Neiva v. Loancare, LLC (In re Neiva)

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In re: FERNANDO A. NEIVA, Debtor

FERNANDO A. NEIVA, Plaintiff v. LOANCARE, LLC, PATRIOT AUCTIONEERS, LLC, SULLIVAN & SULLIVAN AUCTIONEERS, LLC, DAVID H. WELLONS, AND JOHN DOES #1-#19, Defendants

No. 23-40098-EDK

Adversary Proceeding No. 23-4015

United States Bankruptcy Court, D. Massachusetts, Central Division

February 9, 2024

Chapter 13

MEMORANDUM OF DECISION

Elizabeth D. Katz, United States Bankruptcy Judge.

Before the Court are cross-motions for partial summary judgment filed by Fernando A. Neiva, the plaintiff in this adversary proceeding and debtor in the underlying Chapter 13 bankruptcy case (the "Debtor"), and defendants Loancare, LLC ("Loancare") and David H. Wellons ("Wellons") (together, the "Defendants"). Resolution of the motions requires the Court to determine whether the transfer of the Debtor's equity of redemption through a prepetition foreclosure sale of the Debtor's property is avoidable pursuant to § 544 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code"),^[1] whether the Debtor has standing under § 522 of the Code to seek avoidance of the transfer and, if avoidance is warranted in this case, the appropriate remedy to be fashioned.

I. FACTS AND TRAVEL OF THE CASE

The facts material to the issues currently before the Court are relatively few and very straightforward. In August 2014, the Debtor executed a note and mortgage related to the Debtor's purchase of real property located at 45 Liberty Street in Marlborough, MA (the "Property"). On January 11, 2023, Loancare, the holder of the mortgage by assignment, conducted a foreclosure sale of the Property (the "foreclosure sale"), at which Wellons was the high bidder. No foreclosure deed or other post-foreclosure documents related to the foreclosure sale were recorded at the appropriate registry of deeds (the "Registry") as of February 2, 2023, when the Debtor filed a voluntary petition under Chapter 13 of the Bankruptcy Code.

On May 4, 2023, the Debtor commenced the current adversary proceeding and, shortly thereafter, filed an amended complaint adding Wellons as a defendant (the "complaint"). The complaint raises a variety of claims against multiple defendants related to the foreclosure sale. Some of the claims and defendants have been dismissed and some of the remaining claims are not presently before the Court. Currently for disposition are the parties' cross-motions for summary judgment as to Count I of the complaint, through which the Debtor seeks avoidance of the foreclosure sale pursuant to § 544(a)(3) of the Bankruptcy Code.^[2]

II. POSITIONS OF THE PARTIES

A. Jurisdiction, Core vs. Non-Core Proceeding, and Abstention

At the outset, the Defendants argue that "the Court does not have jurisdiction to hear" Count I of the complaint, because the claim is not within this Court's core jurisdiction. Defs. Summ. J. Mot. 4, Oct. 30, 2023, ECF No. 53. According to the Defendants, the Debtor is attempting to adjudicate rights arising under state law that the Debtor held when the case was commenced and thus, pointing to Frazier v. Residential Funding Corp. (In re Frazier), Bankr. No. 06 11764 RS, Adv. No. 06-1295, 2006 WL 2715145 (Bankr. D. Mass. Sept. 21, 2006), they say that this Court cannot decide this matter as a core proceeding. Alternatively, the Defendants ask the Court to exercise discretionary abstention in favor of the state courts under 28 U.S.C. § 1334(c)(1).

The Debtor argues first that, even if the matter were non-core, this Court would still have jurisdiction to hear it, although the Court would be required to submit findings of fact and rulings of law to the district court and would not be able to enter a final order. More importantly, the Debtor maintains that the claims do not arise under state law, but instead are created entirely by the Bankruptcy Code and are not cognizable in a nonbankruptcy forum. Accordingly, the Debtor maintains that this Court has jurisdiction over the matter, this Court has the authority to enter final orders and judgment as to Count I, and abstention would be inappropriate.

B. Avoidability of the Transfer

Count I of the Debtor's complaint seeks avoidance of the foreclosure of the Debtor's equity of redemption pursuant to § 544(a)(3), which, in essence, permits a trustee to avoid a prepetition transfer of a debtor's property if that transfer is not perfected in accordance with applicable state law. Relying on Weiss v. U.S. Bank, N.A. (In re Mularski), 565 B.R. 203 (Bankr. D. Mass. 2017), the Debtor argues that since (1) the equity of redemption is an interest in real property, (2) that property interest was transferred prepetition through the foreclosure sale, and (3) there was nothing on record to perfect that transfer vis-a-vis a bona fide purchaser as of the date of the bankruptcy filing, then the foreclosure of the equity of redemption is avoidable under § 544(a)(3).

Although the language of the statute, "any transfer of property of the debtor" does not require that the debtor initiate the transfer for purposes of § 544(a), the Defendants briefly argue that the foreclosure of the Debtor's equity of redemption may not be avoided under § 544(a)(3) because the only transfer of property that the Debtor made was in the granting of original mortgage. The Defendants also point to various cases where courts have held that when a foreclosure sale has occurred and a memorandum of sale is signed prepetition, the Debtor no longer has the equity of redemption and the property is not property of the bankruptcy estate. Citing to Cerrato v. BAC Home Loans Servicing (In re Cerrato), 504 B.R. 23, 29 (Bankr. E.D.N.Y. 2014), the Defendants say the debtor in that case could not avoid a foreclosure sale under § 544 because the right to redeem was cut off at the time of the foreclosure sale, despite the fact that a foreclosure deed was not recorded.

Furthermore, the Defendants argue that the transfer is not avoidable due to the preforeclosure recording of a Servicemembers Civil Relief Act judgment and an "Affidavit Pursuant to M.G.L. Ch. 244 §§ 35B and 35C." Defs. Summ. J. Mot. Exs. A, B. Citing to Munoz v. James B. Nutter & Co. (In re Munoz), Bankr. No. 10-31627-hcm, Adv. No. 10-3039-hcm, 2011 WL 710501 (Bankr.W.D.Tex. Feb. 22, 2011), the Defendants maintain that the unsatisfied mortgage of record, together with the pre-foreclosure documents of record, subject a bona fide purchaser to inquiry notice, which would have revealed the foreclosure sale.

C. The Debtor's Standing under § 522(h)

The Debtor argues that, notwithstanding the Court's prior decision that Chapter 13 debtors lack direct standing to bring actions under § 544 of the Bankruptcy Code, see Kalesnik v. HSBC Bank USA, Nat'l Ass'n (In re Kalesnik), 571 B.R. 491, 498 (Bankr. D. Mass. 2017), the Debtor here has standing to bring an avoidance action under § 544 by way of § 522(h), because, as required by § 522(h), the transfer is avoidable by the trustee, but the trustee has not attempted to avoid it, and the Debtor could have exempted the property under subsection (g)(1) if the trustee had avoided the transfer. The Debtor maintains that the conditions for exempting the property under subsection (g)(1) are satisfied because, in accordance with that subsection, the Debtor could have exempted the property if it had not been transferred, the transfer was not voluntary, and the Debtor did not conceal the property.

In response, the Defendants first argue that § 522(h) is not available to the Debtor because, for the reasons discussed above, the transfer is not avoidable under § 544(a)(3). In addition, the Defendants say that the case relied upon by the Debtor, Giacchetti v. Everhome Mortgage (In re Giacchetti), 584 B.R. 441 (Bankr. D. Mass. 2018), is not binding on this Court, fails to fully analyze pertinent legal issues, and is distinguishable. Further, relying on case law from other districts, the Defendants contend that the Debtor cannot exercise the trustee's avoidance powers in this case, because the consequence of the avoidance will solely benefit the Debtor and will be of no benefit to the creditors or the bankruptcy estate.

The Debtor counters that the cases raised by the Defendants are not binding on this Court and says that the Supreme Court acknowledged the ability of debtors to avoid a foreclosure sale by way of § 522(h) in BFP v. Resolution Trust Corp., 511 U.S. 531, 541 n.7 (1994). The Debtor further argues that to require a benefit to creditors, and not to the debtor, in order to allow a debtor to avoid a transfer using § 522(h) would render § 522(h) useless and is in direct contravention of explicit provisions of the Bankruptcy Code.

The Defendants also claim that "[t]o avoid the foreclosure sale under 11 U.S.C. § 522(h), [the Debtor] must establish that the Property at issue is property of the bankruptcy estate, since only property of the estate can be exempted by a debtor." Defs. Reply Br. 1, Dec. 4, 2023, ECF No. 60. That is, the Defendants maintain that Debtor is not entitled to exempt the Property under applicable state law because legal title to the Property was transferred through the foreclosure sale and the Debtor no longer owns the Property. Accordingly, the Defendants contend that the Debtor cannot exempt the Property as required by § 522(h).

The Debtor points out that no objection to the Debtor's claimed exemption in the Property was timely-filed in the main case. Furthermore, the Debtor argues, § 522(g)(1) allows a debtor to exempt property as if the transfer never occurred, so the fact that the Debtor does not currently own the Property is irrelevant.

Finally the Defendants assert that the requirement in § 522(g)(1) that the transfer be involuntary is not satisfied, because Loancare "did not...