Degiacomo v. Traverse
753 F.3d 19
| 1st Cir. | 2014Background
- Debtor Virginia Traverse owns a Lynn, MA home (value ≈ $223,500) and recorded a $500,000 Massachusetts homestead declaration in 2009.
- In 2005 Traverse executed a $200,000 mortgage to Washington Mutual (later acquired by JP Morgan); that mortgage was never recorded.
- In 2007 Traverse executed and recorded a $31,000 second mortgage in favor of Citibank. Traverse has remained current on both loans.
- Traverse filed Chapter 7 in 2011, claimed the full $500,000 homestead exemption, and listed the unrecorded JP Morgan mortgage as a secured claim.
- The Chapter 7 trustee avoided JP Morgan’s unrecorded mortgage under 11 U.S.C. § 544 and preserved it for the estate under § 551, then sought to sell the house under § 363 to realize value for the estate; the bankruptcy court and BAP approved.
- The First Circuit reversed, holding that preservation of an avoided mortgage gives the estate the lien’s value but does not convert an otherwise exempt, fully encumbered home into property of the estate subject to sale for unsecured creditors.
Issues
| Issue | Trustee's Argument | Traverse's Argument | Held |
|---|---|---|---|
| Whether avoiding and preserving an unperfected mortgage under §§ 544/551 permits the trustee to sell an otherwise exempt debtor's home under § 363 | Preservation puts estate in creditor's shoes; trustee can sell the property to realize value of preserved lien for unsecured creditors | Preservation yields only the avoided lien/value; homestead exemption removes the home's equity from the estate, so trustee cannot sell the property | Held: Trustee may sell the preserved mortgage (the lien/value) but may not sell the exempt underlying property absent residual equity for the estate |
| Whether preservation of the lien creates an ownership/equity interest in the underlying property sufficient to justify sale | Preserved lien effectively creates estate "equity" because estate stands as senior lienholder | Preserved lien does not confer present ownership or unsecured-equity; it only preserves the lienholder's rights (e.g., foreclosure on default, proceeds on sale) | Held: Preservation does not create present ownership or unsecured equity in the asset; equity for sale is value above secured claims and exemption |
| Whether the bankruptcy court had jurisdiction under Stern to enter final orders on the trustee's avoidance/preservation claims | Trustee: claims arise from bankruptcy and are core; bankruptcy court can enter final judgment | Traverse: argued Stern might limit jurisdiction because claims rest on state law and affect property rights | Held: Claims arise from the bankruptcy and the court correctly exercised jurisdiction |
Key Cases Cited
- Owen v. Owen, 500 U.S. 305 (1991) (exemptions remove interests from estate, affecting trustee's powers)
- Schwab v. Reilly, 560 U.S. 770 (2010) (exemptions remove a monetary interest, not necessarily the physical asset)
- Dewsnup v. Timm, 502 U.S. 410 (1992) (liens pass through bankruptcy unless avoided)
- French v. Edwards, 440 F.3d 145 (4th Cir. 2006) (avoidance/preservation protects estate against illegitimate depletions and alters creditor priorities)
- Haberman v. Wash. Mut. Bank, 516 F.3d 1207 (10th Cir. 2008) (trustee who avoids a lien preserves the value of that lien for the estate)
- In re Canning, 706 F.3d 64 (1st Cir. 2013) (standard of review on appeal from BAP)