Gordon v. White (In re Morgenstern)

• Decision Date: 24 December 2015
• Docket Number: Adv. No. 14–1090–BAH,Bk. No. 13–11736–BAH
• Citation: 542 B.R. 650
• Parties: In re: Thomas L. Morgenstern, Debtor Olga L. Gordon, Chapter 7 Trustee, Plaintiff v. June White, Defendant
• Court: U.S. Bankruptcy Court — District of New Hampshire

542 B.R. 650

In re: Thomas L. Morgenstern, DebtorOlga L. Gordon, Chapter 7 Trustee, Plaintiff

v.June White, Defendant

Bk. No. 13–11736–BAH

Adv. No. 14–1090–BAH

United States Bankruptcy Court, D. New Hampshire.

Signed December 24, 2015

James F. Radke, Murtha Cullina, LLP, Boston, MA, Attorney for the Plaintiff

MEMORANDUM OPINION

Bruce A. Harwood, Chief Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the chapter 7 trustee's (the "Trustee") adversary complaint, in which the Trustee asserts that creditor June White ("White") recorded, post-petition, a deed on property of the bankruptcy estate in violation of the automatic stay of 11 U.S.C. § 362(a),¹ asks the Court to declare the deed void as a matter of law, and seeks compensatory and punitive damages under § 362(k), or alternatively under § 105(a). After a trial on the complaint, the Court took the matter under advisement. For the reasons set forth below, the Court finds that White's procurement and recording of the deed did violate the automatic stay and that the deed is void. Additionally, the Court finds White's conduct to be deserving of a sanction under § 105(a) in the form of a compensatory damages award to the Trustee.

This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and Local Rule 77.4(a) of the United States District Court for the District of New Hampshire. This is a core proceeding in accordance with 28 U.S.C. § 157(b).

II. FACTS

The following facts are taken from the testimony and exhibits admitted at trial. Where necessary, the Court has taken judicial notice of the dockets of the adversary proceeding and main bankruptcy case.

Pre–Petition Events

The property at the center of the dispute between White and the Trustee is real property located at 8 Maple Avenue in Rye, New Hampshire (the "Property"). The debtor in this case, Thomas Morgenstern (the "Debtor"), acquired title to the property in September 1992. Ex. 10, Deed dated 9/14/1992. In September 2009, the Debtor transferred the Property to a revocable trust known as the Carlear Realty Revocable Trust (the "Trust"). Ex. 11, Deed dated 9/16/2009. The Debtor recorded the Trust the same day. Ex. 12, Declaration of Revocable Trust. The Debtor became a 25% beneficiary of the Trust and Alexander Sekulic was appointed the trustee.² The Certification of Trust provides that the Trust was organized under the laws of the State of New Hampshire. Ex. 13, Certification of Trust, § 8.04.³ There is no evidence that the Trust contained any property, other than the Property, during the relevant period of time in this case.⁴

In November 2009, the Trust mortgaged the Property to White to secure the repayment of a $40,000 loan. Ex. 14, Mortgage dated 11/16/2009 (the "Mortgage"). The Trust subsequently defaulted on the terms of the loan and White sued the Trust, trustee, and the Debtor in Rockingham County Superior Court (the "Superior Court"). See Ex. 15, Case Summary. Eventually White was partially successful on her claims and obtained authority from the Superior Court to conduct a foreclosure sale of the Property.⁵ See Ex. 17, 1/25/2013 order awarding White a money judgment; Ex. 18, 3/11/2013 order authorizing White to conduct a judicial foreclosure on the Property.

Post-petition Events

The Debtor filed his bankruptcy petition under chapter 13 of the Bankruptcy Code on July 8, 2013 (the "Petition Date"). White was included as a creditor in the Debtor's creditor mailing matrix on the Petition Date. The notice was mailed to White's current address of 8 River Ave., Hampton, New Hampshire. See Ex. 2, Certificate of Notice dated 7/8/2013. On August 14, 2013, the Debtor converted his bankruptcy case to one under chapter 7. White also was mailed notice of the conversion at her current address. See Ex. 3, Certificate of Notice dated 8/16/2013. White asserted that she did not receive either of these notices and was not aware of the Debtor's bankruptcy petition until December 2013, when she appeared pro se in this Court and filed a motion to dismiss the bankruptcy case. See Ex. 4, White's Motion to Dismiss filed in Main Bankruptcy Case.

At the same time she was making efforts to dismiss the Debtor's bankruptcy, White attempted to foreclose her mortgage on the Property. On February 10, 2014, White recorded a series of affidavits in the Rockingham County Registry of Deeds. These affidavits were apparently intended to show that White was in possession of the Property. See Exs. 20, 21, 22, and 23. Just over a month later, Sekulic, as trustee of the Trust, executed a deed conveying the Property to White, in exchange for $50,000. Ex. 24, Deed dated 3/29/2014. White recorded this deed and promptly began taking steps to auction the Property. The trial record is not clear on the background of this transaction, but whatever happened, Sekulic apparently had reservations about deeding the Property to White, because he moved to enjoin White's auction of the Property at the beginning of May 2014.See Ex. 25, Sekulic Motion for Injunction filed in Superior Court. He also sued White on behalf of the Trust, alleging that she had fraudulently obtained the deed to the Property. See Ex. 26, Sekulic Complaint filed in Superior Court.

In early May, the Superior Court held a hearing on Sekulic's request for an injunction. The Trustee appeared at this hearing (by counsel), alerted the Superior Court to the Debtor's pending bankruptcy, and explained the Trustee's position that the bankruptcy estate had an interest in the Property. As a result of the Trustee's efforts, the Superior Court enjoined the sale indefinitely.

In response to this setback, White moved this Court for relief from the automatic stay (Main Case Doc. No. 110). The Trustee responded by asking the Court for authority to exercise the Debtor's right to revoke the Trust (Main Case Doc. No. 116), pursuant to the terms of the Trust and New Hampshire law. The Court held a joint hearing on White's stay relief motion and the Trustee's motion to revoke the Trust. After reviewing the Trust documents, and based on NH RSA 564–B:6–602, the Court granted the Trustee's motion and authorized her to revoke the Trust. See Ex. 28, Court's order dated July 28, 2014. At this time White voluntarily withdrew her stay relief motion. Several months after receiving authority to revoke the Trust, the Trustee filed this adversary proceeding.

The Adversary Proceeding

The Trustee's complaint contains four counts. Count I seeks a declaratory judgment that the deed transferring the Property from the Trust to White is void. Counts II and III seek compensatory and punitive damages pursuant to § 362(k), respectively. Finally, Count IV seeks, in the alternative, damages pursuant to § 105(a). After various pretrial motions and a brief period of discovery, the Court held a trial on the complaint.

The Trustee's case at trial was relatively straightforward. Only one witness testified, the Trustee herself. The evidence introduced was virtually all documentary, the substance of which the Court discussed above. The Trustee took the position that it was immaterial whether White actually received notice of the bankruptcy case at its filing because at the time White accepted and recorded the deed to the Property, she was undoubtedly aware of the bankruptcy case, having filed numerous pleadings with the Court. In terms of actual damages, the Trustee presented evidence of her counsel's legal fees and costs to litigate this adversary proceeding, which amount to $84,863.96—exclusive of time spent at trial. See Ex. 32, Murtha Cullina LLP Invoices. At the conclusion of her case, the Trustee asked the Court for permission to set-off any judgment in her favor against any claim White had against the bankruptcy estate.

White's defense focused on what she sees as the unreasonable and vindictive nature of the Trustee's complaint. To this end, White presented evidence of settlement negotiations between herself and the Trustee. This evidence was designed to show that the Trustee should have settled with White, rather than going to trial. White also presented several other defenses. White argued that the Property was not property of the bankruptcy estate because its legal title was held by the Trust, not the Debtor, and, accordingly, that the automatic stay did not apply. White also argued that her right to foreclose on the Property had been established pre-petition and that the recording of the deed was a ministerial act that did not violate the automatic stay. As a result, White claimed that the deed had effectively transferred the Property, which she now owned free and clear of any interest of the bankruptcy estate.

At the conclusion of the trial, the Court took the matter of advisement, after giving White an opportunity to respond in writing to the Trustee's request for a setoff.

III. DISCUSSION

The claims in this adversary proceeding present three distinct legal issues. The Court will address each in turn. First, the Court will discuss how White's actions violated the automatic stay. Second, the Court will set out the reasons it finds that the Trustee is not an "individual" within the meaning of § 362(k) and accordingly not entitled to recover damages under that section. Finally, the Court will address an appropriate measure of damages under § 105(a).

A. The Stay Violation

i. The Property is Property of the Bankruptcy Estate

On the Petition Date, the Property became property of the bankruptcy estate pursuant to § 541(a). Section 541(a) defines property of the estate:

(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held:

(1) Except as provided in subsections (b) and (c)(2) of this section, all legal or equitable interests of the debtor in property as of the commencement of the case.

§ 541(a)(1). Section 541's invocation of the term "equitable interest" is...