Strayton v. Champion Mortgage, A Division of Key Bank, USA, Na

In re
ROBERT H. STRAYTON,
Debtor
______________________________________
ROBERT H. STRAYTON,
Plaintiff
v.
CHAMPION MORTGAGE, A DIVISION
OF KEY BANK, USA, NA,
Defendant
U NITED STATES BANKRUPTCY COURT
D ISTRICT OF M ASSACHUSETTS
Chapter 13
Case No. 06-13703-RS
Adversary Proceeding
No. 06-1394
MEMORANDUM AND ORDER
Before the Court is the Debtor/Plaintiff’s request for continuation of previously granted
injunctive relief to prevent completion of a pending foreclosure sale of his residence until a final
determination of this adversary proceeding. For the reasons stated below, the Court grants the
injunctive relief requested.
Procedural Status
On September 27, 2006, the Defendant, Champion Mortgage, A Division of Key Bank,
USA, National Association, conducted a foreclosure sale of a Natick condominium unit on
which it holds a second mortgage. On October 16, 2006, the Debtor commenced the within
Chapter 13 case, scheduling this condominium unit as co-owned with his wife, claiming a
Massachusetts homestead exemption with respect thereto and listing Middlesex Savings Bank as
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first mortgagee with a $99,962 secured claim and the Defendant as second mortgagee with a
$99,648 secured claim.
On October 25, 2006, the Debtor filed this adversary proceeding seeking to invalidate the
foreclosure sale as a fraudulent transfer and as a sale not in compliance with Massachusetts law.
In addition, the Debtor seeks to invalidate the sale on account of the buyer’s alleged lack of
authority. On October 26, 2006, I held a non-evidentiary hearing on, and granted, the Debtor’s
request for an injunction against the Defendant, constraining enforcement of its second mortgage
and completion of its foreclosure sale. On November 1, 2006, I conducted an evidentiary
hearing to consider whether to maintain the injunction through completion of the adversary
proceeding. At that hearing, I took live and affidavit testimony and admitted various exhibits. I
also authorized the submission of post-hearing briefs, which I have reviewed. Lastly, I
continued this injunction through my decision on this matter, which I now render.
Background and Findings
The Debtor and his wife acquired the subject condominium unit in January 1998 and
have since occupied it as their principal residence (“Residence”). In October 2002, they
obtained a home equity line from the Defendant (“Line”), secured by a second mortgage on the
Residence. Thereafter, the Debtor defaulted on the Line and, in August 2005, made a
forbearance agreement with the Defendant resolving that default. In late 2005, the Debtor
allegedly defaulted on the forbearance agreement by virtue of a late payment. For the next seven
months, the Debtor and the Defendant engaged in extended negotiations regarding a further
forbearance. The Defendant acted through an ever-changing cast of loan officers, all of whom
extended to the Debtor forbearance reassurances and forbearance terms. None of these officers
remained employed by the Defendant or, if employed, assigned to the Debtor’s account through
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completion of a forbearance agreement. While the Debtor awaited delivery of promised
forbearance documents, the Defendant elected to proceed with foreclosure, a right the Defendant
had taken care to reserve throughout its negotiations with the Debtor. That foreclosure
commenced in August 2006, culminating in the foreclosure sale which occurred on September
27, 2006 and which is the subject of this adversary proceeding.
In conducting the foreclosure, the Defendant did the following (directly or through its
agents): (a) gave default and foreclosure notice to the Debtor and his wife by registered mail; (b)
published the statutorily required legal notice in a local newspaper; and (c) on two consecutive
Sundays, placed a so-called display advertisement in the auction section of The Boston Herald.
The Defendant did not do the following: (a) market the Residence; (b) obtain a current appraisal
of the Residence; (c) contact any broker for valuation or market information including the
availability of prospective buyers or otherwise interested parties; or (d) seek the Debtor’s
permission for a property inspection by prospective buyers or otherwise interested parties.
Four qualified bidders attended the foreclosure auction sale. The highest and successful
bid was $130,000 subject to the approximately $100,000 first mortgage debt. The auctioneer and
the successful bidder signed a memorandum of sale. The closing of the sale has not taken place
as a result of my earlier injunction.
Taking into account the valuation evidence presented at the hearing, I find that the
Residence has a fair market value of at least $325,000.
Discussion
In deciding this matter, I employ the familiar standard for the issuance of a preliminary
injunction, which requires that I weigh four factors: the likelihood that the Debtor will succeed
on the merits of his action to invalidate the foreclosure sale or otherwise avoid it; the potential
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for irreparable harm to the Debtor absent the injunction; the balance of the harm to the
Defendant resulting from the injunction and the harm to the Debtor absent the injunction; and the
public interest. Gately v. Massachusetts, 2 F.3d 1221, 1224 (1st Cir. 1993). I first consider the
likelihood of success on the merits.
It is well-established that, under Massachusetts law, a foreclosing mortgagee must do
more than comply with the procedure prescribed by statute. In re Edry, 201 B.R. 604, 606
(Bankr. D. Mass. 1996). The foreclosing mortgagee must also act in good faith and use
reasonable diligence in conducting the foreclosure sale. See In re LaPointe, 253 B.R. 496, 499-
500 (1st Cir. BAP 2000).
Here, the Defendant’s reasonable diligence consists of the above-noted publication of a
so-called display advertisement in The Boston Herald on two consecutive Sundays. This
advertisement is no more than a bulk notice, in one case lumping three properties and in the
other case lumping seven properties, and in neither case offering anything other than the address
of the to-be-auctioned property and the date, location and time of the auction sale. The
testimony in support of this decidedly minimal foreclosure program by the Defendant’s
foreclosure lawyer and the auctioneer was not helpful, indeed, seemed more than usually self-
serving and, in at least one instance, deliberately obtuse. The gist of their testimony is a
somewhat lordly “custom and practice” defense with little recognition or acknowledgment of the
mandate of Edry et al.
More importantly, the diligence not done is persuasive on the question of success on the
merits: no marketing, no appraisal, no real estate broker contact, no inquiry into the market
regarding either value or prospective buyers; no inspection effort. Moreover, if the foreclosure
sale is completed, significant value will be lost to the estate.
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Accordingly, I find that there is a substantial likelihood that the Debtor will succeed on
the merits of his action to invalidate the foreclosure sale as a consequence of the Defendant’s
lack of reasonable diligence in the conduct of that sale.
I also find that the injunction standard is met as to the other criteria: the loss of the
Debtor’s home would constitute an irreparable harm; that harm far outweighs any harm to the
Defendant if I issue the injunction since the Defendant retains its lien, its secured claim and all
the rights appurtenant thereto in the Debtor’s Chapter 13 case; and the public interest is
implicated where, as here, adherence to the requisites of public transaction is at issue.
Conclusion
The Debtor meets the standard for the issuance of a preliminary injunction to restrain the
Defendant’s enforcement of its lien on the Residence and to constrain its completion of the
foreclosure sale of the Residence pending resolution of the within adversary proceeding.
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Preliminary Injunction
For the reasons set forth above, the Court hereby orders and decrees that the Defendant,
Champion Mortgage, A Division Key Bank, USA, A National Association, and its agents,
owners and employees are hereby enjoined until further order of this Court from selling,
conveying, assigning, hypothecating, transferring, pledging, encumbering, expending, alienating,
or otherwise disposing of the Debtor’s residence, to wit, Condominium Unit #11 at 13 School
Street in Natick, Massachusetts or from taking any action to complete its previously commenced
foreclosure sale with respect thereto or to interfere with the Debtor’s possession and enjoyment
thereof.
Date: January 17, 2007 	_______________________________
Robert Somma
United States Bankruptcy Judge
cc: R. Ravosa, Esq., Counsel to Plaintiff
C. DeCosta, Esq., Counsel to Defendant, Champion Mortgage
R. Jachowicz, Esq., Counsel to Interested Party, Derek Davis
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