Newrez LLC D/B/A Shellpoint Mortgage Servicing v. Mary Yvonne Emerson ( 2022 )


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  •                 RENDERED: DECEMBER 2, 2022; 10:00 A.M.
    TO BE PUBLISHED
    Commonwealth of Kentucky
    Court of Appeals
    NO. 2022-CA-0051-MR
    NEWREZ LLC D/B/A SHELLPOINT
    MORTGAGE SERVICING                                                 APPELLANT
    APPEAL FROM RUSSELL CIRCUIT COURT
    v.             HONORABLE VERNON MINIARD, JR., JUDGE
    ACTION NO. 13-CI-00132
    MARY YVONNE EMERSON                                                  APPELLEE
    OPINION
    REVERSING AND REMANDING
    ** ** ** ** **
    BEFORE: CETRULO, COMBS, AND GOODWINE, JUDGES.
    GOODWINE, JUDGE: NewRez LLC d/b/a Shellpoint Mortgage Servicing
    (“NewRez”) appeals from the order dismissing its foreclosure action against Mary
    Yvonne Emerson (“Mary”). NewRez argues Mary and her husband, Donnie E.
    Emerson’s, (“Donnie”) discharge of their debts in her Chapter 7 bankruptcy case
    did not preclude NewRez from obtaining an in-rem foreclosure on its unrecorded
    mortgage lien. After careful review, we reverse and remand.
    On May 28, 2003, Mary borrowed $194,150.00 from GMAC
    Mortgage Corporation (“GMAC”) for the purchase of a home in Russell County.
    The mortgage loan was evidenced by a promissory note signed by Mary, and it was
    secured by a mortgage on the property signed by Mary and Donnie. The mortgage
    was never recorded in the Russell County Clerk’s office.
    In 2011, Mary defaulted on the note and mortgage by failing to make
    the required payments. On February 22, 2013, GMAC filed the underlying
    foreclosure action against Mary, individually and as trustee of the Emerson family
    trust, and Donnie. GMAC also named two other creditors as defendants, United
    Citizens Bank of Southern Kentucky, Inc. (“United Citizens”) and Mortgage
    Electronic Registration Systems, Inc. (“MERS”). On March 29, 2013, United
    Citizens filed an answer, counterclaim, and crossclaim. The other parties did not
    initially file responsive pleadings because the case was stayed pending the
    Emersons’ bankruptcy case.
    On March 13, 2013, the Emersons filed a Chapter 7 bankruptcy
    petition in the United States Bankruptcy Court for the Western District of
    Kentucky under Case No. 13-10266. In the bankruptcy Schedule F, GMAC was
    listed as a creditor holding an unsecured, nonpriority claim. Record (“R.”) at 567.
    Mary did not reaffirm the debt owed to GMAC, redeem the property, or surrender
    it. Additionally, neither the Emersons nor the bankruptcy trustee moved to avoid
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    the mortgage. On July 13, 2013, an order of discharge was entered in the
    bankruptcy case.
    On April 12, 2013, the circuit court foreclosure case was
    automatically stayed during the bankruptcy proceedings. Although the bankruptcy
    court entered the order of discharge in 2013, GMAC did not file a notice to
    terminate the automatic stay until November 15, 2015.
    For the next few years, the parties engaged in motion practice. In
    May 2016, MERS transferred its interest to Nationstar Mortgage LLC
    (“Nationstar”) and Nationstar was substituted as a defendant. Nationstar then filed
    an answer, counterclaim, and crossclaim, and the other parties responded.
    In 2017, the Emersons moved for summary judgment against GMAC.
    The circuit court initially granted the Emersons’ motion for summary judgment
    against GMAC, but the court later entered an agreed order vacating the order. The
    Emersons’ motion for summary judgment was the first pleading they filed in
    response to GMAC’s 2013 complaint.
    On January 30, 2018, the circuit court entered an order substituting
    Ditech Financial LLC FKA Green Tree Servicing LLC as the plaintiff after GMAC
    assigned the mortgage to Ditech.
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    On August 28, 2018, the circuit court entered an agreed order
    dismissing United Citizens because its claim was satisfied and its lien on the
    property released.
    On September 19, 2018, Ditech moved for summary judgment and
    order of sale, requesting an in-rem judgment against Mary and Nationstar.
    Nationstar opposed the motion arguing Ditech’s mortgage was unrecorded, so it
    did not have actual notice of the lien. The Emersons also opposed the motion. A
    hearing on this motion was continued indefinitely.
    On January 28, 2020, the circuit court entered an agreed order
    dismissing all claims and counterclaims between Ditech and Nationstar. The same
    day, the circuit court entered an agreed order dismissing Nationstar’s crossclaims
    against the Emersons.
    On March 19, 2020, the Emersons filed a motion requesting the
    circuit court order Ditech to provide their counsel the original promissory note and
    mortgage.
    Ditech transferred the loan to NewRez, and it began servicing the
    mortgage loan on December 1, 2019. On August 4, 2020, NewRez filed a motion
    to substitute as plaintiff, which was granted by order entered August 11, 2020.
    For nearly a year, the circuit court case was effectively stayed by the
    United States Department of Housing and Urban Development’s foreclosure and
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    eviction moratorium for borrowers with FHA-insured single-family mortgages
    covered under the Coronavirus Aid, Relief, and Economic Security (“CARES”)
    Act.
    On September 24, 2021, NewRez filed a motion for summary
    judgment on its foreclosure claim. As Mary’s personal liability was discharged in
    bankruptcy, NewRez only sought an in-rem foreclosure judgment and order of
    sale.
    On October 11, 2021, the Emersons filed a response and motion to
    dismiss. First, the Emersons argued NewRez only provided a copy of the note and
    mortgage and failed to provide original documents for inspection. Second, they
    argued NewRez was barred from obtaining judgment because the mortgage was
    not recorded and Mary’s liability on the debt securing the mortgage was
    discharged in bankruptcy.
    During a hearing on October 12, 2021, the circuit court inspected the
    original note produced by NewRez’s counsel. R. at 677. At the conclusion of the
    hearing, the circuit court granted the parties time to file supplemental briefing and
    took the matter under advisement.
    On December 20, 2021, the circuit court entered an order denying
    NewRez’s motion for summary judgment and granted the Emersons’ motion to
    dismiss. The court found NewRez was not entitled to foreclose because “in that
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    the debt was discharged by the United States Bankruptcy Court, . . . there is no
    indebtedness owed by the [Emersons] to [NewRez] to be secured by a mortgage.”
    R. at 695. This appeal followed.
    On appeal, NewRez argues the circuit court erred in failing to enter a
    judgment in its favor because the discharge of the Emersons’ personal liability in
    bankruptcy did not affect its ability to obtain an in-rem judgment and order of sale
    of the property in state court. Neither summary judgment nor an order dismissing
    requires any finding of fact, so we review de novo. Keaton v. G.C. Williams
    Funeral Home, Inc., 
    436 S.W.3d 538
    , 542 (Ky. App. 2013).
    The circuit court erred in finding the bankruptcy court’s discharge of
    the Emersons’ personal liability barred NewRez from foreclosing on the property.
    Whether a creditor may collect debts in personam under a promissory note or in-
    rem under a mortgage are matters handled separately. Under federal law,
    bankruptcy courts have subject matter jurisdiction to “enjoin[] attempts to collect
    discharged debts ‘as a personal liability of the debtor.’” In re Isaacs, 
    895 F.3d 904
    , 913 (6th Cir. 2018) (quoting 11 U.S.C.1 § 524(a)). State courts have subject
    matter jurisdiction over in-rem foreclosure actions because a debtor’s personal
    liability is not at stake. Id. Thus, once a bankruptcy case is closed, a creditor is
    1
    United States Code.
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    “free to record the mortgage and pursue in rem foreclosure of the subject property”
    in state court. In re Williams, 
    490 B.R. 236
    , 239 (Bankr. W.D. Ky. 2013).
    In Kentucky, an unrecorded mortgage is not void
    but is valid between the parties to such transaction, but
    not to purchasers who had no notice thereof. The failure
    to record the mortgage only affects the priority of
    creditor, claims against the property.
    In the case at bar, the unrecorded mortgage was
    not avoided in Debtor’s First Chapter 7 filing. The
    Supreme Court has stated that liens that are not otherwise
    avoided for the benefit of the estate or a debtor under
    Sections 522, 544, 545, 547, 548, 549 or 724(a), pass
    through bankruptcy unaffected. . . . The Chapter 7
    discharge only enjoins enforcement of the personal
    liability of the debtor on the mortgaged debt. Discharge
    does not constitute payment or satisfaction of that debt.
    The holder of the unavoided mortgage retains a
    liquidation preference in the proceeds from the sale of the
    mortgaged property.
    In the case at bar, the Trustee in Debtor’s First
    Chapter 7 Case could have avoided the unrecorded
    contractual lien under 
    11 U.S.C. § 544
    (a)(3) on Debtor’s
    property, but no such action was undertaken. The Bank’s
    right to foreclose on the mortgage in rem passed through
    and survived the bankruptcy. Upon abandonment of the
    property by the Trustee to Debtor, title to the real estate
    revested in the Debtor, subject to Debtor’s contractual
    mortgage lien granted to the Bank.
    
    Id.
     (citations omitted).
    Here, NewRez does not contest the bankruptcy court’s discharge of
    the Emersons’ personal liability on the promissory note. Instead, NewRez sought
    to enforce its right to foreclose on the mortgage and obtain an order for the sale of
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    the property. Mary did not reaffirm or redeem the mortgage loan in Chapter 7
    bankruptcy. Instead, she obtained a discharge of her personal liability under the
    note. Nor did the bankruptcy trustee move to avoid the mortgage in bankruptcy.
    Thus, NewRez’s right to foreclose on the property passed through and survived
    bankruptcy. It follows, therefore, that the Emersons, if in default, are not entitled
    to retain the property.
    Although NewRez and its predecessors failed to record the mortgage,
    the fact that its lien is unperfected only affects priority. The circuit court had
    subject matter jurisdiction to determine the validity of the mortgage lien and
    whether the Emersons were in default and, if so, to enter a judgment and order of
    sale. Thus, the circuit court erred in finding the bankruptcy court’s order
    (discharging the Emersons’ personal liability on the promissory note) and
    NewRez’s failure to record the mortgage prevented NewRez from foreclosing on
    the property.
    On remand, the circuit court must make findings as to the validity of
    the note and mortgage and whether the Emersons defaulted on the note. In re
    Isaacs, 895 F.3d at 914. The circuit court need not “make a finding as to whether
    the mortgage [was] perfected.” Id. If NewRez has a valid lien, regardless of
    perfection, and the Emersons are in default, then NewRez is entitled to a judgment
    and order of sale of the property.
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    Though NewRez’s mortgage is unrecorded, it may record it at any
    time. Even if NewRez never records the mortgage, this only affects the priority of
    its lien on the property.
    For the foregoing reasons, we reverse the judgment of the Russell
    Circuit Court and remand. We instruct the circuit court to proceed with in-rem
    foreclosure proceedings.
    ALL CONCUR.
    BRIEFS FOR APPELLANT:                   BRIEF FOR APPELLEE:
    Shannon O’Connell Egan                  Joel R. Smith
    Nathan H. Blaske                        Jamestown, Kentucky
    Cincinnati, Ohio
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Document Info

Docket Number: 2022 CA 000051

Filed Date: 12/1/2022

Precedential Status: Precedential

Modified Date: 12/9/2022