In re Mullen

• Decision Date: 31 December 2008
• Docket Number: Bankruptcy No. 06-40509-JDP.,Adversary No. 08-8017.
• Parties: In Re Leonard H. MULLEN and April D. Mullen, Debtors. Gary L. Rainsdon, Trustee, Plaintiff, v. Leonard H. Mullen and Edyth V. Mullen, husband and wife, Defendants.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho

Page 353

402 B.R. 353

In Re Leonard H. MULLEN and April D. Mullen, Debtors Gary L. Rainsdon, Trustee, Plaintiff, v. Leonard H. Mullen and Edyth V. Mullen, husband and wife, Defendants.

Bankruptcy No. 06-40509-JDP.

Adversary No. 08-8017.

United States Bankruptcy Court, D. Idaho.

December 31, 2008.

William R. Hollifield, Jeffrey J. Hepworth & Associates, Twin Falls, ID, for Plaintiff.

Kent D. Jensen, Burley, Idaho, Attorney for Defendants.

MEMORANDUM OF DECISION

JIM D. PAPPAS, United States Bankruptcy Judge.

Introduction

Debtors Leonard H. Mullen and April D. Mullen sought relief under chapter 7¹ of the Bankruptcy Code by filing a voluntary petition on September 29, 2006. Thereafter, Plaintiff Gary L. Rainsdon, the chapter 7 trustee in Debtors' bankruptcy case, commenced this adversary proceeding against Debtors' parents, Defendants Leonard H. Mullen Sr.² and Edyth V. Mullen, seeking to avoid the lien Defendants held on Debtors' house and real property. Defendants filed a Motion for Summary Judgment, Docket No. 17; Plaintiff responded with a Cross Motion for Summary Judgment, Docket No. 20. After conducting a hearing concerning the motions on October 20, 2008, and careful consideration of the record, the briefs of the parties, and the applicable law, this Memorandum disposes of the issues raised by the motions.³

Facts⁴

On May 24, 1984 Debtors purchased a home in Cassia County from Defendants, in which Debtors have resided. As part of the purchase price, Debtors gave Defendants a promissory note in the amount of $5,500. The final payment under the note was due on July 1, 1993. The note was secured by a deed of trust of the real property which was promptly and properly recorded.

Despite the note's requirement that Debtors pay monthly installments to Defendants, no payments were made until after the note's maturity date in 1993. However, Defendants took no action to collect the note or foreclose on the deed of trust. On September 28, 2001, Debtors made a $2,000 payment to Defendants on the note.

Debtors filed their bankruptcy petition on September 29, 2006. In the schedules filed with their petition, Debtors disclosed the real estate and listed "Virginia Mullen" as a secured creditor holding a lien on the real property for a debt of $3,500. Virginia Mullen is the same person as Defendant Edyth V. Mullen.

On February 20, 2008 Debtors paid Defendant Edyth V. Mullen $4,000.⁵ Later that day, the trustee under the deed of trust executed a deed of reconveyance concerning the deed of trust, which was recorded and delivered to Debtors.

Plaintiff initiated this adversary proceeding to avoid and preserve Defendants' lien a few days later, on February 26, 2008.

Discussion

I.

Summary judgment may be granted if, when the evidence is viewed in a light most favorable to the non-moving party, there are no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e), incorporated by Fed. R. Bankr.P. 7056; Leimbach v. Lane (In re Lane), 302 B.R. 75, 81 (Bankr.D.Idaho 2003) (citing Far Out Prods., Inc. v. Oskar, 247 F.3d 986, 992 (9th Cir.2001)).

The Court does not weigh evidence in resolving such motions but, rather, determines only whether a material factual dispute remains for trial. In re Lane, 302 B.R. at 81 (citing Covey v. Hollydale Mobilehome Estates, 116 F.3d 830, 834 (9th Cir.1997)). A dispute is genuine if there is sufficient evidence for a reasonable trier of fact to hold in favor of the non-moving party. A fact is "material" if it might affect the outcome of the case. Id. (citing Far Out Prods., 247 F.3d at 992).

The initial burden of showing there is no genuine issue of material fact rests on the moving party. Esposito v. Noyes (In re Lake Country Invs.), 255 B.R. 588, 597 (Bankr.D.Idaho 2000) (citing Margolis v. Ryan, 140 F.3d 850, 852 (9th Cir.1998)). If the non-moving party bears the ultimate burden of proof on an element at trial, that party must make a showing sufficient to establish the existence of that element in order to survive a motion for summary judgment. Id. (citing Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)).

"It is well-settled in this circuit and others that the filing of crossmotions for summary judgment, both parties asserting that there are no uncontested issues of material fact, does not vitiate the court's responsibility to determine whether disputed issues of material fact are present." "Fair Housing Council of Riverside County, Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir.2001)." "[C]ross-motions for summary judgment must be considered separately and do not relieve the court of its responsibility to determine the appropriateness of a summary disposition." Schaefer v. Deppe (In re Deppe), 217 B.R. 253, 259 (Bankr D.Minn.1998); ACLU of Nevada v. City of Las Vegas, 333 F.3d 1092, 1097 (9th Cir. 2003) ("we evaluate each motion separately, giving the nonmoving party in each instance the benefit of all reasonable inferences.").

II.

The Bankruptcy Code cloaks bankruptcy trustees with broad powers to assist them in recovering and administering assets to generate distributions for the unsecured creditors in bankruptcy cases. Among these powers are those designed to allow the trustee to recover, or "avoid" transfers made by a debtor prior to filing for bankruptcy. One of the trustee's avoiding powers are the so-called "strong-arm powers" found in § 544(a).⁶ In this action, Plaintiff contends his strong-arm powers enable him to avoid Defendants' deed of trust on Debtors' real property pursuant to either § 544(a)(3) or (a)(1). Once avoided, Plaintiff alleges the deed of trust lien is automatically preserved for the benefit of the estate under § 551, which provides that "[a]ny transfer avoided [by a trustee] under section . . . 544 . . . is preserved for the benefit of the estate. . . ."⁷

Defendants concede that at the time Debtors filed their petition, the lien created by the deed of trust was unenforceable under Idaho law because the statute of limitations for foreclosure of the deed of trust had lapsed.⁸ Even so, Defendants argue that Plaintiff, in his § 544(a) status as a hypothetical lien-creditor or purchaser, cannot avoid the lien.

A.

Under § 544(a)(3), a trustee may avoid any transfer by a debtor that would be unenforceable as against "a bona fide purchaser of real property . . . from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser at the time of the commencement of the case, whether or not such purchaser exists. . . ." Plaintiff argues that, because Defendants' deed of trust is unenforceable against Debtors' property, he can avoid it under this Code provision.

However, Defendants contend that, under these facts, Plaintiff cannot attain the status of a bona fide purchaser, because the recorded deed of trust would have given him notice of Defendants' rights in Debtors' real property. See Imig v. McDonald, 77 Idaho 314, 291 P.2d 852, 855 (1955) (holding that, in Idaho, a bona fide purchaser is one who acquires title to real property "without notice, actual or constructive, of any outstanding adverse rights of another."). Therefore, Defendants contend, because on bankruptcy day Plaintiff (and the world, for that matter) would have had record notice of Defendants' deed of trust, Plaintiff cannot be a bona fide purchaser as to their interest, and consequently, Plaintiff cannot avoid the deed of trust under § 544(a)(3).

Defendants' argument, though logical, misses the point. As the Ninth Circuit has taught, "state law determines whether the trustee's status as a [bona fide purchaser] will defeat the rights of a person against whom the trustee seeks to assert his powers[,]" but, whether a trustee attains that status is a question of federal law. Michael v. Martinson (In re Michael), 49 F.3d 499, 501 (9th Cir.1995) (quoting Robertson v. Peters (In re Weisman), 5 F.3d 417, 420 (9th Cir.1993)). In other words, the Code, not state law, prescribes any limitations on whether a trustee may assume the status of a bona fide purchaser. Id. (citing 11 U.S.C. § 544(a)(3)).

In In re Michael, the trustee sought to employ the strong-arm powers under § 544(a)(3) to defeat the debtors' late-claimed homestead exemption. However, because the court found that a homestead exemption could never be perfected against a bona fide purchaser, the plain language of § 544(a)(3) prevented trustee from "assuming the status of a bona fide purchaser[.]" Id. at 502.

The facts of this case are different. In other words, nothing in the Code prevents Plaintiff from assuming the status of a bona fide purchaser. But while the Code, as a matter of law, bestows the status of a bona fide purchaser on Plaintiff, the question remains whether the § 544(a)(3) power can be used to defeat Defendants' lien.

B.

As a hypothetical bona fide purchaser of Debtors' real property, Plaintiff argues he may avoid a deed of trust that has become unenforceable by virtue of the expiration of the applicable statute of limitations. In support of his position, Plaintiff cites the decision of a bankruptcy court dealing with similar facts. See Weisbart v. Sanger Bank (In re Tilton), 297 B.R. 478 (Bankr.E.D.Tex.2003).

In In re Tilton, the trustee sought to avoid a bank's deed of trust lien, arguing that the deed of trust was void under Texas law because the bank had failed to foreclose within the applicable limitations period. The bankruptcy court correctly observed that although the Bankruptcy Code bestows the status of a hypothetical bona fide purchaser on the trustee, it is state law that defines the rights attributable to that status. Id. at 484 (citing Realty Portfolio, Inc. v. Hamilton (In re Hamilton), 125 F.3d 292, 298-99 (5th Cir. 1997)). The Tilton court noted that "rely[ing] on the face of the recorded documents and the statutory limitations provided...