In re Borges, Bankruptcy No. 94-51459. Document No. 48

• Decision Date: 31 July 1995
• Docket Number: Bankruptcy No. 94-51459. Document No. 48,54.
• Citation: 184 BR 874
• Court: U.S. Bankruptcy Court — District of Connecticut
• Parties: In re Duarte BORGES and Ana Borges d/b/a Bridgeport Paving Co., Inc., Debtors.

184 B.R. 874 (1995)

In re Duarte BORGES and Ana Borges d/b/a Bridgeport Paving Co., Inc., Debtors.

Bankruptcy No. 94-51459. Document Nos. 48, 54.

United States Bankruptcy Court, D. Connecticut.

July 31, 1995.

COPYRIGHT MATERIAL OMITTED

Ira B. Charmoy, Charmoy & Nugent, Bridgeport, CT, for debtors.

Stacey M. Daves-Ohlin, Gladstone, Schwartz, Blum & Woods, Bridgeport, CT, for respondent First Lake Corp.

MEMORANDUM AND ORDER ON DEBTOR'S AMENDED MOTIONS PURSUANT TO 11 U.S.C. § 506(a) AND (d)

ALAN H.W. SHIFF, Bankruptcy Judge.

The debtor, Ana Borges, seeks to invoke the equitable doctrine of marshaling¹ in connection with two motions under § 506(a) so as to avoid a senior lien and then apply § 551 to preserve the equity for the benefit of the estate. For the reasons that follow, I conclude that marshaling may not be applied and that the debtor's proposed use of §§ 506 and 551 is contrary to the bankruptcy code.

BACKGROUND

This chapter 11 case was commenced on June 30, 1994. On that date, the debtor owned two adjacent parcels of real property located at 541 and 565 Knowlton Street, Bridgeport. On October 12, 1994 the debtor filed the instant motions under § 506(a) seeking a determination of the value of the parcels and the secured or unsecured status of liens encumbering them. Secured creditors First Lake Corporation ("First Lake") and the Internal Revenue Service objected. Only the First Lake objection is at issue here.

The parties have stipulated to the value of the parcels and amount and priority of the liens as follows:

                541  Knowlton Street: Value of $49,750
                 1.  City of Bridgeport, Tax Collector     $ 2,403.81
                 2.  T & D Associates (first mortgage)      26,395.51
                 3.  First Lake (second mortgage)           97,103.80
                565  Knowlton Street: Value of $53,750
                 1.  City of Bridgeport, Tax Collector     $ 2,361.23
                 2.  Water Pollution Control Authority       4,351.15
                 3.  T & D Associates (first mortgage)      26,395.51
                 4.  First Lake (second mortgage)           97,103.80
                

In addition, there are two other creditors who hold liens encumbering each parcel that are subordinate to First Lake's mortgage. See Amended Motions, filed October 12, 1994.

The first mortgage of T & D Associates ("T & D") encumbers both parcels but secures a single claim in the amount of $26,395.51.² First Lake's claim in the amount of $97,103.80 was created by a mortgage note dated July 7, 1986 and is secured by a second mortgage of that date encumbering both parcels. See Proof of Claim, filed July 21, 1994. The combined value of the two parcels is $103,500. Liens superior to First Lake's mortgage secure claims totalling $35,511.70 which leaves a net equity of $67,988.30 available to First Lake's second mortgage. The debtor argues that each parcel should be examined independently, so that T & D's secured claim would be treated as though it encumbers each parcel separately in the amount of $26,395.51. That approach would result in equity of only $20,950.68 on 541 Knowlton and $20,642.11 on 565 Knowlton, or a total of $41,592.79 in equity available to First Lake's mortgage. The debtor further seeks to invoke the doctrine of marshaling to require the first mortgage holder, T & D, to satisfy its lien out of only 565 Knowlton, and to void T & D's lien on 541 Knowlton. The debtor then seeks to preserve the value of the voided lien for the benefit of the estate pursuant to § 551.

The issues are: (i) may the debtor apply the doctrine of marshaling under the foregoing facts; (ii) if so, does that doctrine result in the voiding of T & D's lien and the preservation of value for the estate under § 551; and (iii) if the answers to (i) and (ii) are no, may the debtor treat First Lake's claim as secured only to the extent of $41,592.79 by examining the security structure on each parcel independently of the other.

DISCUSSION

Section 506(a) and (d) provide in relevant part:

(a) An allowed claim of a creditor secured by a lien on property in which the estate has an interest . . . is a secured claim to the extent of the value of such creditor\'s interest in the estate\'s interest in such property . . . and is an unsecured claim to the extent that the value of such creditor\'s interest . . . is less than the amount of such allowed claim.

(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void. . . .

Section 544(a) provides in relevant part:

The trustee shall have, as of the commencement of the case . . . the rights and powers of, or may avoid any transfer of property of the debtor . . . that is voidable by—

(1) a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;

(2) a creditor that extends credit to the debtor at the time of the commencement of the case, and obtains, at such time and with respect to such credit, an execution against the debtor that is returned unsatisfied at such time, whether or not such a creditor exists. . . .

Section 551 provides in relevant part:

Any transfer avoided under section . . . 544 . . . or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate.

Section 1107(a) provides in relevant part:

(a) A debtor in possession shall have all the rights . . . and powers . . . of a trustee serving in a case under this chapter.

1. Standing and Applicable Law

The debtor asserts that § 544(a) empowers a trustee, and pursuant to § 1107(a) a debtor in possession, to invoke the doctrine of marshaling as a hypothetical lien creditor. First Lake does not dispute that contention, and most courts that have addressed the issue agree that a trustee has standing to invoke the marshaling doctrine in appropriate circumstances. See, e.g., Herkimer County Trust Co. v. Swimelar (In re Prichard), 170 B.R. 41, 45 (Bankr.N.D.N.Y.1994); In re Wilmot Mining Co., 167 B.R. 806, 811 (Bankr.W.D.Pa.1994); Chittenden Trust Co. v. Sebert Lumber Co. (In re Vermont Toy Works, Inc.), 135 B.R. 762, 768 (D.Vt.1991); Fundex Capital Corp. v. Balaber-Strauss (In re Tampa Chain Co., Inc.), 53 B.R. 772, 777-78 (Bankr.S.D.N.Y.1985). I conclude that the debtor in possession has standing to invoke the doctrine. See Topcon Instrument Corp. of Am. v. West Coast Optical Instruments, Inc. (In re West Coast Optical Instruments, Inc.), 177 B.R. 720, 722 (M.D.Fla. 1992).

The parties also agree that Connecticut law governs the application of the marshaling doctrine. "Property interests are created and defined by state law. Unless some federal interest requires a different result, there is no reason why such interests should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding." Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); accord Nobelman v. Am. Sav. Bank, ___ U.S. ___, ___, 113 S.Ct. 2106, 2110, 124 L.Ed.2d 228 (1993); see Century Brass Prods., Inc. v. Colonial Bank (In re Century Brass Prods., Inc.), 95 B.R. 277, 279 (D.Conn.1989); In re C & B Oil Co., Inc., 72 B.R. 228, 230 (Bankr.N.D.Ohio 1987).

2. Equitable Marshaling

The debtor relies on both Connecticut statutory and common law. She cites Conn. Gen.Stat.Ann. § 52-380i (West 1991), which provides:

Upon proceedings for the foreclosure of any judgment lien, when the judgment creditor holds a mortgage upon real estate in this state as security for the debt, or any part of it, that has gone into the judgment, which mortgage is a first charge upon the property mortgaged, the court shall, upon the motion of the judgment debtor or any later encumbrancer on the property covered by the judgment lien, order such mortgaged property to be first applied to the debt secured by it, at its cash value, to be ascertained by the court; and a foreclosure of the judgment lien shall be granted only as to the portion of such judgment that remains unsatisfied.

The plain language of § 52-380i provides that it applies only where a creditor holds both a judgment lien on property of a debtor and a mortgage as security for the same debt, in which event the debtor could, in the action to foreclose the judgment lien, move the court to require the creditor to enforce its rights under the mortgage before it seeks satisfaction from the judgment lien. The Connecticut Supreme Court has held that the predecessor to § 52-380i "clearly indicates that its provisions may be invoked only in a proceeding to foreclose a judgment lien." Little v. United Investors Corp., 157 Conn. 44, 48, 245 A.2d 567 (1968); see also Hartford Nat'l Bank and Trust Co. v. Kotkin, 185 Conn. 579, 582 n. 4, 441 A.2d 593 (1981) (per curiam) ("The statutory right to marshaling . . . would not be available to the defendants until there is a proceeding for satisfaction of the judgment."); Connecticut Nat'l Bank v. Higganum Supply, Inc., Case No. 65591, 1993 WL 7667, at *4 (Conn.Super.Ct., Jan. 11, 1993) ("General Statutes Sec. 52-380i concerns the foreclosure of a judgment lien and nowhere does it provide that the doctrine of marshalling securities may be used as a special defense to a foreclosure action."). The statute was enacted to remedy the situation in which a lender obtains a security interest on a borrower's property, the borrower transfers that property to a person who assumes and agrees to pay the security interest, that person subsequently defaults, and the lender obtains a judgment lien applicable to all of the original borrower's property and attempts to proceed against that property prior to foreclosing the security interest. See Merchants Bank and Trust Co. v. Pettison, 112 Conn. 652, 654-55, 153 A. 789 (1931). The statute was enacted because the common law doctrine of marshaling did not...