Seaver v. New Buffalo Auto Sales, LLC (In re Hecker)

Case No. 11-6007 (8th Cir. Oct. 20, 2011)
The Court ruled that because there was no equity in the real property at issue on the petition date, judgment liens held by certain judgment holders, who ended up recovering on their judgment liens due to certain post-petition events, did not enable the judgment holders to receive more than they would have received in a liquidation on the petition date, and therefore the judgments did not constitute preferential transfers under § 547(b). The Court also ruled that under Minnesota law, because the transferee of the real property from the trustee pursuant to a court approved settlement did not register his interest, the property remained an estate asset. Therefore, when judgment holders subsequently registered their judgments and obtained judgment liens against the property, these liens were avoidable under § 549. This determination was not altered by the fact that the trustee obtained an order approving a proposed sale of the property, or by the fact that two creditors obtained relief from stay. The proposed sale never closed, and under Minnesota law the trustee had a right of redemption to foreclosed property. Finally, the Court held that § 551 preserved the judgment liens for the estate. The Court remanded to determine whether the avoidance of the post-petition registration of the judgments restored the estate, or whether a money judgment was necessary
Procedural context:
The chapter 7 trustee appealed the bankruptcy court’s granting of summary judgment in favor of New Buffalo Auto Sales, LLC, Maurice J. Wagener, and Palladium Holdings, LLC, which ruled that certain post-petition acts related to registration and transfer of prepetition judgments under Minnesota law did not constitute either preferential or avoidable transfers.
Prepetition, two judgments were entered against the debtor in favor of Koch Group, Mpls, LLC ("Koch Group") on the one hand, and New Buffalo Auto Sales, LLC (“New Buffalo”) and Maurice Wagener (“Wagener”) on the other hand. The debtor held nonexempt real property. U.S. Bank held a mortgage on the property, and obtained relief from stay to foreclose. Meanwhile, the trustee filed a motion to approve a settlement with the debtor and other individuals, whereby the trustee would transfer the estate's interest in the nonexempt real property to one of the individuals in exchange for $75,000. While the settlement motion was pending, U.S. Bank purchased the property at foreclosure. Under Minnesota law, a six month redemption period began to run. Subsequently, the bankruptcy court approved the trustee’s settlement motion. The trustee transferred the estate’s interest per the settlement; however, the deed was never registered, and the property remained in the debtor’s name. The trustee discovered that the $75,000 came from the debtor’s children’s and grandchildren’s trust. The deed was returned to the trustee, but the trustee retained the $75,000 pending resolution of whether it constituted property of the estate even prior to the settlement. Later, the prepetition judgment holders registered their judgments on the title of the real property upon which U.S. Bank foreclosed. The registration created judgment liens against the property under Minnesota law. Koch Group then assigned its judgment to Palladium Holdings, LLC (“Palladium”); this judgment was later satisfied. Neither the debtor nor the trustee timely redeemed property from foreclosure under Minnesota law. New Buffalo exercised its right of redemption using its post-petition judgment lien and sold the property to Palladium for $218,025.30 (for redemption price) plus $80,000 cash and a $320,000 mortgage against the property. The trustee filed suit against New Buffalo and Wagener and registered a notice of lis pendens. Two days later, New Buffalo registered its $320,000 mortgage. The trustee subsequently added Palladium as defendant. The complaint sought to avoid New Buffalo and Wagener’s and Palladium’s judgments against Northridge as preferential transfers under 11 U.S.C. § 547(b), and to have the post-petition registration of the judgments avoided under § 549. New Buffalo and Palladium moved for summary judgment, which the bankruptcy court granted.
Schermer, Vetners, and Nail

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