NOT FOR PUBLICATION ∗ UNITED STATES BANKRUPTCY APPELLATE PANEL OF THE TENTH CIRCUIT _________________________________
GEORGE V. CZAPLINSKI, BAP No. KS-20-011
Debtor. __________________________________
GEORGE V. CZAPLINSKI, Bankr. No. 18-21471 Adv. No. 19-06011 Appellant, Chapter 7
v.
BANK OF AMERICA, OPINION
Appellee. _________________________________
Appeal from the United States Bankruptcy Court for the District of Kansas _________________________________
Before ROMERO, Chief Judge, HALL, and TYSON, ** Bankruptcy Judges. _________________________________
HALL, Bankruptcy Judge. _________________________________
In bankruptcy, the goal is to obtain a discharge of the personal liability associated
with a petitioner’s debts. This concept is often over-simplified as “getting rid of” debts.
∗ This unpublished opinion may be cited for its persuasive value, but is not precedential, except under the doctrines of law of the case, claim preclusion, and issue preclusion. 10th Cir. BAP L.R. 8026-6. ** Honorable Kimberley H. Tyson, Bankruptcy Judge, United States Bankruptcy Court for the District of Colorado, sitting by designation. But obtaining a bankruptcy discharge does not entitle a debtor to wipe the slate clean of
enforceable liens against property. In this appeal, the chapter 7 debtor takes issue with the
order and judgment of the United States Bankruptcy Court for the District of Kansas,
dismissing his complaint challenging the validity and enforceability of a lien against his
residence. Finding no error in the Bankruptcy Court’s conclusion that the lien is valid and
enforceable, we AFFIRM the dismissal.
I. Factual Background & Procedural History
George Czaplinski (the “Debtor”) resides at 6310 Aberdeen Road, Mission Hills,
Kansas (the “Residence”). Capital Federal Savings held a first mortgage against the
Residence (the “First Mortgage”) when the Debtor and his non-filing spouse executed an
equity line of credit agreement in favor of Bank of America, N.A., formerly NationsBank
(the “Bank”), on March 24, 2000 (the “Line of Credit”). The Line of Credit extended a
$100,000 credit line to the Debtor. 1 The Bank secured the Line of Credit with a second
priority mortgage against the Residence (the “Second Mortgage”). 2 The Line of Credit
provided the Debtor could access credit by writing special checks, withdrawing funds
from branch locations or ATMs, making requests for advances by phone, or through
overdraft when his primary checking account lacked sufficient funds for a transaction. 3
The Line of Credit had a term of fifteen years unless “blocked, suspended or terminated”
by the Debtor’s written request. 4
1 Line of Credit at 2, ¶ 2, in Appellee’s App. at 393. 2 Second Mortgage, in Appellee’s App. at 399. 3 Line of Credit at 2, ¶ 4, in Appellee’s App. at 393. 4 Line of Credit at 2, ¶3, in Appellee’s App. at 393. 2 The Debtor refinanced the obligations secured by the First Mortgage and the
Second Mortgage by consolidating the two loans and borrowing $450,000 from the Bank
in July 2002 (the “$450,000 Loan”). To secure the $450,000 Loan, the Debtor granted the
Bank a mortgage lien also secured by the Residence (the “Third Mortgage”). 5 At the July
16, 2002 closing of the $450,000 Loan, the Bank paid off the First Mortgage and paid off
the $101,162.73 outstanding balance of the Line of Credit. On the same day, the Bank
executed a Real Estate Subordination Agreement (the “Subordination Agreement”),
subordinating the Second Mortgage to the Third Mortgage. 6
Between August 8, 2002 and December 20, 2005, the Debtor made draws on the
Line of Credit by either requesting funds directly or through overdraft protection
advances until the balance reached $100,983.00. 7 Although the account number changed
in 2016 due to the Bank’s consolidation, the Line of Credit remained active. 8 Thereafter,
the Debtor continued to make payments on the Line of Credit, the last of which occurred
on August 7, 2017. 9 Account histories for the Line of Credit indicate, as of the date of the
Debtor’s last payment, he owed $80,240.92. 10
5 The record before the Bankruptcy Court does not contain a copy of the Third Mortgage. 6 Subordination Agreement, in Appellant’s App. at 42. 7 Home Loan History Statement, in Appellee’s App. at 445. 8 Notice of Account Number Change, in Appellee’s App. at 435. 9 Home Loan History Statement at 14, in Appellee’s App. at 457. 10 Id., in Appellee’s App. at 457. 3 On July 19, 2018, the Debtor filed a pro se petition under chapter 7 of the United
States Bankruptcy Code. 11 In his bankruptcy case, the Debtor identified a claim of
$82,819.00 owed to the Bank and secured by the Residence in Schedule D: Creditors
Who Have Claims Secured by Property, of his bankruptcy petition.12 The Debtor later
filed a complaint initiating an adversary proceeding against the Bank (the “Complaint”)
on March 1, 2019. The Complaint alleged the Bank failed to release the Second Mortgage
securing the Line of Credit, resulting in damages to the Debtor. The Complaint also
challenged the validity, priority, and extent of the lien securing the Line of Credit
pursuant to § 544(a).
The Bank filed a motion for summary judgment, asserting it held a valid lien and
was not required to release the Second Mortgage. The Debtor filed a cross-motion for
summary judgment, arguing the Bank did not properly record the Second Mortgage
securing the Line of Credit with the register of deeds. The Bankruptcy Court denied the
Debtor’s cross-motion for summary judgment, concluding the Bank held an enforceable
mortgage securing the Line of Credit. 13 The Bankruptcy Court granted the Bank’s motion
for summary judgment in part and denied the motion in part. 14 The Bankruptcy Court
concluded the Bank was not required to release its lien after the $450,000 Loan
11 All future references to “Bankruptcy Code,” “Code,” or “§,” refer to Title 11 of the United States Code. 12 Appellee’s App. at 159. 13 Order Denying Debtor’s Motion for Summary Judgment at 5, in Appellee’s App. at 261. 14 Order Granting in Part and Denying in Part Bank of America’s Motion for Summary Judgment (“Summary Judgment Order”) in Appellee’s App. at 247. 4 transaction. 15 However, the Bankruptcy Court found a genuine issue of material fact
existed as to the amount due under the Line of Credit. 16 Accordingly, the adversary
proceeding continued to trial.
The Debtor appeared pro se at trial, where he testified 17 he and his wife voluntarily
executed the Second Mortgage securing the Line of Credit. The Debtor also testified that,
at the July 16, 2002 closing of the $450,000 Loan, a representative of the Bank handed
him an account card, which he believed was an unsecured credit card. 18 The Debtor did
not produce the card itself, account statements for the alleged credit card, or any other
evidence of a credit card. 19 However, the Debtor testified he believed any amounts owed
to the Bank were on account of unsecured credit card debt. 20 The Debtor, persistent in
this theory, explained his understanding that: (i) the 2002 $450,000 Loan transaction
terminated the Line of Credit; and (ii) based on the Subordination Agreement, his liability
to the Bank could not exceed $450,000. 21 As a result, the Debtor believed any amounts
15 Summary Judgment Order at 8-9, in Appellee’s App. at 254-55. 16 Id. at 9-10, in Appellee’s App. at 255-56. 17 The Bankruptcy Court did not find “the Debtor’s testimony to be credible,” in part due to his selective memory focusing only on what the Debtor perceived to be beneficial to him. Order Denying Plaintiff’s Lien Avoidance Claim and Dismissing Complaint (the “Dismissal Order”) at 7, n. 9, in Appellee’s App. at 383. 18 Tr. at 25, in Appellee’s App. at 287. 19 Id. at 25-26, in Appellee’s App. at 287-88. 20 Id. 25, in Appellee’s App. at 287. 21 Id. at 11, in Appellee’s App. at 273. 5 incurred by charges made on the unsecured credit card provided by the Bank at the 2002
closing did not encumber the Residence. 22
A representative from the Bank testified the card given to the Debtor was likely a
debit card associated with the Debtor’s primary checking account with the Bank.23 The
Bank’s representative also explained the Debtor’s checking account included overdraft
protection linked to the Line of Credit such that, if the Debtor had insufficient funds for
checking account transactions, advances would be made from the Line of Credit to cover
those transactions. 24 The Bank’s representative presented account histories for the Line of
Credit that included advances labeled either as ODP (overdraft protection) transfers or
online checking advances. 25
After the trial’s conclusion, the Bankruptcy Court entered the Dismissal Order. 26
In the Dismissal Order, the Bankruptcy Court found the Second Mortgage securing the
Line of Credit included a future advance clause stating, “this Mortgage also secures all
future advances [Bank] at its discretion may loan to Borrower which references this
Mortgage, together with all interest thereon.” 27 The Bankruptcy Court concluded, under
Kansas law, the Second Mortgage contained an enforceable future advance clause and
found the Debtor had not requested termination of the Line of Credit pursuant to its
22 Id. at 18, in Appellee’s App. at 280. 23 Tr. at 90-91, in Appellee’s App. at 352-53. 24 Id. at 88-89, in Appellee’s App. at 350-51. 25 Id. at 84-89, in Appellee’s App. at 346-51 26 Appellant’s App. at 66. 27 Dismissal Order at 8, in Appellant’s App. at 73. 6 terms. 28 As a result, the Bankruptcy Court held the Bank had no obligation to release the
Second Mortgage securing the Line of Credit when it paid the line down in July 2002. 29
The Bankruptcy Court also found all the Debtor’s draws on the Line of Credit
including those after the $450,000 Loan transaction, were made pursuant to the terms of
the Line of Credit. 30 As such, the Bankruptcy Court held the Bank’s claim for
approximately $80,000 is secured by the Second Mortgage against the Residence and
dismissed the Complaint. The Debtor filed a timely notice of appeal of the Dismissal
Order. 31
II. Jurisdiction & Standard of Review
“With the consent of the parties, this Court has jurisdiction to hear timely-filed
appeals from ‘final judgments, orders, and decrees’ of bankruptcy courts within the Tenth
Circuit.” 32 Neither party elected to have this appeal heard by the United States District
Court for the District of Kansas; thus, the parties have consented to our review.
“A ‘final decision’ generally is one which ends the litigation on the merits and
leaves nothing for the court to do but execute the judgment.” 33 An order resolving all
claims asserted in an adversary proceeding is a final order for purposes of 28 U.S.C.
28 Id. at 8-9, in Appellant’s App. at 73-74. 29 Id., in Appellant’s App. at 73-74. 30 Id. at 5, in Appellant’s App. at 70. 31 Notice of Appeal, in Appellant’s App. at 77. 32 Straight v. Wyo. Dep’t of Trans. (In re Straight), 248 B.R. 403, 409 (10th Cir. BAP 2000) (first quoting 28 U.S.C. § 158(a)(1), and then citing 28 U.S.C. § 158(b)(1), (c)(1) and Fed. R. Bankr. P. 8002). 33 Catlin v. United States, 324 U.S. 229, 233 (1945) (citing St. Louis I.M. & S.R.R. v. S. Express Co., 108 U.S. 24, 28 (1883)). 7 § 158(a). 34 As the Dismissal Order resolved all of the Debtor’s claims under § 544(a), the
Court has jurisdiction pursuant to 28 U.S.C. § 158(a). 35
A determination that a lien may not be avoided pursuant to § 544(a) is a legal
question reviewed de novo. 36 “De novo review requires an independent determination of
the issues, giving no special weight to the bankruptcy court’s decision.” 37 Any of the
Bankruptcy Court’s findings of fact considered in forming the basis of its legal
conclusions are reviewed for clear error. 38 “A finding of fact is clearly erroneous if it is
without factual support in the record or if, after reviewing all of the evidence, we are left
with the definite and firm conviction that a mistake has been made.” 39
III. Discussion
The Debtor’s argument is succinct. He contends, at the July 2002 closing,
proceeds from the $450,000 Loan paid to the Bank satisfied and “closed” the obligation
under the Line of Credit. Further, the Bank subordinated the Second Mortgage securing
34 Adelman v. Fourth Nat’l Bank & Tr. Co, N.A., of Tulsa (In re Durability, Inc.), 893 F.2d 264, 266 (10th Cir. 1990) (“the appropriate ‘judicial unit’ for application of these [finality] requirements in bankruptcy is not the overall case, but rather the particular adversary proceeding” (citing multiple cases)). 35 Id. 36 In re Murray, 506 B.R. 129, 133 (10th Cir. BAP 2014), aff'd, 586 F. App'x 477 (10th Cir. 2014) (citing Pierce v. Underwood, 487 U.S. 552, 558 (1988)). 37 LTF Real Estate Co. v. Expert S. Tulsa, LLC (In re Expert S. Tulsa, LLC), 522 B.R. 634, 643 (10th Cir. BAP 2014) (citing Salve Regina Coll. v. Russell, 499 U.S. 225, 238 (1991)). 38 Sender v. Nancy Elizabeth R. Heggland Family Tr. (In re Hedged-Invs. Assocs., Inc.), 48 F.3d 470, 472 (10th Cir. 1995) (citing In re Reliance Equities, Inc., 966 F.2d 1338, 1340 (10th Cir. 1992)) (stating “court of appeals must not disturb the bankruptcy court’s findings of fact unless they are clearly erroneous”). 39 In re Miniscribe Corp., 309 F.3d 1234, 1240 (10th Cir. 2002) (quoting Conoco, Inc. v. Styler (In re Peterson Distrib., Inc.), 82 F.3d 956, 959 (10th Cir. 1996)). 8 the Line of Credit to the Third Mortgage securing the $450,000 Loan, and the
Subordination Agreement extinguished the lien of the Second Mortgage. The Debtor
argues, as a result, the Bank wrongfully failed to release the Second Mortgage securing
the Line of Credit after the July 2002 closing. As such, any advances under the Line of
Credit that led to liability in excess of $450,000 are unsecured.
Unfortunately, the Debtor is operating under the mistaken beliefs that the Line of
Credit was “closed” and the Subordination Agreement terminated the Line of Credit
when the evidence in the record before this Court confirms the Line of Credit remained
opened and the Second Mortgage securing the Line of Credit remains valid and
enforceable.
a. The Bank was Not Obligated to Release the Mortgage
“Property interests are created and defined by state law.” 40 “The justifications for
application of state law are not limited to ownership interests; they apply with equal force
to security interests.” 41 Thus, to determine whether the Second Mortgage constitutes a
valid and enforceable mortgage on the Residence, the Court must look to Kansas law. 42
The Supreme Court of Kansas provides that promissory notes and mortgages are
contracts between the parties, and the rules of construction applicable to contracts
therefore apply. 43 The primary rule of contract construction is that the intent of the parties
40 Butner v. United States, 440 U.S. 48, 55 (1979). 41 Id. 42 Valley Bank & Tr. Co. v. Spectrum Scan, LLC (In re Tracy Broad. Corp.), 696 F.3d 1051, 1060 (10th Cir. 2012). 43 First Nat’l Bank & Tr. Co. v. Lygrisse, 647 P.2d 1268, 1272 (Kan. 1982). 9 must prevail. 44 The Debtor argues the Bank had an obligation to release the Second
Mortgage when it received proceeds from the $450,000 Loan in 2002. On the other hand,
the Bank points to the future advance clauses in the Line of Credit and the Second
Mortgage as trumping any obligation to release the Second Mortgage. The intent of the
parties is evident from the Line of Credit and the Second Mortgage. The Line of Credit
required the Debtor to notify the Bank in writing if he wanted to suspend or terminate the
Line of Credit, something which the Debtor never did.45 Similarly, the Second Mortgage
secures future advances under the Line of Credit and was not to be released until the Line
of Credit was closed. 46
“Future advance clauses are clearly valid and enforceable in the State of Kansas” 47
and are addressed in the Kansas Statutes applicable to real estate mortgages. Specifically,
under Kansas law, a real estate mortgage
may secure future advances and the lien of such mortgage shall attach upon its execution and have priority from time of recording as to all advances made thereunder until such mortgage is released of record: Provided, That the lien of such mortgage shall not exceed at any one time the maximum amount stated in the mortgage. 48
44 Mark Twain Kan. City Bank v. Cates, 810 P.2d 1154, 1161 (Kan. 1991). 45 Line of Credit at 4, ¶17, in Appellee’s App. at 395. 46 Second Mortgage at 5, in Appellee’s App. at 403. 47 Halliburton Co. v. Bd. of Cty. Comm’rs of Jackson Cty., 755 P.2d 1344, 1349 (Kan. Ct. App. 1988). 48 Kan. Stat. Ann. § 58-2336 (2020). 10 Kansas law further provides that when a debt is paid in full “and there is no agreement
for the making of future advances to be secured by the mortgage, the mortgagee . . . shall
enter satisfaction . . . of such mortgage . . . forthwith.” 49
The only interpretation the Court can derive from reading these two statutes in
tandem is, where a mortgage contains a valid future advance clause, the mortgagee is not
automatically required to release the mortgage upon payment in full. In such a case, the
mortgagee must comply with the terms of the instrument allowing for future advances. In
this case, the Second Mortgage securing the Line of Credit provides “[u]pon payment of
all sums secured by this Mortgage and closing of the Obligation, [the Bank] shall release
this Mortgage without charge to Grantor except for any recordation costs.” 50 However,
the Line of Credit provides “[i]f the Account is not blocked, suspended or terminated,”
the Debtor may “request Advances for fifteen (15) years from the date of this
Agreement.” 51 Moreover, to “suspend or terminate” the Line of Credit, the Debtor needed
only to notify the Bank of any such request in writing. 52
The Bank was under no obligation to release the Second Mortgage securing the
Line of Credit while the obligation under the Line of Credit remained opened. The
language in the Line of Credit is clear: to request termination, the Debtor must provide
written notice. The Debtor never provided any evidence of a written request to terminate
the Line of Credit. Additionally, the Debtor continued to take advances under the Line of
49 Kan. Stat. Ann. § 58-2309a(a) (2020). 50 Second Mortgage at 5, in Appellee’s App. at 403. 51 Line of Credit at 2 ¶ 4, in Appellee’s App. at 393. 52 Id. at 4 ¶ 17, in Appellee’s App. at 395. 11 Credit, repeatedly increasing the balance after the $450,000 Loan transaction. Since the
Line of Credit remained opened, the Bank was under no obligation to release the Second
Mortgage. Accordingly, the Bankruptcy Court did not err in determining the Bank was
not obligated to release the Second Mortgage.
b. The Line of Credit is Secured by the Residence
Next, the Debtor argues the Bank’s Second Mortgage lien in the Residence should
be avoided pursuant to § 544(a). Section 544 “afford[s] trustees the power to avoid any
transfer or obligation that a hypothetical creditor with an unsatisfied judicial lien on the
debtor’s property could avoid under relevant state nonbankruptcy law.” 53 Although not
an issue raised on appeal in this case, individual debtors “may exercise section 544
avoiding powers only in the limited circumstances outlined in section 522(h).” 54
The Debtor again argues the Residence does not secure any advances made by the
Bank under the Line of Credit (i) after the Bank executed the Subordination Agreement,
or (ii) for debt exceeding $450,000. However, the Bankruptcy Court’s findings of fact
establish the existence of a lien securing the Line of Credit and are not clearly erroneous.
The Bankruptcy Court found the Debtor and his wife executed the Line of Credit and the
Second Mortgage in March 2000. As of July 16, 2002, the Debtor’s balance under the
53 Morris v. St. John Nat’l Bank (In re Haberman), 516 F.3d 1207, 1210 (10th Cir. 2008) (citing 11 U.S.C. § 544(a)(1)). 54 5 Collier on Bankruptcy ¶ 544.07[3] (16th ed. 2020). Under § 522(h), a “debtor may avoid a transfer of property of the debtor . . . to the extent that the debtor could have exempted such property under subsection (g)(1) . . . if (1) such transfer is avoidable by the trustee under section 544 . . . ; and (2) the trustee does not attempt to avoid such transfer.” 11 U.S.C. § 522(h). 12 Line of Credit was $100,860.87. While the Debtor and his wife refinanced the First
Mortgage against the Residence and paid down the Line of Credit balance to zero with
the $450,000 Loan, as explained previously, the Bank was not required to release the
Second Mortgage because the Debtor did not request that the Line of Credit be blocked,
suspended, or terminated. Accordingly, the Line of Credit remained opened for the stated
fifteen-year term.
At trial, the Bank provided account statements indicating the Debtor drew on the
Line of Credit after July 2002. The Bankruptcy Court found “[t]he evidence that the
advances shown on account statements were made under the terms of the [Line of Credit
was] unassailable.” 55 The Bankruptcy Court noted each advance contained in the account
statements described a method of advance, such as “ODP Advance,” “electronic
advance,” or “balance advance.” 56 The Debtor acknowledged he had a checking account
with the Bank, and such account may have been linked to the Line of Credit for overdraft
protection. The account statements themselves reflect advances were made to cover
insufficient fund transactions against the Debtor’s checking account. And, all advances
made by the Bank under the Line of Credit occurred during the fifteen-year term of the
Line of Credit. The advances resulted in a balance of $80,240.92 as of August 2017,
approximately one year before the bankruptcy petition.
The Debtor testified the Bank provided him with a “credit card,” which he
believed was unsecured and not linked to the Line of Credit. However, the Debtor
55 Dismissal Order at 5, in Appellant’s App. at 70. 56 Id. at 6, Appellant’s App. at 71. 13 produced no evidence of the credit card or any related credit card statements. The Bank’s
representative testified the card was likely a debit card the Debtor could use to initiate
transfers from the Line of Credit. Lacking any evidence to support the Debtor’s claims,
the Bankruptcy Court rejected his testimony that the advances were charges to an
unsecured credit card.
The Debtor’s arguments on appeal do not refute any of the factual findings
underpinning the Bankruptcy Court’s legal conclusion that the Bank’s Second Mortgage
is valid and enforceable. The Debtor primarily argues the Bankruptcy Court failed to
recognize the Subordination Agreement’s legal significance, claiming the agreement
renders any advances in excess of $450,000 unsecured. The Debtor is mistaken. He is not
a party to the Subordination Agreement and derives no benefit from it. 57 Furthermore, the
Subordination Agreement is narrow in scope and only serves to reverse the priority of the
liens of the Second Mortgage and the Third Mortgage. 58 The Subordination Agreement
does not purport to modify, release, or otherwise terminate the Line of Credit or
otherwise alter or change the Debtor’s obligations under the Line of Credit. In fact, the
Subordination Agreement itself is perhaps the best evidence that the parties did not intend
the Subordination Agreement to somehow terminate the Line of Credit and consequently
require the release of the Second Mortgage. If the Line of Credit terminated, then the
57 163 Am. Jur. Proof of Facts 3d 305 (2017) (“The subordination agreement will only be between the two creditors whose rights and remedies against the borrower are altered or adjusted according to the terms of the agreement.”). 58 Subordination Agreement at 2, in Appellant App. at 98 (“Subordinator hereby subordinates the Senior Lien to Bank of America’s Junior lien.”). 14 Second Mortgage would have been required to be released and the Subordination
Agreement would serve no purpose.
Considering there is no evidence in the record to support the Debtor’s claims, and
the Bankruptcy Court’s factual findings are supported by evidence in the record, the
factual findings are not clearly erroneous. As the Bankruptcy Court’s findings of fact
support its conclusion that the Bank retained a valid and enforceable lien against the
Residence based on the Second Mortgage securing the Line of Credit, the Bankruptcy
Court did not err in dismissing the Complaint.
IV. Conclusion
The Debtor erroneously believes that the 2002 $450,000 Loan transaction, and the
Bank’s contemporaneous execution of the Subordination Agreement, terminated the
Second Mortgage securing the Line of Credit. Despite his contentions, the Debtor admits
the Bank advanced approximately $100,000 in the three years following the $450,000
Loan transaction and fails to present any evidence the advances were not made pursuant
to the terms of the Line of Credit. Accordingly, upon determining the Bankruptcy Court
correctly concluded the Second Mortgage securing the Line of Credit remains a valid and
enforceable mortgage, we AFFIRM its dismissal of the Complaint.