In re Aumiller
| Decision Date | 08 June 1994 |
| Docket Number | Bankruptcy No. 89-00785. Adv. No. 90-1015. |
| Citation | 168 BR 811 |
| Parties | In re Joseph AUMILLER, Debtor. SOVRAN BANK/DC NATIONAL, Plaintiff, v. UNITED STATES of America, Joseph Aumiller, and Bryan Ross, Chapter 7 Trustee, Defendants. |
| Court | United States Bankruptcy Courts – District of Columbia Circuit |
COPYRIGHT MATERIAL OMITTED
Lee Calligaro, Washington, DC, for plaintiff Sovran Bank/DC Nat.
Richard Gins, Washington, DC, for defendant Joseph Aumiller.
David M. Katinsky, Washington, DC, for defendant U.S.
DECISION REGARDING MOTIONS FOR SUMMARY JUDGMENT
Under the court's consideration is the Motion for Summary Judgment filed by the plaintiff, Sovran Bank/DC National ("Sovran"); the Motion for Summary Judgment filed by the trustee; and the Cross-Motion for Summary Judgment filed by the Defendants, Joseph Aumiller and the United States. The parties assert that there are no genuine issues as to any material fact and that summary judgment is appropriate. The legal issues raised by the parties are 1) whether Sovran has a lien against proceeds from the sale of real estate owned by the debtor; 2) whether the trustee may avoid such lien under sections 544 or 547 of the Bankruptcy Code, 11 U.S.C.; and 3) whether such lien takes priority over a federal tax lien. For the reasons set forth below, the court concludes that Sovran has an equitable lien against the sale proceeds, and that such lien may not be avoided by the trustee under section 544(a). However, the court finds that there is a genuine issue of material fact as to whether the trustee may avoid Sovran's equitable lien under section 547. For the reasons set forth below, the court reserves judgment on the issue of whether Sovran's equitable lien takes priority over the federal tax lien until after the court decides the avoidance issue under section 547.
Sovran commenced this adversary proceeding seeking a determination of the priority of a lien it claims against property of the debtor, Joseph Aumiller. On January 12, 1989, Joseph Aumiller, Inc. (the "Company"), executed a Promissory Note in the amount of $70,000 in consideration for a loan made to the Company by Sovran. On the same date, Joseph Aumiller ("Aumiller") entered into a personal guaranty of all payments due under the Note, and further executed a document entitled Covenant Not to Encumber and Assignment of Proceeds (the "Covenant") relating to property located at 4429 Burlington Place, N.W., Washington, D.C. (the "property"). The Covenant was filed and recorded with the District of Columbia Recorder of Deeds on February 7, 1989.
Under the terms of the Covenant, Aumiller agreed to execute upon the request of Sovran "such further documents as Lender Sovran may reasonably require to cause a lien and encumbrance in favor of Lender to be recorded against the interest of the Undersigned Aumiller in and to the Property." Throughout June and July of 1989, Sovran requested Aumiller to execute a deed of trust on the property, but he failed to do so. On August 4, 1989, Sovran filed a collection action against Aumiller in the Superior Court of the District of Columbia. On September 8, 1989, Aumiller filed a petition for relief under Chapter 7 of the Bankruptcy Code.
In addition to Aumiller's indebtedness to Sovran under the guaranty, the Internal Revenue Service has a claim against Aumiller for unpaid taxes. On August 23, 1989, the Internal Revenue Service filed a notice of federal tax lien against Aumiller in the amount of $97,641.20 with the District of Columbia Recorder of Deeds, which lien constitutes an encumbrance against the property. On January 23, 1990, this court ordered that the property be sold free and clear of liens, with the proceeds of sale in the amount of $56,344.83 to be held in escrow pending the court's determination of this adversary proceeding.
On July 5, 1990, Sovran filed a motion for summary judgment, claiming that it has an equitable lien against the sale proceeds that is superior to the federal tax lien. On July 26, 1990, the trustee filed a motion to intervene in the adversary proceeding, claiming that he is an indispensable party to the action. Along with the motion to intervene, the trustee filed an answer and counterclaim, and a motion for summary judgment, claiming that Sovran's interest in the proceeds may be avoided under sections 544 and/or 547 of the Bankruptcy Code. The trustee's motion to intervene was granted by the court.
On July 27, 1990, Aumiller and the United States (hereinafter the "defendants") filed a joint opposition to Sovran's motion for summary judgment and a cross-motion for summary judgment. The defendants argue that Sovran does not have a security interest under District of Columbia law; and, even if it had a security interest, it is inferior to the federal tax lien as a matter of federal law. However, recognizing a potential controversy between the United States and the trustee if the court granted the trustee's motion to avoid Sovran's lien against the proceeds,1 the United States and the trustee entered into a proposed settlement. Under the settlement, the United States and the trustee agreed that if the court granted the trustee's motion to avoid Sovran's lien, the sale proceeds would be distributed first to pay the trustee a 2½% sales commission and compensation for services rendered, then to pay the priority wage claimants, with the remaining funds to be allocated 90% to the United States and 10% to the State of Maryland. The State of Maryland did not object to the proposed settlement, thus eliminating the necessity of deciding the lien priority issue if the trustee prevails in avoiding Sovran's lien.
Before deciding whether the trustee may exercise its powers of avoidance under section 544 or 547 in this case, the court must determine the nature of Sovran's interest, if any, in the proceeds. Sovran claims that it has a lien on the property by virtue of the Covenant, which Sovran contends constitutes an equitable mortgage. Alternatively, Sovran claims that an equitable lien exists as a result of Aumiller's agreement to execute a mortgage upon Sovran's demand and his subsequent failure to do so.
Equitable liens have been recognized and enforced in numerous types of fact situations. See Handler Const. v. Corestates Bank, N.A., 633 A.2d 356 (Del.1993) (); Equitable Trust Co. v. Imbesi, 287 Md. 249, 412 A.2d 96, 99-100 (Md.1980); 9 Thompson, Commentaries on the Modern Law of Real Property, §§ 4711-4713 (1958) (equitable mortgages). One common situation is where there is a written document expressing the parties' intent to make a particular piece of property security for a debt which for some reason fails to constitute a legal mortgage or lien. Id. Another situation giving rise to an equitable lien is when there is an unfulfilled promise to grant a lien against an interest in property and equity deems done that which was agreed to be done. Id. Sovran contends that both situations exist in this case.
Sovran argues that the Covenant should be treated as an equitable mortgage because the language contained in that written document expresses the parties' intent that the Covenant was to constitute a mortgage upon Aumiller's property described therein. Courts, however, have consistently held that an agreement not to sell or encumber property or an agreement to assign the rents and profits of the property, absent a foreclosure provision or a specific grant of a lien in the property, does not evidence an intent to create a mortgage and therefore fails to create a lien on the property. See, e.g., Perpetual Federal Savings And Loan Ass'n v. Willingham, 296 S.C. 24, 370 S.E.2d 286, 288 (Ct. App.1988) (); Browne v. San Luis Obispo National Bank, 462 F.2d 129, 133 (9th Cir.1972) (); In re Friese, 28 B.R. 953, 955 (Bankr.D.Conn.1983) ().
Sovran argues that the Covenant herein is more than a mere negative covenant not to encumber because it contains both language of assignment as well as a specific promise to execute a lien and encumbrance. Sovran relies primarily upon the following paragraphs contained in the Covenant to distinguish this case from those cited above:
To continue reading
Request your trial