United States Bankruptcy Appellate Panel of the First Circuit
MICHAEL P. BLAIS, d/b/a Straightline Builders, and MELISSA A. BLAIS, Debtors.
MICHAEL P. BLAIS and MELISSA A. BLAIS, Appellees U.S. BANK NATIONAL ASSOCIATION, as Trustee For Holders of Bear Stearns Asset-Backed Securities I Trust 2006-IM1, Asset-Backed Certificates, Series 2006-IM1, Appellant,
Bankruptcy Case No. 12-20972-PGC.
Michael K. Martin, Esq., and Jisel E. Lopez, Esq., on brief for Appellant.
James F. Molleur, Esq., Jennifer G. Hayden, Esq., and Jessica A. Lewis, Esq., on brief for Appellees.
Before Feeney, Bailey, and Hoffman, United States Bankruptcy Appellate Panel Judges.
Hoffman, U.S. Bankruptcy Appellate Panel Judge.
U.S. Bank National Association, as Trustee for Holders of Bear Stearns Asset-Backed Securities I Trust 2006-IM1, Asset-Backed Certificates, Series 2006-IM1 (the " Bank" ), appeals from the bankruptcy court order (the " Order" ) sustaining the objection of the debtors, Michael P. Blais and Melissa A. Blais, to its secured claim. For the reasons discussed below, we VACATE the Order and REMAND to the bankruptcy court for further proceedings consistent with this opinion.
Richard and Noella Michaud conveyed property located at 351 West Street, Biddeford, Maine (the " Original Property" ) to Mr. Blais, by deed dated August 17, 2001. The Michauds owned the property next door. On May 13, 2002, Mr. Blais conveyed the Original Property to himself and Ms. Blais, as joint tenants. On December 22, 2004, the Blaises conveyed back to the Michauds a seven-foot strip of land which comprised a portion of the Original Property
abutting the Michauds' property, retaining the remaining land on which their home was located (the " Remaining Property" ).
On November 28, 2005, in connection with a refinance of the debt on the Remaining Property, the Blaises executed a $245,000.00 promissory note (the " Note" ) in favor of Impac Funding Corporation d/b/a Impac Lending Group, the Bank's predecessor-in-interest. To secure their obligations under the Note, the Blaises executed a mortgage (the " Mortgage" ) in favor of Mortgage Electronic Registration Services, Inc. (" MERS" ), as nominee for Impac and Impac's successors and assigns. The Mortgage was recorded in the York County Registry of Deeds in Book 14704, Page 0215 on December 16, 2005, and identified the subject property as 351 West Street, Biddeford, Maine. The legal description attached to the recorded Mortgage, however, rather than describing the Remaining Property, mistakenly described only the seven-foot strip which the Blaises no longer owned.
MERS assigned the Mortgage to the Bank on May 23, 2011. Thereafter, the Blaises defaulted on their obligations under the Note and the Bank commenced a foreclosure action in state court. On September 15, 2011, the court entered judgment with the consent of the Bank and the Blaises (the " Consent Judgment" ) which provided, among other things, that:
The [Bank] is the current holder of a mortgage on real estate located at 351 West Street, Biddeford, York County, State of Maine to secure the Note, which mortgage is recorded in the York County Registry of Deeds in Book 14704, Page 215 (" Mortgage" ); the legal description of which mortgaged property contained in the Mortgage (" Property" ) is incorporated herein by reference.
Like the Mortgage, the Consent Judgment attached as Exhibit A a legal description of only the seven-foot strip. Pursuant to the terms of the Consent Judgment, the parties agreed: (1) there was no genuine issue as to any material fact involving the Bank's foreclosure complaint; (2) the Mortgage enjoyed a first priority position; and (3) if the Blaises failed to redeem by paying the judgment amount within 120 days of the entry of the Consent Judgment, the Bank would be entitled to proceed with a sale of the property described in the Mortgage and at its option to take exclusive possession of the property.
The Blaises failed to redeem. Before the scheduled foreclosure sale, however, the Bank learned of the error in the legal description attached to the Mortgage. The foreclosure sale was postponed and on May 22, 2012, the Bank commenced an action in the York County Superior Court seeking to reform the Mortgage to reflect the parties' original intention that it encumber the Remaining Property.
Also on May 22, 2012, the Bank's counsel caused to be recorded in the York County Registry of Deeds his affidavit (the " Affidavit" ), in which he averred that he had commenced a reformation action against the Blaises on behalf of the Bank, which action related to property known as 351 West Street, Biddeford, Maine. He further averred that the property involved in the action was the property described in the deed dated May 13, 2002, from Mr. Blais to himself and Ms. Blais, except for the seven-foot strip which had been conveyed to the Michauds. In other words, the Affidavit identified the affected real estate as the Remaining Property. The next day, the clerk of the court caused to be recorded in the York County Registry of Deeds a Clerk's Certificate in which she described the reformation action as follows:
I, Diane Hill, Clerk of the York County Superior Court, certify that [the Bank], as Plaintiff, has filed in this Court a Complaint against Michael P. Blais and Melissa A. Blais . . . as Defendants. In this action, Plaintiff seeks to reform a mortgage deed between Plaintiff and Defendants. The specific real property affected by the action is located at 351 West Street in the City of Biddeford, County of York, and State of Maine. Defendants' property is more particularly described in a deed dated May 13, 2002, and recorded in the York County Registry of Deeds at Book 11622, Page 278, excepting the 7-foot strip conveyed to Richard and Noella Michaud on December 22, 2004, and recorded in said Registry in Book 14331, Page 93.
The Complaint is dated May 22, 2012. It was filed with this Court on May 22, 2012.
On August 2, 2012, during the pendency of the reformation action and before the entry of any judgment, the Blaises filed a voluntary petition for relief under chapter 13 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Maine. In their August 14, 2012, chapter 13 plan of reorganization (the " Plan" ), the Blaises treated the Bank's claim as unsecured and the Remaining Property as unencumbered. The Plan disclosed a total of approximately $284,000.00 of unsecured debt and projected that nearly $140,000.00 would be disbursed to general unsecured creditors. On schedule A-real property, accompanying their bankruptcy petition, the Blaises listed their ownership of the Remaining Property, which they valued at $260,000.00. On their schedule C-property claimed exempt, the Blaises claimed a $95,000.00 exemption in the Remaining Property pursuant to Me. Rev. Stat. Ann. tit. 14, § 4422(1)(A).
The Bank filed an objection to confirmation of the Plan asserting that its claim was fully secured and superior to the interests of the chapter 13 trustee under Bankruptcy Code § 544(a). In support, the Bank alleged that: (1) the parties to the original Mortgage transaction intended that the Remaining Property would secure the Note; and (2) because the Affidavit and the Clerk's Certificate gave the trustee ...