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Brown v. Gorman

United States District Court, E.D. Virginia, Alexandria Division

October 10, 2017

BARBARA MURPHY BROWN, Debtor/Appellant
v.
THOMAS P. GORMAN, Trustee/Appellee.

         On Appeal from BKNO. 17-10180-KHK in the United States Bankruptcy Court for the Eastern District of Virginia

          MEMORANDUM OPINION

          Leonie M. Brinkema United States District Judge

         After the Court heard oral argument from the parties on appellant Barbara Murphy Brown's ("Brown" or "appellant") appeal of the bankruptcy court's dismissal of her Chapter 13 proceeding, the dismissal was affirmed. Brown has appealed that oral ruling. This Memorandum Opinion more fully explains the basis for the Court's decision.

         I. BACKGROUND

         The Chapter 13 proceeding at issue was not Brown's first, and to understand the bankruptcy court's decision, the history of Brown's proceedings is necessary.

         A. First Bankruptcy Case

         Represented by counsel, Brown filed a previous Chapter 13 petition on June 11, 2015 in the United States Bankruptcy Court for the Eastern District of Virginia. See Murphy Brown v. Gorman, No. 1:15-cv-01265, 2016 WL 3702974, at *1 (E.D. Va. July 7, 2016). In her initial Schedule A disclosure of real property Brown listed an ownership interest with her husband, Jeffery L. Brown, as tenants by the entirety in her residence on Barbara Lane in Fairfax, Virginia ("the property"), which she valued at $900, 000, and against which she reported a secured debt of $1.2 million. Id. Brown's Schedule D disclosure of secured creditors listed the $1.2 million debt as owed to HSBC Mortgage ("HSBC"); however, that debt was marked as "contingent" and "disputed." Id. In Section 5 A of the proposed Plan, Brown proposed to cure what she listed as the estimated amount owed to HSBC, $162, 000, for mortgage arrearage, although in Section 6A she sought rejection of HSBCs claim on the ground that it was based on an executory contract and in Section 7B she sought avoidance of HSBCs security interest in the property on the ground that she had rescinded the mortgage loan under the Truth in Lending Act ("TILA"). Id. Brown proposed making a $3, 000 monthly payment to the Trustee "as a show of good-faith, " with the condition that it should be disbursed only "after the resolution of the debtor's adversary proceeding yet to be filed." Id. That $3, 000 bore little relation to the actual monthly mortgage payment required by the Note, which as of June 2015 was apparently $7, 514.40 per month. Id.

         After the initial meeting of creditors, the Trustee filed a Motion to Dismiss with Prejudice and an Amended Objection to Confirmation of the Plan, primarily arguing that Brown was not eligible for relief under Chapter 13 because her secured debt exceeded the $1, 149, 525 limit set under 11 U.S.C. § 109(e). Id. The Trustee further contended that Brown's Chapter 13 petition was not filed in good faith, as evidenced by the Plan's failure to assert a credible means of reorganizing Brown's finances, supporting the inference that her sole intent was to use the automatic stay to prevent foreclosure proceedings while she and her non-debtor husband challenged the validity of the mortgage note. Id.[1]

         On September 2, 2015, after the Motion to Dismiss was filed, Brown amended her Schedules A and D by reducing HSBC's secured mortgage claim to $1, 078, 513.03, which she continued to describe as "contingent, " "unliquidated, " and "disputed." Id. at 2. The new lower principal balance appeared to be based on Brown's misreading of a Notice of Payment Change filed by HSBC on July 20, 2015, which reflected what the principal balance would have been had Brown and her husband adhered to their contractually required mortgage payments up to the date of the Notice. Id. The evidence in the record demonstrated that Brown's description of this reduced amount of the secured mortgage claim was not offered in good faith, as her bankruptcy counsel had received correspondence from HSBC's counsel more than a month before Brown filed her Chapter 13 petition advising that the payoff on Brown's mortgage loan was actually $1, 528, 038.81 as of April 7, 2015. That amount consisted of a $1, 232, 745.11 principal balance on the mortgage, $215, 773.93 in accrued interest, $67, 371.46 in escrow advances, and other fees and penalties. Id.

         On September 3, 2015, the bankruptcy court held an evidentiary hearing on the motion to dismiss in which Brown admitted that she and her husband took out a mortgage in the amount of $1, 265, 000 from HSBC on June 27, 2008 and signed a corresponding promissory Note. Id. She and her husband made the required monthly payments for 21 months, but ceased making payments in March 2010 when they sent notice to HSBC that they were rescinding the loan. Even though the Browns did not pay any of the remaining loan balance, Brown asserted that the notice of rescission meant that they did not "owe a dime." Id. In response to the bankruptcy court's questioning, Brown confirmed that she had no assets in her bank accounts and that neither she nor her husband were able to raise over a million dollars within the next two months, which the bankruptcy court deemed to be the outer limit of the reasonable time in which a borrower must tender a rescission payment. Id.

         The bankruptcy court ruled orally at the conclusion of the hearing[2] that Brown must be in a position to refund the unpaid balance of the mortgage loan to the lender for a rescission to be effective because a rescission returns the parties to the same position they were in ab initio. Id. Accordingly, the bankruptcy court found that Brown's attempted rescission was not effective because she had not shown the ability to repay the loan, and she remained obligated on the Note. Id. Moreover, the court found that the mortgage arrearage plus accrued interest combined with the unpaid principal balance of the Note placed the amount of secured debt above the statutory limit for Chapter 13 proceedings. Id. Lastly, the bankruptcy court found that Brown did not file her Chapter 13 petition in good faith as her sole purpose in filing was to postpone the collection rights of the mortgage lender. Id. In light of these findings, the bankruptcy court granted the Trustee's Motion to Dismiss and ordered Brown's Chapter 13 case dismissed without prejudice.[3] See In re Brown, 538 B.R. 714, 721 (Bankr. E.D. Va. 2015).

         Proceeding pro se. Brown appealed that decision, arguing that the bankruptcy court erred in finding that she had not filed her Chapter 13 petition in good faith and in concluding that the amount of the secured debt exceeded the statutory debt limit of $1, 149, 525.00, thereby rendering Brown ineligible for relief under Chapter 13. Murphy Brown. 2016 WL 3702974, at *2.

         After full briefing by the parties, this Court affirmed the bankruptcy court's order, finding that:

• "The bankruptcy court did not err in finding that Brown never effectively rescinded the loan because she ignored her tender obligation to restore the lender to the same position it was in before the transaction." Id. at 3.
• "[T]he bankruptcy court accurately calculated the principal balance due as of April 1, 2010 as $1, 217, 394.45 based on the original loan amount of $1, 265, 000, which was a 30-year note with a prime interest rate plus a margin of 2.25%, and applying the payments that had been made. Id. In addition, the bankruptcy court properly calculated interest accrued on the loan from March 1, 2010 through the petition date as $141, 500 based on the minimal rate of 2.25%. Id. In light of these findings, even excluding consideration of accrued interest, late fees and penalties called for in the Note, the principal ...

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