Summary:
The Male Debtor executed a promissory note in favor of Option One Mortgage, the predecessor to Wells Fargo, and at the same time both Debtors executed a Deed of Trust. Subsequently, the Male Debtor defaulted on the note and the property was sold at foreclosure. A Substitute Trustee’s Deed was then recorded, conveying the property to Wells Fargo.
Later, the Clerk of Court was informed that the Notice of Sale had not been included in the foreclosure file and Clerk set aside the foreclosure sale. Wells Fargo then transferred the property to Male Debtor (but not to the Female Debtor) by means of a quitclaim deed that purported to reinstate the Deed of Trust.
The Debtor filed Chapter 7 and the Trustee challenged the status of Wells Fargo under two alternatives, first with a claim to quiet title to the property and secondly, to avoid the Substitute Trustee’s deed to Wells Fargo as an avoidable fraudulent transfer.
In reviewing the action to quite title, the bankruptcy court held that the Clerk of Superior Court did have authority, pursuant to set aside the foreclosure sale under Rules 60(b) and (c) due to the defect. The Clerk did not, however, have authority to set aside or vacate the Substitute Trustee’s Deed, which accordingly was a valid transfer of the property to Wells Fargo.
At that point, when Wells Fargo was validly the owner of the property, under the Doctrine of Merger "when the holder of a deed of trust also becomes the owner of that which is secured, the doctrine of merger invalidates the deed of trust." In re Carpenter, No. 09- 03768-8-SWH, 2010 Bankr. LEXIS 647, at *5 (Bankr. E.D.N.C. Mar. 2, 2010). After such merger, the original Deed of Trust was effectively extinguished and a new Deed of Trust needed to again be executed to be effective. Further, as the Deed of Trust was extinguished, it imposed no obligations on the Debtor, who’s acceptance of the quit claim deed would then be presumed.
As to the avoidance of the alleged fraudulent transfer, following Iqbal and Twombley, the bankruptcy court dismissed this cause of action, finding that the Complaint contained a bare recitation of the elements and did not include any fact, such as the amount of the debt, the actual value of the property, or the amount of the bid by Wells Fargo, supporting the contention that the Male Debtor received less than the reasonable equivalent value of the property in exchange for the Substitute Trustee’s Deed.
Commentary:
Because the avoidance due to fraudulent conveyance was dismissed, the only remaining cause of action is to quiet title. Whereas 11 U.S.C. § 522(g) does not allow a Debtor to exempt assets that the Trustee recovered through an avoidance or preference action on voluntary transfers, this quiet title action would allow the Debtor to claim an exemption in this property. A conversion to Chapter 13 to pay out the equity above exemptions might be in order for the Debtor.
Angell v. Wells Fargo- Clerk of Court Cannot Set Aside Substitute Trustee’s Deed and Doctrine of Merger of Deed of Trust and Deed.PDF
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