Kim v. JP Morgan Chase Bank, N.A. (In re Kim)

Citation: 585 B.R. 881Docket: Civil Action No. 16–cv–02928–PAB; Bankruptcy No. 10–33960 MER, Chapter 7

Court: District Court, D. Colorado; March 1, 2018; Federal District Court

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Debtors Alexander N. Kim and Laura J. Foster are appealing a November 15, 2016 decision from the United States Bankruptcy Court for the District of Colorado regarding their Chapter 11 bankruptcy case related to the property at 69 Vista High Drive, Carbondale, CO. Jurisdiction for the appeal is established under 28 U.S.C. 158(a). Kim executed a $2,000,000 note to Washington Mutual Bank, secured by the property through a Deed of Trust recorded in 2008. After Washington Mutual was closed, JP Morgan Chase Bank acquired the note from the FDIC. The debtors filed for bankruptcy on September 21, 2010, with Chase submitting a proof of claim shortly thereafter, later amended in 2013. The case transitioned to Chapter 7 bankruptcy, allowing Chase to seek foreclosure on the property.

During the 2014 foreclosure proceedings, Chase discovered the original note was missing and subsequently withdrew its motion for sale. Chase later secured a lost instrument bond worth $3,000,000. The debtors objected to Chase's claim, arguing it was invalid without possession of the note. Following a two-day evidentiary hearing, the bankruptcy court concluded that the note was lost, that Chase could enforce it under Colorado law despite the loss, and that the bond provided sufficient protection against double payments. The debtors filed a notice of appeal on November 29, 2016, raising eight issues primarily contesting the factual support for the bankruptcy court's findings and the legality of its rulings.

A party can appeal final judgments or orders from a bankruptcy court to either a district court or a bankruptcy appellate panel under 28 U.S.C. § 158(a)(1). The reviewing court examines the bankruptcy court's legal decisions de novo, as established in *In re Baldwin*, 593 F.3d 1155, 1159 (10th Cir. 2010), and also reviews mixed questions of law and fact that primarily involve legal issues de novo, as seen in *In re Wes Dor Inc.*, 996 F.2d 237 (10th Cir. 1993). Factual findings by the bankruptcy court are reviewed for clear error, meaning they are upheld unless unsupported by the record or if the reviewing court is convinced a mistake was made, as noted in *In re Johnson*, 477 B.R. 156, 168 (B.A.P. 10th Cir. 2012). If factual findings are based on incorrect legal standards or misapplied standards, they are reviewed de novo.

In the context of bankruptcy, a "claim" is defined as a right to payment, regardless of its disputed status (11 U.S.C. § 101(5)(A)). State law governs property rights determinations within bankruptcy proceedings, prompting the court to apply Colorado law, particularly the Colorado Uniform Commercial Code (UCC). An instrument endorsed in blank becomes payable to bearer and can be negotiated by possession alone (Colo. Rev. Stat. 4-3-205(b)). The bankruptcy court confirmed that the Note in question is endorsed in blank, but the dispute arises because Chase does not possess the Note. The bankruptcy court allowed Chase's claim based on Colorado's lost instrument statute, which permits a person not in possession of an instrument to enforce it under specific conditions: prior possession, loss not due to transfer or lawful seizure, and inability to regain possession due to destruction or unknown whereabouts. Additionally, the person seeking enforcement must prove the instrument's terms and their right to enforce it, with the court ensuring adequate protection against potential claims from others before judgment is rendered.

To enforce a claim under the lost instrument statute, Chase must demonstrate the required elements by "clear and convincing evidence." Debtors contend that the bankruptcy court incorrectly determined that Chase possessed the note and was entitled to enforce it. They argue that Chase did not provide competent evidence of possession, claiming that the evidence consisted solely of "hearsay electronic business records" showing multiple copies of the Washington Mutual (WaMu) note. However, the bankruptcy court found that Chase successfully presented convincing evidence that the original note was scanned into its business records on September 17, 2009, and that the original note was subsequently lost after being transferred to Chase's former attorney.

Chase's representative, Marilyn Lea, testified regarding the procedures for document transfers and scanning original notes, asserting the authenticity of the screenshot showing the scanned note. The bankruptcy court deemed her credible and admitted the screenshot as a business record. Debtors challenged Ms. Lea's testimony, arguing she lacked direct knowledge of the original note’s possession or scanning. However, the court noted that a business record can be admitted by anyone with sufficient knowledge of the record-keeping system, making Ms. Lea's lack of personal knowledge irrelevant. Debtors also claimed that the bankruptcy court admitted Exhibit L for a limited purpose, but the court clarified that it was admitted solely as a business record of Chase, establishing its contents without extending its implications.

Chase demonstrated possession of the Note as required by the bankruptcy court, which found credible evidence supporting that Chase took possession in 2009. The court rejected the debtors’ challenge to this credibility regarding Ms. Lea. The debtors contended that Chase could not enforce the Note under the Purchase and Assumption Agreement (PAA) due to non-compliance with its terms, specifically section 3.3, which they argued necessitated a separate deed or bill of sale for each note. However, the bankruptcy court ruled that the PAA was irrelevant to the debtors’ obligations since the Note was indorsed in blank, allowing enforcement by the bearer. The court noted that the FDIC properly transferred the Note to Chase, as supported by testimony regarding the transfer process. Furthermore, section 3.3 of the PAA only outlines limitations on Chase's recourse against the FDIC for title defects and does not impose requirements for valid transfers. The debtors cited cases to bolster their argument, but the factual scenarios were not analogous, and none addressed instruments payable to the bearer. Finally, the debtors claimed Chase did not prove the loss of the Note by clear and convincing evidence. The court found no evidence suggesting the Note was transferred or seized by another entity, thus confirming Chase’s assertion of loss.

The bankruptcy court determined that the original paper Note was lost, possibly during transmission involving Chase's prior counsel. Evidence presented at the hearing supported this conclusion, including an affidavit regarding the loss related to the debtors' loan. The debtors contended that Chase did not demonstrate the Note was sent to its foreclosure counsel; however, the court did not find evidence that the Note was lost during this transfer. Chase was not obligated to prove the specifics of the loss, as Colorado's lost instrument statute only requires that the loss is not due to a transfer or lawful seizure. The court found no evidence suggesting that the Note was transferred or seized, supported by testimony regarding its transfer and the acquisition of a lost instrument bond.

The court rejected the debtors' reliance on case law, stating that the circumstances in those cases differed significantly, as they involved parties who could not enforce the instrument due to various defects. The court concluded that the debtors failed to demonstrate any clear error in the bankruptcy court's finding that Chase had proven the Note was lost under the statute.

Regarding the admissibility and reliability of Chase's evidence, the debtors challenged the bankruptcy court's ruling. They presented testimony from forensic expert Robert Byrnes, who claimed he needed to review an original document preserved in a forensic manner to verify Chase's records. The court deemed the demand for detailed metadata unreasonable, noting that Byrnes did not assert that the scanned Note had been altered. Instead, the court accepted testimony indicating that the scanning process was not subject to modification. The debtors argued that the court's finding effectively shifted the burden of proof onto them.

Ms. Lea testified that modifying the business records as evidence was infeasible, and the bankruptcy court found her testimony credible. The court concluded that metadata was unnecessary to verify Chase's receipt of the Note and did not shift the burden of proof onto the debtors. Debtors argued that the court should have drawn a negative inference due to Chase's failure to produce certain documents, but the court had discretion in this matter. It awarded debtors $22,841.03 in attorney's fees as a sanction for Chase's noncompliance with discovery requests, but did not impose harsher sanctions. The bankruptcy court's order from November 15, 2016, was affirmed, and the request for oral argument was denied as unnecessary. The court's records were referenced specifically by volume and page. Debtors contended that Chase's documents were unreliable and that the bankruptcy court failed to apply the clear and convincing standard, but these arguments were rejected. Additionally, concerns regarding the metadata of a scanned Note were addressed, with the court finding that the document had been appropriately recorded in Chase's files in 2009.