In re Laines, Case No. 04-10020-RGM (Bankr. E.D.Va. 8/6/2007)
| Decision Date | 06 August 2007 |
| Docket Number | Case No. 04-10020-RGM. |
| Court | U.S. Bankruptcy Court — Eastern District of Virginia |
| Parties | In re: JUAN NELSON LAINES, Chapter 7, Debtor. |
This case is before the court on the applications for compensation of the chapter 7 trustee and his counsel. Except for the applications, the final report was previously approved. The final report states that the trustee recovered more than $1.1 million from the sale of two residential properties (the debtor's home and a rental townhouse) but that the estate is administratively insolvent. This is surprising because the trustee's initial motions to approve the two sales stated that he expected to recover $483,400.001 for distribution to the unsecured creditors. What happened?
The debtor filed his chapter 7 petition on January 2, 2004. He scheduled a townhouse in which he owned an interest as a co-owner and claimed an exemption of $4,900. On February 25, 2004, Irwin Mortgage filed a motion seeking relief from the automatic stay as to the townhouse. The trustee objected, stating that there was "substantial equity in the premises," that the debtor had transferred it for no consideration to the other co-owners and that the trustee intended to file a complaint to avoid the transfers. The matter was continued ten times until March 15, 2005, when a consent order was entered granting relief from the stay unless the trustee paid the claim in full within 120 days. Irwin Mortgage did not file a proof of claim.
Two days after Irwin Mortgage filed its motion for relief from stay, JP Morgan Chase Bank filed a motion for relief from the automatic stay seeking relief as to the debtor's home which the debtor had not scheduled. JP Morgan asserted that the debtor borrowed $344,000 on November 28, 2000, and secured the debt by a first trust on the house. It further alleged that the debtor transferred the house by a deed of gift dated March 18, 2001, to Ana E. Laines and himself as tenants by the entirety with the common-law right of survivorship and that they transferred the house by a deed of gift dated October 7, 2003, to Ana E. Laines and Fidel Rovira. Copies of the two deeds of gift were attached to the motion. The trustee objected to the motion stating that there was "substantial equity in the premises," that the debtor had transferred it for no consideration to the other co-owners and that the trustee intended to file a complaint to avoid the transfers. JP Morgan withdrew its motion for relief. It did not file a proof of claim.
The trustee filed a complaint on March 31, 2004, against the debtor and the transferees2 seeking to avoid the transfers of the townhouse and the house as fraudulent and voluntary conveyances under both the Bankruptcy Code and the Virginia Code, and to deny the debtor a discharge. The trustee was successful. The properties were recovered and the debtor was denied a discharge by an order entered on February 16, 2005. See Gold v. Laines (In re Laines), 352 B.R. 397 (Bankr.E.D.Va. 2005).
The trustee immediately proceeded to market the properties. A realtor was employed and the properties were sold. Motions to approve the sales were filed on March 21, 2005, for the townhouse, and March 30, 2005, for the house. The townhouse sale motion came on for a hearing first. There was no objection to the sale. However, the United States appeared at the April 12, 2005 hearing. It consented to the sale free and clear of its docketed criminal restitution judgment. The motion did not mention the docketed judgment or request a sale free and clear of liens under Bankruptcy Code §363(f). The trustee explained that the debtor was convicted of a federal felony after the filing of the bankruptcy case and that the restitution judgment was a part of his sentence. The judgment was docketed on December 29, 2004, after the trustee filed his complaint. With that explanation, the sale was approved. The trustee prepared a draft order which was rejected because it contained broad language that the sale was free and clear of all non-consensual liens arising after the transfer that was avoided. No liens or lienholders were identified in the order. No such relief had been requested by the trustee. The court requested that the draft order be modified. It was. The new proposed order recited seven previously undisclosed docketed judgments including the United States' restitution judgment. It also recited that the judgment liens did not attach to the property. The lienholders were not parties to the adversary proceeding and had not been served with the motion to sell. It was clear that the additional relief requested could not be granted and that the two properties could not be sold without the relief requested. The court withdrew its oral ruling granting the motion to sell. See In re Laines, 352 B.R. 410 (Bankr.E.D.Va. 2006).
The trustee filed amended motions to sell the two properties, this time free and clear of the seven docketed judgments. He served the affected parties. The motion for sale of the house also sought to sell the house free and clear of a previously undisclosed deed of trust granted by the then-record owners of the house (which did not include the debtor) to secure Kamal Patel and recorded on January 12, 2005, a little more than one year after the debtor filed his petition and almost ten months after the trustee commenced his fraudulent conveyance action. Both motions were identical to the original motions except they added the lien information and requested the sales be free and clear of judgment liens, and in the case of the house, of the post-petition deed of trust.
The motions to sell free and clear of liens stated that the trustee anticipated $483,400 to be available for distribution to unsecured creditors (after the payment of the costs of sale and his trustee's fee): $217,350 from the townhouse, and $266,050 from the house.3 The motion did not discuss the impact of the potential judgment liens. The debtor scheduled all of the potential judgment liens as unsecured claims, four judgments in favor of individuals totaling $3,872;4 John Wagner Assoc., in the amount of $21,585.86;5 and St. Anna's Home in the amount of $221,871.6 The United States filed a proof of claim on April 25, 2005, asserting an unsecured post-petition claim of $401,000 for its restitution judgment.7 Patel claimed a post-petition lien of $200,000.
Had the trustee discussed the impact of the potential liens, he could have stated from the information contained in his pleadings and the court's record that there should be between $236,000 and $483,400 (both after payment of his trustee's fee) available for distribution to unsecured creditors. This gives little weight to the United States' post-petition restitution order8 or Patel's post-petition deed of trust.9 The lower end of the range gives full effect to St. Anna's docketed judgment. It accounted for the bulk of the uncertainty in the range of possible distribution to unsecured creditors from $236,000 to $483,400, both after the costs of sale and the trustee's fee, but before the trustee's attorney's fee.
The trustee was authorized to sell the two properties free and clear of liens and resolve the validity of the liens at a later date. The townhouse went to closing on June 7, 2005. The trustee received $175,727.07 after the payment of the first deed of trust. He had estimated in his motion to sell that he would receive $261,350.10
The trustee's first contract for the sale of the house approved by the court did not close.11 He obtained a second contract and filed another motion to sell the house free and clear of liens which was granted. He estimated that there would be $342,500 available for distribution to unsecured creditors, before payment of the real estate agent's commission, the trustee's fee and his counsel's fees. The house went to closing on August 30, 2005. The trustee received $174,628.05 after payment of the first trust. The real estate agent's commission, the trustee's fee and his counsel's fees had yet to be paid from this amount.
The liens that attached to the two properties, if any, were transferred to the proceeds of $350,355.12 the trustee received from the sale of the two properties. The trustee was faced with eight claimants. Seven held docketed judgments. They, and the date that their judgments were docketed, were: St. Anna's Home (November 29, 2001); John Wagner Assoc. (November 17, 2003); Hernan Aguirre (December 5, 2003);12 Oscar Bladmir Lopez (December 8, 2003); Jose Donaldo Aguirre (December 23, 2003); Maximo Portillo (December 23, 2003);13 and the United States (December 29, 2004). The eighth claimant was Patel who claimed a lien only on the house by virtue of a deed of trust recorded on January 12, 2005.
The four individuals, Hernan Aguirre, Lopez, Jose Donaldo Aguirre and Portillo, obtained judgments for unpaid wages. They were all represented by the same attorney who advised the trustee by letter dated May 24, 2005, that Lopez and Hernan Aguirre had been paid in full.
The trustee filed a complaint on June 1, 2005, seeking to determine the validity and extent of the six remaining potential liens. Three claims were resolved by consent, one was disallowed, and two remained liens. The first settlement was with John Wagner Assoc. They agreed that the lien did not attach to either property, that John Wagner Assoc., could file a late proof of claim and that the proof of claim would be allowed as a tardily filed proof of claim under Bankruptcy Code §726(a)(2)(C). The effect was that no distribution would be made to the claimant. The settlement was approved by the court without objection. John Wagner Assoc., filed its proof of claim on August 18, 2005.
The second settlement was with the United States. It was on...
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