Murray v. Nagy (In Re Nagy)Murray v. Nagy (In Re Nagy)
MEMORANDUM OPINION
Plaintiff Dwayne M. Murray, chapter 7 trustee, sued debtors Jennifer Michelle Nagy, Jeffrey Howard Nagy 1 and Chase Home Finance “(Chase”) 2 to avoid a transfer under 11 U.S.C. § 549 and to turn over funds under 11 U.S.C. § 542. The trustee cannot avoid the transfer or compel debtor Jennifer Nagy to turn over the funds.
FACTS
Jennifer Michelle Nagy and Jeffrey Howard Nagy filed chapter 7 on October 13, 2005.
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Dwayne M. Murray was appointed their trustee. The debtors’ schedules and statements filed July 19, 2006 listed on Schedule A their interest in the family home at 40227 Todd Drive in Prai-rieville, Louisiana. They valued the house at $135,000 and disclosed that it was subject to combined mortgage debt of
The plaintiffs claims arise out of the post-petition sale of the home without court authority or the trustee’s knowledge. The debtors sold the Todd Drive property for $161,000.00 on January 29, 2007. 6 For reasons that no party offered into evidence and so are not part of the record, the title company and notary public closing the sale did not learn that the Nagys had filed bankruptcy before the sale. At the closing Mrs. Nagy received $61,177.27. 7 The trustee did not then know that the debtor had received any of the sales proceeds.
The trustee testified at trial that he had not believed that administering the home would yield significant value for the estate because the cost of selling it would consume the apparent equity. The evidence supports an inference that the trustee reached this conclusion based on an erroneous assumption that the mortgages listed on the debtors’ schedules were valid and enforceable. Regardless, his testimony supports a finding that the trustee knew, or should have known, all relevant facts concerning the home and mortgage debt and chose not to administer the immovable property.
Even though the trustee did not pursue any recovery for the estate from the home, he did administer other assets which he sold by public auction for $5,727.70.
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The
No provision for the Todd Drive property appears in the trustee’s final report, his final account, or the order closing the case.
Months after the case closed, the notary who closed the sale contacted the trustee about the Todd Drive property. The trustee learned of the sale, obtained an order reopening the case 10 and filed the complaint that started this adversary proceeding.
ANALYSIS
The trustee’s complaint seeks four types of relief: (1) turnover of the sale proceeds under 11 U.S.C. § 542; (2) avoidance of the sale proceeds payment to Chase and to the debtors as unauthorized post-petition transfers under 11 U.S.C. § 549; (3) avoidance of the transfer of the proceeds to an unnamed immediate or mediate transferee under 11 U.S.C. § 550; and (4) the preservation of the property transferred for the benefit of the estate under 11 U.S.C. § 551. He is not entitled to relief on any count.
Count 1 — The Sale Proceeds Are Not Property of the Estate and Are Not Subject to Turnover Under 11 U.S.C. § 542
The filing of a bankruptcy petition creates a bankruptcy estate comprising essentially all property of the debtors. 11 U.S.C. § 541(a)(1). The chapter 7 trustee becomes the representative of the bankruptcy estate upon his appointment and qualification, 11 U.S.C. § 323(a), and generally he alone can sell estate property, providing the bankruptcy court has approved the sale. See 11 U.S.C. § 363(b).
The Nagys’ bankruptcy filing made the family home on Todd Drive property of the bankruptcy estate. 11 U.S.C. § 541(a)(2). Once the Nagys filed bankruptcy they lost their ability to sell their home without the bankruptcy court’s approval. However, although the court did not approve the debtors’ sale of the home, the $61,177.27 sale proceeds became estate property on January 29, 2007 because they were proceeds of property of the estate. 11 U.S.C. § 541(a)(6). The sale proceeds did not remain estate property, however, because they were abandoned by operation of law when the case closed.
Abandonment takes place by operation of law when a case is closed under Bankruptcy Code section 554(c), which “ ‘deems abandoned to the debtor
any
scheduled property of the estate that is unadministered at the close of the case.’ ”
In re Tadlock,
The evidence does not support a departure from these bright line rules. The Nagys scheduled their interest in the Todd Drive property and listed that it secured mortgage debt of $115,500.
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Because the trustee had not administered the Todd Drive property by the date the case closed on June 18, 2008, the property — and necessarily its proceeds — were abandoned and left the bankruptcy estate by operation of section 554(c). The abandonment is irrevocable, even in the face of an allegation that the property was worth more than the value the debtors assigned to it in their schedules.
In
re
Killebrew,
Once the property was abandoned from the estate, the trustee and estate had no interest in it. “Upon abandonment ... the trustee is ... divested of control of the property because it is no longer part of the estate.... Property abandoned under § 554 reverts to the debtor, and the debtor’s rights to the property are treated as if no bankruptcy petition was filed.”
Kane v. Nat’l Union Fire Ins. Co.,
Count 2 — The Trustee is Not Entitled to Avoid the Payment of the Sale Proceeds to Jennifer Nagy or to Chase as a Post-Petition Transfer Under 11 U.S.C. § 549
Bankruptcy Code § 549(a) empowers a trustee to avoid a transfer of
Section 549(a) allows a trustee to avoid a post-petition transfer of property of the estate. The proceeds of the sale of the Todd Drive property were no longer property of the estate when the trustee sued. The trustee cannot use 11 U.S.C. § 549 to avoid the transfer of the sale proceeds either to Chase or to Jennifer Nagy.
Counts 3 and 4 — 11 U.S.C. §§ 550 and 551 Provide no Basis for the Trustee’s Claims
Section 550 applies only “to the extent a transfer has been avoided ...” under other Bankruptcy Code provisions. Section 551 by its terms also applies to transfers that have been avoided. Thus neither is applicable when a transfer has not been avoided. See generally 5 Collier on Bankruptcy ¶ 550.01 at 550-3 (16th ed. rev.2010); 5 Collier on BANKRUPTCY ¶ 551.01 at 551-2 (16th ed. rev.2010).
The trustee has no claim against Mrs. Nagy under Bankruptcy Code sections 542 or 549. For that reason, no basis exists for his claims under sections 550(a) and 551 for recovery of an avoided transfer from an immediate or mediate transferee and for preservation of the value of an avoided transfer for the estate.
Conclusion
The trustee’s complaint for turnover and avoidance will be dismissed.
Notes
. The court severed and temporarily stayed the trustee’s claims against Jeffrey Nagy in November 2009 because he was on active duty in the United States Army and protected by the Service members Civil Relief Act, 50 App. U.S.C.A. § 501 et seq. (November 17, 2009 Order Severing Defendant and Staying Proceedings, P-59.) Thus this opinion does not address the plaintiff's claims against Jeffrey Nagy.
. The court approved plaintiff’s compromise with Chase and First American Title Insurance Company ("First American”), the issuer of Chase’s title insurance. (Order Granting Motion for Approval of Compromise, P-57.) An order entered on July 20, 2010 dismissed Chase from this case. (Order Dismissing Complaint Against Chase Home Finance, LLC, P-84.) The plaintiff never identified the "unknown party” named in the complaint.
.The debtors filed their petition four days before the effective date of the Bankruptcy Amendment and Consumer Protection Act (“BAPCPA”), Pub.L. 109-8, 119 Stat. 23 (effective October 17, 2005).
. The debtors’ Schedule D (P-18) listed Chase as the first mortgage creditor with a scheduled debt of $99,000, and Whitney National Bank ("Whitney”) as the second mortgage holder with a $16,500 debt.
. On December 20, 2005, a month before the meeting of creditors, the debtors filed an agreement reaffirming their $90,937.66 Chase mortgage debt. Reaffirmation Statement and Agreement (P-7). Jennifer Nagy amended schedule C (P-102) to claim the homestead exemption on March 30, 2010. The court overruled the trustee's objection to the amended exemption on March 28, 2010. The trustee did not appeal that order.
. January 29, 2007 Act of Cash Sale and Settlement Statement (Exhibit Defense 1 in globo, tab 11). Jennifer Nagy signed the closing documents on behalf of both debtors.
. The January 29, 2007 Settlement Statement (Exhibit Defense 1 in globo, tab 12) reflected that Mrs. Nagy received $61,177.27 in proceeds because the closing notary retained enough money to pay only the Chase mortgage debt and not the Whitney debt. No evidence supported a finding or conclusion that Jennifer Nagy knew of the oversights that led to her receipt of part of the sales proceeds. No party offered evidence detailing this outcome and the improper payment to Mrs. Nagy. The closest the court has come to an understanding of the events is an explanation in Mrs. Nagy’s post-trial memorandum, which is not evidence. The memorandum alleged that Chase's first mortgage on the Todd Drive property (which was intended to secure the loan to refinance the debtors’ original Whitney mortgage loan) was not recorded. As a result Whitney never released its original mortgage. Whitney received nothing from the sale proceeds: the closing notary paid only Chase, even though it did not hold a recorded mortgage and should have been paid only after Whitney. The trustee has settled his claims against Chase and First American.
.The property included a computer, television, audio receiver speakers, digital cameras and carpenter tools. See attachments to auctioneer’s application for compensation (P-41 in case no. 05-14225).
. P-54.
. January 23, 2009 order reopening bankruptcy case (P-60).
. Schedules A, D (P-18 in case no. OS-14225).
. After the debtors’ discharge their ownership interest remained subject to the pre-bankruptcy rights of the mortgage creditors.
Johnson v. Home State Bank,
.Bankruptcy Code section 542 provides in relevant part that "an entity ... in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease ... or that the debtor may exempt ... shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate.”
. Section 549(d)(2) requires a trustee to sue under section 549 before the earlier of "(1) two years after the date of the transfer sought to be avoided; or (2) the time the case is closed.” The earlier of those two dates in the debtor's case was June 18, 2008, when the case was closed. Thus the trustee’s January 23, 2009 complaint was untimely. However, Mrs. Nagy did not plead the statute of limitations in her answer to the trustee's complaint, first mentioning it only in her March 4, 2010 pre-trial memorandum. Consequently, the defendant waived the section 549 limitations defense. Fed. R. Bankr.P. 7008(c) (adopting Fed. R Civ. P. 8(c));
In re Pugh,