Opinion
No. 7-02-10188 MA.
March 30, 2005
Daniel J. Behles, Chapter 7 Trustee, Albuquerque, NM.
William F. Davis, Attorney for Debtors, Albuquerque, NM.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
THIS MATTER is before the Court on the Trustee's Motion for Turnover of Property by the Debtor ("Motion for Turnover"). Debtors objected to the Motion for Turnover, and the Court held a final hearing on March 8, 2005. The Chapter 7 Trustee, Daniel J. Behles, represented himself, and William F. Davis represented the Debtors. The parties submitted a Pre-Trial Order on Trustee's Motion for Turnover of Property ("Pre-Trial Order") containing several stipulations of fact. The Trustee seeks turnover from the Debtors of approximately 130 pieces of equipment and motor vehicles which were once secured by a lien in favor of Compass Bank. The Trustee asserts that the bankruptcy estate retained its interest in the equipment and motor vehicles because Compass Bank released its lien, but did not transfer title, such that the vehicles and equipment which are now in the Debtors' possession should be turned over to the trustee in accordance with 11 U.S.C. § 542. The Debtors assert that the property was abandoned by operation of the orders granting relief from stay to Compass Bank, such that the equipment and motor vehicles are no longer property of the bankruptcy estate subject to turnover. Alternatively, Debtors contend that the private sale of the equipment and vehicles by the auctioneer on behalf of Compass Bank effectively cut off the rights of the trustee. After reviewing the relevant facts in light of applicable statutes and case law, the Court finds that while the orders granting relief from the automatic stay do not constitute an abandonment of the trustee's interest in such property, the private sale extinguished the trustee's right to recover the property under 11 U.S.C. § 542.
To the extent needed to supplement the Court's findings of fact detailed below, the Court incorporates by reference herein all stipulations of fact contained in the Pre-Trial Order.
The facts are largely not in dispute. Debtors filed their voluntary petition under Chapter 11 of the Bankruptcy Code on January 10, 2002. The case was converted on June 2, 2003, and Michael J. Caplan was appointed the interim Chapter 7 Trustee. Compass Bank was owed money secured by certain real property and by the equipment and vehicles that are the subject of the Motion for Turnover. Compass Bank filed a Motion for Relief from Automatic Stay on March 31, 2003. (Docket # 577). On June 18, 2003, a Stipulated Order Granting Compass Bank Partial Relief by Modifying the Automatic Stay ("Stay Order") was entered. Counsel for Compass Bank, the interim Chapter 7 Trustee Michael J. Caplan, and counsel for the Debtors approved the Stay Order. The Stay Order terminated the automatic stay with regard to the equipment and vehicles.
Compass Bank entered into a contract with Cunningham Associates, Inc. to sell at auction on August 6, 2003 the equipment and vehicles that are the subject of the Motion for Turnover. See Trustee's Exhibit 4. No auction was ever held. Instead, Compass Bank instructed Cunningham Associates, Inc. to conduct a private sale. See Trustee's Exhibits 8, 9, 10 and 12. In July of 2003, Compass Bank gave notice to all creditors, Debtor's counsel, and Michael J. Caplan, the interim Chapter 7 Trustee, of its intent to sell the vehicles and equipment by private sale on or after August 6, 2003. See Trustee's Exhibit 12. Cunningham Associates, Inc. received a bid for $122,000.00 to purchase the equipment and vehicles, which was later raised to $133,000.00, and ultimately withdrawn. ( See Pre-Trial Order, Uncontroverted Facts, ¶¶ l. and m.). Compass Bank then accepted the bid of New Mexico Underground for $130,000.00 to purchase the vehicles and equipment. The sale did not realize proceeds in excess of what the Debtors owed to Compass Bank.
Debtors have a long-standing business relationship with New Mexico Underground, and Mr. Willie Montano, one of the owners of New Mexico Underground. ( Testimony of Sal Guzman and Willie Montano). Sal Guzman approached Mr. Montano regarding the equipment and vehicles, and suggested that New Mexico Underground purchase the equipment and vehicles so that the Debtors could continue to use the equipment and vehicles to complete projects they were working on for New Mexico Underground, with the understanding that they would pay New Mexico Underground what it had paid for the vehicles and equipment. Debtors would thereafter own the vehicles and equipment. This agreement between the Debtors and New Mexico Underground was not reduced to writing.
New Mexico Underground paid the purchase price of $130,000.00 to Cunningham Associates, Inc. Compass Bank then signed the "release of lien" provision on the certificates of title, and the certificates of title were delivered to New Mexico Underground. No bill of sale was issued for the purchase of the vehicles and equipment. New Mexico Underground never took possession of the vehicles or equipment, and never took the certificates of title to the New Mexico Motor Vehicle Department to change the reflected owner or secured party on the certificates of title. Mr. Montano considered the certificates of title his collateral for the loan arrangement between New Mexico Underground and the Debtors. New Mexico Underground did not charge any interest on the loan. Debtors repaid New Mexico Underground the $130,000.00 purchase price for the vehicles and equipment in a series of payments, the last of which was made on or about April 13, 2004. New Mexico Underground delivered the certificates of title to Mr. Guzman on or about February 20, 2004. Debtors remain in possession of the vehicles and equipment. Mr. Guzman testified that he has incorporated his business, and that the vehicles and equipment are now listed on the books of his corporation, Chava Trucking Company, Inc. The certificates of title for all of the titled vehicles and equipment continue to reflect Chava Trucking, or Chava Trucking Company as the registered owner. Daniel J. Behles became the permanent Chapter 7 Trustee in October of 2003. See Order Granting Bravo Trucking's and Barbara Ball's Motion to Resolve Disputed Trustee Election (Docket # 754).
DISCUSSION and CONCLUSIONS OF LAW
A. Wether the vehicles and equipment were abandoned
Debtors first argue that the vehicles and equipment are not subject to turnover because they were abandoned by the estate. The following three orders are relevant to determining whether the vehicles and equipment were effectively abandoned:
Property of the estate as defined by 11 U.S.C. § 541 is subject to turnover. See in re Himes, 179 B.R. 279, 282 (Bankr.E.D.Okla. 1995) (noting that in an action for turnover the trustee bears the burden of proving that the property is property of the estate). The effect of abandonment is to divest the trustee of any interest in the abandoned property, remove the abandoned property from the bankruptcy estate, and re-vest the abandoned property in the debtor. 11 U.S.C. § 554; In re Dewsnup, 908 F.2d 588, 590 (10th Cir. 1990), aff'd, 502 U.S. 410, 116 L.Ed.2d 903, 112, S.Ct. 773(1992) (property abandoned reverts to the debtor); Catalano v. C.I.R., 279 F.3d 682, 685 (9th Cir. 2002) ("Upon abandonment, the debtor's interest in the property is restored nunc pro tunc as of the filing of the bankruptcy petition."); In re Bray, 288 B.R. 305, 306 (Bankr.S.D.Ga. 2001) (abandonment divests the trustee of any interest in the abandoned property, and the property is no longer a part of the bankruptcy estate) (citations omitted).
1. The Stay Order, entered June 17, 2003 (Docket # 661);
2. Stipulated Order Granting Compass Bank Relief by Modifying the Automatic Stay and for Abandonment of All Property Encumbered by Compass Bank ("Second Stay Order") (Docket # 712); and
3. Agreed Order to Set Aside Trustee's Abandonment of Property ("Order Setting Aside Abandonment") (Docket #784).
The Stay Order modifies the automatic stay as to the vehicles and equipment to allow Compass Bank to repossess and resell the vehicles and equipment, with proceeds from the sale to be applied to the debt owed by the Debtors to Compass Bank. The Stay Order recites that the Chapter 7 Trustee has "decided to abandon the vehicles and equipment" but the Stay Order does not decree that the vehicles and equipment are abandoned.
The Second Stay Order recites that Compass Bank and the Interim Chapter 7 Trustee have already agreed to orders modifying the automatic stay with regard to the vehicles and equipment, and that the automatic stay should be modified further to allow Compass Bank to proceed with foreclosure actions against certain additional real property described in the Second Stay Order. The decretal portion of the Second Stay Order states that the "above described real property is abandoned pursuant to the bankruptcy code and shall not become property of a successor bankruptcy estate." The Order Setting Aside Abandonment identifies several pieces of real property, "nontitled equipment, 1999 Mercedes Benz SL500, [and a] 1998 Lincoln Navigator" as property previously abandoned by the Interim Chapter 7 Trustee. The Order Setting Aside Abandonment sets aside the abandonment with regard to the identified properties, but does not reimpose the automatic stay.
The Stay Order was ineffective to abandon the vehicles and equipment. "Termination of the automatic stay is neither analogous to, nor the equivalent of, an abandonment of property of the estate." In re Ridgemont Apartment Assocs., 105 B.R. 738, 741 (Bankr.N.D.Ga. 1989). Abandonment is governed by 11 U.S.C. § 554, which provides, in relevant part, that "[a]fter notice and a hearing, the trustee may abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(a). Orders granting relief from the automatic stay do not effectuate an abandonment of the property, unless the order specifically provides for abandonment. See Catalano, 279 F.3d at 687 ("[I]f an abandonment order is included within an order issued pursuant to another section of the Bankruptcy Code, the order must set forth the abandonment specifically and affirmatively, and parties in interest must have received the requisite notice and hearing required by § 554(a)."). Though the Stay Order recites that the trustee intends to abandon the vehicles and equipment, a stated intention to abandon in the future does not constitute a present abandonment. The Second Stay Order specifically abandons only the real property described within the Second Stay Order, and is silent with regard to the abandonment of vehicles or equipment, though it recites that the parties have already entered into stipulated orders for relief from the automatic stay with regard to vehicles and equipment. The Order Setting Aside Abandonment specifically identifies nontitled equipment, a 1999 Mercedes Benz SL500, and a 1998 Lincoln Navigator. These vehicles and equipment are included in the items subject to the Trustee's turnover action. Because the Order Setting Aside Abandonment specifically identifies non-titled equipment and two vehicles, the implication is that all other titled vehicles remain abandoned by the estate. However, because the Stay Order was ineffective to abandon the vehicles and equipment, and the Second Stay Order does not specifically abandon any vehicles or equipment, the Court will not conclude that the effect of the Order Setting Aside Abandonment is to confirm the abandonment of all titled vehicles by the estate. Because there has been no formal abandonment of the vehicles and equipment in accordance with 11 U.S.C. § 554, the vehicles and equipment remain property of the estate.
B. Whether the private sale of the vehicles and equipment to New Mexico Underground effectively transferred the title sufficient to cut off the rights of the Chapter 7 Trustee
Debtors next assert that even if the vehicles and equipment were not abandoned, the private sale to New Mexico Underground effectively cut off the rights of the trustee to recover that property despite the fact that the owner reflected in the certificates of title was never changed. Debtors cite several New Mexico cases for the proposition that the statutory title transfer provisions do not provide the exclusive method for transferring title, so that while the owner reflected in a certificate of title serves as prima facie evidence of ownership, ownership may be shown by other proof. See, e.g., Schall v. Mondragon, 74 N.M. 348, 353, 393 P.2d 457, 461 (1964) (noting that "[s]ince New Mexico does not require an exclusive or mandatory method of transferring title to an automobile, it therefore follows that title and ownership pass when the parties intend it to pass.") (citations omitted); Clovis Fin. Co. v. Sides, 72 N.M. 17, 21, 380 P.2d 173, 176 (1963) ("Such language [contained in N.M.S.A. 1953 § 64-3-10 (now codified as N.M.S.A. 1978 § 66-13-12 (Repl. Pamp. 2001)) providing that the certificate of title is prima facie evidence of ownership] clearly indicates an intention that the certificate of title is only evidence of ownership and that the same may be shown by other proof.").
There is no dispute that the certificates of title continue to reflect Chava Trucking as the owner, that Compass Bank signed the release of lien provision on each of the certificates of title, and that New Mexico Underground did not obtain a bill of sale for its purchase of the vehicles and equipment. It is also undisputed that the Debtors currently have possession of the certificates of title, the vehicles, and the equipment. Based on these facts, the Chapter 7 Trustee asserts that Compass Bank did not conduct a sale of the collateral, but instead accepted a price for the release of its liens, and that because the property was not abandoned, it remains subject to turnover under 11 U.S.C. § 542. Debtors counter that the private sale was conducted in accordance with applicable law and that because the interim Chapter 7 trustee received notice of the private sale, the Chapter7 trustee cannot now seek turnover of the vehicles and equipment that were the subject of the private sale. This Court agrees.
The arrangement between New Mexico Underground and the Debtors was ineffective to create a security interest in favor of New Mexico Underground. Pursuant to § 66-3-201 N.M.S.A. 1978 (Repl. Pamp. 2001), a security interest is not perfected against attaching creditors, subsequent transferees or lienholders unless it is perfected in accordance with that section. Because this section of the New Mexico statutes provides the exclusive method for perfection, and because New Mexico Underground did not perfect its security interest in accordance with the statute, any claimed security interest of New Mexico Underground in the vehicles and equipment would be ineffective against the Chapter 7 trustee. Cf. Jones v. Beavers, 116 N.M. 634, 638, 866 P.2d 362, 366 (Ct.App. 1993) (party who loaned debtor funds to pay off outstanding loan on dump truck and who obtained possession of the certificate of title, but failed to perfect it in accordance with applicable New Mexico statutes did not have a valid security interest in the debtor's truck). However, because the Debtors repaid New Mexico Underground, New Mexico Underground returned the certificates of title to the Debtors and does not now assert a security interest in the vehicles or equipment. This issue is not relevant to whether a sale occurred between Compass Bank and New Mexico Underground, and ultimately, whether the trustee can regain possession of the vehicles and equipment.
Relief from the automatic stay allows a creditor to pursue its rights in collateral. See Catalano, 279 F.3d at 686 (noting that "[w]hen 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."). If the collateral has not been abandoned, the trustee retains an interest in any excess proceeds from the sale or foreclosure, but does not retain an interest in the collateral itself, provided that under applicable state law, a sale or foreclosure of the collateral by the creditor cuts off the rights of the debtor to the property. See In re Home Hearth Plano Parkway, L.P., 320 B.R. 596, 603 and n. 6 (Bankr.N.D.Texas 2004) (finding that any surplus after foreclosure is property of the estate, noting that because the property was not administered or abandoned, it remained property of the estate even after the stay was lifted, "until the estate's rights were cut off by foreclosure."). In other words, following a sale of the debtor's collateral pursuant to state law, the excess proceeds remain property of the estate subject to an action for turnover by the trustee. See Nebel v. Richardson, (In re Nebel), 175 B.R. 306, 312 (Bankr.D.Neb. 1994) ("Relief from the 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.") (citing Killebrew v. Brewer (In re Killebrew), 888 F.2d 1516, 1520 (5th Cir. 1989)). What is not subject to turnover is the property itself, provided the creditor conducted a lawful foreclosure action in accordance with applicable state law. See Home Hearth, 320 B.R. at 603, n. 6. This is because the trustee, who holds an interest in all property of the estate, retains whatever interest the debtor has under applicable state law following a creditor's realization of its security interest through foreclosure or sale of the debtor's property .
In this case, the trustee seeks turnover of the property itself, presumably because he believes the property is worth more than the price realized at the private sale. But there is no evidence that the private sale was not properly conducted in accordance with applicable law.
In accordance with applicable New Mexico statutes, following a default by the debtor, a creditor may sell or dispose of property in any "commercially reasonable" manner, including by private sale. N.M.S.A. 1978 § 55-9-610(a) and (b) (Repl. Pamp. 2001). Compass Bank gave notice to the Debtors, all creditors, and the Chapter 7 trustee of its intent to sell the vehicles and equipment at private auction, as required by applicable New Mexico statutes. Id.; Cf. Richardson Ford Sales, Inc. v. Johnson, 100 N.M. 779, 676 P.2d 1344 (Ct.App. 1984) (finding notice of private sale to debtors reasonable, and sale itself commercially reasonable). Following the sale, the debtor retains a right to any surplus proceeds, but a completed sale transfers all of the debtors rights in the collateral to the transferee. N.M.S.A. 1978 § 55-9-608(a)(4) (Repl. Pamp. 2001) (requiring secured party to account for and pay debtor for any surplus); N.M.S.A. 1978 § 55-9-617(a)(1) (Repl. Pamp. 2001) ("A secured party's disposition of collateral after default: (1) transfers to a transferee for value all of the debtor's rights in the collateral.").
The Trustee does not allege that the sale was not conducted in a commercially reasonable manner as required by state law, but rather asserts that no sale occurred at all. The technical defect of having not issued a bill of sale does not negate the essence of the transaction. In accordance with applicable New Mexico law, title to a vehicle passes "if at all, when the parties intended that it should." Forsythe v. Central Mut. Ins. Co., 84 N.M. 461, 464, 505 P.2d 56, 59 (1973) (citations omitted). Having tendered the purchase price to Compass Bank, the sale of the vehicles and equipment was consummated, and New Mexico Underground could have requested and obtained a bill of sale for the purchase of the vehicles and equipment, and could have taken the bill of sale to the motor vehicle department and obtained new certificates of title reflecting New Mexico Underground as the owner. Thus the private sale of the vehicles and equipment to New Mexico Underground for a purchase price that did not realize proceeds in excess of the amount owed Compass Bank effectively cut off the rights of the Trustee to the property. Having received notice of the private sale, the trustee cannot now challenge the sale by seeking turnover of the property, despite the fact that there was no formal abandonment of the property, and despite the fact that Compass Bank did not issue a bill of sale, but instead released its lien and delivered the certificates of title to New Mexico Underground. The Trustee's request for turnover, therefore, fails, notwithstanding the subsequent transaction between New Mexico Underground and the Debtors.
These findings of fact and conclusions of law are entered in accordance with Rule 7052, Fed.R.Bankr.P. An appropriate order will be entered.