Summary
holding that issue of whether Chapter 7 trustee could sell property of the estate free of the interests of the property's co-owner pursuant to § 363(h) “arises under the Bankruptcy Code and ‘stems from the bankruptcy itself’ ” (quoting Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) )
Summary of this case from Johnson v. RFF Family Partnership, LP (In re Johnson)Opinion
Case No. 10-52667 Adv. Pro. No. 10-2172
12-23-2014
In re: MOHAMED KEBE, Debtor. Susan L. Rhiel, Plaintiff, v. Central Mortgage Company, et al., Defendants.
Chapter 7
MEMORANDUM OPINION AND ORDER ON CHAPTER 7 TRUSTEE'S REQUEST TO SELL BOTH THE ESTATE'S INTEREST IN PROPERTY AND THE INTEREST OF THE CO-OWNER
I. Introduction
Susan Rhiel, the Chapter 7 trustee of the bankruptcy estate of Mohamed Kebe, seeks to sell the estate's interest in a residence that Kebe owned when he commenced his bankruptcy case and also to sell the interest of nondebtor Mamadou Seye, who co-owns the home and lives there with his wife and three children. In order to prevail, Rhiel must meet her burden of proving that any benefit a sale would bring Kebe's bankruptcy estate outweighs the detriment the sale would cause Seye. Because a sale of the property would cause Seye significant detriment while netting relatively little for the estate, the Court concludes that Rhiel has failed to satisfy her burden.
II. Jurisdiction and Constitutional Authority
The Court has jurisdiction to hear and determine this matter pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. See 28 U.S.C. § 157(b)(2)(N).
Rhiel seeks to sell property of the estate free of the interests of the property's co-owner pursuant to § 363(h) of the Bankruptcy Code. This matter arises under the Bankruptcy Code and "stems from the bankruptcy itself[.]" Stern v. Marshall, 131 S. Ct. 2594, 2618 (2011). The Court accordingly has the constitutional authority to hear and enter a final order determining Rhiel's request.
III. Background
The Court sets out below the lengthy history of this dispute in order to place its decision in context. In September 2004, Kebe and Seye purchased residential real property located at 6797 Sowers Drive, Canal Winchester, Ohio ("Property"). To finance the purchase, Kebe and Seye executed a promissory note in the principal amount of $152,000 ("Note") and granted a mortgage to Washtenaw Mortgage Company ("Mortgage") to secure the Note's repayment. The Mortgage was subsequently assigned to Central Mortgage Company ("Central Mortgage").
On March 11, 2010 ("Petition Date"), Kebe filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code, and his interest as the co-owner of the Property became property of his bankruptcy estate. Kebe scheduled the Property as having a value of $161,000 as of the Petition Date. Doc. 1, Schedule A - Real Property, and Central Mortgage filed a proof of claim asserting that it was owed $144,828.74. Case No. 10-52667, Claim No. 6. Kebe lived at the Property on the Petition Date, but has since moved. His brother-in-law, Seye, was and still is the Property's co-owner and continues to live at the Property with his wife and three children.
References to documents filed in Kebe's bankruptcy case, Case No. 10-52667, will be designated as "Doc. ___" and references to documents filed in the adversary proceeding, Adversary Proceeding No. 10-2172, will be designated as "Adv. Doc. ___."
Several weeks after the Petition Date, Rhiel filed an interim report stating that the Mortgage was not properly executed and that she would be filing an adversary proceeding against Seye and an objection to Kebe's claim of exemption in the Property. Doc. 13. She then filed the complaint ("Complaint") commencing this adversary proceeding (Adv. Doc. 1) against Seye and Central Mortgage.
On the same day she filed the Complaint, Rhiel filed an objection to Kebe's claimed homestead exemption. Doc. 17.
The Complaint asserted six claims for relief. Count One sought a declaration that Kebe's interest in the Property is not encumbered by the Mortgage. Invoking the rights and powers of a hypothetical bona fide purchaser of real property conferred by § 544(a)(3) of the Bankruptcy Code, Rhiel sought in Count Two of the Complaint to avoid the lien on Kebe's interest in the Property on the basis that the Mortgage's certificate of acknowledgment failed to satisfy the requirements of Ohio law. Count Three requested avoidance of the transfer of Kebe's interest in the Property represented by the Mortgage as an alleged preferential transfer under § 547(b) of the Bankruptcy Code. Count Four sought preservation of the lien on Kebe's interest in the Property for the benefit of his estate under § 551. Count Five requested recovery of "the property transferred, or value thereof, from [Central Mortgage] pursuant to 11 U.S.C. § 550[.]" In Count Six, Rhiel sought a judgment authorizing her to sell the Property free and clear of Seye's interest under § 363(h) of the Bankruptcy Code. In a prior opinion, the Court granted summary judgment in favor of Rhiel on Counts Two and Four and dismissed Counts One and Three as moot. Count Five remains pending, and Count Six is the subject of this opinion.
Seye failed to answer the Complaint by the June 1, 2010 deadline, and Rhiel moved for default judgment. Adv. Doc. 5. Seye, however, filed a response to the motion for default judgment through counsel, asserting that he was "out of the jurisdiction" at the time the Complaint was filed, that he made diligent efforts to retain counsel upon his return, and that as an immigrant from Senegal he had limited knowledge of the court system. Adv. Doc. 7 at 1. He moved to file an answer instanter along with his response to the default judgment motion. Id. at 3. According to his response, "Counsel for Defendant Seye contacted the Chapter 7 Trustee's counsel, who was unwilling and unable to consent to leave to answer." Id. at 2. Rhiel filed a reply in which she argued that Seye's response should be stricken as untimely. She asserted that, because the response deadline was 21 days from the date of service of the motion for default judgment (June 7, 2010), the deadline to respond expired on June 28, 2010 and Seye's response therefore was late. Adv. Doc. 9 at 2. But an additional three days is added to the response period when service of a motion is made by mail. See Fed. R. Bankr. P. 9006(f). Thus, the deadline for filing a response to the motion for default judgment was July 1, 2010, and Seye's response, which was filed on June 29, 2010, was in fact timely. Rhiel also argued that "Seye's limited knowledge of the court system is irrelevant in this matter, as few defendants understand the court system or know the proper steps to take in a lawsuit, regardless of where they are from[,]" and that Seye had delayed in taking the necessary action to defend the lawsuit. Adv. Doc. 9 at 4.
The summons and complaint were served on Seye by mail on April 29, 2010. The 30th day from the date of service fell on Saturday, May 29, 2010, and the following Monday was the Memorial Day holiday. Thus, the answer date was June 1, 2010. See Fed. R. Bankr. P. 9006(a)(1)(C).
The Court set the default judgment motion, response and reply for hearing. Prior to the hearing, the parties reached an agreement permitting Seye to file an answer. Adv. Doc. 10. Seye then filed his answer, along with a cross-claim against Central Mortgage based on the defective Mortgage, and a third-party complaint against Pillar Title Agency, Inc. ("Pillar") for alleged negligence in permitting its agent to notarize the Mortgage in an improper manner. Adv. Doc. 12. Pillar moved to dismiss the third-party complaint, and both Pillar and Seye filed briefs on the issues raised by the motion to dismiss. Adv. Docs. 18, 20 and 22. While the dismissal motion was pending, Rhiel moved for summary judgment against Seye and Central Mortgage (Adv. Doc. 23), both defendants responded (Adv. Docs. 27, 28) and Rhiel filed a reply (Adv. Doc. 37).
After filing her reply, Rhiel filed a motion for entry of an order appointing another judge in the district to mediate this adversary proceeding (Adv. Doc. 39), stating that her attempts to settle the case had been unavailing. She also stated:
The Debtor and Seye are interested in keeping this house and, upon information and belief, are current on their mortgage payments. If the Trustee could resolve her claims against Central Mortgage, she would have no reason to sell the Property pursuant to § 363(h), in which case Seye could likely settle his dispute against
Central Mortgage and Pillar as well. The Trustee has always been willing to resolve this case in a way that would allow the Debtors [sic] to keep the house, if that is possible.Id. at 4. Although the Court granted the motion, and the matter was scheduled for mediation, it later was informed that the mediation had been unsuccessful. Adv. Doc. 49.
In the meantime, the Court issued its memorandum opinion on the motion to dismiss the third-party complaint. See Rhiel v. Central Mortg. Co. (In re Kebe), 444 B.R. 871 (Bankr. S.D. Ohio 2011) ("Kebe I"). In Kebe I, the Court ruled that it lacked subject matter jurisdiction over Seye's negligence claim against Pillar because Seye failed to meet his burden of establishing that the outcome of the proceeding between the two could conceivably have any effect on Kebe's bankruptcy estate. The Court then dismissed the third-party complaint. Apparently ignoring the reasoning in Kebe I, Central Mortgage filed its own motion for leave to file a third-party complaint against Pillar, asserting that the Court had supplemental jurisdiction over Pillar and that the inclusion of Pillar in the litigation would benefit all parties to the dispute. Adv. Doc. 53. Pillar filed its opposition (Adv. Doc. 54), and the matter was set for oral argument. After hearing the arguments of the parties, the Court denied the motion on the same basis—lack of subject matter jurisdiction—that it had granted Pillar's previous motion to dismiss Seye's third-party complaint. Adv. Doc. 58.
The Court then issued a memorandum opinion concluding that Rhiel was entitled to summary judgment on her claims against Central Mortgage to avoid and preserve the Mortgage. Adv. Doc. 61. Rhiel v. Central Mortg. Co. (In re Kebe), 469 B.R. 778 (Bankr. S.D. Ohio 2012) ("Kebe II"). But the Court also found that summary judgment on the request to sell Seye's interest in the Property was not appropriate given the state of the record. Id. at 800. Rhiel fell short, the Court concluded, because the summary judgment record failed to demonstrate that a sale of the Property free of Seye's interest would produce a benefit to the estate, i.e., that the estate's share of the net proceeds would exceed existing liens on Kebe's interest in the Property. Id. Rhiel relied on the value of the Property as set forth in Kebe's petition, and presented no evidence to establish whether any other liens encumbered the Property. Nor did Rhiel present evidence regarding the costs of sale or the projected amount of the net proceeds of a sale. Id. at 797. Accordingly, the Court denied summary judgment, without prejudice, on the portion of the Complaint seeking authority to sell the Property free of Seye's interests. Id. at 800.
Following the ruling on the summary judgment motion, a number of procedural skirmishes broke out. Central Mortgage moved to dismiss Seye's cross-claim on the ground that the Court lacked both subject matter jurisdiction and constitutional authority to determine the matter. Adv. Doc. 69. Rhiel filed a motion to dismiss Count Six of the Complaint, i.e., the count seeking authority to sell Seye's interest in the Property, and an order permitting her to pursue Count Five, her claim for a money judgment against Central Mortgage under 11 U.S.C. § 550 ("Motion for Monetary Judgment") (Adv. Doc. 76). Rhiel's asserted basis for the Motion for Monetary Judgment was that, if she could sell the Property at all, it was unlikely that any sale would bring the bankruptcy estate as much as she believed she was entitled to recover from Central Mortgage under § 550 (i.e., $76,000, one half of the original principal amount of the Mortgage) as a result of her avoidance of the Mortgage on Kebe's interest. Central Mortgage responded by arguing, among other things, that Rhiel was not entitled to a monetary recovery from it under § 550 and that Rhiel should abandon the Property. Adv. Doc. 77. Rhiel filed a reply in which she contended that abandonment of the Property would constitute a breach of her fiduciary duties. Adv. Doc. 78. The Court conducted a telephonic status conference on the Motion for Monetary Judgment at which Rhiel's ability to proceed under § 550 was discussed, and the parties were asked to review case law provided by the Court on the applicability of § 550. Afterward, Rhiel withdrew the Motion for Monetary Judgment. Adv. Doc. 82.
A second pretrial conference was then held at which discovery deadlines were established and a trial date was set. Seye failed to comply with the deadline for identifying expert witnesses, and Rhiel moved to prohibit him from presenting expert testimony at trial. Adv. Doc. 85. Seye's counsel responded that Seye was in Senegal due to the death of his mother and that he had not had the opportunity to retain or pay an expert. Adv. Doc. 88. Counsel for Seye asked that discovery deadlines be reset to a time after Seye returned from overseas. Following a hearing, discovery deadlines were reset, and the trial date was rescheduled. Rhiel filed another motion to prohibit Seye from presenting expert testimony or evidence at trial because he again failed to meet the disclosure deadline. Adv. Doc. 99. Seye responded by seeking a seven-day extension of the deadline (Adv. Doc. 101) and by filing an appraisal prepared by Dan McKean, whom he identified as an expert. Rhiel objected, and asked for an extension of time within which to file her own witness and exhibit lists. Seye objected to the proposed extension, and moved for a continuance of the trial date. The Court set the various disputes for hearing. At the hearing, the Court ruled that there would be no continuance of the trial date, and that Seye was permitted 48 hours within which to file his expert report. The report was filed later that evening. Adv. Doc. 115.
During the ensuing trial, Rhiel presented testimony from a title agent and a realtor, and testified on her own behalf as to her experience in selling property as a bankruptcy trustee. Seye called an appraiser and a finance professor as witnesses on his behalf. Seye was called to testify by both parties.
In lieu of closing arguments, the parties opted to file post-trial briefs, and the Court entered a post-trial scheduling order. In accordance with the scheduling order, the parties filed the following: (1) Plaintiff, Susan L. Rhiel, Trustee's Post-Trial Brief ("Rhiel Brief") (Adv. Doc. 125); (2) Defendant Mamadou Seye Post-Trial Brief in Lieu of Closing Arguments ("Seye Brief") (Adv. Doc. 126); and (3) Plaintiff, Susan L. Rhiel, Trustee's Reply to Defendant Mamadou Seye's Post-Trial Brief (Adv. Doc. 127). Seye filed a motion to strike the Rhiel Brief, asserting that the affidavit attached to it contained information not presented at trial and thus constituted an impermissible attempt to present new evidence. Adv. Doc. 130. Rhiel filed a response to the motion to strike. Adv. Doc. 132. The Court issued an order denying the motion to strike, but at the same time reopening the record on the issues of the expenses incurred by the estate and Seye's ability to make payments necessary to retain his interest in the Property ("Reopening Order"). Adv. Doc. 133.
The affidavit stated that if she were permitted to sell the Property, Rhiel would agree to limit her attorneys' fees to $30,000 and her expenses to $2,848.53, but that if she did "not prevail at the trial, and need to continue to litigate this adversary proceeding, I will make a determination as to an appropriate amount of attorneys' fees and expenses at the end of the case at such time as the file is ready for closure." Adv. Doc. 125, Rhiel Aff. at 2.
As explained in the Reopening Order, "[t]he only element [of § 363(h)] at issue in this adversary proceeding is whether the benefit to the estate of a sale of [the Property] free of the interests of [Seye] outweighs the detriment, if any, to [Seye]." Id. at 2 (internal quotation marks omitted). Finding that the trial record was factually inadequate for the Court to make that determination, the Court ordered Rhiel to file a supplemental affidavit clarifying whether the expenses set forth in the affidavit attached to the Rhiel Brief included all amounts paid or owed to individuals who had performed services on behalf of Kebe's estate, and whether the expense figure set out in the affidavit was the total amount of expenses for which she would seek reimbursement. Id. at 5. The Reopening Order required both parties to submit any documentary evidence that would establish the amounts Seye had paid on the Note and that would demonstrate his ability to make payments on the Note, pay the real estate taxes and maintain insurance on the Property, and make any other payments necessary to retain the Property. Id. at 5-6.
In response, Seye filed reports attaching 15 months of Seye's checking account statements, federal income tax returns for Seye and his two children who were employed during the tax year 2013, and a letter from Central Mortgage addressed to Seye and Kebe containing information regarding its loan modification program. Adv. Docs. 136, 137. Rhiel filed nothing in response to the Reopening Order. On September 4, 2014, however, she filed a copy of the complaint in foreclosure filed by Central Mortgage in the Franklin County Court of Common Pleas on August 22, 2014 (Doc. 138). Seye moved to strike the foreclosure filing from the docket on the basis that it was an attempt by Rhiel to impermissibly present new evidence. Adv. Doc. 139. Rhiel did not respond to the motion to strike.
Central Mortgage sought relief from stay in Kebe's underlying bankruptcy case in order to pursue its state court remedies. Doc. 45. It obtained relief from stay on April 17, 2014, by way of an agreed order entered into with Rhiel. Doc. 50. The agreed order provided, in part, that "all costs of sale shall be taxed against the one half interest in the Property owned by Mamadou Seye. The bankruptcy estate shall not incur any of the costs associated with the foreclosure proceedings; and [u]pon a sale of the Property at foreclosure, Central [Mortgage] shall remit one half of the gross proceeds of sale to the Trustee." Id. at 2. Seye and his counsel were served with a copy of the relief from stay motion, but filed no response.
IV. Findings of Fact
Based on the evidence adduced at trial, including the documentary evidence and the testimony presented, and having considered the demeanor and credibility of the witnesses, the Court makes the findings of fact set forth below. This opinion constitutes the Court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure ("Civil Rule(s)"), made applicable by Rule 7052 of the Federal Rules of Bankruptcy Procedure ("Bankruptcy Rule(s)").
The findings set forth below track the parties' shifting burdens under § 363(h). Rhiel's initial burden was to demonstrate that the sale would bring some benefit to the estate. To meet this burden, she had to show that the estate's share of the net proceeds of a sale of the Property would exceed any existing liens on Kebe's interest in the Property—for if she could not do so, then there could not possibly be a benefit to the estate. Given that Rhiel was successful in making this initial showing, Seye was required to come forward with evidence of detriment. He did so, meaning that Rhiel was required to meet her ultimate burden of proving that the benefit to the estate of the sale would outweigh the detriment the sale would cause Seye. See Kebe II, 469 B.R. at 796.
A. Rhiel's Initial Burden of Demonstrating Some Benefit to the Estate
The starting point for the determination of whether Rhiel met her initial burden is the value of the Property. Based on the testimony of her appraiser, Ralph Berger, Rhiel asserted that the fair market value of the Property is $118,000. Berger's estimate was based on his personal inspection of the Property as well as his analysis of the sales of three properties in the area that he believed to be comparable to the Property. Hearing Transcript ("Tr.") (Adv. Doc. 120) at 37-41. By contrast, Seye's appraiser, Dan McKean, testified that the fair market value of the Property based upon comparable sales in the area and the condition of the Property is $105,000. Tr. at 134-39. Seye argued that the appraisal conducted by Berger was flawed because, among other things, he used an "across the board" adjustment (of $10,000), which is not preferred in the industry, and one of his comparables had been on the market for 577 days and was located in a different neighborhood than the Property. Seye asserts that if the Court disregards the sale of the property that is not truly a comparable sale, the actual value of the Property should be determined to be in the range of $105,000 to $107,000. Seye Br. at 6.
The Court finds the valuation of Seye's appraiser more credible than that of Rhiel's. Berger's across-the-board adjustments of $10,000 to the comparable sales he used was not explained, and he conceded that such adjustments are not preferred. Tr. at 47. Berger also testified that an adequate exposure time for the Property would be three to six months, yet one of the properties he used as a comparable was on the market for more than a year and a half and was outside of the neighborhood where the Property is located. That house sold for considerably more than the other houses used as comparables, making it an outlier that skewed Berger's appraisal. Tr. at 139-40. Put differently, this purported comparable sale was not in fact comparable. And yet Berger stated in his appraisal that he had given it the most weight. Rhiel Ex. 8.
Regarding the factors the Court uses in evaluating competing appraisals, see In re Smith, 267 B.R. 568, 572-76 (Bankr. S.D. Ohio 2001).
Further, after reviewing the photographs attached to the appraisals and the descriptions of the Property by both appraisers, the Court finds that the Property is in substantial disrepair, with significant deferred maintenance issues. McKean's report noted this deferred maintenance more fully, leading the Court to conclude that the lower valuation reflected in McKean's appraisal is a more accurate estimate of the Property's value. See Rhiel Ex. 8; Seye Ex. B. For example, unlike Berger, McKean noted that the house on the Property had water in the basement near the furnace and that a kitchen range with a hood was installed in what appears to be an unfinished garage. McKean's appraisal also documented the deferred maintenance inside the house, including drywall damage, more thoroughly than did Berger's appraisal. And McKean's description of his appraisal methodology reflected a process more rigorous than that of Berger. The Court accordingly finds that the $105,000 appraisal amount set forth in the opinion of McKean is the more realistic value of the Property.
The next step in deciding whether Rhiel met her initial burden is to estimate the net proceeds of a sale of the Property in light of the costs of sale and the existing liens on Kebe's interest in the Property. Based on her 27 years' experience as an attorney and 15 years' experience as a bankruptcy trustee, Rhiel testified that costs of sale, including real estate commissions and preparation of sale documents, generally amount to 10% (or less) of the sale price. Tr. at 61, 65, 67. The Court will defer to her experience on this issue and accept the 10% figure as the projected costs of sale here. Real property taxes on the Property would be deducted, but Rhiel testified that she believed they were current. Tr. at 65. The value of any other liens on Kebe's interest in the Property also would be deducted. According to Kevin Savely, a title examiner who testified on behalf of Rhiel, the only valid lien on Kebe's interest in the Property appeared to be one held by the State of Ohio in the amount of $471.15. Tr. at 17.
As already discussed, Rhiel has avoided the Mortgage lien on Kebe's interest in the Property.
Under these circumstances, the calculation relevant to whether Rhiel has met her initial burden is as follows:
| Sale price | $105,000.00 |
| Minus 10% costs of sale | - $10,500.00 |
|---|---|
| $94,500.00 | |
| Minus State of Ohio lien | - $471.15 |
| $94,028.85 | |
| Minus 1/2 to other party(ies) withliens on Seye's interest | - $47,014.42 |
| 1/2 to Bankruptcy Estate | $47,014.43 |
If the Property were to sell for $105,000, the estate's share of the net proceeds ($47,014.43) would exceed existing liens on Kebe's interest in the Property ($471.15). In addition, as explained in more detail in Section IV.C. below, Rhiel presented evidence suggesting that a sale of the Property might result in a small distribution to unsecured creditors. Thus, Rhiel met her initial burden of proof.
B. Seye's Burden of Proving Detriment
Because Rhiel satisfied her initial burden, the Court will analyze the detriment a sale would cause Seye. Seye emigrated from Senegal to the United States approximately 26 years ago and has lived in central Ohio for approximately the last 16 years. Seye and his wife and three children have lived at the Property since 2004. Tr. at 199. Although Kebe is a co-owner of the Property, his financial contributions to the household have consisted primarily of buying groceries for the family, Tr. at 202, and he no longer resides at the Property.
Seye's youngest child was a high school student at the time of trial; two of his children are adults with full-time jobs. Tr. at 222-24, 226. Those two children typically turn over their paychecks to Seye, and because their cultural tradition expects it, will remain in the home up to, and possibly after, marriage, and will continue to give their paychecks to their father. Tr. at 95, 222-23, 226-27, 245. All payments that have been made on the Note have been made by Seye, sometimes with the help of his two children who are employed. Tr. at 201-03, 225, 229. According to Seye, the monthly payment on the Note is approximately $1,334. Tr. at 200. Seye made payments on the Note until Rhiel filed the Complaint, at which time he stopped doing so out of fear of losing the Property despite making the payments. Tr. at 202-03.
In an attempt to quantify the detriment that a sale of the Property would cause Seye, his counsel called as an expert witness Professor Itzhak Ben-David, an assistant professor of finance at The Ohio State University Fisher College of Business. According to Ben-David, there are three components to the detriment Seye would suffer if Rhiel were permitted to sell the Property free and clear of his one-half interest. The first component is the financial effect that losing one-half of the current market value of the Property—for example, $59,000 if the Property were valued at $118,000—would have on Seye's balance sheet. Tr. at 191. The second component is approximately $11,800 for loss of the "option value," Tr. at 191, and the third component is for other costs of approximately $24,000, Tr. at 192, for a total detriment of $94,000. Tr. at 189, 192, 195-96. See also Seye Ex. D (estimating Seye's loss based on the three components at approximately $105,300).
Ben-David explained that he arrived at the $105,300 figure based on a $130,000 valuation of the Property rather than the $118,000 valuation posited at trial. Tr. at 190.
The Court will discuss each of these components in more detail below. But even at first glance, there appears to be no basis for concluding that the $94,000 dollar amount of detriment calculated by Ben-David at trial is even remotely accurate. Assuming that Seye owes $138,000 on the Note, Tr. at 179, and that his one-half interest in the Property has a value of $59,000—numbers that would give Seye negative equity in the Property of $79,000—Ben-David's testimony essentially is that losing a house with $79,000 of negative equity would cause Seye calculable damages of approximately $94,000. But it is difficult to see how that could possibly be the case. After all, Ben-David himself pointed out that, rather than detriment, there actually is "economic benefit from basically she[dd]ing off my negative equity . . . because by giving up a negative asset I'm improving my balance sheet." Tr. at 176. And a close review of the components that make up the $94,000 amount reveals that they are not based on Seye's actual circumstances.
The Court is using the $138,000 amount only for purposes of its calculations. It is not finding that this is the amount Seye owes Central Mortgage.
First, Ben-David's position that the immediate negative effect of a sale on Seye's balance sheet would be $59,000 does not hold up under scrutiny. Assume for the sake of argument, as Ben-David did during his testimony, that the Property's fair-market value is $118,000 (so that Seye's one-half interest in the Property has a value of $59,000) and that this is Seye's only asset. Also assume that the principal amount of Seye's liability on the Note is $138,000 and that this is his only debt. Under this scenario, the $59,000 home value on the asset side of Seye's balance sheet before the sale would be offset by his $138,000 liability on the Note. As noted above, using those numbers, Seye has a negative equity of $79,000 before the sale. As explained in Section IV.C below, Rhiel estimates that a sale of the Property for $118,000 would result in the payment of $52,864 to Central Mortgage (with the other half of the net sale proceeds being paid to the estate), reducing Seye's $138,000 debt to $85,136. Seye would have $0 remaining home value after the sale, meaning that his negative net worth would be $85,136, compared to a negative equity in the Property before the sale of $79,000. That is, Seye's negative equity after the sale would be approximately $6,000 greater than his negative equity before the sale, for a $6,000 detrimental effect on his balance sheet—far less than the $59,000 impact posited by Ben-David.
Seye is liable for the full amount due under the Note. Although Kebe also was so liable at one time, he has discharged his personal liability on the Note in his bankruptcy case.
Ben-David's allocation of approximately $11,800 for Seye's loss of the "option value" also is unwarranted under the circumstances of this case. According to Ben-David, the option value becomes relevant when the owner of an asset has zero or negative equity in the asset and the lender with the lien on the asset has no personal recourse against the owner. There is economic value, Ben-David suggested, in being able to retain the asset under those circumstances. For if the asset increases in value to such an extent that the owner has positive equity, the owner wins. On the other hand, if the asset's value instead remains the same or even decreases in value, the owner is no worse off than before given that the lender has no recourse against the owner. Tr. at 171.
Ben-David conceded that this analysis does not necessarily apply if the lender has recourse against the owner, Tr. at 171-72, which is the case with Seye, against whom Central Mortgage could obtain an in personam judgment under Ohio law. Ben-David speculated that the option-value analysis might still be relevant here if Seye's financial situation is so poor that Central Mortgage effectively has no recourse against him. Tr. at 172. But Ben-David also admitted that he does not "have any specific data" to support such a dire view of Seye's financial condition. Tr. at 172. Furthermore, in calculating Seye's option value, Ben-David assumed that it was possible that the Property would increase in value by $20,000, Tr. at 180, an assumption for which there also is no support in the record. Likewise, Ben-David acknowledged that the calculation of the option value "depends on market conditions" but that his calculation "comes from a theoretical paper[,]" not from any analysis of market conditions. Tr. at 191. In other words, Ben-David's calculation of the option value assumes several facts not in the record. Because an expert's opinion that assumes facts not supported by the record should be disregarded, see Shaw v. Strackhouse, 920 F.2d 1135, 1142 (3d Cir. 1990), the Court gives no weight to Ben-David's testimony regarding the option value.
The third component in Ben-David's analysis relates to others costs, including costs resulting from the loss of "the subjective value of home ownership[,]" Tr. at 168, the costs of the time and expense involved in finding a new home and moving into it, the costs incurred in losing one's existing social network and in establishing a new network, and the costs imposed by the physical and mental health effects arising from the loss of one's home ("Third-Category Costs"). Tr. at 169, 173. Ben-David calculated the Third-Category Costs in Seye's case to be $23,000 to $24,000. Again, though, he did not examine Seye's actual circumstances. Rather, Ben-David calculated those amounts by conducting a review of the literature regarding strategic default, Tr. at 173-74, where the "homeowner is underwater [and] decides to default because . . . he realizes he is better off shedding off the negative equity in his home and suffering the costs of . . . the damages associated with losing his home ownership." Tr. at 174-75. According to Ben David, an owner of a home that is "underwater" because its value is less than the outstanding mortgage debt engages in an analysis comparing the costs and benefits of continuing to make payments on the mortgage note and keeping the home to the costs and benefits of declining to make payments and eventually losing the home to foreclosure. Tr. at 176.
Based on his review of the literature, including a study by economists for the Board of Governors of the Federal Reserve System, Ben-David determined that "on average homeowners wait for their home values to decline 62% underwater before they default." Tr. at 178. He stated that the 62% figure "is an average number found in studies looking at the financial crisis over hundreds of thousands of homeowners . . . ." Tr. at 183. Using this 62% average, Ben-David calculated Seye's Third-Category Costs to be $23,000, Tr. at 181, or $24,000. Tr. at 192. Ben-David conceded that it "could be that [the percentage] need[s] to be adjusted to the specific situation" (i.e., Seye's situation). Tr. at 188.
The Court finds that the specific situation indeed is relevant; there are numerous factors that go into the decision whether to engage in a strategic default, some of which might not be pertinent to Seye's circumstances. Yet Ben-David conceded that he did not "interview Mr. Seye and I didn't ask [Seye's counsel] about what are the specific consequences or circumstances." Tr. at 174. Furthermore, Ben-David provided no reason for believing that the homeowners in the studies he reviewed made rational assessments of the costs and benefits of either defaulting or continuing to pay their mortgage debt. For all these reasons, the Court declines to rely on Ben-David's testimony or report to find that Seye's Third-Category Costs are $23,000 to $24,000. In short, while Ben-David's theories were interesting from an academic point of view, the Court finds that his opinions were too theoretical for purposes of quantifying any detriment to Seye and were not based on familiarity with Seye's actual circumstances. Accordingly, the Court gives his opinions no weight for purposes of determining Seye's detriment. Instead, the Court assesses Seye's detriment in the manner outlined below.
Although Seye has not provided the Court any persuasive methodology for quantifying his total detriment in terms of dollars and cents, there is no requirement that he do so. As discussed in the legal analysis set forth below, when deciding whether to authorize a sale of property of the estate free of interests of a co-owner under § 363(h), courts balance the benefit to the estate against the detriment to the co-owner. In so doing, they consider both economic detriment as well noneconomic detriment, and the courts do not require the co-owner to quantify the noneconomic detriment in order to prevail.
First, Seye would experience the economic detriment of a negative effect on his balance sheet. As discussed above, a sale by Rhiel would have an immediate detrimental effect on Seye's personal balance sheet. Using the Property's fair-market value of $105,000 determined by the Court, Seye's one-half interest in the Property has a value of $52,500. This value is offset by his liability on the Note, which the Court is assuming to be $138,000. Using those figures, Seye has negative equity in the house of $85,500. The Court estimates that a sale of the Property for $105,000 would result in the payment of $47,014.42 to Central Mortgage, reducing Seye's $138,000 debt to approximately $90,985. Because Seye would receive none of the sale proceeds and would have $0 remaining home value after the sale, his net worth vis-a-vis the Property after the sale would be negative $90,985. This amount compares to a negative equity in the Property before the sale of $85,500. The difference is $5,485. Thus, the sale would have an immediate negative effect on Seye's balance sheet of $5,485.
The negative effect of $5,485 would be the same regardless of the actual amount of the debt.
The negative effect on Seye's economic condition would not end there. Seye testified that he is the secretary of an organization composed of approximately 36 members of his mosque and/or the Senegalese community who contribute money on a regular basis to a fund for members who are in need of financial assistance. Tr. at 203-04; 215-16. He believes that he could obtain funds from the members of the organization and that those funds, as well as financial assistance from his sons and income from his business of selling of African art at various festivals around the country, would allow him to make the payments needed to cure the arrearage on the Note if Rhiel were to cease her attempts to sell the Property. Tr. at 93-94, 203-06, 241. A sale by Rhiel, though, would deprive Seye of his ability to use these sources of funds in order to both retain the Property while at the same time reducing his liabilities to Central Mortgage through making payments on the Note. Instead, in order to obtain replacement housing, Seye would be forced to make payments (e.g., rent) that would provide a place to live but would not reduce his liability to Central Mortgage. Moreover, upon the sale, Seye would incur moving costs. Tr. at 215. The Court notes that locating suitable replacement housing would take some time and moving five individuals from their residence of ten years into a new home would take considerable time.
Seye is not a native English speaker, Tr. at 220, and struggled at trial to express himself. Yet, even with the language difficulties, the Court found Seye to be a credible and sincere witness.
Seye attempted to quantify the moving costs, but the evidence he attempted to present, on which the court reserved as to its admissibility, Tr. at 213, must be excluded as inadmissible hearsay.
Second, Seye would incur detriment that is not readily quantifiable and that courts have included in the § 363(h)(3) analysis as "noneconomic" detriment. Seye testified that the fear of losing the family's home of ten years has negatively affected his health and that of his wife, suggesting that the actual loss of the home would have a similar effect. Tr. at 220-21. The detriment to Seye also would include the negative effect that losing his home would have on Seye's standing in the ethnic and religious communities of which he is a member. Tr. at 218-20.
Given all the foregoing, Seye has carried his burden of proving that he would suffer detriment as a result of the sale of the Property. Indeed, the Court finds that the combined economic and noneconomic detriment to him would be significant.
C. Rhiel's Burden of Proving that the Benefit to the Estate Outweighs the Detriment to Seye
In order to prevail, therefore, Rhiel must satisfy her ultimate burden of proving that the benefit any sale would bring the estate would outweigh the detriment to Seye. Toward this end, Rhiel posited that, once the costs of sale and the amount of the existing lien on the Property are deducted and the remaining proceeds are split equally between the estate and Central Mortgage, the estate would receive $52,864.42. From this amount, Rhiel would deduct her statutory commission of $6,650, her attorneys' fees, which she would cap at $30,000, and her expenses of $2,848.53, leaving the estate with a final amount of $13,365.89 to distribute to unsecured creditors.
Footnote 4 of the Rhiel Brief states that, due to the extensive litigation in the case discussed in the background set forth above, the attorneys' fees incurred to the date of the brief's filing were in excess of $50,000, and that she would agree to limit the fees to be sought as an administrative expense to $30,000, together with costs advanced in the amount of $2,848.53, but that if she "do[es] not prevail at the trial, and need[s] to continue to litigate this adversary proceeding, [she] will make a determination as to an appropriate amount of attorneys' fees and expenses at the end of the case at such time as the file is ready for closure." Rhiel Br., Aff. at 2.
The Rhiel Brief sets this amount at $13,590.89, Rhiel Br. at 5, which appears to be the result of an arithmetical error that is insignificant for purposes of this opinion.
Rhiel calculates the percentage dividend such a distribution would provide unsecured creditors. Claims filed in the case totaled $307,720.76. (Case No. 10-52667, Claims Register.) Proof of claim number 7-1, filed by CitiFinancial, Inc. in the amount of $4,086.78, was disallowed (see Doc. 36), leaving a total claims pool of $303,633.98. Central Mortgage filed proof of claim number 6-1, a secured claim accounting for $144,828.74 of the $303,633.98 total. Secured claims do not share in distributions in Chapter 7 cases; secured creditors must instead look to their collateral. Thus, if Central Mortgage's claim were fully secured, it would not be counted in the claims pool for distribution purposes. But because Central Mortgage's lien on Kebe's one-half interest of the Property was avoided, Central Mortgage has a partially unsecured claim, assumed to be $91,964.32 under Rhiel's calculations, Rhiel Br. at 5, which is a claim against the estate that would share in any distribution to unsecured creditors. Thus, the actual unsecured claims pool under Rhiel's calculation is $250,769.56 (claims of $303,633.98 minus distribution to Central Mortgage of $52,864.42 on account of its remaining lien on Seye's one-half interest in the Property). A distribution of $13,365.89 among that claims pool would result in a dividend to unsecured creditors of approximately 5.3%. Rhiel relies on this distribution to unsecured creditors in support of her contention that the benefit to the estate of a sale of the Property would outweigh the detriment to Seye and that she therefore has satisfied her ultimate burden of proof. Rhiel Br. at 5. For the three reasons explained below, the Court disagrees.
First, Rhiel has not proven that the significant detriment a sale of the Property would cause Seye would be outweighed by the relatively small benefit unsecured creditors would realize from receiving a $13,365.89 distribution (for a 5.3% dividend).
Consistent with the case law that measures the benefit to the estate by the distribution to unsecured creditors, Rhiel did not include the amount of the net sale proceeds that she would use to pay her attorneys' fees and other administrative expenses in her analysis of whether the benefit to the estate would outweigh the detriment to Seye. The Court notes that, even if she had done so, Rhiel nonetheless would not have prevailed here. There is no evidence that any benefit the estate would realize from the payment of attorneys' fees and other administrative expenses would outweigh the detriment to Seye.
Second, Rhiel has not shown that unsecured creditors would receive such a distribution in any event. For she failed to comply with the Reopening Order's requirement that she clarify the precise amount of administrative expenses that would be sought for services performed on behalf of the estate, and the limit that she purports to place on her attorneys' fees is not a hard cap. Rather, Rhiel's willingness to limit her attorneys' fees to $30,000 is expressly conditioned on her "prevail[ing] in the trial" and her being "permitted to sell the Property." Rhiel Br., Aff. at 2. Of course, Rhiel's being permitted to sell the Property would depend not only on her success at trial, but also on her success on any appeal. Given this, the Court has no way of knowing whether Rhiel's fees will be $30,000 or some higher amount. In sum, additional attorneys' fees and other administrative expenses could reduce the amount available for distribution to unsecured creditors. Thus, Rhiel's attempt to meet her ultimate burden of proof by relying on the approximately $13,000 she believes might be distributed to unsecured creditors must fail.
Third, assuming for the sake of argument that Rhiel's attorneys' fees would be $30,000 and that the total amount of other administrative expenses that would be sought on account of services performed on behalf of the estate would be limited to $2,848.53, the amount distributable to unsecured creditors would not be the approximately $13,000 on which Rhiel relies. The starting point for the Court's calculation is the $105,000 valuation of the Property. If the Property were to sell for $105,000, administrative expenses were limited to $2,848.53, and Rhiel's fees were capped at $30,000, the outcome likely would be:
| Sale price | $105,000.00 |
| - $10,500.00 | |
|---|---|
| $94,500.00 | |
| Minus State of Ohio lien | - $471.15 |
| $94,028.85 | |
| Minus 1/2 to party(ies)with liens on Seye's interest | - $47,014.42 |
| 1/2 to Bankruptcy Estate | $47,014.43 |
| Minus Rhiel's commission | - $5,451.00 |
|---|---|
| $41,563.43 | |
| Minus Rhiel's attorneys' fees | - $30,000.00 |
| $11,563.43 | |
| Minus Rhiel's expenses | - $2,848.53 |
| $8,714.90 |
Rhiel testified that her many years as a trustee and her experience in selling property as a trustee led her to believe that costs of sale are generally 10% of the purchase price. Tr. at 65, 67. As stated above, the Court will defer to her experience on this issue and adopt 10% as the projected costs of sale here.
Based on a pool of unsecured claims totaling $256,619.56, the net amount to the estate of $8,714.90 would yield a dividend of approximately 3.4% to unsecured creditors. As is the case with Rhiel's alternative calculation of a $13,365.89 distribution, there is simply no basis to conclude that the benefit the unsecured creditors would realize from receiving a distribution of approximately $8,700 (a dividend of 3.4%) would outweigh the substantial detriment a sale would cause Seye. For all these reasons, the Court finds that Rhiel has not met her burden of proving that the benefit to the estate of a sale of the Property free of Seye's interest would outweigh the detriment to Seye.
The unsecured claims pool under the Court's calculation results from subtracting the distribution to Central Mortgage of $47,014.42 from the claims pool of $303,633.98. Because the distribution to Central Mortgage under the Court's calculations would be $47,014.43, or lower than the $52,864.42 estimated by Rhiel, the claims pool is higher than under Rhiel's calculations.
V. Legal Analysis
A. The Benefit to the Estate Weighed Against the Detriment to Seye
In light of these findings, the Court must rule in favor of Seye. A trustee may use, sell or lease property of the estate outside of the ordinary course of business pursuant to § 363(b)(1). See Weingarten Nostat, Inc. v. Serv. Merch. Co., 396 F.3d 737, 742 (6th Cir. 2005). Under certain circumstances, the trustee also may sell property of the estate free and clear of interests in the property. See 11 U.S.C. § 363(f). But notwithstanding § 363(f), a trustee may sell both the estate's interest in property and the interest of certain co-owners, including tenants in common and joint tenants, only if:
(1) partition in kind of such property among the estate and such co-owners is impracticable;11 U.S.C. § 363(h).
(2) sale of the estate's undivided interest in such property would realize significantly less for the estate than sale of such property free of the interests of such co-owners;
(3) the benefit to the estate of a sale of such property free of the interests of co-owners outweighs the detriment, if any, to such co-owners; and
(4) such property is not used in the production, transmission, or distribution, for sale, of electric energy or of natural or synthetic gas for heat, light, or power.
The Property is a single-family residence, and there is no practicable manner of partition in kind. The sale of the entire Property would obviously realize more for the estate than the sale of only the estate's half-interest. Id. at 796. And no one has suggested that the Property is used in the production, transmission or distribution of electric energy or gas. Id. In fact, the parties have stipulated that subsections (1), (2) and (4) of § 363(h) have been satisfied. Tr. at 254-55.
Thus, the only issue remaining before the Court is whether, as required by § 363(h)(3), the benefit to Kebe's bankruptcy estate of a sale of the Property free of Seye's interests outweighs the detriment to Seye. "[T]he balancing of the detriment to a co-owner versus the benefit to the estate is a fact sensitive analysis that is decided on a case by case basis." Dahar v. Jackson (In re Jackson), No. 02-1085, 2003 WL 21991629, at *4 (Bankr. D.N.H. Aug. 6, 2003). See also Stern v. Molano (In re DeVanzo), No. 8-09-08128, 2010 WL 1780038, at *5 (Bankr. E.D.N.Y. May 3, 2010) ("Ultimately, the Court's decision to allow a § 363(h) sale is an equitable judgment that is discretionary and fact driven.").
When gauging detriment to a nondebtor co-owner of property that a trustee wishes to sell, a court may consider economic as well as noneconomic detriment, including the psychological, emotional and physical impact on the nondebtor co-owner of losing a home through involuntary displacement. See Lovald v. Tennyson (In re Wolk), 686 F.3d 938, 940 (8th Cir. 2012) ("In evaluating the detriment to the co-owner, noneconomic factors can be considered."); Cmty Nat'l Bank & Trust Co. v. Persky (In re Persky), 893 F.2d 15, 20-21 (2d Cir. 1989) ("The Bank contends that consideration of emotional, psychological, or physical detriment is improper under § 363(h)(3). . . . [But] it seems evident that in valuing detriment to the co-owner, § 363(h)'s balancing test should include non-economic factors."); Jackson, 2003 WL 21991629 at *3 ("[T]he provisions of section 363(h)(3) of the Bankruptcy Code would be meaningless unless the Court is required to consider non-economic factors in the balancing test."); Hunter v. Levesque (In re McCoy), 92 B.R. 750, 752 (Bankr. N.D. Ohio 1988) ("In balancing the estate's benefit against the co-owner's detriment, the legislative history of § 363(h) evidences congressional intent that bankruptcy courts broadly interpret 'detriment' to include not only economic detriment, but also psychological, emotional and even physical detriment.").
Weighing the minimal benefit to the estate from a forced sale of the Property against the serious upheaval to Seye, the Court found for the reasons set forth above that Rhiel has not met her burden of proving that the benefit to the estate would outweigh the detriment to Seye. As a result of a sale, unsecured creditors would receive a distribution that is small both in terms of dollar amount and percentage dividend they would receive on their claims. Meanwhile, Seye would receive none of the sale proceeds, and the sale would immediately decrease his net worth. The sale also would have a negative effect on his financial condition going forward as he started using funds to pay for replacement housing—funds that he could have been using to make debt-reducing payments on the Note. In addition, being forced to move would involve time and expense for Seye. On top of all that, Seye would experience serious significant noneconomic detriment, including the psychological effects of losing one's family home of ten years and the negative effect on his well being and that of his family.
Where, as here, "the benefit to the estate is small or speculative and the impact on the co-owner's life is large, courts have denied a trustee's request to sell a personal residence" under § 363(h). Boudreaux v. Sheffield (In re Sheffield), No. 11-03008, 2012 WL 6761675, at *3 (Bankr. S.D. Ga. Dec. 14, 2012) (internal quotation marks omitted). For example, in Wolk the bankruptcy court held that the Chapter 7 trustee's sale of property of the estate free of the co-owner's interest would bring approximately $31,000 minus liquidation costs into the estate, but that the detriment to the co-owner would outweigh the benefit to the estate, a holding affirmed by both the bankruptcy appellate panel and the Eight Circuit. On the one hand, the "administrative and commission costs of a sale would have reduced the benefit to the bankruptcy estate's unsecured creditors[,]" meaning that the "trustee thus failed to show that the bankruptcy estate would reap substantial benefits from the sale of the home." Wolk, 686 F.3d at 940. By comparison, the co-owner, who was the only one who had made mortgage note payments, would suffer psychological harm and "would be further burdened by having to finance a new house and pay relocation costs." Id. Another court has held that the substantial detriment of a sale of co-owned property to the co-owner, who had lived in the home for 14 years and had been the only one to make the mortgage note payments, outweighed the minimal return the estate would realize if the home were sold. See Bakst v. Griffin (In re Griffin), 123 B.R. 933, 936 (Bankr. S.D. Fla. 1991). In yet another case involving a co-owner who lived in the home the trustee sought to sell and had made all the mortgage note payments that had been paid to the lender—Berland v. Gauthreaux (In re Gauthreaux), 206 B.R. 502, 506-07 (Bankr. N.D. Ill. 1997)—the court likewise found that the detriment to the co-owner outweighed the potential benefit to the debtor's estate. The Court notes that in Gauthreaux, the estate's creditors stood to receive a dividend of between 50% and 75% upon a forced sale, but even at that relatively high return, the court nonetheless denied the trustee's request to sell the home, finding that the sale price was speculative and that loss of the co-owner's house "would cause him irreparable harm through diminishing the quality of his life most seriously." Id. at 507.
Just as in Gauthreaux, because Rhiel does not have an offer in hand, the price at which the Property would actually sell is speculative. And in light of the uncertainty over the attorneys' fees and other administrative expenses that have been and might be incurred in this case, it also is speculative whether any funds would be available to unsecured creditors at all. See Lovald v. Tennyson (In re Wolk), 451 B.R. 468, 472-73 (B.A.P. 8th Cir. 2011) (affirming bankruptcy court's denial of trustee's motion to sell interest of co-owner where "[t]he bankruptcy court correctly recognized that the maximum benefit to the estate was one-half of the equity in the property, or $31,535.54, less commissions and costs of sale" and that the "trustee failed to prove that any of such funds, if realized, would ultimately be available for distribution to unsecured creditors of the debtor."), aff'd, 686 F.3d at 940.
Rhiel makes two arguments in support of her position that she has met her ultimate burden of proof. Both are unpersuasive. She first takes the position that a forced sale with its resulting involuntary displacement would result in no real detriment to Seye because he stands to lose the Property in any event due to his failure to stay current on his payments on the Note after she filed the adversary proceeding. Rhiel Br. at 8-10. Seye testified that he had stopped making payments on the Note when Rhiel took action to sell his home, but that as of the date of the trial he had not been sued in foreclosure. Tr. at 202, 246. He further testified that he anticipated that financial assistance from his sons and from the community of which he is part, as well as income from his business, would allow him to make up the payment shortfall if he prevails in this dispute. Tr. at 203-06, 210, 221, 230. A foreclosure complaint had not been filed at the time of trial and, although one was filed on August 22, 2014, at this point there has been no judgment in foreclosure or a sheriff's sale. While there was no documentary or testimonial evidence presented to corroborate Seye's confidence in the availability of funds from his family and community, there also was no evidence presented to refute his testimony. Thus, the loss of the Property through foreclosure remains speculative at this juncture and cannot be relied upon by Rhiel as a basis for finding no detriment to Seye. See Spear v. Crow Canyon Office Park Partners (In re Haley), 100 B.R. 13, 16 (Bankr. N.D. Cal. 1989) ("The Court is skeptical that CCOPP will be able to obtain the necessary financing to cure the delinquencies on the Bank's secured debt. However, it is unable to find that there is no possibility that CCOPP can do so.").
Rhiel also relies on Seye's right of first refusal to purchase the estate's interest in the Property pursuant to § 363(i) of the Bankruptcy Code. Rhiel Br. at 10. Her counsel suggested during the trial that Seye could avoid a sale by paying $59,000 to Rhiel for the estate's interest in the Property. Tr. at 229-30. But Seye's failure to take Rhiel's offer does nothing to support her position. There is no evidence in the record suggesting that Seye has the ability to exercise the right of first refusal at the same time he attempts to cure the arrearage on the Note. See Armstrong v. Trout (In re Trout), 146 B.R. 823, 830 (Bankr. D.N.D. 1992) (holding that the detriment to the co-owner outweighed the benefit to the estate where, among other things, the co-owner did not have the ability to exercise her right of first refusal).
See 11 U.S.C. § 363(i) ("Before the consummation of a sale of property to which subsection . . . (h) of this section applies . . . a co-owner of such property . . . may purchase such property at the price at which such sale is to be consummated.").
Even if Seye did have the ability to take the approach proposed by Rhiel, if he exercised his right of first refusal the sum of the amount he would pay to Rhiel ($59,000) and the amount he would still owe to Central Mortgage (at least $138,000) would exceed $197,000—for property that is worth approximately $105,000. Even where the co-owner had a right of first refusal that it would potentially make economic sense to exercise (e.g., where the co-owner had equity in the property), courts have held that the detriment to the co-owner can still outweigh the benefit to the estate. See Persky, 893 F.2d at 15 ("The Bank insists that in many cases a non-debtor co-owner will not be ousted from the . . . property because he can re-purchase it rather easily considering the amount of equity he already has in it. Adopting the Bank's proposition would mean that there is never any detriment to a co-owner resulting from a forced sale . . . . 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."). It is far from clear that Seye's exercise of his right of first refusal would make economic sense, making Rhiel's reliance on § 363(i) all the more unavailing here.
Seye made payments on the Note for many years, only to have the co-owner of the Property, who never made payments, file for bankruptcy protection and discharge his liability on the Note. Rhiel requests authority to conduct a sale that would leave Seye looking for a new residence while remaining liable for the balance due on the Note, with the only alternative proposed by Rhiel being to exercise his right of first refusal at a time when it is not financially feasible for him to do so.
It is understandable that, having successfully avoided the Mortgage, Rhiel initially believed that she might generate something for unsecured creditors from the sale of the Property. But the cases that Rhiel has cited in the Rhiel Brief and in her pretrial brief in which a sale free of the co-owner's interest was authorized are inapposite. In one of those cases, the co-owner made no showing of detriment whatsoever. See Bostic v. Nat'l City Bank (In re DeRee), 403 B.R. 514, 523 (Bankr. S.D. Ohio 2009) ("[T]he record is completely devoid of what impact if any the sale of the Property would have on [the co-owner]."). In another, the court found that the co-owner would experience only the noneconomic harm of displacement and that the co-owner would have no economic harm from the sale, but instead might receive as much as $95,000 from the equity in the property, so that the detriment to the co-owner did not outweigh the benefit unsecured creditors would receive from a distribution of $14,000 to $15,000 (approximately 45%). See DeVanzo, 2010 WL 1780038 at *8-9. Seye has presented evidence of economic detriment as well as noneconomic detriment here, and the evidence put forth at trial leads to one inescapable conclusion: the detriment to Seye from the forced sale of the Property outweighs any benefit to the estate, whether the dividend is 5% or 3%, or perhaps even lower. As in Wolk, Griffin and Gauthreaux, the benefit to the estate is speculative and small, while the detriment to the co-owner would be significant.
B. Entry of Final Judgment on Rhiel's Request to Sell the Property
As discussed in the background section above, Rhiel's claim for certain relief against Central Mortgage (Count Five) remains pending. Accordingly, unless the Court directs otherwise, its decision regarding Rhiel's request to sell the Property (Count Six) would "not end the action as to any of the claims or parties and may be revised at any time before the entry of a judgment adjudicating all the claims and all the parties' rights and liabilities." Civ. R. 54(b). But in the words of Civil Rule 54(b), made applicable by Bankruptcy Rule 7054, the Court "expressly determines that there is no just reason for delay" in entering final judgment on Count Six. Civ. R. 54(b). For the reasons set forth below, the Court will "direct entry of a final judgment as to one or more, but fewer than all, claims or parties[.]" Id.
Civil Rule 54(b) "attempts to strike a balance between the undesirability of piecemeal appeals and the need for making review available at a time that best serves the needs of parties." Pittman ex rel. Sykes v. Franklin, 282 F. App'x 418, 430 (6th Cir. 2008) (internal quotation marks omitted). "[T]he Sixth Circuit has articulated a non-exhaustive list of factors to consider in determining whether there is no 'just reason for delay[.]'" Planned Parenthood Sw. Ohio Region v. DeWine, No. 1:04-CV-493, 2011 WL 4063999, at *2 (S.D. Ohio Sept. 13, 2011). Those factors include
(1) the relationship between the adjudicated and unadjudicated claims; (2) the possibility that the need for review might or might not be mooted by future developments in the district court; (3) the possibility that the reviewing court might be obliged to consider the same issue a second time; (4) the presence or absence of a claim or counterclaim which could result in set-off against the judgment sought to be made final; (5) miscellaneous factors such as delay, economic and solvency considerations, shortening the
time of trial, frivolity of competing claims, expense, and the like. Depending upon the facts of the particular case, all or some of the above factors may bear upon the propriety of the trial court's discretion in certifying a judgment as final under Rule 54(b).Corrosioneering, Inc. v. Thyssen Envtl. Sys., 807 F.2d 1279, 1283 (6th Cir. 1986).
Applying these factors, the Court determines that there is no just reason for delay in entering final judgment on Count Six. First, because in Count Six Rhiel seeks to sell the estate's interest in the Property free of Seye's interest pursuant to § 363(h), while in Count Five she seeks a monetary recovery from Central Mortgage under § 550(a), Count Six is "separate and distinct from" Count Five. Pittman, 282 F. App'x at 431. Second, while it is uncertain whether Rhiel is entitled to relief on Count Five against Central Mortgage under § 550(a) at all, Count Five clearly would have no viability if Rhiel were permitted to sell the Property. See Kebe II, 469 B.R. at 795; Olson v. Parker (In re Parker), 395 B.R. 12, 24 (Bankr. W.D. Mich. 2008). Thus, a decision on Rhiel's request to sell the Property in Count Six must come before a decision on her request for a recovery against Central Mortgage in Count Five, meaning that further developments in this Court on Count Five would not moot any appeal of the Court's decision on Count Six. Third, "there is no danger that [Count Six] [would] be brought [on appeal] a second time." Pittman, 282 F. App'x at 431. Fourth, "there are no pending claims which could result in set-off against the judgment sought to be made final." Id. (internal quotation marks omitted). Finally, "additional factors such as judicial economy and finality counsel in favor of designating [the Court's decision on Count Six] as a final judgment" because doing so removes the impediment—the uncertainty over whether Rhiel would be permitted to sell the Property free of Seye's interest—that Seye testified has kept him from moving forward with his attempt to cure the arrearage with Central Mortgage. Id.
The Court need not decide here—and does not decide—whether relief is available to Rhiel on Count Five. --------
VI. Conclusion
For the foregoing reasons, the Court concludes that Rhiel has not met her burden of proving that the benefit to the estate of selling the Property free of Seye's interest would outweigh the detriment the sale would cause Seye. The Court also determines that there is no just reason for delay in entering judgment on Rhiel's request to sell the estate's interest in the Property free of Seye's interest (Count Six). Accordingly, contemporaneously with the entry of this opinion, the Court will enter final judgment against Rhiel and in favor of Seye on Count Six and will certify the judgment for immediate appeal under Civil Rule 54(b). A status conference on Count Five will be scheduled by separate order of the Court.
IT IS SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
John E. Hoffman, Jr.
United States Bankruptcy Judge Dated: December 23, 2014 Copies to: Attorneys for Plaintiff
Attorneys for Defendants