Opinion
NO. 2013-CA-000264-MR
06-13-2014
JPMORGAN CHASE BANK, N.A. APPELLANT v. L&N FEDERAL CREDIT UNION; DONNIE L. HAMMONS, and PAMELA R. HAMMONS APPELLEES
BRIEF FOR APPELLANT: John P. Brice Lexington, Kentucky BRIEF FOR APPELLEE L&N FEDERAL CREDIT UNION: Ralph W. Hoskins Corbin, Kentucky
NOT TO BE PUBLISHED
APPEAL FROM KNOX CIRCUIT COURT
HONORABLE GREGORY A. LAY, JUDGE
ACTION NO. 12-CI-00149
OPINION
VACATING AND REMANDING
BEFORE: CLAYTON, COMBS, AND STUMBO, JUDGES. COMBS, JUDGE: JPMorgan Chase Bank, N.A., appeals from an order of the Knox Circuit Court granting default judgment. Because the entry of default judgment was erroneous as a matter of law, we must vacate the judgment and remand this case for further proceedings.
The property at 560 Hammons Lane in Knox County is the subject matter of this appeal. The property was conveyed to appellees Donnie L. Hammons and Pamela R. Hammons, his wife, from Don L. Hammons and Nola F. Hammons, his wife, by deed dated October 26, 1998. Several transactions ensued. On July 7, 2003, Donnie Hammons mortgaged the property in favor of First Magnus Financial Corporation. On January 17, 2012, as the nominee of First Magnus Financial Corporation, Mortgage Electronic Registration Systems, Inc., assigned its interest in the mortgage executed by Donnie Hammons in 2003 to JPMorgan Chase, the appellant. The assignment was recorded on January 30, 2012. As of March 1, 2011, the loan to JPMorgan Chase had a balance in excess of $37,000.00.
On June 30, 2006, the Hammonses opened a home equity line of credit with appellee L&N Federal Credit Union. The Hammonses jointly executed a second mortgage on the property. The credit union eventually advanced nearly $46,000.00 to the Hammonses.
On August 11, 2009, the Hammonses' marriage was dissolved. They defaulted on the home-equity loan agreement, and L&N exercised its option to accelerate the remaining unpaid balance of the loan.
On August 31, 2011, Pamela Hammons filed a petition for relief pursuant to Chapter 7 of the United States Bankruptcy Code, 11 U.S.C. §701 et seq. Donnie Hammons filed a similar petition on October 31, 2011. Pursuant to the provisions of 11 U.S.C. §362(a), automatic stays of any other proceedings against the debtors and their property were imposed.
On December 15, 2011, L&N was granted relief from the bankruptcy court's automatic stay of proceedings against Donnie Hammons. However, L&N did not pursue similar relief from the stay of proceedings affecting the bankruptcy estate of Pamela Hammons.
On January 30, 2012, Pamela Hammons was granted a discharge by the bankruptcy court. Because Pamela's bankruptcy proceedings were not completed, the case did not close until June 18, 2012.
On March 30, 2012, L&N initiated this foreclosure action against Donnie Hammons and his former wife, Pamela, now tenants in common with respect to the real property subject to L&N's mortgage. L&N specifically disclaimed any right to recover any deficiency and sought only to enforce its mortgage. JPMorgan Chase was also named as a defendant in the proceedings; it was served through the office of Secretary of State. There is no dispute that the automatic stay was in effect with respect to actions affecting the property when L&N's complaint was filed in Knox Circuit Court.
Each of the defendants was served with summons and a copy of the complaint in April 2012. No answers or responsive pleadings were filed, and on June 29, 2012, L&N filed a motion for default judgment and order of sale.
The trial court's default judgment and order of sale were entered July 6, 2012. The judgment provided that L&N was entitled to recover more than $50,000.00. It also provided that JPMorgan Chase had no interest in the subject property and was not entitled to any distribution of the judicial sale proceeds. On August 16, 2012, counsel for JPMorgan Chase filed a notice of appearance in the proceedings.
The master commissioner's notice of sale was entered on August 31, 2012. Appraisers were appointed, and the property was valued at $45,000.00.
On September 20, 2012, JPMorgan Chase filed a motion for relief from the court's default judgment. It explained that it had not responded to the state court proceedings even after it had been served with process since Pamela's bankruptcy case was open and active as of March 30, 2012. JPMorgan Chase argued that the state foreclosure proceeding was subject to the federal bankruptcy court's automatic stay. It also noted that L&N had not filed a motion for relief from the stay or a motion requesting that the property be abandoned by the bankruptcy estate. Therefore, JPMorgan Chase contended that the Knox Circuit Court lacked jurisdiction to entertain the foreclosure action. In a separate argument, JPMorgan Chase contended that the default judgment should be set aside because it had a valid excuse for failing to file an answer. It could assert a meritorious defense, and no prejudice would result.
In its response to the motion, L&N admitted that it had "jumped the gun by commencing [the] action on March 30, 2012 before [Pamela's] bankruptcy action was closed." It explained that when it discovered its error, it "obeyed the stay and took no further action until the closure of the bankruptcy case." L&N contended that JPMorgan Chase had no standing to complain about the violation of the automatic stay in any event since it was neither a debtor nor a creditor of Pamela Hammons, who had raised no objection to the proceeding. L&N argued that JPMorgan Chase had failed to protect its interests, if any; that it lacked a meritorious defense to the foreclosure action; and that it would now cause the financial interests of L&N to be prejudiced by its failure to act sooner.
The sale of the subject property was conducted on September 21, 2012, and it was sold to Elisha Havens. The total proceeds equaled $32,000.00. The master commissioner's report of sale was duly filed on September 24, 2012. JPMorgan Chase filed a motion for relief from the judgment pursuant to the provisions of Kentucky Rule[s] of Civil Procedure (CR) 60.02 on September 24, 2012.
On September 27, 2012, JPMorgan Chase filed a motion to vacate the judicial sale, contending that it had not received the statutorily required notice of sale since its counsel had not received proper notice.
L&N filed its response to the motion to vacate the judicial sale on October 2, 2012. It argued that it had no obligation to serve a notice of sale upon a party in default for failure to appear but that it nonetheless had served JPMorgan Chase at its mailing address pursuant to the requirements of CR 5.02.
On October 16, 2012, the circuit court denied both the motion to set aside the default judgment and the motion to vacate the judicial sale. On January 7, 2013, the court's order confirming the sale was entered, and the master commissioner was directed to convey the property to Elisha Havens. On February 4, 2013, the court ordered the entirety of the sale proceeds to be distributed among the master commissioner, the property appraisers, and L&N. This appeal followed.
JPMorgan Chase presents several arguments on appeal. First, it contends that L&N's knowing violation of the automatic stay provisions of the bankruptcy code caused the foreclosure action to be invalid from its inception. In the alternative, JPMorgan Chase argues that it was prohibited by the automatic stay provisions from responding to the complaint until after June 18, 2012 - the date on which Pamela's bankruptcy case was finally closed. Consequently, it could not have been deemed to be in default until July 8, 2012.
JPMorgan Chase next argues that the trial court abused its discretion by failing to vacate the judgment and order of sale because: (1) it had a valid excuse for not filing an answer; (2) as holder of a prior mortgage against the property, it had a meritorious defense; and (3) no prejudice would have resulted since L&N had already acknowledged the priority of its mortgage -- at least to the extent of Donnie Hammons's interest in the property. JPMorgan Chase also argues that the provisions of KRS 426.690 prohibit the entry of a judgment and an order of sale that failed to make the sale of the property subject to its prior lien. Finally, JPMorgan Chase contends that the master commissioner's failure to properly serve notice of the sale pursuant to the provisions of the civil rules requires that the sale be set aside. In light of our conclusion that the default judgment must be vacated as a matter of law, we need not address the remaining contentions and shall refrain from doing so.
Our analysis depends upon JPMorgan Chase's appeal of the default judgment directly and not the denial of the motion to set aside the default judgment. Therefore, our review focuses upon whether the pleadings are sufficient to uphold the judgment and whether JPMorgan Chase was actually in default. Jeffrey v. Jeffrey, 153 S.W.3d 849, 851 (Ky.App. 2004). A trial court may properly enter default judgment "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend as provided by these rules of civil procedure." CR 55.01.
Section 362(a)(1) provides that a bankruptcy petition "operates as a stay, applicable to all entities, of the commencement or continuation . . . of a judicial . . . action or proceeding against the debtor that was or could have been commenced" before the debtor filed for protection under the bankruptcy laws. 11 U.S.C. §362(a)(1) (emphasis added). The automatic stay serves both to preserve the debtor's insolvent estate and to protect his or her creditors from a scramble for the assets during the pendency of the bankruptcy proceeding. See In re Meis-Nachtrab (N.D. Ohio 1995), 190 B.R. 302.
There is considerable disagreement in the law concerning the nature of actions undertaken in violation of the automatic stay. The majority of federal circuit courts of appeal have concluded that those actions are void ab initio. However, the United States Court of Appeals for the Sixth Circuit has held that actions undertaken in violation of the automatic stay are not void but merely voidable. Easlty v. Pettibone Michigan Corp., 990 F.2d 905 (6th Cir. 1993).
There is no dispute that L&N's March 2012 filing in Knox Circuit Court violated the automatic stay provision. Regardless of whether we view the foreclosure action as void as of its inception or merely voidable as a consequence of the early filing, it is beyond dispute that the commencement of the foreclosure action was, in fact, stayed by the federal bankruptcy laws. Therefore, we must conclude that the foreclosure action was commenced not on March 30, 2012, the date on which the action was filed, but rather on June 18, 2012 -- the date the stay was lifted. Under the circumstances, the trial court's default judgment entered on July 6, 2012, was at least premature since JPMorgan Chase's response time had not yet run. Consequently, the default judgment must be vacated.
Furthermore, we note that JPMorgan Chase notified the court and L&N -- prior to the sale of the property -- that it intended to rely upon the bankruptcy court's stay of the proceedings. It took no later action to indicate otherwise. Thus, even if an equitable argument could be properly advanced, it would be to no avail.
The circuit court erred by granting the motion for default judgment before JPMorgan Chase was required to answer the complaint concerning its interest in property included in a bankruptcy estate. Since the default judgment was improperly granted and was, therefore, void, the subsequent order of sale and the order confirming the sale are similarly void. The matter is remanded to the Knox Circuit Court for further proceedings.
ALL CONCUR. BRIEF FOR APPELLANT: John P. Brice
Lexington, Kentucky
BRIEF FOR APPELLEE L&N
FEDERAL CREDIT UNION:
Ralph W. Hoskins
Corbin, Kentucky