Brekelmans v. Salas (In re Salas)

Docket Number318-02662,ADV. 320-90027
Decision Date23 May 2023
CourtU.S. Bankruptcy Court — Middle District of Tennessee




On March 21, 2023, this matter was before the Court on cross-motions for summary judgment. Previously, the Court heard argument on a motion for summary judgment filed by Nicolaas Brekelmans and Gail Gregory Brekelmans Co-Personal Representatives of the Estate of Nina Brekelmans and Michael McLoughlin and Martha Johnson, Co-Personal Representatives of the Estate of Patrick McLoughlin (collectively "plaintiffs").[1]The Court ruled from the bench that summary judgment was not appropriate in this case. After further consideration, the Court raised two specific issues and requested that the parties address them with respect to summary judgment:

1. In relationship to the strong-arm avoidance claims under 11 U.S.C. § 544(a)(3) (a bona fide purchaser) and 11 U.S.C § 544(a)(1) (a hypothetical judgment lienholder), whether it is appropriate to consider inquiry notice and if so, whether inquiry notice existed as a matter of law based on the undisputed facts.[2]

2. In relationship to the fraudulent conveyance claims under 11 U.S.C. §§ 544(b)(1) and 548(a)(1)(B), whether the District of Columbia Bankruptcy Court ("D.C. Court") already determined the issue of ownership and bare legal title in its homestead exemption opinion.[3] If so, is the D.C. Court's Homestead Opinion entitled to preclusive or collateral effect in this proceeding.

I. Summary Judgment Standards

Pursuant to Federal Rule of Civil Procedure 56(a), as incorporated by Federal Rule of Bankruptcy Procedure 7056, an entry of summary judgment is mandated "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." When considering a motion for summary judgment, the Court "must view the evidence and draw all reasonable inferences in favor of the nonmoving party." Browning v. Levy, 283 F.3d 761, 769 (6th Cir. 2002) (citation omitted). The Court does not "'weigh the evidence and determine the truth of the matter but . . . determine[s] whether there is a genuine issue for trial.'" Id. (citation omitted).

II. Claims Pursuant to 11 U.S.C. §§ 544(a)(3) and 544(a)(1)

In Counts I and II of the amended complaint, the plaintiffs seek to avoid Max Salas' interest in property located at 1610 Riggs Place, NW, Washington, D.C. ("Property") pursuant to 11 U.S.C. § 544(a)(3) (as a bona fide purchaser) and 11 U.S.C. § 544(a)(1) (as a hypothetical judgment lienholder). To determine whether bona fide purchaser or hypothetical judgment lienholder status exists, this Court must look to state law. In re El-Erian, 512 B.R. 391, 396 (citations omitted). See also Treinish v. Norwest Bank Minnesota, N.A. (In re Periandri), 266 B.R. 651, 655 (B.A.P. 6th Cir. 2001) (citation omitted).

Under District of Columbia ("D.C.") law, if a deed conveying an interest in real property is recorded, it is effective against a subsequent bona fide purchaser whether or not they had notice. In contrast, when a deed is unrecorded, the Court must determine whether the subsequent bona fide purchaser had notice of said deed. In re El-Erian, 512 B.R. at 396 (citations omitted). In the present case, the deed was not recorded. Therefore, whether a subsequent bona fide purchaser would have had notice is the issue here. Under D.C. law, notice may be actual, constructive, or inquiry. Clay Props., Inc. v. Washington Post Co., 604 A.2d 890, 895 (D.C. 1992). See also Webster v. Hope (In re Hope), 231 B.R. 403, 424 (Bankr. D.D.C. 1999).[4]

First, actual knowledge would be inapplicable because the trustee assumes the role of a bona fide purchaser without actual knowledge. In re Aumiller, 168 B.R. at 818. As stated earlier, the plaintiffs were granted derivative standing and stepped into the shoes of the Trustee. As such, actual knowledge is irrelevant. Constructive notice is also inapplicable because constructive notice has come to mean record notice. Clay Props., 604 A.2d at 895 n.15. This leaves open the possibility of inquiry notice as a trustee may be held to such notice. In re El-Erian, 512 B.R. at 396 (citation omitted).

In its prior order, this Court raised the issue of whether Max Salas' physical possession of the property created inquiry notice based on case law from other jurisdictions.[5] Under D.C. law, inquiry notice is found when a purchaser is "aware of circumstances which generate enough uncertainty about the state of title that a person of ordinary prudence would inquire further about those circumstances. The purchaser is on inquiry notice of all facts and outstanding interests which a reasonable inquiry would have revealed." Clay Props., 604 A.2d at 895.

Max Salas asserts that the following undisputed facts would put a bona fide purchaser or a hypothetical judgment lienholder on inquiry notice:

1. Max Salas lived in the Property.
2. Max Salas was the only party who ever made mortgage payments on the Property.
3. Max Salas signed the leases to rent portions of the Property.
4. Max Salas collected the rent payments from the Property.
5. Max Salas collected and distributed insurance proceeds after the Property was destroyed by fire.
6. The plaintiffs recorded notice of their D.C. judgments against Max Salas and Len Salas with the D.C. Recorder of Deeds prior to the filing of Len Salas' bankruptcy petition in this Court and Max Salas' bankruptcy petition in the D.C. Court.

Based on this last undisputed fact, Max Salas asserts that the recording of the judgment would have per se provided inquiry notice to any reasonable third party. In re Hope, 231 B.R. 403, 423-26 (Trustee was barred from pursuing 11 U.S.C. § 544(a) action because reasonable party would have been put on notice by recorded divorce judgment and was then charged with inquiring further about the terms of the divorce.). Max Salas argues that with any amount of due diligence, a third party would have discovered there existed a dispute about who owned the property as Len Salas had filed multiple pleadings in the underlying lawsuits asserting he was not the owner of the property. The fact that the judgments were not actually final and appealable when recorded might also be a factor in determining whether inquiry notice existed.

The plaintiffs, on the other hand, point to other undisputed facts in support of their assertion that inquiry notice did not exist:

1. Len Salas was the named owner on the title to the Property.
2. The mortgage on the Property was in Len Salas' name only.
3. The rental leases were signed by Max Salas on behalf of "CLR" rather than individually.
4. The recorded judgment showed Len Salas was held liable as the owner of the Property.
5. The recorded judgment showed Max Salas was held liable for mismanagement not ownership of the Property.

As stated earlier, in considering motions for summary judgment, the Court does not "'weigh the evidence and determine the truth of the matter but . . . determine[s] whether there is a genuine issue for trial.'" Browning v. Levy, 283 F.3d 761, 769 (citation omitted). See also Thompson v. Fresh Prods., LLC, 985 F.3d 509, 523 (6th Cir. 2021) (court is not to weigh evidence or determine truth). In the present case, a determination of whether inquiry notice existed would require the weighing of evidence, and therefore, is not an appropriate matter for summary judgment. As such, the Court finds the cross-motions seeking summary judgment on the strong-arm avoidance claims under both 11 U.S.C. §§ 544(a)(1) and (3) must be denied.

III. Claims Pursuant to 11 U.S.C §§ 544(b)(1) and 548(a)(1)(B)

In Counts IV and V of the amended complaint, the plaintiffs seek to invoke the Trustee's powers to avoid fraudulent transfers under 11 U.S.C. §§ 544(b)(1) and 548(a)(1)(B). In denying the plaintiffs' original motion for summary judgment, this Court ruled that if the proof showed that Len Salas had only bare legal title, there would be no recoverable interest in the Property under the fraudulent conveyance provisions. This ruling was premised on the Supreme Court's decision in United States v. Whiting Pools, Inc., 462 U.S. 198, 204 n.8 (1983), and the many cases which have cited it for the proposition that where a debtor only holds bare legal title, and not equitable title to property, only the legal title becomes part of the debtor's bankruptcy estate. See, e.g., Kapila v. Moodie (In re Moodie), 362 B.R. 554, 561 (Bankr. S.D. Fla. 2007) ("[A]n interest that is limited in the hands of the debtor is equally limited in the hands of the estate, and therefore, where the debtor holds bare legal title without any equitable interest, the estate acquires bare legal title without any equitable interest in the property."); Geremia v. Dwyer (In re Dwyer), 250 B.R. 472, 474 (Bankr. D.R.I. 2000) (Bare legal title has no value to an estate, and a transfer of bare legal title cannot form the basis for a fraudulent transfer action); Swanson v. Stoffregen (In re Stoffregen), 206 B.R. 939, 942 (Bankr. E.D. Wis. 1997) (Where the debtor owned only bare legal title to the property, a transfer of the property could not be recovered under 11 U.S.C. § 548.).

Pointing to the in-depth discussion of ownership found in the D.C Court's Homestead Opinion, this Court offered the parties an opportunity to present arguments as to whether the D.C. Court already decided the issue of ownership and bare legal title. And if so,...

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