Opinion
NOT FOR PUBLICATION
Attorney for Plaintiff: Gary B. Rudolph, Esq. Sparber Rudolph Annen
Attorney for Defendant: Jeffrey A. Agnew, Esq.
MEMORANDUM DECISION
Peter W. Bowie, Chief Judge United States Bankruptcy Court
This adversary proceeding, filed by the Chapter 7 trustee to seek authority to sell real property pursuant to 11 U.S.C. § 363(h), came on for trial on the sole issue of whether the benefit to the estate of a sale of the property outweighed the detriment to the co-owner. The other issues under § 363(h) were resolved in the trustee's favor by way of summary adjudication.
The Court has subject matter jurisdiction over this proceeding pursuant to 28 U.S.C. § 1334 and General Order No. 312-D of the United States District Court for the Southern District of California. This is a core proceeding under 28 U.S.C. § 157(b)(2)(N),(0).
Discussion
Debtors Randy and Laurie Schisler filed their Chapter 7 petition on September 17 2002. On their original Schedule A they listed an "Equitable Interest" in a single family residence in Ramona, California. Schedule A indicated it was Randy's interest only, and valued the interest at $150,000, with a secured claim for an identical amount. Schedule D indicated the total debt on the property was in excess of $159,000.
About five weeks later, debtors amended their schedules to reflect that Randy had a "2/5 Equitable Interest" in the property, a claim of a homestead exemption of $75,000, and that there was a $57,000 second mortgage on the property. Schedule H disclosed that Glenna Ann Beckett, of the same address, was a co-debtor on the mortgages.
The trustee's initial report indicated that the meeting of creditors was concluded and she was investigating possible non-exempt assets. The debtors received their discharge on December 19, 2002. In January, 2003 the trustee gave notice of her intent to sell some personal property, which she subsequently did. In March, 2003 she obtained a Claims Bar Date from the Court and notice was given setting a June 11, 2003 deadline. In October, 2003 the trustee filed a single claim objection, which was sustained.
In April, 2004 the trustee filed and noticed out her First and Final fee application. At the trial in this matter, she testified that as she was wrapping up matters she had a broker give her an opinion as to market value of the home. The broker told her sale of the house should close at around $575,000. The trustee wrote debtors' attorney, explained her position and that the total amount of claims in the case - including administrative claims at that point - was about $25,000. She offered to allow the debtors to refinance the property to pay the estate approximately that amount. Debtors did not accept.
Sometime thereafter, the trustee learned that the debtors, post-petition, had transferred the 40% interest and received $45,000 for it. The trustee again wrote their attorney, explained it was a serious matter, and demanded turnover and an accounting of the transaction. Meanwhile, Ms. Beckett learned of the trustee's claim of an interest in the property. She hired her own attorney who explained her position to the trustee in a letter. Thereafter, the trustee sought to employ counsel for the estate. In January, 2005 the trustee filed and served her complaint to avoid the post-petition transfer of the estate's 40% interest in the property. In August, 2005 she was successful on summary judgment in recovering the 40% interest.
In October, 2005 the trustee filed the instant complaint for authority to sell the property under § 363(h). The following day the trustee also filed a motion for turnover against the debtors. Turnover was ordered the following month, but required contempt proceedings, and even a complaint to revoke discharge, and in May, 2006 the parties finally reached agreement that included a stipulation for judgment for turnover and payment of $45,000 to the estate.
Debtor Randy Schisler had been Ms. Beckett's son-in-law, having married her daughter. Earlier, the Schisler family was living with Ms. Beckett in the South Bay area. The Schislers had a baby girl, and when she was about 2 they found the Ramona property. Ms. Beckett testified it was her dream home. It is large, on about .95 acre, with over 3300 square feet of living space.
Ms. Beckett testified the Schislers had no money, so she paid the 20% down payment and closing costs. Ms. Beckett was a registered nurse and making "good money". At some point around 1995 or 1996 the Ramona property was refinanced to draw down equity to pay off a line of credit Randy had taken out and used.
At some point, Randy and Ms. Beckett's daughter divorced. When the Ramona house was purchased, Ms. Beckett set up title with 60% in her name, 20% in her daughter's, and 20% in Randy's. As part of the divorce, the daughter transferred her 2 0% interest to Randy in lieu of paying child support. It appears Randy continued to reside at the Ramona property with Ms. Beckett.
Subsequently, Randy's next wife, Laurie, and her children moved into the Ramona property while she was getting her divorce. At some point, Ms. Beckett agreed to allow Randy to put a second mortgage on the property of about $60,000, which was to be his sole responsibility.
As already noted, the Schisler bankruptcy was filed in 2002 and the debtors received their discharge in December, 2002. Almost a year later, Randy Schisler signed over to Ms. Beckett the estate's 40% interest in the Ramona property, without trustee consent or court authorization. In return, he received $45,000 in cash, payoff of the second trust deed (almost $60,000), and payoff of the first trust deed (roughly $153,000). To finance the transaction, Ms. Beckett refinanced with a $300,000 loan in her name, alone. Ms. Beckett received net loan proceeds of about $37,000 which she testified she used to make repairs to the property.
Turning to the present, Ms. Beckett still resides at the Ramona property, as she has for over 22 years. She is 65 and due to commence receiving Social Security payments in January, 2008. She asserts she is disabled and unable to work any longer. She testified she had had a series of medical problems, including heart bypass surgery, a cracked pelvis and broken femur. She was off work for over one year in 2003, then returned to work in 2004. In March, 2005 she slipped in some mud, fell and broke her back. She said the doctors were considering implanting a morphine pump to help manage her pain. She is also extremely hard of hearing, even with the assistance of special equipment. She applied once for Social Security disability, representing herself, but the application was denied. She has since consulted with an attorney and intends to refile.
Until Social Security kicked in, Ms. Beckett's only income was from drawing down on her retirement. She rents out much of the space at the house and has five tenants. The renters pay about $2,400 per month. The monthly mortgage payment is about $2,050, and property taxes are about $4,200 per year. She testified she gets to live essentially rent-free because of the renters.
She testified the renters are much more than just co-occupants. They have become something like a family - at least as to some - and the renters help out around the place. Ms. Beckett has personal ties to the property, as well, from her more than 22 years there. Her granddaughter was two when they moved in, and her grandson was born while the family lived there with her. She has raised generations of pets there, and still keeps an aging mare on the property which she rides occasionally for short stretches with her doctor's permission.
The trustee's argument has been that Ms. Beckett would be at least as well off if the property were sold, she could put the bulk of her share of the proceeds to work, and she could rent an apartment, or even a small house nearby for $600 - $950 per month. She could also board the horse at a stable, which Ms. Beckett testified would cost $200 - $350 per month depending on the level of care and feed. The trustee says the house is much too big, and the lot is, also. It was a fall in the corral area that broke her back. Ms. Beckett's attorney acknowledged that the property may be too large for her to manage, and it might be safer for her to move. The Court notes that may be true, but Ms. Beckett would also be alone, with both her hearing and physical impairments if she were moved. As her attorney noted, those may be "value judgments".
For as long as § 363(h) has been on the statute books, relatively few published decisions have been rendered. In In re Persky, 893 F.2d 15 (2nd Cir. 1989), the court grappled with the benefit versus the detriment in terms of what a court may properly consider. There, the lender contended:
. . . that consideration of emotional, psychological, or physical detriment is improper under § 363(h). The Bank insists that in many cases a non-debtor co-owner will not be ousted from the marital property because he can re-purchase it rather easily considering the amount of equity he already has in it.
The court responded:
Adopting the Bank's proposition would mean that there is never any detriment to a co-owner resulting from a forced sale because §§ 363(1) and (j) provide that the co-owner will receive his share of the equity from the proceeds of the sale, and in addition must be given a right of first refusal once a final bid is made on the property. (Citation omitted.) This analysis has little rhyme or reason because, if it is correct, Congress' direction in § 363(h) requiring a balancing of detriment and benefit would be meaningless. Since first refusal rights, a co-owner's right to her share of the proceeds, and the balancing test are all included in the statute, it is obvious that Congress was acutely concerned with the potential harshness that § 363(h) might create. (Citation omitted.) Hence, it seems evident that in valuing detriment to the co-owner, § 363(h)'s balancing test should include non-economic factors.
898 F.2d at 20-21.
In the instant case, the analysis under § 363(h)(3) is made more complicated by the circumstances in which it arises. As noted, in May, 2 004, as she was winding up the bankruptcy case, the trustee obtained a broker price opinion that indicated substantial non-exempt equity in the property. She quite appropriately wrote debtors' counsel and offered to allow the debtors to pay off the creditors of the estate through a refinance. We'll never know what might have happened if the trustee had sent a copy of that letter to Ms. Beckett, particularly since Ms. Beckett thought she had bought out the debtors' interest in the property six months previously. Regardless, as of May, 2004 the trustee testified the claims register showed total claims filed of $20,985.76. Moreover, the trustee had gotten about $4,500 from sale of personal property. As the trustee estimated, total claims, including her own probably were no more than $25,000. No one responded to the trustee's reasonable proposal.
Then the trustee learned of the post-petition transfer of the 40% interest in the property. Again, she wrote to debtors' counsel, and she demanded both turnover of the $45,000 and an accounting. No copy was sent to Ms. Beckett, but about six weeks later Ms. Beckett's attorney wrote to the trustee asserting Ms. Beckett's position. It is indeed unfortunate that Randy Schisler did not promptly turnover the $45,000 to the trustee. It appears those funds, alone, would have paid off all administrative expenses and creditor claims, and probably returned some monies to Mr. Schisler.
The sequence of events that followed is somewhat puzzling, for promptly after hiring counsel, the trustee filed her complaint against Ms. Beckett to avoid and recover the unauthorized post-petition transfer of the real property. For some reason, she did not pursue a turnover motion at that time to recover the $45,000 which again, might have obviated the need to pursue the first or second adversaries against Ms. Beckett. In any event, as already noted, the trustee was successful on summary judgment in avoiding the transfer. Then she filed the instant adversary for authority to sell, and the next day finally filed the turnover motion.
The turnover motion proves to be the most puzzling piece, because it is not at all clear what claim the trustee has to the $45,000 once she avoided the unauthorized transfer. She had recovered the 40% interest in the property, which is all the estate ever owned. The $45,000 was the cash consideration which Ms. Beckett paid for the now-avoided transfer. If anyone had a claim to the money, it was she, not the trustee. But, of course, she was not a party to the trustee's turnover proceeding against Randy Schisler. As noted, the trustee ultimately did recover the $45,000 from Mr. Schisler, after expensive litigation, and the trustee has held on to it ever since.
By this stage of the proceedings, with the litigation against Mr. Schisler and the sequential adversaries filed against Ms. Beckett, the administrative claims of the trustee's counsel probably had exceeded the funds available plus the $45,000. So, in effect, Ms. Beckett is being sued to recover the trustee's administrative expenses in litigating with Mr. Schisler, and herself, at least in part because the trustee did not first pursue the turnover proceeding.
The only issue pending before the Court is whether the trustee has carried her burden of establishing that the benefit to the estate of a sale of the Ramona property outweighs the detriment to Ms. Beckett if the property is sold out from under her after more than 22 years, and relegating her to go off on her own, with her disabilities. It is a given that economically the estate will benefit by payment of all reasonable claims. To their credit, trustee's counsel has stated that it will subordinate its administrative claim to ensure full payment of all creditors. When non-economic circumstances are considered, however, the Court concludes that the trustee has not met her burden that the benefit outweighs the detriment. To the contrary, the Court is persuaded that the detriment outweighs the benefit at the present time.
An issue that is not before the Court at the present time is whether, having recovered by turnover the $45,000 which was the consideration for the transfer of Mr. Schisler's and the estate's 40% interest in the property, the trustee has thereby adopted in some way the transfer such that the estate has the $45,000 and Ms. Beckett has the benefit of her bargain. While it is hard to see how the trustee gets to keep both, the Court expresses no opinion on the merits of such an argument because neither side has had any opportunity to address it, nor is it necessary to resolution of the instant adversary proceeding.
Conclusion
For the reasons set out above, the Court finds and concludes that the trustee has failed to satisfy one element of the elements required for this court to authorize sale of a non-debtor's interest in property pursuant to 11 U.S.C. § 363(h). Accordingly, judgment shall be entered in favor of Ms. Beckett's Trust and against the trustee. Counsel for Ms. Beckett shall prepare and lodge a separate form of judgment consistent with this Memorandum Decision within thirty (30) days of the date of service of this Decision.
CERTIFICATE OF MAILING
The undersigned, a regularly appointed and qualified clerk in the office of the United States Bankruptcy Court for the Southern District of California, at San Diego, hereby certifies that a true copy of the attached document, to wit:
MEMORANDUM DECISION
was enclosed in a sealed envelope bearing the lawful frank of the Bankruptcy Judges and mailed to each of the parties at their respective address listed below:
Said envelope(s) containing such document were deposited by me in a regular United States mail box in the City of San Diego, in said district on April 2, 2008.
Barbara J. Kelly, Judicial Assistant