In re Loy, Case No. 07-51040-SCS (Bankr. E.D.Va. 4/3/2008)

Decision Date03 April 2008
Docket NumberCase No. 07-51040-SCS.
CourtU.S. Bankruptcy Court — Eastern District of Virginia
PartiesIn re: JONATHAN A. LOY, Chapter 15, Debtor in a Foreign Proceeding.
MEMORANDUM OPINION

STEPHEN ST. JOHN, Bankruptcy Judge.

This matter came before the Court upon the Motion to Sell Real Property Free and Clear of All Liens, Claims, and Encumbrances filed by Jeremiah Anthony O'Sullivan (the "Trustee"), the official receiver and trustee of the property of Jonathan A. Loy (the "Debtor") in an English Insolvency Proceeding. The Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 157(b) and 1334(b). Venue is proper pursuant to 28 U.S.C. § 1410. Upon consideration of the pleadings and arguments of the parties, the Court makes the following finding of facts and conclusions of law.

I. Background and Factual Findings

This case was commenced upon the filing by the Trustee on October 28, 2007, of a Petition for Recognition of Foreign Main Proceeding (the "Petition") under Chapter 15 of the Bankruptcy Code and a Memorandum of Law in Support of the Petition. The Petition sought recognition of an insolvency proceeding in England based upon a Bankruptcy Order on Creditor's Petition from the Exeter County Court, Devon, England, United Kingdom (the "English Order"), which adjudicated Loy as a bankrupt, as a Foreign Main Proceeding under 11 U.S.C. § 1517(a)(1). See Jonathan A. Loy, Case No. 07-51040-SCS, Docket Entry No. 3, Motion to Approve Petition for Recognition of Foreign Main Proceeding, filed October 28, 2007, at ¶¶ 11-12 [hereinafter "Motion to Approve"]. The Trustee attached to his Petition exhibits which provided proof of the entry of the English Order commencing a bankruptcy against Loy and of the appointment of Jeremiah Anthony O'Sullivan as Trustee in that proceeding.

This Court recognized the Foreign Main Proceeding. See In re Loy, 380 B.R. 154, 163 (Bankr. E.D. Va. 2007). Pursuant to the final order entered by this Court on December 18, 2007 (the "Recognition Order"), the Trustee is currently serving as a Foreign Representative as defined in 11 U.S.C. § 101(24) in a recognized Foreign Main Proceeding under 11 U.S.C. § 1517(a)(1).

On January 11, 2008, the Trustee filed a Motion to Sell Real Property Free and Clear of All Liens, Claims, and Encumbrances ("Motion to Sell"). The Motion to Sell seeks entry of an order authorizing the sale of certain real property of the Debtor located in Hampton, Virginia (the "Real Property") pursuant to 11 U.S.C.§§ 1521(a)(2) and 363(b) and (f). Among the allegations in the Motion to Sell, the Trustee alleges he recorded a Memorandum of Lis Pendens against the Real Property (the "lis pendens") on February 1, 2007. The lis pendens was filed to provide notice to third parties that the Real Property vested in the Trustee and the bankruptcy estate on August 17, 2006 (the date of entry of the English Order). The Trustee also alleges that when the Real Property vested in the Trustee and became property of the estate, it was subject to a purported first deed of trust securing a note (the "Note") currently held by TowneBank (the "TowneBank Deed of Trust"). The balance due on the Note is approximately $150,000.00. The Trustee further alleges that the Debtor recorded a document entitled "Deed of Gift" (the "Deed of Gift") on October 24, 2007. Under the terms of the Deed of Gift, the Debtor transferred the Real Property to himself and his wife, Susan Loy ("Mrs. Loy"), as tenants by the entirety. The Trustee further alleges that the Debtor executed and recorded a Deed of Trust on October 29, 2007, for the benefit of Joseph Pinard (the "Pinard Deed of Trust") with respect to the Real Property.

In the Motion to Sell, the Trustee seeks an order pursuant to 11 U.S.C. §§ 363(b) and (f) authorizing him to sell the Real Property to an unidentified buyer free and clear of all liens, claims, and encumbrances, including but not limited to the TowneBank Deed of Trust without further order of the Court, provided, however, that the purchase price is not less than $350,000.00.

The Motion to Sell is opposed by Joseph L. R. Pinard. Pinard alleges he possesses a lien on the Real Property by reason of the Pinard Deed of Trust and objects to the Motion to Sell "since it seeks to invalidate [his] lien on the property." TowneBank also objects to the Motion to Sell, alleging that "all necessary parties are not before this court and, at this juncture, the court is without jurisdiction to adjudicate the remedy sought by the Trustee" and further that the trustees designated under the TowneBank Deed of Trust are not named as parties to this proceeding. TowneBank also alleges that the legal description of the Real Property in the TowneBank Deed of Trust contains a "scrivener error in that the attachment to the trust wherein the legal description of the property is contained is erroneous" and that at such time as all necessary parties are before this Court, and before the Real Property is sold, TowneBank will seek an appropriate order to correct this error.

The Debtor and Mrs. Loy also object to the Motion to Sell on a number of bases. Principal among these objections is their contention that the Trustee unlawfully filed the lis pendens against the Real Property, contending that the Motion to Sell seeks a determination that the lis pendens filed by the Trustee against the Real Property prior to this bankruptcy proceeding was properly filed.1 The Loys also defend the Motion to Sell by contending that the Debtor is not the sole owner of the Real Property, and in fact it is the marital property of the Debtor and Mrs. Loy, having been purchased with marital funds which flowed directly from the sale of their former marital residence in England. The Loys also contend that the Motion to Sell should be denied under the doctrines of laches and unclean hands. Finally, the Loys assert that the Trustee acted in bad faith by reason of his delay in seeking recognition by this Court.

The Trustee's Motion to Sell asserts that the Deed of Gift and the Pinard Deed of Trust are void and that in the context of the Motion to Sell, this Court may enter an order selling the Real Property free and clear of the interests of Pinard and the Loys:

Subsequent to the date upon which the [Real] Property vested in the Trustee and became property of the estate, and after the recording of the Lis Pendens, the Debtor recorded a document entitled "Deed of Gift" on October 24, 2007, and a "Deed of Trust" on October 29, 2007, with respect to the [Real] Property. The Deed of Gift and Deed of Trust are void ab initio because the Debtor did not have authority from the Trustee to record either of these documents on behalf of the estate.

Motion to Sell, ¶ 9.

The Trustee also asserts that he is not aware of any other recorded liens, claims, or encumbrances with respect to the Real Property as of August 17, 2006, and that no valid liens, claims, or encumbrances exist after August 17, 2006, arguably the date when the Real Property vested in the Trustee and became property of the estate. The Trustee further submits that any valid liens, claims, or encumbrances on the Real Property that existed prior to August 17, 2006, should be transferred to the proceeds of sale, and that any distribution of the proceeds of sale with respect to such liens, claims, or encumbrances should be subject to the further order of this Court. This requested distinction in treatment would result in only the lien, if any, of the TowneBank Deed of Trust attaching to the proceeds of sale and the claims of Pinard and Mrs. Loy to the Real Property in effect being eliminated as a result of the entry of the proposed sale order advocated by the Trustee. This negation is based upon the assertion of the Trustee that these property interests are void ab initio because these interests were transferred subsequent to the appointment of the Trustee pursuant to the English Order.2

At the hearing on the Motion to Sell conducted by this Court on February 11, 2008, the Court explored the merits of the Motion to Sell. In addition, the Court raised concerns as to whether the Trustee could be awarded the relief he seeks, including a declaration that the interests of Pinard and Mrs. Loy were void ab initio.

Section 1521 of the Bankruptcy Code provides for additional relief that may be granted to a recognized foreign representative under Chapter 15 and provides, in pertinent part:

(a) Upon recognition of a foreign proceeding, whether main or nonmain, where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including—

....

(7) granting any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).

11 U.S.C. § 1521(a)(7) (2008).

The Trustee seeks authorization to sell the Real Property pursuant to §§ 363(6) and (f) of the Bankruptcy Code, which provide, in pertinent part:

(b) (1) The trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate...

....

(f) The trustee may sell property under subsection (b) or (c) of this section free and clear of any interest in such property of an entity other than the estate, only if—

(1) applicable nonbankruptcy law permits sale of such property free and clear of such interest;

(2) such entity consents;

(3) such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property;

(4) such interest is in bona fide dispute; or

(5) such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.

Id. §§ 363(b)(1), (f).

However, the right of a trustee to sell pursuant to § 363 where there is...

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