In re Hyde, 03-14530-JNF.

• Decision Date: 26 September 2005
• Docket Number: No. 03-14530-JNF.,03-14530-JNF.
• Parties: In re Phillip W. HYDE, Debtor.
• Court: United States Bankruptcy Courts. First Circuit. U.S. Bankruptcy Court — District of Massachusetts

334 B.R. 506

In re Phillip W. HYDE, Debtor.

No. 03-14530-JNF.

United States Bankruptcy Court, D. Massachusetts.

September 26, 2005.

Richard L. Blumenthal, Silverman & Kudisch, P.C., Newton Center, MA, for Debtor.

MEMORANDUM

JOAN N. FEENEY, Bankruptcy Judge.

I. INTRODUCTION

The matter before the Court is the "Debtor's Motion for Court Order, Confirming the Sale Proceeds of 26 Union Street, Cambridge, MA, as Exempt" (the "Motion").¹ Pursuant to his Motion, the Debtor, Phillip W. Hyde (the "Debtor"), seeks a ruling that sale proceeds from his former residence, which he had claimed as exempt, are not liable for any debts that arose prior to the commencement of his Chapter 7 case, including the nondischargeable debt owed to the Board of Trustees of the Public School Teachers' Pension and Retirement Fund of Chicago (the "Fund"), which obtained an ex-parte, trustee process attachment against the sales proceeds in the Middlesex Superior Court, Department of the Trial Court, on August 12, 2005.

The Fund filed an Opposition to the Debtor's Motion. The Court heard the matter on August 25, 2005. At the hearing, neither party requested the opportunity to submit evidence, and neither party disputed the material facts germane to the resolution of the issues before the Court. Both parties filed briefs. The issue presented is whether the proceeds from the sale of real property, property which the Debtor had claimed as exempt and which the Trustee abandoned, are protected from the reach of the Fund by operation of 11 U.S.C. § 522(c). A subsidiary issue is whether this Court should order the Fund to release its attachment or find the Fund in contempt for violation of the automatic stay. Another significant issue, and one that this Court finds determinative, is whether this Court should enter any orders relating to the scope of the Debtor's homestead exemption in light of the Post-Judgment Garnishment obtained by the United States with respect to a restitution order issued as part of the Debtor's sentence following criminal conviction for mail fraud after the commencement of his bankruptcy case.

II. FACTS

The Debtor filed a voluntary Chapter 7 petition on May 28, 2003. On Schedule C-Property Claimed Exempt, the Debtor claimed, pursuant to Mass. Gen. Laws ch. 188, § 1, a homestead exemption in the sum of $300,000 for his residence located at 26 Union Street, Cambridge, Massachusetts (the "Property").² Other than the Fund and the holders of two mortgages on the Property, the Debtor listed few creditors: American Express, MBNA America and an individual with a disputed claim arising out of an automobile accident.

On August 13, 2003, the Fund filed a "Complaint to Determine Dischargeability of a Debt, Objection to Debtor's Discharge and for Declaratory Relief." While the Fund's adversary proceeding was pending, the Debtor filed a "Motion to Avoid Lien Pursuant to 11 U.S.C. § 522(f)," seeking to avoid its judicial lien, namely a writ of attachment issued by the United States District Court for the District of Massachusetts in the sum of $317,678.16. On June 18, 2004, this Court overruled the Fund's Opposition to the Debtor's Lien Avoidance Motion and avoided the lien, citing Patriot Portfolio, LLC v. Weinstein (In re Weinstein), 164 F.3d 677, 687 (1st Cir.1999), cert. denied, 527 U.S. 1036, 119 S.Ct. 2394, 144 L.Ed.2d 794 (1999), in which the First Circuit held that the exceptions to the Massachusetts homestead for preexisting liens and prior contracted debts were preempted by §§ 522(f) and 522(c).³

On the same day the Court determined the Lien Avoidance Motion, it issued a Memorandum and Order, entering judgment in favor of the Fund on Count I of its Complaint under 11 U.S.C. § 523(a)(2)(A). The Court later amended its judgment to provide for prejudgment interest calculated in accordance with Illinois law. The parties subsequently filed a Consent Judgment pursuant to which they agreed to the dismissal of Count II of the Fund's Complaint, through which the Fund purported to state a cause of action under 11 U.S.C. § 727(a)(2), and that the Fund would be entitled to prejudgment interest calculated in accordance with Illinois law in the sum of $197,069.47, as well as post-judgment interest on the entire nondischargeable judgment in the sum of $514,747.63. Thus, this Court in approving the Consent Judgment entered a final order that the Fund held a nondischargeable debt in the sum of $514,747.63.

Additionally, on March 18, 2004, approximately nine and one-half months after the Debtor filed his Chapter 7 case, the United States Attorney for the District of Massachusetts initiated criminal proceedings against the Debtor for mail fraud in connection with his conduct relating to the Fund. See Board of Trustees of the Public School Teachers' Pension and Retirement Fund of Chicago v. Hyde (In re Hyde), Adv. P. No. 03-1358, Slip Op. (Bankr.D. Mass. June 18, 2004). In May of 2004, the Debtor pled guilty to mail fraud, and, on April 20, 2005, the United States District Court for the District of Massachusetts sentenced him to one year and one day in prison to be followed by two years of supervised release. In addition, as part of his sentence, in the section captioned "Criminal Monetary Penalties" the district court ordered him to pay restitution to the Fund in the amount of $317,678.68 "to be paid on a scheduled [sic] to be established by the U.S. Probation Officer during the period of supervised release."

On February 14, 2005, the Court entered an order discharging the Debtor from all dischargeable debts. Approximately five months later, on July 7, 2005, the Trustee filed a Notice of Abandonment with respect to the 26 Union Street Property in which he stated the following: "The trustee believes there is no equity over the existing liens. There would be no benefit to the estate if the trustee sold the property."

On August 10, 2005, the Debtor sold the Union Street Property to avoid a mortgagee's foreclosure sale. According to the Debtor,

[O]n or around August 12, 2005, the Fund, without permission of this Court or seeking relief from the automatic stay, commenced a civil action in the Middlesex Superior Court, Docket No. 05-2845, seeking a temporary restraining order of the Debtor's sale proceeds and obtained an ex-parte trustee process attachment of said sale proceeds against the Debtor's real estate attorney at the closing.

Motion for Court Order at ¶ 12.

According to the Fund, it commenced an action in the Middlesex Superior Court, Department of the Trial Court, in which it sought, inter alia, "(i) to enjoin the transfer to Hyde of any of the net proceeds from the sale of the Property and (ii) a trustee process attachment of any funds held by Hyde's closing attorney and payable to Hyde." The record contains an "Interlocutory Order Continuing Restraining Order in Force," continuing the restraining order issued on August 12, 2005 until August 29, 2005 and a "Summons and Restraining Order" issued by the Middlesex Superior Court, restraining the Debtor from assigning or otherwise alienating "any money, property or payments received by Hyde or for the benefit of Hyde from the sale of the property located at 26 Union Street...."

Additionally, according to the Fund, the United States Attorney's Office also took action to secure the Debtor's obligations under the Restitution Order. The Court takes judicial notice that the United States filed an "Application for Writ of Garnishment" in the United States District Court for the District of Massachusetts on August 16, 2005 and that the district court granted the Application on August 16, 2005, ordering the Clerk of the Court to issue the writ. The Writ of Garnishment, as issued, contained an order requiring Bicknell & Smith, LLP to answer in writing, under oath, within ten (10) days, as to whether it had custody, control or possession of any property owned by the Debtor, including non-exempt, disposable earnings. A Clerk's Notice of Post-Judgment Garnishment also was issued addressed to the Debtor. The record contains a copy of the "Clerk's Notice of Post-Judgment Garnishment." The Notice provides in relevant part the following:

Your are hereby notified that non-exempt accounts are being taken by the United States of America which has a judgment in the sum of $317,778.68. As of August 15th, 2005, a balance of $317,778.68 remains outstanding.

Also, you are hereby notified that there are exemptions under the law which may protect some of the property from being taken by the Government if you can show that the exemptions apply. Attached is a summary of the major exemptions that apply in Massachusetts....

Attorney Andrew Bram answered the writ on behalf of Bicknell & Smith, stating that he held proceeds from the sale of the Property in the amount of $121,895. On September 13, 2005, the Debtor filed a Claim for Exemption, in which he stated that "the monies garnished pursuant to an Order of this Court dated August 18, 2005(sic), are exempt from the reach of creditors pursuant to 11 U.S.C. § 522(c), as said monies are the direct sale proceeds of the Defendant's homestead, which was scheduled as exempt in his Chapter 7 Bankruptcy Petition...." The Debtor requested that the district court take no action "until such time as the Bankruptcy Court has made its final ruling."

III. POSITIONS OF THE PARTIES

A. The Debtor

The Debtor's Motion is predicated on two assumptions: 1) that the automatic stay is in effect; and 2) his homestead exemption extends to the proceeds of the sale of the Property. He states: "The sales proceeds are exempt by operation of the Massachusetts homestead law, and are further protected from the reach of creditors pursuant to 11 U.S.C. § 522(c)." Moreover, he states that he reserves the right to commence an adversary proceeding against the Fund for damages, sanctions and attorneys' fees pursuant to 11 U.S.C. § 362(h).

The Debtor argues that the Fund admitted in an...