Opinion
20-32236 Adv. 20-3037
12-15-2021
In re: ANTHONY W. NORVELL PAMELA M. NORVELL, Debtor. v. Equity Trust Company, Defendant. Anthony W. Norvell Pamela M. Norvell, Plaintiff,
Chapter 13
DECISION GRANTING PLAINTIFFS' MOTION FOR SUMMARY JUDGMENT AS TO COUNT I AND GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTION AS TO COUNTS II AND III (DOC. 14)
GUY R. HUMPHREY UNITED STATES BANKRUPTCY JUDGE
I. Introduction
This case comes before the court on the motion of Plaintiffs Anthony and Pamela Norvell ("the Norvells") for summary judgment. The present adversary proceeding arises out of In re Norvell, a Chapter 13 bankruptcy case before this court. The Norvells and their creditor, Equity Trust Company ("Equity Trust"), agree that they engaged in a loan transaction but concur on little else - they dispute the amount disbursed, the applicable interest rate, the amount already repaid, and the value of the underlying real property. The Norvells ask the court to determine the amount of Equity Trust's claim and the value of two properties. They also seek to avoid Equity Trust's judicial liens against their primary residence and cramdown Equity Trust's mortgages on both properties.
II. Factual and Procedural Background
The court reviewed the evidentiary materials submitted by the parties and takes judicial notice of the docket in this adversary proceeding and the related estate case and the Montgomery County Court of Common Pleas docket for Case #2019-CV-01990.
On July 21, 2017 Anthony and Pamela Norvell, together with Robert and Amber Nicholas (collectively "the Borrowers"), signed a cognovit promissory note ("the note") for the principal sum of $250,000 plus interest on any unpaid balance in favor of Equity Trust. Doc. 14, Ex. 1. The note required the Borrowers to repay the loan in two portions - $100,000 on or before March 1, 2018 and the remaining $150,000 on or before March 1, 2028. Id. While the note did not state an interest rate on the first portion, it specifies that interest at 15 % per annum would be charged on the $150,000 beginning on April 1, 2018 and ending on March 1, 2028. Id. The parties dispute whether the Borrowers ever received the full amount of the loan. The Norvells assert that Equity Trust disbursed only the first portion, $100,000, while Equity Trust asserts that it disbursed the full amount. Doc. 14, 4; Doc. 17, 3. Additionally, the parties disagree as to the amount already repaid by the Borrowers. The Norvells state that they have repaid $26,400.16 while Equity Trust believes the calculation to be $26,700.20. Doc. 14, 4; Doc. 17, 3. In making these calculations, the parties rely on a nearly illegible handwritten ledger. Doc. 14, Ex. 6.
The Borrowers granted mortgages on three properties as security for the loan, two of which are owned by the Norvells - 2211 Social Row Road, Dayton, Ohio 45458 (the "Social Row property") and 25 ½ Third Street, Franklin, Ohio 45005 (the "Third Street property"). Doc. 14, Ex. 1, 2. The Norvells reside at the Social Row property and use the Third Street property as a rental property. Doc. 14 ¶¶ 17, 19. Freedom Mortgage Corporation ("Freedom Mortgage") holds a recorded mortgage lien on the Social Row property in the amount of $245,267.24. Doc. 14, Ex. 0. The Freedom Mortgage lien holds priority over the mortgages of the Borrowers.
Under the terms of the note, each of the signers authorized an attorney to appear and obtain a judgment against any or all of the signers for the amount due and any costs of suit. Doc. 14, Ex. 1. The signers waived their rights to service, process, and appeal. Id. Additionally, they released all errors and agreed to be held jointly and severally liable for the debt. Id. On May 8, 2019 Equity Trust obtained two judgments against Anthony Norvell and Pamela Norvell respectively in the Montgomery County Court of Common Pleas, case number 2019 CV 01990. Doc. 14, Ex. 8, 9. Equity Trust then obtained two certificates of judgment lien on property owned by Anthony Norvell and Pamela Norvell on September 23, 2020. Doc. 14, Ex. 8, 9.
On October 5, 2020 the Norvells filed a bankruptcy petition in this court under Chapter 13 of the Bankruptcy Code. Pursuant to Ohio Revised Code § 2329.66(A)(1), Debtor Anthony Norvell claimed a homestead exemption in the amount of $145,425 in the Social Row property as his residence. Doc. 17, Scheds. A 1.2, C.
From Schedule A/B and the property appraisal, it appears to the court that Anthony Norvell is the sole owner of the Social Row property. Schedule A at 2, In re Norvell, No. 3:20-bk-32236, (Bankr. S.D. Ohio Oct. 5, 2020) ECF No. 17; Doc. 14, Ex. 6.
On November 9, 2020 the Norvells filed the complaint initiating this adversary proceeding. The complaint lists three counts: Count 1 requests the court to determine the amount of Equity Trust's claim; Count 2 seeks a determination that the Norvells may avoid Equity Trust's judicial liens; and Count 3 seeks a determination that the Norvells may "cramdown" Equity Trust's mortgages to the available equity in the properties. Equity Trust filed proof of a secured claim in the amount of $250,000 on December 14, 2020 and an answer in this proceeding on January 4, 2021. On September 30, 2021 the Norvells filed a motion for summary judgment on all counts. Doc. 14. Equity Trust submitted a response on October 8, 2021. Doc. 17.
III. Legal Standard and Analysis
A. Jurisdiction
This court exercises jurisdiction pursuant to 28 U.S.C. § 1334 and the standing order of reference in the District Court for the Southern District of Ohio, Amended General Order 05-02. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(b)(2)(B) and (K).
B. Summary Judgment Standard
A court "shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a) (made applicable in this adversary proceeding by Federal Rule of Bankruptcy Procedure 7056). A factual disagreement is genuine if "a rational trier of fact could find in favor of either party on the issue." SPC Plastics Corp. v. Griffith (In re Structurlite Plastics Corp.), 224 B.R. 27, 30 (B.A.P. 6th Cir. 1998) (citing Schaffer v. A.O. Smith Harverstone Prods., Inc., 74 F.3d 722, 727 (6th Cir. 1996)). A fact is material if it might affect the outcome of the suit under substantive law. Niecko v. Emro Mktg. Co., 973 F.2d 1296, 1304 (6th Cir. 1992) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). When reviewing a motion for summary judgment, a court views all evidence and draws all inferences in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).
C. The Norvells' Arguments Seeking to Reduce the Amount of Equity Trust's Claim Are Precluded by Res Judicata Because the State Court Entered Final Judgment on the Issue
In Count 1, the Norvells ask this court to determine that Equity Trust's claim should be set at $73,599.84. Doc. 14, 4-6. However, both parties concede that the Montgomery County Court of Common Pleas has already entered judgment liquidating the Cognovit Note and determining both the amount owed to Equity Trust and the applicable interest rates. Specifically, the judgment determined the amount owed to be "(A) $100,000 plus interest at the statutory rate (4%) from March 1, 2018, (B) $150,000 plus 15% interest from April 1, 2018, and (C) court costs." Equity Trust's Proof of Claim #13-1, Ex. 3.
Under the Full Faith and Credit Act, federal courts must "give the same preclusive effect to a state-court judgment as another court of that State would give." 11 U.S.C. § 1738; Parsons Steel, Inc. v. First Alabama Bank, 474 U.S. 518, 523 (1986); Corzin v. Fordu (In re Fordu), 201 F.3d 693, 703 (6th Cir. 1999) (same). Under Ohio law, "a valid, final judgment rendered upon the merits bars all subsequent actions based upon any claim arising out of the transaction or occurrence that was the subject matter of the previous action.'" Grava v. Parkman Twp., 653 N.E.2d 226, 229 (Ohio 1995). A final judgment also precludes any claims "which were or might have been litigated in a first lawsuit." Rogers v. Whitehall, 494 N.E.2d 1387, 1388 (Ohio 1986); Holzemer v. Urbanski, 712 N.E.2d 713, 716 (Ohio 1999) (same); see also In re Fordu, 201 F.3d at 703 (quoting Migra v. Warren City Sch. Dist. Bd. Of Educ., 465 U.S. 75, 77 n. 1 (1984)) ("Claim preclusion generally refers to the effect of a judgment in foreclosing litigation of a matter that never has been litigated, because of a determination that it should have been advanced in an earlier suit."). In Ohio, there are four elements of claim preclusion:
(1) a prior final, valid decision on the merits by a court of competent jurisdiction;
(2) a second action involving the same parties, or their privies, as the first; (3) a second action raising claims that were or could have been litigated in the first action; and (4) a second action arising out of the transaction or occurrence that was the subject matter of the previous action.Yust v. Henkel (In re Henkel), 490 B.R. 759, 771 (Bankr. S.D. Ohio 2013) (quoting Hapgood v. City of Warren, 127 F.3d 490, 493 (6th Cir. 1997)).
Here, there is a final judgment of the Montgomery County Court of Common Pleas involving the same parties now before this court. "As to this element, it is well-settled law in Ohio that a default judgment carries the weight of a final decision on the merits that may serve to bar later claims." Yust, 490 B.R. at 771 (quoting Frazier v. Matrix Acquisitions, LLC, 873 F.Supp.2d 897, 901 (N.D. Ohio 2012)). The present claim clearly arises out of the same loan transaction and involves claims and defenses that could have been raised in state court. Claim preclusion encompasses a broad scope and includes litigation of counter claims and affirmative defenses that should have been raised, but were not, in the prior litigation. Yust, 490 B.R. at 772.
The Norvells ask this court to consider evidence that they made partial payments on the loan, that they did not receive the full loan amount, and that no interest rate applied to the first portion of the loan. In so doing, they ask the court to relitigate the amount owed to Equity Trust. However, the appropriate forum in which to raise these issues was and is the state court. This federal court cannot entertain a collateral attack on a valid, final state court judgment that would be recognized and credited by Ohio courts under Ohio law. The court must give full faith and credit to the state court judgment. For this reason, the court grants summary judgment as to Count 1 and finds that Equity Trust's claim is equal to the amount determined in the state court judgment.
Any attack on the state court judgment must occur, if at all, in the state court. As to the requirements of obtaining a cognovit judgment and vacating such a judgment under Ohio law, see Sutton Bank v. Progressive Polymers, L.L.C., 163 N.E.2d 546, 550-54 (Ohio 2020) (discussion of the rights of parties to cognovit notes, and their interpretation under Ohio law); Export Impact Bank of U.S. v. Advanced Polymer Scis., 624 F.Supp.2d 696, 699-707 (N.D. Ohio Mar. 11, 2009), aff'd 604 F.3d 242 (6th Cir. 2010) (analysis of a motion to vacate a cognovit judgment entered by the district court); Jacobs v. Acacia Chattanooga Vehicle Auction, Inc., No. 2:10 cv 912, 2011 WL 6415519, at *3-6, 2011 U.S. Dist. LEXIS 148582, at *7-17 (S.D. Ohio Dec. 21, 2011) (similar); and PNC Bank v. Pataskala Town Center, LLC, NO. 17-3008, 2017 WL 6812267, at *4 n.3, 2017 U.S. App. LEXIS 26303, at *9 n.3 (6th Cir. Dec. 21, 2017) (discussion of statutory requirements to enter a cognovit judgment in Ohio).
D. The Judicial Lien Against Anthony Norvell is Avoidable Because the Lien Impairs Anthony Norvell's Homestead Exemption
The court finds that Anthony Norvell is entitled to avoid Equity Trust's judicial lien on the Social Row Property in its entirety because, even using Equity Trust's figures, the lien impairs the state law homestead exemption to which he is entitled.
1. Anthony Norvell is Entitled to a $145,425 Homestead Exemption Under Ohio Law
When a debtor files a bankruptcy petition, all "legal or equitable interests of the debtor in property as of the commencement of the case" become part of the bankruptcy estate. 11 U.S.C. § 541(a)(1). See Owen v. Owen, 500 U.S. 305, 308 (1991). However, § 522 permits debtors to exempt certain property from the bankruptcy estate. Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 548 (6th Cir. 1998) ("The Bankruptcy Code allows debtors to exempt certain property from the bankruptcy estate."). As permitted by § 522(b)(1), Ohio elected to opt out of the § 522(d) federal bankruptcy exemptions. Ohio Rev. Code § 2329.662. Because of this, debtors domiciled in Ohio are entitled to claim only the state law exemptions. 11 U.S.C. § 522(b)(3).
Under Ohio law, a debtor is entitled to a homestead exemption, currently set at $145,425.00, as of April 1, 2019. Ohio Rev. Code § 2329.66(A)(1)(b), (B). The Ohio homestead exemption allows debtors to hold as exempt “one parcel or item of real or personal property that the person or a dependent of the person uses as a residence.” Ohio Rev. Code § 2329.66(A)(1)(b).
The parties do not dispute that the Social Row property serves as the Norvells' primary residence and that Anthony Norvell is entitled to claim a $145,425 homestead exemption. However, for clarity, the court notes that, while the Norvells appear to state in their Motion that they jointly assert a homestead exemption in the amount of $145,425 in the Social Row property, Schedule A and the Appraisal Report filed in this case and attached to the Norvells' Motion for Summary Judgment reflect that the property is only owned by Anthony Norvell. Schedule A at 2, In re Norvell, No. 3:20-bk-32236, (Bankr. S.D. Ohio Oct. 5, 2020) ECF No. 17; Doc. 14, Ex. 6. Thus, the exemption can only be asserted by Anthony Norvell. Under Ohio law and § 522, Anthony Norvell is entitled to claim a $145,425 homestead exemption.
This does not affect the amount of the exemption being claimed and asserted in the Motion - that being $145,425 - since only one exemption is being asserted in the statutory amount.
2. Anthony Norvell's Homestead Exemption is Impaired by the Judicial Lien but the Certificate of Judgment Against Pamela Norvell Did Not Create a Lien Because She Does Not Own Property
A debtor may avoid a judicial lien if it impairs an exemption to which the debtor is entitled. 11 U.S.C. 522(f)(1)(A); Holland v. Star Bank, N.A. (In re Holland), 151 F.3d 547, 549 (6th Cir. 1998). Equity Trust does not dispute the characterization of its judgment liens as "judicial liens" as defined in 11 U.S.C. § 101(36).
a. The Validity of Equity Trust's Liens
As an initial matter, the court notes that Equity Trust obtained two separate certificates of judgment, one for each of the Norvells. With the exception of the named party, both certificates grant identical judgment liens in the amount of $100,000 plus interest at 4% per annum and $150,000 plus 15% interest from April 1, 2018 and court costs. Doc. 14, Ex. 8; 9. However, as this court has previously noted, the term "lien" as described in § 101(37) "presupposes the existence of some [real] property which can be charged against." In re Bryan, No. 3:16-bk-30204 at *4 (Bankr. S.D. Ohio Oct. 13, 2016) ECF No. 20 (quoting Clowney v. North Carolina Nat'l Bank, 19 B.R. 349, 352 (Bankr. M.D. N.C. 1982)) (cleaned up); 11 U.S.C. § 101(37) (defining a "lien" as a "charge against or interest in property to secure payment of a debt or performance of an obligation."). A certificate of judgment cannot create a lien when the debtor owns no real property in the Ohio county in which the creditor obtained the judgment to which it may attach. No. 3:16-bk-30204 at *4.
Equity Trust's certificates created valid liens only to the extent that the named judgment debtor held a legal interest in real property within Montgomery County at the time that Equity Trust obtained the certificate. See Bank of Ohio v. Lawrence, 120 N.E.2d 88, 90 (Ohio 1954) ("It is well established that a judgment is not a lien on after-acquired property unless a certificate of the judgment is refiled after the acquisition . . ."). As noted, Anthony Norvell owns the Social Row property, which is located within Montgomery County. Because of this, the certificate of judgment attached to real property and constitutes a valid lien against him. Conversely, Pamela Norvell does not appear to own any real property. Thus, Equity Trust's certificate of judgment against Pamela Norvell could not attach to real property and create a lien. As this court has previously stated, a debtor cannot avoid a lien that does not exist. In re Bryan, No. 3:16-bk-30204 at *4. Therefore, the court finds that the judicial lien against Pamela Norvell may not be avoided under § 522(f)(1)(A) because such a lien could not be created.
In such circumstances, this court follows the practice of granting motions to compel the release of certificates of judgment upon the debtor's obtaining a discharge or subject to the debtor obtaining a discharge, using its equitable powers under § 105, to ensure that the debtor's § 524 discharge is not impaired or otherwise negatively affected. See In re Bryan, No. 3:16-bk-30204; In re Blakely, No. 13-50069, 2013 Bankr. LEXIS 5474 (Bankr. E.D. Ky. Mar. 27, 2013); see also Jarrett v. Ohio (In re Jarrett), 293 B.R. 127, 132 (Bankr.N.D.Ohio 2002) (noting that renewing or refiling a lien in an attempt to reach property acquired post-petition violates the § 524 discharge injunction).
b. The Impairment Calculation
To determine whether a judicial lien impairs an exemption and to what extent, courts apply the mathematical formula provided in § 522(f), which states in relevant part:
For the purposes of this subsection, a lien shall be considered to impair an exemption to the extent that the sum of
(i) the lien;
(ii) all other liens on the property; and
(iii) the amount of the exemption that the debtor could claim if there were no liens on the property; exceeds the value that the debtor's interest in the property would have in the absence of any liens.11 U.S.C. § 522(f)(2)(A). The § 522 calculation prescribes two steps. First, the court must calculate the sum of the lien, all other liens, and the debtor's exemption. Second, the court must subtract the value of the debtor's interest in the property to determine whether and to what extent the debtor's exemption is impaired. The debtor may avoid the lien only to the extent it impairs the debtor's exemption. Brinley v. LLP Mortgage, Ltd. (In re Brinley), 403 F.3d 415, 421 (6th Cir. 2005).
As stated, Anthony Norvell is entitled to claim an exemption of $145,425.00 in the Social Row property. The parties agree that the Social Row property is subject to a mortgage lien in the amount of $245,267.34 held by Freedom Mortgage. Claim 11-1, 2. Thus, the sum of the judicial lien, the mortgage lien, and the exemption is $640,692.34, excluding applicable interest.
The court now turns to the second required step and notes that the parties dispute the value of the Social Row property. Both parties have submitted professional property appraisals that would set the value of the property at different amounts. The appraisal submitted by Equity Trust would set the value at $375,940.00, while the appraisal offered by the Norvells finds a value of $310,000.00. Doc. 14, Ex. 6; Doc. 17, Ex. A-3. Although it is generally impossible to perform the § 522 formula calculation without determining the value of the property, the court finds that here either appraisal would produce the same result. See In re Smith, 267 B.R. 568, 572 (Bankr. S.D. Ohio 2001) ("The dispute between the parties centers on valuation of the Property. Thus, before the impairment formula contained in § 522(f)(2)(A) may be applied, the fair market value of the Property must be determined."). Even if the court assumes arguendo that Equity Trust's higher appraised value is correct, the § 522(f) calculation, as articulated in Brinley, demonstrates that the lien impairs Anthony Norvell's exemption even before adding any applicable interest. 403 F.3d at 421. Thus, regardless of the valuation, the lien is avoidable in the entirety.
A
Amount of Judicial Lien
$250,000.00 (excluding applicable interest)
B
Amount of All Other Liens
$245,267.34
C
Amount of Exemption
$145,425.00
D
Total (Lines A + B + C)
$640,629.34
E
Value of Debtor's Interest in the Property (Using Equity Trust's Appraisal)
$375,940.00
F
Extent of Exemption Impairment (Line D - Line E)
$264,689.34
G
Amount of Lien Remaining on Property (Line A - Line F)
$14,689.34
The calculations provided by Equity Trust itself support this conclusion. Doc. 17, 3-4. The court finds that Anthony Norvell is entitled as a matter of law to claim the homestead exemption on the Social Row property and to avoid the judicial lien in its entirety.
E. Anthony Norvell May Cramdown Equity Trust's Mortgages to the Extent They Are Unsecured but the Court Cannot Determine the Available Equity on Summary Judgment Because the Parties Dispute the Value of the Properties
Chapter 13 reorganization plans must comply with § 1322 which governs the contents of the plan and permits the debtor to modify the rights of both secured and unsecured claim holders. To this end, § 1322(b)(2) states:
(b) Subject to subsections (a) and (c) of this section, the plan may-
(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims[.]11 U.S.C. § 1322(b)(2) (emphasis added). "The power to modify a creditor's claim is broad and may include matters such as the amount and timing of payments due on a claim." In re Baker, 398 B.R. 198, 200 (Bankr.N.D.Ohio 2008) (citing First Union Mortgage Corp. v. Eubanks (In re Eubanks), 219 B.R. 468, 477 (B.A.P. 6th Cir. 1998)). Among other things, under § 1322(b)(2), a debtor may "cramdown" or bifurcate an undersecured claim in accordance with § 506(a) into secured and unsecured components based on the valuation of the underlying real property and strip the creditor's mortgage lien down to the secured value. See Reinhardt v. Vanderbilt Mortg. Fin., Inc. (In re Reinhardt), 563 F.3d 558, 560-61, FN 1 (6th Cir. 2009) ("A bankruptcy court may reduce the balance of the secured claim to the current appraised value of the home, while the amount of the claim in excess of the current property's value becomes an unsecured claim."). The unsecured portion of the lien is then treated as an unsecured claim in the plan. See Baker, 398 B.R. at 200.
However, cramdown is not available if Equity Trust is only secured by the debtor's principal residence. Nobelman v. Am. Sav. Bank, 508 U.S. 324, 331-32 (1993). But Equity Trust has not disputed that its claim is secured by security interests in both the Social Row property and the Third Street property. Doc. 14, Ex. 2. Because of this, § 1322(b) does not prohibit modification of Equity Trust's secured claim because Equity Trust is secured by property other than the debtor's principal residence. Nobelman at 331-32. Anthony Norvell is therefore permitted to cramdown Equity Trust's secured claim to the available equity in the property and bifurcate the unsecured portion to be treated as an unsecured claim in the plan. However, as with the underlying debt issue, the court cannot determine the secured portion of Equity Trust's claim because the parties dispute the value of the properties and have submitted competing appraisals for both, one setting the value at $310,000.00 and one at $375,940.00. Doc. 14, Ex. 6; Doc. 17, Ex. A-3. For this reason, the court finds that Anthony Norvell may cramdown Equity Trust's claim as a matter of law but denies summary judgment as to the determination of the amount of the secured and unsecured portions.
The exception is that a Chapter 13 debtor can modify a claim even if it is only secured by the debtor's principal residence if it is "wholly unsecured." Lane v. W. Interstate Bancorp, 280 F.3d 663, 669 (6th Cir. 2002).
At the evidentiary hearing, the court will also take evidence as to the total amount of Equity Trust's claim, including accrued interest, as provided under the state court judgment.
IV. Conclusion
For the reasons stated, the court grants summary judgment as to the first count and grants in part and denies in part summary judgment on the second and third counts. The court will contemporaneously enter a separate order consistent with this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.