FRANK R. ALLEY, III, Bankruptcy Judge.
This matter comes before the Court on Plaintiff's Complaint to determine the secured status of a proof of claim filed by Defendant. The matter was tried and is now ripe for decision.
Debtor herein, Tyler Westby (
Plaintiff is the Chapter 7 Trustee. She is administering the Chapter 7 as an "asset" case. Defendant is a pre-petition creditor. He has filed a proof of claim, and has since amended the claim three (3) times. The most recent claim asserts that as of the Chapter 7 petition's filing, Defendant was owed $103,749.99, secured by the Property. Plaintiff disputes Defendant's secured status, arguing instead that Defendant should be treated as a general unsecured creditor.
During the pendency of the Chapter 7 case, Plaintiff and Westby entered into a court-approved settlement agreement, whereby in return for $175,000, Plaintiff released her interest in certain estate assets, including the Property. In the course of those proceedings, the present parties agreed that any lien or security interest Defendant had in the Property would attach to the settlement proceeds, which are being held in Plaintiff's counsel's trust account pending further court order.
Prior to his petition Westby was a real estate investor and speculator. To fund his investments, he sought out "investors" — actually lenders — whose loans he promised to secure by "assignment" of his interests in notes and trust deeds which he obtained in connection with the sale of real property to third parties. Defendant was one such lender.
In and around August 2007, Westby sold the Property to Tony and Rosalinda Swanson and took back a note
In April 2008, Defendant loaned Westby $100,000. Westby executed a promissory note for $100,000, payable at 10% interest, in monthly interest-only payments, with the balance due on April 9, 2009 (
Westby did not perform under Westby Note #1. Instead, on April 9, 2009, he executed another note (
At some point the Swansons defaulted on the Swanson Note, and Westby obtained the Property back in his name. In early 2010, Westby began negotiating to sell the Property to Cheryl Guenther (
In early 2010, Westby sold the Property to Guenther for $267,500. As consideration, he received $10,000 in cash plus a $257,500 note dated February 17, 2010, payable at 6% interest, in monthly installments with a balloon payment due on May 15, 2012 (
On March 29, 2010, Westby executed an assignment with the same boilerplate language as Assignment #1, whereby he assigned to himself and Defendant the Guenther Note and the beneficial interest in the Guenther Trust Deed (
According to the testimony, although Assignment #2's language is absolute, like Assignment #1, the parties' intent was to create a security interest to secure Westby Note #2. Westby testified that the assignment was executed jointly to him and Defendant because he wanted to retain his interest in the Guenther Note and Trust Deed because (presumably) there was value in the Guenther Note and the Property above what he owed to Defendant.
Westby did not timely pay Westby Note #2, which came due in April 2010. Instead, Defendant verbally agreed to extend the due date until the Property sold while accepting interest-only monthly payments in the interim.
Guenther did not timely pay Westby the Guenther Note which came due in May 2012. Instead, at some point in early 2014, she and Westby agreed she would transfer the Property back to him in satisfaction of her obligation. On or about April 22, 2014, Guenther executed a quitclaim deed of the Property to Westby (
Westby made interest-only payments on Westby Note #2 through August 2014, with no payments thereafter.
Oregon's Version of Uniform Commercial Code (UCC) Article 9 Applies:
Defendant claims that his right to repayment of the loan is secured by the Property itself. However, as discussed in more detail below, the actual security was the Guenther Note which in turn was secured by the Guenther Trust Deed. The Guenther Note was a "promissory note," ORS 79.0102(1)(LLL), which is an "instrument," ORS 79.0102(1)(tt)(A), which in turn is a form of personal property. Therefore, UCC Article 9 applies. ORS 79.0109(1)(a). It does not matter that the Guenther Trust Deed secures the Guenther Note: Although UCC Article 9 does not apply to transfers of interests in or liens on real property, ORS 79.0109(4)(k), its application to a security interest in a secured obligation "is not affected by the fact that the obligation is itself secured by a transaction or interest to which . . . [Article 9] does not apply." ORS 79.0109(2).
Assignment #2 is a Security Agreement:
Although absolute on its face Assignment #2 was not a "sale" of the Guenther Note and beneficial interest in the Guenther Trust Deed, but rather only a transfer of a security interest in rights thereunder. ORS 79.0102(2) incorporates ORS 72.1060 which provides that "[a] `sale' consists in the passing of title from the seller to the buyer for a price." Westby and Defendant both testified that Assignment #2 did not pass title to either the Guenther Note or Guenther Trust Deed. Rather, the parties' intent was to secure Westby Note #2. Those intentions control.
Plaintiff argues Assignment #2 is an insufficient writing to constitute an enforceable security agreement. The Court rejects this "statute of frauds" defense. A security agreement attaches to collateral when it becomes enforceable against the debtor. ORS 79.0203(1). It becomes enforceable against the debtor and third parties when value has been given, the debtor has rights in the collateral, and the debtor has "authenticated" (which includes signing, ORS 79.0102(1)(g)(A)), a security agreement that "provides a description of the collateral." ORS 79.0203(2)(a)-(c). Here, Westby signed Assignment #2, it describes the collateral (i.e., the Guenther Note and Guenther Trust Deed), and there is no dispute Defendant gave value. It need not have described the debt which it secured (i.e., Westby Note #2). Rather, that information was provided by parole evidence. Indeed it would be counterintuitive to hold a transfer of property absolute on its face could not evidence the transfer of a lesser interest, such as a lien or security interest, in that property.
What is not altogether clear is how much of the Guenther Note and Guenther Trust Deed was given as security. Assignment #2 was executed simply to "Tyler Westby and David Gollersrud [Defendant]." It does not indicate the percentage of ownership of those instruments granted as security. Thus the question arises what percentage the parties intended. The Court need not answer that question because, as explained below, Plaintiff may avoid whatever security interest Defendant received.
Defendant's Security Interest Survived the Quitclaim Deed:
Defendant conceded the Quitclaim Deed "satisfied" the Guenther Note. However, he also argued that despite such satisfaction, there remained an "in rem" claim against the Property. These two positions are reconcilable when the Quitclaim Deed is viewed as a deed in lieu of foreclosure with preservation (non-merger) of the Guenther Note and Guenther Trust Deed as to collection against the Property only, with Guenther's personal liability being released. This is consistent with Westby's testimony that he did not intend to prejudice Defendant's rights by accepting the Quitclaim Deed and with Defendant's testimony that he thought he could collect through the Property.
Even if the parties' intentions were not manifest, non-merger will be presumed according to the mortgagee/grantee's interests, or if appropriate to protect the intervening rights of a third party with a superior interest, as here, or protect against the intervening rights of a third party with a junior interest/lien.
Defendant's Security Interest was Unperfected and Avoidable
There are only two ways to perfect a security interest in a promissory note, one by filing a financing statement, ORS 79.0312(1), the other by taking possession of the note. ORS 79.0313(1). Defendant did neither.
The Bankruptcy Code gives Plaintiff, as trustee, the rights of a creditor with a "judicial lien"
Defendant is Not Entitled to an Equitable Lien:
Defendant argued that he is entitled to an equitable lien in the Property with priority over any rights Plaintiff may have. As a threshold issue, neither Defendant's proofs of claim nor his counterclaim and affirmative defenses assert such rights. Moreover, he did not argue entitlement to an equitable lien at trial or otherwise ask the Court to conform the pleadings to the proof under FRCP 15(b)(2) (made applicable by FRBP 7015).
Under Oregon law, an equitable lien may be imposed to prevent unjust enrichment.
Because Defendant did not perfect his security interest, Plaintiff's rights as hypothetical lien creditor take priority. A judgment should be entered:
Within fourteen (14) days of this Opinion's entry, Plaintiff, after circulation, is to tender a judgment
Even were consent required, Plaintiff in her Complaint expressly agreed to this Court's entry of a final judgment. Defendant to date has not expressly taken a position on the subject. By virtue of LBR 7012-1, he has thus waived any objection to the Court's authority to enter final judgment.