SEGARRA MIRANDA v. DORAL FINANCIAL CORP. et al

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF PUERTO RICO
In re: :
:
SOR ANGIE MEDINA ROSADO, : Case No. 04-01972 (GAC)
:
Debtor : Chapter 7
___________________________________:
:
WILFREDO SEGARRA MIRANDA, :
Chapter 7 trustee, :
:
Plaintiff, :
:
v. : Adv. No. 05-00280
:
DORAL FINANCIAL CORP. D/B/A :
HF MORTGAGE BANKERS, :
SOR ANGIE MEDINA ROSADO, :
:
Defendants :
___________________________________:
DECISION AND ORDER
The debtor filed a petition under Chapter 13 on February 25,
2004. On March 21, 2005, Doral Financial Corp. (“Doral”) filed a
motion for relief from the automatic stay based on the debtor’s
arrears in her mortgage. At the time of the filing of the motion,
Doral indicated that the principal was $151,448.13 and the arrears
were $9,114.74. The debtor did not oppose the motion and the
motion for relief from stay was granted.
On April 19, 2005, one day after Doral was granted relief from
stay, the debtor filed a motion to convert to Chapter 7. Wilfredo
Segarra Miranda was appointed as Chapter 7 trustee on June 17,
2005. On August 11, 2005, the debtor filed amended schedules
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indicating that she intended to retain her residence and reaffirm
her debt to Doral. The debtor scheduled the property with a value
of $182,050.00 and the secured debt to Doral in the amount of
$182,022.24. The debtor thereafter sought to reconvert to Chapter
13, which the trustee opposed and the debtor later withdrew the
request.
On September 27, 2005, the trustee filed this adversary
proceeding seeking to avoid Doral’s lien on the property, alleging
that Doral refinanced the property on August 17, 2005, after the
conversion to Chapter 7, without the Court’s authorization. The
trustee claims that the real property was property of the estate
and that the post-petition lien is avoidable. While the adversary
was pending, the trustee learned that Doral had scheduled the
public sale of the residence and he sought to stay the sale of the
property (dkt. #35), which the Court stayed (dkt. #36).
The trustee filed a motion for summary judgment on October 25,
2006 (dkt. #28). Doral opposed the motion for summary judgment and
filed a cross motion for summary judgment (dkt. #31). The trustee
filed a reply (dkt. #34), Doral filed a sur-reply (dkt. #41) and
the trustee opposed the sur-reply (dkt. #42).
Doral admits that it refinanced the mortgage on the debtor’s
residence, increasing the amount of the secured debt to the
principal amount of $200,000 and that it did not seek bankruptcy
court authorization for the refinancing. Doral argues that there
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was no equity in the property for the estate and that if the lien
is avoided, Doral will be still be secured as to the amount of the
previous lien. Thus, Doral contends that avoidance of the lien
will be of no benefit to the unsecured creditors of the estate.
The trustee contends that although the stay was lifted, the
real property remained property of the estate, as it was not
abandoned by the trustee. The trustee also contends that the
property is worth more than the debt to Doral and it was argued at
the hearing that Doral itself had an appraisal of the property in
the amount of $250,000.
After a hearing, the Court took the matter under advisement.
DISCUSSION
The Court notes at the outset that Doral is a sophisticated
lender with competent bankruptcy counsel. The Court is disturbed
by Doral’s cavalier attitude in refinancing property, with
knowledge of a bankruptcy proceeding, without the Court’s approval.
This is exacerbated by Doral’s conduct in seeking to foreclose the
new lien while an adversary proceeding to avoid it is pending.
This is not conduct that can be condoned.
Doral did obtain relief from the automatic stay to foreclose
its prepetition security interest in the debtor’s property, but
this does not equate with an abandonment of the property.
When a bankruptcy court lifts, or modifies, the automatic
stay, it merely removes or modifies the injunction
prohibiting collection actions against the debtor or the
debtor’s property. Although the property may pass from
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the control of the estate, that does not mean that the
estate’s interest in the property is extinguished. See
Jim Walter Homes, Inc. v. Saylors (In re Saylors), 869
F.2d 1434, 1437 (11th Cir. 1989). “Relief from an
automatic stay entitles the creditor to realize its
security interest . . . in the property, but all proceeds
in excess of the creditor’s interest must be returned to
the trustee.” Nebel v. Richardson (In re Nebel), 175
B.R. 306, 312 (Bankr.Neb. 1994)(citing Killebrew v.
Brewer (In re Killebrew), 888 F.2d 1516, 1520 (5th Cir.
1989)). Thus, an order lifting the automatic stay by
itself does not release the estate’s interest in the
property and “the act of lifting the automatic stay is
not analogous to an abandonment of the property.” Id. at
311 (citing In re Ridgemont Apartment Assocs., 105 B.R.
738, 741 (Bankr.N.D. Ga. 1989).
Catalano v. Comm’r of Internal Revenue, 279 F.3d 682, 686-87 (9th
Cir. 2002); Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516,
1520 (5th Cir. 1989); Brook Valley IV v. Schropp (In re Brook
Valley IV), 347 B.R. 662, 671 (B.A.P. 8th Cir. 2006).
This Court rejects the minority line of cases that hold that
relief from stay can be equated with abandonment. See e.g. In re
Griggs, 82 B.R. 532 (Bankr.W.D.Mo. 1988) and its progeny. Holding
otherwise would be contrary to the provisions of 11 U.S.C. § 554,
which governs abandonment. Brook Valley IV, 347 B.R. at 671. As
stated by the court in Nebel v. Richardson, 175 B.R. 306
(Bankr.D.Neb. 1994):
[i]f the two provisions [§ 362 and § 554] were analogous,
Section 554 would be superfluous in any case in which
relief from stay was granted. This result would conflict
with the principle that the Court should read and apply
the plain language of the Bankruptcy Code. Patterson v.
Shumate, 504 U.S. 753, 112 S.Ct. 2242, 119 L.Ed.2d 519
(1992).
Id. at 311-12. Accordingly, in the present case, the Court
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concludes that the debtor’s real property remained property of the
estate after Doral was granted relief from stay. Brook Valley IV,
347 B.R. at 671.
Moreover, the Bankruptcy Code provides, with exceptions not
present here, that
when a case under chapter 13 of this title is converted
to a case under another chapter under this title–property
of the estate in the converted case shall consist of
property of the estate, as of the date of filing of the
petition, that remains in the possession of or is under
the control of the debtor on the date of conversion.
11 U.S.C. § 348(f)(1)(A). Thus, when the debtor converted her case
from Chapter 13 to Chapter 7, her interest in her residence
transferred to the Chapter 7 estate by operation of law. The
trustee also became the sole representative of the estate. 11
U.S.C. § 323(a).
The Bankruptcy Code provides that the trustee may avoid a
post-petition transfer of property of the estate that is not
authorized by the court or otherwise authorized by the Bankruptcy
Code. 11 U.S.C. § 549(a). “Any entity asserting the validity of
a transfer under § 549 of the Code shall have the burden of proof.”
Fed. R. Bankr. P. 6001.
In the present case, bankruptcy court approval was necessary
to effect the refinancing. The debtor and Doral failed to obtain
court approval for the refinancing. While Doral claimed in its
pleadings that the property did not have equity for the estate,
Doral did not dispute the trustee’s statement that Doral’s
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appraisal at the time of the refinancing was in the amount of
$250,000.00. In any event, the actual value does not bear on the
trustee’s ability to avoid the unauthorized transfer.
Doral contends that if its security interest is avoided, it
will revert to the position that it occupied prior to the
refinancing, i.e. it will be secured by its original lien. But,
the original lien was voluntarily extinguished by Doral. As
explained by the First Circuit Court of Appeals:
in refinancing there are multiple transactions, including
a new loan to the debtor, a mortgage back from the debtor
to the new lender, a pre-arranged use of the proceeds of
the loan to pay off the old loan and the release of the
old mortgage. Thus, new proceeds are generated,
nominally for the benefit of the debtor, and the debtor,
by making a new mortgage, transfers a property interest
to the new lender.
Lazarus v. Greater Atlantic Mortgage, 478 F.3d 12, 15-16 (1st Cir.
2007). While the First Circuit in Lazurus grappled with the issue
of whether the earmarking defense could be applied to protect a
mortgage from avoidance, the Court faced issues very similar to
those posed here. In Lazurus, as in the present case, the Court
recognized that avoidance of the transaction would cause the lender
to lose its status as a secured creditor, and the Court stated that
“the penalty is not without a general benefit-pour encourager les
autres [to encourage the others]-and is easily avoided [by
complying with the directives of the statute].” Id. at 16. That
is to say that avoidance of Doral’s lien in this case will set a
precedent that the refinancing of mortgage loans of debtors in
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bankruptcy can not be contemplated without the bankruptcy court’s
approval.
The Court concludes that the debtor’s real property remained
property of the estate in spite of the order granting Doral relief
from the automatic stay to foreclose its prepetition security
interest. Likewise, the Court concludes that Doral’s refinancing
was unauthorized and subject to avoidance. Because the lien will
be avoided and because Doral voluntarily cancelled its original
lien, the Court concludes that Doral is an unsecured creditor and
that it will share in a pro rata distribution with the other
unsecured creditors upon the sale of the property by the Chapter 7
trustee.
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ORDER
WHEREFORE IT IS ORDERED that the trustee’s motion for summary
judgment (dkt. #28) shall be, and it hereby is, GRANTED. Doral’s
cross-motion for summary judgment (dkt. #31) is DENIED.
IT IS FURTHER ORDERED that Doral’s lien, established in Deed
No. 119 of August 17, 2005, before Notary Public Ariel Obed Caro
Perez, is AVOIDED and the Registrar of Property for the Third
Section of San Juan, Department of Justice of the Commonwealth of
Puerto Rico, is directed to cancel the lien.
SO ORDERED.
San Juan, Puerto Rico, this 26th day of September, 2007.
BY THE COURT:
s/ Gerardo A. Carlo
_______________________
GERARDO A. CARLO
U.S. Bankruptcy Judge
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