In re Paolella
| Citation | 85 BR 974 |
| Decision Date | 18 May 1988 |
| Docket Number | 87-00125F.,Bankruptcy No. 87-00124F |
| Parties | In re Lawrence PAOLELLA, Jr., Linda M. Paolella, Debtors. In re Michael PAOLELLA and Georgette M. Paolella, Debtors. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
Jack K. Miller, Mitchell W. Miller, Miller and Miller, Philadelphia, Pa., for the debtors, Lawrence Paolella, Jr., et ux. and Michael Paolello, et ux.
Kevin Walsh, Adelman Lavine Gold & Levin, Philadelphia, Pa., for Larry Waslow, objector.
Paul A. Patterson, White and Williams, Philadelphia, Pa., for Maryland Nat. Indus. Finance Corp., now known as MNC Commercial Corp.
Joseph Finlay, Pincus, Verlin, Hahn & Reich, Philadelphia, Pa., trustee/objector.
This dispute involves the debtors' requests for orders pursuant to 11 U.S.C. § 554 requiring the trustee to abandon the properties which serve as their residences.1 The debtors claim that their respective estates have no equity in the properties, so that continued administration will be "burdensome to the estate" or "of inconsequential value and benefit to the estate". The trustee and a creditor have responded claiming that postpetition equity was created which, upon liquidation, will benefit the estate.
I have previously considered the issues involved here in a memorandum opinion reported at In re Paolella, 79 B.R. 607 (Bankr.E.D.Pa.1987). In that memorandum opinion, I concluded that the debtors' evidence that the face value of a judgment lien exceeds the value of the properties makes out a prima facie case for abandonment, because absent equity, it is unlikely that property can have value or benefit to an estate being liquidated in Chapter 7. However, based on the longstanding policy by which trustees must be accorded an adequate opportunity to investigate potential assets of the estate, I scheduled a supplemental hearing to allow the trustee in these cases to discover and present evidence to rebut the debtors' prima facie case.
In presenting his evidence, the trustee has raised issues which go to the foundation of the system which Congress has established for the administration of an estate in bankruptcy. I am asked to determine inter alia whether potential equity in property created postpetition, but before the property is liquidated or abandoned, constitutes property of the estate.
Based on the evidence presented at the two hearings in this matter, I make the following findings of fact and conclusions of law.
1. The Chapter 7 bankruptcy of Lawrence and Linda Paolella ("L & L Paolella") was filed on January 8, 1987. At the time of filing, L & L Paolella owned a residence, valued at $110,000 subject to a judgment lien of R.J. Reynolds Tabacco Company, Inc. ("R.J. Reynolds") in the amount of $851,946.38. See Paolella, 79 B.R. at 608.
2. The Chapter 7 bankruptcy of Michael and Georgette Paolella ("M & G Paolella") was also filed on January 8, 1987. At the time of filing, M & G Paolella owned a residence, valued at $225,000 subject to the same R.J. Reynolds' lien. Id.
3. Joseph Finlay, Esquire, was appointed interim trustee on January 8, 1987 in each case and accepted his appointment on January 20, 1987. Mr. Finlay has continued as trustee since the conclusion of the meeting of creditors on April 16, 1987.
4. MNC Commercial Corp. ("MNC") filed a proof of claim in each bankruptcy on April 24, 1987 in the unsecured amount of $4,755,442.50.2
5. At the time of filing, the debtors had no equity in their respective residences.
6. Prior to filing bankruptcy, the debtors had received an offer from R.J. Reynolds by which R.J. Reynolds would agree to satisfy its judgment in return for payment of $100,000. At the time of filing, this offer remained open. The offer was not disclosed by the debtors in their bankruptcy petition or schedules, but was admitted by the debtors at the January 27, 1988 supplemental hearing on this motion. (See Debtors' Proposed Findings of Fact, Conclusions of Law at Finding Paragraph 4.) However the trustee has been aware of the debtors' negotiations with R.J. Reynolds at least since the June 4, 1987 hearing.
7. By letter from debtors' counsel to R.J. Reynolds, postpetition, the debtors accepted Reynolds' offer and agreed to pay Reynolds the sum of $100,000.
8. The debtors were unable to raise the $100,000 payment and consequently failed to perform under the agreement with Reynolds.
9. Subsequently, the debtors continued to negotiate with R.J. Reynolds. Upon learning of R.J. Reynolds' continued willingness to sell the judgment for $125,000, they contacted various friends and relatives to ask that they purchase the judgment.
10. In early May 1987, the following entities (collectively "the purchasers") pooled $125,000:
Vincent Carocella $50,000
Robert Cato & Associates $25,000
Lucette Spor $20,000
Joseph Melvin $15,000
Earnest Spor $10,000
Anthony Rescigno $ 5,000
11. Vincent Carocella is a personal friend and current employer of Michael Paolella. (N.T. 1/27/88 at pp. 22, 29).
12. Robert Cato is a personal friend of Lawrence Paolella. (N.T. 1/27/88 at pp. 46-47).
13. Lucette Spor is Georgette Paolella's sister. (N.T. 1/27/88 p. 22).
14. Joseph Melvin is a personal friend and former employee of Michael and Lawrence Paolella. (N.T. 1/27/88 pp. 22, 27-28, 47).
15. Earnest Spor is Georgette Paolella's father. (N.T. 1/27/88 p. 22).
16. Anthony Rescigno is a friend and former employee of Michael and Lawrence Paolella. (N.T. 1/27/88 pp. 22, 28, 47).
17. The six entities placed the $125,000 in escrow with John Curtin, Esquire, attorney for Mr. Cato.
18. On or about May 2, 1987, Mr. Curtin used the $125,000 to purchase the judgment from R.J. Reynolds. (exhibit T-1). On or about May 18, 1987, R.J. Reynolds executed an irrevocable assignment of the judgment to Philips, Curtin & DiGiacomo as escrow agent. Id. By agreement, Mr. Curtin is currently holding the judgment in escrow for the six purchasers. Id.
19. Both Michael and Lawrence Paolella testified that they have no present agreement to buy the judgment from the purchasers either by paying them the full amount of the judgment or by repaying the $125,000 used to purchase it. (N.T. 1/27/88 pp. 30-32, 49-50). They further testified that they have no arrangement which would preclude the purchasers from executing upon the judgment lien. Id.
20. Both Michael and Lawrence testified that their expectation is that the purchasers will accept repayment of the $125,000 with attorneys' fees and interest in full satisfaction of the judgment. Id. They base this expectation on the fact that the purchasers are friends and relatives. Id.
21. Of the group of purchasers, only Lucette Spor testified. She testified that she expected only return of her $20,000 plus an indeterminate amount of interest. (N.T. 1/27/88 p. 61).
22. On or about January 21, 1988, the trustee, Mr. Finlay, filed complaints in both Paolella bankruptcy cases objecting to the secured claim of Philips, Curtin & DiGiacomo as escrow agent and seeking to equitably limit the secured claim of the purchasers to the sum of $125,000. (exhibit T-2).
1. Postpetition appreciation in the value of property, except to the extent of the debtor's potential exemption rights pursuant to 11 U.S.C. § 522, accrues for the benefit of the trustee until the property is liquidated or abandoned. 11 U.S.C. § 541(a)(6).
2. Here, a postpetition transaction may have created non-exempt equity in one or both Paolella properties if the trustee succeeds in his actions to limit the secured claim of the purchasers to the value which they paid for the judgment (i.e. $125,000).
3. By evidence that the debtors and at least one purchaser of the judgment expect that the judgment lien can be satisfied by repayment of $125,000 with interest, the trustee has demonstrated that there is a reasonable probability he will prevail on the merits of his actions to limit the secured claim of Philips, Curtin & DiGiacomo as escrow agent to $125,000.
4. The trustee has carried his burden in defense to a motion to abandon by demonstrating sufficient likelihood that he will succeed on the merits of an action objecting to the secured claim of a creditor which forecloses his equity.
5. Because there is a reasonable probability of success concerning the trustee's objections to claims, abandonment is not appropriate at this time. The debtors' motion will be denied without prejudice in order to allow refiling by the debtors if the proofs of claim are ultimately upheld.
The parties differ first on the question of whether the R.J. Reynolds' judgment still constitutes a lien on the debtors' respective properties and, if so, in what amount. The debtors argue that the secured claim retained by the escrow agent remains in excess of $850,000. The respondents contend based on Matter of Gladstone Glen, 739 F.2d 1233 (7th Cir.1984) that the secured claim may be equitably limited to $125,000. The trustee has instituted an adversary proceeding against the escrow agent for that purpose.
Also significantly, the parties disagree on the general question of whether the postpetition creation of equity in property prior to abandonment accrues to the benefit of the estate. I turn my attention to this issue first, because if postpetition appreciation belongs to the debtors, the trustee cannot prevail even if he establishes that equity was, in fact, created.
There is no question that upon the debtors' bankruptcy filing an estate was created which included "all legal or equitable interests of the debtor in property as of the commencement of the case". 11 U.S.C. § 541(a)(1). The estate thus includes the debtors' residences until such time as they are liquidated or abandoned pursuant to 11 U.S.C. § 554. Under section 554, property may be abandoned before the case is closed at...
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