KSB

13-05196 Morris v. GreenPoint Credit LLC et al (Doc. # 77)

Morris v. GreenPoint Credit LLC et al, 13-05196 (Bankr. D. Kan. Jul. 8, 2014) Doc. # 77

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SO ORDERED.
SIGNED this 7th day of July, 2014.

 

DESIGNATED FOR ONLINE PUBLICATION ONLY

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:

)
MARK ROBERT KOLARIK, ) Case No. 13-11985
KELLY LYNN KOLARIK, ) Chapter 7

)
Debtors. )
__________________________________________)
)


J. MICHAEL MORRIS, Trustee,
)
)
Plaintiff, )
vs. ) Adv. No. 13-5196
)
GREENPOINT CREDIT, LLC; )
GREEN TREE SERVICING, LLC; )
ROBERT E. ST. CLAIR and )

R. ANNE ST. CLAIR; )
MARK R. KOLARIK and )
KELLY L. KOLARIK, and )
BANK OF AMERICA, N.A., )
)
Defendants. )
__________________________________________)


1

Case 13-05196 Doc# 77 Filed 07/07/14 Page 1 of 7


ORDER DENYING ST. CLAIR DEFENDANTS’ CROSS MOTION TO
DISMISS OR FOR SUMMARY JUDGMENT (Dkt. 53)


The defendants Robert and Anne St. Clair have filed their separate cross
motion to dismiss the chapter 7 trustee’s strong arm complaint to avoid GreenPoint
Credit, L.L.C.’s allegedly unperfected lien on a manufactured home that the St. Clairs
sold to the debtors Mark and Kelly Kolarik under a 2004 installment contract.1 The
St. Clairs move for relief under Fed. R. Civ. P. 12(b)(6), but proffer material outside
the complaint which allows the court to consider their motion as one for summary
judgment.2

The Complaint

Exercising his strong-arm powers as a hypothetical lien creditor under §
544(a), the trustee alleges that the Kolariks entered into a prepetition contract of
purchase and sale with the St. Clairs in July 2004 for the purchase of a 1997 Skyline
mobile home. He further alleges that GreenPoint may claim a lien on the mobile
home that was granted by the St. Clairs’ to secure their purchase money indebtedness
to GreenPoint and that this lien was unperfected on the date of the Kolariks’
bankruptcy filing, July 31, 2013.

The Applicable Legal Standard

1 On March 18, 2014 Green Tree Servicing, LLC previously filed a motion to dismiss or
alternatively for judgment on the pleadings under Fed. R. Civ. P. 12(b)(6) and (c). See Adv.
Dkt. 19. The Court issued its Order Denying Green Tree’s motion (Green Tree Order) on
July 2, 2014 at Dkt. 75.
2 Adv. Dkt. 53 and 54. The St. Clairs appear by their attorney Samantha M.H. Woods. The
chapter 7 trustee J. Michael Morris personally appears.


Case 13-05196 Doc# 77 Filed 07/07/14 Page 2 of 7


As the Court explained in the Green Tree Order, a Rule 12(b)(6) motion to
dismiss for failure to state a claim upon which relief may be granted is generally
governed by the facial plausibility standard enunciated in the Supreme Court’s
Twombly and Iqbal decisions and is confined to the allegations contained in the
complaint.3 But where, as here, the litigants have presented exhibits and materials
outside the complaint in their motion papers, the Court may treat the motion as one
for summary judgment.4 The St. Clairs attached the Contract of Purchase and Sale
between them and the Kolariks bankruptcy Schedules C and G, and a Title and
Registration Receipt for the subject mobile home. As with the Green Tree Order, we
consider these additional documents and treat the motion as one for summary
judgment. That requires me to determine whether material facts are in dispute and
whether the undisputed facts entitle the St. Clairs to judgment as a matter of law on
the trustee’s complaint.

Facts

Most of the undisputed facts in this matter are set forth in the Green Tree
Order and need not be repeated here. In support of their motion, and in addition to
the documents I’ve already considered in the Green Tree Order, the St. Clairs offer a
copy of a Title and Registration Receipt dated January 22, 2004 and related title
documents that refer to the manufactured home. These are found at Exhibit C to their

3 Fisher v. Lynch, 531 F. Supp. 2d 1253, 1260 (D. Kan. 2008); Wagner Equip. Co. v. Wood,
893 F. Supp. 2d 1157, 1159-60 (D. N.M. 2012).
4 Fed. R. Civ. P. 12(d).


Case 13-05196 Doc# 77 Filed 07/07/14 Page 3 of 7


motion.5 The trustee presumably joined the St. Clairs as party defendants because
they claim an interest in the subject mobile home as owners of legal title, a fact which
is not disputed by any party. As such, their interest must be adjudicated relative to
the other parties in this action who claim an interest in the mobile home. The St.
Clairs have not pleaded any cross claims against their purchasers, the Kolariks, or
any other defendants. Based upon their bankruptcy schedules, the Kolariks remain
in possession of the mobile home, but the record is silent on the status of the Kolariks’
payments under the Contract of Purchase and Sale.

Analysis

As did Green Tree Servicing, the St. Clairs assert that the mobile home in
question is not property of the estate because the Contract of Purchase and Sale for
the mobile home between them and the Kolariks is an executory contract that was
not timely assumed or rejected and is therefore deemed rejected by operation of §
365(d)(1) and that, as a consequence of that, the mobile home is no longer property of
the estate under § 365(p). Thus the trustee has no avoidance rights. I rejected this
argument in the Green Tree Order because I concluded that the Contract of Purchase
and Sale is neither a lease nor an executory contract, but is instead an installment
sales contract that falls outside of § 365(d)(1). I reached this conclusion because,
under the Contract, the Kolariks, as buyers, received the right to possess the mobile
home and incurred the attendant burdens of ownership including being responsible

5 Adv. Dkt. 54-3, Ex. C.

Case 13-05196 Doc# 77 Filed 07/07/14 Page 4 of 7


for paying property taxes and insurance premiums, and for maintaining the property.
In describing the terms and effect of the Contract between the St. Clairs and the
Kolariks in his brief on this motion, the trustee correctly notes that “the [Kolariks]
acquired all the ‘beneficial incidents of ownership’ upon entering into the Contract,
and were clearly the ‘equitable owners,” with the St. Clairs being the ‘legal owners.’”6
Thus, the Kolariks’ equitable ownership interest became property of the estate upon
their bankruptcy filing. A more thorough treatment of this issue can be found in the
Green Tree Order and need not be repeated here.

Likewise, in the Green Tree Order, I also addressed whether GreenPoint’s or
Bank of America’s purported lien on the mobile home was properly perfected. I
rejected Green Tree’s attempt to extend the substantial compliance doctrine to perfect
a lien described by the Tenth Circuit in In re Charles7 because neither GreenPoint
nor Bank of America is identified anywhere on the Kansas Department of Revenue
title search report for the mobile home, making this case factually different from
Charles.

But with the St. Clairs’ submission of Exhibit C -- a Title and Registration
Receipt on the mobile home, I must consider whether its content should change my

6 Adv. Dkt. 60, p. 9. See also Roberts v. Osburn, 3 Kan. App.2d 90, 94-589 P.2d 985 (1979),
rev. denied 225 Kan. 845 (discussing effect of 15-year contract for sale of real estate where
deed placed in escrow and legal title remained in the sellers).
7 Morris v. The CIT Group/Equip. Financing, Inc. (In re Charles), 323 F.3d 841 (10th Cir.
2003).


Case 13-05196 Doc# 77 Filed 07/07/14 Page 5 of 7


prior conclusion.8 The St. Clairs do not attempt to authenticate the documents in
Exhibit C or explain their meaning. The exhibit contains one title and registration
receipt that indicates it is a “reissue title” dated January 22, 2004 upon which the St.
Clairs are identified as the owners and “BAHS Bank of America FSB” is the
lienholder. The document does not provide a registration expiration date but instead
notes: “DISPOSED VEHICLE.” Another title and registration receipt contained in
Exhibit C is a duplicate title dated March 22, 2002 again showing the St. Clairs as
owners and “BAHS Bank of America FSB” as lienholder. Exhibit C also contains what
appear to be inquiry or search reports from the KDOR on the mobile home. These
reports reflect different title numbers and issuance dates. All refer to the St. Clairs
as owners but not all refer to “BAHS Bank of America FSB” as the lien holder. None
of these documents comprising Exhibit C necessarily show that GreenPoint or BAHS
Bank of America FSB was the lienholder as of the date of the Kolariks’ bankruptcy
filing, July 31, 2013.9 Indeed one of the KDOR search reports dated January 10, 2014
shows no lien on the mobile home.10 And the trustee’s search report on the mobile
home appears to show no lienholder as of September 3, 2013.11 In short, whether
Bank of America’s lien was perfected by notation on the mobile home’s title as of the
date of the bankruptcy remains a factual dispute that cannot be resolved by summary

8 Adv. Dkt. 54-3.
9 The Contract of Sale and Purchase between the St. Clairs and the Kolariks was entered
into on July 20, 2004.
10 Adv. Dkt. 54-3, p. 3.
11 Adv. Dkt. 60-1 (Ex. 1).


Case 13-05196 Doc# 77 Filed 07/07/14 Page 6 of 7


judgment.

Finally, the St. Clairs argue that if their sale to the Kolariks is secured, their
lien is also perfected by applying the In re Charles substantial compliance doctrine.
But the trustee in this avoidance action is not seeking to avoid a lien on the mobile
home held by the St. Clairs to secure the Kolariks’ purchase. As between the St.
Clairs and the Kolariks, that sale and purchase is an unsecured transaction. There
is no factual dispute that the St. Clairs hold legal title to the mobile home. The mobile
home, however, is subject to the purported lien of GreenPoint (or Bank of America)
granted by the St. Clairs. The trustee is seeking to avoid the alleged unperfected lien
of GreenPoint (or Bank of America), the lien that secured the St. Clairs’ original
purchase of the mobile home from the dealer.

Conclusion

Because material facts remain in dispute regarding the existence of a lien on
the mobile home and its perfection as of the date of the Kolariks’ bankruptcy filing,
the St. Clairs’ motion must be DENIED.

# # #

Case 13-05196 Doc# 77 Filed 07/07/14 Page 7 of 7



13-05196 Morris v. GreenPoint Credit LLC et al (Doc. # 75)

Morris v. GreenPoint Credit LLC et al, 13-05196 (Bankr. D. Kan. Jul. 2, 2014) Doc. # 75

PDFClick here for the pdf document.


 

SO ORDERED.
SIGNED this 2nd day of July, 2014.

 

DESIGNATED FOR ONLINE PUBLICATION ONLY

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:

)
MARK ROBERT KOLARIK, ) Case No. 13-11985
KELLY LYNN KOLARIK, ) Chapter 7

)
Debtors. )
__________________________________________)
)


J. MICHAEL MORRIS, Trustee,
)
)
Plaintiff, )
vs. ) Adv. No. 13-5196
)
GREENPOINT CREDIT, LLC; )
GREEN TREE SERVICING, LLC; )
ROBERT E. ST. CLAIR and )

R. ANNE ST. CLAIR; )
MARK R. KOLARIK and )
KELLY L. KOLARIK, and )
BANK OF AMERICA, N.A., )
)
Defendants. )
__________________________________________)


1

Case 13-05196 Doc# 75 Filed 07/02/14 Page 1 of 10


ORDER DENYING GREEN TREE SERVICING, LLC’s
MOTION TO DISMISS (Dkt. 19)


Green Tree Servicing moves for dismissal of the chapter 7 trustee’s complaint
under 11 U.S.C. § 544(a) to avoid and preserve an alleged unperfected lien of
GreenPoint Credit, L.L.C. in a manufactured home that defendant sellers St. Clair
sold to the debtors Kolarik in 2004 under an installment contract.1 Green Tree’s
motion is brought under Fed. R. Civ. P. 12(b)(6), or alternatively, Fed. R. Civ. P. 12(c)
as incorporated by Fed. R. Bankr. P. 7012(b).2

The Complaint

The trustee alleges that the Kolariks entered into a prepetition contract of
purchase and sale with the St. Clairs in July 2004 for the purchase of a 1997 Skyline
mobile home. The trustee further alleges that the mobile home is believed to be
subject to a lien in favor of GreenPoint Credit, LLC that the St. Clairs gave to secure
their purchase money loan from GreenPoint. Because that lien was not perfected on
the date of the Kolariks’ bankruptcy filing, July 31, 2013, he seeks to avoid it,
exercising his strong-arm powers as a hypothetical lien creditor under § 544(a).

The Applicable Legal Standard

1 Green Tree Servicing LLC appears by its attorney John F. Michaels. The chapter 7
trustee J. Michael Morris personally appears.
2 When a party files a Rule 12(b)(6) motion to dismiss for failure to state a claim after
having filed an answer to the complaint, as Green Tree has done in this case, the motion is
treated as a motion for judgment on the pleadings under Rule 12(c). Jacobsen v. Deseret
Book Co., 287 F.3d 936, 941 n. 2 (10th Cir. 2002). The same legal standard applies to Rule
12(b)(6) and Rule 12(c) motions. Atl. Richfield Co. v. Farm Credit Bank of Wichita, 226 F.3d
1138, 1170 (10th Cir. 2000).

Case 13-05196 Doc# 75 Filed 07/02/14 Page 2 of 10


Motions to dismiss or for judgment on the pleadings under Rule 12 are
ordinarily subject to the facial plausibility standard enunciated in the Supreme
Court’s Twombly and Iqbal decisions and are confined to the allegations contained in
the complaint.3 But where the litigants have presented exhibits and materials
outside the complaint in their motion papers, the Court may treat the motion as one
for summary judgment.4 Here the parties each attached a Kansas Department of
Revenue (KDR) motor vehicle title search on the subject mobile home to their papers.5
The trustee added a copy of the Contract of Purchase and Sale (the “Contract”)
between the St. Clairs and Kolariks.6 I therefore treat Green Tree’s motion as one for
summary judgment, requiring that I determine whether material facts remain in
dispute and whether the undisputed facts entitle Green Tree to judgment as a matter
of law on the trustee’s complaint. Neither party challenges the authenticity of the
documents attached to the motion papers.

Facts

Sometime before 2004, the St. Clairs purchased a manufactured home with
purchase money borrowed from GreenPoint and granted GreenPoint a security
interest in the home. In 2004, the Kolariks purchased the home from the St. Clairs
for $23,884 under the Contract.7 The Contract provides that the debtors were to pay

3 Fisher v. Lynch, 531 F. Supp. 2d 1253, 1260 (D. Kan. 2008); Wagner Equip. Co. v. Wood,
893 F. Supp. 2d 1157, 1159-60 (D. N.M. 2012).
4 Fed. R. Civ. P. 12(d).
5 Adv. Dkt. 35, p. 7 and 38, p. 13.
6 Adv. Dkt. 38, pp. 9-12


7 Id.

Case 13-05196 Doc# 75 Filed 07/02/14 Page 3 of 10


the St. Clairs’ monthly loan payments (including insurance) to GreenPoint and
annually try to assume the GreenPoint loan.8 The GreenPoint loan would remain in
the St. Clairs’ name. If the home were destroyed or damaged, the St. Clairs could
elect to repair it or cancel the contract. If the debtors paid off or assumed the
GreenPoint loan, the St. Clairs were obligated to pass title to them. All other duties
were delegated to the buyers – pay the taxes and insurance and maintain the mobile
home in good and clean condition. The debtors reside in the mobile home that is
situated in a mobile home community on a rented lot. The Kolariks filed their chapter
7 bankruptcy petition on July 31, 2013. They claim the mobile home exempt as their
homestead.

Both the trustee and Green Tree rely on a second document, a motor vehicle
search report from the KDR on the mobile home.9 This document shows that title
number N0056133 to the mobile home was issued March 11, 2004 and the St. Clairs
are the title owners of record.10 No lien holder is shown on this report; instead, it
states “Not Found.” While this report suggests that either no lien exists on the mobile
home or that a lien may exist but be unperfected, the certificate of title is not in the
summary judgment record and the Court cannot tell whether GreenPoint’s lien is
noted on it as Kansas law requires.11

8 Adv. Dkt. 38, pp. 9-12.
9 Adv. Dkt. 35, Ex. A, p. 7 and Adv. Dkt. 38, p. 13.
10 Id. Although not entirely clear, it appears that this motor vehicle search report was
generated or printed on September 3, 2013 from the KDR division of motor vehicles
website.
11 KAN. STAT. ANN. § 84-9-311(a)(2), (b) (2013 Supp.) and § 58-4204(g) (2013 Supp.).


Case 13-05196 Doc# 75 Filed 07/02/14 Page 4 of 10


Green Tree Servicing, LLC, the St. Clairs, and the trustee stipulate that Green
Tree is the loan servicer for Bank of America, N.A. (BOA) which is the successor in
interest to “BankAmerica Housing Services, a Division of Bank of America, FSB” and
is the real party in interest.12 Nothing in the stipulation or record establishes the
relationship between BOA and GreenPoint Credit, or whether BOA is the successor
to GreenPoint with respect to the mobile home loan and lien.13 The trustee amended
his complaint on June 23, 2014 to add BOA as a party defendant but the substantive
allegations of the original complaint remained unchanged.14 GreenPoint Credit has
not answered or otherwise responded to the trustee’s complaint, and the trustee has
not pursued GreenPoint’s default.15 As discussed below, Green Tree’s motion should
be denied.

Analysis

Green Tree makes several arguments why the trustee’s claim must fail as a
matter of law. First, Green Tree argues that because there was no “transfer” of
property by the debtors (the lien being granted by the St. Clairs), there is nothing for
the trustee to avoid.16 But, as the trustee correctly points out, the language of § 544(a)
does not limit its reach to transfers by the debtor; rather, it grants the trustee the

12 Adv. Dkt. 59.
13 GreenPoint Credit may have been acquired or absorbed by BOA at some point during the
financial crisis of 2008, but the Court’s knowledge of this is off-record and cannot be relied
on in deciding these motions.
14 Adv. Dkt. 67.
15 It appears to the Court that GreenPoint Credit, LLC has not been properly served with
summons and the complaint. See Fed. R. Bankr. P. 7004(b)(3).
16 See Adv. Dkt. 19.


Case 13-05196 Doc# 75 Filed 07/02/14 Page 5 of 10


same “rights and powers” that a hypothetical judgment lien creditor, executing
creditor, or bona fide purchaser would have as of the date of the debtors’ petition.17
Because § 544(a) is not limited in the way Green Tree claims, a trustee may avoid
any unperfected lien that encumbers property of the estate without regard to whether
the debtors granted it.18 Green Tree’s argument to the contrary must fail.

Second, Green Tree argues that the mobile home is not property of the estate.19
To reach this conclusion, Green Tree reasons that the Contract is an executory
contract and that, because the Contract was neither assumed or rejected, it must be
deemed rejected under § 365(d)(1). Once an executory contract is rejected, it is no
longer property of the estate per § 365(p)(1).20 Green Tree bases this argument on
the fact that the debtors scheduled the Contract in Schedule G – Executory Contracts
and Unexpired Leases and described the Contract as a “residential lease/rent to own.”
The Contract says nothing about being a “residential lease/rent to own” agreement.
It is not executory.

In this Circuit, the courts apply the Countryman test in determining whether

17 In re Silver, 303 B.R. 849, 863 (10th Cir. BAP 2004) (emphasizing the use of the
disjunctive language “or” in § 544(a)). See also, Morris v. Hicks, et al (In re Hicks), 491 F.3rd
1136, 1140 (10th Cir. 2007) (the rights of a bankruptcy trustee as a hypothetical lien
creditor are determined under state law); KAN. STAT. ANN. § 84-9-317(a)(2) (2013 Supp.)
(subordinating an unperfected security interest to the rights of a trustee who became a lien
creditor as of the date of the petition).
18 In re Sheets, 277 B.R. 298, 307 (Bankr. N.D. Tex. 2002) (transfer is not a prerequisite to
trustee exercising his strong-arm powers under § 544(a)).
19 Adv. Dkt. 35.
20 Section 365(p)(1) speaks to rejected leases of personal property and does not address
rejected executory contracts.

Case 13-05196 Doc# 75 Filed 07/02/14 Page 6 of 10


a contract is an executory contract.21 Under that test, if: (1) the contract has not been
fully completed or performed; (2) future obligations and performance remain due from
both parties to the contract; and (3) failure to perform those obligations would
constitute a material breach, the contract is executory.22 Most courts conclude that
installment land contracts or motor retail vehicle retail sales contracts (including
those for mobile homes) are not executory if the only duty the seller retains is the
duty to convey title when the buyer’s payments are complete and the buyer is
obligated from the beginning of the contract to pay taxes, insurance, and
maintenance.23

This Contract is not a lease nor is it a rent-to-own agreement. Rather, it
documents the sale and purchase of the mobile home “as is” without any
representations as to condition by the St. Clairs. The debtors were not only obligated
to make the monthly loan payments to GreenPoint, they were also obligated to pay
taxes on the mobile home, to insure it, and to maintain it. Apart from conveying title
to the debtors upon completion of monthly payments, the St. Clairs had no other
duties or obligations beyond retaining the right to elect to repair the home in the

21 The test is named for Professor Vern Countryman. See Olah v. Baird (In re Baird), 567
F.3d 1207, 1211 (10th Cir. 2009)(adopting Countryman test of an executory contract).


22 Id.
23 Johnson v. Smith (In re Johnson), 501 F.3d 1163, 1174 (10th Cir. 2007) (Debtors’
obligation to tender installment payments and the seller-dealer’s obligation to release the
lien when handing over the vehicle title are insufficient to classify the sales contract as
executory.). See also In re Drahn, 405 B.R. 470, 475 (Bankr. D. Ia. 2009) (contract for sale of
mobile home is not executory when the only remaining duty is the transfer of title after
debtor has completed payments); In re Martinez, 476 B.R. 627, 632 n.2 (Bankr. D. N.M.
2012).


Case 13-05196 Doc# 75 Filed 07/02/14 Page 7 of 10


event of a total loss or cancel the Contract. That right will not ripen until a casualty
loss is sustained on the mobile home. The Contract is not executory, and therefore
not subject to assumption or rejection under § 365(d)(1). To the extent it is not exempt,
the debtors’ equitable interest in the mobile home is property of the estate.24

The Contract here differs from the contract at issue in In re Reasor in which
this Court concluded the contract was an executory one.25 In that case the sellers
retained legal title to the trailer but also remained obligated to maintain insurance
coverage on the travel trailer that was being purchased by the debtors under an
unsecured installment purchase agreement. It contained no provisions allocating
responsibility for taxes, repairs and maintenance to either party. The sellers
continuously insured the trailer during the 56-month term of the purchase
agreement, even while the debtors were in default. In contrast here, all of the usual
attributes of ownership were allocated to the Kolariks – responsibility for taxes,
insurance, and maintenance of the mobile home; the ability to deduct any interest
paid to GreenPoint; and possession. Upon the completion of the monthly payments or
the successful assumption of the St. Clairs’ GreenPoint loan, the St. Clairs were
obligated to transfer title to the Kolariks. Reasor is distinguishable on its facts and
the terms of the contract. This Contract is not executory.

24 On this record the court is unable to determine the extent of the debtors’ equitable
interest in the mobile home and such determination remains for trial, as does a
determination of the rights of the St. Clairs, GreenPoint, BOA, and Green Tree in the
mobile home based upon a fully developed factual record.
25 In re Reasor, 2014 WL 1647142 (Bankr. D. Kan. Apr. 23, 2014).

Case 13-05196 Doc# 75 Filed 07/02/14 Page 8 of 10


Next, Green Tree asserts that substantial compliance with Kansas certificate
of title statutes suffices to perfect the lien in the mobile home and therefore,
GreenPoint’s (or BOA) lien is deemed perfected, defeating the trustee’s avoidance
action.26 Green Tree cites the Charles case for authority suggesting that the KDR’s
motor vehicle search report that shows the St. Clairs as the owner of the mobile home
is analogous to the certificate of title that the lender was relied on in Charles.27 But
the facts here are distinguishable and do not warrant an extension of the substantial
compliance standard applied in Charles. In that case, the creditor was identified on
certificates of title to trucks as the owner thereof, rather than the lienholder. The
Tenth Circuit held that this met the substantial compliance standard for perfection
because a search of the certificate of title records would give notice to potential
secured creditors that the creditor was claiming an interest in the trucks.28 Here, the
document presented by Green Tree is only a KDR title search report.29 It identifies
the title holders as the St. Clairs (the actual owners), not as lienholders. There is no
mention of either GreenPoint, BOA, or any other creditor in the search report. It
cannot impart notice to anyone that either creditor was claiming an interest in the
mobile home.30 Green Tree’s substantial compliance argument must fail on this

26 Adv. Dkt. 35.
27 Morris v. The CIT Group/Equip. Financing, Inc. (In re Charles), 323 F.3d 841 (10th Cir.
2003).
28 Id. at 845.
29 Adv. Dkt. 35, Ex. A.
30 Cf. Morris v. 21st Mortgage Corp. (In re Jewell), 2006 WL 3512926 at *3 (Bankr. D. Kan.
Dec. 4, 2006) (In distinguishing In re Charles, this Court noted: “One viewing a title that
recited someone other than the seller or borrower as an “owner” would absolutely be placed


Case 13-05196 Doc# 75 Filed 07/02/14 Page 9 of 10


record and at this stage of the proceedings.

Finally, Green Tree claims that because GreenPoint did not extend credit to

the debtors, its lien cannot be avoided under § 544(a)(1) and (2).31 As the trustee

correctly notes, Green Tree misapprehends § 544. When exercising “strong-arm

powers” under § 544(a), the trustee stands in the shoes of a hypothetical lien creditor;

he is clothed with the rights and powers of a judicial lien creditor whether or not such

a creditor actually exists.32 This argument is also without merit.

Conclusion

Based upon the pleadings and the limited record before the Court, Green Tree’s

converted motion to dismiss or for judgment on the pleadings, treated as one for

summary judgment, is DENIED for the reasons set forth above.33

# # #

on notice of the named party’s interest in the property.”).
31 Adv. Dkt. 35.
32 In re Silver, 303 B.R. 849, 863. See also, Zilkha Energy Co. v. Leighton, 920 F.2d 1520,
1523 (10th Cir. 1990) (Under § 544 the trustee may stand in the shoes of a hypothetical
judgment lien creditor of the debtor; it is a legal fiction that permits the trustee to assume
the guise of a creditor with a judgment against the debtor.); In re Brouillette, 389 B.R. 214,
218 (Bankr. D. Kan. 2008) (“Under § 544(a)(1), upon commencement of a bankruptcy case,
the trustee has the status of a creditor with a judicial lien on all property on which a
creditor could have obtained a judicial lien, whether or not such creditor actually exists,”
quoting 5 Collier on Bankruptcy ¶ 544.05.).
33 I note the lack of any evidence in the record that identifies which creditor (GreenPoint,
BOA, or Green Tree) held a lien in the mobile home on the date of the Kolariks’ bankruptcy
petition or whether that lien was properly perfected. Nor is there evidence sufficient to
establish the relationship, if any, among GreenPoint, BOA and Green Tree, or what the
Kolariks have paid under the Contract -- evidence that is essential for the Court to
determine the interests and rights of the parties in the mobile home.


Case 13-05196 Doc# 75 Filed 07/02/14 Page 10 of 10



14-05039 Speth v. Garcia (Doc. # 13)

Speth v. Garcia, 14-05039 (Bankr. D. Kan. Jun. 17, 2014) Doc. # 13

PDFClick here for the pdf document.


 

 


DESIGNATED FOR ONLINE PUBLICATION ONLY

 

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

 

IN RE: )

 )

PAUL A. GARCIA, ) Case No. 12-10393

 ) Chapter 7

Debtor. )

__________________________________________)

 )

STEVEN L. SPETH, Trustee )

 )

 Plaintiff, )

vs. ) Adv. No. 14-5039

 )

WILLIAM B. GARCIA Successor )

Trustee of the Revocable Inter Vivos )

Trustee of Lenore Garcia, u/a/d )

November 18, 2008 )

 )

 Defendant. )

__________________________________________)

 

ORDER ON DEFENDANT’S MOTION TO DISMISS, OR IN THE
ALTERNATIVE, FOR SUMMARY JUDGMENT

 

 Paul Garcia filed his chapter 13 petition on February 28, 2012 and his case was


converted to chapter 7 on February 3, 2014. Plaintiff Steven L. Speth was appointed
chapter 7 trustee. Speth filed an amended complaint pursuant to 11 U.S.C. § 547
alleging that Paul Garcia transferred $35,000 to defendant William B. Garcia,
successor trustee of the Lenore Garcia Inter Vivos Trust (the “Trust”) during the
“insider preference period” either with the intention of hindering, delaying, or
defrauding his creditors or in exchange for less than reasonably equivalent value. The
Trust moved to dismiss or, in the alternative, for summary judgment. For the reasons
set forth below, the motion is granted in part and denied in part.

 The Complaint

 Speth’s sparsely pleaded complaint merely asserts that Paul transferred
$35,000 to the Trust within one year before he filed his bankruptcy case and that he
did so either with fraudulent intent or in exchange for less than reasonably
equivalent value.1 The Trust’s motion seeks either a dismissal of the complaint for
failure to state a claim under Fed. R. Bankr. P. 7012 and Fed. R. Civ. P. 12(b)(6) or
for summary judgment under Fed. R. Bankr. P. 7056 and Fed. R. Civ. P. 56.

1 The chapter 7 trustee, Steven L. Speth, will be referred to as Speth even though he proceeds in his
trust capacity. Speth’s claim lies against William Garcia in his capacity as trustee of the Lenore
Garcia Trust. To avoid confusion between the two trustees, the defendant will be referred to as “the
Trust.” Attorney Timothy J. King appeared on behalf of Speth. Attorney Elizabeth Carson appeared
on behalf of the Trust.

 We first must ascertain what cause of action Speth is attempting to plead here.
In the original complaint, he alleged a claim to avoid and recover a fraudulent
transfer under § 548. The next day Speth filed his amended complaint. The amended
complaint differs from the original only in that it states a claim to avoid and preserve


a preference under § 547 instead of a fraudulent transfer under § 548.2 The factual
and legal allegations remained the same: the debtor transferred $35,000 during the
insider preference period to defendant, the transfer was made with intent to hinder,
delay or defraud creditors [actual fraud] or the transfer was for less than reasonably
equivalent value and was either made at a time that the debtor was insolvent or the
debtor became insolvent as a result of the transfer [constructive fraud].3
While the complaint’s words hint at a §548 fraudulent transfer, Speth’s
reference to § 547 in the amended complaint while referencing the insider preference
period suggests that he may instead be pursuing a preference claim. Speth does not
allege a date certain that the transfer occurred, but alleges it was made during the
insider preference period within one year before the filing of the bankruptcy petition,
again pointing to an allegation of preference.4 The Court’s doubts about Speth’s
intention to assert a preference claim are dispelled by his response brief which
addresses only that:
Plaintiff’s Complaint is based on a good faith belief the following
occurred. On July 22, 2011, debtor Paul J. Garcia and his brother,
Alex Garcia jointly paid $35,000.00 to the Lenore Garcia Inter Vivos
Trust. All beneficiaries of the trust are the debtor and his brothers.
Debtor filed for protection under Chapter 13 on February 28, 2012.
Thus, the transfer occurred within the one year reach back preference
period for an “insider” under 11 U.S.C. § 547. Plaintiff asserts the
trust is an “insider” because of the family relationships of the trust
2 Cf. Adv. Dkt. 1 and 2.
3 See § 548(a)(1)(A) (actual fraud) and (a)(1)(B)(i) and (ii)(I) (constructive fraud).
4 Section 548(a)(1) reaches transfers made during the 2-year period before the date of the petition,
while the insider preference period is up to 1 year before the date of the petition under § 547(b)(4)(B).
Thus, a transfer that falls within the insider preference period will also fall within the 2-year period
for fraudulent transfers.
3
Case 14-05039 Doc# 13 Filed 06/16/14 Page 3 of 12

beneficiaries and thus, the transfer is a preference.5
Since the parties both focus on the Trust’s insider status which is mostly
relevant to calculating the reach back period for the preference claim, the Court will
first address whether the amended complaint states a claim to avoid a preference
under § 547, before turning to the fraudulent transfer claims.
The Preference Claim, § 547
A preference is (1) a transfer of an interest of the debtor or the estate in
property; (2) to or for the benefit of a creditor; (3) made for or on account of an
antecedent debt owed by the debtor before the transfer was made; (4) made while the
debtor is insolvent; (5) made within 90 days preceding the filing of the bankruptcy
petition; and (6) that allows the creditor to receive more than the creditor would
otherwise have received in a chapter 7 liquidation.6 A transfer to an insider made
less than one year but more than 90 days before the petition date is also a preference.7
Unlike a fraudulent transfer, the debtor’s intent or state of mind in making the
transfer is immaterial to determining whether the transferee has received a
preference.8
All Speth pleads is that the debtor transferred “a payment amount of $35,000”
to the Trust during the “’insider’ preference period,” while debtor was insolvent and
5 Adv. Dkt. 10, p. 2. Emphasis added.
6 Bailey v. Big Sky Motors, Ltd. (In re Ogden), 314 F.3d 1190, 1196 (10th Cir. 2002).
7 Section 547(b)(4)(B); Rupp v. United Security Bank (In re Kunz), 489 F.3d 1072, 1076 (10th Cir.
2007) (debtor’s title of director emeritus of bank did not make bank a per se insider of debtor for
preference purposes); In re Hertzler Halstead Hospital, 334 B.R. 276, 286-87 (Bankr. D. Kan. 2005)
(one-year look-back period applies to preference analysis to an insider).
8 In re Antweil, 931 F. 2d 689 (10th Cir. 1991), aff’d 503 U.S. 393 (1992).
4
Case 14-05039 Doc# 13 Filed 06/16/14 Page 4 of 12

for the benefit of the Trust. He does not allege that the Trust is a creditor of the
debtor or that debtor owed an antecedent debt to the Trust before the transfer. Nor
does he affirmatively allege that the Trust is an insider; that allegation can be
inferred from the averment that the transfer occurred during the insider preference
period. Absent these critical allegations, the complaint by itself does not state a
preference claim.

But the Trust has included facts and exhibits outside the amended complaint
in its motion to dismiss, giving the Court liberty to address its motion as one for
summary judgment.9 Summary judgment is appropriate when the uncontroverted
facts show that there remain no genuine issues of material fact in the case and that
the movant is entitled to judgment as a matter of law. The Trust attached the
Revocable Inter Vivos Trust of Lenore Garcia as Exhibit A and a file-stamped copy of
a state court journal entry of judgment entered July 15, 2011 in a case brought by the
Trust against debtor as Exhibit B. While the Trust should have directly cited to the
applicable provisions of the trust document and the journal entry of judgment to
support each of its contentions of fact, Exhibits A and B generally support them.10
Speth does not dispute the authenticity of either the trust document or the state court
judgment. Nor does he dispute the accuracy of the Trust’s separately numbered facts
in his response brief, as he had the opportunity to do.11 He could have responded to
each of the Trust’s statements of fact by properly disputing them, or he could have

9 Fed. R. Civ. P. 12(d).

10 Adv. Dkt. 8, pp. 1-11. See Fed. R. Civ. P. 56(c)(1) and (3); D. Kan. L.B.R. 7056.1(a).

11 Adv. Dkt. 10.


submitted his own additional statements of uncontroverted fact.12 Because he didn’t,
the Trust’s statements of material fact are deemed admitted.13
Ironically, the facts necessary to the preference claim that Speth failed to plead
in his amended complaint are supplied by the Trust in its uncontroverted statement
of facts. In her trust, Lenore Garcia granted Paul and Alex an option to buy her Salina
restaurant for $200,000 payable in 10 annual installments of $20,000. The Trust
document, Exhibit A, supports that statement and sets forth the terms and manner
of exercising the purchase option. The Trust also contends that Paul and Alex only
made one partial payment after they exercised the option, that they missed the
second annual payment entirely, and that the trust obtained a judgment against
them for $35,000 in Sedgwick County District Court in July of 2011.14 Those facts are
supported by the Journal Entry, Exhibit B, where the state court found that Paul and
Alex breached the contract for the purchase of the restaurant and entered judgment
against them. Speth admits that the debtor transferred $35,000 to the Trust on July
22, 2011, well within the insider preference period.15 Exhibit B therefore establishes
that the Trust became a judgment creditor of debtor in July 2011 and that this
antecedent debt existed prior to debtor’s bankruptcy filing on February 28, 2012 and
the $35,000 transfer at issue. As the state court judge concluded in the Journal Entry,
the Trust’s judgment against debtor arose from a prepetition breach of contract for
12 D. Kan. L.B.R. 7056.1(b).
13 D. Kan. L.B.R. 7056.1(a).
14 The Court notes that the principal amount of the judgment is $30,000, not $35,000. See Ex. B
attached to Adv. Dkt. 8.
15 See Adv. Dkt. 10, p. 2
6
Case 14-05039 Doc# 13 Filed 06/16/14 Page 6 of 12

nonpayment of the purchase option granted to and exercised by debtor under the
Trust Document.16
The only dispute is whether the Trust is an insider. Because all of the other
elements of §547(b) appear to be met, the $35,000 transfer in July of 2011 – more
than 90 days but less than 1 year before debtor filed his bankruptcy petition –
qualifies as a preference only if the Trust qualifies as an insider.17 The Trust contends
that it is not an insider because it does not meet the definition of a statutory insider
under 11 U.S.C. § 101(31)(A). Even if it is correct, the Trust may qualify as a nonstatutory
insider.18 But that determination depends on the specific facts regarding
the debtor’s relationship with the Trust, a matter still in controversy at the summary
judgment stage.19 Accordingly, the Court concludes that the uncontroverted facts
presented here may establish an avoidable preference claim if the Trust is an insider,
but the disputed issue of insider status cannot be determined on this record.20 The
Trust’s motion for summary judgment as to the preference claim under § 547(b) is
therefore DENIED.
16 This Court also has familiarity with Lenore’s Trust and the purchase option as it conducted a daylong
trial challenging the dischargeability of Paul’s debt to the trust before granting Paul’s Rule
52(c) motion for judgment at the close of the trust’s evidence. This trial took place before Paul
converted his case to chapter 7. See William B. Garcia, as successor trustee of the Revocable Inter
Vivos Trust of Lenore Garcia, u/a/d November 18, 2008 v. Paul A. Garcia, et al., Adv. No. 12-5126,
Dkt. 114 (Bankr. D. Kan., Mar. 12, 2014).
17 See § 547(b)(4)(B).
18 See In re Kunz, 489 F.3d 1072, 1078-79 (describing the two categories of insiders); In re U.S.
Medical, Inc., 531 F.3d 1272, 1278 (10th Cir. 2008) (Non-statutory insider is one where the
relationship between the parties is sufficiently close and transaction is not conducted at arm’s
length.).
19 In re Kunz, supra at 1079 (refusing to determine whether Bank was a non-statutory insider of the
debtor on summary judgment).
20 Because the Trust has not yet filed its answer to the complaint, there may be other defenses that
may be asserted to the preference claim and the Court makes no determination today regarding the
viability of any such defenses.
7
Case 14-05039 Doc# 13 Filed 06/16/14 Page 7 of 12

The Fraudulent Transfer Claims, § 548(a)(1)(A) and (B)(i) and(ii)(I)

 The Trust’s contention for dismissal or summary judgment boils down to this:
Paul’s $35,000 payment to the Trust was in payment of a judgment entered against
Paul in state court for breach of contract on the purchase option he exercised with
Alex for Lenore’s restaurant. Those facts standing alone do not dictate a conclusion
that the transfer was made with intent to hinder, delay or defraud Paul’s creditors or
that he received less than reasonably equivalent value [REV] for the payment. Nor
did Speth plead factual circumstances from which either fraudulent intent or the lack
of REV may be inferred. Under these circumstances, the Trust contends it is entitled
to dismissal for failure to state a claim or for judgment as a matter of law on the
uncontroverted facts. The Court first examines the actual fraud component of § 548
– subsection (a)(1)(A) and assesses whether Speth’s amended complaint states a
plausible claim for relief on its face under Twombly’s and Iqbal’s facial plausibility
standard.21

21 Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009).

22 Rule 8, made applicable in bankruptcy adversary proceedings by Fed. R. Bankr. P. 7008(a),
stresses notice pleading, requiring only “a short and plain statement of the claim showing that the
pleader is entitled to relief.” Rule 9 (made applicable by Fed. R. Bankr. P. 7009), on the other hand,
requires that fraud be pled with particularity: “In alleging fraud . . . a party must state with
particularity the circumstances constituting fraud . . . . Malice, intent, knowledge, and other
conditions of a person’s mind may be alleged generally.”

 The sufficiency of pleading a fraud-based claim is especially difficult to gauge
where Fed. R. Civ. P. 8 and 9 seem to collide.22 The Tenth Circuit discussed the
Twombly standard in Robbins v. Oklahoma:

[Previously], [u]nder this construction of Rule 8(a), a complaint
containing only conclusory allegations could withstand a motion to
dismiss unless its factual impossibility was apparent from the face of
the pleadings – that is, a complaint was immune from dismissal if it left


open the possibility that a fact not alleged in the complaint could render
the complaint sufficient. . . .

 

Under this revised standard [Twombly], as we explained in Ridge at Red
Hawk, L.L.C. v. Schneider:

 

The mere metaphysical possibility that some plaintiff
could prove some set of facts in support of the pleaded
claims is insufficient; the complaint must give the court
reason to believe that this plaintiff has a reasonable
likelihood of mustering factual support for these claims.

 

493 F.3d 1174, 1177 (10th Cir. 2007) (emphasis in original). The burden
is on the plaintiff to frame a “complaint with enough factual matter
(taken as true) to suggest” that he or she is entitled to relief. Twombly,
127 S.Ct. at 1965. “Factual allegations must be enough to raise a right
to relief above the speculative level.” Id. . . .

 

As best we understand it, however, the opinion seeks to find a middle
ground between “heightened fact pleading,” which is expressly rejected,
. . . and allowing complaints that are no more than “labels and
conclusions” or “a formulaic recitation of the elements of a cause of
action,” which the Court stated “will not do.” [citations omitted.].23

23 419 F.3d 1242, 1246-47 (10th Cir. 2008).

 

 Looking at Speth’s amended complaint in light of this Tenth Circuit guidance,
and keeping in mind the confusion stemming from Speth’s stating that his claim is
asserted under § 547, the sum total of the substantive allegations of actual fraud are
that:

7. During the “insider” preference period prior to commencement of this
case, the Debtor transferred to [the Trust], a payment amount of
$35,000.00 (hereinafter the “Transfer”).

 

8. The Transfer was made with the actual intent to hinder, delay or
defraud the Debtor’s existing creditors.

 

* * *

 

10. The Debtor was insolvent when the Transfer was made, or became


insolvent as a result of the Transfer.24
There are no factual circumstances described from which it may be inferred
that the transfer was fraudulently made. We only know the transfer occurred
between 90 days and 1 year before the filing of debtor’s bankruptcy, not when, where,
or how the transfer occurred. He identifies the transfer as a “payment” but does not
identify for what the payment was made. The factual allegations are so sketchy and
incomplete that the amended complaint does not give fair notice of the fraudulent
intent necessary to support the fraudulent transfer claim. The Court would expect to
see factual allegations in the complaint that show one or more of the badges of fraud.
They include: (1) whether transfer was to an insider; (2) whether transfer retained
possession or control of property after transfer; (3) concealment of the transfer; (4)
pending or threatened litigation against debtor at time of transfer; (5) transfer of
substantially all of debtor’s assets; (6) absconding by debtor; (7) removal or
concealment of assets; (8) reasonably equivalent value in exchange for transfer; (9)
debtor’s insolvency at time of the transfer; and (10) proximity in time to incurring
substantial debt.25
At best, Speth alleged in a conclusory fashion that debtor was insolvent at the
time of the transfer and did not receive reasonably equivalent value in return. There
was no specific allegation that the Trust was an insider of the debtor or explain
24 Adv. Dkt. 2-1.
25 See Zubrod v. Kelsey (In re Kelsey), 270 B.R. 776, 782 (10th Cir. BAP 2001) (In deciding whether
transfer of bank account funds to wife was made with actual intent to hinder, delay or defraud
creditors, bankruptcy court may consider circumstantial evidence establishing badges of fraud); In re
Hertzler Halstead Hosp., 334 B.R. 276, 292 (Bankr. D. Kan. 2005) (because the requisite fraudulent
intent is rarely admitted by a debtor, courts look to circumstantial evidence establishing badges of
fraud).
10
Case 14-05039 Doc# 13 Filed 06/16/14 Page 10 of 12

debtor’s relationship to the Trust. At its best, the amended complaint pleads “labels
and conclusions” or “formulaic recitation of the elements of a cause of action” which
Twombly says is not good enough.26 The Court concludes that these allegations “ . . .
are so general that they encompass a wide swath of conduct, much of it innocent,
[that] the plaintiffs ‘have not nudged their claims across the line from conceivable to
plausible.”27 Speth’s purported claim for avoidance of an actually fraudulent transfer
does not state a claim upon which relief may be granted and must be DISMISSED.28
Section 548(a)(1)(B) empowers the trustee to avoid constructively fraudulent
transfers. Here, Speth invokes subsection (a)(1)(B)(i) and (ii) – debtor received less
than REV in exchange for the payment and was insolvent at the time of the transfer
or became insolvent as a result of the transfer. Like the actually fraudulent transfer
allegations, Speth merely recites the language of § 548(a)(1)(B) and does not allege
factual circumstances. But the Trust’s additional statement of material facts places
the transfer in context. Even assuming the § 548(a)(1)(B) claim is sufficiently pled,
the debtor cannot avoid summary judgment on this claim. The uncontroverted facts
establish that the $35,000 transfer was in payment of the judgment granted by the
26 550 U.S. at 555.
27 Robbins v. Oklahoma, 419 F. 3d 1242, 1247. See In re Crescent Oil Co., Inc., 2011 WL 3878377 at
*1 (Bankr. D. Kan. Aug. 31, 2011) (complaints for avoiding fraudulent transfers under § 548(a)(1)(A)
have heightened pleading requirements under Rule 9 and must plead the circumstances of the
alleged fraud to place the defendant on notice of the precise misconduct with which it is charged).
28 Even if the Court treats the Trust’s motion as one for summary judgment, that motion would also
be granted. The additional statements of material fact that place the transfer in context – payment
of a judgment granted in favor of the Trust for debtor’s breach of contract – does not in any fashion
implicate fraudulent misconduct by the debtor. It alleges a transfer of money to a creditor to satisfy
a bona fide legal obligation -- payment of a judgment debt. There was an absence of anything in the
record to show a genuine dispute of a material fact and the record is devoid of fraudulent conduct –
an essential element of a fraudulent transfer claim under § 548(a)(1)(A). See Butler v. Loomer (In re
Loomer), 222 B.R. 618, 623 (Bankr. D. Neb. 1998) (transfers that were simply payments on a bona
fide preexisting loan negates any inference of fraudulent intent)
11
Case 14-05039 Doc# 13 Filed 06/16/14 Page 11 of 12

state court and owed by debtor to the Trust. Section 548(d)(2)(A) defines “value” to
include the satisfaction of an antecedent debt. By paying the judgment, the debtor
received a dollar for dollar reduction of his debt to the Trust and in this case satisfied
the state court judgment. This constitutes reasonably equivalent value for the
transfer.29 Because debtor received REV in exchange for the transfer, it may not be
avoided as constructively fraudulent. The Trust is entitled to summary judgment on
this claim.
Orders
The Trust’s motion to dismiss or for summary judgment on the § 547 preference
claim is DENIED. The Trust’s motion to dismiss or for summary judgment on the §
548 fraudulent transfer claims (actually fraudulent and constructively fraudulent) is
GRANTED. The Trust shall have 14 days to file its answer to the amended complaint
and thereafter, a scheduling conference will be set in this matter.
# # #
29 See Jobin v. McKay (In re M&L Business Mach. Co., Inc.), 84 F.3d 1330, 1342 (10th Cir. 1996)
(debtor received reasonably equivalent value for payments where payments to investor reduced the
investor’s restitution claim); In re Adam Aircraft Ind., Inc., 493 B.R. 834, 845-46 (Bankr. D. Colo.
2013) (payments to former company president that satisfied corporate debtor’s monetary obligations
under separation agreement were supported by reasonably equivalent value in form of dollar-fordollar
reduction of obligations and could not be avoided as constructively fraudulent); In re Wiley,
438 B.R. 331, 334 (Bankr. D. N.M. 2010) (debtor received reasonably equivalent value for loan
payments to Farm Credit because his loan balance was reduced dollar-for-dollar).
12
Case 14-05039 Doc# 13 Filed 06/16/14 Page 12 of 12


13-05204 Nielsen et al v. Pollan (Doc. # 35)

Nielsen et al v. Pollan, 13-05204 (Bankr. D. Kan. Jun. 17, 2014) Doc. # 35

PDFClick here for the pdf document.


 


 

ORDER DESIGNATED FOR ONLINE PUBLICATION ONLY

 

IN THE UNITED STATES BANKRUPTCY COURT

 FOR THE DISTRICT OF KANSAS

IN RE: )

)

MARY DONNA POLLAN, ) Case No. 13-12513

) Chapter 13

Debtor. )

__________________________________________)

)

SHERI NIELSEN )

JACKIE NIELSEN, )

)

Plaintiffs, )

vs. ) Adv. No. 13-5204

)

MARY DONNA POLLAN, )

)

Defendant. )

__________________________________________)

 

ORDER GRANTING IN PART AND DENYING IN PART

DEFENDANT’S RULE 12(b)(6) MOTION TO DISMISS


 Mary Pollan offered to help Sheri Nielsen acquire a more reliable car by
purchasing a Kia Soul in her name and signing the purchase money loan as the sole
borrower so that Sheri could take advantage of the lower interest rate offered by the
dealer. Both the car and the loan would be in Mary’s name, but Sheri would make the
payments and once the loan was repaid and the lien released, Mary would transfer
the vehicle’s title to Sheri. As long as Sheri made the payments, she would enjoy the
exclusive use of the vehicle.1 But, according to Sheri, after Mary convinced Sheri’s
mother, Jackie, to refinance the car loan at the bank Jackie used, Mary refused to
transfer the certificate of title to Sheri so the new bank could perfect its lien. Instead,
Mary got a duplicate key, took the car, sold it, and kept the money.

1 All of these agreements were oral.

 Sheri’s and Jackie’s complaint states an exception to discharge claim based on
common law fraud under 11 U.S.C. § 523(a)(2)(A). They successfully pled that Mary
schemed to get Sheri and Jackie to pay for a car that she intended to keep. Jackie
successfully pled a companion fraud claim that Mary tricked her into paying off
Mary’s purchase money loan. But, while Mary’s refusal to assign the certificate of
title to Sheri is a part of her alleged scheme, that refusal is not sufficient by itself to
support a fraud exception to her discharge that is based solely on KAN. STAT. ANN. §
8-135(c)(7) (2013 Supp.). To that extent, Sheri and Jackie’s complaint fails to state a


claim under Fed. R. Bankr. P. 7012 and Fed. R. Civ. P. 12(b)(6). The balance of Mary’s
motion is denied.2
Jurisdiction
An action to determine the dischargeability of a debt is a core proceeding over
which the bankruptcy court has subject matter jurisdiction and may enter a final
order and judgment.3
Rule 12(b)(6) Standards—Failure to State a Claim
For the Nielsens’ complaint to survive Mary Pollan’s motion to dismiss, the
facts they pled must be sufficient to state a claim for relief excepting from Pollan’s
discharge a debt incurred by fraud under § 523(a)(2)(A) and § 1328(a)(2). I review the
sufficiency of the complaint to do that, not whether plaintiffs will ultimately prevail
on the claims they alleged.4 Plaintiffs must have alleged enough facts to support a
claim that is plausible on its face.5 The plausibility standard is less than a probability
but more than a sheer possibility that plaintiffs are entitled to the relief requested.6
2 The Nielsens appear by their attorney Barry Arbuckle. Mary Pollan appears by her
attorney Carl B. Davis.
3 28 U.S.C. § 157(b)(1) and (b)(2)(I) and § 1334.
4 Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008) (In ruling on a motion to
dismiss the judge must accept all allegations as true and may not dismiss on the basis that
it appears unlikely the allegations can be proven.).
5 Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) (enough facts must be alleged to
nudge the claim across the line from conceivable to plausible).
6 Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
3
Case 13-05204 Doc# 35 Filed 06/16/14 Page 3 of 14

For purposes of this motion, we take the facts pled in the complaint as true.7
Facts
In their complaint, Sheri and Jackie Nielsen allege that in the spring of 2011,
Mary Pollan agreed to help Sheri acquire a more reliable used car.8 They visited a
dealer and were told that, as a lone buyer and borrower, Mary could qualify for a
lower interest rate than Mary and Sheri would be charged if they purchased and
financed the car together. Mary and Sheri agreed to Mary’s “straw purchase” of the
car. Sheri selected a 2010 Kia. Mary advanced the $2,000 down payment and signed
the secured car loan in her name only.9 The car dealer assigned the loan to T.D. Auto
Finance. According to the complaint, Mary and Sheri agreed that Sheri would have
exclusive use of the car so long as she made payments to Mary to repay the down
payment as well as making the monthly car loan payments to T.D. Auto. When both
obligations were paid in full, Mary would assign the certificate of title to Sheri.
Sheri took delivery of the Soul in July of 2011 and began making monthly loan
7 Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007) (In
reviewing the sufficiency of the complaint, the court assumes the truth of the plaintiff’s
well-pleaded factual allegations and views them in the light most favorable to the
plaintiff.); Mobley v. McCormick, 40 F.3d 337, 340 (10th Cir. 1994) (A Rule 12(b)(6) motion
tests the sufficiency of the allegations within the four corners of the complaint after
accepting as true all well-pleaded factual allegations.).
8 The nature of the relationship between Sheri Nielsen and Mary Pollan is not described in
the complaint.
9 None of the car sale, title, or loan documents specifying the details of the transaction are
attached to the complaint.
4
Case 13-05204 Doc# 35 Filed 06/16/14 Page 4 of 14

payments to Mary and T.D. Auto. Sometime in 2012, Sheri repaid the $2,000 down
payment. In early 2012, Sheri became delinquent on the loan payments to T.D. Auto
and voluntarily surrendered the car to Mary for one day, apparently to prevent its
being repossessed. Mary returned the car after Sheri cured the arrearage. After
this, Mary began to urge Sheri to refinance the car loan in her own name immediately
rather than continue with the monthly payments for the remainder of the four year
term. Sheri could not assume the T.D. Auto loan.

In the spring of 2012, Mary approached Sheri’s mother, Jackie Nielsen, and
asked to help refinance the loan in Sheri’s name so that Mary’s liability could be
eliminated. Jackie had other banking business at Citizens Bank of Kansas. She
applied there and, in April, Citizens approved a loan of $18.000 to Sheri and Jackie.
That loan closed on April 30 and the Bank sent the $17,709 payoff amount to T.D.
Auto. Sheri and/or Jackie began making loan payments to Citizens. On May 29, the
Bank received the lien release from T.D. Auto. Then, the Kansas Department of
Revenue issued a clean Kansas title in Mary’s name. She received it on June 5.
Despite repeated requests, Mary refused to assign the title to the Nielsens or to
deliver it to the Bank. She claimed that, while Sheri had repaid the down payment
loan, she still owed Mary an unrelated debt. One day in September of 2012, Mary
dropped the unassigned title off at the Bank and left. When the Bank called her,
asking that she return and sign the title over to the Nielsens, she returned to the


Bank but refused to sign the title. She took it and left, walking out of the Bank
president’s office with it. On or about September 28, 2012, the Bank made demand
on Mary for assignment of the title or repayment of the $17,709 pay-off that the Bank
had funded.

Mary then had the car dealership make a duplicate key to the Kia and on
October 2, 2012, took it from Sheri’s workplace. She sold Sheri’s Soul to Carmax that
very day for $8,000 and kept the proceeds for her use. In state court litigation that
followed, Mary admitted in discovery that she “never actually intended” for Sheri to
be the car’s owner, even if Sheri made all of the car payments. Sheri and Jackie
stopped paying the bank loan in October of 2012 and Citizens sued. Sheri and Jackie
sued Mary in state court. Mary filed this chapter 13 case on September 27, 2013 and
obtained confirmation of her chapter 13 plan on January 10, 2014.

Analysis

While plaintiffs’ complaint does not identify these claims as arising under §
523(a)(2)(A), the fraud exception to discharge, it does request a determination that
Mary’s debt was incurred by common law and statutory fraud and is therefore
excepted from any chapter 13 discharge that Mary might receive under § 1328(a)(2).

Section 1328(a)(2) incorporates the § 523(a)(2) discharge exception by reference. A

 


fair reading of the complaint suggests that plaintiffs seek to invoke § 523(a)(2)(A).10

10 The only other discharge exception incorporated by § 1328(a)(2) that could be in play is §
523(a)(4) – fraud while acting in a fiduciary capacity. I conclude that plaintiffs’ claims are
not asserted under § 523(a)(4) because there is no allegation that Pollan was acting in a
fiduciary capacity in her dealings with the plaintiffs nor any allegations that can be
construed as creating a technical trust.

11 § 523(a)(2)(A) (Emphasis added).

12 Diamond v. Vickery (In re Vickery), 488 B.R. 680, 691 (10th Cir. BAP 2013) (agreeing with
cases decided by the Seventh Circuit Court of Appeals and the Sixth Circuit Bankruptcy
Appellate Panel).

13 Id. at 687; McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (by distinguishing
between a false representation and actual fraud, § 523(a)(2)(A) makes clear that actual
fraud is broader than misrepresentation).

14 Diamond v. Vickery, 488 B.R. at 690; McClellan v. Cantrell, 217 F.3d at 894.

15 Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 222 (10th Cir. BAP 2013).

This subsection excepts from a debtor’s discharge any debt “for money or
property obtained” by “false pretenses, a false representation, or actual fraud.”11
Some courts, including this Circuit’s bankruptcy appellate panel, have held that a
false representation is not a necessary element of actual fraud under § 523(a)(2)(A)
and that actual fraud supplies a separate basis for excepting a debt from discharge
that is independent from false pretenses or false representation.12 These courts say
that Congress’s use of the disjunctive “or” in the statute forces the conclusion that the
three categories of conduct named in (a)(2)(A) are distinct.13 Intent to deceive
distinguishes actual fraud from constructive or implied fraud14 and the tortfeasor’s
intent can be inferred from the factual circumstances.15 A debtor commits actual
fraud when she “intentionally engages in a scheme to deprive or cheat another of


property or a legal right.” 16 The plaintiffs assert that Mary made affirmative
misrepresentations to them upon which they relied to induce them to participate in
the transaction.17 Their complaint can also be read to allege that Mary engaged in
conduct that fostered a false impression, implicating the presence of false pretenses.18
Even though the plaintiffs style their claims as fraud, because they allege an
exception to discharge that is based on §1328(a)(2), and by reference, § 523(a)(2), we
consider whether the complaint states a claim for relief based on any of the three
prongs of § 523(a)(2)(A).
Plaintiffs have pled common law fraud with sufficient
particularity and have stated a claim under § 523(a)(2)(A).
Mary seeks dismissal of Sheri and Jackie’s common law fraud claim because
they have not pled the factual circumstances of the alleged fraud with sufficient
particularity under Fed. R. Civ. P. 9(b) and that this deficiency warrants dismissal of
the claim. She bases this position on the plaintiffs’ alleged failure to plead a particular
misrepresentation by her. But, as noted above, because actual fraud is a basis for
nondischargeability that is distinct from misrepresentation, and because
16 Diamond v. Vickery, 488 B.R. at 690, quoting Mellon Bank, N.A. v. Vitanovich (In re
Vitanovich), 259 B.R. 873, 877 (6th Cir. BAP 2001). See also McClellan v. Cantrell, 217 F.3d
at 893 (quoting Collier on Bankruptcy, actual fraud means any deceit, artifice, trick, or
design involving direct and active operation of the mind, used to circumvent and cheat
another.).
17 See Adv. Dkt. 1, ¶s 4 and 17.
18 See In re Sturgeon, 496 B.R. at 223 (distinguishing a false representation claim and a
false pretense claim under the discharge exception).
8
Case 13-05204 Doc# 35 Filed 06/16/14 Page 8 of 14

demonstrating actual fraud in this context does not require either a showing of
misrepresentation or reliance, the alleged lack of a misrepresentation, even if correct,
does not settle the issue. Instead, the test is whether the plaintiffs allege a scheme,
deceit, artifice, trick, or design intended to cheat another and whether the facts as
alleged are sufficient to state a claim that is plausible on its face. In their complaint,
Sheri and Jackie set out a detailed factual statement that, taken as true, plainly
supports a plausible claim that Mary schemed to get a car at plaintiffs’ expense and
that she carried out that scheme. The complaint contains the “who, what, when,
where, and how” of the alleged fraudulent scheme and specifically alleges Mary’s
fraudulent intent at paragraph 5:

In 2013, in written responses to legal counsel for the plaintiff Sheri
Nielsen, the debtor admitted [that she] never actually intended for
Sheri Nielsen to be the auto’s owner . . . but that debtor would always
be, and remain the vehicle’s owner, even after the vehicle was fully
paid for.19

19 Adv. Dkt. 1. Emphasis added. Fraudulent intent may be shown if debtor enters into a
contract or makes a promise without intending to comply or perform. See In re Schmidt, 70
B.R. 634, 640 (Bankr. N.D. Ind. 1986).

20 The plaintiffs refer to a lawsuit brought by Citizens Bank against them to collect the
loan balance. Adv. Dkt. 1, Complaint, ¶ 28. It is unclear if Pollan is a party to that lawsuit
or whether plaintiffs have brought separate suit against Pollan in state court as result of
this vehicle transaction. The status of the state court suit(s) is not apparent from the record
before this Court.

The written responses referred to by plaintiffs were supplied in response to discovery
in a state court lawsuit.20 This allegation, taken with the further allegations that


after the car had been paid for, Mary not only refused to assign the certificate of title
to Sheri or Jackie, but instead obtained a duplicate key to the vehicle and
“surreptitiously removed the auto from Sheri Nielsen’s employment,” sold it, and kept
the proceeds, could allow a court to infer that she intended to defraud the Nielsens.
Indeed, the disposal of the vehicle followed shortly after the Bank made demand on
Mary for the assigned certificate of title or repayment of the take out loan.

Jackie also sufficiently alleges actual fraud against Mary. Mary approached
Jackie to enlist her aid in getting the take-out loan from Citizens, Jackie’s bank, to
pay off Mary’s loan with T.D. Auto. Mary never revealed that she intended to retain
the car.21 Why would Sheri and Jackie have agreed to this cleverly contrived
transaction or have borrowed in order to pay for the car if they knew that Mary
intended to keep it? Their allegations are detailed, specific, and particular. They state
a plausible claim for actual fraud. Therefore, Pollan’s motion to dismiss the common
law fraud claim should be DENIED.

21 Complaint, ¶s 12-14, 16-18. In paragraph 17, plaintiffs also allege a misrepresentation
by Pollan: “In reliance on debtor’s representation she wanted to be rid of that loan’s liability
[T.D. Auto Finance] and auto, the plaintiffs’ loan [sic] actually closed the Citizens’ loan on
April 30, 2012 . . .”

In addition to actual fraud, the plaintiffs also state a claim for
misrepresentation and false pretenses under the other prongs of § 523(a)(2)(A). As
alleged in the complaint, Sheri relied on Mary’s representation that she [Sheri] would


have exclusive use and ownership of the vehicle by repaying the down payment to
Mary and making the monthly loan payments to T.D. Auto.22 Later, in 2012, the
Nielsens allege their reliance on Mary’s representation that she wanted to rid herself
of liability on the original car loan and the auto, in procuring the take out loan from
Citizens Bank and paying off T.D. Auto.23 Mary’s alleged intent to defraud or deceive
could be inferred from her statement that she never intended to part with ownership
of the vehicle.
Finally, the plaintiffs’ allegations also state a claim for false pretenses under §
523(a)(2)(A). False pretenses differ from false representations in that the former are
implied misrepresentations, conduct, or omissions intended to create and foster a
false impression.24 Here, if not explicitly misrepresented, Mary’s alleged conduct and
statements created the false impression that Sheri would become the title owner of
the Kia upon repayment of Mary’s car loan. Mary never disclosed her secret intent to
retain ownership of the vehicle at any point in the transaction or their dealings,
including when she solicited the Nielsens to pay off her loan early. The Nielsens
clearly were led to believe the car would be theirs. The plaintiffs’ complaint supports
a claim for false pretenses and misrepresentation under § 523(a)(2)(A). Pollan’s
22 Complaint, ¶4.
23 Complaint, ¶ 17.
24 Bank of Cordell v. Sturgeon (In re Sturgeon), 496 B.R. 215, 223 (10th Cir. BAP 2013).
11
Case 13-05204 Doc# 35 Filed 06/16/14 Page 11 of 14

motion to dismiss for failure to state a claim should be DENIED on this additional
basis.

Violation of KAN. STAT. ANN. § 8-135(c)(7) does not constitute
actual fraud.

 Sheri and Jackie’s complaint appears to allege a claim that Mary’s failure to
transfer and assign a certificate of title to the Kia is a separate act of fraud that
would support an exception from discharge under §523(a)(2)(A). They base that part
of their claim on KAN. STAT. ANN. § 8-135(c)(7), a provision in the Kansas vehicle
code that provides:

It shall be unlawful for any person to buy or sell in this state any
vehicle required to be registered, unless, at the time of delivery thereof
or at a time agreed upon by the parties, not to exceed 60 days . . . after
the time of delivery, there shall pass between the parties a certificate
of title with an assignment thereof. The sale of a vehicle required to
be registered under the laws of this state, without assignment of the
certificate of title, is fraudulent and void, unless the parties shall
agree that the certificate of title with assignment thereof shall pass
between them at a time other than the time of delivery, but within 60
days thereof.25

25 KAN. STAT. ANN. § 8-135(c)(7) (2013 Supp.), emphasis added.

26 Without the certificate of title, the lender was prevented from perfecting a security
interest in the vehicle by noting its lien on the certificate of title and could not secure its
loan to Sheri and her mother. Because she never received a properly assigned title, Sheri

The plaintiffs contend that Mary’s failure to assign the title to Sheri after her lender
financed the payoff of Pollan’s loan in late April-early May of 2012 is, by itself, a
sufficient basis to find that Mary committed actual fraud.26 This resulted in Mary


did not become the owner of the vehicle even though she paid for it.

27 Constructive fraud is a breach of a legal duty which, irrespective of moral guilt, the law
declares fraudulent; neither actual dishonesty of purpose or intent to deceive is necessary.
Actual fraud, on the other hand, is an intentional fraud and the intent to deceive is an
essential element thereof. Andres v. Claassen, 238 Kan. 732, 741-42, 714 P.2d 963 (1986).

28 Actual fraud requires proof that (1) a fraud occurred, (2) debtor intended to defraud, and
(3) the fraud gave rise to the debt that is the subject of the discharge dispute. In re
Philopulos, 313 B.R. 271 (Bankr. N.D. Ill. 2004).

29 See In re Hanson, 432 B.R. 758, 772 (Bankr. N.D. Ill. 2010) (Fraud exception under §
523(a)(2)(A) does not reach constructive frauds); In re Alvarez, 13 B.R. 571, 574 (Bankr.
S.D. Fla. 1981) (commission of statutory fraud [sale of unregistered securities by an
unregistered dealer] does not, of itself, constitute actual fraud for purposes of
nondischargeability under § 523(a)(2)(A)); In re Parker, 264 B.R. 685, 699 (10th Cir. BAP
2001), aff’d 313 F.3d 1267 (10th Cir. 2002) (the fraud discharge exception of § 523(a)(2)(A)
means actual or positive fraud, rather than fraud implied by law; it includes those frauds
involving moral turpitude or intentional wrong.); In re Johnson, 477 B.R. 156, 169 (10th Cir.

remaining the owner of record when she took the Kia back from Sheri five months
later and sold it. Even assuming that the statute applies to the transaction between
Mary and the Nielsens, that alone is not enough to support a plausible claim for relief
under the actual fraud prong of § 523(a)(2)(A).

 The Kansas statute voids a sale as “fraudulent” when the title isn’t assigned,
but nothing in it requires a showing that the seller actually intended to defraud the
buyer. If there is any common law fraud involved, it is likely to be constructive fraud
at worst, fraud that requires neither intent nor moral guilt, but can instead be shown
to have occurred as a result of the tortfeasor’s legal duty.27 A violation of § 8-135(c)(7)
is a constructive or implied fraud, but, standing alone, it is not actual fraud28 and
does not support excepting a debt from discharge under the actual fraud prong of
§523(a)(2)(A).29 While Mary’s alleged refusal to assign and transfer the certificate of


BAP 2012) (Fraud implied in law that may arise in the absence of bad faith or immorality is
insufficient for § 523(a)(2)(A).).

title may be more factual support for the Nielsens’ common law fraud claim, it does
not stand alone as a claim upon which relief may be granted here. To that extent,
Pollan’s motion to dismiss the “statutory fraud” claim based solely on KAN. STAT. ANN.
§ 8-135(c)(7) should be GRANTED.

 With the denial of Mary’s motion to dismiss the common law fraud exception
to discharge pled by these plaintiffs, she is granted 14 days from the date of the entry
of this Order to serve and file her answer to the plaintiffs’ complaint. A scheduling
conference in this proceeding will be scheduled shortly thereafter.

 # # #



12-12240 Smith (Doc. # 75)

In Re Smith, 12-12240 (Bankr. D. Kan. May 16, 2014) Doc. # 75

PDFClick here for the pdf document.


SO ORDERED.
SIGNED this 15th day of May, 2014.

 

DESIGNATED FOR ONLINE PUBLICATION ONLY

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS


IN RE:
CLIFTON JAY SMITH,
KATHRYN MARIE SMITH,
Debtors.
)
)
)
)
)
Case No. 12-12240
Chapter 13

____________________________________)

ORDER SUSTAINING DEBTORS’ OBJECTION TO
NATIONSTAR MORTGAGE’S PROOF OF CLAIM
AND FOR FURTHER PROCEEDINGS


Nationstar Mortgage told Clifton and Kathryn Smith that if they made three
trial payments in November and December of 2011 and January of 2012, Nationstar
would modify their home mortgage loan. As the lender requested, the Smiths executed
a payment forbearance agreement with Nationstar and timely made the trial
payments. Nationstar sent them a Loan Modification Agreement that they signed and

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 1 of 15


returned. Then, even though the Smiths had fully complied with Nationstar’s
conditions and timely returned the signed modification agreement, Nationstar refused
to execute it and instead wrote the Smiths two months later to tell them that their loan
“did not meet investor guidelines.”1

When a mortgage creditor offers a conditional home loan modification with
definite terms to borrowers and the borrowers not only satisfy those conditions, but
also accept the loan modification offer, the offer and its acceptance form an enforceable
contract. The mortgage creditor cannot thereafter revoke its offer or “reject” the
borrowers’ acceptance. If the mortgage creditor’s offer is not conditioned upon its
compliance with undisclosed duties to unidentified third parties, its duties to those
third parties cannot excuse its performance of the obligations it undertook to perform,
once its offer has been accepted (unless those obligations are somehow unlawful). Here,
the Smiths did everything they were supposed to, but Nationstar refused to execute the
modification agreement it had offered them because it concluded that its investor,
Federal National Mortgage Association (FNMA), would not permit the modification
because it had recourse to its assignor and could require the assignor to repay the
defaulted obligation.

As Nationstar was bound by the terms of its modification offer, its claim in this
case must be allowed under the terms of the loan as modified. Nationstar’s calculations
are instead based on the terms of the original mortgage note. The debtors’ objection to

1 And that’s all they told them. See Ex. E.

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 2 of 15


Nationstar’s proof of claim should be SUSTAINED.2

Jurisdiction


Objections to claims and confirmation of chapter 13 plans are core proceedings
over which the bankruptcy court has subject matter jurisdiction.3

Facts4

On May 19, 1999, Clifton and Kathryn Smith executed a promissory note to FT
Mortgage Companies, promising to repay $65,951 over thirty years at 7.25% per
annum in equal monthly installments of principal and interest in the amount of
$449.91. They also granted FT a mortgage encumbering their home in Conway Springs,
Kansas, to secure repayment of the note. The note is endorsed in blank, “without
recourse.”5

No later than November of 2009, the Smiths defaulted on their mortgage

2 Dkt. 28. Following an evidentiary hearing held on April 15, 2014, the Courttook this matter under advisement. Debtors appeared in person and by theirattorney Martin J. Peck. Nationstar Mortgage appeared by its counsel Carrie
Mermis. Karin Amyx appeared on behalf of the chapter 13 trustee Laurie B.
Williams.

3 28 U.S.C. § 157(b)(1) and (b)(2)(B) and (L); 28 U.S.C. § 1334.

4 The parties stipulated to the admission of all exhibits. Even though Exhibits1 and 2 contain unexecuted copies of the Payment Forbearance Agreement andLoan Modification Agreement (and related documents), counsel advised the Courtthat there was no dispute that the debtors properly executed all of the necessaryagreements and timely returned them to Nationstar in accordance with thedirections provided by Nationstar (and Nationstar’s witness so testified).

5 See Ex. A.

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 3 of 15


payments.6 At that time, the remaining principal balance due was $53,948.7 The
parties offered no evidence about what occurred in the ensuing two years, but did agree
that, in October of 2011, the Smiths applied to Nationstar Mortgage, by now the
servicer of the loan for First Horizon Home Loans, a division of First Tennessee Bank
National Association, for a loan modification. On October 24, 2011, Rob Bush, a
“foreclosure prevention specialist” at Nationstar e-mailed the Smiths and told them –

You have been approved for a modification that starts in February. Beforethe modification is official, there are 3 months of trial payments that needto be made. The funds need to be in by the 1st of the month so thepayments need to be made before the 31st of each month so the funds willbe in house on the 1st. For example: the first trial payment is dueNovember 1st, so the payment needs to be made on or before the 31st ofOctober by certified funds, either by Western Union, Moneygram ormoney order. If you have any questions please call me directly.8

Attached to the e-mail were two documents, a cover letter and a forbearance
agreement. The cover letter sets out the due dates and amounts of the requisite three
trial modification payments (in lieu of debtors’ normal mortgage payment) and states
unequivocally that “[a]fter all trial period payments are timely made, your mortgage
will be permanently modified . . . .”9 The Payment Forbearance Agreement that was
attached to this e-mail also states at paragraph 3.C. that during the “deferral period”
(while the trial payments are being made), the lender will review the loan and

6 See Ex. D, p. 10.
7 Id.
8 See Ex. 1.
9 Id.


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Case 12-12240 Doc# 75 Filed 05/15/14 Page 4 of 15


determine whether “additional default resolution assistance” will be offered, including
as a possibility that “Lender will offer to modify my Loan.”10 The Forbearance
Agreement also provides that, during the trial period, Nationstar agreed to forbear
further enforcement proceedings in connection with the Smiths’ loan.

To be sure, the Forbearance Agreement left Nationstar several “outs.”
Paragraph 3.C. contemplates the possibility that the lender might, upon review,
decline to modify the loan, offer some other form of assistance, or simply proceed to
foreclose. Paragraph 3.D. states “I understand that the [Forbearance] Agreement is not
a forgiveness of payment on my Loan or a modification of the Loan Documents” and it
further states that the lender is not “obligated or bound” to modify the loan.11 Nothing
in the Payment Forbearance Agreement or the correspondence mentioned above refers
to a need to meet “investor guidelines” as a condition precedent to modification.12

After they executed and returned the Forbearance Agreement, the Smiths made
the three trial payments on time and, on January 18, 2012, Rob Bush sent them a Loan
Modification Agreement, an Agreement to Maintain Escrow Account, and a Letter of

10 Id.

11 Id.

12 Paragraph 3.C. of the Forbearance Agreement described five possiblealternatives of default resolution assistance that Nationstar could offer. See Ex. 1,

p. 5. The Court acknowledges that the fourth alternative – to offer some form ofpayment assistance or alternative to foreclosure on the lender’s terms in ¶ 3.C.(4)–
was subject to the further approval of the investors or insurers on the loan, butconcludes, in the absence of any contrary contention by Nationstar, that it offered
the third alternative – to modify the Smiths’ loan – under ¶ 3.C.(3).
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Acknowledgment, all attached to an e-mail.13 The subject line of the e-mail read “Please
send docs back signed notarized [sic] by 1/24/12 - thank you.” The Loan Modification
Agreement dated January 18, 2012 provided for the repayment of the outstanding
balance of $69,319.84 at a reduced interest rate of 3.75% per annum, amortized from
February 1, 2012, and payable in 360 equal monthly principal and interest
installments of $321.02 commencing on March 1. The Smiths signed the Loan
Modification Agreement before a notary public and returned it to Nationstar, along
with the other two documents.

Then, on March 19, 2012, Nationstar wrote them stating that they did not meet
the loss mitigation guidelines because “Investor Guidelines Not Met.”14 There was no
further explanation. The Smiths did everything they were supposed to, but Nationstar
refused to execute the modification agreement it had offered them because it concluded
that its investor, Federal National Mortgage Association (FNMA), would not permit
the modification. At trial, Nationstar’s witness, Mr. Hyne, testified that the Smiths’
loan was ineligible for loss mitigation because First Horizon had assigned it to FNMA
“with recourse,” meaning that FNMA could require First Horizon to repay FNMA’s
investment.15 Because of that, Mr. Hyne said, the Smiths’ loan file was “processed in
error” and the loan file subsequently flagged for “no mitigation.” Neither side offered

13 See Ex. 2.
14 Ex. E.
15 The Court cannot square this testimony with the non-recourse


endorsement stamped on the face of the original note.

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 6 of 15


evidence about the extent of FNMA’s investment or the details of the “recourse”
agreement.

Mr. Hyne also testified that after Nationstar “withdrew” its offer to modify, it
pursued attempting another form of modification through the Federal Housing
Administration that would have allowed Nationstar to file a claim with the
Government for payment of the Smith’s arrearage. Unfortunately, by the time
Nationstar concluded that the Smiths were ineligible for the original modification, they
were also ineligible for the FHA relief because that only covers a 12-month deficiency
and the Smiths were then behind by more than a year. According to Hyne, the Smiths
had no available relief.

But in April of 2012, the Smiths reapplied for modification and, notwithstanding
their file having been flagged by the servicer, received another three-month trial period
on April 30, 2012.16 They executed and returned another forbearance agreement on
May 16, 2012, but did not successfully complete the three-month trial.17

The Smiths filed this chapter 13 case on August 15, 2012, disclosing on their
Statement of Financial Affairs that First Horizons had commenced a foreclosure action
in 2012, obtained a judgment, and scheduled a sheriff’s sale. In the chapter 13 plan

16 Ex. C. The April 30, 2012 cover letter signed by Foreclosure PreventionSpecialist Kim Graham contained identical language to the first trial period coverletter sent to the Smiths: “After all trial period payments are timely made, yourmortgage will be permanently modified.”

17 Likewise, the new Payment Forbearance Agreement contained virtuallyidentical terms as the 2011 Forbearance Agreement. Ex. C, ¶s 3.C. and 3.D.

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 7 of 15


they filed with the petition, the Smiths proposed to pay $1,056 per month over 36
months.18 In paragraph 9 of the plan, they provided for payment of the First Horizon
mortgage debt through the trustee in the amount of $69,654.57 with an arrearage of
$3,888. Nationstar objected to confirmation contending that debtors understated the
arrearage and filed a proof of claim in the amount of $73,212.17, including an
arrearage of $23,993.14 on the date of the petition.19 The debtors objected to
Nationstar’s proof of claim.20

For their objection to Nationstar’s claim, the Smiths allege that they should only
be liable for payments in arrears that came due after they made their last trial
payment in January of 2012 and executed the Loan Modification Agreement.21 Had
Nationstar honored its offer to modify their loan, that agreement would’ve taken effect
on February 1, 2012 and their arrearage would only include missed payments from and
after March 1 – some 6 months. Their prior arrearage was added back into the
principal amount of the modified obligation and reamortized. Nationstar argues that
its rejected modification is a dead letter that doesn’t affect the Smiths’ long-term
arrearage. The Chapter 13 Trustee advised that the present plan cannot be confirmed

18 Dkt. 8.

19 Proof of Claim 4-1.

20 Dkt. 28.

21 In their objection, the debtors also initially challenged Nationstar’sstanding as the real party in interest to enforce the mortgage loan but advised attrial that Nationstar’s standing was no longer an issue in the case. The Court
deems this issue abandoned or waived. Dkt. 28.

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 8 of 15


because the plan payment debtors propose does not cure this large arrearage,
rendering the plan unfeasible. She takes no position on the debtors’ objection to
Nationstar’s claim.

Analysis


To prevail on their objection to Nationstar’s claim, the debtors had the burden
of meeting the presumption of its validity that the Bankruptcy Code and Rules
provide.22 They met the presumption by presenting evidence that they made the
requisite three trial payments in November and December, 2011 and January 2012,
that Nationstar offered to them a loan modification, and that they accepted the offer
by returning the signed Loan Modification Agreement before Nationstar “withdrew”
the offer.23 The burden of persuasion then shifted to Nationstar to prove its claim by
a preponderance of the evidence. Whether the parties’ correspondence, the executed
forbearance agreement, and the debtors’ execution of the proffered Loan Modification
Agreement separately or together amount to an enforceable contract is a matter of
state law as is the determination of the extent to which Nationstar’s claim should be
allowed.24

The Forbearance Agreement states that it is governed by Texas law even though

22 See 11 U.S.C. § 502(a) and Fed. R. Bankr. P. 3001(f).

23 At the hearing, counsel stipulated that the debtors executed the LoanModification Agreement and that Nationstar received it.

24 See 11 U.S.C. § 502(b)(1) (Claim allowed except to extent unenforceableunder applicable law).

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Case 12-12240 Doc# 75 Filed 05/15/14 Page 9 of 15


it affects a note that is secured by Kansas real property.25 The Loan Modification

Agreement, Agreement to Maintain Escrow Account, and Letter of Acknowledgment

were all accepted and executed by the debtors in Kansas. None of them contains a

choice of law provision. In general, federal courts apply the choice of law principles

employed by the courts of the forum state.26 Kansas courts generally apply the law the

parties have chosen unless honoring that choice would offend public policy.27 While

Texas law specifically applies to interpreting the Forbearance Agreement, its legal

effect is not in dispute here. The Loan Modification Agreement involves the same note

secured by the same Kansas property and does not contain a choice of law clause.28

25 Ex. 1, ¶ 3.J.

26 Dang v. UNUM Life Ins. Co. of America, 175 F.3d 1186, 1190 (10th Cir.
1999); In re Patterson, 375 B.R. 652 (Bankr. D. Kan. 2007) (While dischargeabilityof debt is a bankruptcy issue, whether debt was owed was a state law issuerequiring Kansas bankruptcy court to apply Kansas choice of law principles.).

27 See Davis v. Miller, 269 Kan. 732, 739, 7 P.3d 1223 (2000) (parties’ choice oflaw provision incorporating Kansas Uniform Premarital Agreement Act inpostmarital settlement agreement was not contrary to public policy and thereforeenforceable). See also Restatement (Second) of Conflict of Laws, § 187 (1969) (Lawof the state chosen by the parties to govern their contractual rights is an exceptionto general conflict of law principle that law of the state where land is locatedapplies); Mark Twain Kansas City Bank v. Cates, 248 Kan. 700, 705-07, 810 P.2d
1154 (1991) (applying Missouri choice of law provision to a mortgage coveringKansas property and executed in Missouri); In re Hildyard, 2014 WL 222113 at *4-5
(Bankr. D. Kan. Jan. 17, 2014) (applying Kansas choice of law provision in loanagreements and notes executed in Kansas to Colorado property encumbered by deedof trust).

28 Except as modified by the Loan Modification Agreement, the terms of theoriginal note and mortgage remain in full force and effect. Ex. 2, p. 4, ¶ 5.(b). Theunderlying Note contains no choice of law provision and is prepared on a FHAKansas fixed rate note form. Ex. A. The mortgage is a FHA Kansas Mortgage formand provides that it is governed by the law of the state where the property is located

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In the absence of a choice of law provision in the Loan Modification Agreement,

Kansas choice of law principles must be applied to determine which substantive state

law should apply.29 The Kansas courts have not adopted the Restatement (Second) of

Conflict of Laws which utilizes the “significant relationship” test.30 Instead, they follow

the first Restatement’s lex loci contractus rule – the law of the state where the contract

is made.31 Under either Restatement’s rule and on these facts, I conclude that Kansas

law governs the Loan Modification Agreement in question. Kansas is the place of

contracting.32 The first Restatement provides that the state from which the acceptance

-Kansas. Ex. B, ¶ 14.
29 Clements v. Emery Worldwide Airlines, Inc., 44 F. Supp. 2d 1141, 1146 (D.
Kan. 1999) (Case brought in Kansas was governed by Kansas choice of laws).

30 Id.; Layne Christensen Co. v. Zurich Canada, 30 Kan. App. 2d 128, 38 P.3d757 (2002) (Kansas appellate courts follow the Restatement (First) of Conflict ofLaws when addressing choice of law issues); Central Power Systems & Services, Inc.

v. Universal Underwriters Ins. Co., __ Kan. App. 2d __, 319 P.3d 562 (2014) (Indeciding which state’s law to apply to a contract dispute, Kansas courts apply theRestatement (First) of Conflict of Laws). See also Restatement (Second) of Conflictof Laws, § 188 (1971).
31 Restatement (First) of Conflict of Laws, § 332 (1934) (law governingvalidity of contract); Wilkinson v. Shoney’s, Inc., 269 Kan. 194, 210, 4 P.3d 1149
(2000) (citing Restatement (First) of Contracts, § 74 (1932) – a contract is made
when the last act necessary for its formation occurs and at the place where thatfinal act is done); Central Power Systems & Services, Inc., supra (applying law ofplace of contract formation and for choice of law purposes that is the place in whichthe last act required for formation occurs); Foundation Property Investments, LLC v.
CTP, LLC, 37 Kan. App. 2d 890, 894-95, 159 P.3d 1042 (2007) (Kansas applies the
lex loci contractus doctrine for contractual disputes, which include promissory notesand mortgages).

32 Restatement (First) of Conflict of Laws, § 311 (place of contracting) and §
326 (1934) (place of contracting when acceptance sent from one state to another).

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is sent is the locus of the contract. 33 The Smiths accepted the loan modification offer

 when they signed and returned the agreement – the last act necessary to the making

of a binding contract – in Kansas.34 Thus the doctrine of lex loci contractus doctrine

indicates that Kansas law governs here. Kansas also has the most significant

relationship to the transaction and parties.35 The Smiths and their property subject to

the mortgage are located in Kansas and the Smiths executed the agreement in Kansas.

The ultimate issue here is whether the debtors’ signing the Loan Modification

Agreement operated as an acceptance of an offer that formed a binding contract and

Kansas law applies in making that determination.

Kansas courts follow the rule stated in the Restatement (Second) of Contracts

that an offer, once accepted, cannot be revoked by the offeror.36 An offeree’s exercise of

33 Restatement (First) of Conflict of Laws, § 326(b) (1934) (place ofcontracting when acceptance sent from one state to another).

34 See Clements, 44 F. Supp. 2d at 1146 (applying lex loci contractus to choice
of law issue and applying substantive law of Kansas since that was the place ofcontract formation.); Layne Christensen Co., 30 Kan. App. 2d at 144 (contract ismade where the last act necessary for its formation occurs); Wilkinson, 269 Kan. at

210.
35 See Restatement (Second) of Conflict of Laws, § 188 (1971).

36 Restatement (Second) of Contract § 36(1) provides that an offeree’s powerof acceptance may be terminated inter alia by revocation by the offeror. The powerof acceptance is terminated when the offeree receives the offeror’s manifestation ofan intention not to enter into the proposed contract. Restatement (Second) ofContracts § 42 (1981). See Berryman v. Kmoch, 221 Kan. 304, 310, 559 P.2d 790
(1977) (an offer to sell may be revoked before the offeree exercises the power ofcreating a contract by acceptance of the offer); Talbott v. Nibert, 167 Kan. 138, 144,
147, 206 P.2d 131 (1949) (an option to purchase property becomes an enforceablecontract after acceptance and before the offer is withdrawn); Nieschburg v. Nothern,

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the power of acceptance creates a contract.37 As the comment to Restatement (Second)

of Contracts states, “[o]nce the offeree has exercised his power to create a contract by

accepting the offer, a purported revocation is ineffective as such.”38 So, after the Smiths

successfully made their three trial payments as the Forbearance Agreement required,

Nationstar sent them a proposed Loan Modification Agreement with all pertinent

terms defined. The agreement came under cover of an e-mail that required the

document to be signed, notarized, and returned by January 24, 2012. The Smiths

complied. Nevertheless, Nationstar argues that it withdrew its offer to modify the

Smiths’ mortgage loan. The Smiths executed and returned (i.e. accepted) the Loan

Modification Agreement in a manner consistent with the instructions they were given

by Nationstar’s representative and prior to their receiving Nationstar’s March 19

101 Kan. 110, 165 P. 857 (1917)(mortgagee’s offer to assign a certificate of purchaseissued under a foreclosure sale may be revoked until it is accepted; if the mortgagoraccepts the offer and gives notice of acceptance with the time required, the acceptedoffer becomes a binding contract.).

37 Restatement (Second) of Contracts § 35 (1981); Nungesser v. Bryant, 283
Kan. 550, 565-66, 153 P.3d 1277 (2007) (an unconditional and positive acceptance isrequired to form a contract); Wachter Management Co. v. Dexter & Chaney, Inc.,
282 Kan. 365, 370, 144 P.3d 747 (2006) (A UCC article 2 contract was formed whenbuyer accepted vendor’s offer to sell it software by signing written proposal issuedby vendor); Steele v. Harrison, 220 Kan. 422, 428, 552 P.2d 957 (1976) (Acommunicated offer creates a power to accept the offer that is made and only thatoffer.); Wallerius v. Hare, 200 Kan. 578, 582, 438 P.2d 65 (1968) (A contract isformed upon a positive and unequivocal acceptance of the offer.); Prince Enterprises,
Inc. v. Griffith Oil Co., Inc., 8 Kan. App. 2d 644, 649, 664 P.2d 877 (1983) (Onemethod by which intention to contract may be demonstrated is by the process ofoffer and acceptance).

38 Restatement (Second) of Contracts § 42, Comment c (1981).

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rejection letter. Once they signed and returned the agreement, it was too late for
Nationstar to withdraw or revoke its offer two months later.

Everything that passed between Nationstar and the Smiths before the March
19, 2012 rejection letter indicated that Nationstar intended to modify if the Smiths
performed. Nothing suggested the existence of the hidden condition that the
modification meet “investor guidelines.” Remember that Nationstar had already
assured the Smiths in the October 24, 2011 cover letter that “your mortgage will be
permanently modified” if all trial period payments were timely made. After the Smiths
made the payments, Nationstar offered them a detailed proposed modification
agreement that they signed and returned. Then Nationstar attempted to terminate the
Smiths’ power to accept the offer by revoking it, claiming as an excuse its alleged
obligations to a third party, FNMA. While a contracting party’s failure to perform may
be justified by impracticability or frustration of purpose, Nationstar did not assert
either theory at trial and did not present any evidence to support that conclusion
here.39 All we know is that Nationstar belatedly concluded it could not modify this note
and remain within FNMA’s “investor guidelines.” We do not know what those are
because there is no evidence concerning the terms of Nationstar’s contractual
obligations, if any, to FNMA. As the party with the burden of persuasion, Nationstar
had the burden to produce that information, but failed to do so.

Because the Smiths accepted Nationstar’s offer to modify their loan before

39 See Restatement (Second) Contracts, § 261 (Supervening impracticabilitydischarges obligation) and § 265 (Supervening frustration discharges obligation).

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Nationstar purported to revoke the offer, and because Nationstar has not substantially
justified its refusal to honor the modification, Nationstar is bound by the provisions of
the Loan Modification Agreement, at least for the purpose of allowing its claim here.
The Smiths’ objection to that claim is therefore SUSTAINED, but because the record
is insufficient for me to determine the extent of their arrearage, if any, under the
mortgage as now modified, the parties are granted 21 days in which to submit a
stipulation as to the arrearage amount to be cured under the plan. If no stipulation is
filed by June 6, 2014, the Clerk will set the matter for an evidentiary hearing. A
hearing on Nationstar’s objection to confirmation is continued until Nationstar’s claim
can be allowed.

# # #

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