Franco v. Franco (In re Franco), Case No. 03–13492 tr7

• Decision Date: 28 July 2017
• Docket Number: Adv. No. 16–1074 t,Case No. 03–13492 tr7, Case No. 13–12941 tr7
• Citation: 574 B.R. 730
• Parties: IN RE: Manuela Q. FRANCO, Debtor. In re: Manuela Q. Franco, Debtor. Hipolito Q. Franco and Carla Franco, Plaintiffs, v. Manuela Q. Franco, HV Franco Minerals, Robert Dennis Hougland, Celia Franco Hougland, and Clarke C. Coll, Defendants.
• Court: U.S. Bankruptcy Court — District of New Mexico

574 B.R. 730

IN RE: Manuela Q. FRANCO, Debtor.

In re: Manuela Q. Franco, Debtor.

Hipolito Q. Franco and Carla Franco, Plaintiffs,
v.
Manuela Q. Franco, HV Franco Minerals, Robert Dennis Hougland, Celia Franco Hougland, and Clarke C. Coll, Defendants.

Case No. 03–13492 tr7
Case No. 13–12941 tr7
Adv. No. 16–1074 t

United States Bankruptcy Court, D. New Mexico.

Signed July 28, 2017

574 B.R. 732

Joseph Charles Drennan, Lubbock, TX, Shay Elizabeth Meagle, Moses, Dunn, Farmer & Tuthill, P.C., Albuquerque, NM, for Plaintiffs.

HV Franco Minerals, pro se.

Christopher A. Lauderman, Joel M. Carson, III, Carson Ryan LLC, Roswell, NM, Leslie D. Maxwell, Walker & Associates, P.C., Albuquerque, NM, for Defendants.

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OPINION

David T. Thuma, United States Bankruptcy Judge

Before the Court is Carla Franco's motion for relief from automatic stay, or for a declaration that the automatic stay does not apply. The motion was filed in the consolidated cases. Also before the Court is the chapter 7 trustee's motion to dismiss this adversary proceeding (which was removed from state court) as having been filed in violation of the automatic stay and therefore void. After trial and a review of the relevant law, the Court rules that the automatic stay applies and should not be modified or annulled. Because of that, the Court further rules that the quiet title count of the adversary proceeding was brought in violation of the automatic stay and is void. The motion to dismiss therefore will be granted in part.

I. FINDINGS OF FACT ¹

For the limited purpose of ruling on the motions, the Court finds:

The Property and the Disputed Mineral Rights. Debtor is an 89–year-old widow. Her husband, Epolito Franco, suffered a series of strokes between 1989–1996, and died in 1997.

In 1969, Epolito and Debtor acquired about 240 acres of land in Eddy County, New Mexico, which included a half interest in oil, gas, and other minerals on and under the land. On October 8, 1996, Epolito and Debtor conveyed 122 acres of the land to their son Hipolito Franco as his sole and separate property (the "Property"). The deed signed by Epolito and Debtor did not reserve any oil, gas, or other minerals (the "Disputed Mineral Rights").

The original agreement between the parties is unclear. Carla Franco, Hipolito Franco's widow,² testified that she and Hipolito paid for the Disputed Mineral Rights. Debtor testified that she and Epolito parted with the Property so they could obtain medical care for Epolito. However, she also testified that she and Epolito had always intended to bequeath their mineral rights, including the Disputed Mineral Rights, to their children in equal shares.

The 1998 Loan. In 1998, Hipolito and Carla Franco applied for a loan from Western Commerce Bank. The loan was to be secured by a mortgage on the Property. On July 23, 1998, Guaranty Title Company issued a commitment to insure the bank's first priority mortgage on the Property. The title commitment described the Property as "fee simple in the surface estate only." The metes and bounds description of the Property differed to some extent from that used in the 1996 deed.³ More importantly, the title commitment's legal description begins with "The surface estate only of ...." One of the requirements for issuing a final policy of title insurance was:

Record a correction warranty deed from Manuela Q. Franco, widow of Epolito V. Franco (record his death certificate) to Hipolito Q. Franco, a married man dealing in his sole and separate property.

One of the exceptions to insured title was:

11. Title to all of the water, oil, gas and other minerals and mineral substances,

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together with all right, privileges and easements appurtenant thereto.

On August 7, 1998, Debtor signed a warranty deed in favor of Hipolito Franco. The deed states on page one that it is "given to correct legal description on [the 1996 warranty deed]." The legal description attached is identical to the description in the title commitment, including the "surface estate only" language. Hipolito Franco did not sign the deed.

On August 7, 1998, Hipolito and Carla Franco granted Western Commerce Bank a line of credit mortgage on the Property. The mortgage uses the same legal description as the correction deed and the title commitment (including the "surface estate only" language), except that it also purports to encumber the mortgagors' interest in water and water rights appurtenant to the Property. The mortgage secures a promissory note of $38,898.27 payable to Western Commerce Bank, with a maximum obligation limit of $99,000. The mortgage and "correction deed" were recorded one minute apart.

The Bankruptcy Cases. Debtor filed a chapter 7 case on April 30, 2003, and a second chapter 7 case on September 9, 2013. She received a discharge in each case. The latter case was closed on December 30, 2013.

The Debtor scheduled $12,473.42 in unsecured claims the 2013 case, and $20,812.06 in unsecured claims in the 2003 case.

Debtor did not schedule any mineral rights in either case. There is no written evidence that she told her bankruptcy attorneys about any claim to minerals. Manuela did not list Hipolito or Carla Franco as creditors, and they did not receive official notice of either case.

In June 2016, Debtor asked that the 2013 case be reopened so she could amend schedule B and list certain mineral rights. The Court granted the motion and also granted the United States Trustee's motion to reopen the 2003 bankruptcy case. Clarke Coll was appointed the chapter 7 trustee in both cases, which were consolidated. On July 15, 2016, Debtor filed an amended Schedule B, which added the following:

Mineral Rights and Interest: See attachment for full description. Total mineral acres of 850. Debtor holds ½ interest in mineral acres worth approximately $1,500.00 per acre.

Debtor valued the mineral rights at $637,000. The attachment states that the mineral rights are in three parcels (240 acres, 290 acres, and 320 acres). If the Disputed Mineral Rights are property of the estate, it would be solvent.

The State Court Action. Both before and after filing the bankruptcy cases, Debtor filed documents asserting title to the Disputed Mineral Rights. She also entered into oil leases purporting to lease the Disputed Mineral Rights to third parties.

Carla Franco testified that she first learned about Debtor's claims to the Disputed Mineral Rights in 2014, after being contacted by an oil company. She and Hipolito Franco brought an action against Debtor and others in New Mexico's Fifth Judicial District Court on October 17, 2014, asserting three claims: for a judgment quieting title to the Disputed Mineral Rights; for damages caused by disparagement of title; and for injunctive relief.⁴ The trustee was not named.

Carla Franco filed a motion for summary judgment on the quiet title count on March 23, 2016. On April 5, 2016, Carla Franco's counsel sent an email to Debtor's

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counsel, informing him of the 2013 bankruptcy case, and pointing out that the Disputed Mineral Rights had not been scheduled. The email contained a thinly veiled threat that Debtor's chapter 7 discharge could be revoked if she pursued her claim to the Disputed Mineral Rights. The email also mentioned federal criminal prosecution and Medicare/Medicaid fraud.

On May 3, 2016, Debtor filed a response to the summary judgment motion, stating in essence that she would not assert an interest in the Disputed Mineral Rights.

On May 4, 2016, Carla Franco filed a Rule 1–1054(b)(1) certification, in which she stated that Debtor had filed for bankruptcy and failed to disclose the Disputed Mineral Rights, and therefore lacked standing to respond to the motion for summary judgment.

On November 4, 2016, the state court entered a judgment that Carla and Hipolito Franco own the Disputed Mineral Rights. Carla Franco's counsel submitted the proposed form of judgment after learning of the bankruptcy cases.

The trustee filed a motion to intervene in the state court action on November 17, 2017. The motion is pending.

On December 23, 2016, Carla Franco removed the state court action to this Court, commencing this adversary proceeding.

II. DISCUSSION

A. The Automatic Stay and Property of the Estate.

When a bankruptcy petition is filed, § 362(a)⁵ stays a broad range of proceedings against the debtor, including acts to obtain possession or control over property of the estate. § 362(a)(1) and (3). Property of the estate includes "all legal and equitable interest of the debtor in property as of the commencement of the case." § 541. The automatic stay applies to all estate property, including property that is not disclosed on the debtor's bankruptcy schedules. PHH Mortgage Corp. v. Dick (In re Dick) , 2007 WL 490948 (Bankr. D. Kan.) ; In re Muhlig , 494 B.R. 755, 769 (Bankr. S.D. Fla. 2013) ; In re Enyedi , 371 B.R. 327, 333–34 (Bankr. N.D. Ill. 2007).

Property of the estate that is not abandoned under § 554(c) and not administered in the...