Opinion
Case No. 12-56875 Adv. No. 13-2109
08-08-2014
In re: Philip Scott Edwards Christina M. Edwards, Debtors. Heartland Bank, Plaintiff v. PHH Mortgage Corporation, Defendant.
Brett R. Sheraw, Esq. (electronic service) Mia L. Conner, Esq. (electronic service) Nathan L. Swehla, Esq. (electronic service) Judith M. McInturff, Esq., 50 W. Broad Street, Ste. 2300, Columbus, Ohio 43215 Kathleen Tourgeman, Courtroom Deputy
ORDER DENYING MOTION FOR SUMMARY JUDGMENT FILED BY HEARTLAND BANK (DOC. NO. 48)
On July 10, 2014, the Court concluded a hearing on the above-captioned Motion for Summary Judgment filed on behalf of Heartland Bank ("Heartland") and a Response filed on behalf of PHH Mortgage Corporation ("PHH"). For reasons expressed below, the Court denies the Motion.
PHH Mortgage Corporation ("PHH") acquired an interest in this case on June 27, 2013, based upon an assignment of claim from HSBC Mortgage Company.
Phillip S. and Christina M. Edwards ("Debtors") are co-owners of a home located at 7916 Harrisburg London Road, Orient, Ohio 43146. Two mortgages encumber the Debtors' residence. The first lienholder, HSBC Mortgage Corporation ("HSBC"), issued a $286,400.00 loan on August 13, 2003, that allowed the Debtors to purchase the residence. Both Debtors signed the HSBC mortgage; however, directly under Mrs. Edwards' signature the following phrase appears "...signing to release her dower interest." In addition, the Note only bears the signature of Mr. Edwards.
Sixteen months later, on December 2, 2004, Heartland, the second lienholder, issued a loan to the Debtors for $145,000.00, and they both signed the note and mortgage granting a lien on their residence. In this instance, not only did Mrs. Edwards sign the note but she also signed the mortgage without any reference to or qualification regarding her dower interest. The Debtors used Heartland's loan in Mr. Edward's business as a franchisee for Snap On Tools. The parties modified the loan terms in January 2008. However, in March of 2008, and after sixteen years in business, Mr. Edwards closed his franchise. Three years later on April 30, 2012, Heartland filed a foreclosure proceeding in the Franklin County, Ohio Court of Common Pleas. On June 28, 2012, Heartland obtained a "Default Judgment in Foreclosure."
On August 9, 2012, the Debtors filed the instant Chapter 13 proceeding that stayed the foreclosure sale of their residence. Heartland filed an Objection to Confirmation on September 25, 2012. It was asserted that because HSBC failed to respond to the Foreclosure Complaint and Motion for Default Judgment, that its security interest was extinguished, leaving Heartland in the first position, after payment of real estate taxes. Heartland filed a secured proof of claim on November 30, 2012, for $134,116.45, and HSBC filed a secured proof of claim on December 6, 2012, for $255,767.60.
On February 25, 2013, the Court entered an Order confirming the Debtors' Chapter 13 Plan. This Plan included the following special provision to address the conflicting interests of HSBC and Heartland:
Heartland Bank shall commence an adversary proceeding within thirty (30) days of confirmation of the plan. Until the adversary is concluded by court order or settled by and between the parties, Debtors shall pay the sum of $2,265.93 (referred to in Plan Section B(2) as a "Conduit Mortgage Payment") to the Chapter 13 Trustee ... The Chapter 13 Trustee shall hold these funds for distribution to HSBC if it prevails in the Adversary Proceeding; or for distribution to all parties, including but not limited to the secured claim of Heartland Bank, if Heartland Bank prevails in the Adversary Proceeding. In the event Heartland Bank fails to bring an Adversary Proceeding within thirty (30) days after confirmation of this Chapter 13 plan, it forfeits its rights to do so and its' claim shall be preserved as a second mortgage claim to be paid to the extent secured.
Chapter 13 Plan at 12.
In compliance with this special provision, Heartland filed the instant adversary proceeding on March 27, 2013, by filing a Complaint seeking Declaratory Judgment and to Determine Validity, Priority and Extent of Liens. Heartland seeks a finding that HSBC's security interest terminated by failing to answer in the foreclosure proceeding, and that alternatively any interest of HSBC would be limited to Mr. Edward's interest in the property, since Mrs. Edwards signed the mortgage for the sole purpose of releasing her dower interest.
On April 3, 2014, Heartland filed the instant Motion for Summary Judgment and PHH filed a Response on April 23, 2014. Heartland's Motion asks the Court to give preclusive effect to the State Court's Foreclosure Judgment regarding the priority, validity and extent of the liens. Heartland contends that its lien is now the senior lien, and PHH's lien expired upon entry of the Default Judgment in Foreclosure. In addition, Heartland repeats its alternative dower argument, that any interest of PHH should be limited to Mr. Edward's interest in the home.
In addition to jurisdictional challenges, PHH responds that its lien cannot be extinguished because a foreclosure sale of the residence never occurred, due to the intervening bankruptcy proceeding. This latter point underlies a recent decision where the court confirmed the preservation of liens until the completion and confirmation of a foreclosure sale. Smith v. Vista Hill Partners, LLC (In re Smith), 510 B.R. 164, 169 (Bankr. S.D. Ohio 2014) (quoting Deutsche Bank Nat'l Trust Co. v. Richardson, Case No. 2010-CA-3, 2011 WL 900790, at *4 (Ohio Ct.App. Mar. 11, 2011)). The lack of a foreclosure sale is not in dispute, and indeed the filing of this bankruptcy case stayed all such proceedings.
Heartland's response to this reality is that the Default Judgment its Counsel prepared and submitted to the Franklin County Court of Common Pleas, extinguished the lien of PHH. Further, it is asserted that this Default Judgment declared Heartland to be in first position, subject only to the payment of real estate taxes due at the time of the foreclosure sale. On this basis, Heartland argues that the Default Entry drafted by Heartland's Counsel and entered without any explanation of the factual and legal bases for the conclusions reached, binds PHH. However, this Court cannot tell from the Default Judgment that the Court of Common Pleas considered any of the issues between the parties, or whether that court signed the default entry simply due to the lack of a response. Sill v. Sweeney (In re Sweeney), 276 B.R. 186, 194 (6th Cir. BAP 2002) (stating that the rule established in [Hinze v.] Robinson [(In re Robinson), 242 B.R. 380 (Bankr. N.D. Ohio 1999)] is that the state court must decide the merits of the case, and the court being asked to give preclusive effect to a default judgment in subsequent litigation must have some reliable way of knowing that the decision was made on the merits).
This is an important distinction, as noted in a recent decision:
Because an issue must have been actually and directly litigated in the prior proceeding in order for issue preclusion to apply, the issue-preclusive effect of a default judgment is "restricted to those instances where the plaintiff has actually submitted to the state court admissible evidence, apart from the pleadings, and the state court, based upon the evidence submitted, has actually made findings of fact and conclusions of law sufficiently detailed to support the application of the collateral estoppel doctrine." ...(citations omitted)... It does not appear that the State Court received evidence apart from the pleadings. The doctrine of issue preclusion, therefore, does not apply to the State Court Judgment.
In re Smith 510 B.R. at 170.
In addition, the Default Judgment is itself inconsistent with the Foreclosure Complaint and Motion for Default Judgment prepared and filed by Heartland's Counsel. For example, the Complaint seeks a declaration of the validity of Heartland's lien, a marshalling of all other liens and encumbrances, the sale of the residence, and that all named Defendants are required to present their claims. Similarly, Heartland's Motion for Default Judgment requested declaration of its status as first lienholder, and the sale of the home with all defendants required to present their claims, liens or interests. However, the Default Entry prepared and filed by Heartland's Counsel inexplicably omits the critical step of a foreclosure sale and opportunity of interested parties to stake a claim to any proceeds. Indeed, if Heartland had its way it is unclear where any remaining balance would go after satisfaction of its asserted first position and the payment of real estate taxes.
For these reasons, the Court concludes that Heartland is not entitled to summary judgment. As a result, the parties are in the same relative positions they occupied prior to the foreclosure proceeding-nothing more and nothing less. PHH holds the first mortgage, and Heartland is in second position. However, Mrs. Edward's signature on the PHH mortgage appears to suggest that she signed only to release dower. Yet, the Debtors are not parties to this adversary proceeding. In addition, there is no indication in the Schedules that the Debtors dispute the validity or extent of PHH's interests, and they have not objected to the proof of claim. At a minimum testimony from the Debtors on this point will be necessary.
On these bases, the Court DENIES the Plaintiff's Motion for Summary Judgment.
IT IS SO ORDERED.
Copies to:
Brett R. Sheraw, Esq. (electronic service)
Mia L. Conner, Esq. (electronic service)
Nathan L. Swehla, Esq. (electronic service)
Judith M. McInturff, Esq., 50 W. Broad Street, Ste. 2300, Columbus, Ohio 43215
Kathleen Tourgeman, Courtroom Deputy