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In re Kim

United States District Court, D. Colorado

March 2, 2018

In re ALEXANDER N. KIM and LAURA J. FOSTER, Debtors.
v.
JP MORGAN CHASE BANK, N.A., and DOUGLAS E. LARSON, Trustee, Appellees. ALEXANDER N. KIM and LAURA J. FOSTER, Appellants,

          ORDER

          PHILIP A. BRIMMER, United States District Judge

         This is an appeal by debtors Alexander N. Kim and Laura J. Foster (“debtors”) from the November 15, 2016 order [Docket No. 7-15 at 172-182] of the United States Bankruptcy Court for the District of Colorado (the “bankruptcy court”). The Court's jurisdiction is based on 28 U.S.C. § 158(a).[1]

         I. BACKGROUND[2]

         Debtors own real property located at 69 Vista High Drive, Carbondale, CO 81623 (“the Property”). R. V at 808, p. 167, ll. 12-14.[3] On February 22, 2008, debtor Kim executed a note in the amount of $2, 000, 000 (“the Note”) payable to Washington Mutual Bank, FA (“Washington Mutual”). See Docket No. 14-1. The note was secured by the Property through a Deed of Trust, which was recorded in Eagle County, Colorado on February 29, 2008. R. IV at 293, ¶ 2-3. Washington Mutual later endorsed the Note in blank. See Docket No. 10-1 at 27.

         Prior to these bankruptcy proceedings, Washington Mutual was closed by the Office of Thrift Supervision and the FDIC was appointed as receiver over Washington Mutual. Id. at 294, ¶ 6. JP Morgan Chase Bank, N.A. (“Chase”) purchased the Note and associated loan through a Purchase and Assumption Agreement (“PAA”) with the FDIC. Id., ¶ 7. Chase claims that the FDIC transferred the Note to Chase in the summer of 2009. See R. V at 737, p. 96, ll. 4-11; id. at 758-59, pp. 117-118, ll. 19-25, 1-18.

         On September 21, 2010, debtors filed for bankruptcy under Chapter 11. See R. I at 4-6. On November 12, 2010, Chase filed a proof of claim. Docket No. 10-1. Chase filed an amended proof of claim on February 27, 2013. Docket No. 10-2. Chase attached a copy of the Note to the proof of claim filed on November 12, 2010. See Docket No. 10-1 at 24.

         On May 9, 2013, the bankruptcy court ordered that debtors' case be converted to a Chapter 7 bankruptcy. See R. I at 87. Chase subsequently received relief from the automatic stay to foreclose on the Property. See R. II at 14-15. In 2014, Chase initiated foreclosure proceedings against the Property. R. IV at 294, ¶ 18. In the 2014 foreclosure proceedings, Chase filed a qualified holder statement pursuant to Colo. Rev. Stat. § 38-38-101(1)(b)(II). See Docket No. 14-4. Chase claims that, during the 2014 foreclosure proceedings, its counsel discovered that the original note was missing. See Docket Nos. 10-13, 10-14, 10-15, 10-16. On July 29, 2014, Chase withdrew its motion for an order authorizing sale. Docket No. 11-1. On November 11, 2015, Chase acquired a lost instrument bond in the amount of $3, 000, 000. Docket No. 14-2; R. V at 802-803, pp. 161-162, ll. 17-25, 1-10.

         On September 3, 2015, debtors filed an objection to Chase's claim in the bankruptcy proceedings. See R. III at 129-133. Debtors argued that Chase's claim is barred because Chase was not in possession of the Note. Id. at 132, ¶ 12. On June 21, 2010, the bankruptcy court held a two-day evidentiary hearing on debtors' objection to Chase's claim and on debtors' request for attorney's fees and costs as a sanction for Chase's conduct in the bankruptcy proceedings.[4] See R. V at 412-846.

         After the hearing, the bankruptcy court, in a written order, found that (1) the Note is lost; (2) pursuant to Section 4-3-309 of the Colorado Uniform Commercial Code, Colo. Rev. Stat. § 4-3-309, Chase was in possession of the original Note and was entitled to enforce it when the Note was lost; and (3) under the Colorado foreclosure statutes, the lost instrument bond that Chase posted provided debtors adequate protection from being required to pay twice on the Note. See R. VI at 175-178.

         On November 29, 2016, debtors filed a timely notice of appeal. R. VI at 185-187. Debtors raise eight issues on appeal, Docket No. 18 at 7-9; however, many of the issues raised by debtors overlap. Debtors' issues fall into two categories: (1) the bankruptcy court's factual findings were not supported by the evidence; and (2) the bankruptcy court's legal rulings were improper. Id.

         II. STANDARD OF REVIEW

         A party may appeal the “final judgments, orders, and decrees” of a bankruptcy court to either the district court or a bankruptcy appellate panel. 28 U.S.C. §§ 158(a), (c)(1). The Court reviews the bankruptcy court's legal determinations de novo. See In re Baldwin, 593 F.3d 1155, 1159 (10th Cir. 2010). The Court also reviews de novo mixed questions of law and fact that primarily involve legal issues. See In re Wes Dor Inc., 996 F.2d 237 (10th Cir. 1993). The bankruptcy court's factual findings, including findings regarding credibility, are reviewed for clear error. See DSC Nat'l Props., LLC v. Johnson (In re Johnson), 477 B.R. 156, 168 (B.A.P. 10th Cir. 2012); In re Baldwin, 593 F.3d at 1159; Rinehart, Blair, & Mask v. Sharp (In re Sharp), 361 B.R. 559, 564-65 (B.A.P. 10th Cir. 2007). The reviewing court must defer to the facts found by the bankruptcy court “unless it is without factual support in the record or, after examining all the evidence, we are left with a definite and firm conviction that a mistake has been made.” In re Johnson, 477 B.R. at 168 (quotations omitted). If, however, a “lower court's factual findings are premised on improper legal standards or on proper ones improperly applied, they are not entitled to the protection of the clearly erroneous standard, but are subject to de novo review.” Id.

         III. ANALYSIS

         The bankruptcy code describes a “claim” as a “right to payment, whether or not such right is . . . disputed, [or] undisputed.” 11 U.S.C. § 101(5)(A). “W ithin the context of a bankruptcy proceeding, state law governs the determination of property rights.” Miller v. Deutsche Bank Nat'l Trust Co. (In re Miller), 666 F.3d 1255, 1262 (10th Cir. 2012) (quoting In re Mims, 438 B.R. 52, 56 (Bankr. S.D.N.Y. 2010)). Accordingly, to determine whether Chase has a valid claim, the Court considers Colorado law, in particular the Colorado Uniform Commercial Code (“Colorado UCC”). Id.

         Under Colorado law, an instrument that is “payable to an identified person may become payable to bearer if it is indorsed in blank pursuant to [Colo. Rev. Stat.] § 4-3-205(b).” Colo. Rev. Stat. § 4-3-109(c). Section 205(b) provides that, when an instrument is indorsed in blank, “an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially indorsed.” Colo. Rev. Stat. § 4-3-205(b).

         It is undisputed that the Note is endorsed in blank. See Docket No. 10-1 at 27; see also R. VI at 175 (bankruptcy court noting same). The dispute in this case centers on the fact that Chase is not in possession of the Note. The bankruptcy court found that Chase's claim was allowed based on Colorado's lost instrument statute. The lost instrument statute provides:

(a) A person not in possession of an instrument is entitled to enforce the instrument if (i) the person was in possession of the instrument and entitled to enforce it when loss of possession occurred, (ii) the loss of possession was not the result of a transfer by the person or a lawful seizure, and (iii) the person cannot reasonably obtain possession of the instrument because the instrument was destroyed, its whereabouts cannot be determined, or it is in the wrongful possession of an unknown person or a person that cannot be found or is not amenable to service of process.
(b) A person seeking enforcement of an instrument under subsection (a) of this section must prove the terms of the instrument and the person's right to enforce the instrument. If that proof is made, section 4-3-308 applies to the case as if the person seeking enforcement had produced the instrument. The court may not enter judgment in favor of the person seeking enforcement unless it finds that the person required to pay the instrument is adequately protected against loss that might occur by reason of a claim by another person to enforce the instrument. Adequate protection may be provided by any reasonable means.

Colo. Rev. Stat. § 4-3-309.

         In order to enforce a claim under the lost instrument statute, Chase is required to prove the elements of the statute by “clear and convincing evidence.” Gooch v. Rodewald, 432 P.2d 755, 756 (Colo. 1967) (quoting Walker v. Drogmund, 74 P.2d 1235 (Colo. 1937)). Debtors argue that the bankruptcy court erred when it found that Chase was in possession of the note and entitled to enforce it. Docket No. 18 at 32-46.

         A. The Bankruptcy ...


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