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In re Scott

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - DETROIT
Jun 29, 2011
Case No. 10-69733 (Bankr. E.D. Mich. Jun. 29, 2011)

Opinion

Case No. 10-69733

06-29-2011

In re: Michael G. Scott and Colleen E. Scott, Debtors.


Hon. Walter Shapero


OPINION GRANTING IN PART TRUSTEE'S MOTION TO SELL

The matter before the Court is Chapter 7 Trustee's Motion, under 11 U.S.C. § 363(f), (1) For Authority to Sell Real Property Free of Any Interest, and to Pay CitiMortgage and Any Other Junior Liens as Unsecured Creditors; (2) To Approve Sale Procedures; and (3) For Other Relief (Docket No. 40). The property involved is Debtors' residence at 4820 School Bell Lane, Bloomfield Hills, Michigan ("Property"). A number of hearings, including evidentiary hearings, were held and this is the Court's opinion.

I. BACKGROUND

The factual background and resulting contextual framework is complicated, extensive, and necessary to an understanding of the result.

Prior to 2002, the Debtors had a single mortgage on the Property. In March 2002, they gave a second and Future Advance Mortgage on the Property to Charter One Bank, which essentially secured a line of credit. That mortgage came to be held by RBS Citizens Bank ("RBS"). In September 2002, Debtors sought to refinance those two existing mortgages and such resulted in the giving of a new mortgage to ABM Amro Mortgage Group, Inc., which later came to be held by Citimortgage ("Citi"). At, or incident to, the closing on that new mortgage, the documentation would indicate the intention was to pay-off, and obtain and record discharges of, both of the existing two mortgages, resulting in Citi having the only, and first, lien. Monies were apparently sent by a closing agent to both of the existing mortgagees consistent with that intention. Such a discharge was apparently effected and apparently recorded as to the prior first mortgage. However, such was not effected as to the RBS mortgage because RBS records reflected that, by the time the funds payable to it were received, such were apparently slightly less than the amount it believed was the full amount necessary to pay off and discharge its mortgage. Therefore, RBS simply applied the amount received from the closing to the balance of the account, leaving a small balance, and did not issue a discharge of its mortgage, and it appears there apparently was no follow-up. Citi recorded its mortgage soon after the closing. Thereafter, Debtors began both paying on the Citi mortgage and using the RBS line of credit.

On September 27, 2010, Debtors filed this Chapter 7 case. As of that date, the balance owing on the RBS line of credit account had become approximately $128,000, and the balance owed to Citi on its mortgage was some $361,679. Soon thereafter, both Citi and RBS filed Motions for Relief from Stay. Those motions were unopposed and, by the middle of December 2010, orders lifting the stay were entered with respect to each motion. RBS proceeded soon thereafter to initiate a foreclosure by advertisement, and on January 18, 2010, the Property was sold at a sheriff's foreclosure sale to an unrelated third party, Demetrious Athanasiou, for $129,040.83. (It also appears that somehow the funds actually paid by him to the sheriff did not actually find their way to RBS, by reason of a lost remittance or for some other reason, and such apparently remains an unresolved matter). By virtue of the sheriffs deed and applicable law, there is a right to redeem the Property until July 18, 2011.

In February 2011, the Trustee filed the pending sale motion, seeking to sell the Property itself, not just the Debtors' redemption rights. The Trustee served, among others, RBS, Citi, and Athanasiou. That motion, as filed, sought (1) authority to sell the Property under 11 U.S.C. § 363(f) (subject to higher/better offers under specific procedures providing for same) to a relative of Debtors who had offered the sum of $250,000 cash; and (2) the entry of an order in connection therewith, which specifically also provides that Citi may not assert a secured claim to the net sale proceeds, but will instead have only an unsecured claim for any amounts owed to it. In practical effect, that would mean that the Trustee would retain as assets of the estate for ultimate distribution to creditors of the net proceeds of the proposed sale, which would amount to whatever the difference is between (a) the amount the Property is sold for and (b) the amounts necessary to pay Anthanasiou, the sheriffs deed grantee, in order to satisfy his interest and the associated costs of the sale.

The cornerstone of the Trustee's position and the desired order provision is that the RBS foreclosure eliminated Citi's mortgage as a matter of law, i.e.: because the RBS mortgage was on record (and was never discharged) before Citi's mortgage was recorded, Citi's mortgage was thus a second lien and, as such, it was extinguished by reason of the RBS senior lien foreclosure under the recited circumstances and Citi should be treated, if otherwise so entitled, and held to be no more than an unsecured creditor of the bankruptcy estate. Such a finding and order provision would be necessary in order for the Trustee to be able to fully effectuate the sale and convey the required marketable, insurable title to the purchaser. Citi filed the only formal objection to Trustee's motion. A representative of Athanasiou has appeared at the hearings and representatives of RBS gave evidence as witnesses.

II. DISCUSSION

The Trustee specifically seeks authority to sell the Property and sale approval under 11 U.S.C. § 363(f)(4) and (5). The latter section provides that "[t]he Trustee may sell property . . . [of a Debtor] free and clear of any interest in such property of an entity other than the estate, only if . . . such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest." 11 U.S.C. § 363(f)(5). There are differences of opinion as to whether authorization of a motion to sell under § 363(f)(5) requires an actual or a hypothetical payment in full satisfaction of all interests in the subject property. Compare In re Silver, 338 B.R. 277 (Bankr. E.D. Va. 2004) (holding that "a trustee cannot sell property under authority of § 363(f)(5) if the interests to which the property is subject cannot be satisfied fully in a compelled legal or equitable proceeding"), and Richardson v. Pitt County (In re Stroud Wholesale, Inc.), 47 B.R. 999, 1002 (E.D. N.C. 1985), aff'd mem., 983 F.2d 1057 (4th Cir. 1986), with In re Healthco Int'l Inc., 174 B.R. 174 (Bankr. D. Mass. 1994) (construing "money satisfaction of such interest" appearing in subparagraph (f)(5) to mean a payment constituting less than full payment of the underlying debt"). There are also difference of opinion as to the nature and extent of the legal or equitable proceeding contemplated by this provision, i.e.: whether such can be purely hypothetical or need they be real, etc. Compare In re Gulf States Steel, Inc. of Ala., 285 B.R. 497, 508 (Bankr. N.D. Ala. 2002) (requiring a showing that some "mechanism exists to address extinguishing the lien or interest without paying such interest in full"), with Scherer v. Fed. Nat'l Mortgage Ass'n (In re Terrace Chalet Apts., Ltd.), 159 B.R. 821, 829 (N.D. Ill. 1993) (requiring a showing of the actual basis that could be used to compel acceptance of less than full monetary satisfaction).

The Court, in this instance need not subscribe to one or the other school of thought regarding the nature and extent of the legal or equitable proceeding contemplated by § 363(f)(5) because it is the Trustee's position that the provision may be satisfied by the possibility of a strip down or a cram down of Citi's mortgage (or more specifically elimination of that mortgage interest altogether), which could hypothetically take place, if not in this Chapter 7 case, in either a Chapter 11 or a Chapter 13 case. However, that argument fails, if for no other reason than Citi's mortgage, if it has one, is or was on Debtors' principal residence. A principal residence is not subject to stripping or cram down in either chapter pursuant to 11 U.S.C. § 1322(b)(2) and 11 U.S.C. § 1129(b) respectively. In this Court's view, the hypothetical proceeding needs, at the very least, to be legally possible. The Trustee has not, and cannot point to any other actual or hypothetical proceedings where the required money satisfaction can be achieved. Accordingly, Trustees Motion for Authority to Sell the Property Free of Any Interest under 11 U.S.C. § 363(f)(5) should be denied.

As for § 363(f)(4), that code section provides that "[t]he Trustee may sell property . . . [of a Debtor] free and clear of any interest in such property of an entity other than the estate, only if . . . such interest is in bona fide dispute." 11 U.S.C. § 363(f)(4). It is to be initially, if not dispositively noted, that while the motion is fashioned and pursued as one to sell the Property itself, what the Trustee actually is possessed of and technically has to sell, is only the Debtors about-to-expire equity of redemption arising from the RBS mortgage foreclosure sale on January 18, 2011. In a strict sense, there is absolutely no dispute about that, bona fide or otherwise. The sought sale of the Property itself is simply a way to attempt to realize a perceived value for creditors arising due to the passage of time or a change of circumstances within a sixty or so day period from what the situation was when the Trustee did not oppose either Citi's or RBS's motions to lift the stay - presumably because the Trustee did not then, at least, see any equity in the Property available for creditors. More significant to the analysis and result, however, is the Trustee's required sale condition that the Court not only approve the proposed sale, but that the approving order find and conclude that Citi's interest is only that of an unsecured creditor, if that, and that its lien interest was legally and completely extinguished by the RBS foreclosure. The essential bona fide dispute in question here is over the question of who is entitled to the difference between what is paid to Athanasiou to redeem the Property and the total potential sale proceeds - a very significant amount in this case. At this time, that dispute is between the Trustee and Citi. As noted, the Trustee argues simply that since the recorded RBS mortgage predated that of Citi and it was never formally discharged, its foreclosure should be treated and seen as the foreclosure of a first mortgage - a necessary legal result of which was that Citi's thus to be considered junior mortgage, was extinguished. Citi appears to argue in effect that under all of the facts, the RBS mortgage when foreclosed, should be considered, and held to have been, a second mortgage to that of Citi and thus, when RBS foreclosed, it was foreclosing a junior mortgage to that of Citi, thus the latter was not affected by that foreclosure. The immediate ramifications of such a holding would be that Citi, and not the Trustee, is entitled to all of the indicated net proceeds. The more extended possible effect of Citi winning the argument would arguably be, among other things, a position that Athanasiou, the sheriffs sale purchaser (and any subsequent purchaser from him), took the Property subject to Citi's mortgage. Another ramification, if the Trustee prevails, might be the effect and/or possible arguably binding nature of the decision on parties other than Citi or the Trustee, and those who were not formally before the Court, or any claim(s) Citi may have against any entity insuring its mortgage interest (or subrogation incident thereto), or against anyone else, arising out of the consummation of its mortgage. The foregoing description of the dispute and the disputants clearly permits a conclusion that there at least exists a bona fide dispute satisfying that requirement of § 363(f)(4).

This would obviously be a lot simpler matter if the Trustee found a purchaser for enough to make a sale worthwhile, to whom it could merely quit claim the equity of redemption - obviously the less likely of the alternatives.

However, concluding there exists a dispute sufficiently bona fide to meet § 363(f)(4) thereby permitting a sale does not thereby also permit or allow the Court at the same time, and in the same limited proceeding, to actually also decide the merits of that dispute. Section 363(f)(4) neither provides for nor contemplates such. Indeed, the whole idea of § 363(f) is to defer the determination of the dispute and not go beyond a finding that a dispute exists to enable the sale. An, if not the, idea of § 363(f) is to avoid putting the finalization of the administration and liquidation of a bankruptcy estate's assets, particularly in a Chapter 7 estate, at the mercy of protracted litigation. However, important substantial and procedural rights cannot be sacrificed to that altar, even in a situation like this, where the clear danger is that the equity of redemption might expire rendering the matter moot. In this case, in order for the contemplated sale to be fully effected and the sought after provision in the Order included, there also needs to be decided the very issue(s) which created the dispute, and in this case, to do so in favor of the Trustee's position. No other outcome will do if the proposed purchaser is to obtain good or marketable and insurable title. An arguable possibility might be that Citi can be adequately protected by a transfer of its claims to the proceeds of the sale to await the eventual outcome of later proceedings deciding entitlement to same. That, of course, is the point of the statute. The major problem with that in this case, however, is that the dispute needs to be fully and properly litigated and finally and unappealably decided by July 18, 2011 - some 20 days from now. That obviously cannot be accomplished (even if this Court decided the dispute and issued its order today or did so somewhat earlier). In sum, then, deciding the merits of the bona fide dispute (in addition to its existence) is something which the Court has concluded it should not and cannot do in the context of a requested § 363(f) sale proceeding. Rather it is something that is or should be done under F.R.Bankr.P. § 7001(2) requiring an adversary proceeding, or some other equivalent process, to determine the validity, priority or extent of a lien or other interest in property, keeping in mind that given the indicated and the facts, effectively disposing of the dispute might very well formally need to also involve parties other than the Trustee and Citi who are the only actual contesting parties before the Court at this point. Such also negatively impacts the adequacy of suggested protection to Citi by transferring its claims to the proceeds, i.e.: the mentioned potential negative effect of a decision incident to the sale motion that Citi's mortgage was legally extinguished, on any other rights Citi might have against third parties, or possibly even the Debtors or rights of those parties. To date, those questions have not been sufficiently explored, and, as a practical matter, cannot be within the allotted time.

There is an ancillary consideration occasioned by the July 18, 2011 redemption deadline which arguably could afford a basis for a total denial of the motion. The Trustee's Motion, as filed, properly proposed a procedure for obtaining higher and better offers, prior to the closing of the sale. The Motion as thus originally filed, and the Order sought, are now incapable of accomplishment. Normally and properly obtaining the best price for the property is important to approval of sales in the Bankruptcy Court. Doing so in a way the motion originally proposed is one, and possibly a preferred, way of satisfying that concern. Another could be by a private sale under circumstances where the Court and the interested parties have an opportunity to evaluate and conclude whether the private sale price is the best that can be obtained under the circumstances. Uncorroborated by evidence, arguments that such might be so are not sufficient. These proceedings and the passage of time and the immutable July 18, 2011 deadline have necessarily and unfortunately brought this situation to a point where now neither can properly be accomplished. Such is yet another, or a reinforcing, reason for the Court's somewhat more limited conclusion.

The Court believes it has acted as expeditiously as the circumstances and due process permit. The real problem was, and is, the nature and extent of the disputed issues and, crucially, the ever diminishing time frame within which they need to be properly, absolutely, and most importantly, finally disposed of. This is a fact of life in this case that only the sheriff's sale purchaser can possibly change, if he chose to do so. If, as appears to be the case, he chooses not to, as is his right, or somehow the interested parties do not among themselves effect a timely settlement, the result, and a proper result, will be that any potential interest of the bankruptcy estate in the Property will likely be extinguished and the remaining interested parties will be left to deal, likely in some other venue, with the property and their issues.

It is therefore this Court's conclusion, for the indicated reasons, that while the Trustee has borne his burden of showing the existence of a good faith dispute under § 363(f)(4), and thus a basis for granting approval of the sale, the Court will not include in any order with reference to same, any language which disposes of the merits of the dispute, or particularly states or concludes that Citi has no mortgage or security interest in the Property and that its position is nothing better than that of a possible unsecured creditor. The Trustee shall prepare and present an appropriate order.

Walter Shapero

United States Bankruptcy Judge


Summaries of

In re Scott

UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - DETROIT
Jun 29, 2011
Case No. 10-69733 (Bankr. E.D. Mich. Jun. 29, 2011)
Case details for

In re Scott

Case Details

Full title:In re: Michael G. Scott and Colleen E. Scott, Debtors.

Court:UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF MICHIGAN SOUTHERN DIVISION - DETROIT

Date published: Jun 29, 2011

Citations

Case No. 10-69733 (Bankr. E.D. Mich. Jun. 29, 2011)