DeGiacomo v. Traverse (In re Traverse)

Bankruptcy Case No. 11-17703-WCH
The U.S. Bankruptcy Appellate Panel for the First Circuit affirmed the Massachusetts Bankruptcy Court's granting of summary judgment in favor of the Chapter 7 trustee, allowing him to preserve an unrecorded mortgage lien for the benefit of the bankruptcy estate.
Procedural context:
Debtor filed a Chapter 7 claim under the United States bankruptcy code. Debtor claimed a homestead exemption, which is consistent with Massachusetts law. Chapter 7 trustee, who filed a motion for summary judgment, sought to avoid the claim and preserve the property for the bankruptcy estate because a mortgagee held an unsecured interest in the property. Debtor filed a counterclaim seeking a declaration that even if the trustee can use his strong arm powers, he could not successfully foreclose, thereby disallowing any sale of the property. Debtor appealed.
Virginia A. Traverse ("Debtor") executed a mortgage that became in favor of JP Morgan, which was unrecorded. Debtor also executed a mortgage in favor of Citibank, which was recorded. Debtor was not in default on any mortgage payments. Debtor recorded a homestead declaration on her property, consistent with Massachusetts law. Debtor filed for relief under Chapter 7 of the United States Bankruptcy Code (the "Code"), listing her property as exempt pursuant to the homestead exception. Mark G. DeGiacomo, the Chapter 7 trustee ("Trustee"), sought to avoid JP Morgan's mortgage under § 544 of the Code and preserve the property for the bankruptcy estate (the "estate"). Debtor filed a counterclaim seeking a declaration that Debtor has the rights of redemption and possession of the property, reasoning that just like JP Morgan cannot foreclose on the property so to Trustee cannot sell the property. On appeal, Debtor attacked the constitutionality of the Bankruptcy Appellate Panel ("B.A.P.") ruling on her counterclaim, citing Stern v. Marshall (“Stern”), which prohibits an Article I court from ruling on a state law counterclaim. The B.A.P. first commented that it is inconsistent to file a counterclaim in a Article I court and then claim that an Article I court is constitutionally barred from hearing that claim. Notwithstanding Debtor’s inconsistency, Stern limits a bankruptcy court from ruling upon a counterclaim created by state law. Here, in contrast, Trustee’s avoidance action is a Code-created. Concerning Trustee’s petition for summary judgment, the B.A.P. affirmed the bankruptcy court’s ruling because Trustee’s avoidance powers puts him in the homeowner’s shoes with the added ability to “pay off” JP Morgan’s mortgage through the estate. As such, the trustee’s ability to sell the property is not dependent on the mortgagee’s ability to foreclose on the property. Affirmed.
Haines, Deasy, Tester

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