Deutsche Bank Tr. Co. Ams. v. Burley

COURT OF CHANCERY
OF THE
STATE OF DELAWARE
SELENA E. MOLINA LEONARD L. WILLIAMS JUSTICE CENTER
500 NORTH KING STREET, SUITE 11400
MASTER IN CHANCERY WILMINGTON, DE 19801-3734
Final Report: May 6, 2020
Draft Report: April 16, 2020
Date Submitted: January 24, 2020
Seth L. Thompson, Esquire Mr. Timothy Burley
Parkowski, Guerke & Swayze, P.A. 620 N. Broom Street
1105 N. Market Street, 19th Floor Wilmington, DE 19805
Wilmington, DE 19801 burleytimothy35@yahoo.com
Re: Deutsche Bank Tr. Co. Ams. v. Burley
C.A. No. 2017-0912-SEM
Dear Counsel and Parties:
Pending before me is a motion for partial judgment on the pleadings. The
plaintiff seeks judgment in its favor, and against the defendant, on an equitable
subrogation claim. The plaintiff contends that its predecessor-in-interest satisfied
defendant’s mortgage in a refinancing transaction, the defendant has not paid it back,
and equity dictates judgment for the plaintiff on the balance due (plus interest). The
defendant disagrees that equity tips in the plaintiff’s favor arguing that the
refinancing was fraudulent and, as such, the plaintiff should not be able to recover
anything from the defendant. I find I cannot dispose of the equitable subrogation
claim on the pleadings. I, therefore, recommend that the motion for partial judgment
on the pleadings be denied to allow for discovery into the refinancing transaction
C.A. No. 2017-0912-SEM
May 6, 2020
Page 2
and the factual predicate necessary to determine which way equity shifts in this
matter. This is my final report. 1
I. BACKGROUND 2
On or about July 30, 2004, the defendant Timothy Burley (“Defendant”)
purchased property located at 611 North Harrison Street in Wilmington, Delaware
(the “Property”) for $85,000.00.3 Defendant made a $7,000.00 down payment and
financed the remainder through a mortgage with Pike Creek Mortgage Services Inc.,
nominee Mortgage Electronic Registration Systems Inc. (“MERS”) (the “First
Mortgage”). 4
The First Mortgage was satisfied on March 30, 2007 by Homecomings
Financial, LLC (“Homecomings”).5 In recognition of the payoff, a mortgage was
executed, purportedly between Homecomings, nominee MERS, and Defendant (the
“Second Mortgage”).6 I use “purportedly” because Defendant contends the Second
Mortgage was fraudulent and his signature thereon forged. Defendant did, however,
1
This report makes the same substantive findings and recommendations as my April 16,
2020 draft report, to which no exceptions were filed.
2
The facts in this report reflect the well-pled facts, taken in the light most favorable to the
defendant as the non-moving party.
3
Docket Item (“D.I.”) 6.
4
Id.
5
D.I. 1, Ex. G; D.I. 9. In addition to the well-pled factual allegations, I also consider the
exhibits attached thereto, giving each the weight it deserves. See Mehta v. Mobile Posse,
Inc., 2019 WL 2025231, at * 2 (Del. Ch. May 8, 2019).
6
D.I. 1, Ex. A.
C.A. No. 2017-0912-SEM
May 6, 2020
Page 3
make payments under the Second Mortgage through 2015, although Defendant pled
that the payments were meant to apply to the First Mortgage.7 When Defendant
became aware of the Second Mortgage and underlying fraud, sometime in 2015,
Defendant stopped making payments.8
On November 16, 2016, the Second Mortgage was assigned to plaintiff,
Deutsche Bank National Trust Company Americas, as Trustee for Residential
Accredit Loans, Inc., Mortgage Asset-Backed Pass-Through Certificates, Series
2007-QS6 (“Plaintiff”). 9 With the Second Mortgage in default, Plaintiff, on
December 22, 2017, filed a Verified Complaint for foreclosure on the Property. 10
Plaintiff sought foreclosure in rem under scire facias proceedings and under an
equitable subrogation claim. Defendant answered the complaint on January 26,
2018. 11 Plaintiff then filed this motion for partial judgment on the pleadings on July
19, 2019, 12 it was heard on January 17, 2020, 13 and it was submitted for decision on
January 24, 2020, when the supplemental submissions I requested were filed. 14
7
D.I. 6.
8
Id.9
D.I. 1, Ex. B.
10
D.I. 1.
11
D.I. 6-11.
12
D.I. 15.
13
D.I. 26.
14
D.I. 30.
C.A. No. 2017-0912-SEM
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Page 4
II. ANALYSIS
Plaintiff moves for judgment on the pleadings for its equitable subrogation
claim under Court of Chancery Rule 12(c). Plaintiff’s motion may be granted if “no
material issue of fact exists and [Plaintiff] is entitled to judgment as a matter of
law.” 15 I am “required to view the facts pleaded and the inferences to be drawn from
such facts in a light most favorable to the non-moving party[;]” 16 here, Defendant.
Equitable subrogation “is an equitable remedy originally borrowed from the
civil law[.]” 17 In the refinancing context, it can be invoked such that “[o]ne who
fully performs an obligation of another, secured by a mortgage, becomes by
subrogation the owner of the obligation and the mortgage to the extent necessary to
prevent unjust enrichment.” 18 Delaware courts require any party seeking equitable
subrogation to establish five factors:
(1) payment must have been made by the subrogee to protect his or her
own interest; (2) the subrogee must not have acted as a volunteer;
(3) the debt paid must have been one for which the subrogee was
not primarily liable; (4) the entire debt must have been paid; and (5)
subrogation must not work any injustice to the rights of others. 19
15
Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
16
Id.17
E. States Petroleum Co. v. Universal Oil Prods. Co., 44 A.2d 11, 15 (Del. Ch. 1945).
18
E. Sav. Bank, FSB v. CACH, LLC, 2014 WL 3827496, at *4 (Del. Super. July 31, 2014)
(quoting Restatement (Third) of Property (Mortgages) § 7.6(a) (1997)).
19
E. Sav. Bank, FSB v. CACH, LLC, 124 A.3d 585, 590 (Del. 2015) (quoting Reserves
Dev. LLC v. Severn Bank, FSB, 2007 WL 4054231, at *17 (Del. Ch. Nov. 9, 2007), aff’d,
961 A.2d 521 (Del. 2008)).
C.A. No. 2017-0912-SEM
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As these factors demonstrate, equitable subrogation has its limits. It cannot
be used by a mere volunteer: “one who pays the debt of another upon his own
initiative, and without invitation, compulsion or the necessity for self-
protection[.]” 20 A claim of equitable subrogation is also susceptible to equitable
defenses (e.g., unclean hands). 21 And, “[m]oreover, Delaware courts have refused
to apply subrogation when it would ‘work any injustice to the rights of others.’” 22
Although Plaintiff attempts to couch its equitable subrogation claim in
simplistic terms, viewing the pleadings in a light most favorable to Defendant (as I
must under Rule 12(c)), its likelihood of success is less than clear. Accepting
Defendant’s allegations that he did not request nor approve the Second Mortgage,
the refinancing was fraudulent, and his signature was forged on the refinancing
documents, I have more questions than answers. For example, was Plaintiff (through
its predecessor-in-interest) a mere volunteer when it paid off the First Mortgage?
Or, was Plaintiff’s predecessor-in-interest induced by fraud to pay Defendant’s debt,
ripening an equitable subrogation claim? Or, did Plaintiff’s predecessor-in-interest
engage in, know of, or reasonably should have known of the underlying fraud to
20
E. States Petroleum Co., 44 A.2d at 15. But, on the other hand, “one who is induced by
fraud to pay the debt of another is, ordinarily, not a mere volunteer, and may rely on
subrogation.” Id.
21
See Oldham v. Taylor, 2003 WL 21786217, at *5 (Del. Ch. Aug. 4, 2003).
22
E. Sav. Bank, FSB v. CACH, LLC, 124 A.3d at 593.
C.A. No. 2017-0912-SEM
May 6, 2020
Page 6
such extent that equity shifts away from Plaintiff and in Defendant’s favor? I cannot
answer these questions on the limited, disputed record. Stated another way, I cannot
determine which way equity tilts without a more complete factual record.
Plaintiff urges me to follow the lead of Oldham v. Taylor. 23 In Oldham, a
refinancing occurred without the involvement or consent of one joint owner. Justice
Jacobs (sitting by designation) found, however, that the non-consenting joint owner
was still personally liable, under an equitable subrogation theory, for the benefit she
received from the new mortgage. In so holding, Justice Jacobs overruled the joint
owner’s argument that a defect in the refinancing (namely, that there was no
Delaware attorney at the closing) amounted to unclean hands, barring recovery,
because there was no violation of the “public policy or law of Delaware[.]” 24
Oldham is distinguishable, however, in its procedural posture and on its
merits. First, Oldham was decided after a full trial on the merits, lending support to
my inclination to require that these equitable issues be more fully developed before
disposition. Second, the alleged inequities in Oldham pale in comparison to the
inequities alleged here. Defendant’s allegations not only smell of equitable defenses
but also call into question whether Plaintiff can establish the five equitable
subrogation factors.
23
2003 WL 21786217.
24
Id. at *5.
C.A. No. 2017-0912-SEM
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Page 7
To be clear, the inequities alleged here are disputed. I make no findings of
fact or conclusions of law regarding the enforceability of the refinancing transaction
and Second Mortgage. What I do find is that discovery should commence and the
matters should be teed up for resolution on a more-developed record. 25
III. CONCLUSION
For the foregoing reasons, I recommend that the motion for partial judgment
on the pleadings be denied. I find I cannot dispose of Plaintiff’s equitable
subrogation claim on the pleadings and that discovery into the many lingering
questions is necessary. The equitable issues at stake should be weighed and
adjudged on a more-developed factual record. This is a final report and exceptions
may be taken pursuant to Court of Chancery Rule 144.
Respectfully submitted,
/s/ Selena E. Molina
Master in Chancery
25
See, e.g., Claros Diagnostics, Inc. S’holders Rep. Comm. v. OPKO Health, Inc., 2020
WL 829361, at *13 (Del. Ch. Feb. 19, 2020) (explaining, typically, “application of unclean
hands is based upon a developed factual record”).