DeGiacomo v. Traverse (In re Traverse)

United States Court of Appeals for the First Circuit, No. 13-9002 (May 23, 2014)
Reversing the lower courts, the First Circuit concluded that when an undefaulted mortgage lien is avoided and preserved for the benefit of the Estate under Code sec. 551, and when the value of the property is less than the total of all mortgage liens and the Debtor's homestead exemption, the Trustee may not sell the property pursuant to Code sec. 363, but rather is limited either to (i) selling the avoided mortgage or (ii) simply stepping into the shoes of the mortgagee and awaiting a voluntary sale by the Debtor or a default that would allow foreclosure. This ruling is fair because it produces the same result for the Debtor as would apply if no mortgage had been avoided and the exemption were claimed. The ruling reflects the Court's underlying determinations that (i) sec. 363 does not empower a trustee to sell exempted interestts, (ii) preserving the lien for the benefit of the Estate only gives the Estate an exclusive interest in the avoided lien, without giving it any current ownership interest in the underlying property, and (iii) just because the avoided lien promises the Estate and general creditors a "benefit" from the sale does not mean that the preserved mortgage itself creates "equity" for the Estate under sec. 363.
Procedural context:
Appeal from the Bankruptcy Appellate Panel for the First Circuit, which had affirmed the bankruptcy court's determination that a trustee, after avoiding a real estate mortgage and preserving the value for the Estate, could sell the Debtor's home pursuant to Code sec. 363 and his core power as a trustee administering property, notwithstanding the absence of equity after the two mortgages and the homestead exemption. Reversed.
When Virginia Traverse filed her Chapter 7 case, she owned a home in Massachusetts valued at $223,500 and subject to a homestead of $500,000 as well as two mortgages senior to the homestead, a first of $185,777 and a second of $29,431. Because the first mortgage had never been recorded, the Trustee successfully avoided it and preseved it for the benefit of the Estate pursuant to Code sec. 551. Neither mortgage was in default and no equity existed after the two mortgages and the homestead exemption. The Trustee sought to sell the home free of liens, applying the proceeds to pay off the avoided mortgage and another, with any balance going to the Debtor against the homestead exemption. The Debtor sought a determination that the Trustee's rights were limited to selling the first mortgage, thereby enabling the Debtor to continue living in the home so long as she didn't default on a mortgage.
Torruella, Howard and Kayatta

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