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Durham v. MTC Financial Inc.

United States District Court, D. Arizona

January 18, 2019

Carl Durham, Plaintiff,
v.
MTC Financial Incorporated, Defendant.

          ORDER

          Douglas L. Rayes United States District Judge

         Following a January 15, 2019 hearing, the Court issued a minute entry granting Plaintiff Carl Durham's request for a temporary restraining order (“TRO”) and enjoining the January 16, 2019 trustee's sale of his home. (Doc. 17.) This written order elaborates on the Court's reasoning.

         I. Factual Background[1]

         When someone borrows money to finance a home, that loan customarily is memorialized in a promissory note, which “is a contract that evidences the loan and the obligor's duty to repay.” Hogan v. Wash. Mut. Bank., N.A., 277 P.3d 781, 784 (Ariz. 2012). Repayment of a home loan typically is secured by pledging the home as collateral. This security is called a mortgage, A.R.S. § 33-702, and in Arizona the mortgage often takes the form of a deed of trust, which transfers legal title to the home to a trustee while leaving the borrower with possession of the property. “The trustee, in turn, holds bare legal title for the beneficiary, who is typically the original lender under the note, . . . for the sole purpose of selling the property if the trustor/borrower defaults on the note.” Steinberger v. McVey ex rel. Cty. of Maricopa, 318 P.3d 419, 426 (Ariz.Ct.App. 2014). Although generally the promissory note and deed of trust travel together, A.R.S. § 33-817, they “are nonetheless distinct instruments that serve different purposes.” Hogan, 277 P.3d at 784.

         In April 2007, Plaintiff borrowed $182, 700 (the “Loan”) from National City Bank. Plaintiff's obligation to repay the Loan was evidenced by a promissory note (“Note”), and repayment of the Loan was secured by a second mortgage on Plaintiff's home in the form a deed of trust (“Deed of Trust”).[2] If Plaintiff did not make timely payments on the Loan per the terms of the Note, the Deed of Trust authorized the designated trustee, on the lender's behalf, to sell Plaintiff's home to satisfy the unpaid balance. The Deed of Trust identified Plaintiff as the borrower, National City Bank as the lender, and National City Bank, Consumer Loan Services as the trustee. But, as is common in the modern mortgage industry, the identities of the lender and trustee changed over time as the Loan was sold to other financial institutions and those financial institutions, in turn, substituted new trustees under the Deed of Trust. (Doc. 1-3 at 3, 10-15.)

         Plaintiff fell behind on Loan payments in late 2010. By that time, the Loan apparently had been acquired by Citigroup Global Markets Realty Corporation (“Citigroup”), and BSI Financial Services, Inc. (“BSI”) serviced the loan on Citigroup's behalf.[3] Plaintiff pursued loss mitigation with BSI, which resulted in two distinct agreements: (1) an April 12, 2011 settlement agreement (“Settlement Agreement”) addressing the lien on Plaintiff's home memorialized in the Deed of Trust and (2) a Contingent Compromise Settlement Agreement (“Contingent Compromise”) signed by Plaintiff on April 14, 2011, and by BSI (as attorney-in-fact for Citigroup) on April 18, 2011, which addressed Plaintiff's repayment obligations under the Note. (Doc. 1-3 at 3-4, 19-22.)

         The Settlement Agreement is not in the record, but the recitals in the Contingent Compromise indicate that the Settlement Agreement exists and provide some clues about its terms. Recital A confirms that Plaintiff borrowed $182, 700 from National City Bank in April 2007, that the Loan was memorialized in a Note, and that the Note was secured by a lien on Plaintiff's home as memorialized in the Deed of Trust. Recital B explains that the lien “was released pursuant to the acceptance of a settlement . . ., the terms of which were memorialized in a settlement letter . . . dated April 12, 2011, ” but that, “[p]ursant to the terms of the Settlement Agreement, ” Plaintiff still owed the outstanding balance due on the Note, which at that time had risen to $196, 122.93. (Doc. 1-3 at 19.)

         The Contingent Compromise addressed this outstanding balance. Per its terms, Plaintiff agreed to pay BSI a lump sum of $10, 000 on May 13, 2011, and then to pay another $20, 000 (at a 0% interest rate) in monthly installments of $200 beginning on June 1, 2011 and due on the first of each month thereafter. If Plaintiff timely paid these amounts, Citigroup agreed to compromise the amount due on the Note. But if Plaintiff failed to timely pay these amounts, Citigroup had the option to terminate the Contingent Compromise without notice to Plaintiff and to pursue whatever remedies were available to it under the terms of the Note. (Doc. 1-3 at 19-20.)

         Thus, it appears that Citigroup released the Deed of Trust on April 12, 2011, at which point Plaintiff's obligation to repay the Loan remained, but possibly became unsecured because Citigroup released the lien that until then had secured repayment. Through the Contingent Compromise, Citigroup agreed to accept $30, 000 in full satisfaction of this outstanding, unsecured balance, contingent upon Plaintiff making all payments on schedule. If Plaintiff did not timely make all payments, Citigroup could revert to the terms of the Note. But the Loan presumably remained unsecured because the Deed of Trust had been released on April 12, 2011, and nothing in the record indicates that termination of the Contingent Compromise also unwound or terminated the Settlement Agreement.[4]

         Plaintiff alleges that he made all payments due under the Contingent Compromise, “to the best of [his] knowledge and belief.” The record, however, contains little evidence of those payments. Plaintiff submitted a copy of a cashier's check that indicates he timely made the $10, 000 lump sum payment. Plaintiff also submitted a bank statement showing that he made a $200 payment to BSI on June 16, 2011, though it is not clear whether this was a late payment for the installment due June 1, 2011, or an early payment for the installment due July 1, 2011. The record contains no documentation of installment payments. (Doc. 1-3 at 4, 24, 44.)

         Plaintiff, however, filed for Chapter 7 bankruptcy in November 2011, and he admitted during the January 15, 2019 hearing on his TRO request that he stopped making Contingent Compromise payments by at least that date.[5] BSI was identified as a creditor in Plaintiff's bankruptcy case, and Plaintiff received a Chapter 7 bankruptcy discharge on March 19, 2012. (Doc. 1-3 at 4, 26-27.)

         In August 2015, Defendant Trinity Financial Services, LLC (“Trinity”) acquired ownership and servicing rights to Plaintiff's Loan via a Corporate Assignment of Deed of Trust.[6] Precisely how Trinity acquired these rights is not entirely clear from the record. National City Bank originated the Loan. At some point, National City Bank merged with PNC Bank N.A. (“PNC”). On August 12, 2010, PNC assigned the Deed of Trust to Dreambuilder Investments, LLC (“Dreambuilder”).[7] In April 2011, Plaintiff entered the Contingent Compromise with Citigroup, which indicates that at some point between August 2010 and April 2011 Dreambuilder (or its successor in interest) sold the Loan to Citigroup. But in August 2015, Dreambuilder assigned the Deed of Trust to Trinity, indicating that at some point between April 2011 and August 2015 Dreambuilder reacquired the Loan from Citigroup (or its successor in interest). The record, however, contains no evidence of how Citigroup came to own the Loan, or how Dreambuilder once again came to occupy that role so that it could then transfer it to Trinity in August 2015. For purposes of this order, however, the Court accepts that Trinity acquired ownership and serving rights to the Loan-to the extent any remained-in August 2015. (Doc. 1-3 at 10, 17, 19, 35, 38.)

         In December 2017, Plaintiff began the process of refinancing the first mortgage on his home through PNC. At this time, Plaintiff believed that the second mortgage on his home had been satisfied-the Deed of Trust having been released by the Settlement Agreement, and the unsecured obligation to repay the Loan having been discharged through bankruptcy. During the refinancing process, however, PNC informed Plaintiff that the lien from his second mortgage still was held against his home, and that it currently was held by Trinity. (Doc. 1-3 at 4-5.)

         In January 2018, Plaintiff contacted Trinity to obtain more information. Trinity notified Plaintiff that it “received the ownership and servicing rights” to the Loan in August 2015, and that as of January 11, 2018 the outstanding amount of the Loan was $28, 655. Then, in May 2018, Trinity sent Plaintiff a Settlement Termination Letter explaining that Trinity was terminating the Contingent Compromise because Plaintiff failed to pay the July 1, 2011 installment (and presumably others thereafter, given Plaintiff's admission during the TRO hearing). Citing Paragraph 6 of the Contingent Compromise, Trinity also told Plaintiff that “the terms reverted back to the original terms of the Note and Deed of Trust.” Paragraph 6 of the Contingent Compromise, however, does not reference the Deed of Trust, only the Note. (Doc. 1-3 at 5, 20, 38, 40.)

         In September 2018, Trinity sent Plaintiff a Notice of Default and Intent to Foreclose, which stated that Plaintiff owed $55, 693.26 on the Loan as of September 7, 2018. The following month, Plaintiff sent Trinity a letter disputing that he owed any balance on the Loan. Later that month, Trinity sent Plaintiff a payoff statement reflecting a total payoff amount of $240, 431.99. Finally, on October 15, 2018, Defendant MTC Financial Inc., dba Trustee Corps (“Trustee Corps”), in its capacity as trustee for Trinity under the Deed of Trust, noticed a trustee's sale of Plaintiff's home for January 16, 2019. (Doc. 1-3 at 5, 46, 51, 53, 57-58.)

         In November 2018, Plaintiff sent letters to Trinity requesting, among other things, an itemized accounting of the Loan history and a copy of the Settlement Agreement referred to in the recitals of the Contingent Compromise. Plaintiff received a partial accounting of the Loan history, reflecting activity since September 11, 2013 only, but no copy of the Settlement Agreement. (Doc. 1-3 at 5-6, 54-55, 63-67.)

         II. Procedural History

         Faced with the prospect that his home might be sold at auction, Plaintiff filed a complaint in Maricopa County Superior Court (“State Court”) on December 28, 2018. The complaint names as the defendant “MTC Financial Inc. dba Trustee Corps on behalf of Trinity Financial Services, LLC, ” and asserts three claims. First, Plaintiff claims that Defendants failed to release the Deed of Trust pursuant to the Settlement Agreement in violation of A.R.S. § 33-707(A), which provides:

If a mortgagee, trustee or person entitled to payment receives full satisfaction of a mortgage or deed of trust, he shall acknowledge satisfaction of the mortgage or deed of trust by delivering to the person making satisfaction or by recording a sufficient release or satisfaction of mortgage or deed of release and reconveyance of the deed of trust, which release, satisfaction of mortgage or deed of release and reconveyance shall contain the docket and page number or recording number of the mortgage or deed of trust. If a mortgagee, trustee or person entitled to payment receives an amount less than full satisfaction of a mortgage or deed of trust, but has agreed in writing to release the mortgage or deed of trust, the mortgagee, trustee or person shall acknowledge release of the mortgage or deed of trust by delivering to the person making payment of the agreed amount that is less than full satisfaction or by recording a sufficient release of the mortgage or release and reconveyance of the deed of trust, which release or release and reconveyance shall contain the docket and page number or recording number of the mortgage or deed of trust. It shall not be necessary for the trustee to join in the acknowledgment or satisfaction, or in the release, satisfaction of mortgage or deed of release and reconveyance. The recorded release or satisfaction of mortgage or deed of release and reconveyance constitutes conclusive evidence of full or partial satisfaction and release of the mortgage or deed of trust in favor of purchasers and encumbrancers for value and without actual notice

         Second, Plaintiff claims that Defendants cannot seek to recover the unpaid debt because the applicable statute of limitations for an action on a debt is six years, and Defendants contend that Plaintiff stopped making installment payments on July 1, 2011. Third, Plaintiff claims that Defendants are attempting to collect a debt that was discharged through bankruptcy in violation of 11 U.S.C. § 524. In addition to compensatory damages, Plaintiff requests that the Court “[g]rant a Preliminary Injunction and/or Temporary Restraining Order . . . to keep the Defendants from causing further harm and proceeding any further with the Trustee's Sale of 17251 N. 61st Ave., Glendale, Arizona 85308 on January 16, 2019 at 11:30 AM.” (Doc. 1-3 at 2-8.)

         On January 3, 2019, the State Court issued an order directing Defendants to appear for a hearing on Plaintiff's TRO request on January 15, 2019 at 9:30 AM. Plaintiff served Trustee Corps with the summons, complaint, and a copy of the State Court's order on January 9, 2019, but did not serve Trinity.[8] Before this hearing could occur, however, Trustee Corps removed the case to this Court on January 11, 2019, invoking the Court's jurisdiction to hear disputes between citizens of different states where the amount in controversy exceeds $75, 000. (Doc. 1; Doc. 1-7; Doc. 16); 28 U.S.C. §§ 1331, 1441, 1446.

         On January 14, 2019, the Court issued an order setting a hearing on Plaintiff's TRO request for January 15, 2019 at 2:00 PM. The Court also permitted Trustee Corps to file a written response by no later than noon on the day of the hearing. Trustee Corps timely did so. (Doc. 8; Doc. 15; Doc. 16.)

         III. ...


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