A BRIEF SUMMARY OF BANKRUPTCY LIEN … BRIEF SUMMARY OF BANKRUPTCY LIEN AVOIDANCE SECTIONS -Jan M. Sensenich 11 U.S.C. 522(f) - Liens that Impair Exemptions 1. Judicial Liens (ex

A BRIEF SUMMARY OF BANKRUPTCY LIEN AVOIDANCE SECTIONS

- Jan M. Sensenich

11 U.S.C. § 522(f) - Liens that Impair Exemptions

1. Judicial Liens (ex. judgment liens)

2. Non-possessory, non PMSI liens in

-household furnishings , goods, wearing apparel, appliances, animals, crops, musical instruments

or jewelry, held primarily for household use of debtor or dependents;

-implements, tools of the trade or professional books, etc. of debtor or dependent;

-professionally prescribed health aids or debtor or dependent.

On motion, qualifying liens can be avoided to the extent that they impair debtor’s exemptions in

specified property.

11 U.S.C. § 544 - Trustee as Liens Creditor (“Strong Arm Clause”)

1. Trustees can avoid liens that are avoidable by

-perfected judgment lien creditors;

-holder of a unsatisfied execution;

-bona fide purchaser of real estate

2. With respect to mortgage liens, these tend to be mortgages which are valid between borrower and

lender but,

-Are not recorded at all;

-are not recorded in the proper land records;

-contain defective or missing acknowledgments (in the past missing witnesses have also been

found to be a fatal defect, however witnesses are no longer required)

The bottom line is that if the mortgage would not give constructive notice to a 3rd party without notice

of the transfer, the lien is avoidable by a trustee under this statute.

11 U.S.C. § 547 - Preferences

1. Trustees can avoid transfers (including liens) which occur within the preference period and result in

the creditor receiving more from the transfer than the creditor would have received in a hypothetical

Chapter 7 liquidation and where the transferor is insolvent.

2. There are numerous exceptions and defenses listed in §547(c).

11 U.S.C. § 548 - Fraudulent Transfers

Trustees can avoid fraudulent transfers. The details are in this Section and defy easy summary. In

general, (a)(1) (A) actions are based on an actual intent to hinder, delay or defraud. Actions under ,

(a)(1) (B) are based on what has been sometimes called constructive fraud, where no actual intent is

necessary. It should be noted that actions under this section are subject to a two year statute of

limitations. Trustees can also bring actions under state statutes which often have longer statutes of

limitations.

AVOIDING UNSECURED MORTGAGES UNDER IN RE: POND, 252 F.3d

122 (2nd Cir. 2001)

Under the 2nd Circuit’s decision in this case, Chapter 13 debtors may, through confirmation of their

Chapter 13 Plan, avoid liens on their residential property where there is no equity in the property to

secure the subject lien. In other words, when the value of the property is less than the total of the liens

and encumbrances with priority over the subject mortgage, the subject mortgage is not “secured” by

the debtors principle residence and is therefore not entitled to the anti-modification protection of §

1322(b)(2). Note, this requires neither a motion not an adversary proceeding and can be done by the

debtor’s Plan. However, in some jurisdictions (such as Vermont) local rules require a separate motion to

determine the value as a precondition mortgage avoidance.

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AVOIDING DEFECTIVE MORTGAGES IN CHAPTER 13-

THE HOW AND WHY

(Or How to Use your Strong Arm to Strip off a Defective Mortgage without Losing your Shirt)

Jan M. Sensenich

A. INTRODUCTION – How §544 works and how it can work in Chapter 13 cases

The classic use of § 544 of the Bankruptcy Code (also known as the

“Strong Arm Clause”) is for a Chapter 7 trustee to avoid a defective lien on a

debor’s asset in order to benefit the Chapter 7 estate and its unsecured creditors.

This would typically involve the Chapter 7 trustee selling the asset subject to the

defective lien to enhance payments to unsecured creditors. While that use of this

tool is valuable for Chapter 7 trustees and the unsecured creditors in such cases,

that classic use of the Strong Arm clause rarely benefits homeowners, whose

options in such as situation is to either suffer the loss of their home or other asset

to the trustee or to work out some deal with the trustee which would involve them

refinancing to pay off the trustee and their unsecured creditors. For most

Chapter 7 debtors such refinancing would rarely be an option unless provided by

a private lender such as a family member.

The main reason that avoidance of a defective lien in this situation does

not benefit the debtor/homeowner is § 551 of the Code. Under this section, the

avoided lien is preserved for the benefit of the bankruptcy estate. What this

means is that the equity freed up by the trustee’s action in avoiding the lien can

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only benefit the bankruptcy estate, and cannot be claimed as exempt by the

debtor.

Use of the Strong Arm powers in Chapter 13 however presents some

more flexible and more attractive options for debtor/homeowner. The basic rules

are the same, however the flexibility of a Chapter 13 plan allows debtors to share

in the benefits of the avoided mortgage along with their unsecured creditors. In a

nutshell, this is made possible by the fact that a 60 month plan allows the debtor

to pay into the plan an amount that would normally be five years of mortgage

payments. If those payments were applied to a mortgage, the bulk of the

payments would be applied to interest. If a mortgage is avoided however, and

the mortgage loan turned into just another unsecured claim, the debtor is freed

up to have those five years of payments count as part of the dividend to

unsecured creditors which is necessary for the plan to pass the liquidation

analysis or best interests of creditors test. Typically, in most such cases, those

five years of payments will not be enough by themselves to pay enough into the

Plan to make up for the equity freed up by the avoidance of the mortgage, but

they go a long way toward reducing that amount to a number which the debtor

can finance at the end of the plan. This requires that the Plan permit the debtor

to refinance near the end of the plan, but typically at that point the debtor would

have plenty of equity to support such a loan and would have little other debt to

deal with at that point.

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In cases were this approach has been successful, it has not been unusual

for a debtor to only have to refinance a new mortgage at the end of a plan which

is half or less than half the size of the avoided mortgage. In this way the

unsecured creditors benefit by a much more generous dividend and the debtors

benefit by a much smaller mortgage at the end of their plan. A “win-win” situation

for the debtor and the general unsecured creditors, with the exception of the one

holding the defective and avoided mortgage. For that creditor it is a “win-win-

lose” proposition with the mortgage lender being the loser.

B. USE OF §544 TO AVOID DEFECTIVE LIENS

1. Who can use it (trustee, debtor or both?) – the question of standing

and does it really matter?

Section 544 vests the “trustee” with the avoiding power found in that section.

The case law is mixed as to whether Chapter 13 debtors can exercise such

powers as debtors in possession as Chapter 11 debtors exercise under 11

U.S.C. § 1107. There are certainly arguments that such powers do not extend to

debtors, including the distinctions that (1) there is no counterpart to § 1107 in

Chapter 13 and (2) there is a trustee in all Chapter 13 cases, and there are not in

all Chapter 11 cases, unless one is appointed. For purposes of these materials,

it will be assumed that avoidance of a defective lien will be undertaken by the

Chapter 13 trustee and the debtor, jointly. This makes the distinction of who has

standing irrelevant, because between the debtor and the trustee, there can be no

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one else in a Chapter 13 case who could exercise those powers. Moreover, the

approach described in these materials is not likely to work effectively unless the

debtor and trustee agree to cooperate in the process. For a trustee to undertake

avoiding the mortgage without the cooperation of the debtor would likely result in

a voluntarily dismissed case. For the debtor to undertake it without the

cooperation of the trustee would likely either result in a failure of the adversary

proceeding or a dismissal of the case, or both. Who ultimately has standing may

be an intellectually stimulating discussion, but is not likely to be a practical

concern in avoiding a defective mortgage when trustee and debtor work together.

2. The Process

Federal Bankruptcy Rule 7001 (2) provides that “a proceeding to determine

the validity, priority, or extent of a lien or other interest in property, other than a

proceeding under Rule 4003(d)” is an adversary proceeding. That requires of

course that actions to avoid defective liens under the Strong Arm Clause be

commenced as adversary proceedings, by summons and complaint and under

Part VII of the Bankruptcy Rules. This of course means that these actions

involve more work than is involved in simple motion practice. A complaint must

be drafted and served with a summons and typically most courts have pre-trial

conference rules that apply as do all of the federal discovery rules.

That said, aside from the obligatory procedures applicable to adversary

proceedings, as a practical matter, these actions tend to be fairly simple-

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particularly from the factual side. In most cases, there really are no material facts

in dispute. In a typical case, if there is a material defect in a mortgage, the

contents of the mortgage, defect and all, is a matter of public record. Proving

the content (and defect) requires little more than obtaining a certified copy of the

document from the land records. Moreover, in most cases defendants are not

inclined to dispute the content of the publicly recorded document anyway and

usually stipulate to the content of the instrument, defect and all. This being the

case, discovery does not typically take much more that requests to admit and

sometimes can be dispensed with entirely if the parties are willing to stipulate to

the facts underlying the claimed defect.

Since the facts generally do not generate much argument in these cases,

they tend to fall into two categories (1) where the local case law is well

developed, and the facts are clear, some defendants choose to fold and not

contest the avoidance; (2) where the case law is less well developed or unclear,

or where the defendant or their counsel is more aggressive, legal defenses come

into play, such as equitable subrogation, the impact of curative statutes on the

defect, whether the defect can be cured by construction or simply whether the

claimed defect is material enough to render the mortgage voidable. More on

those later in the materials.

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3. Types of defective liens subject to avoidance

What problems in a mortgage can constitute defects sufficient to render

them avoidable flow directly from whatever local statutes (typically state statues)

regulate what is necessary for a mortgage to give constructive notice of the

mortgage to subsequent purchasers of the property. The way § 544 works is that

it gives the trustee essentially the same rights as a subsequent purchaser for

value of the property. Thus, if under state law, the defect is significant enough

that it would not impart constructive notice of the mortgage, even if recorded in

the land records, to a new purchaser of the property, then the defect is also

significant enough for the trustee to avoid it under § 544. For this reason, any

discussion of defects in these materials must be somewhat generic, and for a

truly accurate list for any given jurisdiction, there is no substitute for careful

research – first on the applicable statutes regarding the recording of mortgages

and then on the case law interpreting the impact of those defects on subsequent

purchasers (or if you are really lucky, bankruptcy trustees using § 544).

However, there are some pretty general problems that in most jurisdictions will

prove fatal. Such as:

a. Mortgage not recorded at all

It is hard to get more basic than this. If its not recorded, most

recording laws are going to say it does not give notice- how can it?

b. Mortgage recording in the wrong place

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Typically in most jurisdictions, land records are recorded in county

offices. In some places, they are even done on the town or municipal

level. Frequently the locality in which a particular parcel of land is

situated may be very different than the mailing address of the property.

This can often result in an out of state lender (such as ones that do

business by mail or internet) in recording a mortgage in the wrong

office, which is essentially just as fatal as not recording it at all.

c. Faulty property description

It should be pretty clear that if the mortgage describes some

property other than the one intended to be encumbered, it cannot

provide notice to a new purchaser of the encumbrance on the intended

parcel.

d. Faulty or missing acknowledgment

Most jurisdictions require that mortgages include an

acknowledgment by a notary public or some similarly empowered

official wherein it is recorded that the signature(s) on the document

were those of the grantors and that the signature was their free act and

deed. There is considerable case law (some later in these materials)

holding that a missing acknowledgment or one that is sufficiently

defective (such as one that is missing grantor names, etc.) is a fatal

flaw in the mortgage.

e. Missing witnesses

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Some jurisdictions require one or more witnesses on mortgages.

Some do not. Check your statutes. When they are required and they

are missing, it can be a fatal defect.

f. Missing grantor

It doesn’t take a lot of analysis to see why a missing signature by a

grantor to render an instrument voidable if not void. Where the

grantors are a married couple, in states which recognize a tenancy by

the entireties (where wife and husband own the property as a single

married unit and neither can convey any interest in the property without

the other joining in the transfer) the mortgage fails to encumber the

marital estate unless it has been executed by both spouses.

g. Others?

The above list is only a general list of defects the author has

encountered and have resulted in avoided mortgages. There are

doubtless many more that may exist or arise depending upon what

local recording statues require and the applicable case law holds.

There is no substitute for knowing what formalities are required in your

jurisdiction and then checking to make sure mortgages you review

comply with them.

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4. Defenses

a. Defect? What defect? Probably the most elemental defense to

an action to avoid a mortgage based on an alleged defect will go to the

heart of the issue- what constitutes a fatal flaw in the document such to

render it subject to avoidance by a subsequent bona fide purchaser. As

pointed out above, you have to rely on your recording statues and the

state law, including case law interpreting it.

b. Curative Statutes. Before you break out the champagne and

give the debtors the good news that you are going to help them leave

Chapter 13 with a lot less mortgage debt than what they entered with,

check on your states curative statutes with respect to the date of the

mortgage. Most states have statutes, which require such defects to be

litigated within a certain time frame after the recording of the instrument. If

you are hoping to take advantage of a missing or defective

acknowledgment or witness these may well torpedo your case. In cases

where there is no recording or the recording is in the wrong place, they

should be less of a problem. As always- check your local laws.

c. Estopple

There is a body of case law in most jurisdictions, sometimes called

“estopple by deed” whereby the grantor under a deed is estopped from

attempting to take advantage over a defect in an instrument that they

presumably drafted. As an equitable doctrine it is akin to the “clean

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hands” doctrine and makes perfectly good sense outside the realm of

bankruptcy. The reason this defense is a loser when used against the

trustee is that the trustee stands in the shoes of a subsequent purchaser

and/ or hypothetical lien creditor. This defense would not work when used

against a third party to the original transaction, so cannot work against a

trustee using § 544.

d. Equitable Subrogation

This is an equitable doctrine where an entity that is secondarily

liable on a debt pays the debt to a third person and is thereby subrogated

to the rights of entity which was paid, against the primary obligor.

Subrogation is most common of course when insurance companies settle

claims with their insureds and then pursue collection of those claims

against third parties. This doctrine has been used as a defense in

mortgage avoidance cases where the mortgagee with a defective

mortgage paid off a prior mortgagee with a validly perfected mortgage and

then argues that the mortgagee should be subrogated to the rights of the

holder of the previous valid mortgage. In most cases the author is aware

of this approach has failed because typically, the conditions necessary for

the doctrine to apply are not present in mortgage avoidance cases.

Specifically there is generally not a relationship between the holder of the

subsequent defective mortgage and the holder of the previous validly

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perfected mortgage to (such as there would be between insured and

insurer) which would cause the doctrine to apply. For a discussion of this

doctrine applied to § 544 cases, see Lawlor v. Chittenden Trust Co., A.P.

04-1060, Bankr. D. Vt. (2005) (printed in the Appendix of Cases at the end

of these materials).

e. Correction by construction

Where a defect in a deed is such that it is clear on the face of the

document that an error has been made, and when it is possible from

contents of the rest of the document to ascertain what the correction

should be, courts will generally allow a cure of that defect by construction.

For example, if the grantors names are John and Mary Black, and their

names are correctly shown in several places in the mortgage, but one of

their names is misspelled “Flack” instead of “Black” most courts would

hold that the misspelling is an error that is evident and the correction

should be evident by reference to the rest of the document. The 2nd

Circuit Court of appeals affirmed this approach when both grantors names

were missing entirely from the acknowledgment in the mortgage.

Sensenich v. Bank of America, No. 09-2305 (2d Cir. 2009). Other courts

have gone the other way on the same facts. Biggs v. Ocwen Federal

Bank, 377 F.3d 515 (6th Cir. 2004); In re Wilson, 318 Fed.Appx. 354, WL

72319 (6th Cir. 2009 . Evaluating this defense really comes down to how

obvious it is that there is an error in the mortgage, and whether it is clear

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from the contents of the mortgage what the correction to the error should

be.

5. Some case law

What follows is by no means and exhaustive survey of the case

law, but rather is a representative sampling of the cases that is useful for

getting a sense of how § 544 interplays with state defective mortgage law.

i. Circuit Court Decisions

(i) First Circuit

In re Ryan, 851F.2d 502 (1st Cir. 1988) contains a very detailed discussion of constructive notice and how § 544 relies on state law for a determination of whether the trustee’s rights as hypothetical bona fide purchaser are sufficient to avoid a defective mortgage. Ironically the case involves the First Circuit Court of Appeals applying Vermont Law (Vermont is in the 2nd Circuit) in an appeal from a Massachusetts bankruptcy case, where the debtors owned a vacation home in Vermont. The Court of Appeals reversed the Massachusetts District Court and found that the bankruptcy trustee could avoid a mortgage which was missing a witness, holding that under Vermont Law, (based on an ancient Vermont Supreme Court case) such a defect would render the mortgage (even though it was duly recorded in the land records) inadequate to provide constructive notice of the lien to a subsequent bona fide purchaser for value.

(ii) Second Circuit

In Mortgage Lender’s Network, USA, v. Sensenich, 313 F.3d 93,94, (2d Cir. 2002), the Court of Appeals upheld the trustee’s right to avoid a mortgage where it was defective based on a missing witness signature, but certified the question of whether the recording of the foreclosure complaint in the land

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records provided alternative constructive notice, to the Vermont Supreme Court. The Vermont Supreme Court ruled that compliance with the state foreclosure statute amounted to constructive notice to a subsequent BFP for value, notwithstanding the defect in the originally recorded mortgage.

Sensenich v. Bank of America, No. 09-2305 (2d Cir. 2009)

Even though the grantors names were absent from the acknowledgment attached to the mortgage, the Court held that the error could be cured by construction and affirmed both the Bankruptcy Court and District Court in denying relief to the trustee.

(iii) Sixth Circuit

Biggs v. Ocwen Federal Bank, 377 F.3d 515 (6th Cir. 2004). In this case the Court of Appeals, construing Tennesee Law, held that the missing names of the grantors in a deed of trust was a fatal defect, and held that the deed of trust was invalid against subsequent purchasers of the property.

In re Wilson, 318 Fed.Appx. 354, WL 72319 (6th Cir. 2009). In this case the Sixth Circuit, applying Kentucky law, reached the same conclusion as in Biggs, above, that a notary acknowledgment which was missing the names of the grantors was a fatal flaw in the mortgage and that the mortgage failed to provide constructive notice to subsequent purchasers.

[Author’s Note: both of these Sixth Circuit decisions reach the opposite result as the 2nd Circuit in Sensenich v. Bank of America. For obvious reasons this author believes both of these eminently well reasoned decisions reach the correct result]

[MORE CASES TO ADD]

C. HOW TO INCORPORATE §544 LIEN AVOIDANCE INTO A CHAPTER 13 PLAN

Litigating a § 544 adversary proceeding is one thing, but how does the

debtor propose a plan which will take into consideration the unknown outcome

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of the litigation? How is the debtor protected from loss of the house to the

mortgage should the adversary proceeding litigation fail? Doing so takes

some carful planning by debtor’s counsel and the trustee and some

cooperation.

1. Avoiding the res judicata bar from plan confirmation

There is case law which holds that confirmation of a Chapter 13 Plan acts

as a bar under res judicata to actions such a § 544 avoidance actions unless

they are specifically proposed in the Plan and taken into account in the

confirmation process. To avoid this pitfall, the plan should reference the

proposed adversary proceeding and the underlying basis for it, bearing in mind

that that the plan itself has no power to effect the avoidance, which requires an

adversary proceeding. Ideally the order confirming the plan should also make

clear that nothing in the order confirming the plan bars the proposed litigation

and all matter which are brought before the court in the adversary proceeding

will be determined in the adversary proceeding and that none of those issues

are barred by confirmation of the plan. This of course requires that the

debtor’s counsel and the trustee be aware of the defect in the mortgage prior

to confirmation. Ideally both entities are checking for defective liens as part of

the preparation for filing the case (debtor’s counsel) or preparing for the

meeting of creditors and confirmation hearing (trustee).

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2. Structuring the Plan to incorporate various outcomes to litigation

There are two possible approaches to the issue of the timing of

confirmation and the pace of the mortgage avoidance action. One is to simply

not confirm the case until the adversary proceeding is concluded. At the point

when the adversary proceeding is done, the rights of the parties are clear and

the plan can avoid having to take into account various outcomes of the

litigation. The drawback to that approach is that the case may stay in an

unconfirmed for many months as the adversary proceeds. Even if summary

judgment resolves the action, it can still take many months to brief argue and

decide a motion for summary judgment.

The other approach, and the one this trustee has more often advocated, is

to confirm the Plan subject to the outcome of the adversary proceeding.

Generally payments to creditors other than the defendant/mortgagee proceed

and the trustee (or debtor’s counsel, via a special escrow account) holds the

payments that would otherwise go to the mortgagee until conclusion of the

adversary proceeding. One might point out that there is some risk that if the

adversary proceeding fails and the mortgage survives, there will be accrued

late fees which will have to be covered by the debtor. That is true and one of

the reasons that care should be taken to chose these actions carefully. There

is definitely an element of calculated risk here for both trustee and debtor.

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Using this approach the plan is structured under the assumption that the

adversary proceeding will prevail, and must treat the unsecured creditors as

they would in a hypothetical Chapter 7 case were the trustee were to

successfully avoid the mortgage and sell the house - more on that below. The

plan also provides that in the event that the adversary proceeding fails and the

mortgage survives intact, that any mortgage arrearage will be cured and

payments maintained. These cases may also involve a proposal to modify the

mortgage in the event that the adversary proceeding fails to avoid the

mortgage.

3. Impact of §511 lien preservation on the liquidation analysis

Section 551 is what really makes a successful lien avoidance under the

trustee’s avoiding powers much more of a coup for the unsecured creditors

than the debtor. Section 551 is short and fairly simple. It reads:

Any transfer avoided under section 522, 544, 545, 547, 548, 549, or 72(a) of this title, or any lien void under section 506(d) of this title, is preserved for the benefit of the estate but only with respect to property of the estate.

What this means is simply that when a trustee uses her or his

magical avoiding powers under those sections, the primary beneficiary

needs to be the “estate” and not the debtor. The whole purpose here is

to augment the estate to provide a better payoff to unsecured creditors.

When viewed in the more typical Chapter 7 context, the estate is formed

when a petition is filed and then, at the time the debtors exemptions are

allowed, those exemptions are take out of the estate for purposes of

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distribution and what is left is what the trustee liquidates and uses to pay

the claims of creditors. By giving trustees these avoiding powers the

whole purpose is to advance payment prospects for the general

unsecured creditors.

Does this mean that avoidance of a $100,000 mortgage translates

into $100,000 going into the pockets of the unsecured creditors? The

short answer is “generally not”. The same hypothetical liquidation

analysis operates that operates in any Chapter 13 case. The test found

at § 1325(a)(4) requires that the unsecured creditors get at least as

much as they would if the estate (including the trustee’s avoidance

action) were liquidated in Chapter 7. Lets use avoidance of a $100,000

mortgage as an example. Assume a Chapter 7 trustee litigated a § 544

action to conclusion, was successful and sold the house. What would

the costs of doing so likely be? Conservatively, one might expect to see

a trustee’s legal fees for doing so, including the transactional costs of

selling the house and related work to be from $5,000 to $8,000,

depending upon going rates and how much of a fight the mortgagee puts

up, etc. $10,000 probably would not be out of the question if the

adversary proceeding involved more than a simple motion for summary

judgment or the real estate transaction was complicated. Let’s use a

figure of $8,000. The Chapter 7 trustee would have to retain a broker to

see the house. Assuming the value of the house was $150,000, a

broker’s 6% commission would be $9,000. The trustee’s statutory

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commissions would probably be about $8,300 (25% of the first $5,000,

10% of the next $45,000 and 5% of the next $50,000 after that, which

gets us to the $100,000 of the avoided mortgage). We will assume the

rest of the equity is exempt. Adding those costs, we get a total of

$25,300. Subtracting that from the $100,000 of avoided mortgage gets

us to a dividend to unsecured creditors of $74,700.

So how is our Chapter 13 Plan going to bring in enough to pay the

unsecured creditors $74,700? With a trustee’s fee at about 7% that

would require almost $80,000 to be paid into the Plan, or a little over

$1,300 per month. This is likely considerably more than the debtors

mortgage payment. However, lets say the debtor, without making the

mortgage payment can manage a $1,000 per month plan payment. That

will bring in $60,000 over a five-year plan, and if the debtor can borrow

$20,000.00 by the end of the plan and make a balloon payment, we then

have the $80,000 needed to fund the Plan. The debtor starts with a

$100,000 mortgage and ends up with a $20,000 mortgage five years

later. Assuming in addition to the holder of the avoided mortgage (now

unsecured creditor for $100,000), there are $40,000 in other general

unsecured claims. The total pool of unsecured claims would be

$140,000. The dividend to unsecured creditors of $74,700 would yield

about a 53% dividend to unsecured creditors. Based on the liquidation

analysis without the avoided mortgage it would have likely been zero.

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3. Providing clear title

One might say, ok, let’s say you manage to get a “creative” plan like this

confirmed, and then with a bit of luck and some skill and some hard work, you

manage to triumph in summary judgment and get a judgment order avoiding

the mortgage. What keeps the debtor from running to the land records with a

certified copy of the judgment, and saying “thanks Ms. Trustee, this has been

great fun, but I don’t need you anymore”, and then records the judgment

avoiding the mortgage and dismissing his case before he or she makes all the

plan payments. The simple solution here is that the judgment rendered by the

Bankruptcy Court is not effective unless and until the debtor completes all

payments under the plan and the trustee signs a certification right at the end of

the judgment itself. The judgment would have language making clear that it is

not effective without the trustee’s certification and cannot be recorded in the

land records without it. Essentially the judgment is conditional until the trustee

certifies that all plan payments are complete. That protects the trustee, the

estate and its creditors and gives the debtor a powerful incentive to hang in

there and make all of the plan payments.

Ok, that might make sense one could say, but how is the debtor going to

get a new lender to refinance that last balloon payment without that judgment

avoiding the defective mortgage filed in the land records? The solution to that

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chicken and egg problem is that trustee holds that Judgment (which he or she

has the power to make final) in escrow pending the closing on the refinance.

The trustee promises to deliver that final judgment, with his or her

endorsement that all payments have been made to the closing agent upon

receipt of the plan payoff funds. Once the trustee has the funds, the closing

agent for the refinancing can then record the judgment avoiding the lien along

with their new (and hopefully validly executed) mortgage.

Thus ends the adventure. The debtor is enjoying his new and much lower

mortgage payment. The unsecured creditors are marveling at their 53%

dividend (except perhaps for the largest one) and probably a title insurer

somewhere cuts a check to the lender for the balance of the claim.

D. APPENDIX

1. SAMPLE CONFIRMATION ORDER

2. SAMPLE COMPLAINT

3. SAMPLE MOTION FOR SUMMARY JUDGMENT

4. SAMPLE CONDITIONAL JUDGMENT ORDER AND FINAL JUDGMENT

ORDER

5. DECISIONS

In re Ryan, 851 F.2d 502, (1st Cir. 1988)

In re Lawlor, D. Vt. A.P. 04-1060 (2005)

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In re Jakab, D. Vt. , A.P. 02-1036 (2003)

In re Eaton, D. Vt. A. P. 06-1022 (2006)

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Case 13-10143 Doc 6-1 Filed 03/14/13 Entered 03/14/13 15:30:29 Desc Exhibit Page 1 of 19



















Filed & Entered On Docket

March 25, 2013






25th March


UNITED STATES BANKRUPTCY COURT DISTRICT OF VERMONT

IN RE: ) )

SHAWN P. BURKE ) Case No. 10-11158 ) Chapter 7 Case

Debtor. )

TRUSTEE DEED

THIS INDENTURE, made this _____ day of August, 2012, by and between Raymond J.

Obuchowski, Esq., as Trustee in Bankruptcy of the Estate of Shawn P. Burke, Grantor; and

David F. Giza, Grantee; and,

WHEREAS, a Voluntary Petition seeking relief under Chapter 7 of Title 11 of the United

States Code was filed in the United States Bankruptcy Court for the District of Vermont on

August 31, 2010, by the above-captioned Debtor, and

WHEREAS, an Order for Relief was entered and the said Raymond J. Obuchowski, Esq.

was appointed Interim Trustee of the above estate on August 31, 2010, and thereafter duly

qualified and has continued to act and is now acting as Trustee, and

WHEREAS as of the date of the filing and to the date hereof, the Debtor had an interest,

which was part of the Bankruptcy Estate, being a house and land consisting of 5.28 acres, more

or less, which was previously the Debtor’s former principal residence as located at 322 New

Boston Road, Granville, New York; and,

WHEREAS, the Trustee gave notice to creditors under Federal Bankruptcy Rules 2002

and 6004, and pursuant to 11 U.S.C. Section 363 (b) and of his intent to sell property, described

as follows:

ALL THAT CERTAIN PIECE OR PARCEL OF LAND, situate in the Town of

Granville, County of Washington and State of New York and which said parcel is more particularly bounded and described as follows:

BEGINNING at a point on the easterly boundary of New Boston Road, said point being situate the following two courses and distances from the intersection of said road boundary with the southerly boundary of lands conveyed from Frederick and Gertrude A. Williams to Christel Gambino-Tromblee (Deed reference: Liber 602, page 238) viz: 1) North 33 degrees 45 minutes 00 seconds East, a distance of 143.19 feet and 2) North 37 degrees 50 minutes 05 seconds East, a distance of 120.17 feet, running thence from said point of beginning North 37 degrees 50 minutes 05 seconds East, continuing along the easterly boundary of New Boston Road, a distance of 125.83 feet to a point; thence North 31 degrees 50 minutes 20 seconds East, continuing along said road boundary, a distance of 107.39 feet to a point, thence North 25 degrees 34 minutes 25 seconds East, continuing along said road boundary a distance of 52.18 feet to a point; thence South 81 degrees 56 minutes 40 seconds East, a distance of 872.21 feet to a point; thence South 22 degrees 05 minutes 45 seconds West, a distance of 265.17 feet to a point; thence North 81 degrees 56 minutes 40 seconds West, a distance of 929.39 feet to the point of beginning. Containing 5.28 acres of land, more or less, designated as lot 2 of Subdivision map. Being the same premises conveyed by Owen Burke, Jr. to Owen Burke, Jr. and Shawn Patrick Burke by warranty deed dated February 24, 1993 and recorded in the Washington County Clerk's Office on February 25,1993 in Liber 684 of Deeds at Page 219.

Being the same premises described in a deed dated September 8, 1999 from Owen Burke, Jr. to Shawn Patrick Burke, which deed was recorded at the Washington County Clerk's Office on September 9, 1999 in Liber 835 of Deeds at Page 134.

for the negotiated sum of $30,000.00, and

WHEREAS, pursuant to said notice, any persons objecting to the proposed sale were to

file said objections on or before August 9, 2012, and such matter having been scheduled for

hearing on August 17, 2012, and since no counter-bids for the property having been made, and

the United States Bankruptcy Court for the District of Vermont having approved said sale to

David F. Giza by Order docketed on August 10, 2012, and recorded in Liber __ at Page __ of

the Washington County Clerk’s Office, such Order not having been stayed or appealed.

NOW THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that I, Raymond J.

Obuchowski, Esq., Trustee in Bankruptcy of the Estate of the above Debtor, (Grantor) by virtue

of the power and authority vested in me as aforesaid, and in consideration of $30,000.00 (Thirty

Thousand and 00/100 dollars), paid to my full satisfaction by David F. Giza, Grantee, by these

presents do freely give, grant, sell, convey and confirm unto David F. Giza, Grantee, his heirs,

successors and assigns forever, all right, title and interest of the Bankruptcy Estate only, in a

certain piece of land in the Town of Granville, County of Washington, State of New York,

described as follows:

ALL THAT CERTAIN PIECE OR PARCEL OF LAND, situate in the Town of Granville, County of Washington and State of New York and which said parcel is more particularly bounded and described as follows:

BEGINNING at a point on the easterly boundary of New Boston Road, said point being situate the following two courses and distances from the intersection of said road boundary with the southerly boundary of lands conveyed from Frederick and Gertrude A. Williams to Christel Gambino-Tromblee (Deed reference: Liber 602, page 238) viz: 1) North 33 degrees 45 minutes 00 seconds East, a distance of 143.19 feet and 2) North 37 degrees 50 minutes 05 seconds East, a distance of 120.17 feet, running thence from said point of beginning North 37 degrees 50 minutes 05 seconds East, continuing along the easterly boundary of New Boston Road, a distance of 125.83 feet to a point; thence North 31 degrees 50 minutes 20 seconds East, continuing along said road boundary, a distance of 107.39 feet to a point, thence North 25 degrees 34 minutes 25 seconds East, continuing along said road boundary a distance of 52.18 feet to a point; thence South 81 degrees 56 minutes 40 seconds East, a distance of 872.21 feet to a point; thence South 22 degrees 05 minutes 45 seconds West, a distance of 265.17 feet to a point; thence North 81 degrees 56 minutes 40 seconds West, a distance of 929.39 feet to the point of beginning. Containing 5.28 acres of land, more or less, designated as lot 2 of Subdivision map. Being the same premises conveyed by Owen Burke, Jr. to Owen Burke, Jr. and Shawn Patrick Burke by warranty deed dated February 24, 1993 and recorded in the Washington County Clerk's Office on February 25,1993 in Liber 684 of Deeds at Page 219.

Being the same premises described in a deed dated September 8, 1999 from Owen Burke, Jr. to Shawn Patrick Burke, which deed was recorded at the Washington County Clerk's Office on September 9, 1999 in Liber 835 of Deeds at Page 134.

Said property is sold in "as is" condition, without representations or warranties of any

kind, express or implied, including, without limitation, representations of merchantability and/or

fitness for any particular purpose.

TO HAVE AND TO HOLD said granted premises, with all privileges and appurtenances

thereof, to the said David F. Giza, Grantee, and his heirs and assigns, to his own use and behoof

forever.

FURTHERMORE, the Grantor, for himself, and his successors and assigns, does

covenant with David F. Giza, Grantee, and his heirs and assigns, that from and after the

ensealing of these presents, neither Raymond J. Obuchowski, as Trustee, nor the Bankruptcy

Estate of said Debtor, will have or claim any right in the said lands and premises.

IN WITNESS WHEREOF, I have executed this deed the day and year first above written.

____________________________________ Raymond J. Obuchowski

Trustee in Bankruptcy

STATE OF VERMONT COUNTY OF WINDSOR, SS

On the _____ day of August, 2012 before me personally came RAYMOND J. OBUCHOWSKI, Trustee in Bankruptcy of the Estate of Shawn P. Burke, and he executed the foregoing instrument and duly acknowledged that he executed the same as his free act and deed and as the duly authorized representative of the Bankruptcy Estate of Shawn P. Burke.

___________________________________________Notary Public

My Commission Expires: 2/10/15

Filed & Entered On Docket

March 12, 2010

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Vt. LBR 5091-1. Judge’s Signature

90

VT. LBR 5091-1. JUDGE’S SIGNATURE

Any order signed and filed electronically has the same force and effect as if the Judge had affixed the Judge’s original signature to a paper copy of the order and the Clerk had entered it on the docket in a non-electronic manner. See Vt. LBR 9036-1(c).

PART VI

VT. LBR 6003-1. FIRST DAY MOTIONS.

(a) Notice of Preliminary Hearing on First Day Motions. A Chapter 11 debtor seeking relief at the outset of the case must provide notice of the preliminary hearing on the first day motions to the Office United States Trustee, committee of unsecured creditors, if any, and otherwise to the 20 largest unsecured creditors, as well as any other parties directly affected by the motions. The debtor may serve notice by electronic mail, fax, hand delivery, or such other means as the Court approves.

(b) Notice of Final Hearing on First Day Motions. The debtor must serve notice of the final hearing on first day motions on all creditors, unless the Court orders otherwise.

VT. LBR 6004-1. SALE OF ESTATE PROPERTY

(a) Sales Free and Clear of Liens. A party seeking to sell property free and clear of liens under § 363(f) must file a motion and obtain a Court order approving the sale.

(1) Contents of Motion. The motion must include:

(A) a detailed description of all property to be sold;

(B) an itemized valuation of all property to be sold together with the basis for each valuation;

(C) a listing setting forth the holders and amounts of all secured claims against each property to be sold such that the Court may determine whether the proposed sale price for each property is sufficient to pay the loans against each such property;

(D) the terms of the bidding, including acceptable methods of bidding (e.g., whether parties may bid via telephone during the auction);

(E) the date, time, and location of the hearing to approve the sale procedure, if applicable;

(F) the date, time, and location of the proposed sale;

(G) the date, time, and location of the hearing to approve the results of the sale, if applicable;

(H) a listing of all methods used to advertise the sale;

(I) a description of the due diligence undertaken to identify and provide notice to: (i) all parties with an interest in the property being sold, and (ii) all potential bidders; and

Vt. LBR 6004-1. Sale of Estate Property

91

(J) an affirmation that the proposed sale complies with § 363(f), with a specific explanation of how it complies.

(2) Notice. The notice of sale must set forth the information outlined in subparagraph (1) above and may do so in summary form. The notice of sale must also make clear that the sale is subject to Court approval and that even if the case trustee deems a bid to be the highest and best bid, the Court may still deny approval of the bid if it finds the bid is not in the best interest of the estate or finds it is not in compliance with the Bankruptcy Code or the Federal Rules of Bankruptcy Procedure. The notice of sale and notice of motion must be served on all secured creditors, the Office of the United States Trustee, all parties who have (or are identified on public record as claiming to have) an interest in the property being sold, all other parties listed on the master mailing list, and all parties that the movant, through due diligence, determines to be potential bidders.

(3) Hearings. If a movant seeks Court approval of a proposed sale procedure, a hearing to approve the proposed sale procedure must be set at least seven days before the proposed sale, unless the Court approves a shorter time. The movant must also set a hearing to approve the sale within seven days of the sale, unless the Court approves a longer time.

(4) Potential Consequence of Noncompliance. Failure to comply with the requirements of this Rule may result in the sale being denied or postponed. Further, any costs incurred by other parties due to the movant’s noncompliance may be assessed against the movant or movant’s counsel.

(b) Other Sales Outside the Ordinary Course of Business. The debtor-in-possession or case trustee may seek approval of a sale outside the ordinary course of business through a notice of intent to sell, if the movant is not seeking to sell property free and clear of liens and the aggregate value of the estate’s property being sold is less than $2,500. A motion or notice of intent to sell outside the ordinary course of business must include:

(1) the type of sale and known prospective purchasers;

(2) the terms of sale, including but not limited to: the location and condition of the items to be sold, bidding procedures, and minimum bid, if any; whether the sale is subject to higher and better offers, the funds required at approval of the sale, the form of funds required at approval of the sale and at closing of the sale, and a proposed date for both the sale and closing of the sale;

(3) identification of the property (e.g., the VIN, make, model, serial number of a vehicle; volume/page number and town where ownership of real property is recorded; street address of real property), as applicable;

(4) the names and purported interests of all parties known, or discovered after reasonable investigation, to claim an interest in the property;

(5) the fair market value of the property, the basis for valuation, and the amount of any outstanding indebtedness secured by the property;

(6) a copy of the contract or a summary of the terms of sale; and


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(7) any other information that provides due process to all parties in interest and is likely to maximize the sale price.

(c) Notice of Intent to Sell and Order. The Court will enter an order approving sale of estate property by the case trustee submitted in conjunction with a notice of intent to sell, as referenced in paragraph (b), provided the proposed order contains all the information set forth in the notice, indicates that no objections were filed within the time required under the applicable Federal Rules of Bankruptcy Procedure, and contains sufficient specificity to provide the Court with all information necessary to make a determination that the statutory requirements of § 363(b)(1) have been met.

(d) Form of Orders Approving Sales. All orders approving sales must state the name and address of the buyer, identify the property sold, specify the amount paid, and disclose the net proceeds to the estate. If the property sold is different from the property listed on the notice of sale, the proposed order must identify and explain any differences.

(e) Sale or Refinance of Property in Chapter 12 and 13 Cases.

(1) Approval Procedures. No sale or refinance of the debtor’s principal residence or other real property may take place while a Chapter 12 or 13 case is pending unless: (A) the Court approves the sale or refinance after notice to all parties in interest, see Fed. R. Bankr. P. 2002(a)(2), or (B) the debtor obtains the Chapter 12 or 13 trustee’s approval using the procedure described in subparagraph (2), below.

(2) Chapter 12 or 13 Trustee’s Approval. If the debtor wishes to use the proceeds of a sale or refinance of property to fund a Chapter 12 or 13 plan, the debtor may request a “Certificate of Approval” from the Chapter 12 or 13 trustee on seven days’ notice to all parties in interest, as long as one of the following conditions is met:

(A) to the extent there are proceeds, all proceeds will be dedicated to fund the Chapter 12 or 13 plan;

(B) the confirmed Chapter 12 or 13 plan provides a dividend of no less than 15% to all unsecured creditors holding allowed claims; or

(C) to the extent the confirmed Chapter 12 or 13 plan does not provide at least a 15% dividend to all unsecured creditors holding allowed claims, the proceeds of the sale or refinance are used to create such a dividend, and any proceeds the debtor retains must be claimed as exempt as permitted by applicable law.

The debtor’s request for a Certificate of Approval must indicate which of the three conditions will be met if the sale or refinance is approved, list all debts secured by the property, and itemize how the debtor proposes to distribute the proceeds. If no objections are timely filed, then after the expiration of the notice period, the Chapter 12 or 13 trustee may issue a Certificate of Approval authorizing the debtor to use the proceeds of the sale or refinance of the property to fund the Chapter 12 or 13 plan in accordance with the debtor’s request. If a timely objection is filed, then the matter will be set for a hearing.


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(3) Sale Plans. Even if the Chapter 12 or 13 plan sets forth the contents of a sale motion as required by paragraph (a) or (b), above, the Chapter 12 or 13 plan is confirmed, and the confirmation order includes reference to the sale, the debtor must file a separate motion to approve the sale prior to consummating the sale.

(4) Broker’s Commissions; Closing Costs. Where a Chapter 12 or 13 plan calls for the sale of real or personal property and a broker’s commission is payable as part of the sale, the broker may collect a commission of up to 6% (or up to 10% for vacant land or commercial property) of the sale price without a Court order, absent unusual circumstances. The Court must be made aware of any unusual circumstances prior to the sale. Customary closing costs do not need prior Court approval for disbursement, provided they have been set forth in the plan.

(5) Payment of Secured Claims. If there is a mortgage or other claim secured by the property being sold and it is to be paid from the sale proceeds, the secured creditor must be paid directly, except that any pre-petition arrearage due must be paid through the Chapter 12 or 13 trustee, unless the Court orders a different treatment of the secured claim.

(f) Mortgage Modification in Chapter 12 and 13 Cases.

(1) Approval Procedures. No mortgage, whether secured by the debtor’s principal residence or other real property, may be modified by agreement of the parties, outside the plan, while a Chapter 12 or 13 case is pending unless a modification agreement is signed by both the debtor(s) and the lender (or the debtor obtains an order approving the modification without both signatures, based upon a description of the efforts the debtor made to obtain the lender’s signature), and includes a provision that the modification agreement is not effective without Court approval, and either:

(A) the Court approves the mortgage modification after notice to all parties in interest, pursuant to Fed. R. Bankr. P. 2002(a)(2); or

(B) the mortgage modification is approved as part of the plan confirmation process.

(2) Debtor’s Retention of Funds Available as a Result of the Modification. If a debtor files a motion to approve a mortgage modification and seeks to retain the differential between the prior monthly payment and the current, lower monthly payment on the debtor’s secured claim rather than apply the differential to fund a higher dividend to unsecured creditors, the debtor must set forth in the motion facts to support the request, and must file with the motion an amended Schedule J showing the new payment and current monthly expenses.

(g) Chapter 11 – Additional Requirements. If a chapter 11 debtor-in-possession or trustee seeks authority to sell all or substantially all of the assets of the estate under § 363(b) prior to the entry of a confirmation order, the motion to sell must contain the following:

(1) a clear and conspicuous statement to that effect;

Documents

A BRIEF SUMMARY OF BANKRUPTCY LIEN … BRIEF SUMMARY OF BANKRUPTCY LIEN AVOIDANCE SECTIONS -Jan M. Sensenich 11 U.S.C. 522(f) - Liens that Impair Exemptions 1. Judicial Liens (ex