Zuppardo v. BC Properties Limited, LLC (In re J.H. Investment Services, Inc.)

No. 09-15732 (11th Cir. Feb.3, 2011)
The Eleventh Circuit affirmed in part and reversed in part. The Court AFFIRMED the bankruptcy court and district court order denying Zuppardo's interest in the Sale Proceeds; and REVERSED the orders avoiding Zuppardo's interest in the Unit, quieting title to the Unit and requiring Zuppardo to vacate the property. The Eleventh Circuit held that the bankrutcy court lacked jurisdiction to entertain a claim regarding ownership of the Unit. The Court found that the Unit had been sold twice to bonafide purchasers prior to the institution of the Chapter 11 proceedings and, therefore, the Unit was not a part of the bankruptcy estate. The Court held that the Trustee lacked standing to seek avoidance of Zuppardo's interest in the Unit because the claim had no material relationship to the JHIS bankruptcy estate and the outcome benefitted only BC Properties. Regarding Zuppardo's claim to the Sale Proceeds, the Court held that these funds were clearly part of the estate. The Court agreed with the district court that Zuppardo had no cognizable claim under the common fund doctrine. The Court also noted that Zuppardo had not preserved his original objection to the Trustee's $100,000 settlement with BC Properties. The remainder of the record was not clear as to whether the bankruptcy court had avoided, under Section 544, Zuppardo's interest in the remainder of the Sale Proceeds. However, the Eleventh Circuit agreed with the lower courts that Zuppardo would not have a secured claim with respect to the Sale Proceeds, but so no reason why Zuppardo would not have an unsecured claim.
Procedural context:
Zuppardo appealed order by District Court affirming Bankruptcy Court order granting summary judgment to Trustee on motion to avoid Zuppardo's equitable interest in the Unit and Sale Proceeds pursuant to Section 544.
On 1/1/99, Zuppardo entered into installment contract with Debtor ("JHIS") for purchase of condo unit (the "Unit"). The Unit was subject to existing mortgage on the complex with AmSouth Bank. Zuppardo expressly agreed that note and mortgage would not be recorded and title would be held in escrow. Zuppardo satisfied his payment obligations under the contract prior to 2/20/07. On 2/20/07 JHIS sold 14 units (including Zuppardo's Unit) to BC Properties ("BC"). BC recorded a warranty deed on 2/26/07. Zuppardo filed suit seeking a writ of attachment on a portion of the BC sale proceeds (the "Sale Proceeds"). Closing counsel filed an interpleader action and the funds were deposited into registry of the court. On 3/29/07 Zuppardo recorded an "Amended and Revised Satisfaction of Mortgage" which contained an acknowledgment from JHIS as to Zuppardo's payment in full and satisfaction of all obligations relating to the sale of the Unit. On 5/17/07, Zupardo recorded a "Notice of Redemtion Rights" asserting that he was the equitable owner of the unit. On 5/25/07, creditors initiated an involunatry Chapter 11 against the Debtor. The bankruptcy court appointed a trustee who removed the interpleader action to the bankruptcy court. The Sale Proceeds were subsequently turned over to the Trustee. Trustee filed a cross-claim and motion for summary judgment against Zuppardo arguing that Zuppardo had never recorded his interest in the Unit and therefore, Trustee could avoid Zuppardo's interest in the Sale Proceeds pursuant to Section 544(a). Zuppardo raised various arguments including the fact that he recorded his interest in the Unit prior to commencement of the Chapter 11 case. Bankruptcy court granted summary judgment to the Trustee without addressing Zuppardo's pre-petition satisfaction of mortgage. Bankruptcy court found any claims by Zuppardo to the Unit or Sale Proceeds were inferior to the Trustee pursuant to Sections 544(a)(1) and (a)(3) and could be avoided. BC Propertes filed a cross claim against the Debtor, and on 3/25/08 the bankruptcy court approved a settlement, over Zuppardo's objection, which provided, in part, that the Trustee would confirm BC Properties' ownership of the real property - including the Unit. The court ordered Zuppardo to vacate the Unit. Zuppardo also filed a claim seeking recover of attorney's fees under the common fund doctrine. The court held Zuppardo failed to satisfy the requirements of the common fund doctrine and granted summary judgment to the Trustee. The District Court affirmed the Bankruptcy Court's decision stating that that under Florida law (Fla. Stat. Section 695.01) the first to record had superior title and Zuppardo recorded its interest after BC Properties recorded its warranty deed. The District Court also held that the Trustee's interest in the Unit and Sale Proceeds was superior to Zuppardo's unrecorded equitable interest which were avoidable under the strong-arm provisions of Section 544.

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