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GMAC Mortgage, LLC v. Orcutt

United States District Court, D. Vermont

February 28, 2014

GMAC MORTGAGE, LLC, Appellant,
v.
DAVID ORCUTT, HOLLIE STEVENS, and JAN M. SENSENICH, Appellees

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For GMAC Mortgage, LLC (Defendant) (5:13-cv-00082-cr), Appellant: James B. Anderson, Esq., Ryan Smith & Carbine, Ltd., Rutland, VT.

For David Roy Orcutt (Debtor), Hollie Jean Stevens (5:13-cv-00082-cr), Appellees: Michelle M. Kainen, Esq., Kainen Law Office, P.C., White River Junction, VT.

Jan M. Sensenich (Plaintiff) (Chapter 13 Trustee) (5:13-cv-00082-cr), Appellee, Pro se, Norwich, VT.

For GMAC Mortgage, LLC (5:13-cv-00083-cr), Appellant: James B. Anderson, Esq., Ryan Smith & Carbine, Ltd., Rutland, VT.

For David Roy Orcutt (plaintiff), Hollie Jean Stevens (5:13-cv-00083-cr), Appellees: Michelle M. Kainen, Esq., Kainen Law Office, P.C., White River Junction, VT.

Jan M. Sensenich (Plaintiff) (Chapter 13 Trustee) (5:13-cv-00083-cr), Appellee, Pro se, Norwich, VT.

OPINION

Christina Reiss, Chief United States District Judge.

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OPINION AND ORDER AFFIRMING IN PART AND REVERSING IN PART BANKRUPTCY COURT'S APRIL 2, 2013 ADVERSARY PROCEEDING ORDER AND BANKRUPTCY COURT'S APRIL 2, 2013 PLAN AND HOMESTEAD EXEMPTION ORDER (No. 13-82, Doc. 1; No. 13-83, Doc. 1)

This matter comes before the court on the appeals filed by GMAC Mortgage, LLC (" GMAC" ) from two Orders of the United States Bankruptcy Court for the District of Vermont. GMAC appeals the Bankruptcy Court's April 2, 2013 Plan and Homestead Exemption Order overruling GMAC's objections to, and confirming, the Chapter 13 Plan submitted by Debtors David Orcutt and Hollie Stevens (" Debtors" ), which treated GMAC as an unsecured

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creditor.[1] GMAC also appeals the Bankruptcy Court's April 2, 2013 Adversary Proceeding Order granting Debtors' motion for summary judgment, denying GMAC's cross-motion for summary judgment, and ruling that the mortgage Ms. Stevens executed and delivered to GMAC in 2007 (the " 2007 Mortgage" ) is inoperative under Vermont law.

In both appeals, GMAC challenges whether Debtors can properly claim a homestead exemption for their Tunbridge, Vermont property on which GMAC holds the 2007 Mortgage and whether the Bankruptcy Court has the statutory and constitutional authority to enter a final judgment declaring the 2007 Mortgage inoperative as a matter of state law. If the Bankruptcy Court had the statutory and constitutional authority to determine the validity of the 2007 Mortgage, then GMAC contends the Bankruptcy Court must consider the state law doctrine of equitable subrogation, which GMAC maintains would require the Bankruptcy Court to treat it as a secured creditor.

Debtors oppose GMAC's appeal and maintain that their claim of a homestead exemption within their Chapter 13 Plan is proper, that the 2007 Mortgage is void ab initio under Vermont law because Mr. Orcutt did not sign it, and that in the course of confirming their Plan and determining GMAC's objections thereto, the Bankruptcy Court had the statutory and constitutional authority to enter a final judgment finding the 2007 Mortgage inoperative under state law. Debtors further argue that Vermont statutory law controls the validity of the 2007 Mortgage and allows no consideration of the competing equities, including consideration of the doctrine of equitable subrogation.

Trustee Jan M. Sensenich (the " Trustee" ) contends that GMAC never obtained a valid lien on Debtors' property through the 2007 Mortgage and therefore the Bankruptcy Court properly adjudicated the issues of Debtors' homestead exemption and GMAC's secured creditor status based on that assumption. The Trustee further contends that the Bankruptcy Court's decisions were well within its jurisdiction and that GMAC cannot avail itself of any equitable remedies under state law.

The court heard oral argument on GMAC's appeals on October 7, 2013. Debtors are represented by Michelle M. Kainen, Esq. GMAC is represented by James B. Anderson, Esq. The Trustee is involved in the Main Proceeding, but is not a party in the Adversary Proceeding.

I. Factual Background.

The facts in the pending appeals are undisputed. Debtors are husband and wife who were married on February 14, 1997. By warranty deed dated July 20, 1999, they purchased real property located at 120 Clarksville Road in Tunbridge, Vermont (the " Tunbridge Property" ), as tenants by the entirety. At all relevant times, the Tunbridge Property was Debtors' homestead. At the time of their initial

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purchase of the Tunbridge Property, Debtors executed a note (the " 1999 Note" ) for $39,000 and corresponding mortgage (the " 1999 Mortgage" ) in favor of Katrina B. Clark.

On October 10, 2001, Debtors executed and delivered a note and mortgage on the Tunbridge Property in favor of Beneficial Finance of New Hampshire (the " 2001 Mortgage" ), in the amount of $15,000. Debtors refinanced the 1999 and 2001 debts in 2004 with GMAC through a note (the " 1st 2004 Note" ) and a mortgage on the Tunbridge Property (the " 1st 2004 Mortgage" ). As a result of the 2004 refinancing, GMAC discharged the 1999 Mortgage and 2001 Mortgage. Also in 2004, Debtors borrowed an additional $15,000 from GMAC. This amount was documented in a separate note (the " 2nd 2004 Note" ) and was secured by a new mortgage in favor of GMAC on the Tunbridge Property (the " 2nd 2004 Mortgage" ).

In 2007, Debtor Stevens refinanced again with GMAC. At the closing, she executed and delivered to GMAC a note in the amount of $105,000 (the " 2007 Note" ) which was secured by the 2007 Mortgage, which Ms. Stevens also executed and delivered to GMAC. Ms. Stevens used the proceeds from the 2007 Note to pay credit card debts in the amount of $22,773.00, received $11,206.29 in cash, paid closing costs, and obtained a discharge of the first and second 2004 Notes and the first and second 2004 Mortgages for both herself and her husband. Mr. Orcutt did not sign either the 2007 Note or the 2007 Mortgage, although he was present at the closing.

II. Procedural Background.

A. The Proceedings Prior to Remand.

In June 2011, Debtors filed a voluntary Chapter 13 petition for bankruptcy protection (the " Petition" ), as well as a proposed Plan. Schedule A to the Petition listed the Tunbridge Property as jointly held by Debtors as tenants by the entirety with a current value of $110,600. In Schedule C, Debtors claimed an exemption pursuant to 27 V.S.A. § 101 in the amount of $103,104 for the Tunbridge Property. Debtors' Schedule D listed three statutory tax liens totaling $7,496, as well as a secured claim held by a Vermont bank totaling $5,448. In Schedule F of the Petition, Debtors listed GMAC as a creditor holding an unsecured, nonpriority claim for $102,951 and noted: " Money loan[e]d for invalid mortgage on primary residence[.]" (Bankr. Case No. 11-10553, Doc. 1 at 25.) Debtors' unsecured, nonpriority claims totaled $199,851. The proposed Plan did not provide for payment of the 2007 Note and Mortgage.

GMAC filed: (1) an objection to confirmation of the Plan, alleging that it made no provision for paying the 2007 Note and Mortgage and thus did not comply with 11 U.S.C. § 1325(a)(3); and (2) an objection to Debtors' claim of a homestead exemption under 11 U.S.C. § 522(b)(1) and 27 V.S.A. § 101, arguing that the Tunbridge Property was subject to the 2007 Mortgage. GMAC also filed a proof of claim for a secured claim in the amount of $107,747.

In conjunction with the filing of the Petition, Debtors filed an adversary proceeding (the " Adversary Proceeding" ), characterizing it as " an action to determine the nature, extent and validity of the mortgage on [D]ebtors' residence, pursuant to 27 V.S.A. § 141, 27 V.S.A. § 349, 11 U.S.C. § 522 and Federal Rule of Bankruptcy Procedure 7001." (Bankr. Case No. 11-01013, Doc. 4 at 1.) In Count One, Debtors asked the Bankruptcy Court to issue a declaratory judgment that the 2007 Mortgage

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was " void" because Mr. Orcutt did not sign the 2007 Mortgage or join in the conveyance, and under Vermont law, " [i]n order to convey an interest in a homestead, both spouses must join in the execution of the conveyance." Id. at 3.

Thereafter, Debtors and GMAC cross-moved for summary judgment in the Adversary Proceeding. The Bankruptcy Court granted Debtors' motion for summary judgment on Count One of Debtors' Amended Complaint on the grounds that " the 2007 Mortgage securing [the 2007 Note] with a lien against [Debtors'] homestead property was inoperative because Mr. Orcutt did not execute it and it purported to encumber entirety property which he owned with his wife." In re Orcutt, 2012 WL 627675, at *1, *4-6 (Bankr. D. Vt. Feb. 24, 2012) (further noting " the 2007 Mortgage is inoperative under the clear mandates of 27 V.S.A. § 141" ). The Bankruptcy Court denied GMAC's cross-motion for summary judgment on both counts of the Amended Complaint, [WL] at *1, as well as GMAC's later motion for reconsideration. See In re Orcutt, 2012 WL 909323, at *2 (Bankr. D. Vt. Mar. 12, 2012).

In initially ruling on the validity of the 2007 Mortgage, the Bankruptcy Court rendered a declaratory judgment under Vermont law. It did not cite any provision of the Bankruptcy Code which authorized the declaratory judgment and did not address the implications of Stern v. Marshall, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), in its decision. GMAC filed a timely appeal.

On December 13, 2012, this court vacated the Bankruptcy Court's February 24, 2012 Order in the Adversary Proceeding and remanded the matter so that the Bankruptcy Court could address whether it had subject matter jurisdiction to issue a declaratory judgment under state law in light of Stern v. Marshall. See GMAC Mortg., LLC v. Orcutt, 2012 WL 6552914, at *13 (D. Vt. Dec. 13, 2012). The court concluded that " the Bankruptcy Court lacked the constitutional authority to adjudicate Debtors' [A]dversary [P]roceeding solely as a matter of state law," but observed that the Bankruptcy Court may possess the statutory and constitutional authority to determine the validity of the 2007 Mortgage as part of its claims allowance process, or as an integral part of another proceeding under the Bankruptcy Code., [WL] at *6, *11. It noted that " by adjudicating the claim as purely a question of state law, the Bankruptcy Court did not consider the competing equities" or whether " Debtors will receive a windfall and unjust enrichment at the expense of GMAC and their unsecured creditors if the Bankruptcy Court does not exercise its equitable powers.", [WL] at *11-12. The court therefore remanded the proceeding so that the Bankruptcy Court could " clarify the statutory and constitutional basis under which it is proceeding and adjudicate the issues raised by the parties consistent with that statutory and constitutional authority.", [WL] at 12.

B. The Bankruptcy Court's Decision on Remand.

After remand, proceedings resumed in the Bankruptcy Court with all parties and the Bankruptcy Court essentially adopting the same positions they had taken prior to remand. In the Adversary Proceeding, the Bankruptcy Court issued an Order that " clarifie[d]" that the outcome of Debtors' Adversary Proceeding was " integral to resolution of other pending matters in the bankruptcy case" ; and determined " that, pursuant to controlling law, [GMAC's] mortgage is inoperative" and " that this determination dispose[d] of all open legal issues pending in this case." In re Orcutt,

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(Bankr. D. Vt. Apr. 2, 2013) (the " April 2, 2013 Adversary Proceeding Order" ). The Bankruptcy Court concluded that it had the statutory and constitutional authority to adjudicate the validity of the 2007 Mortgage:

In order to clarify this Court's previous ruling and more clearly tether the determination of the validity of the [2007 Mortgage] to provisions of the Bankruptcy Code, the Court points to the necessary connection between the declaration that the [2007 Mortgage] is inoperative under state law and the determination of the bankruptcy issues pending in [Debtors'] Chapter 13 case. Under Stern and its progeny--and consistent with the District Court's remand order--the relationship between this Court's determination of the [2007 Mortgage] validity and the pending rulings on [GMAC's] objection to [Plan] confirmation under § 1325, allowance of [GMAC's] claim under § 506(a), and the propriety of [Debtors'] homestead exemption under § 522(b)(1) and 27 V.S.A. § 101 confer constitutional and statutory authority upon this Court to enter a final judgment in this [A]dversary [P]roceeding.

[WL] at *7. The Bankruptcy Court declined to address GMAC's arguments regarding the competing equities and the extent to which the Bankruptcy Court should exercise its equitable powers to hold the 2007 Mortgage valid, reasoning:

[GMAC] has not annunciated how an order declaring the [2007 Mortgage] to be valid is necessary or appropriate to carry out a provision of the Bankruptcy Code. Rather, it argues that this is the right thing to do because such a declaration would generate additional funds for [GMAC] and a greater divided for unsecured creditors, and to declare the [2007 Mortgage] inoperative will result in a windfall to, and unjust enrichment of, [Debtors]. However, whenever one party loses, it can argue that the prevailing party is being unjustly enriched. That argument is not persuasive. Moreover, to breathe validity into a mortgage that is clearly invalid under state law would be contrary to the longstanding jurisprudence requiring that bankruptcy courts apply state law to value mortgages, and would deprive [Debtors] of their fresh start. In the absence of a clear explanation of how declaring the ...

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