In re Pierce

• Decision Date: 25 November 2001
• Docket Number: Adversary No. 00-3499.,Bankruptcy No. 00-37098-H2-13.
• Parties: In re Stephanie PIERCE, Debtor. Elbar Investments, Inc., Plaintiff, v. Stephanie R. Pierce, et al., Defendant.
• Court: United States Bankruptcy Courts. Fifth Circuit. U.S. Bankruptcy Court — Southern District of Texas

272 B.R. 198

In re Stephanie PIERCE, Debtor Elbar Investments, Inc., Plaintiff, v. Stephanie R. Pierce, et al., Defendant.

Bankruptcy No. 00-37098-H2-13.

Adversary No. 00-3499.

United States Bankruptcy Court, S.D. Texas, Houston Division.

November 25, 2001.

COPYRIGHT MATERIAL OMITTED

Richard L. Petronella, Houston, TX, for Plaintiff.

Pamela J. Franklin, Houston, TX, for Defendant.

Jennine Yvette Hovell-Cox, Houston, TX, for A.I.S.D. & Beechnut M.U.D.

Mary Daffin, Houston, TX, for Fairbanks Capital Corporation.

James J. Savage, Houston, TX, for Constable Glen Creek.

David Peake, Houston, TX, Chapter 13 Trustee.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

WESLEY W. STEEN, Bankruptcy Judge.

In this adversary proceeding, the Court must determine the effect of a judicial (tax) sale of the debtor's homestead that took place only minutes after this bankruptcy case was filed. Without knowledge that the case had been filed, Elbar Investments, Inc. ("Elbar") purchased the Debtor's homestead at the constable's sale for $31,000. The constable has declined to issue a deed to the property until this court determines the effect of the automatic stay. In a motion filed in the main bankruptcy case, Elbar asked the Court to annul the § 362 automatic stay retroactively, to validate the sale. That motion was denied. In this adversary proceeding, Elbar asks the Court to order the constable to issue the deed, asserting that it is a good faith purchaser without knowledge of the bankruptcy filing or of the § 362 stay. Alternatively, Elbar seeks the return of the purchase price, which was deposited in the registry of this Court. By separate order issued this date, the Court orders the purchase price returned to the constable for delivery to Elbar. The Court concludes that Elbar's "good faith purchaser" status cannot be the basis for validating a postpetition execution sale that violated the automatic stay unless the court annuls the stay retroactively under § 362(d).

JURISDICTION

This is an adversary proceeding that arises in a case under title 11, arises under title 11 of the United States Code, and involves property of the estate. The United States District Court has jurisdiction under 28 U.S.C. § 1334(b) and (d). By Order dated August 9, 1984, under authority granted by 28 U.S.C. § 157(a), the United States District Court for the Southern District of Texas referred all such proceedings to the bankruptcy judges for the district. This is a core proceeding as defined by 28 U.S.C. § 157(b)(2)(G), (K), and (O). The bankruptcy judge may hear and may determine core proceedings, 28 U.S.C. 157(b)(1). No party has objected to the exercise of core jurisdiction by the bankruptcy judge.

FACTS¹

Unless otherwise indicated, the following findings of fact are made from the testimony at the hearing on Elbar's motion for retroactive relief from the automatic stay and from facts that clearly appear from the pleadings to be undisputed. The conclusions and the decision concerning the motion from relief from the stay are presented here in explanation of that order as well as in explanation of the judgment resolving this adversary proceeding. No party has suggested that any of those findings and conclusions are incorrect.

Stephanie Pierce ("Debtor") did not pay the 1998 and 1999 taxes assessed against her home. The taxing authorities obtained a judgment and began proceedings to sell the residence at a constable's sale. The Debtor was current on her mortgage payments, but when the mortgagee learned of the pending constable's sale, the mortgagee gave its own notice of foreclosure for nonpayment of taxes. The Debtor then made arrangements with the mortgagee to pay the deficiency. The mortgagee forwarded a check to the Constable.² Unfortunately, the mortgagee did not include the name of the Debtor, nor any description of the property. The Constable could not determine which property was involved, so it returned the check to the mortgagee. By that time, the date of the advertised sale had arrived. Minutes before the sale, the Debtor filed this bankruptcy case under chapter 13 of the Bankruptcy Code. Without knowledge of the bankruptcy filing, the Constable sold the house to Elbar for $31,000.

There is no evidence that the Debtor filed the case in bad faith. It is uncontroverted that she thought that she had resolved the tax delinquency. There is no indication that the Debtor has filed multiple bankruptcy cases or that she intended to abuse the automatic stay. There is no indication that she knew that she would be unable to complete a chapter 13 plan. In a rare alliance, the mortgagee has joined with the Debtor to object to annulment of the § 362 stay. Thus, this is a rare case in which both the Debtor and her only active creditor both seek the same bankruptcy relief. No creditor or other party in interest has requested dismissal or other relief against the Debtor. It is only Elbar, the purchaser of the homestead at the constable's sale, who seeks relief from the effects of the bankruptcy filing.³

Elbar had no relationship to the Debtor prior to the date that it tried to buy her house at the constable's sale. Elbar is in the business of purchasing property at foreclosure and tax sales. Its representative, Mr. Bustamente, testified that he reviews over a thousand properties each month, that he attends tax and foreclosure sales each month, and that he buys property at almost every sale. Elbar purchased the Debtor's home at the Constable's sale for $31,000. Neither the Constable⁴ nor Elbar had knowledge of the bankruptcy filing prior to the sale.

It is not clear when Debtor's counsel contacted the Constable's office to notify him of the bankruptcy filing. There was a suggestion, not supported by convincing evidence at the § 362 hearing, that telephonic notice may have been given about the time of the sale. The Constable's records show that the first written communication was received on August 3, two days after the sale. The Constable had not yet issued a deed to the property and had not disbursed the sale proceeds. Elbar had not taken possession of the property. When the Constable learned of the bankruptcy filing, he informed all parties that he would take no further action until directed by court order.

On August 15, 2000, Elbar filed a motion for relief from stay, seeking retroactive relief to validate the sheriff's sale. On the same date, Elbar filed this adversary proceeding, seeking adjudication of the transfer of title. The Constable deposited the $31,000 into the registry of the Court.

While these matters were pending, the bankruptcy case went on. Although the Court concludes that the Debtor did not file the case in bad faith, her prosecution of the case was far from adequate. She failed to attend two § 341 meetings, and she also failed to attend the debtor education class scheduled by the chapter 13 trustee. She did not make all of the payments that her plan required her to make to the chapter 13 trustee. Therefore, on February 20, 2001, at the hearing on the trustee's motion to dismiss, the Court dismissed the case with prejudice to refiling for 180 days. That order was later vacated as erroneously issued.

On May 4, 2001, the Court held a hearing on Elbar's request for termination of the stay. The Debtor testified that she did not receive timely notice of the creditors' meetings or of the education classes because of difficulty in receiving her mail. She testified that her subdivision suffers from persistent, incorrect mail delivery. She testified that she fell behind on her payments to the trustee because she was caring for her aged mother who has Alzheimer's disease. She testified that she had extraordinary medical expenses. The Debtor's testimony was uncontroverted.

The Debtor also testified that she now no longer has the expense of her mother's illness and that she has received a pay raise. She testified that she would therefore be able to complete a chapter 13 plan. This testimony was apparently a surprise to everyone except the Debtor. The mortgagee supported reinstatement of the case, and Elbar indicated a willingness to allow the Debtor to re-enter chapter 13, provided that Elbar could continue to prosecute its claim that the tax sale was valid.

CONCLUSIONS

The Effect of A Bankruptcy Filing-Bankruptcy Code Section 362

There is no dispute that the Debtor's home was property of the estate at the moment that the bankruptcy case was filed.⁵ When a bankruptcy case is filed, section 362 of the Bankruptcy Code automatically and immediately imposes a statutory stay of the enforcement of any judgment obtained before the commencement of the case and a stay of any act to enforce any lien against property of the estate. The stay is not a judicial injunction that depends on notice. The stay is effective upon the filing of the case, regardless of notice.⁶

As pointed out by the Debtor in the motion to dismiss the adversary proceeding, the stay is intended to give the debtor a "breathing spell." Wedgeworth v. Fibreboard Corp., 706 F.2d 541, 544 (5th Cir.1983). The stay is intended to benefit both debtors and creditors by assuring an equitable distribution of the debtor's assets and by preventing a race to the courthouse. GATX Aircraft Corp. v. MV Courtney Leigh, 768 F.2d 711, 716 (5th Cir.1985). Although it is very rare to see a creditor object to the court granting relief from the stay, it occasionally happens, and in fact it happened in this case in which the mortgage lender objected to Elbar's motion for relief from the stay.

Retroactive Relief from the § 362 Automatic Stay

The bankruptcy court has the power to terminate, to annul, to modify, or to condition the automatic stay.⁷ To grant such relief, the Court must find that there is "cause."⁸ Annulment of the stay has the effect of eliminating it (or terminating it retroactively).⁹

The Court did not grant Elbar retroactive relief from the stay because the Court did not find that...