In re Inv. Sales Diversified, Inc.
| Decision Date | 14 March 1984 |
| Docket Number | Adv. No. 4-82-670.,Bankruptcy No. BKY 4-82-740,BKY 4-82-763 and BKY 4-82-764 |
| Citation | 38 BR 446 |
| Parties | In re INVESTMENT SALES DIVERSIFIED, INC., Developers' Sales, Inc. and Developers' Sales Escrow, Inc., Debtors. Dean A. BEUTEL, Plaintiff, v. William J. JOANIS, Trustee, Defendant. |
| Court | U.S. Bankruptcy Court — District of Minnesota |
Ronald Groth of Thomson, Wahlfors, Moran & Groth, Ltd., Minneapolis, Minn., for plaintiff, Dean A. Beutel.
Virginia Dwyer of Briggs & Morgan, P.A., St. Paul, Minn., for William Joanis the trustee.
A trial was held in the above-titled declaratory judgment adversary proceeding before the Honorable Kenneth G. Owens on July 19, 1983. Ronald Groth of Thomson, Wahlfors, Moran & Groth, Ltd. represented the plaintiff, Dean Beutel (Beutel), and Virginia Dwyer of Briggs & Morgan, P.A. represented William Joanis the trustee. Due to the death of Judge Owens, this matter is to be determined by the undersigned bankruptcy judge. Based on the transcript of the proceedings and the briefs and arguments of counsel, this court finds the following:
FACTS
1. The trustee is the acting Chapter 7 trustee in three interrelated bankruptcies: Investment Sales Diversified, Inc. (IDS), Developers' Sales, Inc. (DSI), and Developers' Sales Escrow, Inc. (DSEI).
2. IDS filed for Chapter 7 on April 23, 1982 and DSI and DSEI filed on April 27, 1982.
3. Beutel commenced this adversary action to determine the relative rights of the parties to an escrow fund available from the sale of a vendor's interest in a contract for deed involving certain real estate legally described as: "Lot 9, Block 2, Lakeview Point" (the "real estate") situated in Anoka County, Minnesota.
4. ISD was in the business of buying and selling mortgages and vendor's interests in contracts for deed. DSI was the broker for the transactions in which ISD was involved. DSEI served as manager and servicing agent for those contracts and mortgages. The debtor companies were intertwined to the extent that it is nearly impossible to distinguish the activities of one from another and will be referred to, in this order, collectively except where specific reference to one of the debtors is required.
5. The fee title to the real estate at the time of the petition was vested in Norman and Patricia Jorgensen, husband and wife, as joint tenants (the "Jorgensens").
6. The real estate was sold on July 1, 1981 by the Jorgensens to Crystal Development, Inc. (Crystal) on a Contract for Deed. The contract was filed for record on October 2, 1981.
7. Crystal sold the real estate to Donald C. and Susan D. Burgardt (the "Burgardts") on a Contract for Deed dated September 22, 1981. The contract was filed for record on September 23, 1981.
8. On September 22, 1981, Crystal transferred all of its interest in the real estate to ISD by quit claim deed. The deed was filed for record on August 9, 1982 (after the filing of the bankruptcy petitions). An Assignment of Contract for Deed to ISD was delivered but never filed for record.
9. ISD quitclaimed its interest in the real estate to Beutel on September 23, 1981. The deed was filed of record on August 9, 1982 (after the filing of the bankruptcy petitions).
10. The Burgardts were in possession of the real estate at the time the bankruptcy petitions were filed.
11. Beutel and ISD executed a purchase order for the real estate on September 23, 1981 in which the parties agreed that DSEI would manage the contract for deed for Beutel at a cost of $36.00 per year.
12. The parties further executed a Management Agreement on September 23, 1981 which delineated the rights of the parties in relation to the servicing of the contract. Pursuant to the purchase order and the Management Agreement, the Burgardts' payments on their contract for deed were received by DSEI on behalf of Beutel at the time the bankruptcy petitions were filed.
13. It was the company policy of ISD, DSI, and DSEI to record interests in contracts for deed. ISD's and Beutel's interests in this contract were not recorded by ISD due to a cash flow shortage in the debtors' operations prior to bankruptcy. Beutel had purchased at least six contracts through the debtors or their predecessor corporations, all the contracts had been duly recorded except the contract presently under discussion.
14. At least one of the debtors was a successor corporation to First Guaranty Venture, from whom Beutel purchased his first vendor's interest in a contract for deed. Sales brochures of First Guaranty shown to Beutel prior to his first purchase stated that investors in First Guaranty were protected by the recording of documents with the Registrar of Deeds. Such recording was to be performed by First Guaranty.
15. First Guaranty and DSI (later ISD) entered into a consent order agreement with the Minnesota Commissioner of Securities in September of 1978 in which First Guaranty and DSI agreed, among other things, to record all assignments of vendor's interests in contracts for deed within 30 days of sale to the investor.
16. ISD, DSI, and DSEI maintained common filing systems and common offices. Each contract handled by the three corporations was given a contract number and the contracts were referred to by the three debtors by the same numbering system.
17. The Burgardts paid the balance due on the contract for deed and Beutel and the trustee have deeded by quit claim deed their interest in the property to the Burgardts. The proceeds of the payoff in the amount of $6,305.50 have been deposited in an escrow account pending the resolution of this dispute.
Beutel argues that Section 541(d) of the Bankruptcy Code bars the trustee from avoiding the plaintiff's interest herein as that interest is part of a "bona fide secondary mortgage market" and is thus excluded from the debtors' estates under that section and not subject to the avoiding powers of the trustee. Section 541(d) states:
"Property in which the debtor holds, as of the commencement of the case, only legal title and not an equitable interest, such as a mortgage secured by real property, or an interest in such a mortgage, sold by the debtor but as to which the debtor retains legal title to service or supervise the servicing of such mortgage or interest, becomes property of the estate under subsection (a) of this section only to the extent of the debtor\'s legal title to such property, but not to the extent of any equitable interest in such property that the debtor does not hold." (Emphasis added).
The plaintiff's argument is based on the underlined clause contained in 541(d) and the legislative history of the section. The legislative history of 541(d) reflects that the section is primarily a reiteration of Section 541(a), which includes the debtor's interest in property in the estate only to the extent held by the debtor prebankruptcy, with one specific application: "(t)he purpose of section 541(d) as applied to the secondary mortgage market is therefore to make certain that secondary mortgage market sales as they are currently structured are not subject to challenge by bankruptcy trustees. . . ." Senate Debate, 95th Cong., 124 Cong.Rec. H 11864-66 (daily ed. Oct. 6, 1978).
I do not accept, for several reasons, the plaintiff's argument that the business of the debtors here, the buying and selling of vendor's interests in contracts for deed in a metropolitan area, falls within the definition of secondary mortgage market sales as defined by Congress when that body enacted Section 541(d). Congress intended that exclusion from property of the estate to cover the national market of sales of first mortgage interests by the primary mortgage originators and the purchase of those first mortgages by investors.
The cases in this area of the Code support the conclusion that the business conducted by the debtors here did not fall into the type of activity that Congress sought to protect with Section 541(d). In re Adana Mortgage Bankers, Inc., 12 B.R. 989 (Bkrtcy.N.D.Ga.1980), and In re Columbia Pacific Mortgage, Inc., 20 B.R. 259 (Bkrtcy.W.D.Wash.1981) dealt with the bankruptcies of the first mortgage lenders and the rights of the creditors of the bankrupt, in particular those creditors who had purchased mortgage participation interests from the bankrupt debtors.
In Columbia, where the bankrupt, a residential mortgage company, had sold undivided participation interests in its loans to several savings and loan organizations, the court discussed Section 541(d) thusly:
Columbia, supra, at 261. See also Adana, supra, and its discussion of the legislative history of 541(d).
The debtors here do not come under the purview of the language of Columbia as the debtors were not engaged in a national market but a metropolitan one, were not involved in first mortgages but rather in contracts for deed and second and third mortgages, and, most importantly, the debtors were not the originators of first mortgages who then sold those first mortgages to investors, but rather served as the middlemen in the conduct of a seller-originated debt instrument market.
Judge Owens stated as a finding of fact in a related adversary proceeding arising from these bankruptcies: ". . . ISD (and DSI and DSEI), since July of 1978, had engaged in the business of brokering and managing real estate debt instruments, including mortgages and contract for deed vendor's interests." F & M Marquette v. ISD, Adv.Pro. 4-81-537 (1983) unreported decision, p. 2. Judge Owens later...
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