In re Gomez

• Decision Date: 03 April 2008
• Docket Number: Bankruptcy No. 07-70348.,Adversary No. 07-7018.
• Citation: 388 B.R. 279
• Parties: In re Jose Luis GOMEZ, et al., Debtors. Jose Luis Gomez, et al., Plaintiffs, v. Kamper Investments, LLC, et al., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

388 B.R. 279

In re Jose Luis GOMEZ, et al., Debtors Jose Luis Gomez, et al., Plaintiffs, v. Kamper Investments, LLC, et al., Defendants.

Bankruptcy No. 07-70348.

Adversary No. 07-7018.

United States Bankruptcy Court, S.D. Texas, McAllen Division.

April 3, 2008.

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Jose Luis Flores, Attorney at Law, McAllen, TX, for Plaintiffs.

Antonio Villeda, Kelly K. McKinnis, Attorneys at Law, McAllen, TX, H. Gray Burks, IV, Barret, Burke, Wilson, Castle & Frappier, Houston, TX, for Defendants.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, the Court awards legal title to the property at issue in this dispute to Jose Luis Gomez and Esmeralda Gomez. The Court has jurisdiction of this proceeding pursuant to 28 U.S.C. § 1334. This is a core proceeding under 28 U.S.C. § 157.

Background

On August 7, 2007, the home of Jose Luis Gomez and Esmeralda Gomez ("Debtors") was purportedly foreclosed on by Wells Fargo Bank ("Wells Fargo") and purchased by Kamper Investments, LLC ("Kamper"). The following day, Debtors filed for chapter 13 bankruptcy relief. Debtors filed an adversary proceeding against Kamper and Wachovia Bank¹ asserting that legal title to the property never transferred, seeking to avoid any alleged transfer of the property and bringing claims for wrongful foreclosure, deceptive trade practices, intentional infliction of mental distress, breach of common law duty to perform with care, skill and experience, conversion and wrongful eviction, breach of contract, and negligence. Debtors also moved for a temporary restraining order to prevent forcible detention from the property.

A hearing was held on the temporary restraining order on September 27, 2007. The Court denied the temporary restraining order on the basis that the offered affidavits were inadequate to support the requested relief. Debtors filed an amended request for a temporary restraining order. The Court held a hearing on October 11, 2007 and granted the relief. A subsequent scheduling conference was held on November 20, 2007. At that hearing, the parties agreed that only questions of law remained as to the Debtors' complaint. Therefore, upon agreement of the parties, the Court closed the evidentiary record and granted the parties leave to submit post-hearing briefs on the remaining issues of law.

On December 3, 2007, Debtors filed an amended complaint dropping all of their previous causes of action except for a request for a declaratory judgment that legal title of the property never transferred, or, in the alternative, a claim to avoid the transfer pursuant to 11 U.S.C. § 522(h) and 544(a)(3). Wells Fargo responded and asserted that regardless of whether the sale can be avoided, Debtors are barred by 11 U.S.C. § 1322(c)(1) from curing and maintaining this debt. After consideration of the evidence and the parties' briefs, the Court now issues its final ruling as to the avoidance of the foreclosure sale and transfer of Debtors' property.

The Foreclosure Sale

The facts of the foreclosure sale are not in dispute. The Debtors' homestead property was purchased by Kamper at the foreclosure sale conducted by Wells Fargo on August 7, 2007. There are no allegations that the sale was not properly conducted in accordance with state law. Debtors argue, however, that legal title never passed to Kamper because a substitute trustee's deed was not prepared or delivered to Kamper at the time of Debtors' bankruptcy filing. The delivery of a substitute trustee's deed, Debtors assert, is a requirement for title to transfer.

In Texas, the legal and equitable interests in property are severed when a deed of trust is executed. Flag-Redfern Oil Co. v. Humble Exploration Co., 744 S.W.2d 6, 8 (Tex.1987). Upon execution, the mortgagor retains legal title while the mortgagee gains equitable title. Id.

For any interest in real property to be transferred, the conveyance must be "in writing, signed by the grantor, and delivered to the grantee." Adams v. First Nat'l Bank of Bells/Savoy, 154 S.W.3d 859, 869 (Tex.App.—Dallas 2005, no. pet. h.) (citing TEX. PROP.CODE ANN. § 5.021 (Vernon 2003)). "A conveyance is effective and title is transferred when the following has occurred: (1) execution of the deed, and (2) delivery of the deed." Id. (citing Stephens County Museum, Inc. v. Swenson, 517 S.W.2d 257, 261 (Tex.1974)). "Two elements must be established to prove delivery of a deed: (1) the deed must be delivered into the control of the grantee, and (2) the grantor must intend the deed to become operative as a conveyance." Id. (citing Binford v. Snyder, 144 Tex. 134, 189 S.W.2d 471, 475 (Tex.1945)). "What constitutes a delivery is a question of law," Id. (citing Ragland v. Kelner, 148 Tex. 132, 221 S.W.2d 357, 359 (1949)), but whether there has been a delivery is a question of fact. Id. (citing Ragland, 221 S.W.2d at 359). While much litigation has examined the intent of the grantor, there is little dispute that "[t]o consummate a delivery, the deed must be placed in the hands of the grantee, or within his control." Raymond v. Aquarius Condominium Owners Ass'n., Inc., 662 S.W.2d 82, 91 (Tex.App. 13 Dist.1983, n.w.h) (citing Jones v. Young, 539 S.W.2d 901, 904 (Tex.Civ. App.—Texarkana 1976, writ ref'd n.r.e.)).

The parties do not dispute that a substitute trustee's deed was never prepared and delivered. At the foreclosure sale, Kamper received a form entitled Buyers Receipt for Funds and Acknowledgement and Substitute IRS Form 8300. The face of the receipt, however, defeats any claim that it may substitute for delivery of a deed. It states clearly that "[t]itle does not transfer until delivery of the Substitute Trustee's deed." Wells Fargo Exh. 10.

The law is clear. For an interest in real property to be conveyed, it must be in writing, signed and delivered. Adams, 154 S.W.3d at 869 (citing TEX. PROP.CODE ANN. § 5.021 (Vernon 2003)). No deed was delivered and the buyer's receipt prevents transfer of legal title until the deed is delivered. Accordingly, the Court finds that legal title did not transfer. The homestead remains property of the bankruptcy estate. See 11 U.S.C. § 541(a) (property of the estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case.").

11 U.S.C. § 1322

Wells Fargo argues that regardless of the transfer of title, Wells Fargo's claim must be paid in full during the term of the plan pursuant to 11 U.S.C. § 1322(c)(1). Section 1322(c)(1) provides:

a default with respect to, or that gave rise to, a lien on the debtor's principal residence may be cured under paragraph (3) or (5) of subsection (b)² until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.

11 U.S.C. § 1322(c)(1). The meaning of the phrase "sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law" is subject to varying interpretation throughout the federal courts. Courts disagree on whether this phrase references the simple act of the foreclosure auction or whether this phrase refers to some moment beyond the foreclosure auction where all of the mortgagor's potential rights have expired.

Wells Fargo cites to the Third Circuit case of In re Connors, to support its position that the phrase refers only to the foreclosure auction. 497 F.3d 314 (3rd Cir.2007). In re Connors, decided August 2007, addressed a split (described by the Court as a "virtual tie")³ among the New Jersey federal courts as to whether "under 11 U.S.C. § 1322(c)(1), a Chapter 13 debtor has the right to cure a default on a mortgage secured by the debtor's principal residence between the time the residence is sold at a foreclosure sale and the time the deed is delivered." Id. at 317. The Court held this right does not exist. Id.

In Connors, on November 10, 2004, after defaulting on his mortgage note, Debtor's property was sold at a foreclosure sale. Id. Debtor filed bankruptcy on November 14, 2004. On January 19, 2005, after Debtor's state law redemption rights had expired, the purchaser of the property at the foreclosure sale filed a motion to lift the stay to allow it to pay the balance due on the property and receive the deed. Id. The Bankruptcy Court granted the motion and the District Court affirmed. Id. The District Court held that "the right to cure expires at the foreclosure sale and § 1322(c)(1) only allows additional remedies as available under state law."⁴ Id. at 317-18.

The Third Circuit affirmed, finding that "foreclosure sale" in § 1322 references a discreet event rather than the entire foreclosure process. Id. at 319-20. Although in Connors, Debtor had allowed his state law redemption rights to expire, the Court noted that its holding would not otherwise cut off the "debtor's state-law post-sale remedies." Id. at 321. The Court based its finding on what it considered the unambiguous language of the statute and the practice of the local courts, rules and statutes of referring to foreclosure "sale" to mean the single event of the foreclosure auction rather than the entire foreclosure proceeding including delivery of the deed. Id. Further, the Court noted that in New Jersey the "successful bid at a foreclosure auction is generally irrevocable ... and the bidder acquires equitable title that is not subject to defeasance except under narrow circumstances." Id. at 320 (internal citation omitted). Id. at 320. Accordingly, regardless of redemption rights, the Court found a residence is "sold" at the foreclosure auction even if legal title has not been transferred.⁵ Id. at 321 (citing In re Townsville, 268 B.R. 95, 118-19 (Bankr.E.D.Pa.2001)).

The Sixth Circuit, applying Michigan law, has likewise found "a foreclosure sale" in § 1322(c)(1) unambiguously refers to a discreet event. In re Cain, 423 F.3d 617 (6th Cir.2005). The Court granted a creditor's objection pursuant to § 1322(b)(1)...