In re Mejia

576 B.R. 464

IN RE: Edward MEJIA, Debtor.

Case No. 16–11019 (MG)

United States Bankruptcy Court, S.D. New York.

Signed November 20, 2017

ALTER & BRESCIA, LLP, Attorneys for Debtor Edward Mejia, 550 Mamaroneck Avenue, Suite 401, Harrison, New York 10528, By: Bruce R. Alter, Esq.

LAW OFFICES OF LORNA J. LA MOTTE, PLLC, Attorneys for Creditor Wells Fargo Bank N.A., 65 Broadway, Suite 839, New York, NY 10006, By: Lorna J. LaMotte, Esq.

SALVATORE A. GRENCI, PC, Attorneys for 223 West 252nd Street, LLC., 425 Windmill Avenue, West Babylon, New York 11704, By: Salvatore A. Grenci, Esq.

MEMORANDUM OPINION AND ORDER DENYING DEBTOR'S MOTION TO APPROVE DEBTOR'S SALE OF REAL PROPERTY UNDER SECTION 363 AND FOR OTHER RELIEF

MARTIN GLENN, UNITED STATES BANKRUPTCY JUDGE

The debtor in this chapter 7 case filed a motion to approve a sale of his home pursuant to section 363 to a buyer who has offered $900,000, the highest and best offer after suitable marketing efforts. The chapter 7 case remains open. The balance due on the mortgage exceeds $770,000. The debtor's schedules claimed and he is entitled to receive a New York State homeowner's exemption of $165,550. Three appraisals show that the estate has no interest in the property above the amount of exempt equity. At the section 341 meeting, the chapter 7 trustee stated on the record that she "abandoned" the property because it has no value to the estate; and she filed a report of no distribution in the case. But the chapter 7 trustee never abandoned the property in any of the ways permitted by section 554 of the Bankruptcy Code. The chapter 7 trustee filed an opposition to the section 363 sale motion, arguing that the debtor can't sell the property using section 363, but can sell the property outside of bankruptcy.

These facts present two issues for the Court to decide: Can a chapter 7 debtor sell property under section 363? Can the debtor sell the property outside of bankruptcy if the chapter 7 trustee has not so far abandoned the property in the manner provided by section 554 ? As explained below, the answer to both questions is no. But, as also explained below, the debtor's path forward to sell the property outside of bankruptcy is also clear.

I. BACKGROUND

Pending before the Court is Edward A. Mejia's (the "Debtor") Motion Seeking Order (i) Authorizing and Approving Contract of Sale of Debtor's Real Property Pursuant to § 363 of the Bankruptcy Code and Bankruptcy Rule 6004; (ii) Authorizing and Approving the Payment of Certain Pre–Petition Secured Obligations and Related Closing Costs Including the Earned Broker's Commission and Attorney's Legal Fees at the Closing; and (iii) Granting Purchaser Good Faith Purchaser Status Pursuant to § 363(m) of the Bankruptcy Code(the "Motion," ECF Doc. # 33) filed on October 4, 2017. Annexed to the Motion are the Exclusive Right to Sell Agreement (the "Brokerage Agreement," ECF Doc. # 33–2 at 1–5) with Morris Park Realty Group (the "Broker"), the contract of sale (the "Proposed Contract of Sale," ECF Doc. # 33–2 at 7–17), Wells Fargo Bank N.A.'s ("Wells Fargo") payoff quote (the "Payoff Quote," ECF Doc. # 33–2 at 18–22), the proposed sale order (the "Proposed Sale Order," ECF Doc. # 33–3), and other exhibits (ECF Doc. # 33–1). On October 18, 2017, Wells Fargo filed its Non–Opposition Response to the Motion (ECF Doc. # 37). No opposition to the Motion was filed by the objection deadline. Angela Tese–Milner, Esq., the chapter 7 Trustee of the Debtor's estate (the "Chapter 7 Trustee"), however, filed an untimely objection on November 11, 2017 (the "Objection," ECF Doc. # 41).

Tese–Milner's Objection misstates the law in one very important respect. She incorrectly asserts that she has abandoned the estate's interest in the Property, by stating on the record at the 341 meeting on May 31, 2016, that the Property had no value to the estate (i.e., no equity above the amount of the Debtor's homeowner's exemption), and by filing a report of no distribution on June 23, 2016. Therefore, she contends, the Debtor can sell the Property outside of bankruptcy. (Obj. ¶ 2.) The Property—inconsequential value or not—remains property of the estate until abandoned in one of the three ways permitted by section 554 of the Bankruptcy Code. That has not happened yet.

Following the hearing on November 15, 2017, which Tese–Milner did not attend, the Debtor filed a motion under section 554(c) to compel the Chapter 7 Trustee to abandon the Property so that it can be sold outside of bankruptcy. (ECF Doc. # 45.) With the Court's permission, that motion will be heard on shortened notice on November 27, 2017.

On April 21, 2016 (the "Petition Date"), the Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code (the "Petition," ECF Doc. # 1). The Debtor is an accountant who resides at 223 W. 252nd Street, Bronx, New York 10471 (the "Property") with his non-debtor wife. (Mot. ¶ 3.) The Debtor co-owns the Property with his non-debtor sister, Maritza Mejia Tirado ("Tirado"), both owning a one-half interest in the Property. (Id.¶¶ 3–4.) Tirado does not reside at the Property.

The Property is encumbered by a mortgage (the "Mortgage," Non–Opp'n Resp., Ex. A, ECF Doc. # 37–1) held by Wells Fargo, as servicer for Deutsche Bank National Trust Company ("Deutsche Bank"), as Trustee for BCAPB LLC Trust 2007– ABI. (Mot. ¶ 5.) Wells Fargo obtained a judgment of foreclosure and sale of the Property, but the sale was stayed by the bankruptcy filing. (Mot. ¶ 5.) Wells Fargo obtained two independent appraisals of the Property, one by Kessin Appraisals, Inc. (ECF Doc. # 33–1 at 14–21), effective December 23, 2016, which valued the Property at $850,000, and the other by Epidamy Appraisal Services (ECF Doc. # 33–1 at 22–28), effective April 13, 2017, which valued the Property at $905,000. An earlier appraisal of the Property by James D. Scagnelli, dated May 23, 2016, valued the Property at $869,000 (ECF Doc. # 33–1 at 9–13). Wells Fargo's payoff statement as of October 27, 2017 shows the outstanding balance due as $772,878.66. (ECF Doc. # 33–2 at 18–22.) The Property is also encumbered by Environmental Control Board Violations of $557.57. (See ECB Proof of Claim, ECF Doc. # 33–2 at 23–27.)

Following an unsuccessful effort to modify the mortgage during this case through the Court's Loss–Mitigation Program, the Debtor and Tirado engaged a real estate broker and marketed the Property; several offers were received. The Debtor and Tirado accepted the highest offer and a signed contract to sell the Property for $900,000, from which a 5% broker's commission and other sale expenses must be deducted.¹ Before deducting the broker's commission and other sale expenses, sale proceeds to the sellers would be $126,563.77, one-half of which would be payable to the Debtor.

The Debtor claimed and is entitled to receive a homestead exemption under New York CPLR § 5206 of $165,550. (See Debtor's Schedule C, ECF Doc. # 1 at 16.) The Debtor's equity in the Property is far less that the homestead exemption. Obviously, the estate has no interest in the Property.

A. The Motion

The Debtor seeks authority to sell the Property under sections 363(b) and (f) free and clear of all liens, claims and encumbrances. The Debtor argues that the sale—the result of extensive marketing activities by the Broker—is supported by sound business judgment: the sale price is the highest and best price and is in the best interest of the estate and its creditors. (Mot. ¶¶ 22, 24, 25.) The Debtor further explains that a free and clear sale should be approved under section 363(f)(3) of the Bankruptcy Code because the sale proceeds will be sufficient to pay all liens secured by the Property. (Id.¶¶ 26–29.)

The Debtor also requests approval to pay the mortgage and ECB Violations, the Broker's commission, State and City transfer taxes, title fees and charges, and legal fees. The Debtor anticipates receiving surplus sale proceeds of approximately $60,000 from his 50% ownership interest in the Property, less than the amount of his homestead exemption. (Id.¶ 35.) The Chapter 7 Trustee's report of no distribution establishes that the estate has no interest in the Property. (Id.¶ 36.) The Debtor also requests that the Court enter an order granting the Purchaser "good faith purchaser" status under section 363(m). (Id.¶¶ 41–44.)

B. Wells Fargo's Non–Opposition Response

On October 18, 2017, Wells Fargo filed its Non–Opposition Response to the Motion. Wells Fargo "request[ed] that this Court grant the Debtor's motion to sell the property conditional upon the full payment of the lien held by Wells Fargo [ ], subject to a payoff quote ... together with such other relief as the Court may deem just and proper." (Non–Opp'n Resp.)

C. The Chapter 7 Trustee's Objection

On November 11, 2017, after the deadline to file objections, the Chapter 7 Trustee filed her Limited Objection to the Motion. The Chapter 7 Trustee objects to the sale of the Property under section 363. The Chapter 7 Trustee states that the estate has no interest in the Property given the Debtor's homestead exemption and the amount of the secured claim; and that, accordingly, she filed a report of no distribution and abandoned the Property on the record at the 341 meeting. (Opp. ¶ 2.) The Chapter 7 Trustee contends that while the Debtor may sell the Property outside of the bankruptcy case, the Debtor cannot use the Court for a private sale of the Property in a chapter 7 case. (Id.) The Chapter 7 Trustee also opposes approval of the payment of the broker's and attorney's fees in the sale since no professionals have been retained in the chapter 7 case. (Id.¶ 3.)

II. LEGAL STANDARD

A. Section 363 Sales and Abandonment of Property

Section 363(b)(1) of the Bankruptcy Code provides that "[t]he trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate ...." 11 U.S.C. § 363(b)(1). In a case filed under chapter 7 of the...