Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-azd-2_11-cv-00977/USCOURTS-azd-2_11-cv-00977-0/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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WO 

IN THE UNITED STATES DISTRICT COURT 

FOR THE DISTRICT OF ARIZONA 

In Re 

Va Bene Trist, LLC, a Nevada Limited 

Liability Company, 

Debtor, 

Chapter 12

Case No. 2:07-bk-6227-GBN 

Adv. No. 2:08-ap-844-GBN 

No. CV 11-00977-PHX-NVW 

ORDER 

Va Bene Trist, LLC, a Nevada Limited 

Liability Company, 

Appellant, 

vs. 

Washington Mutual Bank; WMALT 2006-

A; California Reconveyance Company; 

JPMorgan Chase Bank NA; and WMALT 

2006-8, 

Appellees. 

Before the Court are Appellant’s Brief (Doc. 19), Appellee’s Response (Doc. 22), 

and Appellant’s Reply (Doc. 23). For the reasons stated below, the Court will affirm the 

decision of the Bankruptcy Court. 

I. BACKGROUND 

The central issue before the Bankruptcy Court was whether Appellees have a 

secured claim on Appellant’s real property located at 30019 North 150th Street, Phoenix, 

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Arizona. Appellant originally loaned Los Pintos, an entity with which David Menken 

was involved, funds for the purchase of the property in 2001. Over the next few years, 

Menken transferred title of the property between himself and Los Pintos in order to 

personally obtain refinancing loans secured by the property. In 2005, Menken obtained 

two loans secured by deeds of trust on the property: one from American Home Mortgage 

in the amount of $1.19 million, and one from Axis in the amount of approximately 

$300,000. Appellant eventually acquired title to the property in 2006 from Los Pintos in 

satisfaction of the original loan to purchase the property. Menken was Appellant’s 

manager at all relevant times and resided at the property. No mortgage payments have 

been made since 2007. 

In June 2006, Menken obtained two loans from American Home Mortgage which 

were used to pay off the two previously existing liens on the property.1

 Although 

Menken signed these documents and obtained the loans in his name, title to the property 

remained in Appellant’s name. Nonetheless, the loan documentation—including the 

residential loan application, the Truth In Lending Act disclosure statement, the loan 

commitment letter, the “Notice to Customers Required by Federal Law, Federal Reserve 

Regulation Z, Notice of Right to Rescind,” the Borrower’s Certification and 

Authorization, the RESPA Servicing Disclosure, the promissory note, and the deed of 

trust—indicates that the loans were intended to be secured by deeds of trust against the 

property. The loans were subsequently transferred, and a trustee’s sale was eventually 

noticed against the property after no mortgage payments had been made for several 

months. Appellant then filed for Chapter 12 bankruptcy. The matters at issue in these 

proceedings relate primarily to the $1.19 million American Home Mortgage loan. 

 1

 It is not clear from the record whether the “American Home Mortgage” was the 

lender for both the 2005 and the 2006 loans. 

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The Bankruptcy Court ruled that WMALT is the holder of the note, and JPMorgan 

Chase Bank is the current servicer of the loan. The Bankruptcy Court found that the 

purpose of the loan was to refinance the existing mortgage secured by the property, and 

that there was therefore a valid lien upon the property pursuant to the theories of 

equitable subrogation and replacement of mortgage. The Bankruptcy Court accordingly 

reformed the deed of trust to reflect the Appellant as trustor under the deed of trust and 

allow Appelles a secured claim against Appellant. 

II. LEGAL STANDARD 

The Bankruptcy Court’s findings of fact are reviewed for clear error and its legal 

conclusions are reviewed de novo. See Ormsby v. First Am. Title Co. of Nev., 591 F.3d 

1199, 1205 n.2 (9th Cir. 2010) (quoting Zurich Am. Ins. Co. v. Int’l Fibercom, Inc., 503 

F.3d 933, 940 (9th Cir. 2007)). Evidentiary rulings by the Bankruptcy Court are 

reviewed for an abuse of discretion. See Latman v. Burdette, 366 F.3d 774, 786 (9th Cir. 

2004). The decision of the Bankruptcy Court will not be reversed for harmless error. See 

Dean v. Trans World Airlines, Inc., 924 F.2d 805 (9th Cir. 1991). The Court may affirm 

the Bankruptcy Court based “on any ground supported by the record[.]” In re Cerchione, 

414 B.R. 540, 545 (9th Cir. BAP 2009). 

III. ANALYSIS 

Appellant claims that the Bankruptcy Court erred in its ruling in several respects, 

with regard to both substantive and evidentiary rulings. 

A. Substantive Challenges 

In his substantive challenges to the Bankruptcy Court’s ruling, Appellant claims 

that Appellees’ proofs of claim on the bankruptcy estate are procedurally barred because 

they were not timely filed. This claim is without merit because Appellees, as secured 

creditors, were not required to file a proof of claim. See Brawders v. County of Ventura, 

503 F.3d 856 (9th Cir. 2007). 

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Second, the Bankruptcy Court did not err by finding that Appellees have standing 

to enforce the note because WMALT was in possession of the note, which was indorsed 

in blank, and produced it at trial, thus establishing that it was the current note holder with 

rights to enforce the note. See A.R.S. § 47-3205(B) (“When indorsed in blank, an 

instrument becomes payable to bearer and may be negotiated by transfer or possession 

alone until specifically indorsed.”). 

Third, the Bankruptcy Court did not commit reversible error by imposing a lien on 

the property, reforming the deed of trust to make Appellant trustor thereunder, and 

subrogating WMALT, the current note holder, to the prior secured lien against the 

property. The Bankruptcy Court applied the analogous doctrines of replacement of 

mortgage and equitable subrogation in imposing the lien. Both doctrines rely on the 

same principles, but are applied in different situations depending on the identity of the 

subsequent lender and its relationship to the earlier lender: replacement of mortgage 

applies when a lender provides a subsequent loan to refinance a loan it previously made, 

whereas equitable subrogation applies where a subsequent lender provides a loan to 

refinance a prior loan made by a different entity. See Continental Lighting & 

Contracting, Inc. v. Premier Grading & Utilities LLC, 227 Ariz. 382, 258 P.3d 200 (Ct. 

App. 2011) (adopting the replacement of mortgage doctrine and holding “where a senior 

lien is released of record and, as part of the same transaction, is replaced with a new lien, 

the latter retains the same priority as its predecessor”); Lamb Excavation, Inc. v. Chase 

Manhattan Mortg. Corp., 208 Ariz. 478, 95 P.3d 542, 544 (2004) (“[A]pplication of the 

doctrine of equitable subrogation allows a subsequent lender who supplies funds used to 

pay off a primary and superior encumbrance to be substituted into the priority position of 

the primary lienholder[.]”). 

Appellant contends that the Bankruptcy Court erred in both “finding that 

American Home – Delaware was AHM Mortgage – NY” (Doc. 19 at 18) and applying 

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either the theory of equitable subrogation or replacement of mortgage in imposing the 

lien. Appellant’s argument fails because the identity of the subsequent lender is 

effectively irrelevant. 

The Bankruptcy Court did not err in finding that a lien should be imposed because 

there was sufficient evidence in the record to indicate that the 2006 loan was intended to 

be, and was in fact, used to pay off the previous loan on the property; that the lender was 

not a volunteer; and that the loan was intended to be secured by a deed of trust on the 

property. Whether the lien was imposed under either a theory of equitable subrogation or 

replacement of mortgage is irrelevant; if the subsequent lender was a different entity from 

the original lender, a lien would be properly imposed under the theory of equitable 

subrogation, and if the subsequent lender was the same entity as the original lender, a lien 

would be properly imposed under the theory of replacement of mortgage. Accordingly, 

there was no error in the Bankruptcy Court’s determination to impose a lien on the 

property, and any potential error in naming the theory under which to impose the lien is 

harmless. 

Third, the Bankruptcy Court did not err by reforming the deed of trust to show that 

the loan was intended to be secured by a deed of trust on the property and naming 

Appellant as trustor thereunder. There was sufficient evidence to show that there was at 

least mistake, and likely fraud or inequitable conduct, as to which party held title to the 

property when the loan was made. Further, the loan documentation sufficiently 

establishes both parties’ evinced intent that the loan be secured by a deed of trust on the 

property. See Arc Elec. Co., Inc. v. Esslinger-Lefler, Inc., 121 Ariz. 501, 591 P.2d 989 

(Ct. App. 1979) (“Reformation is proper where the contract does not reflect the intention 

of the parties because of fraud, inequitable conduct or mistake.”). Accordingly, reversal 

for reforming the deed of trust to reflect the lien on the property and Appellant as trustor 

is not warranted. 

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Finally, Appellant claims the Bankruptcy Court erred in imposing the lien through 

either equitable subrogation, replacement of mortgage, or reformation because Appellant 

is a bona fide purchaser. There was sufficient evidence for the Bankruptcy Court to find 

that Appellant was on constructive notice of the prior liens on the property through the 

deeds of trust and notice of trustee’s sale recorded with the Maricopa County Recorder. 

It was therefore not reversible error for the Bankruptcy Court to determine that Appellant 

was not a bona fide purchaser, and to accordingly impose a lien on the property and 

reform the deed of trust to reflect Appellant as trustor. 

B. Evidentiary Challenges 

The Court will also reject Appellant’s objections to various evidentiary rulings by 

the Bankruptcy Court. 

First, the Bankruptcy Court did not abuse its discretion by allowing Vickie Landis 

to testify at trial as the Bank’s representative. Sufficient notice was given to Appellant 

that a designated representative of the Bank would testify, even if Landis was not 

specifically disclosed by name. Any error in allowing Landis to testify even though she 

was not named in the witness disclosure is thus harmless since Appellant was on notice 

that a representative of the Bank would testify. 

Second, the Bankruptcy Court did not abuse its discretion by admitting the 

September 1, 2006 WaMu Servicing and Pooling Agreement into evidence under the 

business record exception to the hearsay rule. Fed. R. Ev. 803. It was permissible for the 

Court to determine the exhibit was sufficiently authenticated by Landis’s testimony. See

Fed. R. Ev. 901. Even without this exhibit, there was sufficient evidence for the 

Bankruptcy Court to find that WMALT was the noteholder and had standing to enforce 

the note, so any error in this regard would be harmless. 

Third, Appellant claims the Bankruptcy Court erred by admitting the Declaration 

of Custody of Instrument and Acknowledgement of and Certification of Ownership by 

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Barbara Gad because the document constituted hearsay. Even if the Declaration was 

hearsay, Landis testified to the truth of the information that was provided in the 

declaration. Any error in admitting the Declaration was therefore harmless since there 

was sufficient independent evidence of ownership of the Note provided through Landis’s 

testimony; accordingly; there is no reversible error. 

IT IS THEREFORE ORDERED that the judgment of the Bankruptcy Court is 

affirmed. 

IT IS FURTHER ORDERED the Clerk shall enter Judgment in favor of Appellee 

and against Appellant. The Clerk shall terminate this case. 

Dated this 9th day of January, 2012. 

 

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