Opinion
Case No. 01-41133-7, Adv. No. 03-4100.
November 29, 2004
MEMORANDUM OF OPINION
In this adversary proceeding the Trustee in Bankruptcy and a bank both assert that Cynthia Jackson ("Ms. Jackson") defrauded them. The dispute centers around $50,000 placed in a segregated account following the sale of a house. Since all of the parties bear some of the blame for the current problems, all must share in the loss.
This court has jurisdiction in this matter under 28 U.S.C. § 1334(a), 28 U.S.C. § 157(a), and United States District Court for the Southern District of Texas General Order 2002-2 referring all bankruptcy cases and proceedings to the Bankruptcy Judges of this district. This is a core proceeding under 28 U.S.C. § 157(b)(A), (H), (K), and (O).
FACTS
Except as noted in this opinion, the court adopts the parties' Stipulations (Exhibit 62) and will recite only such facts as are necessary to a decision in this matter. The exhibits were consecutively numbered and all were admitted by agreement of the parties. The only witness presented at trial was the Trustee. Exhibit 32 is the deposition of Ms. Jackson taken June 4, 2004 (the "Jackson Deposition of June 2004"). Exhibit 33 is the deposition of Ms. Jackson taken September 8, 2004 (the "Jackson Deposition of September 2004"). Exhibit 34 is the deposition of Angela Cooper, an employee of Wells Fargo (the "Cooper Deposition"). The court read all three depositions. Ms. Cooper is in charge of a section which handles home equity loans that are involved in bankruptcy proceedings. Consequently, Ms. Cooper had no direct or personal knowledge of the making of the loan in question. Her responses about the loan were all based on the loan records. There is relatively little dispute about the facts of this case. The dispute centers around the result mandated by those facts.
On October 11, 2001, Joseph C. Coppola (the "Debtor") filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the captioned case. Ronald J. Sommers is the duly qualified and acting trustee (the "Trustee"). Prior to filing bankruptcy, the Debtor transferred $164,605.56 to Ms. Jackson which she used as the down payment on a house in Lake Placid, New York (the "New York House"). The Debtor and Ms. Jackson resided in that house from May 2001 until it was sold in October 2003. Ms. Jackson's deposition reveal that she and the Debtor are not married (Jackson Deposition of June 2004, page 6) but they still live together. She is the principal source of income for the household because he works as a bartender which is seasonal work (Jackson Deposition of June 2004, page 44). In his schedules the Debtor stated he was an unemployed physician living off of early withdrawals from his retirement plans. He has not practiced medicine in New York (Jackson Deposition of June 2004, page 83).
In connection with the purchase of the New York House, Ms. Jackson secured a loan from Wells Fargo Mortgage, Inc. dated April 21, 2001, which was secured by a lien on the New York House. That mortgage was paid off when the property was sold in October 2003.
On December 18, 2001, the Trustee filed a "Complaint to Avoid and Recover Fraudulent Transfers; For Preliminary and Permanent Injunction and for Constructive Trust" against Ms. Jackson in adversary proceeding number 01-3596 (the "First Jackson Adversary"). On the next day the Trustee filed in Essex County, New York, where the New York House is located, a "Notice of Pendency (Lis Pendens) Pursuant to N.Y.C.P.L.R. § 6501" (the "Lis Pendens") (Exhibit 35). The entire controversy in this adversary proceeding centers around the effect or non-effect of the Lis Pendens. The Lis Pendens recites the Trustee's suit against Ms. Jackson, gives the basis for it and states: "In the Lawsuit, Ronald J. Sommers, Trustee, seeks the imposition of a constructive trust over the Property. The Lawsuit involves an interest in the Property." The Lis Pendens states that "the Property" is described in Schedule A to Exhibit A which is attached. Attached to the Lis Pendens, as Exhibit A, is the April 25, 2001 deed whereby Ms. Jackson acquired the New York House and attached to that, as Schedule A, is the complete legal description of the New York House. Ms. Jackson was served with and received a copy of the Lis Pendens in December 2001 (Stipulation 12).
In September 2002, the Debtor and Ms. Jackson entered into settlement negotiations with the Trustee. Ms. Jackson was represented in those negotiations by her duly authorized Houston attorney. During the discussions, Ms. Jackson represented to the Trustee that the New York House was free of liens except for the mortgage held by Wells Fargo Home Mortgage, Inc. incurred when she acquired the property. The parties reached a settlement which was memorialized in a letter agreement dated October 4, 2002 (the "Settlement Letter") (Exhibit 37). The letter is signed by Ms. Jackson, the Debtor, their attorney, and the attorney for the Trustee. When the First Jackson Adversary was called for trial on October 7, 2004, the attorneys for the parties announced the settlement.
The matters recited in the paragraph are contained in Stipulations 13 through 26.
The Settlement Letter provided that the Debtor and Ms. Jackson would execute a note to the Trustee for $140,000 in settlement of claims which the Trustee asserted exceeded $195,000. The Debtor was to deed a Houston condominium to the Trustee and paragraph 4 provided: "Cynthia Jackson shall execute and deliver a deed to the New York Property on or before October 11, 2002. The deed is subject to the approval of the Trustee." Paragraph 5 states: "This settlement is subject to a title search on both the Houston Condominium and the New York Property. If there are liens on either property other than the first lien or the lis pendens filed by Ronald J. Sommers, Trustee, the Trustee reserves his right to revoke this settlement offer." The Settlement Letter contained provisions allowing the Debtor and Ms. Jackson to live in the New York House for six months so long as they kept it insured, paid the monthly mortgage payments and the taxes. During that six months "Coppola and Jackson may purchase the New York [House] from the Trustee for the total remaining unpaid balance of the Settlement Monies at any time and, if and when the Trustee is paid in full, the New York [House] will be returned." The parties stipulated that: "The New York House and Houston Condo were to be deeded to the Trustee regardless of the settlement of the First Jackson Adversary. In fact, they would not have been deed back if the compromise of the $195,000 for $140,000 had not been approved" (Stipulation 19).
The Trustee had a Public Records Search done on the New York House as of October 8, 2002 (Exhibit 39). That search showed the first lien to Wells Fargo Home Mortgage, Inc. and the Lis Pendens filed by the Trustee. It showed that various taxes had been paid in 2002. A full search was run on Mrs. Jackson for 10 years which revealed no other mortgages, federal tax liens, judgments, state tax warrants or bankruptcies. On October 18, 2002, the Trustee filed a motion in which he asked the court to approve the compromise and settlement contained in the Settlement Letter (Exhibit 14). On December 13, 2002, the court entered an order approving the settlement (Exhibit 15). On November 5, 2002 Ms. Jackson executed a General Warranty Deed conveying the New York House to the Trustee (Exhibit 40). The deed recited: "The Property is free from encumbrances, save and except the mortgage held by Wells Fargo Home Mortgage, Inc., or its assigns, in the original principal amount of $119,000 recorded in the Essex County Clerk's Office on April 27, 2001 at Book 1033 of Deeds Page 146." It also stated that: "Grantor will forever WARRANT title to the Property." The Deed was recorded on December 21, 2002 in the Real Property Records of Essex County, New York (Stipulation 62).
On January 22, 2003, the Debtor and Ms. Jackson signed a promissory note the amount of $140,000 payable to the Trustee (the "Trustee's Note") (Exhibit 36). A more formal Settlement Agreement was signed by the Debtor and Ms. Jackson on January 31, 2002 and by the Trustee on February 19, 2003 (Exhibit 38). On February 28, 2003 an Agreed Final Judgment was entered in the First Jackson Adversary (Stipulation 66 and Exhibit 63).
Meanwhile, back at the ranch . . . Ms. Jackson, with the assistance of the Debtor, was making arrangements for a home equity line of credit secured by the New York House. In August or September 2004, Ms. Jackson applied to Wells Fargo for the line of credit, using the Internet (Stipulation 33). During the trial, the parties referred to the home equity lender as "Wells Fargo," so the court will adopt that designation. Apparently the first lien was made by a different subsidiary of Wells Fargo National Association, namely Wells Fargo Home Mortgage, Inc. As noted, Wells Fargo Home Mortgage Inc. was paid off when the New York House was sold. Consequently Wells Fargo Home Mortgage, Inc. is not a party to this proceeding.
With apologies to old Western movies.
The affidavit of Angela Cooper (Exhibit 65) states that: "I am the custodian of records for Wells Fargo National Association which does business as Home Equity Access L.C.A." The court has not found a reference to Home Equity Access L.C.A. in any of the documents, but the Trustee styled his suit in that manner and there has been no objection that the proper party was not named.
Negotiations with representatives of Wells Fargo were conducted by mail and telephone by Ms. Jackson and the Debtor through September and into October 2002. On October 18, 2002 Ms. Jackson executed a $50,000 Home Equity Access Line of Credit Agreement (the "Line of Credit") with "Wells Fargo Bank, N.A.'" (Exhibit 47. It is also Exhibit A to Angela Cooper's affidavit which is Exhibit 65). On the same day, Ms. Jackson executed a Mortgage on the New York House to secure the Line of Credit (Exhibit 48 and Exhibit B to Ms. Cooper's affidavit). The Mortgage was recorded in Essex County, New York on November 12, 2002 (Stipulation 45). The settlement statement on the closing of the Line of Credit lists the settlement date as October 15, 2002 (Exhibit 51). There is no date by Ms. Jackson's signature.
Wells Fargo does not maintain offices in New York state (Cooper Deposition, page 58). Ms. Cooper stated that Ms. Jackson dealt with loan officers in Phoenix, Arizona (page 38), that the records are kept in Billings, Montana (page 29), and that Ms. Coopers' office is in Beaverton, Oregon (page 5).
Prior to making the Line of Credit, Wells Fargo secured a verification of Ms. Jackson's employment dated October 3, 2002 (Exhibit 49), a Second Mortgage Property Evaluation (Exhibit 53), and a property ownership report dated October 9, 2002 (Exhibit 50 and Exhibit D to Ms. Cooper's affidavit). The property ownership report gave the name of the owner of the property, and when and from whom she acquired the property. It specifically did not contain any search for liens and encumbrances. On October 18, 2002 Ms. Jackson signed a Borrowers Affidavit (Exhibit 50 and Exhibit C to Ms. Cooper's affidavit). Paragraph 5 of the Borrowers Affidavit states:
In some of its pleadings, Wells Fargo, states that it secured a title search. This is the only search secured by Wells Fargo. This property ownership report is not a full title search in that it did not search for all liens against the property and other matters filed affecting Ms. Jackson.
As to contracts Conveyances: THAT no agreement or contract for conveyance, or deed, Conveyance, written lease, or writing whatsoever, is in existence, adversely affecting the title to said premises, except that in connection with which this affidavit is given, If any, see Section 2.
Section 2 lists only the April 25, 2001 mortgage to Wells Fargo Home Mortgage, Inc. There is no mention of the Lis Pendens or the October 4, 2002 Settlement Letter with the Trustee. Ms. Jackson did not disclose the existence of these items to Wells Fargo (Stipulations 50 and 51).
Wells Fargo routinely performs a lien search on home equity loans of $250,000 or greater but does not routinely perform lien searches on home equity loans of less than $250,000. It did not perform a lien search prior to issuing the home equity line of credit to Ms. Jackson (Stipulations 46-49, 52 and Cooper Deposition pages 39, 40, 44, and 45). Under applicable law, Wells Fargo was on constructive notice of the Lis Pendens at the time it made the home equity loan to Ms. Jackson (Stipulation 41).
Ms. Cooper stated that, if she had been involved in making the loan, and if she had known of the Lis Pendens, she would have recommended that the loan not be made (Cooper Deposition, page 69). However, Ms. Cooper is not in the loan origination section of Wells Fargo, so her personal recommendation cannot be considered to be the policy of Wells Fargo.
Ms. Jackson made a number of withdrawals on the Line of Credit between October 2003 and April 2, 2004 to purchase two used vehicles and to pay bills. The balance owing on the Line of Credit as of April 30, 2004 was $47,375.32 (Stipulation 56). As a result of the filing of this adversary proceeding, Ms. Cooper made the decision that there should be no further advances on this Line of Credit (Cooper Deposition, pages 56 and 57). Ms. Jackson has been making monthly payments on the Line of Credit (Cooper Deposition, page 23, Jackson Deposition of June 2004, page 78 et. seq., and Jackson Deposition of September 2004, page 38).
The Debtor and Ms. Jackson did not pay the Trustee's Note when it became due on April 7, 2003. Pursuant to the Settlement Letter and the Settlement Agreement, the Trustee had the right to sell the New York House after April 7, 2003 (Stipulations 67 and 68). The Debtor and Ms. Jackson did not move out of the New York House. In late June, they listed the house for sale with a real estate broker (Stipulation 69). In July 2003, the Trustee, with court approval, listed the house with the same broker (Stipulations 70 and 71).
On August 15, 2003, the Trustee received an earnest money contract for the sale of the New York House for $340,000, which the parties stipulated was the fair market value of the New York House. (Stipulations 74 and 75). On August 21, 2003, the Trustee filed a motion to sell the New York House pursuant to a contract of sale for $335,000 (Exhibit 20). An order approving the sale was entered on September 2, 2003 (Exhibit 21). Both the motion and order provide, that as part of the closing, the Trustee is to pay the first lien to Wells Fargo Mortgage, Inc. and the second lien to Home Equity Access LCA (which is referred to in this adversary proceeding as Wells Fargo). The sale was scheduled to be closed on September 17, 2003.
The court does not understand the discrepancy between the Stipulations which state that the sale was for $340,000 and the motion and order which recite a sale price of $335,000. The contract of sale attached to the order is for $335,000, so the court assumes the sale price recited in the Stipulations is in error.
On September 10, 2003, the Trustee filed a motion to amend the terms of the order of sale (the "Motion to Amend") (Exhibit 21) . The Motion to Amend recited that the $50,000 second lien to Wells Fargo had come to light during an examination of the title in preparation for closing. The Motion to Amend asked that $50,000 be held in a segregated account pending a determination whether the Trustee or Wells Fargo is entitled to the money. An order granting that relief was signed on September 15, 2004 (Exhibit 25). The sale closed in October 2003 (Stipulation 82). The net proceeds of the sale were insufficient to pay off the amounts due to the Trustee and the balance due to Wells Fargo on the Line of Credit. (Stipulations 82-90). The Trustee placed $50,000 of the sale proceeds in a segregated account, pending a court determination of the entitlement to those funds (Stipulation 85).
A similar statement is contained in Stipulation 79. The court does not understand these statements since the second lien was specifically mentioned in the application and the order to sell. On page three of an affidavit by the attorney for the Trustee (Exhibit 23) she recites that she was made aware of the second lien on the property in discussions with Ms. Jackson's attorney concerning listing the house for sale and understood that the second lien was placed on the property prior to the Debtor's bankruptcy. In her haste to get the sale approved, she did not adequately check her file and thus it was after the court signed order approving the sale that she became aware that the second lien was placed on the property after the Settlement Letter was entered into. See also the affidavit of Ms. Jackson's attorney (Exhibit 24).
On November 5, 2003, the Trustee commenced this adversary proceeding against Wells Fargo and Ms. Jackson. The principal thrust of the Trustee's Complaint (Docket item 1) is that the Debtor had an equitable interest in the New York House by virtue of paying $164,506.64 as a down payment on the property. When the bankruptcy was filed, an estate was created which included "all legal or equitable interests of the debtor in property." § 541(a) of the Bankruptcy Code. The Trustee asserts that Wells Fargo's second lien can be avoided under § 549(a) because it occurred after the commencement of the case and had not been authorized by the court. In the alternative, the Trustee seeks to avoid the lien under either the Texas or the New York fraudulent transfer acts. He also seeks damages for fraud against Ms. Jackson and sanctions against both defendants for violation of the automatic stay of § 362.
The Bankruptcy Code is 11 U.S.C. § 101 et seq. References to section numbers are to sections of the Bankruptcy Code, unless otherwise specified.
Wells Fargo's Answer (Docket item 10 and Exhibit 28) basically denies the Trustee's allegations and states that Wells Fargo had no actual knowledge of the Lis Pendens. It includes a counter claim for the balance due on the Line of Credit and attorney's fees. It also includes an alternative cross claim against Ms. Jackson, in the event the Trustee is successful in his suit. Through an attorney, Ms. Jackson filed an answer (Docket item 10 and Exhibit 29) in which she basically denied the allegations of both the Trustee and Wells Fargo. By order of January 16, 2004 (Docket item 13) her attorney was permitted to withdraw. Attorney Jeff Barry represented Ms. Jackson during her depositions and at the deposition of Ms. Cooper. Mr. Barry signed the Joint Pre-Trial Statement (Docket item 40) and appeared at the trial on her behalf. However, Mr. Barry has not filed a notice of his appearance on behalf of Ms. Jackson in this adversary proceeding.
On September 7, 2004, the Trustee filed an answer to Wells Fargo's counterclaim (Docket item 38). Trial was held on October 20, 2004 and the court took the matter under advisement.
DISCUSSION
Basically, this adversary proceeding is a dispute over who gets the $50,000 in the segregated account. From Ms. Jackson's standpoint, she owes somebody. If the Trustee is successful, she will owe Wells Fargo and apparently she has been making monthly payments to Wells Fargo. If Wells Fargo wins, her debt to Wells Fargo will be paid off, and she and the Debtor will owe the Trustee the balance due on the Trustee's Note. The Trustee's Motion for Order Approving Compromise and Settlement (Exhibit 14) filed in the Debtor's bankruptcy case on October 18, 2002, shows that the Trustee expected to apply the proceeds of the sale of the Houston Condominium and the New York House toward a reduction of the note. Paragraph 23 of the motion states: "Jackson and [the Debtor] will remain liable on any deficiency remaining after the sale of the New York [House] and sale of the Houston Condominium."
October 18, 2002 is the same date that Ms. Jackson signed the documents in favor of Wells Fargo.
The Trustee asserts that the Lis Pendens was sufficient to put Wells Fargo on notice of the Trustee's claim, and thus, the Trustee's interest in the funds trumps that of Wells Fargo. Wells Fargo asserts that the notice was not sufficient.
Wells Fargo was on constructive notice of the Lis Pendens at the time it made the loan to Ms. Jackson (Stipulation 41). It is undisputed that Wells Fargo did not get a title search and thus was not actually aware of the Lis Pendens. The question then becomes, what is the effect of the Lis Pendens?
The pertinent statute is Section 6501 of the New York Civil Practice Law and Rules which reads as follows:
§ 6501. Notice of pendency; constructive notice
A notice of pendency may be filed in any action in a court of the state or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property, except in a summary proceeding brought to recover the possession of real property. The pendency of such an action is constructive notice, from the time of filing of the notice only, to a purchaser from, or incumbrancer against, and a defendant named in a notice of pendency indexed in a block index against a block in which property affected is situated or any defendant against whose name a notice of pendency is indexed. A person whose conveyance or incumbrance is recorded after the filing of the notice is bound by all proceedings taken in the action after such filing to the same extent as a party.
N.Y.C.P.L.R. § 6501 (McKinney 2004).
The purpose of this statute "is to afford constructive notice from the time of the filing so that any person who records a conveyance or encumbrance after that time becomes bound by all of the proceedings taken in the action." Corporation of the Presiding Bishop of the Church of Jesus Christ of Later-Day Saints v. Solow Building Corporation 381 N.Y.S.2d 887, 888 (App. Div. 1976).
In Security Pacific Mortgage and Real Estate Services, Inc v. The Republic of the Philippines 962 F.2d 204 (2d Cir. 1992), after the filing of the notice of lis pendens, Nico Construction Company, Inc. performed substantial services on the property for which it filed mechanic's liens. The court held that the mechanic's liens were subordinate to the claim of Security Pacific. The court said:
These mechanic's liens were filed after Security Pacific filed a notice of pendency, and hence only entitled Nico to share in any surplus resulting from the [foreclosure] sale. As there was no surplus, Nico could not recover by way of the mechanic's liens. (incumbrancer filing after notice of pendency bound by foreclosure proceedings and results of sale).
Id. at 209 (citations omitted).
This adversary proceeding is similar to the Security Pacific case. The Trustee filed this adversary proceeding asserting a constructive trust on the New York House. The Trustee filed the Lis Pendens. The adversary proceeding was settled by the conveyance of the New York House to the Trustee, but before the settlement was fully carried out, Wells Fargo placed a lien on the New York House. Wells Fargo was on notice of the Trustee's suit, the same as Nico was on notice of Security Pacific's suit. The property was sold pursuant to a Bankruptcy Court order which bound all of the parties; an action which is analogous to the foreclosure in the Security Pacific case. Consequently, Wells Fargo is only entitled to any surplus which remains after the Trustee is paid in full.
In argument, Wells Fargo asserted that if it had looked at the records of the First Jackson Adversary Proceeding just prior to the time Ms. Jackson signed the Wells Fargo documents on October 18, 2002, it would not have seen the October 4, 2002 Settlement Letter because it had not been filed with the court and the Trustee's Motion to Settle was not filed in the Debtor's bankruptcy case until October 18, 2002. This argument overlooks the pleadings in the First Jackson Adversary Proceeding in which the Trustee sought a constructive trust on the New York House; a contention which was clearly stated in the Lis Pendens.
This argument by Wells Fargo assumes that its scope of search of the records is that of a casual examiner of the records of the case. The New York statute places a much higher standard on Wells Fargo. Wells Fargo is "bound by all proceedings taken in the action after such filing to the same extent as a party.' N.Y.C.P.L.R. § 6501 (emphasis added). The parties knew that the Settlement Letter had been entered into on October 4, 2002 and had announced that settlement to the court on October 7, 2002 (Stipulation 25). Thus, with the knowledge of a party, Wells Fargo was charged with the knowledge that the Trustee had been successful in his efforts to secure title to the New York House for the benefit of the bankruptcy estate.
The court considered the affirmative defense in paragraph 45 of Wells Fargo's Answer and finds it not persuasive in view of the New York statute cited above and the Security Pacific case.
Wells Fargo argues that there is nothing in the Lis Pendens or the Settlement Letter which says that Ms. Jackson cannot place a lien on the property. That is true. However, the New York statute cited above advises Wells Fargo that if it accepts a lien from Ms. Jackson, it does so at its peril and the Security Pacific case tells us that Wells Fargo's lien is subordinate to the rights of the Trustee.
This contention was made in argument and in paragraph 48 of Wells Fargo's Answer.
In argument Wells Fargo asserted that this adversary proceeding was brought over a $15,000 dispute. It's argument is that, if it had been paid in full from the proceeds of the sale of the New York House, the Trustee's Note would have been paid down to a balance of approximately $15,000, for which the Trustee could have pursued the Debtor and Ms. Jackson. However, the shoe is on the other foot. If Wells Fargo had acknowledged its obvious failure to secure a proper title report before making the Line of Credit (as the New York Statute, in effect, directs it to do), the result in the Security Pacific case would have followed, resulting in full payment of the Trustee's Note and a substantial reduction in the amount due to Wells Fargo on the Line of Credit. If anyone should be faulted for engaging in de minimus litigation, it should be Wells Fargo.
As of September 9, 2004 the balance due on the Trustee's note was $19,155.80 with interest accruing at $8.15 per day (Stipulation 87).
Wells Fargo states: "Since no judgment was entered in the bankruptcy case or the adversary proceeding divesting Ms. Jackson of title to the New York House, the Notice of Pendency was nothing more than notice of a lawsuit that did nothing to affect the title to the New York House" (Post-Trial Brief, Docket item 56, page 3). The court disagrees. The Lis Pendens (the Notice of Pendency) advised Wells Fargo that in the First Jackson Adversary, the Trustee was claiming title to the New York House by way of a constructive trust. All courts strongly encourage settlements. Consequently, the Trustee should not be penalized or criticized for achieving title to the New York House through a settlement (which involved the deeding of the New York House to him) as opposed to a judgment awarding him title to the New York House on a constructive trust theory. Clearly, the First Jackson Adversary involved title to the New York House.
Wells Fargo's Arguments
In its Answer, Wells Fargo asserted several affirmative defenses. The court will review those which it has not already discussed. In paragraph 44 of its Answer, Wells Fargo asserts that the Trustee is not entitled to damages under § 362. The court will deny the Trustee any recovery under § 362.
In paragraph 47, Wells Fargo asserts that the Trustee has a duty to mitigate the damages, and, in that respect, the Trustee sold the New York House for less than its market value. Wells Fargo did not present any evidence to support this contention and did not mention it in argument. Stipulation 43 states: "Neither Wells Fargo nor Cynthia Jackson have produced any documents which value the New York House at greater than $335,000." Stipulation 74 states: "Neither Wells Fargo nor Cynthia Jackson have produced any documents or provided any other evidence which would indicate that the sale of the New York [House] made by the Trustee in October, 2003, was not a sale for fair market value." A cloud is cast on these stipulations by the fact that Stipulation 72 recites that "[o]n August 15, 2003, the Trustee received an earnest money contract on the New York House for $340,000," and Stipulation 73 states that: "$340,000 was fair market value for the New York House." However, the Trustees Application to Sell (Exhibit 19) and the order approving that application (Exhibit 20) both refer to a sales price of $335,000. The contract of sale attached to the order recited a sale price of $335,000. Apparently the property was sold for $335,000. Since neither Wells Fargo nor Ms. Jackson introduced any evidence showing another value for the New York House, the court denies the affirmative defense in paragraph 47 of Wells Fargo's Answer.
In paragraph 49, Wells Fargo asserts that it did not participate in nor acquiesce in any fraudulent act, if any, committed by Ms. Jackson. In view of the decisions announced above, it is not necessary for the court to decide that matter.
Wells Fargo filed a counterclaim against the Trustee in which it sought from the Trustee, payment of the Line of Credit executed by Ms. Jackson, together with costs and attorney's fees (Wells Fargo's Answer at paragraphs 50-54). In view of the decisions announced above, Wells Fargo's counterclaim against the Trustee will be denied.
Wells Fargo's Claims Against Ms. Jackson
In paragraph 4 of its prayer on page 13 of its Answer, Wells Fargo states: "Alternatively, in the event that the Trustee's claims and causes of action are upheld by the Court, Wells Fargo be granted judgment against Cynthia Jackson for actual and punitive damages resulting from her breach of warranty of title and fraud." In paragraph 55 of its Answer, Wells Fargo states that it "seeks a judgment against Cynthia Jackson for actual damages resulting from such breach of warranty of title."
In paragraph 57, Wells Fargo states that during their negotiations, Ms. Jackson failed to disclose to Wells Fargo the existence of the First Jackson Adversary and the existence of the Lis Pendens. Stipulation 50 affirms that statement. Wells Fargo asserts that the failure to disclose those items constitute false representations of material facts upon which Wells Fargo relied. It feels that Ms. Jackson's misrepresentations were intentional and malicious and thus it seeks "actual and punitive damages resulting from her fraud on Wells Fargo."
The decision on this matter is dictated by Stuart Silver Associates, Inc., v. Baco Development Corp. 665 N.Y.S.2d 415 (App.Div. 1997). The court stated:
The elements of a cause of action for fraud are a representation concerning a material fact, falsity of that representation, scienter, reliance and damages. Plaintiff must show not only that he actually relied on the misrepresentations, but also that such reliance was reasonable. Where a party has the means to discover the true nature of the transaction by the exercise of ordinary intelligence, and fails to make use of those means, he cannot claim justifiable reliance on defendant's misrepresentations.
The parties here disagree as to whether Politis ever promised an 8% return. . . . Yet, even if we assume that Politis made all of the disputed statements and intended to induce reliance thereupon, plaintiffs have failed to state a fraud claim because they cannot show that their alleged reliance was justified. Plaintiffs were relatively sophisticated investors who should have understood the risks of investing in a real estate venture without conducting a "due diligence" investigation or consulting their lawyers and accountants. In fact, Lorraine Borden did not even read the prospectus, the implication being that she entered into this venture based on Politis' alleged oral promises alone. As such reliance is not reasonable, the existence of a dispute as to whether Politis made such promises does not create a triable issue on the fraud claim.
Id. at 417-18 (citations omitted).
Wells Fargo asserts that it relied upon Ms. Jackson's Borrower's Affidavit in making the Line of Credit. It is incumbent on Wells Fargo to show reliance. It has not done so; there is no evidence of reliance. It appears that Ms. Jackson signed all of the documents with respect to the loan (including the closing statement) at the same time; thus one cannot attribute any reliance on the Borrower's Affidavit. The only witness for Wells Fargo was Ms. Cooper who testified through her deposition and an affidavit which is Exhibit 65. Ms. Cooper is in the collection department of Wells Fargo and was not involved in the making of the loan in any way. Thus Ms. Cooper is not competent to testify about reliance in making the loan. Wells Fargo has not pointed to any statements in her testimony that would indicate reliance and the court does not recall any proof of reliance from its reading of Ms. Cooper's deposition and affidavit. Because Wells Fargo has wholly failed to show reliance on the Borrower's Affidavit, or any other representation made by Ms. Jackson, the court must deny Wells Fargo's allegations of fraud by Ms. Jackson.
Even if Wells Fargo could show reliance on Ms. Jackson's Borrower's Affidavit, the Stuart case instructs us that the reliance must be reasonable. Wells Fargo is a sophisticated lender in the real estate market. It understands the risks of making real estate loans without conducting a due diligence investigation of the title to the real property involved. Wells Fargo made a business decision to make the Line of Credit loan to Ms. Jackson without an investigation of the title to the New York House. Having failed to do its due diligence, any reliance by Wells Fargo on Ms. Jackson's Borrower's Affidavit was not reasonable.
Wells Fargo asked for actual and exemplary damages for the alleged fraud by Ms. Jackson. Wells Fargo offered no evidence of the actual or exemplary damages. Thus, even if the court were to find that Ms. Jackson defrauded Wells Fargo, it could not grant Wells Fargo a judgment because there was no evidence to support a damage award.
Stipulation 90 reads: "The payoff on the [Line of Credit] in principal and interest is $48,182.10 and interest continues to accrue at the rate of 8.7% per annum, or $8.56250 per day." This stipulation is defective in that it does not state the date upon which the stated balance was due. Further, both Ms. Jackson and Ms. Cooper stated in their depositions that Ms. Jackson makes regular monthly payments on the Line of Credit. Consequently, the court has no evidence of the amount owing on the date of trial. At best, the principal amount stated in Stipulation 90 shows the amount owing on the Line of Credit; it does not reflect either actual or exemplary damages.
Likewise, Wells Fargo offered no evidence on the breach of warrant of title issue nor any damages alleged to have arisen therefrom. Consequently, Wells Fargo's complaint against Ms. Jackson on that issue must be denied.
Interestingly, Wells Fargo did not ask for a judgment against Ms. Jackson on the Line of Credit or for any attorneys' fees against Ms. Jackson. Perhaps this is because Ms. Jackson continues to pay on the Line of Credit. Or is the omission an intentional act in an attempt to keep this court from reviewing the attorneys' fees which Wells Fargo wishes to charge to Ms. Jackson? Stipulation 101 reads: "The Wells Fargo Home Equity Line of Credit Agreement allows for Wells Fargo to recover its attorneys fees from Jackson related to collecting on its note." The court will specifically order that none of Wells Fargo's attorneys' fees and expenses (whether incurred by the attorneys or by Wells Fargo in any other manner) with respect to this adversary proceeding shall be charged to Ms. Jackson. The court reaches this conclusion for two reasons: (1) Wells Fargo wholly failed to present any evidence to support its Cross-Claim against Ms. Jackson, and (2) this adversary proceeding was not an action against Ms. Jackson in an attempt to collect the Line of Credit. With respect to (2), this adversary proceeding was totally unnecessary. This adversary proceeding was caused by Wells Fargo's refusal to acknowledge the clear consequences of its business decision not to secure an adequate title search on the New York House before extending the Line of Credit to Ms. Jackson. Had Wells Fargo accepted the clear consequences of its business decision, the Trustee would have been paid off, Wells Fargo would have had the surplus to reduce the Line of Credit as directed by the Security Pacific case, and we would not have had this adversary proceeding. This court, as a court of equity, cannot allow Wells Fargo to charge Ms. Jackson with attorney's fees and costs for a totally unnecessary matter.
Trustee's Arguments
The Trustee's Complaint in this adversary proceeding (Docket item 1) mentions the New York statute cited above but then shifts to the theory that the New York House was property of the bankruptcy estate. This argument is based on the assertion in the First Jackson Adversary that when the Debtor provided the funds for the down payment on the New York House, the house became property of the Debtor's bankruptcy estate, even though title to the house was in Ms. Jackson's name. The Trustee's position is shown on the Lis Pendens (Exhibit 35), the first paragraph of which describes the filing of the Debtor's bankruptcy case and the New York House (which is defined in the Lis Pendens as the "Property"). The second paragraph reads:
The lawsuit is entitled Ronald J. Sommers, Trustee v. Cynthia Jackson, Adversary No 01-3596, In the United States Bankruptcy Court for the Southern District of Texas, Houston Division ("Lawsuit"). In the Lawsuit, Ronald J. Sommers, Trustee seeks to avoid and recover fraudulent transfers made by debtor in the Bankruptcy to Cynthia Jackson (the defendant in the Lawsuit). The debtor, Joseph C. Coppola, testified at his first meeting of creditors held pursuant to § 341 of the Bankruptcy Code that he transferred monies to Cynthia Jackson to purchase the Property. In the Lawsuit, Ronald J. Sommers, Trustee, seeks the imposition of a constructive trust over the Property. The Lawsuit involves an interest in the Property.
While the constructive trust argument may have some merit, the Trustee, understandably, took the easier method of having the property conveyed to him as a part of the settlement of the First Jackson Adversary. The Trustee did not get a judicial determination that the Debtor's bankruptcy estate (through him as the Trustee) had a constructive trust over the New York House. None of the settlement documents mention constructive trust and the Agreed Final Judgment in the First Jackson Adversary (Exhibit 63) refers to "transfers" and not to a constructive trust. Thus, the trustee's allegations of transactions involving "property of the estate" are not supported by the record in the Debtor's bankruptcy case.
In paragraphs 27 through 31 of the Trustee's Complaint, which commenced this adversary proceeding, the Trustee asserts that Wells Fargo's lien should be "avoided and recovered" under § 549 and 550. Under § 549, a Trustee "may avoid a transfer of property of the estate — (1) that occurs after the commencement of the case; and . . . (2)(B) that is not authorized under this title or by the court." The pleading implies, but does not state, that Wells Fargo's placing of a lien on the New York House was a "transfer of property of the estate." As a result of the settlement of the First Jackson Adversary, the New York House did not become property of the Debtor's bankruptcy estate until it was deeded to the Trustee. Thus Wells Fargo's placing of a lien on the New York House was not a "transfer of property of the estate."
Section 550 describes the liability of the transferee of an avoided transfer.
In paragraphs 32 through 36 of the Complaint, the Trustee asserts that Ms. Jackson violated both the Texas and New York fraudulent transfer acts by securing a lien on the New York House in favor of Wells Fargo after she entered into the Settlement Letter with the Trustee. Based on this allegation, the Trustee asserts that Wells Fargo's lien should be avoided. The Trustee does not allege that Wells Fargo had any knowledge of Ms. Jackson's fraud or that Wells Fargo knowingly participated, in any way, in that fraud. The court does not see how Ms. Jackson's fraud on the Trustee could give the Trustee any grounds to set aside Wells Fargo's lien.
In paragraphs 40 through 43 of his Complaint, the Trustee seeks damages pursuant to § 362(h) for a willful violation of the automatic stay. In the last sentence of paragraph 42, the Trustee asserts that: "The lien was placed on the property in direct contravention of the lis pendens and the settlement." Paragraph 43 reads: "The Trustee seeks damages from the Defendants for the willful violation of the automatic stay pursuant to § 362(h) in an amount which will at least cover the deficiency to the estate for payment of the note." Thus, the Trustee is complaining about a debt and a lien both created after the filing of the Debtor's bankruptcy case. Damages for violation of the automatic stay are covered by § 362(h). The automatic stay is contained in § 362(a). The Complaint does not point to which of the eight subsections of § 362(a) is alleged to have been violated by the filing of Wells Fargo's lien. Most of the subsections relate to activities to collect, enforce, or create a lien with respect a pre-bankruptcy debt. The only possible applicable subsection is (3) which prohibits "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." As noted above, the New York House did not become property of the estate until it was deeded to the Trustee. Thus, the placing of a lien on the New York House by Wells Fargo did not violate § 362(a)(3).
Paragraphs 37 through 39 of the Complaint assert that Ms. Jackson committed fraud on the Trustee. The amount necessary to pay off the Trustee's Note as of September 9, 2004 is $19,155.80 plus interest (Stipulation 87). The Trustee set aside $50,000 of the proceeds of the sale of the New York House in a segregated account pending resolution of this adversary proceeding (Stipulation 85). Since the court has determined that the Trustee has first call on those funds, there should be sufficient funds to pay off the Trustee's Note. That being the case, it is not necessary for the court to examine the Trustee's claims of fraud against Ms. Jackson.
Stipulation 89 provides:
In addition to being paid the principal and interest owed to the Trustee pursuant to the Trustee's Note the Trustee is also entitled to his attorney's fees related to collecting the amounts owed thereunder, which include his fees associated with selling the New York House and his fees in this current Adversary Proceeding.
The Trustee's Attorneys' Second Interim Application for Fees covers work done between January 1, 2003 through March 31, 2004 (Exhibit 58). On pages 15 and 16 under the heading of "Project No. 7" the attorneys request fees of $7,002.00 with respect to this adversary proceeding. Pages 2 through 8 of the Trustee's Attorneys' Detail Work-in-Progress Report (Exhibit 57) cover work with respect to this adversary proceeding from April 7, 2004 through October 18, 2004 and requests $39,093.50 in attorney's fees. The total of those two requests is $46,095.50, but it does not include time after October 18, 2004, including time in trial of this adversary proceeding. Thus, the total attorney's fee request could exceed $50,000. That is very sad, considering that this adversary proceeding could have been totally avoided if Wells Fargo had acknowledged the effect of its bad business decision and accepted the surplus as the Security Pacific case states. The problem is compounded by the fact that Wells Fargo asserts that its attorney's fees in this Adversary Proceeding are approximately $20,000 (Exhibit 65). No evidence was offered as to the attorney's fees paid by Ms. Jackson. One attorney filed an answer for her. Another attorney attended three depositions, prepared for trial including signing the Joint Pre-Trial Order which contained the stipulations, and attended trial. Based on local attorney rates, Ms. Jackson's attorney's fees could easily be more than $5,000. Thus, the attorneys are requesting more than $75,000 in fees in a dispute involving $50,000. That is a sad commentary.
The Trustee has $50,000 in the segregated account. The balance due on the Trustee's Note is slightly less than $20,000. That leaves about $30,000 of the proceeds of the sale of the New York House for the court to be concerned with.
CONCLUSION
There is fault on all sides in this adversary proceeding.
Ms. Jackson, in concert with the Debtor, caused the problem in the first place by creating the Line of Credit and the related mortgage on the New York House after they had entered into the Settlement Letter calling for a conveyance of the New York House to the Trustee. Ms Jackson (and presumably, the Debtor) got the benefit of the Line of Credit in the form of bills paid and vehicles purchased. On the other hand, if Wells Fargo had followed the dictates of the Security Pacific case, the Trustee's Note would have been paid in full and approximately $30,000 would have been used to reduce the Line of Credit obligation. Should Ms. Jackson be penalized because of Wells Fargo's actions in this adversary proceeding?
The Trustee's attorney greatly complicated matters by alleging matters which were not be supported by the evidence in this case. On the other hand, because of Well's Fargo's contentions, the Trustee was forced to proceed with this adversary proceeding.
Wells Fargo refused to accept the consequences of its business decision and forced the costs incurred in this adversary proceeding to exceed the amount in controversy. It is such actions that give the law and lawyers a bad reputation with the public.
The solution to this dilemma is neither easy nor totally fair. The court will spread the loss among the parties in the following manner.
1. Wells Fargo shall immediately credit the principal of the Line of Credit by $35,000. This amount is calculated as follows: $30,000 representing the credit which would have been given on the Line of Credit if Wells Fargo had accepted the consequences of its bad business decision and followed the Security Pacific case. By its actions, Wells Fargo deprived Ms. Jackson of $30,000 of her equity in the New York House. The court also allows $5,000 toward the unnecessary attorney's fees that Wells Fargo's actions caused Ms. Jackson in this adversary proceeding.
2. The $50,000 held in a segregated account by the Trustee shall be disbursed (a) first to the full payment of principal and interest due on the Trustee's Note so that the note shall be fully paid, and (b) then to the attorney for the Trustee for fees and expenses with respect to this adversary proceeding. Such amount shall be the total fees and expenses allowed to the Trustee's attorneys for this adversary proceeding, and no future application shall include any request for fees or expenses with respect to this adversary proceeding. Any prior authorization of attorneys' fees or expenses with respect to this adversary proceeding is revoked, and any funds which the Trustee has received with respect to such prior authorization shall be credited to fees and expenses on other matters authorized by the court.
3. All relief requested by Wells Fargo in this adversary proceeding is denied. Wells Fargo is enjoined from attempting to collect from Ms. Jackson any fees or expenses with respect to this adversary proceeding.
This memorandum shall constitute findings of fact and conclusions of law as required by Fed.R.Bankr.P. 7052.