In re Virginia A. TRAVERSE, Debtor. Mark G. DeGiacomo, Chapter 7 Trustee for the Estate of Virginia A. Traverse v. Virginia A. Traverse
No. 13-9002
United States Court of Appeals, First Circuit
May 23, 2014
The Supreme Court addressed a similar situation in Tibbs. In that case, the Florida Supreme Court‘s initial decision reversing the defendant‘s conviction left unclear whether reversal was based on “insufficient evidence” or rather on “weight of the evidence.” 457 U.S. at 38-39, 102 S.Ct. 2211. Following a retrial and conviction, the Florida Supreme Court issued a second opinion clarifying that its earlier reversal had been based on “weight of the evidence.” Id. The defendant argued on appeal, among other things, that the earlier reversal had, in fact, been based upon insufficiency, and, as a result, that the Double Jeopardy Clause as incorporated barred his retrial. The Supreme Court affirmed the conviction following retrial, reasoning that “[a]ny ambiguity in Tibbs I [v. State, 337 So.2d 788 (Fla.1976)] was resolved by the Florida Supreme Court in Tibbs II [v. State, 397 So.2d 1120 (Fla.1981)].” Id. at 46, 102 S.Ct. 2211. The state court‘s “bind[ing]” construction of its earlier decision established that the defendant‘s “successful appeal of his conviction rested upon a finding that the conviction was against the weight of the evidence, not upon a holding that the evidence was legally insufficient to support the verdict.” Id. at 46-47, 102 S.Ct. 2211. “Under these circumstances,” the Court concluded, “the Double Jeopardy Clause does not bar retrial.” Id. at 47, 102 S.Ct. 2211. On like reasoning, we conclude that the grant of the petition here was in error.
III.
The district court‘s grant of petitioner‘s request for habeas relief is reversed. Habeas relief is barred, and the petition is dismissed with prejudice.
Tara Twomey, National Consumer Bankruptcy Rights Center, and Ray DiGuiseppe on brief for the National Association of Consumer Bankruptcy Attorneys, Amicus Curiae.
Mark G. DeGiacomo, with whom Keri L. Wintle and Murtha Cullina LLP were on brief, for appellee.
Before TORRUELLA, HOWARD, and KAYATTA, Circuit Judges.
HOWARD, Circuit Judge.
This case requires us to explore the contours of a bankruptcy trustee‘s lien avoidance and preservation powers under
In 2005, six years before filing a petition for Chapter 7 bankruptcy, Virginia Tra-
I. Facts and Background
Virginia A. Traverse resides in a home in Lynn, Massachusetts. She has been the title owner of the property since April 30, 1999, when she recorded her ownership with the Essex County South District Registry of Deeds. On July 11, 2005, Traverse executed a mortgage on the home in favor of Washington Mutual Bank to secure a loan of $200,000. On September 25, 2008, JP Morgan Chase acquired this mortgage as part of its blanket acquisition of Washington Mutual‘s assets. At no point did either mortgagee record the mortgage on Traverse‘s home with the Registry of Deeds. Meanwhile, in March of 2007, Traverse executed a second mortgage in favor of Citibank to secure a loan of $31,000, which Citibank recorded in due course. Traverse has kept current on her mortgage payments to both JP Morgan and Citibank.
On August 14, 2011, Traverse filed a voluntary bankruptcy petition under Chapter 7 of the Bankruptcy Code. On her bankruptcy schedules, Traverse valued her home at $223,500.1 She listed the remaining claim secured by JP Morgan‘s mortgage as $185,777.30 and the claim secured by Citibank‘s mortgage as $29,431.04. Finally, pursuant to the Massachusetts Homestead Act, Traverse claimed a homestead exemption in the property in the amount of $500,000. Traverse‘s home-stead exemption, which Traverse had formally recorded in a Declaration of Homestead in January 2009, went unchallenged by any interested party.
On December 15, 2011, Mark D. DeGiacomo, acting as the Chapter 7 trustee of Traverse‘s bankruptcy estate, filed a complaint to avoid JP Morgan‘s unrecorded mortgage and to preserve it for the benefit of the estate. In response, Traverse filed a counterclaim seeking a declaratory judgment that, even if he preserved the mortgage, DeGiacomo could sell only the mortgage itself and not her underlying property. Traverse argued that because the trustee‘s preservation of JP Morgan‘s mortgage gave the estate only the rights of the original mortgagee, it created no right to sell her home until she defaulted on her payments and triggered the right of foreclosure. After DeGiacomo moved for summary judgment, the bankruptcy court granted summary judgment in his favor on all counts and the Bankruptcy Appellate Panel (BAP) affirmed. Both tribunals concluded that, having preserved JP Morgan‘s interest in Traverse‘s home for the bankruptcy estate, the trustee was entitled to sell the home in order to liquidate that interest. While not disputing
Traverse now challenges that conclusion as a matter of law.
II. Standard of Review
On appeal from the BAP, we train our analysis on the underlying bankruptcy court decision, reviewing factual findings for clear error and conclusions of law de novo. In re Canning, 706 F.3d 64, 68-69 (1st Cir.2013). Under the de novo standard, we do not defer to the bankruptcy court‘s ruling, but consider the matter anew as though no decision were rendered below. Id. at 69. Neither do we cede any deference to the conclusions of the BAP. In re Hill, 562 F.3d 29, 32 (1st Cir.2009).
III. Discussion
Under
A core power of a bankruptcy trustee under
Where, on the other hand, a property fails to yield any remaining equity for the estate beyond the value of its secured encumbrances and the debtor‘s homestead exemption, a trustee generally should not sell the home, but should leave the secured creditors to their own legal means of recovering their claims. See Scimeca Found., 497 B.R. at 781 (“[I]t is appropriate for a chapter 7 bankruptcy trustee to ... allow the secured creditors to exercise their right to recover possession of their collateral.“). This is because, by definition, “[a] secured creditor can protect its own interests in the collateral subject to the security interest.” U.S. Department of Justice, Executive Office for United States Trustees, Handbook for Chapter 7 Trustees at 8-20 (2002). If a debtor defaults on her mortgage payments, the secured creditor‘s options include its contractual right to foreclose on the debtor‘s home. If, however, a debtor continues to satisfy her contractual obligations to the benefit of the creditor, the mortgagee has no grounds to foreclose and the debtor may retain her home through the bankruptcy proceedings. See Ellerstein, 105 B.R. at 216 (“[If] [t]he debtors’ home is subject to a mortgage which is not in default and the debtors’ equity is less than the properly claimed homestead ex-
Traverse‘s homestead exemption leaves no residual equity for her unsecured creditors, and her lack of default on her monthly payments precludes both Citibank and JP Morgan from foreclosing on her property. There is consequently no dispute that, if Traverse‘s mortgages remained with their respective banks, the foregoing analysis would dispose of the case: the bankruptcy trustee would have no claim to sell Traverse‘s property and Traverse would retain possession of her home. Indeed, this appears to be the trustee‘s precise position with regard to Citibank‘s second mortgage. In the case of JP Morgan, however, the trustee notes a further wrinkle: neither Washington Mutual nor JP Morgan perfected the first mortgage on Traverse‘s home by recording the lien with the Registry of Deeds.
Where a creditor has an unperfected lien on a debtor‘s property, the Bankruptcy Code empowers a trustee to avoid and preserve the lien for the benefit of the estate. The trustee exercises this power through two strong-arm provisions. First, the trustee‘s right of avoidance under
Second, the trustee does not argue that the preserved mortgage freed up equity in Traverse‘s home for the bankruptcy estate by eliminating a secured debt to be satisfied before the home‘s value can begin accruing to unsecured creditors. Nor, again, could he do so, because Traverse‘s unchallenged exemption of $500,000 swallows the full $223,500 value of her home regardless of whether the sale‘s proceeds are first used to satisfy the $185,777.30 mortgage claim. Rather, the trustee insists that the preserved mortgage itself, as a senior lien on the home, has created equity in the home for the estate. He suggests, in short, that the preserved mortgage has turned some corresponding share of the home‘s value into the “property of the estate” to be liquidated through sale.
The trouble with the trustee‘s argument is that his preservation of an undefaulted mortgage on Traverse‘s home for the benefit of the bankruptcy estate is not co-extensive with an ownership right over the underlying property. Under
The trustee makes much of the Supreme Court‘s holding in Schwab v. Reilly, 560 U.S. 770, 782, 130 S.Ct. 2652, 177 L.Ed.2d 234 (2010), in which the Court held that exemptions claimed under the Code remove only a monetary “interest” in a debtor‘s asset, rather than the asset itself, from the property of the bankruptcy estate. Various courts have applied this same principle to state-created homestead exemptions, including that in Massachusetts. See Peirce, 483 B.R. at 376 (“Mass. Gen. Laws ch. 188 only protects the owner‘s interest in the home to the extent of the monetary exemption.“); In re Gebhart, 621 F.3d 1206, 1210 (9th Cir.2010) (“The homestead exemptions available to the debtors ... do not permit the exemption of entire properties, but rather specific dollar amounts.“). The trustee reasons that, if Traverse‘s home remains part of the bankruptcy estate despite Traverse‘s homestead exemption, he may dispose of it like any other property so long as he repays Traverse the value of her exemption from the proceeds.
As a preliminary matter, we note that the rule articulated in Schwab does not apply directly to this case. In each of the cases above, the debtor‘s exemption could not prevent the trustee from selling the underlying asset because that asset‘s value surpassed the exemption amount, creating additional equity for the bankruptcy estate. Schwab, 560 U.S. at 776, 130 S.Ct. 2652; Peirce, 483 B.R. at 376; Gebhart, 621 F.3d at 1210. By contrast, where a debtor‘s homestead exemption equals or surpasses the total value of her property, the bankruptcy court has construed the Massachusetts homestead exemption to protect the debtor‘s physical ownership of as well as her financial rights in her home. Peirce, 483 B.R. at 376 (“[S]o long as the available monetary exemption is greater than or equal to the value of that property, the owner‘s possessory and pecuniary interests are both fully protected.“). This reading accords with the established policy behind the Massachusetts homestead exemption, which “favors preservation of the family home regardless of the householder‘s financial condition” and inclines courts to construe the exemption “liberally in favor of debtors.” Shamban v. Masidlover, 429 Mass. 50, 705 N.E.2d 1136, 1138 (1999); see also Hildebrandt, 320 B.R. at 44 (“Homestead laws are designed to benefit the homestead declarant and his or her family by protecting the family residence from the claims of creditors.” (internal quotation marks omitted)). We decline to depart from that practice today.
More to the point, neither Schwab nor its progeny address the precise legal question before us. The issue raised by this case is not whether Traverse‘s homestead exemption withdrew her home or merely the right to its proceeds from the property of the estate. The issue is whether a trustee‘s powers of sale under
The trustee suggests that his preservation of Traverse‘s first mortgage for the bankruptcy estate makes this case different. He insists that the preserved mortgage empowers him to sell Traverse‘s home because, with the bankruptcy estate now standing in the shoes of the secured lienholder, the sale would directly benefit the unsecured creditors. Just because the preserved mortgage entitles the estate to benefit from the sale of Traverse‘s property, however, does not mean that the trustee is by that fact empowered to sell the property so as to immediately realize that benefit. In itself, a mortgage carries neither a right of immediate ownership of Traverse‘s property, nor a right of immediate payment of the secured loan‘s outstanding value, but only a right to foreclose on Traverse‘s property in the event that she defaults on her loan or to receive payment in full when the home is sold through other means. And that is the extent of the rights gained by the estate through the trustee‘s preservation. See Haberman, 516 F.3d at 1210 (“[T]he trustee, on behalf of the entire bankruptcy estate, in some sense steps into the shoes of the former lienholder, with the same rights in the collateralized property that the original lienholder enjoyed.“); Carvell, 222 B.R. at 180 (“Preservation is just that. It simply puts the estate in the shoes of the creditor whose lien is avoided.“). We make this observation not to revive the red herring argument that the trustee would need to exercise a mortgagee‘s power of foreclosure in order to sell Traverse‘s home; of course he could accomplish such a sale, when appropriate, simply in the exercise of his powers under
To put it another way, contrary to the trustee‘s assertions, just because the preserved mortgage promises the bankruptcy estate a benefit from the sale of Traverse‘s home does not mean that the preserved mortgage creates “equity” for the estate. Bankruptcy courts have defined the equity that justifies a sale of property, consistently and explicitly, in one way: the value remaining for unsecured creditors above any secured claims and the debtor‘s exemption. See, e.g., Hyman, 123 B.R. at 344; In re White, 409 B.R. 491, 495 (2009); McKeever, 132 B.R. at 999. It is this equity for unsecured creditors that authorizes a trustee to liquidate the property in the first place, as the trustee should not exercise his
The trustee, in essence, would have the preserved mortgage function as both the senior secured interest that entitles the bankruptcy estate to derive value from Traverse‘s property ahead of junior lienholders and the unsecured equity interest that excuses him from leaving the secured creditors to satisfy their claims contractually.6 Yet precisely because of their contractual means of protecting their interests, the bankruptcy scheme typically entrusts secured creditors such as mortgagees to vindicate their claims based on their privately negotiated terms. That in some cases a mortgagee will have no immediate means for claiming the value of its collateral—for example, when the mortgagor remains current on her mortgage payments pursuant to the contractual agreement—is not a flaw in the system, but rather reflects Congress‘s intent not to augment the mortgagee‘s rights over a compliant mortgagor simply because the mortgagor enters the world of bankruptcy. Cf. Dewsnup v. Timm, 502 U.S. 410, 418, 112 S.Ct. 773, 116 L.Ed.2d 903 (1992) (noting the rule, valid since the Bankruptcy Act of 1898, that “a lien on real property passe[s] through bankruptcy unaffected“).7
Our holding today comports not only with the most coherent reading we can make of the trustee‘s powers under the Bankruptcy Code, but also with any sense of fairness on these facts. As noted above, there is no dispute that if Traverse‘s first mortgage remained with JP Morgan she would retain her home in these exact same circumstances. We see no reason why the trustee‘s preservation of the mortgage under
We affirm today the principle that the preservation of a lien entitles a bankruptcy estate to the full value of the preserved lien—no more and no less. Where this lien is an undefaulted mortgage on otherwise exempted property, the trustee may for the benefit of the estate enjoy the liquid market value of that mortgage, claim the first proceeds from a voluntary sale, or wait to exercise the rights of a mortgagee in the event of a default.9 But the trustee may not repurpose the mortgage to transform otherwise exempted assets, to which neither the estate nor the original mortgagee boasted any ownership rights, into the property of the bankruptcy estate.
IV. Conclusion
In the end, we see the matter differently than did the lower courts. Accordingly, we reverse the decision of the BAP and remand to that tribunal with directions to vacate the bankruptcy court‘s judgment and to remand the matter to the bankruptcy court for further proceedings consistent with this opinion.