If you “Stonewall,” you must pay

September 30, 2024

Dear constituency list members of the Insolvency Law Committee, the following is a case update by Summer Shaw analyzing In re Buettner, 654 B.R. 927 (Bankr. E.D. Cal. 2023), a recent case of interest:

SUMMARY

In In re Buettner, Chapter 13 debtors were compelled to file suit to enforce California Civil Code § 2941, which requires a lender to reconvey a deed of trust within 30 days of payoff. The Bankruptcy Court for the Eastern District of California held in a very well-reasoned opinion that debtors were entitled to recover their attorney’s fees, even if the lender reconveys after the lawsuit is filed but before judgment is entered.To read the full published decision, click here.

FACTS

The two sets of debtors, consolidated here, were Buettner and Elkins, a married couple; and Krone (the “Debtors”). Each of the Debtors was in Chapter 13, with wholly unsecured junior mortgages, held by PHH, that they had elected to “strip off” because the junior deeds became “void” once their chapter 13 plan payments were complete, pursuant to 11 U.S.C. §§ 506(d) and 1322(b)(2). Krone completed all of his payments on or before September 11, 2020, and Buettner and Elkins completed all of their payments on or before September 24, 2021. After completion of the plan payments, pursuant to California Civil Code § 2941, the mortgagee or assignee of a mortgagee (i.e., PHH), within 30 days after any mortgage has been satisfied, was required to execute and record a reconveyance in the county in which the mortgage is recorded. Additionally, under § 2941, “the beneficiary or assignee of the beneficiary must also execute and deliver to the trustee the original note, deed of trust, request for a full reconveyance, and other documents as may be necessary to reconvey or cause to be reconveyed, the deed of trust.” Cal. Civ. Code § 2941(b)(1).

Krone’s attorney demanded PHH reconvey their deed of trust on Krone’s property on December 12, 2020, February 6, 2021, and May 30, 2021. On June 22, 2022, Krone then filed an adversary complaint against PHH, “after more than nineteen months of PHH inaction.” The Buettner/Elkins attorney demanded PHH reconvey on January 25, 2022 and filed an adversary complaint against PHH on March 4, 2022, more than 180 days after payments were complete.

Ultimately, PHH reconveyed the deed of trust on Krone’s property on August 22, 2022, “710 days after the lien became void;” and reconveyed the deed of trust on Buettner’s and Elkins’ property on March 23, 2022, more than 150 days after their lien became void. Both Debtors sought their attorney’s fees in the adversary proceedings.

PHH contended that: 1) “there (was) no federal statutory or common law lien removal authority”; and 2) that even if the bankruptcy court found in the Plaintiffs’ favor, they were not required to pay the Plaintiffs’ attorneys’ fees because they voluntarily reconveyed their deeds of trusts, making the case moot.

REASONING

The bankruptcy court found that the “federal lien removal authority, independent of state law, is firmly rooted in more than a century of federal law.” The court first went through the extensive California law that supports the fact that “when a California mortgage debt goes to $0.00, the lien securing that debt is extinguished by operation of law. A consequence of liens being ‘void’ under federal law is that they correlatively are extinguished under California law. The court went on to explain that “Chapter 13 plan confirmation orders are final judgments with claim and issue preclusion effect.” Therefore, it “follows that there is nothing left to declare regarding value in a declaratory judgment (once the debtor has paid all payments under a confirmation order that values a lien at $0.00 after payments are complete). The only remaining step is to clear the cloud on title by removing the lien.” Only upon reconveyance of the lien does the cloud on title, that “stymies” the debtor’s property, finally become extinguished.

“The lien removal power survived the merger of law and equity in 1938 and is now found at 28 U.S.C. § 1655 in tandem with Federal Rule of Civil Procedure 70 and Federal Rule of Bankruptcy Procedure 7070.”

As for the attorney’s fees issue, the court held: “The adversary proceedings to enforce the § 506(d) judicial determinations that the deeds of trust are ‘void’ qualify as ‘actions on a contract’ for purposes of Civil Code § 1717…The subsequent reconveyance by PHH (after the deadline, pursuant to §2941) makes the Debtors ‘prevailing parties’ for purposes of Civil Code § 1717.” PHH argued that the “absence of a specific attorneys’ fee provision in § 2941 and decisions that the section does not create a statutory right to fees…” means there is no right to attorney’s fees. “True enough, but fallacious.” The “fallacy” is the “omission to note that § 2941 neither negates § 1717 nor renders inapplicable basic contractual rights to fees.” Luchini, 511 B.R. at 679-80.”

Finally, the court held that pursuant to Rule 70(e) “belated reconveyances do not moot the prevailing party attorneys’ fees issues for the Plaintiffs” just because PHH decided to finally stop stonewalling after the Debtors were forced to incur legal fees to obtain that which the law required PHH to do, and it did not.   

PHH appealed to the district court but on June 11, 2024, filed a motion to dismiss the appeal, before anyone briefed, stating they “elected to pay the attorney’s fees award.”

These materials were written by Summer Shaw of Shaw & Hanover, PC in Palm Desert, California (ss@shaw.law).  Editorial contributions were provided by Maggie E. Schroedter of Robberson Schroedter LLP (maggie@thersfirm.com).  

Thank you for your continued support of the Committee.