509 B.R. 292
Bankr. D. Haw.2014Background
- IndyMac made a $524,000 construction loan to Lawrence and Kathy Abatie in 2003, secured by a recorded first mortgage on Lahaina property; the note permitted recovery of reasonable attorneys’ fees and the mortgage expressly secured modifications of the note.
- In 2007 IndyMac and the Abatíes executed a Modification Agreement that altered interest and payment terms (including negative amortization) but did not amend or re-record the mortgage; the principal was acknowledged as $524,000.
- HSBC later acquired the note (original endorsed in blank) and succeeded to IndyMac’s interest; The Mortgage Store (TMS) held a junior (second) mortgage from 2006 and its chapter 7 trustee foreclosed and purchased the property subject to HSBC’s mortgage.
- TMS’s trustee sold the property for $840,000, paid HSBC $524,000 at closing, and is holding remaining proceeds pending resolution of objections to HSBC’s secured claim; HSBC moved for disbursement of the remaining proceeds.
- The trustee challenged HSBC’s right to enforce the note/mortgage, the effect of the 2007 modification on the mortgage’s scope, the amount and documentation of HSBC’s claim (including escrow and advances), and HSBC’s requested attorneys’ fees; the court resolved these disputes.
Issues
| Issue | HSBC’s Argument | TMS Trustee’s Argument | Held |
|---|---|---|---|
| Right to enforce note and mortgage | HSBC has the original note endorsed in blank and thus is entitled to enforce the note and the mortgage | Assignment of mortgage did not transfer the note; assignment without note severs obligation from security | HSBC entitled to enforce note; mortgage follows the note under Hawaii law; endorsement in blank + possession makes HSBC a person entitled to enforce the note |
| Effect of 2007 Modification on security | Modification changed terms but did not create a new obligation; mortgage text secures modifications and therefore secures amounts under the modified note | Modification (negative amortization) created a new note or materially jeopardized junior lien, so mortgage shouldn’t secure additional or modified amounts | Modification did not create a new obligation; 2003 mortgage secures the modified debt; junior lienholder had constructive notice and cannot force senior to protect it |
| Standing and amount of HSBC’s claim | HSBC asserted secured claim against estate property; trustee lacks standing to challenge amounts because non-party to loan | Trustee can object to amount, questions documentation of advances, interest calculation, and escrow balance | Trustee has standing under bankruptcy and Hawaii law; principal established by modification and ledger; HSBC substantiated principal and escrow sufficiently despite confusing docs |
| Attorneys’ fees sought by HSBC; trustee’s fees recovery | HSBC seeks $57,188.02 in fees incurred by multiple firms; fees are recoverable under note/mortgage provisions | Trustee objects to excessive, poorly documented, pre-acquisition, and duplicative fees; seeks offset for trustee’s fees | Court reduces HSBC’s fees to $14,988.16 after disallowing duplicative, unsubstantiated, or client-choice transition charges and all Allen Matkins billing; denies trustee’s fee claim but disallows HSBC fees incurred after sale closing |
Key Cases Cited
- S.N. Castle Estate v. Haneberg, 20 Haw. 123 (Haw. 1910) (assignment of notes operates as assignment of mortgage)
- McIntosh v. Murphy, 52 Haw. 29 (Haw. 1970) (Hawaii courts follow Restatement authority)
- Bynum v. Magno, [citation="106 Hawai'i 81"] (Haw. 2004) (Hawaii appellate reliance on Restatement principles)
- In re Hoopai, 369 B.R. 506 (9th Cir. BAP 2007) (bankruptcy trustee’s duties to object to claims under §704)
- United States v. Hoopai (reversal on other grounds), 581 F.3d 1090 (9th Cir. 2009) (post-BAP appellate decision relevant to procedural posture)
- Lahaina Fashions v. Bank of Hawaii, [citation="131 Hawai'i 437"] (Haw. 2014) (Hawaii courts’ practice of citing Restatement and modern property law authorities)