UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF MICHIGAN _________________ In re: PETER J. APOSTLE, Case No. GG 11-01008 Chapter 7 Debtor. _________________________________/ FIRST HORIZON HOME LOAN CORPORATION, KJELL ALEXANDER AUMAUGHER, ANGELA AUMAUGHER, & KRISTIANE MARIE AUMAUGHER, Plaintiffs, Adv. Proc. No. 11-80228 v. PETER J. APOSTLE, Defendant. _________________________________/ OPINION REGARDING NONDISCHARGEABLE DEBT ADVERSARY PROCEEDING Appearances: Kay E. Kossen, Esq., Kalamazoo, Michigan, attorney for First Horizon Home Loan Corporation, Kjell Alexander Aumaugher, Angela Aumaugher, and Kristiane Marie Aumaugher, Plaintiffs. Thomas M. Wardrop, Esq., Grand Rapids, Michigan, attorney for Peter J. Apostle, Debtor-Defendant. I. INTRODUCTION. This adversary proceeding arises from the sale of a condominium and boat slip (collectively, the “property”) located in Muskegon, Michigan. The property was originally owned by the Debtor-Defendant, Peter J. Apostle, and his wife Kathryn Apostle (the “Apostles”), and sold to Thomas and Kathryn Bergeman (the “Bergemans”) on land contract. During the term of the land contract, the Apostles obtained a loan from Fifth Third Bank, and Fifth Third placed a properly recorded mortgage on the property. The Bergemans subsequently sold the property to Kjell Alexander (“Alex”) Aumaugher, his wife Angela Aumaugher, and his sister, Kristiane Marie Aumaugher (the “Aumaughers”). The Aumaughers financed their purchase of the property by obtaining a loan from First Horizon Home Loan Corporation (“First Horizon” or collectively with the Aumaughers, the “Plaintiffs”). The First Horizon loan was also secured by a mortgage on the property. Although Apostle received the balance due under the land contract from the Bergemans as part of the sale transaction, the Fifth Third loan was never re-paid and the Fifth Third mortgage remains outstanding. The Plaintiffs brought this adversary proceeding seeking a determination that the “debt” owed by the Debtor-Defendant as a result of his failure to disclose the Fifth Third lien at the sale closing is excepted from his discharge under 11 U.S.C. § 523(a)(2)(A).1 II. JURISDICTION. This court has jurisdiction over this bankruptcy case. 28 U.S.C. § 1334. The case and all related proceedings have been referred to this court for decision. 28 U.S.C. § 157(a); Local Rule 83.2(a) (W.D. Mich.). This adversary proceeding is a core                                                              1 The Plaintiffs’ complaint also asserts a count for willful and malicious injury under § 523(a)(6). However, the Plaintiffs offered no evidence or argument in support of this cause of action at trial. With the exception of one conclusory sentence, § 523(a)(6) was likewise not addressed in the Plaintiffs’ post-trial brief. Regardless, the court has considered whether the Plaintiffs have established that they are owed a nondischargeable debt under § 523(a)(6). They have not.   2 proceeding. 28 U.S.C. § 157(b)(2)(I) (determinations regarding dischargeability of a debt). Notwithstanding a recent Supreme Court decision, Stern v. Marshall, __ U.S. __, 131 S. Ct. 2594 (2011), this court is constitutionally authorized to enter a final order. See Tibble v. Wells Fargo Bank, N.A. (In re Hudson), 455 B.R. 648, 656 (Bankr. W.D. Mich. 2011) (the Stern decision is extremely narrow; “[e]xcept for the types of counterclaims addressed in Stern v. Marshall, a bankruptcy judge remains empowered to enter final orders in all core proceedings”). This opinion constitutes the court’s findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052. III. FACTS AND PROCEDURAL BACKGROUND. Trial of this adversary proceeding was held on January 20, 2012.2 During the trial, the court heard testimony from three witnesses. Peter J. Apostle, the Debtor- Defendant (“Apostle”) testified credibly about the general circumstances surrounding his acquisition of the property, the subsequent sale transaction, and the fact that the Fifth Third mortgage on the property remains outstanding. Eileen Miedona, Apostle’s bookkeeper, provided brief, but helpful, testimony corroborating Apostle’s explanation of how the failure to pay the Fifth Third loan with the proceeds from the sale of the property went unnoticed by Apostle for so long. Curiously, only one of the four Plaintiffs, Angela Aumaugher, appeared at trial. She also testified credibly, although her                                                              2 After the conclusion of trial, the court gave the parties an opportunity to file supplemental briefs or argument. The Debtor-Defendant submitted his Proposed Findings of Fact and Conclusions of Law on January 26, 2012, and the Plaintiffs submitted their Proposed Findings of Fact and Conclusions of Law on February 2, 2012. (AP Dkt. Nos. 64 & 66.) 3 knowledge of the material facts was extremely limited. She explained that her husband, Alex, knew more details than she did about the purchase of the property and the subsequent discovery of the Fifth Third lien. Indeed, the court was astounded when Angela Aumaugher testified truthfully that she first became aware that she was a plaintiff in this adversary proceeding when she received an email with the date and time of the trial a few weeks prior to the scheduled trial date. Given the paucity of relevant testimony from the Plaintiffs, the majority of the following factual findings are gleaned from Apostle’s testimony and, more importantly, from the ten exhibits admitted into evidence at trial. A. The Apostles Purchase the Property. Apostle’s fairly extensive background in the real estate development industry dates back to at least the mid-1990s.3 At that time, Apostle was a member of S&A Development, a limited liability company that developed property commonly known as the North Pier Condos, located at 2411 Lake Avenue in Muskegon, Michigan. (Tr. at 13-14.)4 The North Pier Condos were comprised of two buildings (a total of approximately 40-48 units) and related boat slips. (Tr. at 15-16.)                                                              3 In addition to working in real estate development, Apostle was a majority shareholder in a title insurance company, Harbor Title Agency, from approximately 1996 until 2006 and operated an insurance agency, Farm Bureau Insurance of Michigan, from 1978 until 2010. (Tr. at 23-27.) 4 All citations are to the transcript from the trial held on January 20, 2012, and are denoted as “Tr. at __” herein. 4 In approximately 1996, Apostle and his wife, Kathryn Apostle, purchased unit 3 of the North Pier Condos, and its boat slip, from S&A Development, LLC. (Tr. at 16.) To finance the purchase of the property, the Apostles obtained a loan from Old Kent Bank. (Tr. at 17.) B. The Apostles Sell the Property to the Bergemans on Land Contract. On September 1, 1997, the Apostles sold the property to Thomas and Karen Bergeman on land contract. (Plaintiffs’ Exh. 1.) The total purchase price for the property was $110,000. (Id.) The land contract called for monthly payments of $865.50 to be made by the Bergemans to the Apostles, beginning in September 1997, and continuing until August 1, 2027, when the remaining balance would be due. (Id.) Paragraph 9 of the land contract gives the Apostles, as sellers, the right to place a mortgage on the property, but provides that “the aggregate amount due on all outstanding mortgages shall not, at any time, be greater than the unpaid principal of this [land contract] . . . .” (Id.) The land contract also required the Apostles to advise the Bergemans in writing of any mortgage placed on the property. The land contract was prepared under Apostle’s direction and was recorded on July 22, 1998. (Id.; Tr. at 20- 21.) C. The Apostles Re-Finance the Property. On December 16, 2003, the Apostles obtained a new loan, in the amount of $119,000 from Fifth Third Bank. (Plaintiffs’ Exh. 3.) The new loan was secured by a mortgage on the property in favor of Fifth Third Mortgage -- MI, LLC. (Plaintiffs’ Exh. 2.) The mortgage was recorded on December 23, 2003. (Id.) For unexplained reasons, 5 but probably due to an oversight, the mortgage covers only the condo and not the boat slip. (Tr. at 37.) Both the note and mortgage contain provisions requiring the Apostles to repay the new loan immediately upon sale of the property. (Plaintiffs’ Exh. 3, p. 4; Plaintiffs’ Exh. 2, ¶ 18.) As a result of the new loan, the prior Old Kent loan was paid off and the Old Kent mortgage was discharged. (Tr. at 29-30.) D. The Bergemans Sell the Property to the Aumaughers. In the summer of 2004, the Bergemans decided to sell the property to the Plaintiffs, Alex Aumaugher, his wife, Angela Aumaugher, and his sister, Kristiane Marie Aumaugher. Because of the land contract, the sale of the property was accomplished through an “escrow closing” that actually involved two separate transactions. 1. The Apostles Give a Warranty Deed to the Bergemans. Apostle testified that he became aware of the Bergemans’ plan to sell the property when Nexus Realty, the Bergemans’ listing agent, contacted him a few days before the closing. (Tr. at 41-42.) He did not, however, know the identity of the Bergemans’ purchasers, did not know how the transaction was being financed, and did not have any direct contact with the purchasers prior to or during the closing. (Tr. at 57- 59; 67.) Instead, the transaction was handled by the listing agent and closing officer. Nexus Realty prepared a warranty deed for the closing, and asked Apostle to provide the land contract balance. (Tr. at 42.) As requested, Apostle prepared an Amortization Schedule showing the balance due and owing on the land contract and provided it to the closing officer at Nexus Title. (Plaintiffs’ Exh. 10; Tr. at 44.) The Amortization 6 Schedule shows $109,009.14 in principal and accrued interest due under the land contract as of August 27, 2004. (Id.) The Sellers’ Closing Statement for the transaction reflects the $109,009.14 land contract balance and, after deductions for closing costs, lists the balance due to the Sellers (the Apostles) as “$107,988.14 + $75.00.” (Plaintiffs’ Exh. 9.) The “Payment of Existing Lien” section of the Sellers’ Closing Statement is completely blank. When questioned about this at trial, Apostle admitted that he had signed the Sellers’ Closing Statement. (Tr. at 48.) He acknowledged that, at the time of the closing, he knew he owed Fifth Third Bank under the December 2003 note. (Tr. at 50.) In hindsight, he also admitted that, because the amounts he owed to Fifth Third Bank under the note exceeded the land contract balance, he would have had to bring money to the closing to fully satisfy the Fifth Third obligation. (Id.) Apostle testified that he simply did not pay attention to these facts, and assumed the title insurance company would take care of paying Fifth Third and discharging the mortgage. (Tr. at 47-48.) 2. The Bergemans Give a Warranty Deed to the Aumaughers. Angela Aumaugher testified about the circumstances under which she, her husband, and her sister-in-law decided to purchase the property. She explained that the Aumaughers purchased the property as an investment and vacation home for their extended family. (Tr. at 87.) According to the closing documents, the purchase price for the property was $180,000.00. (Plaintiffs’ Exh. 8.) To finance the purchase, the Aumaughers obtained a $133,750.00 loan from First Horizon. This loan was secured by a mortgage on the property. (Plaintiffs’ Exh. 7.) The balance due from the 7 Aumaughers, listed on the closing documents as $45,395.80, was actually paid by Angela Aumaugher’s father-in-law, Stanley Aumaugher. (Tr. at 96.) According to Angela Aumaugher’s testimony, Stanley Aumaugher was present at the closing on August 27, 2004, and financed the purchase of the property, even though title was placed in his children’s’ names. (Id.) At the conclusion of the closing, the Bergemans transferred the property to the Aumaughers via warranty deed. (Plaintiffs’ Exh. 6.) Angela Aumaugher further testified that, at the time of the closing in August 2004, she did not know Peter J. Apostle and did not know that Fifth Third Bank had a mortgage on the property. (Tr. at 92-93.) She explained that neither she nor her husband had any contact with Apostle prior to, during, or immediately after the closing in August 2004. (Tr. at 105; 110.) This was entirely consistent with Apostle’s testimony that he never talked to the Aumaughers before the closing and never spoke to them at the closing. Angela Aumaugher stated that she and her family would not have purchased the property if they had known there was a mortgage on the property that would not be discharged as a part of the sale. (Tr. at 101.) She also testified that she and her family members purchased title insurance as part of the sale transaction. (Tr. at 95.) E. Post-Closing Events. 1. Apostle Continues Paying on the Fifth Third Loan. Apostle testified that his brother, Kosta Apostolopoulos, picked up the check from Nexus Title after the closing. (Tr. at 51.) At Apostle’s direction, his brother deposited the check in one of Apostle’s accounts at Fifth Third Bank. (Id.) 8 Although Apostle did not immediately realize it, payments on the Fifth Third loan continued to be withdrawn from Apostle’s bank account after the closing. (Tr. at 52.) Apostle testified that he was not aware that the payments were still being debited from his account because he had several accounts at Fifth Third Bank, all of which had significant amounts flowing in and out of them. (Tr. 52-53.) This particular account was a general personal account into which Apostle deposited commissions from his insurance business and funds from his various other businesses. (Tr. at 72-73.) Although he was unable to recall any specific examples, Apostle testified that other automatic deductions were also likely being made from the account. (Tr. at 80.) In addition, Apostle had a bookkeeper, Eileen Miedona, who handled his books and records. Ms. Miedona corroborated Apostle’s statement that, during the relevant time period, he had several bank accounts with large sums of money flowing in and out. (Tr. at 121.) Ms. Miedona stated that a deposit of $100,000 or more would not have been uncommon.5 (Id.) Apostle learned that payments were still being made on the Fifth Third loan when he closed his bank account at Fifth Third Bank and received a delinquency notice. (Tr. at 74-75.) At that time, Apostle called Nexus Title and Transnation Title to inquire about the problem. (Tr. at 76-77.) Apostle stated that he continued making payments on the loan to protect his credit until 2010, at which point he could no longer afford the                                                              5 Without Ms. Miedona’s credible testimony, the court would have had doubt about Apostle’s testimony that he was unaware of the continuing automatic deductions to pay the mortgage. 9 payments. (Tr. at 78-79.) On February 3, 2011, Apostle filed a voluntary petition under chapter 7 of the Bankruptcy Code. 2. Apostle Contacts the Aumaughers. After Apostle learned that the Fifth Third mortgage was still outstanding, he also sent a letter to the Aumaughers advising them of the situation. (Tr. at 78.) According to Angela Aumaugher, the Aumaughers contacted their title company upon receipt of Apostle’s letter. (Tr. at 94.) The title company assured the Aumaughers that the problem would be “taken care of” and “would not affect them in any way.” (Id.) 3. The Aumaughers Transfer the Property to Stanley Aumaugher. The Aumaughers appear to have taken the title company’s advice to heart. To the court’s surprise, in December 2011, with this adversary proceeding pending and the Fifth Third mortgage still encumbering the property, the Aumaughers sold the property to their father, Stanley Aumaugher. 6 (Tr. at 96-97.) The loan to First Horizon was completely satisfied with the proceeds from the sale and First Horizon’s mortgage was discharged. (Tr. at 102.) Angela Aumaugher explained that she was completely                                                              6 The court was not the only party surprised by this development. On January 12, 2012, approximately one week before the scheduled trial of this adversary proceeding, the Plaintiffs’ attorney filed a Motion to Adjourn Trial. (AP Dkt. No. 50.) In the motion, the Plaintiffs’ attorney explained that she only learned that the Aumaughers had sold the property when she contacted them in preparation for trial. The Plaintiffs’ attorney requested a lengthy six month adjournment, so that the “real parties in interest” could be identified and substituted as Plaintiffs. The court held a hearing on the Motion to Adjourn on January 19, 2012, and ultimately denied the motion. The court determined that a subsequent sale of the property was not dispositive of the real issue in the case – i.e., whether Apostle owed the Plaintiffs a nondischargeable debt as a result of his failure to disclose the Fifth Third lien.   10