Schlarman v. Nageleisen (In re Nageleisen)

• Citation: 527 B.R. 258
• Decision Date: 06 March 2015
• Docket Number: CASE NO. 14–20862,ADVERSARY CASE NO. 15–2002
• Parties: In re: Barbara L. Nageleisen, Debtor Lori A. Schlarman v. Barbara L. Nageleisen, et al., Defendants.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — Eastern District of Kentucky

527 B.R. 258

In re: Barbara L. Nageleisen, DebtorLori A. Schlarman

v.Barbara L. Nageleisen, et al., Defendants.

CASE NO. 14–20862

ADVERSARY CASE NO. 15–2002

United States Bankruptcy Court, E.D. Kentucky, Covington Division.

Signed March 06, 2015

David A. Kruer, David Kruer & Company, LLC, Covington, KY, for Debtor.

Michael B. Baker, Ft. Mitchell, KY, for Plaintiff.

Lori A. Schlarman, Hebron, KY, pro se.

MEMORANDUM OPINION

Tracey N. Wise, Bankruptcy Judge

This adversary proceeding raises a novel question regarding the scope of property of the estate under 11 U.S.C. § 541 : whether the Debtor's right of redemption, arising at a postpetition foreclosure sale of estate property in which the estate has not abandoned its interest, is property of the estate. The Chapter 7 Trustee argues that the right of redemption is property of the estate. ROR Holdings, LLC, a Kentucky limited liability company, to which the Debtor assigned her right of redemption, argues that it is not. Finding that the right of redemption is a proceed of the auctioned estate property within the meaning of § 541(a)(6), the Court holds that Debtor's right of redemption is estate property, and rules for the Trustee.

Facts and Procedural History

The following facts are undisputed.

The Debtor's prior bankruptcy case, under chapter 13, was voluntarily dismissed on January 16, 2014. Several weeks later, a default judgment was entered against the Debtor in the Bank of Kentucky's foreclosure action in Kenton County Circuit Court. The default judgment ordered a master commissioner's sale of several pieces of real estate, including a property located at 3532 Wolf Rd., Taylor Mill, KY (“the Wolf Road property”), which the Debtor owns jointly with her non-filing spouse, Alan Nageleisen.

In June 2014, before a master commissioner's sale could occur, Debtor filed a voluntary petition under chapter 7 listing the Debtor's interest in the Wolf Road property as an asset. The parties agree that the Debtor's interest in that real estate is property of the estate. The automatic stay with respect to the Debtor expired thirty days after the Debtor's filing by operation of law under 11 U.S.C. § 362(c)(3)(A), which this Court confirmed on motion of the Bank of Kentucky. The stay with respect to property of the estate, however, remained in effect.

On a joint motion by the Bank of Kentucky and the Chapter 7 Trustee for stay relief, the Court entered an order granting stay relief “without abandonment” to allow the master commissioner's sale to proceed. [See Doc. 71 in main case.] With respect to the Wolf Road property, the Court ordered the Bank of Kentucky to hold any net sales proceeds from its sale in escrow, so as to preserve the Trustee's interest.

The foreclosure sale was held on November 25, 2014. None of the mortgagees on the Wolf Road property placed bids. As a result, the property sold for only $5,000—a small fraction of its $135,000 appraised value, and thereby lower than the minimum bid necessary to clear the statutory right of redemption. See Ky. Rev. Stat. § 426.530(1) (granting owners in foreclosure a right of redemption in the event foreclosed property is sold for less than two-thirds of its appraised value).

On December 18, 2014, the Debtor's husband, Alan Nageleisen, executed a document “waiv[ing] in favor of the” Debtor any right of redemption he acquired at the foreclosure sale with respect to the Wolf Road property. [Doc. 17–4.] The Debtor, in turn, assigned to ROR Holdings LLC (“ROR”),¹ a Kentucky limited liability company whose members are the Debtor and her son, Karl Nageleisen, any right of redemption in the Wolf Road property she acquired either at the foreclosure sale, or by virtue of her husband's waiver.

Shortly thereafter, the Chapter 7 Trustee filed this adversary proceeding. Count I of the Trustee's complaint seeks a declaratory judgment that the right of redemption in the Wolf Road property is property of the estate. The remaining counts of the complaint seek avoidance of the Debtor's transfer of the right of redemption to ROR, money damages for the transfer, and leave to sell the right of redemption.

On the same date that the Trustee filed this adversary proceeding, she moved for a preliminary injunction barring the Debtor, ROR, and Alan and Karl Nageleisen from transferring or exercising the right of redemption. The Court granted the Trustee's motion for a preliminary injunction, and the parties agreed that Count I could be resolved on summary judgment. Thereafter, the Trustee and ROR filed cross-motions for summary judgment [Docs. 17, 18]. The motions were briefed and argued, and this matter is ripe for decision.

Analysis

A. Jurisdiction and Summary Judgment Standard

The Court has jurisdiction of this matter pursuant to 28 U.S.C. § 1334(b), and this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A). While taking no firm position on the matter in its briefing, ROR suggests that the Court may lack constitutional authority under Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), to decide whether the right of redemption in the Wolf Road property is property of the estate. The Court does not read Stern so broadly. Stern involved a state-law counterclaim brought to augment the estate; this case involves a request under the Bankruptcy Code to define the estate. Since Stern was decided, the Sixth Circuit has continued to treat in rem disputes over the extent of debtors' estates as within bankruptcy courts' authority. See, e.g., Lawrence v. Ky. Transp. Cabinet (In re Shelbyville Road Shoppes, LLC), 775 F.3d 789 (6th Cir.2015) (affirming a bankruptcy court's property-of-the-estate determination in a turnover action); Underhill v. Huntington Nat'l Bank (In re Underhill), 579 Fed.Appx. 480 (6th Cir.2014) (reversing a bankruptcy court's property-of-the-estate determination on the merits). The Court finds it has constitutional authority, as well as statutory authority, to decide Count I of the Trustee's complaint.

Summary judgment is appropriate if “there is no genuine issue as to any material fact” and “the movant is entitled to judgment as a matter of law.” Fed. R. Bankr. P. 7056 (incorporating by reference Fed. R. Civ. P. 56 in adversary proceedings). The movant bears the burden of showing that no genuine issues of material fact are in dispute, and the evidence, together with all inferences that can permissibly be drawn therefrom, must be read in the light most favorable to the party opposing the motion. See Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 585–87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) ; Provenzano v. LCI Holdings, Inc., 663 F.3d 806, 811 (6th Cir.2011).

B. Whether the Right of Redemption is Property of the Estate

The filing of a chapter 7 petition creates a bankruptcy estate. “[F]ederal bankruptcy law”—particularly, § 541 of the Code—“dictates to what extent [an] interest is property of the estate.” Tyler v. DH Capital Mgmt., Inc., 736 F.3d 455, 461 (6th Cir.2013) (quoting Bavely v. United States (In re Terwilliger's Catering Plus, Inc.), 911 F.2d 1168, 1172 (6th Cir.1990). But the “nature and extent of property rights in bankruptcy are determined by the ‘underlying substantive law’ ” governing those interests. Id. (quoting Raleigh v. Ill. Dep't of Rev., 530 U.S. 15, 20, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000) ). Here, Kentucky law speaks in two important respects to the “nature and extent” of rights of redemption, addressing in whose favor they arise and when.

1. State Law

Kentucky's right-of-redemption statute, Kentucky Revised Statute § 426.530, provides that if property sold pursuant to a foreclosure action brings under two-thirds of its appraised value, “the defendant” may redeem the property by paying the purchase price at the auction, plus interests and expenses. Kentucky courts have construed the word “defendant” to refer exclusively, and in all events, to the property's owner.

In Kirklevington Associates, Ltd. v. Kirklevington North Associates, Ltd., 848 S.W.2d 453 (Ky.Ct.App.1993), the Kentucky Court of Appeals construed “defendant” to refer only to owner-defendants in foreclosure actions—not to non-foreclosing mortgagees or holders of judgment liens who also are named as defendants in foreclosure actions. In a later case, the Kentucky Court of Appeals held that where the owner of the foreclosed property acquired the property after the foreclosure judgment and was therefore not named as a defendant in the foreclosure action, he acquires the right of redemption—even if he is not substituted as a defendant in the action. See Humbert Mortg., Inc. Money Purchase Pension Plan v. Redell, 263 S.W.3d 594 (Ky.Ct.App.2008) ; see also United States v. Wood, 658 F.Supp. 1561, 1568 n. 2 (W.D.Ky.1987) (holding that where an owner-defendant in a foreclosure action conveys the foreclosed property to a third party after judgment and before sale, “the grantee of such a debtor ... steps into the debtor's shoes, and as holder of title to the property at the time of sale, ... is the exclusive beneficiary of the statutory right of redemption.”).

Kentucky courts have also addressed when a right of redemption arises and hold that a right of redemption does not exist until the foreclosure sale occurs. In Humbert, the owner of foreclosed property died intestate before the foreclosure sale. Id. at 595. After the sale failed to clear the redemption price, the owner's heir, her son, sold the consequent right of redemption. Id. at 595–96. The purchaser of the property argued that the heir could not sell the right of redemption reasoning that the right of redemption was personal property, and the heir therefore did not inherit it from the owner until the estate had been administered—which had not occurred at the time of the sale. Id. at 596. The Kentucky Court of Appeals rejected the purchaser's argument, holding that “[n]o right of redemption existed at [the time of the owner's death] because the property had not sold.”...