Adversary Proceeding Not Required for Bankruptcy Courts to Determine Lien Status

(Excerpt) In Wells Fargo Bank, N.A. v. AMH Roman Two NC, LLC, the Fourth Circuit denied Wells Fargo’s motion to set aside an order canceling its mortgage because the motion was not timely. In 2002, Wells Fargo extended a mortgage to the debtors on a property in Pendleton, North Carolina. Two years later, debtors refinanced the property with PNC Bank. Although PNC fully repaid Wells Fargo’s loan, Wells Fargo allowed the debtors’ line of credit to remain open, and permitted the debtors to take advances totaling over $300,000. Then, in 2012, debtors filed voluntary petitions for relief under chapter 13, which triggered an automatic stay on collection efforts outside of the bankruptcy case. PNC filed two proofs of claim against the debtors, while Wells Fargo filed one. Six months later, PNC filed a motion for relief from the automatic stay, seeking to foreclose its interest in the property. Wells Fargo did not respond to PNC’s motion. The bankruptcy court entered an order which granted PNC relief from the automatic stay, accorded priority to PNC’s mortgage, and canceled Wells Fargo’s mortgage. Subsequently, PNC foreclosed on the property and the bankruptcy court’s order was recorded in the Wake County Register of Deeds. Thereafter, AMH Roman Two NC, LLC (“AMH”) purchased the property relying, in part, on the order cancelling Wells Fargo’s mortgage. After learning that its mortgage was canceled by the bankruptcy court’s order, Wells Fargo moved to set aside the order under Federal Rules of Civil Procedure 60(b). Specifically, it argued that the bankruptcy court lacked jurisdiction to cancel the lien because the order resulted from a motion, rather than an adversary proceeding. The bankruptcy court denied the motion to set aside the order canceling the mortgage because the motion was untimely, and because granting the motion would unfairly prejudice AMH. On appeal, the United States District Court for the Eastern District of North Carolina and thereafter the United States Court of Appeals for the Fourth Circuit affirmed the bankruptcy court’s order, finding that Wells Fargo failed to act to prevent the foreclosure despite receiving adequate notice and due process. Moreover, the Fourth Circuit noted that AMH was a bona fide purchaser who relied in good faith on the bankruptcy court order when it purchased the property in foreclosure

Adversary Proceeding Not Required for Bankruptcy Courts to Determine Lien Status

(Excerpt) In Wells Fargo Bank, N.A. v. AMH Roman Two NC, LLC, the Fourth Circuit denied Wells Fargo’s motion to set aside an order canceling its mortgage because the motion was not timely. In 2002, Wells Fargo extended a mortgage to the debtors on a property in Pendleton, North Carolina. Two years later, debtors refinanced the property with PNC Bank. Although PNC fully repaid Wells Fargo’s loan, Wells Fargo allowed the debtors’ line of credit to remain open, and permitted the debtors to take advances totaling over $300,000. Then, in 2012, debtors filed voluntary petitions for relief under chapter 13, which triggered an automatic stay on collection efforts outside of the bankruptcy case. PNC filed two proofs of claim against the debtors, while Wells Fargo filed one. Six months later, PNC filed a motion for relief from the automatic stay, seeking to foreclose its interest in the property. Wells Fargo did not respond to PNC’s motion. The bankruptcy court entered an order which granted PNC relief from the automatic stay, accorded priority to PNC’s mortgage, and canceled Wells Fargo’s mortgage. Subsequently, PNC foreclosed on the property and the bankruptcy court’s order was recorded in the Wake County Register of Deeds. Thereafter, AMH Roman Two NC, LLC (“AMH”) purchased the property relying, in part, on the order cancelling Wells Fargo’s mortgage. After learning that its mortgage was canceled by the bankruptcy court’s order, Wells Fargo moved to set aside the order under Federal Rules of Civil Procedure 60(b). Specifically, it argued that the bankruptcy court lacked jurisdiction to cancel the lien because the order resulted from a motion, rather than an adversary proceeding. The bankruptcy court denied the motion to set aside the order canceling the mortgage because the motion was untimely, and because granting the motion would unfairly prejudice AMH. On appeal, the United States District Court for the Eastern District of North Carolina and thereafter the United States Court of Appeals for the Fourth Circuit affirmed the bankruptcy court’s order, finding that Wells Fargo failed to act to prevent the foreclosure despite receiving adequate notice and due process. Moreover, the Fourth Circuit noted that AMH was a bona fide purchaser who relied in good faith on the bankruptcy court order when it purchased the property in foreclosure