are associated with the enforcement of Wells Fargo’s
security interest, they were a part of Wells Fargo’s in rem claim and not an
attempt to increase a debt discharged in bankruptcy. Even if we construed
51
Motion at 6, in Appellants’ App. at 38; Attachment [in Support of Motion]
at 5, in App. at 104; Appellants’ Br. at 17, 20.
52
Appellants’ Br. at 17.
53
11 U.S.C. § 524(i).
54
Modification Agreement, ¶10.4 at 2, in Appellants’ App. at 210.
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paragraph 10.4 as Debtors suggest, that provision must be read in conjunction
with the other provisions in the agreement. As discussed previously, the
Modification Agreement did not make Debtors personally liable for any debt
secured by the Property. Thus, paragraph 10.4 of the Modification Agreement did
not constitute a violation of the discharge injunction.
B. The bankruptcy court correctly concluded that it could not provide
any relief to Debtors.
Debtors requested monetary damages for violations of the automatic stay
and discharge injunction, release of the lien on the Property, and a permanent
injunction to prevent Wells Fargo from asserting any claims against the
Property.55 Having concluded that there were no violations of the automatic stay
or discharge injunction, we need only address the latter two types of requested
relief.
1. The bankruptcy court cannot set aside the lien on the
Property.
Generally, to finance the purchase of a home, debtors will execute at least
two documents: a promissory note and a mortgage against the property. A
promissory note is a promise to pay the debt incurred to procure the property. “A
mortgage is an interest in real property that secures a creditor’s right to
repayment.”56 “A mortgage is a consensual lien [or security interest] since it is
created by agreement.”57 This is exactly the case here – to finance the purchase
of the Property, Debtors executed a note and granted a lien against the Property.
What Debtors stubbornly refuse to understand and accept is the concept that the
55
Motion at 65-67, in Appellants’ App. at 96-98.
56
Johnson v. Home State Bank, 501 U.S. 78, 82 (1991).
57
In re Sun ‘N Fun Waterpark, LLC, 408 B.R. 361, 370 (10th Cir. BAP
2009). The Bankruptcy Code defines a “lien” as a “charge against or interest in
property to secure payment of a debt or performance of an obligation.” 11 U.S.C.
§ 101(37). A “security interest” is a “lien created by an agreement.” 11 U.S.C. §
101(51).
Page 15 of 20
debt and the lien are treated distinctly in bankruptcy. The debt was discharged, 58
but the lien survived bankruptcy. 59
Generally, a lien on real property passes through bankruptcy unaffected and
“stays with the real property until the foreclosure,” based on the bargained-for
agreement between a mortgagor and mortgagee.60 This is true unless the lien is
avoided or modified in bankruptcy.61 Here, neither Debtor nor the Chapter 7
trustee challenged the lien on the Property during the bankruptcy case. 62 Debtors’
suggestion that Well Fargo’s failure to file a proof of claim somehow invalidates
the lien on the Property contradicts § 506(d) and case law. Section 506(d)
provides that a lien securing a claim against a debtor will not be void just because
no entity filed proof of that claim under § 501.63 Additionally, the United States
Supreme Court has held that a lien holder is not required to file a proof of claim
or otherwise participate in a bankruptcy case in order to protect his lien. 64
58
The grant of a discharge does not extinguish any debt, it simply prevents
any act to collect the debt as a personal liability of the debtor. 11 U.S.C. §
524(a)(2); Johnson, 501 U.S. at 84.
59
Dewsnup v. Timm, 502 U.S. 410, 418 (1992) (a lien on real property passes
through bankruptcy unaffected); Farrey v. Sanderfoot, 500 U.S. 291, 297 (1991)
(“Ordinarily, liens and other secured interests survive bankruptcy”).
60
Dewsnup, 502 U.S. at 417.
61
Id. at 417-18 (lien unaffected subject, of course, to the power of other
persons or entities to pull lien holder into the proceeding pursuant to § 501); In re
Picht, 428 B.R. 885, 891-92 (10th Cir. BAP 2010) (“The United States Supreme
Court has repeatedly held that liens pass through Chapter 7 bankruptcy
unaffected, and the debt secured by the lien continues to exist and is enforceable
against property securing the debt (unless, of course, the lien is avoided).”).
62
See In re Lowther, 52 F.App’x 476 (10th Cir. 2002) (debtor’s ex-husband’s
lien granted through divorce decree was not extinguished by debtor’s bankruptcy
discharge even though ex-husband did not file proof of claim or properly perfect
lien under state law, where debtor listed her debt to ex-husband only as unsecured
claim and failed to avoid lien in her bankruptcy case).
63
11 U.S.C. § 506(d)(2).
64
See Dewsnup, 502 U.S. at 417-18; Chandler Bank of Lyons v. Ray, 804 F.2d
(continued...)
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Finally, Debtors cite no statutory authority to avoid the lien on the Property. 65
Even if there was a statutory basis to avoid the lien on the Property, it is now too
late.66 Because the lien on the Property remained intact, the bankruptcy court
correctly concluded that it could not now set aside the lien. 67
2. The bankruptcy court cannot review the Foreclosure
Judgment.
The Rooker–Feldman doctrine68 provides that lower federal courts, such as
bankruptcy courts, lack jurisdiction to engage in appellate review of “claims
‘actually decided by a state court’ and claims ‘inextricably intertwined with a
prior state-court judgment.’”69 As described by the Supreme Court:
The Rooker–Feldman doctrine . . . is confined to cases of the kind
64
(...continued)
577, 579 (10th Cir. 1986).
65
See 11 U.S.C. § 522(f) (granting debtor power to avoid judicial lien that
impairs exemption); 11 U.S.C. § 544 (granting the trustee the power to avoid
unperfected liens). “An individual debtor may . . . exercise section 544 avoiding
powers only in the limited circumstances outlined in section 522(h)”. 5 Collier
on Bankruptcy ¶ 544.07[4], at 544-32 (Alan N. Resnick & Henry J. Sommer eds.,
16th ed.). Section 522(h), however, limits the debtor’s ability to avoid a lien to
situations where the transfer was involuntary. Because Debtors voluntarily
granted the lien on the Property, they lack standing to avoid it under § 544.
Likewise, § 522(f) is not applicable because the lien at issue is not a judicial lien.
See In re Nichols, 265 B.R. 831 (10th Cir. BAP 2001) (consensual mortgage lien
was not transformed into judicial lien by virtue of state court’s foreclosure
decree); In re Ruck, 451 B.R. 128, 131-32 (Bankr. D. Kan. 2011) (even if
mortgage “merged” into foreclosure decree, it did not convert consensual lien of
mortgage to judicial lien).
66
See Smiley v. Assocs. Fin’l Servs. (In re Smiley), 26 B.R. 680, 683 (Bankr.
D. Kan. 1982) (motion to avoid a lien filed postdischarge deemed untimely;
motion must be filed prior to the granting of a discharge to effectively carry out
the Code and provide some finality to a bankruptcy case and to the fixed right of
all parties).
67
The issue of who holds the lien is distinct from whether a lien exists
against the Property.
68
See Rooker v. Fid. Trust Co., 263 U.S. 413 (1923); D.C. Court of Appeals
v. Feldman, 460 U.S. 462 (1983).
69
Mo’s Express, LLC v. Sopkin, 441 F.3d 1229, 1233 (10th Cir. 2006)
(quoting Kenmen Eng’g v. City of Union, 314 F.3d 468, 473 (10th Cir. 2002)).
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from which the doctrine acquired its name: cases brought by
state-court losers complaining of injuries caused by state-court
judgments rendered before the federal district court proceedings
commenced and inviting district court review and rejection of those
judgments. Rooker–Feldman does not otherwise override or supplant
preclusion doctrine . . . . 70
The Tenth Circuit has applied the Rooker-Feldman doctrine to bar claims that are
inextricably intertwined with foreclosure decisions. 71
Here, Wells Fargo brought the 2012 Foreclosure Action in state court and
obtained a judgment against Debtors. Then, Debtors, the “state-court losers,”
turned to the bankruptcy court and asked it to enjoin Wells Fargo from asserting
any claims against the Property.72 They challenged Wells Fargo’s documentation
to foreclose and claimed that Wells Fargo was not the true lien holder, thereby
lacking standing to commence the foreclosure action. 73 They sought monetary
damages against Wells Fargo for its “[i]nappropriate and costly mistakes,” release
of the lien on the Property, as well as an injunction against Wells Fargo from
asserting any claims on the Property.74 All of Debtors’ injuries are based on the
Foreclosure Judgment.
“To commence a foreclosure action in Oklahoma, a plaintiff must
demonstrate it has a right to enforce the [mortgage] . . . .” 75 Although the
Foreclosure Judgment is not a part of the record, we can presume it included
70
Exxon Mobil Corp. v. Saudi Basic Indus., 544 U.S. 280, 284 (2005).
71
Dillard v. Bank of N.Y., 476 F.App’x 690, 692 (10th Cir. 2012); Orcutt v.
Libel, 381 F.App’x 866, 868-69 (10th Cir. 2010).
72
Exxon Mobil Corp. v. Saudi Basic Indus., 544 U.S. 280, 284 (2005).
73
Debtors argue that they can challenge standing at any time during the
judicial process. Appellants’ Br. at 23. What Debtors fail to recognize is that the
2012 Foreclosure Action and the bankruptcy case are two different judicial
proceedings. Debtors must raise the issue of Wells Fargo’s standing to file the
2012 Foreclosure Action in the court where the action was filed.
74
Motion, Prayer ¶¶ 4, 7, and 8 at 66-67, in Appellants’ App. at 97-98.
75
Deutsche Bank Nat’l Tr. v. Brumbaugh, 270 P.3d 151, 154 (Okl. 2012).
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findings of every material fact necessary to support the judgment. 76 Thus, we
presume the state court concluded that Wells Fargo had standing to enforce the
mortgage. Debtors’ claims based on the inadequacy of the foreclosure
documentation, the nonapplication of payments, and Wells Fargo’s alleged
violation of the Real Estate Settlement Procedures Act and the Truth in Lending
Act are issues that are inextricably intertwined with the state court proceedings
because a determination on them would invariably require the bankruptcy court to
review and reject the Foreclosure Judgment.77 The Rooker-Feldman doctrine bars
such a review. Thus, the bankruptcy court correctly concluded that it lacked
jurisdiction to review the Foreclosure Judgment.
C. The bankruptcy court did not abuse its discretion in refusing to reopen
Debtors’ case.
Section 350(b) provides that “[a] case may be reopened in the court in
which such case was closed to administer assets, to accord relief to the debtor, or
for other cause.”78 Bankruptcy courts have broad discretion to reopen a case. 79
“A bankruptcy court that refuses to reopen a Chapter 7 case that has been closed
76
KMC Leasing, Inc. v. Rockwell-Standard Corp., 9 P.3d 683, 688-89 (Okla.
2000) (absent explanation of the ruling by the trial court and absent a record to
the contrary, appellant court will presume the trial court found every special thing
necessary to sustain the general finding and conclusion).
77
Dillard, 476 F.App’x at 691. (claims challenging bank’s documentation to
foreclose and alleging that bank used deceptive tactics in its pursuit of mortgaged
property were barred by Rooker-Feldman doctrine as they effectively sought
review and rejection of foreclosure proceedings); Orcutt, 381 F.App’x at 866.
(claims that foreclosures were illegal and that sought an injunction and damages
are inextricably intertwined with foreclosure decisions because they assert
injuries based on the state court decision and to prevail, would require the district
court to review and reject those decisions); In re Kline, 472 B.R. 98, 106 (10th
Cir. BAP 2012) (even though debtor did not ask for direct reversal of foreclosure
judgment, the relief and arguments presented would necessarily require the
bankruptcy court to reject the foreclosure judgment, thus debtor was barred by the
Rooker-Feldman doctrine from attempting to relitigate propriety of creditor’s
conduct).
78
11 U.S.C. § 350(b).
79
In re Alpex Computer Corp., 71 F.3d 353, 356 (10th Cir. 1995); In re
Petroleum Prod. Mgmt., Inc., 282 B.R. 9, 13 (10th Cir. BAP 2002).
Page 19 of 20
will not abuse its discretion if it cannot afford the moving party any relief in the
reopened case.”80 If substantive relief cannot be granted, then reopening a case
would be futile and a waste of judicial resources.81 This is exactly the case here.
Debtors asked the bankruptcy court to 1) sanction Wells Fargo for
violations of the automatic stay and discharge injunctions, 2) release the lien on
the Property, and 3) set aside the Foreclosure Judgment. Because Debtors are not
entitled to any such relief, it would have been futile to reopen their bankruptcy
case.82 Accordingly, the bankruptcy court did not abuse its discretion in denying
the motion to reopen.
IV. Conclusion
Because the bankruptcy court properly found Wells Fargo did not violate
the automatic stay or the discharge injunction and that it lacked jurisdiction to
review the Foreclosure Judgment, it did not abuse its discretion in denying
Debtors’ Motion to Reopen. Accordingly, we affirm the bankruptcy court’s
decision. 83
80
In re Schicke, 290 B.R. 792, 798 (10th Cir. BAP 2003).
81
In re Carberry, 186 B.R. 401, 402 (Bankr. E.D. Va. 1995).
82
In re Skyline Woods Country Club, LLC, 431 B.R. 830, 835 (8th Cir. BAP
2010) (affirming the bankruptcy court’s denial of a motion to reopen on the basis
that reopening the case would have been futile and a waste of judicial resources
because the doctrine of res judicata precluded review of the state judgment, which
was exactly the relief the appellants sought).
83
We grant Wells Fargo’s motion to strike (BAP ECF No. 33) certain
documents from Appellants’ Appendices because they were not before the
bankruptcy court at the time of its decision. Adams v. Royal Indem. Co., 99 F.3d
964, 967 n.3 (10th Cir. 1996) (court should strike documents in appendix not
presented to trial court); Aero–Med., Inc. v. United States, 23 F.3d 328, 329 n.2
(10th Cir. 1994) (court should strike documents in appendix not presented to trial
court).
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