In re Ford

• Decision Date: 01 August 2003
• Docket Number: Adversary No. 02-5047.,Bankruptcy No. 02-50780-PWB.
• Citation: 296 B.R. 537
• Parties: In re Joe Frank FORD, Sr., Debtor. Joe Frank Ford, Sr., Plaintiff, v. A.C. Loftin, The L & R Company of Rome, Inc., a/k/a L & R Corporation of Rome, Inc., and Jefferson Associates, L.L.C., a/k/a Jefferson & Associates, LLC., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Georgia

296 B.R. 537

In re Joe Frank FORD, Sr., Debtor Joe Frank Ford, Sr., Plaintiff, v. A.C. Loftin, The L & R Company of Rome, Inc., a/k/a L & R Corporation of Rome, Inc., and Jefferson Associates, L.L.C., a/k/a Jefferson & Associates, LLC., Defendants.

Bankruptcy No. 02-50780-PWB.

Adversary No. 02-5047.

United States Bankruptcy Court, N.D. Georgia, Rome Division.

August 1, 2003.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Brian R. Cahn, Perrotta & Associates, P.C., Cartersville, GA, for Joe Frank Ford, Sr.

J. Bryant Durham, Jr., Rome, GA, for A.C. Loftin.

Wade C. Hoyt, IV, The Hoyt Firm, Rome, GA, for The L & R Company of Rome, Inc.

Susan E. Edlein, Holland & Knight LLP, Atlanta, GA, for Jefferson Associates L.L.C.

MEMORANDUM OPINION

PAUL W. BONAPFEL, Bankruptcy Judge.

Joe Frank Ford, Sr., the chapter 13 debtor in this case and plaintiff in this adversary proceeding ("Debtor"), claims a beneficial ownership interest in his residence, record title to which he transferred several years ago to his daughter so that she could obtain a loan from a bank, with the real estate as collateral, for his benefit. Defendant A.C. Loftin held a note secured by a deed to secure debt encumbering the residence that the debtor executed long before the transfer of record title to his daughter. After the Debtor filed his chapter 13 petition and Mr. Loftin received notice of it, Mr. Loftin conducted a foreclosure sale at which the successful bidder was Defendant L & R Company of Rome, Inc. ("L & R"). Shortly thereafter, L & R sold the residence to Defendant Jefferson Associates, LLC ("Jefferson").

Debtor contends that the foreclosure sale violated the automatic stay of 11 U.S.C. § 362(a) and that, as such, the foreclosure deed to L & R and subsequent deed to Jefferson are void and without legal effect. Defendants contend that the stay was not applicable to the foreclosure sale because the Debtor did not have a beneficial ownership interest in the residence. Alternatively, Defendants contend that, even if the stay applied, the transfers are unauthorized postpetition transfers that cannot be avoided under the good faith purchaser defense of 11 U.S.C. § 549(c) because the Debtor never recorded a copy of his bankruptcy petition in the real estate records. In this regard, Defendants assert that the successful bid at the foreclosure sale meets the requirement of the § 549(c) defense that a good faith purchaser provide "present fair equivalent value" in exchange for an unauthorized postpetition transfer. The controversy is a core proceeding as defined in 28 U.S.C. § 157(b) over which this Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), (e).

The Court conducted a trial limited to the issues of the validity of the foreclosure sale and the subsequent transfer and the claim of the second purchaser against the Debtor for rent. If the Debtor prevailed on these issues, the parties agreed that the Court would determine questions regarding the Debtor's remedies and the cross-claims of the purchasers for indemnification in later proceedings.

Following the trial, the Court announced its findings of fact and conclusions of law. The Court found as a matter of fact that the Debtor had transferred legal title to his residence to his daughter for the purpose of enabling her to obtain a loan with the residence as collateral for his exclusive benefit, with the daughter later to reconvey at least a life estate in the residence to the Debtor. Based on these facts, the Court concluded that an implied trust arose pursuant to which the Debtor has a beneficial ownership interest in the residence that is property of his estate and that the automatic stay of § 362(a) therefore applies to the foreclosure sale.

The Court then determined that § 549(c) applies only to transfers that are avoidable under § 549(a) and that it does not apply to a transfer that violates the stay. Alternatively, the Court concluded that, even if § 549(c) were applicable, the consideration paid at a regularly conducted foreclosure sale does not establish the payment of "present fair equivalent value" as required by § 549(c). For these reasons, both the foreclosure and subsequent sales were void and legally ineffective. Debtor consequently owes no rent.

This Memorandum Opinion supplements and further explains the Court's rulings and, together with the findings of fact and conclusions of law announced at the conclusion of the trial, constitutes the Court's findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52(a), applicable in this adversary proceeding pursuant to Fed. R. Bankr.P. 7052.

I. STATEMENT OF ISSUES

The Court addresses these issues:

1. Does Debtor have a beneficial ownership interest in his residence, record title to which is in his daughter, that is property of his estate such that the automatic stay of 11 U.S.C. § 362(a) applies to the postpetition foreclosure sale?

2. If so, does 11 U.S.C. § 549(c) provide a defense to the Debtor's action to set aside the transfers due to the violation of the stay? This issue involves two questions. First, is § 549(c) applicable at all? Second, does the sales price at the foreclosure sale constitute "present fair equivalent value" in exchange for the transfer as required to invoke the § 549(c) defense?

3. If the § 362(a) automatic stay applies and the § 549(c) defense is not available, should the Court grant retroactive relief in the form of annulment of the stay under § 362(d) in order to uphold the transfers?

II. FACTS

The Appendix contains a detailed discussion of the evidence and the Court's findings of fact. The following is a summary of the material facts necessary for application of the controlling legal principles.

The Debtor acquired real estate known as 6 Springdale Drive, Rome, Georgia, in August, 1978. Now 61 years old, the Debtor has lived in his residence continuously for some 24 years.

In connection with the purchase of the residence, the Debtor executed two security deeds. The first priority security deed was in favor of Home Federal Savings and Loan Association of Rome, and the second priority security deed was in favor of A.C. Loftin, the foreclosing creditor in this proceeding. The first priority security deed eventually came to be held by First Union Bank ("First Union"). Mr. Loftin's security deed secured a debt in the original principal amount of $6,222.39, payable with interest at 9½ percent per annum in monthly installments, with the last payment being due on January 1, 1997.

In August 1998, the Debtor was facing foreclosure on the residence by First Union. In order to obtain funds to prevent that foreclosure, the Debtor's daughter, Kathy Ford Wright, attempted to arrange a loan for him from a branch of Nations Bank (now Bank of America) in Cartersville Georgia (the "Bank"). The Bank told her that it could not make a loan to the Debtor because his only income was social security disability payments but that it could lend her the money if she had title to the residence. Ms. Wright reported this to her father, and they agreed that he would transfer title to her so that she could get the loan, following which she would re-convey at least a life estate to him. Ms. Wright obtained the loan, and the debt to First Union secured by the first security deed was satisfied. Ms. Wright paid nothing in exchange for the transfer of record title to her. The Bank received a security deed on the residence from Ms. Wright, on which the present balance is approximately $12,000.

Ms. Wright and the Bank were unaware of Mr. Loftin's security deed, and the Debtor apparently thought it had been discharged in a previous bankruptcy case filed around 1981 or otherwise paid. In April 2002, Ms. Wright went back to the Bank to request an additional loan for repairs and improvements to the residence. This time, the Bank reported that a title search had revealed Mr. Loftin's security deed. In fact, Mr. Loftin was advertising the property in April for a non-judicial foreclosure sale on May 7, 2002.

On April 29, 2002, the Debtor filed his chapter 13 bankruptcy case but did not record a copy of the petition in the real estate records. Although Mr. Loftin received notice of the chapter 13 filing, he proceeded with the foreclosure sale. L & R purchased the residence at the foreclosure sale for $19,653.70. Thereafter, L & R sold the property to Jefferson for $31,000.

The Debtor's schedules show a value of $60,000 for the residence. The Debtor testified that he thought the residence was appraised for tax purposes for $55,000 and that he thought it was worth at least $40,000. The Defendants produced no evidence of value other than the sales prices.

III. DISCUSSION

A. The Automatic Stay and Debtor's Ownership Interest.

Under 11 U.S.C. § 362(a), the filing of a bankruptcy petition operates as an automatic stay, applicable to all entities, of, among other things, "any act to create, perfect, or enforce any lien against property of the estate." 11 U.S.C. § 362(a)(4). The stay arises automatically by operation of law and is effective regardless of whether affected parties have notice of the bankruptcy filing¹ or the subject property is listed in the debtor's list of assets.² The stay does not, however, apply to a foreclosure on property that secures a debt the debtor owes if the encumbered property is not property of the estate.³ Thus, the first question is whether the Debtor has an interest in the residence that is property of his estate.

The Debtor transferred record title to his daughter for no consideration so that she could obtain a loan for his benefit with the understanding that she would reconvey at least a life estate to him. She obtained the loan and used the proceeds to pay off the existing security deed held by First Union that was about to be foreclosed. In the meantime, the Debtor maintained continuous occupancy of the property as his residence. The facts in this proceeding are sufficient to...