Rhoads v. JPMorgan Chase, N.A.

Citations: 487 B.R. 214; 2013 WL 693423; 2013 U.S. Dist. LEXIS 26105Docket: Nos. CV-12-0508-PHX-DGC, 2:10-bk-17533 RTB; Adversary No. 2:11-ap-01880 RTB

Court: District Court, D. Arizona; February 25, 2013; Federal District Court

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Appellants Douglas and Shannon Rhoads, along with their attorney Ronald Ryan, submitted an unopposed request for a direct appeal to the Court of Appeals regarding a Chapter 11 Bankruptcy order. They are appealing a final order from the U.S. Bankruptcy Court for the District of Arizona that dismissed their adversary complaint with prejudice and awarded attorneys’ fees to JPMorgan Chase, N.A. The appeal is fully briefed without requests for oral argument. The Court denies the request for direct appeal, addresses the merits of the objections raised by the Rhoadses, and grants the appeal in part while denying it in part.

The Rhoadses borrowed $2,405,000 from Washington Mutual Bank (WaMu) on December 17, 2004, securing the loan with a Deed of Trust on their Scottsdale, Arizona property. JPMorgan acquired WaMu’s loans in 2008. The Rhoadses filed for Chapter 11 Bankruptcy on June 4, 2010, reporting the property’s value at approximately $1,676,000 and a debt to JPMorgan exceeding $2,500,000. JPMorgan’s proof of claim totaled $2,859,608.46, accounting for missed payments and fees. In April 2011, JPMorgan sought to lift the automatic stay to proceed with foreclosure, citing the Rhoadses’ failure to make payments since May 2008. The Rhoadses contested JPMorgan’s authority to enforce the Note, but the bankruptcy court approved JPMorgan’s motion, allowing foreclosure after a specified period. 

Subsequently, the Rhoadses filed a motion to relieve the judgment lifting the stay, which was opposed by JPMorgan. Before the bankruptcy court ruled on this motion, JPMorgan scheduled a foreclosure sale. The Rhoadses filed an adversary complaint against JPMorgan’s proof of claim and sought an emergency stay, which the court granted pending a ruling on their motion for relief from the stay. Ultimately, the bankruptcy court denied the Rhoadses’ motion for relief, treating it as a motion for reconsideration.

On November 23, 2011, the Rhoadses filed an emergency motion for a preliminary injunction to prevent a trustee's sale scheduled for December 20, 2011. They sought to reverse a bankruptcy court order lifting the stay and to approve a sale of their property to a third party at current market value to satisfy JPMorgan's lien. Additionally, on November 27, 2011, they filed a motion in an adversary proceeding requesting modification of JPMorgan’s lien to match the property's sale price, approval of a short sale contract, and that sale proceeds be held in court until the adversary proceeding was resolved. The bankruptcy court denied both motions on December 13, 2011. 

On November 15, 2011, during the pending motions, JPMorgan filed to dismiss the Rhoadses' adversary complaint with prejudice. The Rhoadses responded, and a hearing occurred on January 5, 2012. On January 12, 2012, the bankruptcy court granted JPMorgan’s dismissal motion and awarded reasonable attorneys’ fees to JPMorgan from the Rhoadses and their attorney. The court referenced prior orders granting JPMorgan relief from the stay and denying the Rhoadses' motions.

JPMorgan later applied for attorneys’ fees totaling $8,410.50, which the Rhoadses contested but did not dispute the amount. The Rhoadses also sought reconsideration of the dismissal order. After a hearing on April 17, 2012, the court denied their reconsideration motion and deemed JPMorgan's fees reasonable. 

The Rhoadses attempted to appeal the January 12 order, but the Bankruptcy Appellate Council found it was not a final order. They then requested the bankruptcy court to issue a final order of dismissal, asking for it to be without prejudice. JPMorgan did not object to issuing a final order but opposed reconsideration. On May 29, 2012, the bankruptcy court issued a final order dismissing the Rhoadses’ complaint with prejudice and awarding JPMorgan $8,481.91 in attorneys’ fees. The Rhoadses have appealed this final order, specifically challenging the dismissal with prejudice and the award of attorneys’ fees against them and their attorney.

Under 28 U.S.C. § 158(a)(1), the court has jurisdiction over appeals from final judgments, orders, and decrees of bankruptcy judges. The district court may affirm, modify, or reverse a bankruptcy judge’s decision or remand for further proceedings, with findings of fact not set aside unless clearly erroneous. Legal conclusions are reviewed de novo, while factual findings are accepted unless there is a definite conviction of error. The court must view evidence favorably towards the prevailing party.

Appellants sought to certify a direct appeal to the Ninth Circuit, arguing that the case involves unresolved legal questions and matters of public importance. However, the court found no necessity for direct appeal certification and denied the motion.

The appeal concerns the Rhoadses' attempts to block JPMorgan's non-judicial foreclosure of property purchased with a mortgage from WaMu. The bankruptcy court's final order included findings of fact and law regarding JPMorgan's proof of claim. The Rhoadses claimed ownership of property worth approximately $1,676,000, with JPMorgan holding a first lien on a $2,500,000 debt. Although the Rhoadses alleged third-party payments on the debt, they contradicted their own verified statements and failed to provide evidence of such payments. The bankruptcy court concluded that JPMorgan, as the note holder, had the right to enforce the note and sought relief from the automatic stay. It determined that the Rhoadses did not meet the criteria under 11 U.S.C. § 363(f) for a sale free of JPMorgan's lien, as there was no consent from the lien holder and the sale was proposed for less than the lien amount. Ultimately, the bankruptcy court dismissed the Rhoadses’ adversary complaint for lacking a valid legal theory or sufficient facts to invalidate JPMorgan’s claim or demonstrate payment of the debt.

The Rhoadses’ appeal presents a disorganized collection of critiques regarding foreclosure laws, including criticisms of financial institutions and the mortgage market. However, the court finds the objections lack merit. The Rhoadses claim the bankruptcy court mistakenly stated they conceded JPMorgan as the Note holder. The court clarifies this admission's relevance is negligible since the bankruptcy court's determination was based on the Rhoadses’ own bankruptcy schedules and supporting affidavits from JPMorgan. Additionally, their attempt to amend the schedules does not undermine the bankruptcy court's findings, especially given JPMorgan’s submission of the original Note and declarations affirming its ownership of the Rhoadses’ loans.

The Rhoadses further argue that being the holder of the Note does not equate to having a valid proof of claim, asserting only the 'owner' can enforce it. This distinction is poorly articulated and lacks clarity regarding its significance. They reference In re Veal, which notes that ownership and enforcement rights can differ under the U.C.C. However, the court emphasizes that under Arizona law, a 'holder'—who possesses a negotiable instrument—can enforce it, which JPMorgan has demonstrated regarding the Rhoadses' Note. Consequently, JPMorgan had the authority to file a proof of claim and execute necessary actions, including property sale, without legal error from the bankruptcy court. The case In re Veal is differentiated, as it involved a servicing company that did not prove it held the note, unlike JPMorgan in this instance.

A person in possession of a properly endorsed note is entitled to enforce that note. The Bankruptcy Appellate Panel (BAP) clarified that Article 9 governs ownership transfers and proprietary interests in a note, but these do not affect the note-maker's obligation to pay the party entitled to enforce it. The note-maker's obligation remains unaffected by any fractionalization, securitization, or transfer of ownership, provided they know the identity of the enforcing party. The Rhoadses' claim that JPMorgan cannot enforce the note is unconvincing, as it relies on allegations regarding JPMorgan’s compliance with Article 9, which does not invalidate its proof of claim as the note holder. Their assertion that JPMorgan lacks clear documentation of the loan interests transferred is insufficient, as JPMorgan has evidence of purchasing all loan commitments from WaMu and possesses the note negotiated with WaMu. Furthermore, the Rhoadses failed to cite credible authority showing that mortgage securitization precludes the transfer of a note or affects the note maker's payment obligations. They misinterpret the Arizona Supreme Court case Hogan v. Washington Mutual Bank, which found that physical possession of a note is not required for foreclosure, thus not undermining JPMorgan's standing to enforce the note or its proof of claim. The bankruptcy court ruled correctly that the Rhoadses' challenges to JPMorgan’s proof of claim and their assertion of satisfied debt lacked legal merit, as they claimed unspecified payments exceeded their obligation without substantiating this claim.

The Rhoadses failed to provide sufficient factual allegations regarding their own payments or unsolicited payments from third parties to substantiate their claim that a debt exceeding $2.5 million was fully discharged. Although courts must accept well-pled allegations as true for motions to dismiss, the Rhoadses did not meet the required plausibility standard set forth in *Twombly*, as their assertions lacked the necessary factual support and were inconsistent with their previous acknowledgments of the debt. The bankruptcy court correctly dismissed their complaint with prejudice, determining that mere general allegations could not suffice to demonstrate that the debt had been paid. Furthermore, the Rhoadses' claims relied on vague references to various payment types, including credit default swaps and TARP funds, without providing concrete evidence. The bankruptcy court was justified in denying leave to amend the complaint, as the proposed amendments would be futile given the lack of a basis to support their claims. Regarding the award of attorneys' fees, the Rhoadses and their attorney appealed the decision but did not contest the amount, only the appropriateness of the award. The bankruptcy court's findings were limited, stating that JPMorgan was entitled to reasonable attorneys' fees based on the loan documents and state law, without detailed factual or legal analysis.

JPMorgan presents two legal grounds under state law to justify an award of attorney fees, with only the second allowing for fees against an attorney. A.R.S. § 12-341.01(A) permits courts to award reasonable attorney fees to the successful party in contract disputes. A.R.S. § 12-349(A) mandates the assessment of fees against an attorney or party if a claim is brought without substantial justification, primarily for delay, unreasonably expands or delays proceedings, or abuses discovery. The court finds that JPMorgan, as the prevailing party, is entitled to fees from the Rhoadses but requires further findings regarding fees against their attorney, Ronald Ryan. Although JPMorgan argues that the Rhoadses acted without justification and delayed proceedings, the bankruptcy court did not make these findings, necessitating a remand for further consideration of the fees against Ryan. 

The Rhoadses challenge JPMorgan's proof of claim, citing procedural flaws but fail to provide credible evidence of error. The right to enforce the note exists even if the claimant does not own it. The court deems the Rhoadses' arguments regarding securitization assignments irrelevant to JPMorgan's entitlement to enforce the note. Additionally, JPMorgan contends that the Rhoadses' appeal is moot due to a completed trustee sale, and claims of res judicata and judicial estoppel further undermine their position. However, as the court finds sufficient merit in the dismissal of the adversary complaint, these alternative defenses are not addressed.