Summary:
The Farags (who were eventually represented by my law firm in their Chapter 13 bankruptcy- all statements in this posting are taken solely from the court decisions) obtained a line of credit in 2002 with Wells Fargo, secured by their real property. This was refinanced in 2004 by PNC, which, based on a pay-off statement from Wells Fargo, paid the balance owed and requested that the Deed of Trust be marked as satisfied and record. Wells Fargo failed to do so and the Farags continued to take advances from the line of credit totaling over $300,000.00.
Upon filing Chapter 13 on March 29, 2012, the Farags indicated that the real property would be surrendered. PNC filed two proofs of claim, asserting security interests in the real property for $64,970.51 and $475,924.81, and Wells Fargo similarly filed a secured proof of claim for $307,530.84. Subsequently, on October 4, 2012, PNC Bank filed a Motion for Relief from Stay, which also sought a determination that its liens held priority over Wells Fargo. This motion was served electronically on the attorney that had filed a notice of appearance for Wells Fargo, but not to Wells Fargo itself. With no response to the motion being filed, an order was entered granting both relief from the stay and determining that the liens of PNC Bank were senior to Wells Fargo. (The Farags later completed their Chapter 13 plan and, without objection, received a discharge on May 1, 2013.)
PNC Bank proceeded to foreclose on the real property, which was on June 30, 2014, sold to a third party. On December 30, 2014, Wells Fargo (now represented by new counsel) sought to re-open the bankruptcy case, which was allowed, and then on February 11, 2015, filed a motion to reconsider the order lifting the stay on the basis that (1) Wells Fargo had not received actual notice of the motion; (2) that the determination of the priority of liens was void as it was not accomplished through wither a separate motion or an adversary proceeding; and (3) that the Motion was not an appropriate request for a pay-off under N.C.G.S. § 45-36.3. Judge Aron (sitting by designation in the Eastern District) denied this motion, finding that by filing an unlimited Notice of Appearance, service of the Motion for Relief on the attorney for Wells Fargo was proper and sufficient. Further, the relief requested was clear in both the Motion and Order, making the failure by Wells Fargo to act for more than two year unjustifiable.
The district court affirmed on a slightly different basis- first rejecting the argument by Wells Fargo that the bankruptcy court lacked subject matter jurisdiction to rule on the effectiveness of the pay-off request under N.C.G.S. § 45-36.3. Finding that 28 U.S.C. § 157(3) did not preclude resolution of a matter”affected by state law.” That the priority of the liens was determined by motion rather than an adversary proceeding also not prohibited as the Supreme Court held in United Student Aid Funds v. Espinosa, 559 U.S. 260 (2010), that the bankruptcy rules were procedural and not jurisdictional. That Wells Fargo received, through its attorney, actual notice of the motion with an opportunity to be heard, satisfied its due process rights.
Commentary:
Both the bankruptcy court and the district court accepted that the Motion for Relief by PNC Bank could request a pay-off balance from Wells Fargo, pursuant to N.C.G.S. § 45-36.3, as 28 U.S.C. § 157(3) allows that “[a] determination that a proceeding is not a core proceeding shall not be made solely on the basis that its resolution may be affected by state law.” This would support the argument that N.C.G.S. § 45-36.3 should be used by North Carolina bankruptcy trustees in their Notices of Final Cure Payment to request a pay-off. With its 30-day response deadline and allowance of actual damages, including attorney’s fees, this would provide a speedy statutory means of resolving a thorny problem.
Interestingly, the silence on the part of Wells Fargo in the face of the Motion for Relief was both accepted in the original order as allowing the determination of the priority of the liens and later found to be an insufficient basis for reconsidering that order. Elsewhere , the failure to object to a proposed Confirmation Order by a mortgage creditor was not sufficient to allow confirmation. See In re Martin, 444 B.R. 538 (Bankr. M.D.N.C. 2011). This may be explained both as a difference between an order confirming a plan and reconsidering an order under Rule 60(b), as well as a degree of deference as different judges were involved in the various orders in this case. Unlike in Espinosa, however, there was no caution given by either the bankruptcy or district court in the instant case that in the future “bad-faith efforts” by creditors attorneys engaging in this sort of improper conduct in bankruptcy proceedings should “be deterred by the specter of penalties.” Such warning seem to be reserved for “unscrupulous” debtors and their attorneys.
Lastly, the elephantine question in the room for this case is that the law firm that represented Wells Fargo in the Chapter 13 by filing a Notice of Appearance was the very same law firm that later represented the substitute trustee in the foreclosure initiated by PNC Bank, based on the assertion that its liens held primacy. This would seem to be a clear conflict of interest and also highlights the reason why substitute trustees in foreclosure should be expected exercise a greater degree of neutrality.
For a copy of the opinion, please see:
District Court: Wells Fargo v. Farag- Determination of Priority of Mortgage Liens
Bankruptcy Court: Wells Fargo v. Farag- Determination of Priority of Mortgage Liens
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