The Debtor’s mother obtained an undivided interest in real property, recording her interest on October 6, 2006 with the Rockingham County Register of Deeds. On December 23, 2008, Debtor and Debtor’s Mother obtained a mortgage loan from Ideal Mortgage Bankers, Ltd (“Lender”) and then on June 19, 2009, the Debtor's Mother attempted to convey an interest in the Property to the Debtor as tenants in common through a gift deed. Rather than recording that in Rockingham County, she recorded the gift deed with the Guilford County Register of Deeds. Then on February 4, 2010, the Debtor and the Debtor's Mother granted a Deed of Trust to the Lender, which was also recorded in Guilford County. Two years later, the Debtor's Mother filed Chapter 7 and was granted a discharge, without reaffirming the debt to Lender. Lender then transferred the Guilford County Deed of Trust to GMAC Mortgage on September 12, 2012, and GMAC Mortgage recorded notice of the transfer in Guilford County.
The Debtor then filed a chapter 13 bankruptcy case on March 12, 2013, listing a joint interest in the Property. When Ocwen Loan Servicing, LLC filed a secured claim in his case, the Debtor successfully objected to that secured designation, as the Deed of Trust was not recorded in Rockingham County, with the bankruptcy court entering an order disallowing the secured claim on August 29, 2013. Ocwen, acting without seeking or obtaining relief from stay, had already recorded the Deed of Trust in Rockingham County on August 12, 2013. The Debtor completed his Chapter 13 plan and received a discharge on June 29, 2016.
On May 2, 2017, the Debtor's Mother transferred her remaining interest in the Property to the Debtor. After acquiring the Deed of Trust from Ocwen, BONY commenced a foreclosure action against the Debtor in Rockingham County. The Clerk of Court denied this foreclosure as BONY failed to prove the existence of a valid debt, but the Rockingham Superior Court found, over the objections of the Debtor, that the debt valid as the “Bank of New York is the holder of the Note” allowing the foreclosure. The Debtor then filed a second Chapter 13 bankruptcy case and commenced, with the eventual joinder of the Chapter 13 Trustee, and Adversary Proceeding arguing that the predecessor-in-interest of BONY violated the codebtor stay, under 11 U.S.C. § 1301, in the first Chapter 13 case when it recorded the Deed of Trust in without first obtaining relief, with that the recording of the Deed of Trust being void and its unrecorded Deed of Trust is avoidable under 11 U.S.C. § 544.
BONY responded that the bankruptcy court did not have subject matter jurisdiction and that the Debtor failed to state a claim upon which relief may be granted.
The bankruptcy court began by finding that "while § 1301 references the codebtor, its purpose is to protect a debtor from 'indirect pressures from his creditors exerted through friends or relatives that may have cosigned an obligation of the debtor.'” See In re Whitlock-Young, 571 B.R. 795, 804 (Bankr. N.D. Ill. 2017). Accordingly, as the Debtor fell within the scope of such indirect pressures, he had standing to raise violations of the co-debtor stay. When determining, for purposes of a motion to dismiss, whether an action violates the codebtor stay, the bankruptcy court took the broad view of the codebtor stay and found that the challenged action could have the effect of directly or indirectly pressuring the debtor through the codebtor and not the narrower approach that required a creditor act in an "overt and intentional manner or which has the inescapable and inevitable effect of exerting pressure on the debtor by way of the codebtor." In re Juliao at *9 (Bankr. E.D. Mich. Nov. 29, 2011)
Similarly despite the assertion by BONY that the Trustee did not have standing bring the avoidance claim under § 544 because the avoidance would “not provide a benefit to the estate and unsecured creditors,” the bankruptcy court declined to reach the question of whether that was an additional requirement for a Trustee's standing, because any dividend to unsecured creditors would only result from the successful avoidance of the lien.
Next the bankruptcy court rejected the allegation by BONY that it lacked of subject matter jurisdiction over Debtor’s claims under the Rooker-Feldman doctrine because as a collateral attack on a state court foreclosure judgment. A federal trial court does not lack subject matter jurisdiction solely because “the same or a related question was earlier aired between the parties in state court.” Thana v. Bd. of License Comm'rs for Charles Cty., Md., 827 F.3d 314, 320 (4th Cir. 2016) as :
[T]he Rooker-Feldman doctrine does not stop a district court from exercising subject-matter jurisdiction simply because a party attempts to litigate in federal court a matter previously litigated in state court. If a federal plaintiff presents some independent claim, albeit one that denies a legal conclusion that a state court has reached in a case to which he was a party, then there is jurisdiction and state law determines whether the defendant prevails under principles of preclusion. Davani v. Va. Dept. of Transp., 434 F.3d 712, 718 (4th Cir. 2006) (quoting Exxon Mobil Corp. v. Saudi Basic Indus. Corp., 544 U.S. 280, 293 (2005))(internal alterations omitted).
Rooker-Feldman does not preclude federal courts from determining claims that conflict with a state court’s decision if
the decision does not resolve an injury stemming from the state court judgment itself. Under North Carolina law, see N.C. Gen. Stat. § 45-21.16, there is (as conceded by the attorneys for BONY in the foreclosure action) actually no requirement of a recorded deed of trust as a prerequisite to foreclosure, with recordation only impacting seniority of liens. As the Debtor did not challenge the the "efficacy" of the underlying debt (which is is a required finding for foreclosure) but instead that the recordation was void due to the violation of the co-debtor stay and avoidable by the Trustee under § 544(a)(3), nothing in their Complaint sought an improper reversal or reconsideration of the state court foreclosure judgment.
The bankruptcy court also rejected the argument by BONY that issue preclusion barred the Plaintiffs from disputing the validity of the lien. Issue preclusion (whether through collateral estoppel or res judicata) applies under North Carolina law where “the determination of an issue in a prior judicial . . . proceeding precludes the relitigation of that issue in a later action, provided the party against whom the estoppel is asserted enjoyed a full and fair opportunity to litigate that issue in the earlier proceeding.” Gray v. Fed. Nat’l Mortg., 830 S.E.2d 652, 657 (2019) (quoting Whitacre P'ship v. Biosignia, Inc., 358 N.C. 1, 15 (2004)). The following requirements must be met:
(1) the issue is identical to an issue actually litigated and necessary to the judgment;
(2) the prior action resulted in a final judgment on the merits; and
(3) the current parties are the same as, or in privity with, the parties to the earlier
Again, as before, since recordation and perfection of the Deed of Trust was not an issue in the foreclosure, this argument failed.
BONY additionally raised the statute of limitations, laches, or waiver bar the claim, but the bankruptcy court rejected this as a violation of the automatic stay is void ab initio, with no statute of limitations or waiver that effectively redeems the void action. For the doctrine of laches to apply, BONY would have to have shown that:
(1) a lack of diligence by the party against whom the defense is asserted, and
(2) prejudice to the party asserting the defense.
There was, however, no evidence at this preliminary stage of the case of any delay by the Debtor and the mere passage of time was insufficient to show prejudice to BONY, with this question better left as facts developed.
Lastly, BONY's argument there was no transfer of property by the Debtor that was subject to avoidance under § 544(a) also failed as 11 U.S.C. § 544(a) allows the avoidance of "any transfer of property of the debtor . . . that is voidable by-- (3) a bona fide purchaser of real property . . ..” not just those made by the Debtor.
That the Debtor's Mother could have raised many of these issues as discharge violations from her own Ch. 7 bankruptcy, where she presumably did not reaffirm any mortgage debt, probably was an unnecessary complication, that was best left in reserve.
As to issue preclusion, the requirement of identical parties was also not satisfied and the Trustee was not involved in the state court foreclosure. Similarly as to laches, the Trustee could not have acted before the second bankruptcy case was filed.
It is also unclear why BONY has not sought claims against Ocwen for selling it an unrecorded Pig in a Poke. Perhaps there are Statute of Limitations issues there (why aren't transfers between mortgage holders signed under seal, with a 10 year Statute of Limitations, as they require of borrowers?), but these case more often seem to be less about recovery between corporations and more about fighting any possibility of a borrower benefiting.
For a copy of the opinion, please see: