HENRY J. BOROFF, Bankruptcy Judge.
Before the Court for determination are a Motion for Authority to Compromise (the "Motion to Compromise") filed by the Chapter 7 Trustee Gary M. Weiner (the "Trustee") and a Motion to Compel Abandonment (the "Motion to Abandon") filed by the debtor Gail Dupuis (the "Debtor"). Through the Motion to Compromise, the Trustee seeks leave to settle his pending avoidance action against Wells Fargo Bank, N.A. ("Wells Fargo") through which he sought to avoid and preserve for the bankruptcy estate a mortgage granted by the Debtor in favor of Wells Fargo. The Debtor objects to the Motion to Compromise on grounds that the Trustee does not have the power to carry out its terms. The Debtor prefers that the Trustee abandon the subject property instead.
The facts of the case are without material dispute, based in large part on an Agreed Statement of Facts filed by the Debtor, the Trustee, and Wells Fargo.
On January 18, 2005, the Debtor purchased a residence in Wales, Massachusetts (the "Residence"). The original deed (the "2005 Deed"), recorded at the Hampden County Registry of Deeds (the "Registry") in Book 14770, Page 374, erroneously referred to the Residence as Parcel 2 on the relevant plan recorded in the Registry in Plan Book 335, Plan 125 (the "Plan"). In fact, the Residence is located on Parcel 1 of the Plan. On January 20, 2005, the Debtor purchased two undeveloped lots
In 2007, the Debtor refinanced the mortgage loan on her Residence, granting Wells Fargo a mortgage on the property (the "2007 Mortgage"). At the time of the refinancing, it was the parties' intention that the 2007 Mortgage encumber the Residence (again, Parcel 1) only. But the 2007 Mortgage referred only to Parcels 2 and 3, and not to Parcel 1.
In October 2011, the Debtor defaulted on the mortgage loan payments to Wells Fargo. Around the same time, late in 2011, the Debtor first became aware of the erroneous description of the Residence in the original 2005 Deed and that the 2007 Mortgage erroneously encumbered Parcels 2 and 3. On February 29, 2012, a confirmatory deed was recorded, which provided in relevant part that its purpose was to correct the parcel number which read `Parcel 2' but should have been `Parcel 1'. No analogous correction was made to the 2007 Mortgage. On March 14, 2012, the Debtor recorded a Declaration of Homestead on the Residence, pursuant to Mass. General Laws ("MGL") ch. 188, § 1 (the "Massachusetts Homestead Statute").
Seven days later, on March 19, 2012, the Debtor filed a petition for relief under Chapter 7 of the United States Bankruptcy Code (the "Bankruptcy Code" or the "Code").
On September 13, 2012, the Trustee commenced an adversary proceeding against Wells Fargo
On February 11, 2014, the Trustee filed the Motion to Compromise. The proposed compromise between the bankruptcy estate and Wells Fargo contains the following salient terms: 1) Wells Fargo would pay $10,000 to the Trustee; 2) the adversary proceeding would be dismissed; and 3) the Trustee would execute and deliver to Wells Fargo a new mortgage on the Residence that correctly describes the Residence as located at Parcel 1. Following a hearing on the Trustee's Motion to Compromise and the Debtor's Motion to Abandon, the Court took both matters under advisement.
In support of the proposed compromise, the Trustee asserts that as a hypothetical bona fide purchaser under § 544(a)(3), he may seek avoidance of the 2007 Mortgage and, consequently, preserve the avoided mortgage for the benefit of the bankruptcy estate pursuant to § 551. The Trustee argues that his authority to provide Wells Fargo with a reformed mortgage derives from the fact that, once preserved, the
While the Debtor admits that she originally intended to grant a first mortgage on her Residence (Parcel 1) to Wells Fargo, she maintains that the Trustee has no power to reform a prepetition agreement over the objection of a party and therefore, cannot reform the 2007 Mortgage. She believes the adversary proceeding should proceed to trial for the purpose of invalidating Wells Fargo's mortgage on Parcels 2 and 3 for the benefit of estate. She further argues that because she exempted Parcel 1 under the Massachusetts Homestead Statute and no timely objection was made to the exemption, the Residence is of inconsequential value to the estate and should be abandoned to her.
Section 544(a)(3)
It is settled Massachusetts law that where a mortgage is not timely recorded or contains a defective description so as to not give constructive notice of the mortgage to a bona fide purchaser, the mortgage can be avoided by that purchaser of the property. See M.G.L. ch. 183, § 4; Tramontozzi v. D'Amicis, 183 N.E.2d 295, 344 Mass. 514, 517 (1962); Norton v. West, 394 N.E.2d 1125, 8 Mass.App.Ct. 348 (1979) citing Lamson & Co., Inc. v. Abrams, 25 N.E.2d 374, 305 Mass. 238 (1940); DeWolfe Co., Inc. v. Presidential Development Corp., Inc., 2003 WL 1505766 (March 18, 2003). Section 544(a)(3) grants the same right to a bankruptcy estate representative; in Chapter 7 cases, the
Here, the Trustee asserts that the incorrect legal description in the 2007 Mortgage is just the type of error that would allow a bona fide purchaser without notice of the mortgage to avoid its effect under Massachusetts law. Accordingly, the Trustee, standing in the shoes of such a hypothetical purchaser, claims to be able to avoid the mortgage to the same extent. And once avoided, the mortgage can be automatically preserved for the benefit of the estate under § 551. So far, so good. But the Trustee wishes to go further and actually change the terms of the avoided mortgage. In so doing, the proposed compromise goes too far.
Pursuant to Bankruptcy Rule 9019, the Court has the authority to approve the compromise of a claim. In evaluating a proposed compromise, the Court must balance the value of the claim being compromised against the value to the estate of accepting the compromise proposal. Jeffrey v. Desmond, 70 F.3d 183, 185 (1st Cir.1995). The Court should consider: (1) the probability of success in the litigation being compromised; (2) the difficulties to be encountered in the matter of collection; (3) the complexity of the litigation involved, and the expense, inconvenience and delay attending it; and (4) the paramount interest of creditors and a proper deference to their reasonable views in the premise. Id. Additionally, deference should be given to the Trustee's judgment regarding the settlement provided that the trustee can demonstrate that the proposed compromise falls within a `range of reasonableness'. Hill v. Burdick (In re Moorhead Corp.), 208 B.R. 87, 89 (1st Cir. BAP 1997).
But the considerations and deference cited above go to the question of whether a trustee should enter into a compromise. They do not reach the question of whether the trustee has the power to effect the terms of the compromise. Although the Trustee's status is crafted by federal law, the effect of those rights against other parties claiming a competing interest is determined by applicable state law. Section 544(a) does not give the Trustee any greater rights than he, or any person, would have as a bona fide purchaser or judicial lien creditor under applicable state law. Maine Nat'l Bank v. Morse (In re Morse), 30 B.R. 52 (1st Cir. BAP 1983). "Preservation is just that. It simply puts the estate in the shoes of the creditor whose lien is avoided." In re Carvell, 222 B.R. 178, 180 (1st Cir. BAP 1998).
Id. at 31.
It could be argued that, in at least one respect, the case now before this Court is distinguishable from Traverse. In Traverse, the First Circuit described the mortgage there as an "undefaulted mortgage on otherwise exempted property." Here, the 2007 Mortgage is a defaulted mortgage on the wrong property. But the principle underlying the Traverse holding applies with equal force to the case at hand — preservation of a mortgage does not grant the trustee a right to unilaterally alter the terms of the mortgage vis-à-vis the debtor. The Trustee has simply assumed that, employing the authority of the Bankruptcy Code, he has the authority to reform the mortgage. This Court cannot find the source of that authority. Section 544(a)(3) provides a Chapter 7 trustee with the power to avoid the mortgage and § 551 provides a Chapter 7 trustee to employ an avoided mortgage to wring out value for the bankruptcy estate. But nowhere does either Code section provide the Trustee the right to change the terms of an avoided mortgage to make it more marketable for sale or settlement.
The Trustee is also incorrect in his assertion that once the avoided mortgage is property of the Estate under § 541(a)(1), he stands in the Debtor's shoes for the purposes of reaching a settlement agreement with Wells Fargo. Under § 544, the Trustee stands in the shoes of either a hypothetical bona fide purchaser or a judgment lien creditor, not in the shoes of the Debtor. Upon successful avoidance of the 2007 Mortgage, he would enjoy the rights of Wells Fargo, "no more and no less." Traverse, 753 F.3d at 31. And Wells Fargo could only have reformed the mortgage without the Debtor's consent if (after the Trustee had abandoned the 2007 Mortgage) Wells Fargo sought its reformation in state court.
Disapproval of the proposed settlement does not leave the Trustee bereft of options. For example, he could settle the avoidance dispute with Wells Fargo by accepting a sum for abandoning his interest in the 2007 Mortgage so that Wells Fargo could go into state court to seek its reformation. Or, once the mortgage is avoided and preserved for the benefit of the estate, the Trustee might himself seek
For these reasons, approval of the Compromise in the form offered is not possible. Nor can the Court fashion its own remedy for liquidating the estate's interest in the 2007 Mortgage in lieu of the Trustee's judgment. See In re Central Illinois Energy, L.L.C., 406 B.R. 371 (Bankr.C.D.Ill. 2008) (holding that a bankruptcy court cannot rewrite an agreement and, by doing so, approve terms that differ from those to which the parties agreed; in evaluating a proposed settlement or compromise under Rule 9019, the court must accept or reject the agreement as presented).
Section 554(b) provides that "[o]n request of a party in interest and after notice and a hearing, the court may order the trustee to abandon any property of the estate that is burdensome to the estate or that is of inconsequential value and benefit to the estate." 11 U.S.C. § 554(b). In her Motion to Abandon, the Debtor seeks an order compelling the Trustee to abandon her Residence on grounds that it is of inconsequential value and benefit to the estate because her claimed exemption in the property was never objected to. This argument is easily dispatched.
Under Massachusetts law, "a debtor's homestead exemption is not effective against a mortgagee where the mortgage in question was executed before the debtor recorded a declaration of homestead." In re Swift, 458 B.R. 8, 15 (Bankr. D.Mass.2011); see also In re Guido, 344 B.R. 193 (Bankr.D.Mass.2006). Accordingly, to the extent the 2007 Mortgage is avoided but preserved and reformed by the state court for the benefit of the bankruptcy estate, the 2007 Mortgage would supersede the Debtor's exemption. An order abandoning the Residence would afford the Debtor with the possibility of conveying or encumbering the property, providing the Debtor with a totally undeserved windfall. And at the very least, abandonment at this juncture would confuse and complicate any further proceedings or settlement discussions between the Trustee and Wells Fargo with respect to the 2007 Mortgage. Wells Fargo's current willingness to compensate the estate in order to solve its problems in the drafting of the 2007 Mortgage makes self-evident the value to the estate of preserving the status quo.
For all of the foregoing reasons, the Court will DENY both the Trustee's Motion to Compromise and the Debtor's Motion to Abandon. Orders in conformity with this Memorandum shall issue forthwith.
11 U.S.C. § 544(a)(3).
11 U.S.C. § 550(a)
11 U.S.C. §§ 541(a)(3) and (4).