Degiacomo v. Traverse (In re Traverse)

• Decision Date: 23 May 2014
• Docket Number: No. 13–9002.,13–9002.
• Parties: In re Virginia A. TRAVERSE, Debtor. Mark G. DeGiacomo, Chapter 7 Trustee for the Estate of Virginia A. Traverse, Appellee, v. Virginia A. Traverse, Appellant.
• Court: U.S. Court of Appeals — First Circuit

753 F.3d 19

In re Virginia A. TRAVERSE, Debtor.Mark G. DeGiacomo, Chapter 7 Trustee for the Estate of Virginia A. Traverse, Appellee,

v.Virginia A. Traverse, Appellant.

No. 13–9002.

United States Court of Appeals, First Circuit.

May 23, 2014.

David G. Baker for appellant.

Tara Twomey, National Consumer Bankruptcy Rights Center, and Ray DiGuiseppe on brief for the National Association of Consumer Bankruptcy Attorneys, Amicus Curiae.

Mark G. DeGiacomo, with whom Keri L. Wintle and Murtha Cullina LLP were on brief, for appellee.

Before TORRUELLA, HOWARD, and KAYATTA, Circuit Judges.

HOWARD, Circuit Judge.

This case requires us to explore the contours of a bankruptcy trustee's lien avoidance and preservation powers under 11 U.S.C. §§ 544 and 551 when a debtor's state-law homestead exemption has been invoked.

In 2005, six years before filing a petition for Chapter 7 bankruptcy, Virginia Traversesecured a loan with a mortgage on her home. In the years before her bankruptcy and continuing since filing her petition, Traverse has remained current on all mortgage payments on the property. Because Traverse's home is subject to a homestead exemption under Massachusetts law, in these circumstances the Bankruptcy Code would ordinarily allow Traverse to pass through bankruptcy in possession of her home. Yet because Traverse's bank failed to record the mortgage with the appropriate registry, the bankruptcy trustee contends that his power to avoid and preserve the mortgage justifies him in selling Traverse's home as property of the bankruptcy estate. The bankruptcy judge and Bankruptcy Appellate Panel accepted the trustee's view. We reverse.

I. Facts and Background

Virginia A. Traverse resides in a home in Lynn, Massachusetts. She has been the title owner of the property since April 30, 1999, when she recorded her ownership with the Essex County South District Registry of Deeds. On July 11, 2005, Traverse executed a mortgage on the home in favor of Washington Mutual Bank to secure a loan of $200,000. On September 25, 2008, JP Morgan Chase acquired this mortgage as part of its blanket acquisition of Washington Mutual's assets. At no point did either mortgagee record the mortgage on Traverse's home with the Registry of Deeds. Meanwhile, in March of 2007, Traverse executed a second mortgage in favor of Citibank to secure a loan of $31,000, which Citibank recorded in due course. Traverse has kept current on her mortgage payments to both JP Morgan and Citibank.

On August 14, 2011, Traverse filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. On her bankruptcy schedules, Traverse valued her home at $223,500.¹ She listed the remaining claim secured by JP Morgan's mortgage as $185,777.30 and the claim secured by Citibank's mortgage as $29,431.04. Finally, pursuant to the Massachusetts Homestead Act, Traverse claimed a homestead exemption in the property in the amount of $500,000. Traverse's homestead exemption, which Traverse had formally recorded in a Declaration of Homestead in January 2009, went unchallenged by any interested party.

On December 15, 2011, Mark D. DeGiacomo, acting as the Chapter 7 trustee of Traverse's bankruptcy estate, filed a complaint to avoid JP Morgan's unrecorded mortgage and to preserve it for the benefit of the estate. In response, Traverse filed a counterclaim seeking a declaratory judgment that, even if he preserved the mortgage, DeGiacomo could sell only the mortgage itself and not her underlying property. Traverse argued that because the trustee's preservation of JP Morgan's mortgage gave the estate only the rights of the original mortgagee, it created no right to sell her home until she defaulted on her payments and triggered the right of foreclosure. After DeGiacomo moved for summary judgment, the bankruptcy court granted summary judgment in his favor on all counts and the Bankruptcy Appellate Panel (BAP) affirmed. Both tribunals concluded that, having preserved JP Morgan's interest in Traverse's home for the bankruptcy estate, the trustee was entitled to sell the home in order to liquidate that interest. While not disputing that Traverse's current mortgage payments prevented DeGiacomo from foreclosing on her home in his capacity as mortgagee, the bankruptcy court and the BAP concluded that DeGiacomo could nevertheless sell the home pursuant to his core powers as a trustee administering a debtor's property under the Bankruptcy Code.

Traverse now challenges that conclusion as a matter of law.

II. Standard of Review

On appeal from the BAP, we train our analysis on the underlying bankruptcy court decision, reviewing factual findings for clear error and conclusions of law de novo. In re Canning, 706 F.3d 64, 68–69 (1st Cir.2013). Under the de novo standard, we do not defer to the bankruptcy court's ruling, but consider the matter anew as though no decision were rendered below. Id. at 69. Neither do we cede any deference to the conclusions of the BAP. In re Hill, 562 F.3d 29, 32 (1st Cir.2009).

III. Discussion

Under § 541 of the Bankruptcy Code, all of the debtor's legal and equitable interests in property at the time of her bankruptcy petition automatically become the property of the bankruptcy estate. 11 U.S.C. § 541(a)(1); In re Barroso–Herrans, 524 F.3d 341, 344 (1st Cir.2008) (“When an individual files for bankruptcy, all of his property ... becomes property of the estate.”). Nevertheless, § 522 of the Code allows a debtor to exempt certain property, based either on an enumerated list of federal exemptions or on any alternate exemptions provided by her state. See11 U.S.C. § 522(b); In re Cunningham, 513 F.3d 318, 323 (1st Cir.2008); In re Hildebrandt, 320 B.R. 40, 43 (1st Cir. BAP 2005). Among the state exemptions incorporated by § 522 is the Massachusetts Homestead Act, which allows a debtor to claim an interest of up to $500,000 in a home being used by the debtor as her principal residence. In re Peirce, 483 B.R. 368, 376 (Bankr.D.Mass.2012); see alsoMass. Gen. Laws ch. 188, § 1. The debtor's declared homestead exemption is insulated from conveyance, sale, or levy to help satisfy the debtor's debts in bankruptcy, with the exception of (as relevant here) a debt secured by a lien on the property, such as a mortgage. Mass. Gen. Laws ch. 188, § 3(b); In re Swift, 458 B.R. 8, 15 (Bankr.D.Mass.2011) (“[A] debtor's homestead exemption is not effective against a mortgagee where the mortgage in question was executed before the debtor recorded a declaration of homestead.”). The final working of the scheme is that, when a debtor declares a property as her homestead, proceeds realized from the sale of that property must be used first to pay off any secured claims and subsequently to satisfy the debtor's claimed exemption before, at last, being turned over to her bankruptcy estate.

A core power of a bankruptcy trustee under § 363(b) of the Code is the right to sell “property of the estate” for the benefit of a debtor's creditors. 11 U.S.C. § 363(b)(1) (“The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate....”). Because a debtor's exempted property interests are effectively removed from the estate, however, see Owen v. Owen, 500 U.S. 305, 308, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), § 363 does not empower the trustee to sell exempted interests. In re Carmichael, 439 B.R. 884, 890 (Bankr.D.Kan.2010) (“[W]here the debtor's interest is exempted, the estate no longer has an interest that it may sell.” (quoting Collier on Bankruptcy ¶ 363.08[3] (16th ed.2012))); see also In re Parker, 142 B.R. 327, 330 (Bankr.W.D.Ark.1992) (“The trustee abandons property of the estate in a chapter 7 case usually because there is no equity in the property or the property is exempt.”). Nor does a bankruptcy trustee ordinarily sell property solely for the benefit of secured creditors. See In re Scimeca Found., Inc., 497 B.R. 753, 781 (Bankr.E.D.Pa.2013) (“[A] bankruptcy trustee should not liquidate fully encumbered assets, for such action yields no benefit to unsecured creditors.”); Collier on Bankruptcy ¶ 725.01 (“It is not the proper function of the trustee to liquidate property solely for the benefit of secured creditors.”).² Consequently, where a debtor claims a homestead exemption in her home, a trustee will typically sell the home only where its value exceeds both the mortgage liens on the property and the debtor's homestead exemption. In re Ellerstein, 105 B.R. 214, 216 (Bankr.W.D.N.Y.1989) (“[Where] [t]he debtors' interest is subject to a mortgage ... and the debtors' equity is significantly more than the amount of the homestead exemption ... the trustee would sell the property....”); In re Early, Bankr. No. 05–01354, 2008 WL 2569408, at *3 (Bankr.D.D.C. June 23, 2008) (“[I]f the amount of the debtor's exemption was less than the value of the property, ... a trustee is free to sell the property,” so long as she “distribute[s] the proceeds first to the debtor in payment of the debtor's claimed exemption....”). This excess benefit for the unsecured creditors, calculated as the value of the estate minus any secured claims and exemptions, represents the bankruptcy estate's remaining “equity” in the property. In re Hyman, 123 B.R. 342, 344 (9th Cir. BAP 1991), aff'd,967 F.2d 1316 (9th Cir.1992) (“[T]he equity available for the estate would be any amount exceeding ... encumbrances ... plus the homestead exemption....”); In re McKeever, 132 B.R. 996, 999 (Bankr.N.D.Ill.1991) (defining the estate's “equity” as that “which would be left for unsecured creditors after payment of secured claims and the debtors' homestead exemption”).

Where, on the other hand, a property fails to yield any remaining equity for the estate beyond the value of its secured encumbrances and the debtor's homestead exemption, a trustee generally should not sell the home, but should leave the secured creditors to their own legal means of...