Villalobos et al v. BAC Home Loans Servicing LP

Filing 2

ORDER signed by Judge J P Stadtmueller on 5/21/12 ADOPTING 1 the 3/23/12 report and recommendation of U.S. Bankruptcy Judge Pamela Pepper; GRANTING plaintiffs' motion for summary judgment; DENYING defendant's motion for summary judgment; and DISMISSING with prejudice defendant's counterclaim. See Order. (cc: all counsel)(nm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
LEONEL VILLALOBOS and
MARIBEL VILLALOBOS,
Case No. 12-CV-281-JPS
Plaintiffs,
Bankruptcy Case No. 11-02102
v.
BAC HOME LOANS SERVICING LP,

ORDER
Defendant.

On March 23, 2012, the court received a report and recommendation
from United States Bankruptcy Judge Pamela Pepper, including proposed
findings of fact and conclusions of law, regarding the issue of whether the
court should impose an equitable lien in favor of the defendant on the
plaintiffs’ rental property.
According to the findings of fact proposed by the bankruptcy court,
the plaintiffs, Leonel Villalobos and Maribel Villalobos, owned two
properties – their homestead and a rental property. In March of 2007, the
plaintiffs attempted to refinance a loan on their homestead through
Countrywide Bank (“Countrywide”) (of which the defendant, BAC Home
Loans Servicing LP, was a successor). However, one month after completing
the closing on the loan, the plaintiffs discovered that Countrywide applied
the loan proceeds to pay off the mortgage on the plaintiffs’ rental property

instead of the homestead property.1 As a result, plaintiffs had free and clear
title on the rental property and two mortgages encumbering their
homestead. Moreover, this error meant that Countrywide (now BAC Home
Loans) paid off the plaintiffs’ rental property in full, but had no lien against
that property. Instead, Countrywide had a recorded mortgage on the
plaintiffs’ homestead. Yet, because its loan had not been applied toward the
first mortgage on the homestead (held by U.S. Bank Home Mortgage),
Countrywide’s lien on the homestead was second, behind that of U.S. Bank
Home Mortgage.
On December 20, 2010, plaintiffs filed a petition under Chapter 13 of
the Bankruptcy Code. On February 11, 2011, plaintiffs filed an adversary
proceeding against BAC Home Loans, asking the bankruptcy court to
determine that BAC Home Loans’s second mortgage on the homestead (and
its third mortgage for a home equity line of credit) were unsecured under 11
U.S.C. § 506(d), such that the defendant’s liens for those mortgages could be
voided.
The defendant filed an answer and asserted a counterclaim against
plaintiffs. The counterclaim asserted that plaintiffs had been unjustly

1

According to an uncontradicted affidavit submitted by plaintiffs, the
plaintiffs noticed at the closing that documents incorrectly stated that the borrowed
funds would be paid to the holder of the mortgage on their rental property.
Plaintiffs attest that they notified the closing agent of the error – that the payment
should be made to the holder of the mortgage on the homestead, not the holder of
the mortgage on the rental property. The closing agent told them not to worry and
that he would correct the error when he returned to the office. One month later, the
plaintiffs discovered that the closing agent never corrected the error. When
plaintiffs sought to have the error corrected yet again, Countrywide informed them
that there was nothing that could be done under the circumstances.

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enriched, that the defendant inadvertently paid off the rental property rather
than the homestead property and, thus, that the defendant was entitled to be
equitably subrogated to first lien priority on the rental property, despite the
fact that the defendant did not have a mortgage on the rental property.
Subsequently, the parties filed cross-motions for summary judgment on the
issue of whether the court should impose an equitable lien in favor of the
defendant on the plaintiffs’ rental property. Because the parties could not
agree whether the defendant’s counterclaim constituted a “core” proceeding,
and the plaintiffs did not consent to the bankruptcy court’s authority to enter
a final order on the counterclaim, the bankruptcy court issued a report and
recommendation to this court on the cross-motions for summary judgment,
including proposed findings of fact and conclusions of law. See 28 U.S.C.
§ 157(c)(1); see also Stern v. Marshall, 131 S.Ct. 2594 (2011); In re Ortiz, 665 F.3d
906 (7th Cir. 2011).
The bankruptcy court has recommended that the district court grant
the plaintiffs’ motion for summary judgment, deny the defendant’s motion
for summary judgment, and dismiss the defendant’s counterclaim requesting
imposition of an equitable lien on the rental property in favor of the
defendant. As noted by the bankruptcy court, “the purpose of an equitable
lien is to prevent unjust enrichment.” In re Kirchner, 372 B.R. 459, 463 (Bankr.
W.D. Wis. 2007). Yet, here, the bankruptcy court found that the court’s
refusal to impose an equitable lien in the defendant’s favor would not
unjustly enrich the plaintiffs as plaintiffs did not accept or retain a benefit
“under circumstances making it inequitable for [them] to retain the benefit.”
In re Stoffregen, 206 B.R. 939, 944 (Bankr. E.D. Wis. 2007). Instead, the

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bankruptcy court found that the defendant holds a second mortgage on the
plaintiffs’ homestead – rather than holding a first mortgage on that property
or holding a mortgage on the rental property – not due to any action on the
part of the plaintiffs, but because the defendant erroneously applied the
proceeds of the loan to pay off the wrong lien. Accordingly, the bankruptcy
court concluded that it would be improper to impose an equitable lien on the
rental property in favor of the defendant.
When a bankruptcy judge submits proposed findings of fact and
conclusions of law to the district court in a proceeding that is not a core
proceeding, but that is otherwise related to a case under the Bankruptcy
Code, any final order or judgment is required to be entered by the district
judge after considering the bankruptcy judge's proposed findings and
conclusions and after reviewing de novo those matters to which any party has
timely and specifically objected. 28 U.S.C. § 157(c)(1). In this case, neither
party filed objections to the bankruptcy judge’s proposed findings of fact or
conclusions of law. Having carefully reviewed these findings and
conclusions, the court finds that they should be adopted in their entirety.
Accordingly, the court will also enter a final order and judgment granting the
plaintiffs’ motion for summary judgment, denying the defendant’s motion
for summary judgment, and dismissing the defendant’s counterclaim.
Accordingly,
IT IS ORDERED that the March 23, 2012 report and recommendation
of United States Bankruptcy Judge Pamela Pepper (Docket #1) that: the
plaintiff’s motion for summary judgment as to the defendant’s counterclaim
be granted; the defendant’s motion for summary judgment as to the

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defendant’s counterclaim be denied; and, the defendant’s counterclaim be
dismissed be and the same is hereby ADOPTED;
IT IS FURTHER ORDERED that the plaintiffs’ motion for summary
judgment, asking that the court not impose an equitable lien on the rental
property in favor of the defendant, be and the same is hereby GRANTED;
IT IS FURTHER ORDERED that the defendant’s motion for
summary judgment, asking that the court impose an equitable lien on the
rental property in favor of the defendant, be and the same is hereby
DENIED; and
IT IS FURTHER ORDERED that the defendant’s counterclaim
requesting imposition of an equitable lien on the rental property in favor of
the defendant be and the same is hereby DISMISSED with prejudice.
The clerk is directed to enter judgment accordingly.
Dated at Milwaukee, Wisconsin, this 21st day of May, 2012.
BY THE COURT:

J.P. Stadtmueller
U.S. District Judge

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