In re Eastmare Development Corp., Bankruptcy No. 92-18004-JNF.

• Decision Date: 01 February 1993
• Docket Number: Bankruptcy No. 92-18004-JNF.
• Citation: 150 BR 495
• Parties: In re EASTMARE DEVELOPMENT CORP., Debtor.
• Court: U.S. Bankruptcy Court — District of Massachusetts

150 B.R. 495 (1993)

In re EASTMARE DEVELOPMENT CORP., Debtor.

Bankruptcy No. 92-18004-JNF.

United States Bankruptcy Court, D. Massachusetts, E.D.

February 1, 1993.

Paul D. Nachtwey, Boston, MA, for debtor.

Charles R. Bennett, Boston, MA, for Baybank.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the "Motion to Set Aside Mortgage Foreclosure and For Contempt and For Sanctions for Violation of the Automatic Stay" (the "Motion"). Eastmare Development Corporation ("Eastmare" or the "Debtor"), purportedly doing business as Riverside Historical Realty Trust (the "Trust"), filed the Motion on August 6, 1992, two days after it sought protection under Chapter 11 of the Bankruptcy Code.

On August 27, 1992, the Court conducted a hearing on the Motion and the opposition filed to it by BayBank. At that time, the Court denied the Motion in so far as it sought an order either finding BayBank in contempt for violating the automatic stay or sanctioning BayBank for the same alleged conduct. The Court then ordered the parties to file an agreed statement of facts and briefs with respect to the Debtor's motion to set aside the foreclosure sale.

The parties have complied with the Court's bench order and have filed a Stipulation of Agreed Facts with pertinent exhibits attached. Neither party has requested an evidentiary hearing. Accordingly, the Motion may be considered one for summary judgment, as there are no material facts in dispute. See Federal Rule of Bankruptcy Procedure 7056.¹ Although the Court notes that the relief requested by the Debtor with respect to setting aside the mortgage foreclosure sale properly should have been brought by way of an adversary complaint, see Federal Rule of Bankruptcy Procedure 7001, no purpose is served at this time by requiring the Debtor to file and serve an adversary complaint on BayBank. In re Commonwealth Mortgage Co., Inc., 145 B.R. 368 (Bankr.D.Mass. 1992). Accordingly, the Court shall rule on the Motion.

II. FACTS

The Debtor is a Massachusetts corporation that was organized on October 1, 1987. Peter Bailey ("Bailey") is its President, Treasurer, Clerk, and Director. The Debtor holds 100% of the beneficial interest of the Trust. The Trust is a duly recorded Massachusetts nominee trust created by Declaration of Trust dated October 15, 1987. Bailey is currently the sole Trustee of the Trust.

Eastmare Corporation, Ltd. ("Limited") was a Massachusetts corporation organized on October 20, 1978. Limited was dissolved on December 31, 1990. Prior to its dissolution, Bailey was the President, Treasurer, Clerk, and Director of Limited.

On October 15, 1987, Ruth A. Webster granted to Robert P. Doherty, Jr. ("Doherty"), as Trustee of the Trust, a quitclaim deed to eleven parcels of land, together with the buildings and improvements thereon, known and numbered as 346-352 Merrimack Street, Newburyport, Massachusetts ("the Newburyport Property"). The Debtor, Limited, and Bailey have never held legal record title to the Newburyport Property.

On September 24, 1987, BayBank issued a commitment letter to Limited or an acceptable nominee for a loan in the amount of $2,400,000. On October 15, 1987, Doherty, as Trustee of the Trust, executed a note (the "Note") payable to BayBank in that amount. To secure its obligations to BayBank, the Trust, simultaneously with the execution of the Note, granted BayBank a Construction Mortgage, Security Agreement, and Assignment with regard to the Newburyport Property. The Construction Mortgage securing the Note was a first mortgage. Doherty, as Trustee, also executed UCC-1 Financing Statements which BayBank filed with the appropriate local and state authorities, thereby perfecting its security interest in the personal property of the Trust.

On October 15, 1987, the Debtor also executed and delivered to BayBank a Guaranty of the obligations of the Trust to BayBank. Limited is obligated to BayBank pursuant to a Commercial Note dated July 22, 1988 in the original amount of $300,000.00. On February 23, 1989, Andre R. Coutourier, as Trustee of the Trust, executed and delivered to BayBank a Guaranty of the obligations of Limited to BayBank. On February 23, 1989, the Trust granted BayBank a Mortgage, Security Agreement, and Assignment to secure its obligations pursuant to the Guaranty of the obligations of Limited to BayBank.

On August 4, 1992, a voluntary Chapter 11 proceeding, captioned Eastmare Development Corporation, d/b/a Riverside Historical Realty Trust (Peter A. Bailey, Trustee), Case No. 92-18004, Chapter 11, was filed with this Court. Although the caption of the bankruptcy case suggests that the Debtor did business as the Trust, the Debtor never filed with the Newburyport Town Clerk a Business Certificate that it was doing business as Riverside Historical Realty Trust.

At approximately 11:00 a.m. on August 4, 1992, Bailey and the Debtor's attorney, Paul D. Nachtwey, Esq., informed BayBank's counsel, both in writing and verbally, that the Debtor had filed a bankruptcy petition and that it was their position that the filing automatically stayed BayBank's foreclosure sale scheduled for 2:00 p.m. that afternoon. At or about 2:00 p.m. on August 4, 1992, pursuant to the statutory power of sale granted BayBank by the Trust, BayBank conducted a public, mortgage foreclosure auction sale of the Newburyport Property whose record title owner in fee simple absolute was the Trust. The Debtor's Chapter 11 filing occurred prior to BayBank's foreclosure sale.

Building 62 Corporation was the successful purchaser of the Newburyport Property at the foreclosure action. Building 62 Corporation, a Massachusetts corporation, is a wholly owned subsidiary of BayBank.

III. DISCUSSION

A. The Issues

The specific issue before the Court is whether the foreclosure sale of the Newburyport Property conducted by BayBank after the Debtor filed its Chapter 11 petition violated the automatic stay and should be set aside. Stated more generally, the question is whether the automatic stay applies to a foreclosure sale of real property owned by a nominee trust whose beneficiary is in bankruptcy. Resolution of the issue requires answers to the following separate questions: 1) what is the property of the estate? 2) what is the effect of foreclosure on the property of the estate? and 3) did BayBank take any action "to obtain possession of property of the estate or . . . to exercise control over property of the estate"? See 11 U.S.C. § 362(a)(3).

The issues are important ones for two reasons: 1) BayBank is relying upon dicta in a previous decision of this Court (namely, that the beneficiary of a nominee trusts holds an intangible interest in the trust, not an interest in the real estate) to argue that the automatic stay does not apply to stay a foreclosure sale of real estate owned by a nominee trust whose beneficiary is in bankruptcy, cf. In re Channel Realty Associates Limited Partnership, 142 B.R. 597 (Bankr.D.Mass.1992) (case dismissed because the debtor, the beneficiary of a nominee trust, could not propose a confirmable plan);² and 2) recent Massachusetts decisions teach that nominee trusts are ineligible debtors. See In re Heritage North Dunlop Trust, 120 B.R. 252 (Bankr. D.Mass.1990); In re Village Green Realty Trust, 113 B.R. 105 (Bankr.D.Mass.1990); In re Medallion Realty Trust, 103 B.R. 8 (Bankr.D.Mass.1989), aff'd, 120 B.R. 245 (D.Mass.1990) (the debtor, ostensibly a nominee trust, was eligible for bankruptcy relief since it was actually a partnership). See also 11 U.S.C. §§ 109(b), 101(41), 101(9).

Assuming both precepts are correct, a debtor that is the beneficiary of a Massachusetts nominee trust confronts a conundrum. If nominee trusts are ineligible to be debtors and the automatic stay does not protect the real property because legal title is held by the trust, absent a conveyance of the real estate by the trustee to the trust beneficiary, the bankruptcy filing by the beneficiary will not stay a foreclosure sale of the real estate. In short, the protections afforded to debtors under the Bankruptcy Code would be unavailable to either the trust or the beneficiary under these circumstances. The Debtor's motion tests the Bank's theory that the automatic stay does not prevent the foreclosure sale of real property standing in the name of a nominee trust whose beneficiary owns only an intangible or personal property interest in the trust, not the real estate that constitutes the trust res. The Court's decision has serious ramifications for troubled real estate still held by nominee trusts in Massachusetts.

B. Property of the Estate

Section 541 of the Bankruptcy Code defines property of the estate as "all legal and equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541(a)(1). The scope of section 541 is broad and is intended to include in the estate any property made available by other provisions of the Code. U.S. v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). However, nonbankruptcy law defines the scope and existence of the property interest. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979); In re Farmers Markets, Inc., 792 F.2d 1400 (9th Cir.1986).

The parties are in agreement that the Debtor did not hold record title to the Newburyport property. Accordingly, any interest the Debtor might have in the Newburyport property stems from its ownership of 100% of the beneficial interest in the Trust.

Few Massachusetts cases have characterized the interests of trust beneficiaries, particularly the beneficiaries of nominee trusts. In Welch v. Davidson, 102 F.2d 100 (1st Cir.1938), a case involving a dispute over gift taxes, the court stated that "in equity the beneficiary of a trust is the owner of the trust res; . . . he has an equitable estate in the property constituting the trust and is considered the real owner." Id. at 102...