In re Reasonover
| Decision Date | 03 June 1999 |
| Docket Number | Bankruptcy No. 97-14401-SSM. Adversary No. 98-1288. |
| Citation | 236 BR 219 |
| Parties | In re Robert P. REASONOVER, Wei Tu Reasonover, a/k/a Wei Tu Grandon, Debtors. Robert G. Mayer, Trustee, Plaintiff, v. United States of America, et al., Defendants. |
| Court | U.S. District Court — Virgin Islands, Bankruptcy Division |
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Robert G. Mayer, Robert G. Mayer, P.C., Fairfax, VA, Chapter 7 Trustee.
Robert K. Coulter, Assistant United States Attorney, Alexandria, VA, for the United States of America.
John T. Donelan, Alexandria, VA, for Countrywide Home Loan, Inc.
John Foster, Buonassissi Henning Campbell & Moffet, PC, Fairfax, VA, for Harbor Financial Mortgage Corp. and New American Financial Corp.
This matter is before the court on cross-motions for summary judgment. The question to be resolved is whether the trustee's "strong-arm" powers as a hypothetical bonafide purchaser of real property trump (a) a foreclosing mortgage company's equitable claims to the property; and (b) a lien claimed by the United States of America as the holder of a criminal restitution judgment. A hearing was held on February 23, 1999, at which the chapter 7 trustee, the United States, the mortgage company,1 and two beneficiaries of the restitution order2 presented argument. Having reviewed the authorities cited by the parties, the court concludes that the trustee prevails over both the mortgage company and the United States except with respect to one deed of trust that had not been released of record on the date the debtor filed her petition.
The facts are undisputed. Wei Tu Reasonover, formerly known as Wei Tu Grandon ("the debtor"), filed a joint voluntary petition under chapter 7 of the Bankruptcy Code with her husband, Robert P. Reasonover, in this court on June 12, 1997. Unknown to her, she was still the record owner of a parcel of real estate that she thought she had conveyed some 6 months earlier. Whether a deed was prepared or signed is uncertain, but in any event no deed was ever recorded. Her intended grantee—a corporation in which she held a 50% interest—then sold the property, with the purchase being financed by a mortgage company whose title search failed to pick up the break in the chain of title. Later, the purchaser defaulted, and a successor holder of the mortgage foreclosed. The debtor, herself a mortgage broker, was prosecuted in Federal court for wire fraud involving unrelated transactions. Prior to the filing of her bankruptcy petition, she pleaded guilty in Federal court and was sentenced. Part of the sentence was an order to pay restitution to the Government for the benefit of four defrauded lenders (none of them connected with the property in question). The restitution judgment, however, was not docketed in the land records until after the debtor filed her bankruptcy petition.
In broad terms, those are the facts. A number of additional details, however, are important to an understanding of the issues presented. At the time of the events in question, the debtor, then known by her former married name of Wei Tu Grandon, was a 50% shareholder in Business Depot, Inc.3 That company had been formed in 1995 to buy rundown properties, fix them up, and sell them at a profit. The settlements on those transactions were generally conducted by Rex Title Corporation, whose principal, Susan Chang, often assisted in locating investors willing to make short term loans to Business Depot.
On May 30, 1996, Business Depot purchased a house located in Fairfax County, Virginia at 11114 Saffold Way, Reston,4 from Charles T. and Dierdre Englehart for $105,000. At the last minute, the anticipated investor funding did not materialize, and the debtor arranged for Business Depot to deed the property to her so that she could obtain financing in her own name. This financing took the form of a $73,500 first trust loan from Express Funding, Inc. and a $31,500 second trust loan from Paul Hshieh. After the property was fixed up, the debtor found a buyer for the property, Luis F. Delgadillo. The sales price was $151,000. The debtor instructed William Davidson, a settlement officer at Rex Title, to prepare a deed transferring the property back to Business Depot prior to the settlement so that she would not have to recognize all of the tax liability personally. For whatever reasons, a deed was either not prepared, or, if prepared, was not recorded. Instead, the only deed that was recorded (on December 31, 1996) was from Business Depot to Mr. Delgadillo. His purchase of the property was financed by a first trust loan from First Equitable Mortgage Corporation ("First Equitable") in the amount of $146,450.5 The proceeds of the loan were used to pay off the Express Funding and Hshieh loans that the debtor had placed on the property. The First Equitable note and deed of trust were subsequently assigned to Countrywide Home Funding, Inc. ("Countrywide").
Four months later (April 11, 1997) a certificate of satisfaction was recorded in the land records releasing the Express Funding deed of trust. On May 9, 1997, a sentencing order was entered in the United States District Court for the Eastern District of Virginia, at Alexandria, after the debtor pleaded guilty to one count of wire fraud arising out of an unrelated transaction. As part of the sentence, the debtor was ordered to pay restitution in the amount of $249,000 (jointly and severally with co-defendant Thomas C. Hebert) in monthly installments of $150 for the benefit of four named mortgage companies: Harbor Financial Mortgage Corporation ("Harbor Financial"), New American Financial Corporation ("New American"), Homeside Lending Corporation ("Homeside"), and Mortgage Edge Corporation ("Mortgage Edge").
On June 12, 1997, as noted above, the debtor and her husband filed a joint chapter 7 petition in this court. She did not list an interest in the Saffold Way property on her schedules because she was unaware that she had such an interest and assumed the property had been conveyed back to Business Depot at the time it was sold to Mr. Delgadillo. On June 25, 1997, approximately two weeks after the bankruptcy filing, the restitution judgment was docketed among the judgment lien records of Fairfax County. Shortly thereafter, Countrywide, unaware either of the bankruptcy or that record title was vested in the debtor, purchased the property at a foreclosure sale held on July 23, 1997. Countrywide assigned its interest to Federal National Mortgage Association ("FNMA"), and on August 12, 1997, a foreclosure deed was recorded conveying the property to FNMA for a stated consideration of $142,000. On February 25, 1998, a certificate of satisfaction was finally recorded with respect to the Hshieh loan. At some point, FNMA became aware of the break in the chain of title, and on May 20, 1998, it filed a quiet title action against the debtor and others in the Circuit Court of Fairfax County. That action was stayed once FNMA learned of the debtor's bankruptcy filing. FNMA has subsequently assigned its interest in the Saffold Way property back to Countrywide.
The present action was commenced by the chapter 7 trustee on July 10, 1998, to avoid the transfers through which Countrywide now claims title to the property, as well as the restitution lien and two unrelated judgment liens in favor of Lee Landing Condominium Unit Owners Association ("Lee Landing") and Robert and Maggie Wang ("the Wangs") docketed after the filing of the bankruptcy petition. Named as defendants are the United States, FNMA, Mr. Delgadillo, Business Depot, Harbor Financial, New American, Homeside, Mortgage Edge, Lee Landing, and the Wangs. Answers have been filed by the United States, Countrywide (as successor in interest to FNMA), Harbor Financial, New American, and Homeside. Countrywide and the trustee thereafter filed cross-motions for summary judgment. The United States, while not formally moving for summary judgment in its favor, has filed an extensive opposition to both Countryside's and the trustee's motions asserting that the lien of its restitution judgment is superior to the interest both of the trustee and of Countryside.
This court has subject matter jurisdiction under 28 U.S.C. §§ 1334 and 157(a) and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. Under 28 U.S.C. § 157(b)(2)(K), this is a core proceeding in which final orders or judgments may be entered by a bankruptcy judge. Venue is proper in this district under 28 U.S.C. § 1409(a).
Under Fed.R.Civ.P. 56(c), made applicable by Fed.R.Bankr.P. 7056, summary judgment is appropriate where the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. In the present case, there are no material facts in dispute, and the contested issues are solely matters of law. Since Countrywide and the United States occupy very different positions and rely on very different statutes, their arguments will be separately addressed.
Countrywide's primary argument, reduced to its core, is that it has an equitable claim to the property—arising under a theory of constructive trust, equitable subrogation or reformation—that is superior to the interest of the trustee. It also argues, as a subsidiary position, that the statute relied on by the trustee only permits him to set aside a transfer by the debtor, and that as a technical matter no such transfer occurred.
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