Rinehart v. JP Morgan Chase

Filing 10

MEMORANDUM DECISION AND ORDER: The court finds Rineharts challenges to the Bankruptcy Courts ruling to be without merit and the court affirms the Bankruptcy Courts ruling in its entirety.Signed by Judge Dale A. Kimball on 10/26/12. (jlw)

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF UTAH
CENTRAL DIVISION

In re:
ROBERT C. RINEHART,
Debtors.

MEMORANDUM DECISION AND
ORDER

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Case No. 2:12CV465DAK
ROBERT C. RINEHART,
Judge Dale A. Kimball
Plaintiff/Appellant,
Bankruptcy Case No. 09-27541
vs.
JPMORGAN CHASE BANK, N.A.,
Defendant/Appellee.

This matter is before the court on Appellant Robert C. Rinehart’s appeal of the
Bankruptcy Court’s April 27, 2012 final Order overruling Rinehart’s Objection to JP Morgan
Chase’s Claim. The court held oral argument on the appeal on October 3, 2012. At the hearing,
Rinehart was represented by Paul Toscano, and Appellee JP Morgan Chase (“Chase”) was
represented by James D. Gilson. The court heard arguments from counsel and took the appeal
under advisement. After carefully considering the briefs and exhibits submitted by the parties,
the arguments advanced by counsel at oral argument, the ruling of the Bankruptcy Court, and the
law and facts relating to this appeal, the court renders the following Memorandum Decision and
Order affirming the Bankruptcy Court’s order.

BACKGROUND
Rinehart appeals the Bankruptcy Court’s denial of his Objection to Chase’s Claim in his
Chapter 11 bankruptcy action. Chase’s claim was made based on a mortgage loan secured by
property owned by Rinehart. Rinehart objected to the claim for the face amount of the Note or
the value of the collateral, arguing that the claims should instead be for the amount Chase paid
the FDIC for the purchase of the Note.
On June 7, 2007, Rinehart’s wife, Carolyn Rinehart, executed an adjustable rate note
(“Note”) in favor of Washington Mutual (“WaMu”) in the original principal amount of
$1,885,000.00. The Deed of Trust executed in connection with the Note states that the Note is
secured by real property owned by Rinehart and his wife as joint tenants.
The Note expressly states that the “Lender may transfer this Note. Lender or anyone who
takes this Note by transfer and who is entitled to receive payments under this Note is called the
Note Holder.” Mrs. Rinehart also represented that she would make her “payments every month
until I have paid all of the principal and interest and any other charges described below that I may
owe under this Note.” The Trust Deed similarly states that “Borrower has promised to pay
[$1,885,000.00 plus interest] in regular Periodic Payments and to pay the debt in full not later
than July 01, 2037,” and that the “Note or a partial interest in the Note (together with this
Security Instrument) can be sold one or more times without prior notice to Borrower.”
On September 25, 2008, the United States Office of Thrift Supervision (“OTS”) seized
WaMu and placed it into an FDIC receivership. The FDIC sold and transferred WaMu’s assets
to Chase that same day pursuant to a written Purchase and Assumption Agreement. Such assets
included the Note and Trust Deed at issue in this matter.
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On November 1, 2008, Chase and Mrs. Rinehart executed a Loan Modification
Agreement that modified the Note, which, in part, increased the principal owing to
$1,950,286.85. On July 20, 2009, Debtor filed for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. On January 16, 2012, Chase filed its Proof of Claim evidencing its claim
against the property. On March 15, 2012, Rinehart filed an objection to the claim, arguing that it
should be reduced to the amount that Chase allegedly paid to the FDIC to acquire the Note and
Trust Deed.
The Bankruptcy Court held a hearing on the Objection and found that “there’s no basis in
law for the relief requested by the debtor. No case authority and no–I don’t think the statute
supports the argument. I also [conclude] that there’s no basis in equity. There has been no injury
to the debtor. There has been no injury to creditor’s by the assignment.” Accordingly, the
Bankruptcy Court overruled Rinehart’s Objection to JP Morgan Chase’s claim. Rinehart then
filed this appeal.
DISCUSSION
Rinehart appeals the Bankruptcy Court’s denial of his Objection to Chase’s Claim and
seeks correction of the Bankruptcy Court’s interpretation and application of the meaning of the
language “creditor’s interest” in 11 U.S.C. § 506(a)(1). Section 506(a)(1) provides that
An allowed claim of a creditor secured by a lien on property in
which the estate has an interest . . . is a secured claim to the extent
of the value of such creditor’s interest in the estate’s interest in
such property . . . and is an unsecured claim to the extent that the
value of such creditor’s interest . . . is less than the amount of such
allowed claim. Such value shall be determined in light of the
purpose of the valuation and of the proposed disposition or use of
such property, and in conjunction with any hearing on such
disposition or use or on a plan affecting such creditor’s interest.
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Rinehart argues that the Bankruptcy Court erred in interpreting the language “creditor’s
interest” to mean something other than the amount Chase paid the FDIC for Rinehart’s Note.
Rinehart contends that he was prepared to testify that the estimated discounted price Chase paid
the FDIC was approximately $.00068 of the face value of the Note–or $14,000 for a Note with a
face value of approximately $1,950,000.00. Chase asserts, however, that Rinehart’s calculation
of the acquisition price is pure speculation and, even if Chase acquired the Note and Trust Deed
at a discount, Rinehart’s theory that the claim should be limited to such amount is a completely
novel theory with no basis in law or equity.
In Timbers of Inwood, the Supreme Court analyzed Section § 506(a)(1) for purposes of
interpreting the phrase “interest in property” in § 362(d)(1). United Savings Ass’n v. Timbers of
Inwood Forest Assoc., 484 U.S. 365 (1988). The Court stated that “[i]n subsection (a) of [§ 506]
the creditor’s ‘interest in property’ obviously means his security interest without taking account
of his right to immediate possession of the collateral on default. If the latter were included, the
‘value of such creditor’s interest’ would increase, and the proportions of the claim that are
secured and unsecured would alter. . . . The phrase value of such creditor’s interest in § 506(a)
means ‘the value of the collateral.’” Id. at 372. Because the Court determined that a “creditor’s
interest” under § 506(a) strictly means “the value of the collateral,” the court held that a
creditor’s “interest in property” under § 362(d)(1) did not include the immediate right to
foreclose. Id.
Therefore, in Timbers of Inwood, the Supreme Court has already decided the legal issue
presented in Rinehart’s appeal. The phrase “creditor’s interest” refers to neither the “face value
of the Trust Deed Note” nor to the alleged “discounted acquisition price” paid by Chase for the
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Note. Rather, as determined by the Supreme Court, that phrase refers to the value of the
creditor’s collateral.
Rinehart claims that the legislative history of 11 U.S.C. § 506 and two other United States
Supreme Court cases support his interpretation of the language “creditor’s interest.” The
legislative history of the Bankruptcy Code states that “the bill requires the court to value the
secured creditor’s interest. To the extent of the value of the security interest, he is treated as
having a secured claim, entitled to be paid in full under the plan, unless, of course, he accepts
less than full payment.” But this language, discussing a distinction between the value of a
creditor’s interest and the value of collateral securing that interest, does not establish that a claim
assigned from one creditor to another becomes the amount the latter paid to the former to
purchase the debt.
Rinehart further asserts that the components of the valuation of a creditor’s interest
recognized in the legislative history were recognized in Dewsnup v. Timm, 502 U.S. 410 (1992),
and Nobelman v. American Savings Bank, 508 U.S. 324 (1993). In Dewsnup, the Court held that
any increase in the value of the collateral accrues to the benefit of the creditor, not to the benefit
of the debtor and not to the benefit of other unsecured creditors whose claims have been allowed
and who had nothing to do with the mortgagor-mortgagee bargain.” 502 U.S. at 417. Similarly,
in Nobelman, the Court emphasized the rights that were “bargained for by the mortgagor and the
mortgagee.” 508 U.S. at 329.
In this case, Rinehart contends that Chase had nothing to do with the mortgagormortgagee bargain and that the Rinehart’s only had a relationship with WaMu, who advanced
loan proceeds to them. These two Supreme Court cases, however, are unpersuasive because
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they deal with the concept of “lien stripping,” which is not at issue in this appeal. The holding in
Dewsnup, was that § 506 does not allow a debtor to “strip down” or reduce a creditor’s lien to the
value of the collateral and render unsecured any debt in excess of the value of the collateral. 502
U.S. at 417. This is a fundamentally different issue. Moreover, the Tenth Circuit has held that
Dewsnup only applies in Chapter 7 cases whereas Rinehart has a Chapter 11 bankruptcy cae.
Wade v. Bradford, 39 F.3d 1126, 1128 (10th Cir. 1994). Nobelman also deals with the concept
of lien stripping, but in the Chapter 13 context. Again, Rinehart is not trying to strip Chase’s lien
down to the value of the property. Rather, Rinehart is arguing that Chase should be limited to the
acquisition price it paid to the FDIC. Neither case supports such a position. Both Dewsnup and
Nobelman rely on the value of collateral for purposes of determining whether or not the lien at
issue should be stripped. Thus, both cases are consistent with Timbers of Inwood.
Furthermore, Rinehart contends that his argument on the inadequacy of the discounted
acquisition price is supported by the avoiding powers conferred on a Chapter 7 trustee. Rinehart
claims that if WaMu had been eligible for and had filed Chapter 7, its Chapter 7 trustee would
have a cause of action against the FDIC and Chase for fraudulent conveyance of the Note and
Trust Deed based on the alleged inadequacy of the acquisition price. In such a situation, Rinehart
asserts the trustee could have recovered the Note and auctioned it for the highest and best price.
Rinehart argues that his position is consistent with the holding of the Supreme Court in
Associates Commercial Corp. v. Rash, 117 S. Ct. 1879 (1997), that courts must consider “the
‘proposed disposition or use’ of the collateral in determining its value” and, therefore, the
“creditor’s interest” in the collateral. In this case, the disposition of the collateral that Rinehart
seeks is not the continued occupation of the residence. Instead, Rinehart has proposed a Chapter
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11 plan to liquidate the residence before the end of 2012 for the highest and best price. Rinehart
claims that this disposition must be taken into account in valuing the “creditor’s interest” under §
506(a)(1). Rinehart states that if they intended to continue living in the residence, then full
payment of the Note’s face value would make sense because the Rinehart’s recognize that they
should pay for a residence they intend to occupy. But, in view of the intended liquidation of the
collateral by a stated deadline, Rinehart contends that it makes no sense for Chase to receive all
the liquidation sale proceeds because it was not a party to the bargain between the mortgagor and
mortgagee and it did not advance the original loan proceeds. Therefore, he claims that there is no
benefit of the bargain to protect.
The Rash case is inapplicable to this case because it relates only to valuation. Rinehart is
not challenging the value of the property on this appeal. Because this appeal does not relate to
the value of the property, Rinehart’s arguments regarding the best methods for valuing a
creditor’s collateral under the cram-down provisions of the bankruptcy code are irrelevant.
Moreover, Rinehart’s attempts to argue that only WaMu should be able to benefit from
the value of the property securing the Note because it was the original creditor are without merit.
His arguments ignore the terms of the Note and Trust Deed as well as established law. The Note
states that the “Lender or anyone who takes this Note by transfer and who is entitled to receive
payments under this Note is called the Note Holder.” Rinehart’s obligations are not changed
when there is a transfer of the Note Holder. Chase became the Note Holder when it acquired all
of WaMu’s rights and remedies under the Note and Trust Deed.
Federal and state law support the conclusion that a creditor’s rights under a mortgage loan
can be assigned freely and without impairment. There is no legal or factual support for
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Rinehart’s position that Chase obtained a lesser interest in the property than WaMu enjoyed
when Chase acquired WaMu’s assets.
Rinehart has no standing to challenge the FDIC’s sale of the Note to Chase. The Note
states it can be sold or assigned without notice. Whether or not the Note was sold or assigned to
another Note Holder, Mrs. Rinehart promised to pay all of the principal and interest. In the event
that she failed to make those payments, she and Rinehart pledged the property under the Trust
Deed as security for the Note. Rinehart does not dispute that Mrs. Rinehart received the loan
proceeds or that the property is pledged as collateral. The fact that the Note was assigned did not
alter the obligation to pay the Note in full.
Rinehart also argues that the Bankruptcy Code and Utah Law both protect the equity
interests of debtors. These statutes recognize and protect equities by requiring the value of the
collateral to be applied in priority order to the payment of the obligations owed to creditors as
well as the equities of the seller/debtor. Rinehart claims that the allegedly discounted acquisition
price Chase paid to the FDIC is tantamount to inadequate consideration paid at a foreclosure sale.
Inadequate consideration paid at forced sales of residential realty is not favored under Utah law
and Utah courts have set aside foreclosure sales for the inadequacy of price paid and unfairness.
See Pyper v. Justin C. Bond, et al., 2011 UT 45, 258 P.3d 575 (July 29, 2011). In this case,
Rinehart argues that there are more than slight circumstances of unfairness based on Chase’s
acquisition price of the Note.
But there is no basis in equity for Rinehart’s position. Rinehart’s reliance on Pyper v.
Boyd is unfounded. Pyper deals with the right of redemption under the foreclosure statute and
the grounds necessary to set aside a sheriff’s sale of property. Unlike Pyper, this case does not
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involve an inadequate bid at a foreclosure sale that could result in a debtor being doubly liable on
a debt. This appeal deals with the amount Chase paid the FDIC for the Note, which transaction
did not alter Rinehart’s or Mrs. Rinehart’s obligations under the Note, nor did it prejudice them
in any way.
Rinehart’s theory for limiting the claim to the amount it paid the FDIC for the Note is not
supported by any of the authorities to which he cites and is inconsistent with the Supreme
Court’s construction of § 506(a)(1) in United Savings Ass’n v. Timbers of Inwood Forest Assoc.,
484 U.S. 365 (1988), which defined “creditor’s interest” as “the value of the collateral.”
Moreover, it is well established that mortgage loans may be assigned from one creditor to another
without any impairment to the assignee’s ability to enforce the loan terms against the debtor.
Therefore, the Bankruptcy Court’s Order on Debtor’s Objection is affirmed.
CONCLUSION
Based on the above reasoning, the court finds Rinehart’s challenges to the Bankruptcy
Court’s ruling to be without merit and the court affirms the Bankruptcy Court’s ruling in its
entirety. Because this Memorandum Decision and Order disposes of the appeal, the Clerk of
Court is directed to close the case.
DATED this 26th day of October, 2012.
BY THE COURT:

___________________________________
DALE A. KIMBALL,
UNITED STATES DISTRICT JUDGE

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