In re Blair, Bankruptcy No. 03 B 43122.

• Decision Date: 26 August 2005
• Docket Number: Adversary No. 03 A 4824.,Bankruptcy No. 03 B 43122.
• Citation: 330 B.R. 206
• Parties: In re Karissa S. BLAIR, Debtor. Joel A. Schechter, Trustee, Plaintiff, v. Russell Weiler; Naoma Weiler; Joanna Zeiller; and Karissa S. Blair, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

330 B.R. 206

In re Karissa S. BLAIR, Debtor Joel A. Schechter, Trustee, Plaintiff, v. Russell Weiler; Naoma Weiler; Joanna Zeiller; and Karissa S. Blair, Defendant.

Bankruptcy No. 03 B 43122.

Adversary No. 03 A 4824.

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

August 26, 2005.

COPYRIGHT MATERIAL OMITTED

John E. Gierum, Gierum & Mantas, Park Ridge, IL, Attorney for Russell Weiler and Naoma Weiler.

Joel A. Schechter, Law Offices of Joel A. Schechter, Chicago, IL, Attorney for Trustee.

MEMORANDUM OPINION

A. BENJAMIN GOLDGAR, Bankruptcy Judge.

A chapter 7 trustee administering a debtor's estate will often sell the debtor's house to pay creditors. In this case, chapter 7 trustee Joel Schechter wants to sell the house of the debtor's parents, Russell and Naoma Weiler. According to Schechter, debtor Karissa Blair, the Weilers' daughter, has an interest in the house that became part of her bankruptcy estate when she filed her petition. Schechter claims a sale of the entire property is warranted under section 363(h) of the Bankruptcy Code, 11 U.S.C. § 363(h).

In 2003, Schechter filed a two-count adversary complaint against the Weilers, Blair, and Joanna Zeiller, a judgment creditor of Blair who recorded her judgment against the property. Count I sought permission from the court to sell the property free and clear of liens under section 363(h). Count II sought to avoid Zeiller's judgment lien as a preference pursuant to section 547(b). Schechter later filed an amended complaint adding a third count. The third count invoked section 549(a) and sought to avoid Blair's post-petition transfer of her interest back to her parents.

Schechter and the Weilers have now filed cross-motions for summary judgment on Counts I and III of the complaint. Schechter also moves for a default judgment against Blair on Counts I and III and against Zeiller on Count II.

For the reasons discussed below, Schechter's motion for summary judgment on Counts I and III of the amended complaint will be granted. His motion for default judgments against Blair and Zeiller will also be granted.¹ The Weilers' motion for summary judgment will be denied.

1. Jurisdiction

The court has subject matter jurisdiction over this case pursuant to 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (E), (F), and (N). The court may therefore enter a final judgment. In re Smith, 848 F.2d 813, 816 (7th Cir.1988).

2. Facts

The following facts are undisputed.² Russell and Naoma Weiler live in Beach Park, Illinois, and are the parents of debtor Karissa Blair. The Weilers own the Beach Park property containing their residence.

In 2000, the Weilers decided to move to Wisconsin and sell the Beach Park property to Blair. Because she had a poor credit history, however, Blair was unable to obtain a mortgage. On the advice of a mortgage broker, the Weilers and Blair came up with a way to repair Blair's credit. The Weilers and Blair would become joint tenants of the property and together would borrow money using the property as collateral. After making payments on the loan for six months or so, Blair's credit would be in good enough shape to allow her to secure a mortgage of her own. Blair could then buy the property.

The Weilers and Blair set about carrying out their plan. On December 14, 2000, the Weilers executed a quitclaim deed, conveying the property to themselves and to Blair. The deed, a printed form with the heading "quit claim deed" and the words "Illinois statutory" underneath, recited that grantors "Russell and Naoma Weiler ... convey(s) and quit claim(s) to Russell & Naoma Weiler, and Karissa Blair ... all interest in the following described real estate situated in the County of Lake, in the State of Illinois, to wit...." The space for the property's legal description following this recitation was left blank for some reason, but after the lacuna the deed listed the permanent index number as well as the street address of the property conveyed. The address was the address of the Weilers' Beach Park property. The deed was recorded on January 2001.

After the execution of the deed, the Weilers and Blair obtained a $20,000 home equity loan secured by a mortgage on the Beach Park property, a mortgage junior to the Weilers' mortgage encumbering the property before the transfer. As planned, Blair took possession of the property, agreeing to pay the loans securing both the first mortgage and the junior mortgage, pay all utilities, and generally maintain the property. The Weilers moved to Wisconsin.

At this point, unfortunately, the plan began to unravel. Blair was unable to make a go of it, and she defaulted on both loans. The first mortgagee filed an action to foreclose on its mortgage, but Russell's father paid off the loan and the action was dismissed. Blair's troubles were by no means over, however. In 2003, Zeiller obtained a $500,000 judgment against Blair in an Illinois state court action the nature of which the parties have not disclosed. Zeiller recorded the judgment on September 17, 2003.

Faced with liability for Zeiller's judgment, on October 21, 2003, Blair sought protection under chapter 7 of the Bankruptcy Code. After the bankruptcy filing, the Weilers moved back to the Beach Park property. Blair moved out of the property and into an apartment.

On December 9, 2003, without seeking or receiving authorization from the bankruptcy court, Blair and the Weilers executed another quitclaim deed, this one conveying the Beach Park property back to the Weilers. The deed was recorded on December 23, 2003. No consideration was given for the transfer. In early January 2004, the Weilers obtained a new loan secured by a mortgage on the property, this one in the amount of $113,500. The Weilers used the proceeds to repay Russell's father for saving the property from foreclosure the previous year.

3. Discussion

Although Counts I and III of Schechter's adversary complaint allege very different claims, a single issue under Count I appears to drive the outcome on both: did the Weilers' 2000 quitclaim deed convey to Blair an interest in the Beach Park property of the kind subject to section 363(h)? If it did, as Schechter maintains, he is entitled to judgment on both Counts I and III. If it did not, as the Weilers insist, the Weilers prevail across the board.

a. Section 363(h)

Blair does hold an interest in the property of the kind mentioned in section 363(h). Schechter is therefore entitled to sell both Blair's interest and the Weilers' interest in the Beach Park property.

Section 363(h) of the Code permits a trustee to sell both the estate's interest and the interest of a non-debtor co-owner in property in which the debtor had "an undivided interest as a tenant in common, joint tenant, or tenant by the entirety." 11 U.S.C. § 363(h). "The sale is permissible if four requirements are satisfied: (1) partition is impracticable; (2) the sale of the estate's interest alone would realize significantly less than the sale of the property free of the co-owner's interest; (3) the benefit to the estate outweighs the detriment to the co-owner; and (4) the property is not used in the production, transmission or distribution for sale of electricity or gas for heat, light or power." Id.; see generally Grochocinski v. Zeigler (In re Zeigler), 320 B.R. 362, 382 (Bankr.N.D.Ill.2005); Voiland v. Gillissie (In re Gillissie), 215 B.R. 370, 380 (Bankr.N.D.Ill.1997).

In this case, the Weilers concede (since they do not dispute) that all four of these requirements are satisfied. They make their stand at an earlier point, contending that the debtor, Blair, lacks the kind of interest in the Beach Park property that would allow a sale under section 363(h) in the first place. Blair, the Weilers say, did not have an undivided interest in the property as a tenant in common, joint tenant, or tenant by the entirety. They argue that she had "legal title" but no equitable interest in the property, "as no equitable ownership was intended." (Weiler Mem. at 3). They note that section 541(d) of the Code recognizes this distinction.

The Weilers are mistaken. Blair's interest in the Beach Park property is a matter of state law, not bankruptcy law. The filing of a bankruptcy petition creates an estate consisting of the debtor's property. 11 U.S.C. § 541(a). The scope of the estate is broadly defined, United States v. Whiting Pools, Inc., 462 U.S. 198, 205, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), encompassing "all legal or equitable interests of the debtor in property," 11 U.S.C. § 541(a)(1). Whether a debtor has an interest in property at all, however, depends on state law. "Property interests are created and defined by state law," and in the bankruptcy laws "Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law." Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).

Blair's interest therefore depends on the effect under state law of the instrument that conferred it. That instrument was the deed the Weilers executed on December 14, 2000. By its terms, the deed was an "Illinois statutory" quitclaim deed, and the deed in fact matched the statutory form in section 10 of the Illinois Conveyances Act, conveying to the Weilers and Blair "all interest" in the Beach Park property. See 765 ILCS 5/10 (2002). A quitclaim deed in the form prescribed by the statute has the effect of conveying to the grantee "all the then existing legal or equitable rights of the grantor" in the property described. Id.; see also Citizens Nat'l Bank of Alton v. Glassbrenner, 377 Ill. 270, 278, 36 N.E.2d 364, 369 (1941); Hubbard v. Buddemeier, 328 Ill. 76, 80-81, 159 N.E. 229, 232 (1927).

The Weilers accordingly conveyed to Blair, not mere legal title to the Beach Park property, but the same interest in the property the Weilers held. In re...