Jeffery Watson Potter and Associated Case in US District Court

1The Bank of America Stay Motion included a request for reformation of its mortgages to
cover Tracts 10, and 11, and 12. See Docket # 381, ¶ 12. 	That portion of the Bank of America
Stay Motion has been withdrawn. See Docket # 639.
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UNITED STATES BANKRUPTCY COURT
DISTRICT OF NEW MEXICO
In re: 	JEFFERY W. POTTER, 	No. 7-05-14071 MS
Debtor.
MEMORANDUM OPINION
THIS MATTER is before the Court on Bank of America, N.A.’s Renewed Motion for
Relief from the Automatic Stay (“Bank of America Stay Motion” - Docket # 381) 1 and on the
Motion for Relief from the Automatic Stay by La Vista Homeowner’s Association (“LVHA Stay
Motion” - Docket # 592). 	Bank of America, N.A. (“Bank of America”) is represented by
William R. Keleher, and La Vista Homeowner’s Association (“LVHA”) is represented by
Clifford C. Gramer. Yvette J. Gonzales, the Chapter7 Trustee, by and through her attorney
George “Dave” Giddens; Jeffery W. Potter, pro se; and Martin F. Friedlander, pro se each
objected to the Bank of America Stay Motion (See Docket #399, #397 and $398). 	LVHA filed a
response to the Bank of America Stay Motion, joining in the motion (Docket # 396), and Mr.
Friedlander filed a response to LVHA’s joinder (Docket # 407). The Chapter 7 Trustee and Mr.
Friedlander filed objections to the LVHA Stay Motion (See Docket # 626 and #616). 	Mr.
Friedlander also filed a supplemental objection to the Bank of America Stay Motion (Docket #
652), asserting, among other things, that Bank of America is not the holder of one of the notes
and mortgages it seeks to foreclose.
Bank of America and LVHA request relief from the automatic stay for the purpose of
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foreclosing their interests in certain real property commonly referred to as 53 La Vista, Santa Fe,
New Mexico. 	The Court held a final evidentiary hearing on the Bank of America Stay Motion
and the LVHA Stay Motion on March 10, 2008 and took the matters under advisement. 	After
consideration of the testimony and evidence presented at the final hearing, and being otherwise
sufficiently informed, the Court finds that cause exists to lift the automatic stay in accordance
with 11 U.S.C. § 362(d) and in connection therewith FINDS:
1. 	Jeffery W. Potter (Mr. Potter or Debtor) filed a voluntary petition under Chapter 11 of
the Bankruptcy Code on May 19, 2005.
2. Bank of America filed its first motion for relief from the automatic stay on September
29, 2005. (See Docket # 54).
3. 	On March 13, 2006, the Court entered an order denying Bank of America’s request
for relief from the automatic stay without prejudice. (See Order Denying Bank of America’s
Motion for Relief from Stay Without Prejudice to Renewing its Request for Relief After a Period
of Six Months (“First Stay Order” - Docket # 148).
4. The First Stay Order determined, among other things, that the Debtor’s outstanding
debt to Bank of America was $1,298,170.78 as of the petition date. See First Stay Order, ¶ 6.
5. 	Mr. Potter executed two notes in favor of Bank of America: one dated December 21,
2001 in the amount of $928,000.00 (“First Note”), and another note dated December 21, 2001 in
the amount of $200,000.00 (“Balloon Note”).
6. The First Note is secured by a mortgage executed by Mr. Potter dated December 21,
2001 (“First Mortgage”).
7. The Balloon Note is secured by a mortgage executed by Mr. Potter dated December
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21, 2001 (“Second Mortgage”).
8. 	The First Note includes an endorsement which was left in blank. See Exhibit 1.
9. The copy of the First Note attached to the Proof of Claim filed by Bank of America
did not include the endorsement. See Claim # 6.
10. 	The First Mortgage was subject to a Pooling and Servicing Agreement with the
Bank of New York. See Exhibit 6.
11. In connection therewith, Bank of America executed an Assignment of Security
Instrument dated February 11, 2002. The Assignment of Security Instrument was never
recorded.
12. Bank of America gave notice of its intent to terminate the Pooling and Servicing
Agreement with the Bank of New York by letter dated June 24, 2004, and requested the return of
documentation relating to the First Note and First Mortgage. See Exhibits 6 and 7.
13. Bank of America has in its possession the original Assignment of Security
Instrument, the original First Note, and the original First Mortgage.
14. 	Bank of America is the holder of the First Note, the Balloon Note, the First
Mortgage and the Second Mortgage.
15. 	No payments have been made on the First Note or the Balloon Note post-petition.
See First Stay Order, ¶ 7.
16. 	The First Mortgage and the Second Mortgage relate to certain real property
commonly known as 53 La Vista, Santa Fe, New Mexico (“Property”).
17. The Property is comprised of three tracts: 	Tract 10, Tract 11, and Tract 12. The
improvements, consisting of a home, studio garage and guesthouse are all situated on Lot 12. y.
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18. 	The First Mortgage and the Second Mortgage encumber only Tract 12.
19. 	All parties argue that the Property is subject to a Declaration of Easements and
Restrictions and Covenants for Tracts 10, 11, and 12 in La Vista Subdivision which provides that
legal title to Tracts 10 and 11 shall never be conveyed or owned separately from legal title to
Tract 12.
20. Prior to the filing of the bankruptcy, Debtor purported to transfer the Property by
quitclaim deed to Mariana Danilovic, as Trustee of the Legal Defense and Maintenance Trust of
California (“California Trust”). See Exhibit 14 - Title Report, which includes a copy of a
Quitclaim Deed dated September 15, 2003 from Jeffery Potter to Mariana Danilovic, as Trustee
of the California Trust.
21. 	LVHA filed a Claim of Lien against the Property based on unpaid homeowner’s fees
and assessments in the amount of $1,800.00 as of January 31, 2003, plus interest thereafter at the
rate of 6% per annum for the month of February 2003, and 18% per annum commencing March
1, 2003, plus attorneys’ fees and further assessment amounts as may thereafter be accrued. See
Docket 14 - Title Report. 	LVHA’s Claim of Lien was filed against Tracts 10, 11, and 12. Id.
As of January 15, 2008, LVHA claims outstanding assessments, plus interest and attorneys’ fees
in the amount of $68,454.16. See Exhibit 15.
22. 	No payments of homeowners’ association fees and/or assessments have been paid
post-petition. 	See First Stay Order, ¶ 13.
23. 	LVHA requested relief from the automatic stay with respect to Tracts 10, 11, and
12.
24. Pre-petition, Bank of America initiated a proceeding in the First Judicial District
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Court, State of New Mexico, County of Santa Fe as Case No. D-101-CV-200400254 (“State
Court Action”) to foreclose the Second Mortgage. See Exhibit 14 - Notice of Lis Pendens.
25. 	The Bank of America Stay Motion does not request relief from the automatic stay
for the purpose of resuming the State Court Action. Rather, the Bank of America Stay Motion
requests relief from the automatic stay to allow it to foreclose its interest in the First Mortgage
and the Second Mortgage. 	See Docket # 381.
26. The Debtor’s bankruptcy case was converted from Chapter 11 to Chapter 7 on
November 17, 2006. See Docket # 228.
27. 	Yvette J. Gonzales was appointed Chapter 7 Trustee of the Debtor’s bankruptcy
estate. See Docket # 230.
28. 	The Chapter 7 Trustee initiated an adversary proceeding seeking to avoid the
transfer of the Property to the California Trust as a fraudulent transfer, and to recover the
Property for the benefit of the bankruptcy estate. 	See Adversary Proceeding No. 07-1062 M
(“Fraudulent Transfer Action”).
29. 	The Property has been damaged as a result of leaks in the roof and by mold.
30. 	Jane Trusty, a residential certified appraiser in the State of New Mexico, completed
an appraisal of the Property. 	The appraisal completed by Ms. Trusty reports that the market
value of the Property (comprised of Lots 10, 11 and 12 and all improvements in their existing
condition) as of July 9, 2007 is $590,000.00. 	See Exhibit 13.
31. 	Carol Hawkins, a licensed real estate broker, estimated that the value of the Property
is $550,000.00 for all three tracts, assuming no house on the Property. 	If Tracts 10, 11, and 12
could be sold separately, Ms. Hawkins estimated that each lot could be sold for between
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2That section provides, in relevant part:
On request of a party in interest and after notice and a hearing, the court shall
grant relief from the stay provided under subsection (a) of this section, such as by terminating,
annulling, modifying, or conditioning such stay –
(1) for cause, including the lack of adequate protection of an interest in property
of such party in interest;
(2) with respect to a stay of an act against property under subsection (a) of this
section, if –
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization[.]
11 U.S.C. § 362(d)(1) and (2).
3See also, In re Tirey Distrib. Co., 242 B.R. 717, 723 (Bankr.E.D.Okla. 1999)(“‘Cause’
has no clear and limited definition and is therefore determined on a case by case basis.”)(citing
In re Texas State Optical, Inc., 188 B.R. 552, 556 (Bankr.E.D.Tex. 1995)); In re Kansas
Psychiatric Inst., Inc., 186 B.R. 723, 728 (Bankr.D.Kan. 1995)("Section 362(d)(1) does not
define 'cause' and courts are required to consider this issue on a case-by-case basis.")(citing In re
Kelly, 125 B.R. 301 (Bankr.D.Kan. 1991)).
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$250,000.00 and $300,000.00.
32. 	Based on the estimated values proffered by Ms. Trusty and Ms. Hawkins, and on the
Court’s prior finding in the First Stay Order establishing of the outstanding indebtedness to Bank
of America as of the petition date, there is no equity in Tract 12 in excess of the amounts due
Bank of America.
DISCUSSION
Relief from the automatic stay is governed by 11 U.S.C. § 362(d) and may be granted
upon a showing of “cause.” 11 U.S.C. § 362(d). 2 “Cause” is not defined by the Bankruptcy
Code. 	For this reason, “‘discretionary relief from the stay must be determined on a case by case
basis.’” Pursifull v. Eakin, 814 F.2d 1501, 1506 (10 th Cir. 1987)(quoting In re Castlerock
Properties, 781 F.2d 159, 163 (9th Cir. 1986)(quoting In re MacDonald, 755 F.2d 715, 717 (9th
Cir.1985)(additional internal quotation marks omitted)).3 Section 362(g) allocates the burden of
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4See also, Tirey Distrib, 242 B.R. at 723 (“The party requesting the relief from the
automatic stay has the burden of proof on the issue of the debtors’ equity in the property and the
party opposing such relief has the burden of proof on all other issues.”).
5See also, In re Bison Res., Inc., 230 B.R. 611, 616 (Bankr.N.D.Okla. 1999)(“‘[S]ection
362(d)(1) requires an initial showing of cause by the movant, while section 362(g) places the
burden of proof on the debtor for all issues other than ‘the debtor’s equity in property.’”)(quoting
In re Sonnax Ind., Inc., 907 F.2d 1280, 1285 (2nd Cir. 1990)(remaining citation omitted)).
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proof for motions seeking relief from the automatic stay. It provides:
In any hearing under subsection (d) or (e) of this section concerning relief from
the stay of any act under subsection (a) of this section –
(1) the party requesting such relief has the burden of proof on the issue of the
debtor’s equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
11 U.S.C. § 362(g).
Thus where equity in the property is at issue, the creditor bears the burden of proving a lack of
equity, and the opposing party bears the burden as to all other issues. 	Id.4 When equity is not at
issue, i.e., the creditor seeks relief for “cause” other than a lack of equity, the moving party must
nevertheless make a prima facie showing of “cause.” See Wilson v. Unioil (In re Unioil), 54
B.R. 192, 194 (Bankr.D.Colo. 1985)(“Once the party seeking relief from stay establishes a
legally sufficient basis, i.e., ‘cause,’ for such relief, the burden then lies with the debtor to
demonstrate that it is entitled to the stay.”)(citing In re Curtis, 40 B.R. 795 (Bankr.D.Utah
1984)); Tirey Distrib., 242 B.R. at 723 (“‘Although under § 362(g)(2) the debtor has the burden
of proof on the issue of ‘cause’ the [moving party] has the burden of going forward with the
evidence in the first instance to establish that there are some facts to support its allegation of
‘cause.’’”)(quoting In re Tursi, 9 B.R. 450, 453 (Bankr.E.D.Pa. 1981)).5 In the instant
proceeding, Bank of America and LVHA must establish some facts to indicate that sufficient
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6A secured creditor seeking relief from the automatic stay under 11 U.S.C. § 362(d)(2)
must show that it holds a valid security interest in the property. See In re U.S. Physicians, Inc.,
236 B.R. 593, 605 (Bankr.E.D.Pa. 1999) (“The alleged secured party bears the burden of proving
the validity of its security interest in the debtor's property (citations omitted) . . . . relief under §
362(d)(2), requiring, as it does, a debtor's lack of equity in the property regarding which relief is
sought, is only appropriately granted when the movant has a security interest in that property.
Even as to § 362(d)(1), a ‘valid secured status, while not a prerequisite, is a very important factor
to be considered in deciding whether a moving party is entitled to relief from the automatic stay
per 11 U.S.C. § 362(d).”)(quoting In re Tashjian, 72 B.R. 968, 972 (Bankr.E.D.Pa.1987)). See
also, 11 U.S.C. § 362(d)(1) (“ . . . including a lack of adequate protection of an interest in
property of such party in interest.”)(emphasis added); In re Wolsky, 53 B.R. 751, 757
(Bankr.D.N.C. 1985)("Obviously, the initial element of a creditor's prima facie case [seeking
adequate protection] is to prove that a valid security agreement actually exists.").
7Cf. 	Brown v. Spofford, 95 U.S. 474, 478 (1877) (“Promissory notes payable to order
may be transferred by indorsement, or when indorsed in blank or made payable to bearer they are
transferable by mere delivery, and the possession of such an instrument indorsed in blank or
made payable to bearer is prima facie evidence that the holder is the proper owner and lawful
possessor of the same[.]”); Independent School Dist. of Ackley v. Hall, 113 U.S. 135, 139, 5 S.Ct.
371, 373, 28 L.Ed. 954 (1885) (determining that the municipal bonds at issue shared “every
characteristic of negotiable, promissory notes” such that, “[u]pon being indorsed in blank by the
original payees, the title passes by mere delivery, precisely as it would had they been made
payable to a named person or bearer.”)(emphasis added).
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“cause” exists to lift the automatic stay. Opposing parties must then demonstrate why the stay
should not be lifted.
Whether Bank of America has demonstrated it has a security interest in the Property.
As preliminary matter, Mr. Friedlander asserted that Bank of America has not established
that it is the holder of the First Note and First Mortgage, based on the fact that the First Note and
First Mortgage were the subject of a Pooling and Servicing arrangement with the Bank of New
York, and based on the existence of a blank endorsement to the First Note. 6 Bank of America
sufficiently demonstrated that it is the holder of the First Note and the First Mortgage. A blank
endorsement included on a promissory note does not affect current ownership, which was
established in this case by possession. 7 No evidence was presented to the Court that any party
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8The Debtor’s bankruptcy proceeding converted from Chapter 11 to Chapter 7, and the
Debtor is no longer seeking to reorganize. Thus the Property is not necessary to an effective
reorganization. See In re Kelly, 125 B.R. 301, 303 (Bankr.D.Kan. 1991) (noting that in a case
filed under Chapter 7 "effective reorganization is not necessary")(citation omitted). And, as
analyzed below, Bank of America has carried its burden of proving a lack of equity in the
Property. Relief may be granted as to Bank of America under 11 U.S.C. § 362(d)(2).
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other than Bank of America is the current holder of the First Note and First Mortgage; to the
contrary, the testimony established that Bank of America has possession of the following
original documents: the First Note, the First Mortgage, the Balloon Note, the Second Mortgage,
and the unrecorded Assignment of Security Interest.
Sufficient “cause” exists to grant relief from the automatic stay as to the Property.
Because of the convoluted nature of the competing interests of the parties in the Property
and the nature of the Property itself, whether relief from the automatic stay is appropriate
involves more than a simple determination that there is a lack of equity in the Property and that
the Property is not necessary to an effective reorganization.8 The Property consists of three
tracts, yet Bank of America’s First Note and the Balloon Note are secured by mortgages on Tract
12. 	The Property appears to be subject to restrictive covenants that may require that all three
tracts be sold together. LVHA’s Claim of Lien encumbers all three tracts. 	The Chapter 7
Trustee’s interest in the Property as property of the bankruptcy estate is predicated on success in
the pending Fraudulent Transfer Action.
Despite the fact that Bank of America’s First Mortgage and Second Mortgage encumber
only Tract 12, Bank of America has sufficiently demonstrated that there is a lack of equity in the
Property. 	Its indebtedness, as established by the First Stay Order, is at least $1,298,170.78. The
value of the Property is no more than $590,000.00 for all three Tracts. Given that there may be
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restrictions on Bank of America’s ability to transfer only Tract 12, the Court finds that the value
of Tract 12 alone cannot be more than $590,000.00. 	Further, the Property is not necessary to
the Debtor’s reorganization efforts; the case has been proceeding under Chapter 7 liquidation
since November of 2006.
The Chapter 7 Trustee argues that a lack of equity has not been shown as to LVHA,
consequently the automatic stay should not be lifted as to LVHA. 	She further asserts that,
despite the lack of equity as to Bank of America, relief from the automatic stay will not allow
her to sufficiently protect her potential interests in Tracts 10 and 11. 	Mr. Friedlander asserts
that because the Chapter 7 Trustee’s interests depend upon the outcome of the Fraudulent
Transfer Action, any request for relief from the automatic stay should itself be stayed pending
the outcome of the Fraudulent Transfer Action.
Some factors relevant to the issue of whether the stay should be modified for “cause”
include:
(1) an interference with the bankruptcy ; (2) good or bad faith of the debtor; (3) injury to
the debtor and other creditors if the stay is modified; (4) injuries to the movant if the stay
is not modified; and (5) the portionality of the harms from modifying or continuing the
stay.
Tirey Distrib., 242 B.R. at 723 (citing In re Milne, 185 B.R. 280, 283 (N.D.Ill. 1995)).
When stay relief is requested for the purpose of pursuing litigation in a forum other than the
bankruptcy court, factors relevant to the determination of “cause” include:
(1) trial readiness; (2) judicial economy; (3) the resolution of preliminary bankruptcy
issues; (4) costs of defense or other potential burden to the estate; (5) the creditor’s
chances of success on the merits; (6) specialized experience of the non-bankruptcy
forum; . . .(8) the extent to which trial of the case in the non-bankruptcy forum will
interfere with the progress of the bankruptcy case; (9) the anticipated impact on the
movant or other nondebtors if the stay is lifted . . .
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Bison Res., 230 B.R. at 616 (quoting In re Marvin Johnson’s Auto Service, Inc., 192 B.R.
1008, 1014 (Bankr.N.D.Ala. 1996))(footnotes omitted)).
Bank of America’s ability to foreclose its interest in Tract 12 will necessarily require that
LVHA’s Claim of Lien be addressed as part of that proceeding, since LVHA’s Claim of Lien
encumbers all three tracts. 	For this reason, sufficient “cause” exists to lift the automatic stay as
to LVHA as well as Bank of America. 	Furthermore, the enforceability of the restrictive
covenants on the Property will require adjudication. Matters relating to the Property and Bank
of America’s interest therein may require an action for quiet title or declaratory judgment to
determine whether Bank of America can foreclose its interest in Lot 12 in light of the restrictive
covenants associated with the Property and whether the restrictive covenants are enforceable. 	It
will likely take a significant amount of time to resolve these complicated issues. 	There is no
reason to delay such a determination until the Fraudulent Transfer Action has been resolved,
provided that the enforcement of any judgment entered in a proceeding outside the bankruptcy
court is restricted. In the event the Fraudulent Transfer Action has not been adjudicated as of the
time a judgment is entered by any other court in connection with the Property, further relief from
this Court will be required before any party may enforce its rights against the Property. 	On the
other hand, if a judgment is entered in favor of the defendants in the Fraudulent Transfer Action,
the automatic stay will no longer apply to the Property, making it unnecessary for any further
relief from this Court as to the Property. 	Relief from the automatic stay under these conditions
will not unduly interfere with the progress of the bankruptcy proceeding. Nor will it unduly
harm the opposing parties.
Based on these considerations, the Court finds that the automatic stay should be modified
with respect to the Property so that these matters may be sorted out in an appropriate forum, but
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that the Court will continue to exercise its jurisdiction to determine whether the bankruptcy
estate or the California Trust is the ultimate beneficiary of any proceeds that may result from a
sale of the Property. 	Thus the stay will be modified as to the Property to allow the parties to
proceed only to judgment. Enforcement of any judgment obtained is subject to further order of
the Court, unless and until the Fraudulent Transfer Action is resolved in favor of the defendants
to that action.
CONCLUSION
Sufficient cause exists to lift the automatic stay for the purpose of proceeding to
judgment as to Bank of America’s First Mortgage and Second Mortgage and the claim of lien of
LVHA, including any claims, counterclaims or defenses that might be raised by any party with
respect to the Property, except those matters that are the subject of the pending Fraudulent
Transfer Action. That action may proceed though its normal course of litigation. 	In the event
the Chapter 7 Trustee is not successful in the Fraudulent Transfer Action, the bankruptcy estate
will have no interest in the Property; the automatic stay will no longer apply; and Bank of
America, LVHA, the Debtor, the California Trust, or any other party claiming an interest in the
Property may proceed without further order of the Court. If the Chapter 7 Trustee prevails in the
Fraud Transfer Action, it will be necessary for the parties to any action concerning the Property
to request further relief from this Court to enforce any judgment that may have been issued in the
intervening period. 	Orders consistent with this Memorandum Opinion will be entered.
____________________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Date entered on docket: March 19, 2008
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COPY TO:
Jeffery Watson Potter 	William R. Keleher
PO Box 8280 	Attorney for Bank of America, N.A.
Santa Fe, NM 87504-8280 	PO Box 2168
Albuquerque, NM 87103-2168
Clifford C Gramer, Jr
Attorney for La Vista Homeowners’ Association 	Martin S. Friedlander
3733 Eubank Blvd NE 	10350 Wilshire Blvd., Suite 603
Albuquerque, NM 87111-3536 	Los Angeles, CA 90024-4717
Alice Nystel Page 	Yvette J. Gonzales
Office of the United States Trustee 	Chapter 7 Trustee
PO Box 608 	PO Box 1037
Albuquerque, NM 87103-0608 	Placitas, NM 87043-1037
George D Giddens, Jr
Attorney for Chapter 7 Trustee
10400 Academy Rd NE Ste 350
Albuquerque, NM 87111-1229
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