Bankruptcy – Bank’s Deed of Trust Could Be Cancelled

Wells Fargo Bank NA v. AMH Roman Two NC LLC (Lawyers Weekly No. 001-135-17, 15 pp.) (Duncan, J.) No. 16-1681, June 12, 2017; USDC at Raleigh, N.C. (Boyle, J.) 4th Cir.

Holding: The 4th Circuit says a bankruptcy court did not err in denying Wells Fargo’s motion to set aside a bankruptcy court order cancelling the bank’s deed of trust on a real estate parcel, filed two years after the property was sold in foreclosure, in the wake of notice to Wells Fargo’s lawyer; at every stage of this litigation, Wells Fargo was in the best position to protect its interest and failed to do so.

Debtors’ Properties

In November 2002, Wells Fargo extended a $240,800 equity line of credit to debtors secured by a deed of trust on their property in Raleigh, N.C. On Dec. 28, 2004, debtors refinanced the property with PNC Bank, taking out a new installment loan and a new line of credit. During this process, Wells Fargo notified PNC that it had frozen the line of credit Wells Fargo had extended in 2002, and that the pay-off obligation was $285,082.11. PNC transmitted the money to Wells Fargo, who receipted it. All paperwork referenced the correct loan number. However, Wells Fargo did not close the line of credit and in fact allowed debtors to continue to take advances totaling over $300,000.

On March 29, 2012, debtors filed for chapter 13 bankruptcy. At the time, they owned two Raleigh properties secured by deeds of trust held by Wells Fargo. PNC filed two proofs of claim secured by the first property for $64,970.51 and $475,924.81 – the first from the equity line of credit and the second from debtors’ promissory note. Wells Fargo filed a secured proof of claim for $307,530.84 for the debt arising from its line of credit secured by the first property. On Nov. 7, 2012, the bankruptcy court granted PNC’s motion for relief from the automatic stay, accorded PNC’s deeds of trust priority over Wells Fargo’s deed of trust and canceled Wells Fargo’s deed of trust. On Jan. 9, 2013, a certified copy of that order was recorded in the office of the Wake County Register of Deeds. Debtors received their final discharge on May 1, 2013; the bankruptcy court entered a final decree on May 29, 2013.

PNC foreclosed on the property. Relying on the Wake County Registry of Deeds, AMH Roman Two NC LLC bought the property on June 30, 2014. The law firm for a lawyer who initially entered an appearance for Wells Fargo in the bankruptcy case acted as counsel for the foreclosure trustee and prepared the deed conveying the first property to AMH. AMH recorded on Sept. 12, 2014.

Claiming it was caught by surprise, Wells Fargo was allowed to reopen the bankruptcy proceedings, and it moved to set aside the court order under Fed. R. Civ. 60(b)(6). The bankruptcy court denied that motion, and the district court affirmed, on different grounds. Wells Fargo appeals.

Untimely Motion

We agree with the district court that Wells Fargo failed to make its Rule 60(b)(6) motion within a reasonable time. The bankruptcy court issued the order on Nov. 7, 2012, and Wells Fargo waited more than two years to file its motion, on Feb. 11, 2015.

At the core of its assertion of timeliness, Wells Fargo contends the lawyer’s initial representation did not extend to the first property, but only covered the second Raleigh property. The bankruptcy court found, and the district court agreed, that the lawyer entered an unlimited appearance on behalf of Wells Fargo in the bankruptcy case on April 5, 2012, notwithstanding his affidavit to the contrary. He filed a general notice of appearance as counsel for Wells Fargo, a creditor of debtors.

At every critical juncture, Wells Fargo slept on its rights. It did not respond to PNC’s stay motion when PNC challenged Wells Fargo’s interest in the first property. It did not appeal the order before the bankruptcy proceeding concluded. It also did not seek to enjoin PNC’s foreclosure of the property. Instead, Wells Fargo waited more than two years from entry of the order, and several months after AMH purchased the property in good faith, before seeking relief from the order. That is not reasonable under the circumstances.

Further, granting Wells Fargo’s requested relief would create significant unfair prejudice to AMH, an innocent bona fide purchaser who gave fair value for clear title. Finally, even if Wells Fargo did satisfy Rule 60(b)(6)’s threshold requirements, it still does not meet the requirements of that Rule’s enumerated sections for relief.