In re: William David Goldstein and Molly K. Goldstein
Appearances:
Before: TAYLOR, DUNN, and PAPPAS, Bankruptcy Judges.
TAYLOR, Bankruptcy Judge:
INTRODUCTION
Appellants, chapter 71 debtors William David Goldstein and Molly K. Goldstein, appeal the bankruptcy court‘s order authorizing the chapter 7 trustee to compromise and sell, as property of the chapter 7 estate, four state court claims filed by the Goldsteins in postpetition litigation. We conclude that the bankruptcy court did not err when it held that the claims at issue were property of the estate that could be compromised or sold, and we AFFIRM.
FACTUAL BACKGROUND AND PROCEDURAL HISTORY
A. Events preceding the Goldsteins’ bankruptcy filing
Like many similarly situated homeowners impacted by the bad economy, the Goldsteins applied in 2009 for modification of the mortgage2 against their home in Culver City, California. In October 2009, Wells Fargo Bank, N.A. (“Wells Fargo“), as the loan servicer, granted the Goldsteins a three-month trial period plan (“TPP“) under the Home Affordable Modification Program
(“HAMP“).3 The TPP required the Goldsteins to make the first of three payments by November 1, 2009, and to provide executed copies of the TPP and certain other required documentation. The second and third payments were due December 1, 2009 and January 1, 2010, respectively. The TPP provided4:
If I am in compliance with this Loan Trial Period and my representations in
Section 1 continue to be true in all material respects, then the Lender will provide me with a Loan Modification Agreement, as set forth in Section 3, that would amend and supplement (1) the Mortgage on the Property, and (2) the Note secured by the Mortgage.
Request for Judicial Notice, ECF Dkt. #41 at 47 of 254.
The Goldsteins made the three trial payments required under the TPP. Wells Fargo, however, did not provide a permanent loan modification nor did it send the Goldsteins a notice of denial of a permanent modification, as required under the TPP and HAMP.5 Thereafter, the Goldsteins made four more monthly
payments in the amount required under the TPP. Wells Fargo still did not send them either notice of denial or a permanent loan modification agreement. The Goldsteins stopped their payments after May 2010, and in August 2010, filed for protection under chapter 7 to stop foreclosure proceedings. They received their discharges in December 2010, and the bankruptcy case was closed as a no asset case.
B. The State Court Action
In October 2012, nearly two full years after they received their chapter 7 discharges, the Goldsteins filed an action against Wells Fargo and Bank of America, among others, in Los Angeles, California Superior Court (the “State Court Action“). They subsequently filed a verified second amended complaint (the “SAC“). The first, second, third, and fifth causes of action in the SAC relate to the TPP (the “TPP Claims“).6
In the first cause of action, for fraud in the inducement, the Goldsteins alleged that when Wells Fargo offered them the TPP in 2009, Wells Fargo never intended to grant them a permanent loan modification, as required under HAMP; yet, to their detriment, the Goldsteins made seven payments totaling $22,201.83 in reliance thereon. The Goldsteins alleged in the
second cause of action, based on promissory estoppel, that they reasonably relied to their detriment on Wells Fargo‘s promise to provide them with a permanent loan modification following the Goldsteins’ compliance with the TPP and that Wells Fargo should be required to make good on its promise. In the third cause of action, the Goldsteins asserted that Wells Fargo‘s actions with respect to the TPP constituted fraud and were done maliciously and with oppression, entitling the Goldsteins to an award of punitive and exemplary damages. The Goldsteins based their fifth cause of action on breach of contract and the assertions that they complied with their obligations under the TPP, Wells Fargo did not, and the Goldsteins were damaged as a result.
Wells Fargo and Bank of America demurred to the SAC. As to the TPP Claims,
C. Case reopening and subsequent events
The Goldsteins promptly filed a motion to reopen the bankruptcy case, “for the limited purpose of allowing [the Goldsteins] to file an Amended Schedule B (personal property) to schedule certain claims against Wells Fargo Bank.” Order Granting Motion to Reopen, ECF Dkt. #23 at 2. The bankruptcy court granted the motion. It also ordered that a trustee be
reappointed to administer the estate and that the case was to be re-closed 30 days after the Goldsteins filed their Amended Schedule B, “provided that, neither the chapter 7 trustee nor any party in interest opposes such re-closing of the case prior to expiration of the 30-day period.” Id. (emphasis in original).
The Goldsteins filed their Amended Schedule B disclosing the TPP Claims as other contingent and unliquidated claims in the amount of $22,000; they included, however, the following disclaimer:
Debtors believe all causes of action are post-petition causes of action, but Wells Fargo‘s Demurrer in Superior Court alleges that causes of action 1, 2, 3 and 5 are pre-petition causes of action, which debtors lack standing to prosecute, because not scheduled. Approx. $22,000 plus argument for punitive damages.
ECF Dkt. #24 at 4.
Before 30 days passed, Wells Fargo and Bank of America together filed a Motion to Extend Deadline Before Closing of Case (“Motion to Extend“) for the stated purpose of allowing settlement negotiations with the Trustee to continue with respect to the TPP Claims - with the potential for payout to the Goldsteins’ unsecured creditors. The Goldsteins promptly filed opposition. In their opposition, the Goldsteins argued that the case should not be allowed to remain open unless the Trustee filed a motion to sell and that no offer to purchase the TPP Claims then existed. They also argued that determining whether the TPP Claims constituted prepetition or postpetition claims might be problematic, because although events on which the TPP
Claims were based “started pre-petition,” the law “allowing” suit on such events “did not exist” until two years postpetition. ECF Dkt. #28 at 4.
At the hearing on the Motion to Extend, the Goldsteins took a firmer position and asserted that the TPP Claims were postpetition claims.7 The bankruptcy court continued the hearing to coincide with a hearing it then scheduled on a motion to be filed by the Trustee, either to compromise under Rule 9019 or to sell under § 363.
D. The Trustee‘s agreement with Wells Fargo and motion to compromise controversy, or alternatively, for order authorizing sale
The Trustee subsequently entered into a written agreement with Wells Fargo
1. The terms of the Agreement
Pursuant to the Agreement, which was expressly made subject to bankruptcy court approval pursuant to a motion under Rule 9019, Wells Fargo8 agreed to pay the Trustee $60,000 in full settlement of the TPP Claims. As an essential term of the
Agreement, Wells Fargo‘s obligation to pay the $60,000 was made subject to entry of a final order specifically finding that the TPP Claims were property of the bankruptcy estate and not property of the Goldsteins as individuals.9 In addition, the parties to the Agreement agreed that to the extent the bankruptcy court ruled that sale of the TPP Claims under § 363 was the proper procedure, approval under § 363 also satisfied the Trustee‘s obligation to obtain court approval.
2. The Motion
The Trustee moved for approval of the Agreement as a compromise of controversy under Rule 9019, or alternatively, as a sale of estate assets, subject to overbid procedures, under § 363(b) and (m) and Rule 6004. Under both legal theories, the Trustee requested that the bankruptcy court make the specific finding that the TPP Claims were prepetition assets.
In support of her argument that the TPP Claims were prepetition assets,10 the Trustee argued that: (1) the TPP Claims
were based solely on prepetition facts and thus accrued prepetition; and (2) contrary to the Goldsteins’ argument, the discovery rule, which is applicable for purposes of statutes of limitations analysis, did not postpone accrual for ownership purposes under the bankruptcy analysis.11 The Trustee also argued that the decision in West v. JPMorgan Chase Bank, N.A., 214 Cal. App. 4th 780 (2013), which the Goldsteins argued constituted a postpetition change of law that gave rise to their TPP Claims postpetition, merely strengthened the Goldsteins’ claims - it did not create them. Trustee asserted that no binding case law existed prepetition that prohibited the Goldsteins from bringing the TPP Claims before they filed bankruptcy and, thus, that they were prepetition assets of the estate.
3. The Goldsteins’ Opposition
The Goldsteins opposed the Motion based on two primary arguments. First,
claims.12
Second, the Goldsteins asserted that at the time they filed for bankruptcy, neither federal nor state case law “allowed borrowers to sue their lenders for refusing to give the borrower a HAMP loan modification, despite the borrower having fully performed a HAMP TPP.” Opposition to Motion, ECF Dkt. #50 at 23. The Goldsteins cited two decisions13 in which the respective courts, when presented with similar factual scenarios and causes of action, determined that no contracts or executed agreements existed between the subject borrowers and lenders to support the borrowers’ actions. The Goldsteins argued that this state of the law changed in 2012 and 2013, with three decisions. First, the Seventh Circuit issued its opinion in Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547 (7th Cir. 2012), holding that a HAMP TPP was an enforceable contract that “could give rise to
claims against banks, for breach of contract, misrepresentation and fraud.” ECF Dkt. 50 at 25. Then the California court of appeal in West v. JPMorgan Chase Bank and the Ninth Circuit in Corvello v. Wells Fargo Bank, N.A. adopted the Wigod reasoning. The Goldsteins argued that, as a matter of law, their right to remedy under the TPP Claims was created by the postpetition decisional authority in Wigod, West, and Corvello, and not before. They contended, therefore, that the TPP Claims necessarily constituted postpetition claims.
4. The bankruptcy court‘s ruling
The bankruptcy court ruled orally after hearing argument on the Motion and held that all of the TPP Claims arose prepetition and were property of the estate. The bankruptcy court found that:
to the extent there was any fraud, any inducement, any breach of contract, any promissory estoppel claim, that breach would have occurred after the debtors performed and, as debtors[‘] counsel in her last comments said, noted the full performance by the debtors took place in early 2010 after the debtors had made their three payments. Once the debtors made those three payments and otherwise complied with their obligations under the HAMP modification, the fact that they were not granted a permanent
modification, that constitutes the breach. There‘s no question that that was before the bankruptcy case was filed.
Hr‘g Tr. (June 26, 2014) at 53:25-54:11. The bankruptcy court found that the facts giving rise to the fraud claim also arose prepetition, as the Goldsteins themselves alleged in the SAC that they learned that the denial was in February 2010 and they filed bankruptcy in August 2010 because of the denial.
The bankruptcy court also stated that it was not persuaded that “because there were recent cases with respect specifically
to a cause of action based on HAMP modifications that there was no law or no legal right for debtors to have filed a cause of action prior to the bankruptcy case.” Hr‘g Tr. (June 26, 2014) at 55:10-14. The bankruptcy court reasoned that the lack of published cases prepetition was in part due to the fact that HAMP procedures were relatively new. Rather than focusing on the existence of some conflicting legal precedent, which the bankruptcy court noted had no “impact on the date that a claim arises for purposes of when that claim accrues,” Hr‘g Tr. (June 26, 2014) at 56:12-13, the bankruptcy court relied on the fact that prepetition there was “no controlling law saying that the debtors had no right to file a cause of action.” Hr‘g Tr. (June 26, 2014) at 55:21-22. Thus, the bankruptcy court found that the TPP Claims were “assets that the Trustee is entitled to, and in fact obligated to administer.” Hr‘g Tr. (June 26, 2014) at 56:20-21.
The Goldsteins appealed from the bankruptcy court‘s decision the same day the bankruptcy court entered its order.
JURISDICTION
The bankruptcy court had jurisdiction under
ISSUES
Did the bankruptcy court err when it determined that the TPP Claims were property of the bankruptcy estate?
STANDARD OF REVIEW
Whether property is property of the estate is a question of law reviewed de novo. Mwangi v. Wells Fargo Bank, N.A. (In re Mwangi), 432 B.R. 812, 818 (9th Cir. BAP 2010) (citing White v. Brown (In re White), 389 B.R. 693, 698 (9th Cir. BAP 2008)).
DISCUSSION
On appeal, the Goldsteins make the same primary arguments, pro se,14 as their counsel argued to the bankruptcy court.15
First, they contend that none of the TPP Claims were complete, for accrual purposes, until the Goldsteins learned postpetition that Wells Fargo denied them a permanent loan modification - thereby damaging them. Second, they assert that no published decisional authority existed prepetition that supported borrowers’ actions
A. Property of the estate
Section 541(a)(1) of the Bankruptcy Code defines “property of the estate” to include “all legal or equitable interests of the debtor in property as of the commencement of the case.”16 Legal causes of action are included within the broad scope of
§ 541. Sierra Switchboard Co. v. Westinghouse Elec. Corp., 789 F.2d 705, 707 (9th Cir. 1986) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 205 & n.9 (1983)). This includes prepetition tort causes of action, id., as well as prepetition causes of action based on contract, Rau v. Ryerson (In re Ryerson), 739 F.2d 1423, 1425 (9th Cir. 1984). The question presented in this appeal is whether the tort- and contract-based causes of action comprising the TPP Claims accrued, for bankruptcy purposes, prior to the Goldsteins’ petition date and, thus, constitute property of the estate. See Cusano v. Klein, 264 F.3d 936, 947 (9th Cir. 2001). The bankruptcy court concluded they did; we agree.
B. The TPP Claims accrued prepetition.
“To determine when a cause of action accrues, and therefore whether it accrued pre-bankruptcy and is an estate asset, the Court looks to state law.” Boland v. Crum (In re Brown), 363 B.R. 591, 605 (Bankr. D. Mont. 2007) (citing Cusano). “It is important, however, to distinguish principles of accrual from principles of discovery and tolling, which may cause the statute of limitations to begin to run after accrual has occurred for purposes of ownership in a bankruptcy proceeding.” Cusano, 264 F.3d at 947.
In California, “generally, a cause of action accrues and the statute of limitation begins to run when a suit may be maintained. Ordinarily this is when the wrongful act is done and the obligation or the liability arises, but it does not accrue until the party owning it is entitled to begin and prosecute an action thereon. In other words, a cause of action
accrues upon the occurrence of the last element essential to the cause of action.” Howard Jarvis Taxpayers Assn. v. City of La Habra, 25 Cal. 4th 809, 815 (2001) (citations and internal quotation marks omitted). Therefore, if a claim “could have been brought,” it has accrued. Cusano, 264 F.3d at 947. Here, we determine, as did the bankruptcy court, that all of the TPP Claims could have been brought prepetition.
Under the terms of the TPP, Wells Fargo agreed to provide the Goldsteins with a permanent loan modification if the Goldsteins complied with the TPP requirements or to notify them if they did not qualify after making the three TPP payments. The Goldsteins made the third payment on January 1, 2010. Wells Fargo then was required to take one of two possible actions; it did nothing. Thus, at that prepetition point in time, the Goldsteins could have brought their TPP Claims. Wells Fargo did not act in compliance with its alleged representations, promises, or contractual agreements despite the Goldsteins’ full performance. The Goldsteins’ four additional payments arguably increased their damages claim, but did not
Nor were the Goldsteins delayed in their ability to bring the TPP Claims due to their lack of receipt of a written denial of a permanent loan modification or because they may not have learned until sometime postpetition that Wells Fargo denied the permanent loan modification in February 2010.17 Instead, because
Wells Fargo took neither of the HAMP-required alternative actions - and there is no question that the Goldsteins admittedly knew they did not do so - the Goldsteins could have brought the TPP Claims before they filed bankruptcy. As of the commencement of the case, if the TPP Claims could have been brought, they accrued and became part of the bankruptcy estate. See In re Brown, 363 B.R. at 605. We determine, as a matter of law, that the TPP Claims accrued prepetition and therefore conclude that the bankruptcy court did not err when it held that the TPP Claims were property of the estate.
C. The Goldsteins were not prohibited from bringing the TPP Claims prepetition even if some contrary non-binding precedent existed or supportive precedent was lacking at that time.
The Goldsteins also argue that because they never received a signed copy of the TPP, as required by its terms prior to it taking effect, they had no agreement or contract with Wells Fargo until such time as the Seventh Circuit‘s reasoning and decision in Wigod was adopted in California (West) and by the Ninth Circuit (Corvello).18 And the Goldsteins contend that the
state of the law prepetition, before the Wigod, West, and Corvello decisions, in effect, prevented them from bringing the TPP Claims.
In their arguments, the Goldsteins appear to miss the point that in all three of these decisions, the courts reached their ultimate conclusions regarding the viability of the state common law claims at issue through application of existing state law; and their analysis of contractual obligations of banks under HAMP was based on review of HAMP provisions and applicable Treasury guidelines. See Corvello, 728 F.3d at 880 (finding Treasury Supplemental Directive 09-01 to be the controlling Treasury guideline for the process of applying for and receiving a permanent modification); Bushell v. JPMorgan Chase Bank, N.A., 220 Cal. App. 4th 915, 923 (2013) (lenders “must perform HAMP loan modifications in accordance with Treasury regulations,” such as Supplemental Directive 09-01, issued in April 2009, delineating HAMP‘s eligibility requirements and modification procedures).
These courts did not create new legal rights. They interpreted the respective borrowers’ rights under state laws then in effect to consider the impact of HAMP provisions and related agreements. The
reviewing courts to rule in their favor.19 The Goldsteins, arguably, might have done the same.20
The Goldsteins rely on Drewes v. Vote (In re Vote), 261 B.R. 439 (8th Cir. BAP 2001), and Sliney v. Battley (In re Schmitz), 270 F.3d 1254 (9th Cir. 2001), to support their arguments. Both decisions are factually and legally distinguishable. In both cases, the rights under review, crop disaster assistance and fishing rights, respectively, were created postpetition by legislation enacted postpetition. In re Vote, 261 B.R. at 442; In re Schmitz, 270 F.3d at 1255-56. Here, the TPP Claims rely on California common law regarding fraud, promissory estoppel, and contract as it existed prepetition, interfacing with the HAMP provisions enacted in
2009. The Goldsteins’ ability to file the TPP Claims did not require enactment of new legislation. The TPP Claims involved interpretation of the legal significance of the facts as they existed prepetition. The developing case law arguably assisted the Goldsteins’ likelihood of recovery on the TPP Claims as it interpreted what HAMP required of the banks in a manner favorable to the Goldsteins; it did not create a new right.21
The Goldsteins cite no legal authority to support their contention that judicial interpretation of the HAMP provisions resulted in new legal rights that the Goldsteins did not have as of the commencement of the bankruptcy case, and we know of none.
CONCLUSION
Based on the foregoing, we AFFIRM.