In re Morrison
| Decision Date | 29 January 1987 |
| Docket Number | Bankruptcy No. 84-01900K. |
| Citation | 69 BR 586 |
| Parties | In re Thomas J. MORRISON and Elaine H. Morrison, Individually, Jointly, and as Tenants by the Entireties, Debtors. |
| Court | U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Mark C. CLemm, Norristown, Pa., for W. Boulton Alexander.
Harris Goldich, King of Prussia, Pa., for Estate of Marjorie K. Hoffman.
Lawrence J. Tabas, Philadelphia, Pa., for trustee.
Steven D. Usdin, Philadelphia, Pa., for debtors.
The rather simple facts of this case bring before us, first, a difficult procedural issue relating to the standing of a general unsecured creditor to object to the secured status of a secured creditor; and, assuming that we reach it, a difficult substantive issue regarding the validity of a portion of a mortgage which, while failing to disclose the potential of same on its face, was later extended to secure future advances given by the mortgagee to the Debtor-mortgagors. Our result is derived from our conclusion that the substantive claim of the objecting party has no merit as to the validity of the mortgage as a whole and doubtful merit as to the invalidity of any part of the mortgage. We conclude that the objecting creditor has the requisite standing to at least raise the issue of whether the Trustee abused his discretion in not pursuing the claims in issue. However, since we conclude that the Trustee's exercise of discretion to refuse to pursue the objection in issue was reasonable, we hold that the Objection must be dismissed and the matter put to rest.
The Debtors, husband and wife, filed this Chapter 7 bankruptcy proceeding on June 11, 1984. The factual record on which the instant Motion is considered consists of a one-page Stipulation of Facts between Counsel for W. Boulton Alexander (hereinafter "Alexander")1 and the Estate of the late Marjorie Hoffman (hereinafter "Hoffman"),2 which included Alexander's Objection to Hoffman's claim, the matter before us, and Hoffman's Answer thereto; the respective Proofs of Claim and supporting documents filed by both Alexander and Hoffman; and the County records of the title and liens upon the Debtors' premises.3
These documents establish that, on October 8, 1982, the Debtors executed a Mortgage and Security Agreement in the amount of $100,000.00 on their residence in favor of Hoffman, at an interest rate stated therein to be disclosed in a Note of same date. The Note "acknowledges" a pledge of stock valued at $80,000.00 and a $20,000.00 balance of a previous loan from Hoffman to the Debtors, with interest payable at six and one half (6½%) percent per annum.
Neither the mortgage nor the Note makes any reference to the possibility that the mortgage may secure any future advances. However, on May 16, 1983; December 13, 1983; and April 12, 1984, the Debtors "acknowledged" further advances of $44,000.00; $2,400.00; and $14,000.00, respectively, to them from Hoffman, and each Note states that the mortgage of October 8, 1982, is security therefor. The mortgage of October 8, 1982, was, moreover, not recorded until February 21, 1984.
Meanwhile, on May 19, 1981, the Debtor executed two (2) Notes in favor of Alexander in the amount of $50,000.00 and $10,000.00, respectively. On March 15, 1984, Alexander entered confessed judgments in a total amount of $75,500.00 against the Debtors on these notes in state court.
On June 19, 1984, shortly after the filing, James P. Wade accepted an appointment as the interim Trustee in the bankruptcy case. The Trustee, by his counsel, proceeded to file, on September 12, 1984, a Motion to avoid Alexander's judicial lien on the Debtors' residential realty and a Complaint to avoid a preferential transfer of the Debtors to Alexander, at Adversarial Case No. 84-1204. Alexander filed a Motion for relief from the Automatic Stay on July 11, 1984, and, on June 19, 1985, filed, in addition, the instant Objection to Hoffman's claim, which seeks to have the claim disallowed in its entirety. Hoffman, by her counsel, responded with defenses which include a contention that Alexander lacked standing to raise this Objection.
On September 3, 1986, all four (4) of these outstanding matters came before the Court. Alexander, in his Brief, attributes the delay between the filing date and this listing to the Trustee's lengthy process of investigation of the Hoffman claim.4 After negotiation among themselves outside the courtroom on that date, counsel representing Hoffman, Alexander, the Trustee, and the Debtors announced to the court that all of the matters had been resolved by agreement except the instant Objection. This agreement embraced the withdrawal of both Alexander's request for relief from the automatic stay and the Trustee's adversarial Complaint against Alexander, and the acquiescence of Alexander in the avoidance of his judicial lien.5 In an Order of September 18, 1986, upon receipt of the brief Stipulation of Facts referenced supra, we directed that Briefs of the parties be submitted by Alexander and Hoffman, respectively, on or before October 17, 1986, and November 14, 1986.
Upon reviewing the pertinent law upon receipt of the Briefs, we observed that a substantial issue as to whether Alexander had standing to assert the Objection in issue existed. We thereupon issued an Order of November 17, 1986, citing the parties to Fred Reuping Leather Co. v. Fort Greene Nat'l Bank, 102 F.2d 372 (3d Cir. 1939); In re Ludwig Honold Mfg. Co., 30 B.R. 790 (Bankr.E.D.Pa.1983) (per KING, J.); and 3 COLLIER ON BANKRUPTCY, ¶ 502.01, at 502-13 to 502-14 (15th ed. 1986), all of which suggested that Alexander may lack the requisite standing to pursue his claim, and we requested all of the interested parties to brief the standing issue by November 26, 1986. Ultimately, Alexander requested an extension until December 8, 1986, to file his supplemental Brief on this issue, and we accorded same with the proviso that any of the other parties could have until December 12, 1986, to reply.
Alexander, in his supplemental Brief, cites no authorities in support of his claim that he in fact has standing,6 contends that the Trustee "has defaulted in his duty to press" the Objections set forth by Alexander; and asserts that "judicial economy and efficient and cost effective administration" would be furthered by allowing Alexander to assert his Objection instead of "requiring a technical, procedural process" whereby Alexander would be forced to compel the Trustee to act.
The Debtors, in a letter-brief, accuse Alexander's counsel of attempting "to usurp the power and authority of the Trustee throughout the course of this bankruptcy case." The Trustee, in his Brief, indicates that, after investigating the Hoffman claim, he decided not to object to same, pointing out that he has sought to avoid a repayment made by the Debtors to Hoffman as a preferential transfer, as well as pursuing other preference-avoidance litigation,7 but further stating that he has "no objection to Alexander's petitioning the court for leave to proceed."
Despite the considerable apparently contrary authority, we are unwilling to deny Alexander's Objection on the basis of lack of standing to question the Trustee's decision not to pursue the Objection in issue. Unless the Code is clear in stating otherwise, we believe it just to accord any party expending the time and financial resources to raise a claim the opportunity for a disposition on a less technical basis. Very significant to our reasoning process in this regard is the recent decision of the Third Circuit Court of Appeals in In re McKeesport Steel Castings Co., 799 F.2d 91 (3d Cir.1986), which, while not cited by Alexander, convinces us that interested creditors can act "in lieu of the trustee" when the trustee refuses to act or has no reason to act. See id. at 94, 93. Consistent with the McKeesport result, we are very reluctant to allow standing to become a means to avoid deciding difficult substantive issues put before us.
We do acknowledge the principle enunciated by the Court of Appeals in Fred Reuping, 102 F.2d at 372-73, that "a general creditor of a bankrupt has no right to contest another creditor's claim . . . unless upon application the trustee has refused to do so and that . . . court has authorized the creditor to proceed in the trustee's name." We also acknowledge that this holding has been uniformly adopted in all Code cases of which we are aware, including In re Savidge, 57 B.R. 389, 392 (D.Del.1986); In re Werth, 54 B.R. 619, 622 (D.Colo.1985); In re Parker Montana Co., 47 B.R. 419, 421 (D.Mont.1985); and Ludwig Honold, supra, 30 B.R. at 791-02. Cf. In re Meade Land and Development Co., Inc., 1 B.R. 279, 282 (Bankr.E.D.Pa.1979) (per KING, J.) (Act case).8 Although, as we indicate below, the teaching of these cases causes us to require that the objecting creditor establish that the Trustee has abused his discretion before permitting the creditor to proceed, the McKeesport decision appears to us to establish that we cannot justify basing our decision on the principle of standing.9
We must note, however, that Alexander is doing more than merely objecting to the claim of another creditor, which is a difficult enough proposition for an unsecured creditor to sustain in itself. Rather, he is, in effect, seeking to exercise the Trustee's "strong arm" avoidance power, per 11 U.S.C. § 544, as to Hoffman's Claim.
By reason of the avoidance of its judicial liens, Alexander is no more than a general, unsecured creditor of the Debtors. There is considerable question, given Fred Reuping and the other cases cited at page 588 supra, whether, despite the wording of 11 U.S.C. § 502(a), which appeare to give any "party in interest" a right to proceed to object to a claim, it could proceed here. However, although phrasing his Objection in terms of a request to disallow Hoffman's claim, what Alexander is attempting to accomplish is, in substance, an...
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