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Gordon v. Envoy Mortgage, Ltd.

United States District Court, D. New Hampshire

March 20, 2017

Olga L. Gordon, Trustee for the Chapter 7 Estate of Licka Hosch, Appellant and Cross-Appellee
Envoy Mortgage, Ltd., Appellee and Cross-Appellant Opinion No. 2017 DNH 050

          Daniel C. Proctor, Esq. Lawrence M. Edelman, Esq. Michele E. Kenney, Esq. Geraldine L. Karonis, Esq.


          Steven J. McAuliffe United States District Judge

         This is a consolidated appeal and cross-appeal from a decision by the United States Bankruptcy Court for the District of New Hampshire granting the motion of Appellee and Cross-Appellant, Envoy Mortgage Ltd. (“Envoy”), to dismiss the complaint filed by the Chapter 7 Trustee for the Estate of Licka Hosch. For the reasons discussed, the bankruptcy court's decision is affirmed in all respects. The Trustee's motion to certify a question of law to the New Hampshire Supreme Court is denied.

         Standard of Review

         The parties agree that this is a “core” proceeding under 28 U.S.C. § 157(b)(2). Accordingly, this court reviews the bankruptcy court's conclusions of law de novo. Its factual findings are, however, entitled to deference and are reviewed for clear error. See Sheridan v. Michels (In re Sheridan), 362 F.3d 96, 100 (1st Cir. 2004); White v. Gordon, 558 B.R. 15, 18 (D.N.H. 2016); Bates v. CitiMortgage, Inc., 550 B.R. 12, 16 (D.N.H.), aff'd, 844 F.3d 300 (1st Cir. 2016).


         The Bankruptcy Court's factual findings are not in dispute. In November of 2013, in connection with the purchase of real estate in Hudson, New Hampshire (the “Property”), Licka Hosch executed a promissory note to Envoy, secured by a mortgage deed to the Property. Hosch defaulted on her obligations under the note and, on July 30, 2015, Envoy conducted a foreclosure sale, at which it was the high bidder.

         On August 27, 2015 - before Envoy recorded a foreclosure deed - Hosch sought bankruptcy protection by filing a Chapter 13 petition. Under precedent of the bankruptcy court for this district, Envoy was required to obtain relief from the automatic stay before recording the foreclosure deed. See In re Beeman, 235 B.R. 519, 526 (Bankr. D.N.H. 1999). Accordingly, on September 22, 2015, Envoy filed a motion seeking relief from the automatic stay.

         On October 6, 2015, before the bankruptcy court ruled on the motion for relief from the stay, Hosch moved the bankruptcy court to convert her case to a Chapter 7 proceeding. That motion was granted and the Trustee was appointed. The following day, the Trustee recorded in the registry of deeds a notice asserting her rights as a lien creditor against the Property under the provisions of 11 U.S.C. § 544.[1]

         On October 14, 2015, in the absence of any objection, the bankruptcy court granted Envoy's motion for relief from stay in a form order. But, pursuant to Federal Bankruptcy Rule of Procedure 4001(a)(3), it stayed the effect of that order for another 14 days. Finally, on November 3, 2015 - 96 days after the foreclosure sale, 28 days after the case was converted to a Chapter 7 proceeding, and six days after the expiration of the stay imposed by Rule 4001(a)(3) - Envoy recorded the foreclosure deed in the registry of deeds.

         In December of 2015, the Trustee commenced an adversary proceeding, in which she advanced three claims against Envoy:

In Counts I and II, the Trustee seeks a declaratory judgment pursuant to 11 U.S.C. § 544(a)(1) and/or (a)(2) that the Trustee has a first position lien on the Property that is superior to Envoy's ownership interest by virtue of [her] intervening lien and Envoy's untimely recordation of the foreclosure deed and affidavit. . . . [I]n Count III, which is framed in terms of disallowance of a secured claim pursuant to 11 U.S.C. § 506(a)(1), the Trustee essentially requests a declaration that “Envoy's status as the mortgage holder merged, under the Common Law Doctrine of Merger, with [its] ownership interest in the property” such that the estate's interest in the Property has priority over Envoy's ownership interest.

         Bankruptcy Order at 9 (document no. 2 at 83). Envoy moved to dismiss all three of the Trustee's claims, asserting that it timely recorded the foreclosure deed and, therefore, took title to the Property free and clear of all encumbrances which did not have priority over its mortgage, including the Trustee's lien. Alternatively, Envoy asserted that even if it recorded the foreclosure deed late, the effect of an untimely recording would merely render the foreclosure sale void as to the Trustee. But, said Envoy, its mortgage would remain in place, with priority over the subsequently-recorded Trustee's lien.

         The Bankruptcy court held that: (1) Envoy failed to record the foreclosure deed in a timely manner, but (2) “Envoy's mortgage was not extinguished by the recording of the foreclosure deed under the doctrine of merger.” Bankruptcy Order at 19. Accordingly, the bankruptcy court concluded that, “Envoy's mortgage remains unforeclosed and senior in priority to the Trustee's asserted lien rights.” Id. The bankruptcy court then held that the Trustee's complaint failed to state any viable claims and it granted Envoy's motion to dismiss.

         On appeal, the parties advance two arguments. The Trustee asserts that the foreclosure sale and subsequent (though untimely) recording of the foreclosure deed were effective to transfer title to the Property to Envoy, but subject to the Trustee's rights as a priority lien creditor. According to the Trustee, when Envoy eventually recorded its foreclosure deed, it took title to the property and its mortgage “merged” with its fee interest. And, because Envoy recorded that foreclosure deed beyond the statutorily prescribed time (i.e., “late”), New Hampshire's foreclosure statute provides that the Trustee's intervening lien was not extinguished. So, says the Trustee, the bankruptcy court erred in concluding that Envoy's mortgage remains a valid encumbrance on the Property, superior to her lien.

         Envoy, on the other hand, does not take issue with the bankruptcy court's conclusion that its mortgage is superior to the Trustee's lien, but it does assert that the bankruptcy court erred in concluding that it failed to record its foreclosure deed in a timely manner (and, therefore, must conduct a new foreclosure sale to extinguish the Trustee's lien and take clear title to the Property).


         I. Governing Law.

         Under New Hampshire law, a mortgagee that has exercised the statutory power of sale must record a foreclosure deed (along with a copy of the notice of sale and a foreclosure affidavit) in the appropriate registry of deeds within 60 days of the foreclosure sale. N.H. Rev. Stat. Ann. (“RSA”) 479:26, I. There is, however, a “safe harbor” provision which provides that, “If such recording is prevented by order or stay of any court or law or any provision of the United States Bankruptcy Code, the time for such recording shall be extended until 10 days after the expiration or removal of such order or stay.” Id. Upon recording the foreclosure deed, the statute provides that “title to the premises shall pass to the purchaser free and clear of all interests and encumbrances which do not have priority over such mortgage.” RSA 479:26, III.

         Finally, the statute addresses (or attempts to address) the situation in which a foreclosure deed is not timely recorded, providing:

Failure to record said deed and affidavit within 60 days after the sale shall render the sale void and of no effect only as to liens or other encumbrances of record with the register of deeds for said county intervening between the day of the sale and the time of the recording of said deed and affidavit.

RSA 479:26, II (emphasis supplied). Here, the parties disagree as to the legal consequences that follow when a mortgagee fails to record a foreclosure deed in a timely manner and, prior to recordation but after the foreclosure ...

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