In re Savino

558 B.R. 1

In re Louis Savino, Debtor

Case No. 14-14661-JNF

United States Bankruptcy Court, D. Massachusetts.

Signed September 14, 2016

Donald MacDonald, Coleman & MacDonald Law Office, Saugus, MA, for Debtor.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the Debtor's Motion to Establish Value of Real Property and Avoid Judicial Lien (the “Lien Avoidance Motion”) pursuant to which Louis Savino (the “Debtor” or “Savino”) seeks to avoid a judicial lien held by First American Title Insurance Company (“First American”).¹ First American filed an Opposition to the Debtor's Lien Avoidance Motion, and the Court conducted a non-evidentiary hearing on August 2, 2016. At the hearing, the Court granted First American's request to submit a supplemental opposition to the Lien Avoidance Motion with respect to the decision of the United States Court of Appeals for the First Circuit in Nelson v. Scala, 192 F.3d 32 (1st Cir.1999) (holding that a Chapter 7 debtor could avoid judicial liens encumbering his 50-percent interest in his residence, thereby adjusting the “asymmetry” of the statutory language set forth in 11 U.S.C. § 522(f) ). The Debtor filed a Response to the Supplemental Opposition in which he, among other things, applied the formula set forth in 11 U.S.C. § 522(f)(2)(A) in a manner consistent with the decision in Nelson v. Scala.

Because the Debtor's application of the formula set forth in 11 U.S.C. § 522(f)(2)(A) in his Response complies with MLBR 4003-1 and the statute as interpreted by the court in Nelson v. Scala,² the Debtor is entitled to avoid First American's judicial lien in full, unless this Court were to accept First American's arguments that 1) it is entitled to an equitable lien, or 2) Section § 522(o ) of the Bankruptcy Code applies to limit the amount of the Debtor's exemption. See 11 U.S.C. § 522(o ). For the reasons set forth below, the Court rejects First American's arguments. Accordingly, the Court shall enter an order granting the Debtor's Lien Avoidance Motion.

II. FACTS

The material facts necessary to resolve the Lien Avoidance Motion and the Opposition are not in dispute. The Court has adopted the parties' uncontested representations made in their respective pleadings, but not the inferences that First American draws from those representations. Neither party requested an evidentiary hearing.

In In re Savino, Case No. 14–14661–JNF, 2016 WL 2865414 (Bankr.D.Mass. May 11, 2016), this Court considered the Debtor's Motion to Reopen his case for the purpose of avoiding First American's judicial lien. In conjunction with ruling on that motion, the Court noted that the Debtor filed his bankruptcy case on October 7, 2014 and received a discharge on February 27, 2015. The Court further noted that First American, despite notice of the commencement of the Debtor's bankruptcy case and of deadlines applicable to objections to exemptions and the filing of complaints under 11 U.S.C. §§ 523, and 727, did not file a complaint seeking an exception to discharge of its debt. See 2016 WL 2865414 at *1–2.

The Debtor owns property located at 58 Weldon Farm Road, Rowley, Massachusetts (the “Property”). He and his spouse, who is not a debtor, acquired the Property by quitclaim deed dated March 24, 2005 and recorded on March 25, 2005. The Property is subject to a mortgage recorded on March 25, 2005. The Debtor listed the outstanding amount due under the mortgage as $210,760. According to the Debtor, the Property is subject to the following:

A first mortgage, acquired via an assignment dated October 14, 2014, from Debtor and Patrizia Savino held by Green Tree Servicing, LLC in the amount of $210,760.00 and recorded in the Southern Essex District Registry of Deeds in Book 33603, Page 269.... The original mortgage was dated March 24, 2005 from Debtor and Patrizia Savino held by Countrywide Home Loans, Inc. in the amount of $250,000.00 and recorded in the Southern Essex District Registry of Deeds in Book 24094, Page 488....

The Debtor recorded a declaration of homestead on the Property on March 25, 2005 pursuant to § 1 of the prior version of Mass. Gen. Laws ch. 188.³

According to First American, on May 13, 2011, People's United Bank, commenced an action against the Debtor in the Essex Superior Court, Department of the Trial Court, captioned People's United Bank v. Savino, Case No. 1177CV909, for breach of a promissory note and to collect a deficiency following its foreclosure of property formerly owned by the Debtor in Maine. First American attached a copy of the Verified Complaint filed by People's United Bank against Savino, as well as a copy of the docket. The Debtor was served with a copy of the complaint on May 18, 2011. First American averred in its Opposition to the Lien Avoidance Motion that the Debtor recorded a second declaration of homestead on May 20, 2011, immediately after the legal proceedings commenced by People's United Bank. The Debtor did not dispute First American's assertion in its Opposition that he filed a subsequent declaration of homestead, the recordation of which would have had the effect of terminating the prior homestead. See Mass. Gen. Laws ch. 188, § 10. Although the declaration of homestead was recorded on May 20, 2011, it was executed by the Debtor and his spouse on April 6, 2011, before the filing of the People's United Bank complaint. On June 7, 2011 People's United Bank obtained a real estate attachment in the amount of $325,000 against all property belonging to the Debtor, including the Property.

The Debtor formerly owned property located at 36 Franklin Street, Peabody, Massachusetts (the “Franklin Street Property”). According to First American, on or about January 12, 2009, the Debtor refinanced the Franklin Street Property and executed a promissory note in the amount of $216,000. The note required the Debtor to make monthly payments of principal and interest over the course of 30 years. The note was subsequently assigned to JPMorgan Chase Bank, N.A. and, later, to First American. First American added that, when the Debtor refinanced the Franklin Street Property, he also executed a mortgage which was meant to secure payment of the promissory note. It also stated: “Savino, however, failed to record the Mortgage. Once this was discovered sometime in early 2011, Savino agreed to execute a Replacement Mortgage and record it at the Registry of Deeds. Once again, he failed to do so.”

First American further averred that the Debtor sold the Franklin Street Property on July 21, 2011 for $245,000 while the People's United Bank lawsuit was pending. It added the following:

Savino knew that the Franklin Street Property was supposed to be encumbered by the Mortgage but he failed to disclose that fact during the sale or use the sales proceeds to pay off the Note.

Moreover, Savino failed to notify the holder of the Note (at the time, JP Morgan Chase Bank, N.A.) that he intended to sell the Franklin Street Property.

Instead, Savino used the sales proceeds to satisfy the People's United debt. Specifically, he paid $200,000 to People's United's attorney, Michael Feinman, and another $33,000 to his attorney, Robert Waters, Esq., who, upon information and belief, represented him in the People's United Lawsuit....

In exchange for the payment, the People's United Lawsuit was dismissed and the real estate attachment on Savino's real estate including the Weldon Farm Property was discharged....

(paragraph numbers omitted).

On May 6, 2014, First American filed an action against the Debtor in the Suffolk Superior Court, Department of the Trial Court, and sought and obtained, on May 30, 2104, a real estate attachment against the Property in the amount of $300,000. First American did not attach a copy of its complaint or a copy of the docket in the Suffolk Superior Court action to its Opposition to the Lien Avoidance Motion. According to the Debtor, it only alleged breach of contract in its complaint.

III. POSITIONS OF THE PARTIES

First American argues that the Debtor committed fraud when, as a mortgagor, he failed to record the mortgages on the Franklin Street Property and ultimately used the sale proceeds to satisfy the People's United Bank's attachment in the amount of $325,000, which encumbered all property of the Debtor, including both the Franklin Street Property and the Property. First American seeks an equitable lien against the Property and concomitantly denial of the Lien Avoidance Motion or, in the alternative, a reduction in the value of Savino's homestead exemption pursuant to 11 U.S.C. § 522(o )(1) which would result in the survival of First American's lien in the amount of at least $119,240. It argues:

A debtor's fraud and conversion of funds is sufficient to support the imposition of an equitable lien and denial of the homestead exemption if such illicit funds were used to benefit the homestead. See e.g. , In re Gamble – Ledbetter, 419 B.R. 682, 701 (Bankr.E.D.Tex.2009) (imposing equitable lien and rejecting homestead exemption where debtor used fraudulently obtained funds to reduce indebtedness on homestead); In re Thiel, 270 B.R. 785, 786 (Bankr.M.D.Fla.2001) (same); In re Kravitz, 225 B.R. 515 (Bankr.D.Mass.1998) (same). The critical factor in determining whether an equitable lien will attach is whether the fraudulently obtained funds can be traced directly to the homestead. Crawford v. Silette, 608 F.3d 275, 281 (5th Cir.2010).

Citing In re Corbett, 478 B.R. 62, 69 (Bankr.D.Mass.2012), a case in which this Court set forth four elements required to sustain an objection under 11 U.S.C. § 522(o ) (i.e., (1) the debtor disposed of property within 10 years before the bankruptcy filing; (2) the property was nonexempt; (3) some of the proceeds from the sale of the nonexempt property were used to reduce a debt associated with an existing homestead; and (4) the debtor disposed of the nonexempt property with the intent to hinder, delay or defraud a creditor), First...