U.S. Bankruptcy Court
Where a bank and a trust have objected to a debtor’s reorganization plan, the objections based on a privity of contract dispute should be overruled under Johnson v. Home State Bank, 501 U.S. 78 (1991).
“… U.S. Bank Trust, National Association, not in its individual capacity but solely as owner trustee for VRMTG Asset Trust (the ‘Trust’), and U.S. Bank, National Association, Successor Trustee to Bank of America, N.A. as Successor to LaSalle Bank, N.A. as Trustee, for Merrill Lynch First Franklin Mortgage Loan Trust, Mortgage Loan Asset-Backed Certificates, Series 2007-H1 (the ‘Bank’), each filed objections to confirmation of the Plan, respectively, at ECF No. 120 (‘Trust Objection’) and ECF No. 135 (‘Bank Objection.’ together with the Trust Objection, the ‘Objections’). …
“At a combined hearing on (i) confirmation of the Plan, (ii) the motions for relief from the automatic stay filed by the Bank [ECF No. 89] as to property located at 30-32 Saratoga Street. Lowell, MA (the ‘Saratoga Street Property) and the Trust [ECF No. 95], by its servicer NewRez LLC d/b/a Shellpoint Mortgage Servicing, as to property located at 121 Bellevue Street, Lowell, MA (the ‘Bellevue Street Property’) (together, the ‘Motions for Relief’) and (iii) the Bank’s Motion to Show Cause [ECF No. 154] (the ‘Show Cause Motion’), the Court, by agreement of the Debtor, the Trust, and the Bank (the ‘Parties’), directed further briefing on certain threshold issues related to confirmation discussed at the hearing as to whether: 1) the Trust and the Bank have claims that can be treated through a plan in the Debtor’s bankruptcy proceeding where the Debtor is not, and has never been, personally liable for debt secured by property that is now owned or partially owned by the Debtor (the ‘Privity of Contract Dispute’), and 2) with respect to the Bank, the Plan may cram down the Bank’s claim where the Debtor only possesses an alleged partial ownership interest in the property that is subject to the Bank’s mortgage (the ‘Cramdown Dispute’). …
“… The Debtor asks this Court to join ‘the overwhelming majority of courts’ that have applied Johnson and hold that the Trust and Bank have claims that may be treated in the Plan. …
“While the Trust and the Bank cite to caselaw that might inform a decision on the Debtor’s good faith in proposing the plan, the factual distinctions that are raised appear to be of the type that the Supreme Court squarely eschewed in analyzing the narrow, gating issue of whether a claim exists and those cases do not persuade this Court that the objecting parties do not have ‘claims’ that may be treated in a plan. Although the Debtor is not personally liable to the Trust and the Bank, they have a right to proceed against Debtor’s property in rem. Therefore, this Court will apply the reasoning of what constitutes a ‘claim’ in Johnson and overrule the Objections in relation to the Privity of Contract Dispute on these grounds. …
“The Bank also objects to confirmation of the Plan on the basis that ‘Debtor has not shown a colorable claim to ownership of the Property. … The Bank possesses a mortgage on the Saratoga Street Property. … The original mortgagors on the Saratoga Street Property are Houth Song and Samantha Heang, f/k/a Synath Men. In response to the Bank’s Objection and Show Cause Motion and as reflected in the changes made in §2.3 of the Modified Plan, the Debtor asserts a 50% ownership interest in the Saratoga Street Property. The Debtor contends that he obtained Heang’s interest in the Saratoga Street Property as a tenant in common ‘by virtue of a deed dated in or around July 2018.’ … Because he lost the original deed. Heang executed and the Debtor recorded a confirmatory quitclaim deed on January 3, 2024, the date on which the Debtor filed his Response to the Bank Objection, that ‘replaces’ the lost deed and ‘confirms that Kevin Taing has been an owner of the property referenced herein since [on or about July 24, 2018].’ … Accepting the validity of this quitclaim deed for the purposes of this Order only, the Debtor now asserts he possesses a one-half interest in the Saratoga Street Property as a tenant in common, and Song retains the remaining one-half interest. …
“In this case, in the event the Debtor is still only a partial owner of the Saratoga Street Property by the Effective Date, it appears U.S. Bank would retain two separate mortgages on the property: the Plan’s replacement mortgage against the Debtor’s interest and the pre-existing mortgage against Song’s interest. Subject to meeting confirmation requirements such as good faith, as a tenant-in-common, the Debtor could theoretically modify the claim secured by his interest through a plan but cannot impact the Bank’s rights against the non-debtor co-owner or the co-owner’s interest. … The Modified Plan, as proposed, would modify at least some of the rights of the Bank with respect to its pre-existing mortgage with Song. First, it expressly enjoins the Bank from foreclosing on Song’s undivided one-half interest, including based on his current default on the mortgage, unless the Debtor also defaults on the replacement mortgage obligations. The Modified Plan does not address whether the Bank would have immediate recourse to collect on its defaulted promissory note directly from Song or whether Song would be liable for a deficiency so I will assume the Modified Plan does not affect those rights and remedies. Plan injunctions affecting the rights and remedies of creditors as to non-debtor third parties are granted only in extraordinary circumstances and with consent. …. On the record of this case, this Court would not enter an order confirming the Modified Plan if the Debtor is only a partial owner of the Saratoga Street Property, where the Modified Plan provides a separate mortgage securing the Debtor’s plan obligations and calls for an injunction that would limit the Bank’s rights and remedies with respect to the mortgage covering the interest of the co-owner, Song. While the Debtor represents tirat he is attempting to obtain a transfer from Song, that has not happened.
“For the reasons above. I partially overrule the Objections of the Bank and the Trust only as to the Privity of Contract Dispute and partially sustain the Objection of the Bank relating to Cramdown Dispute as to the treatment of its claim with respect to the Saratoga Street Property.”
In Re: Taing, Kevin (Lawyers Weekly No. 04-011-24) (15 pages) (Panos, J.) (Chapter 11 Case No. 22-40896-CJP) (Aug. 12, 2024).
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