WILLIAM C. HILLMAN, Bankruptcy Judge.
The matter before the Court is the request of Warren E. Agin, the plaintiff and Chapter 7 Trustee, (the "Trustee") for entry of a money judgment against the defendant, PNC Mortgage ("PNC"), and PNC's opposition thereto. The Trustee filed the present adversary proceeding seeking to avoid the debtor's grant of a mortgage to PNC as a preferential transfer. A default previously entered against PNC, and the Trustee now seeks a monetary judgment for the value of the property interest preferentially transferred. For the reasons set forth below, I will deny the Trustee's request.
The facts are not in dispute. Kelley J. Spodris (the "Debtor") purchased real property located in Marston Mills, Massachusetts (the "Property") on September 24, 2002. On June 5, 2007, the Debtor transferred the Property to herself and her mother, Donna M. Kelley, ("Kelley") as joint tenants with rights of survivorship. On September 6, 2007, the Debtor and Kelley granted a mortgage on the Property to National City Mortgage. On February 13, 2011, they refinanced the 2007 mortgage with PNC. As part of that transaction, the Debtor and Kelley executed a note in the principal amount of $282,000.00 (the "Note") and granted PNC a mortgage on the Property to secure the obligation (the "Mortgage"). PNC, however, did not record the Mortgage in the Barnstable County Registry of Deeds until April 5, 2011. Pursuant to the Note and Mortgage, both the Debtor and Kelley were jointly and severally liable for the underlying debt.
On June 21, 2011, the Debtor filed a voluntary Chapter 7 petition. On October 17, 2011 the Court entered an order of discharge, discharging the Debtor's personal liability on the Note. Nevertheless, throughout the bankruptcy proceedings and up to the present date the Debtor and Kelley have remained current with their obligation to PNC.
On October 20, 2011, the Trustee commenced the present adversary proceeding against PNC, seeking to avoid the Mortgage as a preferential transfer pursuant to 11 U.S.C. §§ 547 and recover either the Mortgage or the value of the Mortgage for the benefit of the estate pursuant to 550.
When the Trustee attempted to enforce the default judgment against PNC in the United States District Court for the Southern District of Ohio, PNC successfully challenged his attempt the basis that there was no money judgment to enforce. On April 26, 2013, the Trustee filed a motion for judgment in a separate document, seeking entry of a judgment which expressly awarded him monetary recovery in the amount of $234,000.00, with interest accruing from December 28, 2012. PNC filed an opposition on May 10, 2013. After a hearing June 10, 2013, I granted the Trustee's motion over PNC's objection. The Trustee subsequently sought to amend the judgment to correct a typographical error such that the reference to December 28, 2012 should have been December 28, 2011. I held another hearing on August 14, 2013, before entering the amended judgment (the "Monetary Judgment").
PNC timely appealed the entry of the Monetary Judgment to the United States District Court for the District of Massachusetts (the "District Court"). In an opinion dated March 31, 2014, the District Court found that I erroneously entered a money judgment under Fed.R.Civ.P. 55(b) without compelling the Trustee to prove his damages, as the claim was not for a "sum certain."
On remand, I conducted a status conference on May 2, 2014, at which the Trustee renewed his request for entry of a money judgment, which PNC opposed. I took the matter under advisement, and the parties subsequently filed briefs in support of their positions.
The Trustee argues that a money judgment is necessary to make the estate whole, as there is no way for him to realize the full value of the avoided mortgage interest (the "Avoided Interest"). The Trustee points out that he can only avoid and preserve the Mortgage for the benefit of the estate as to the Debtor's interest in the Property. Because the Property will remain subject to the Mortgage to the extent of Kelley's interest in the Property, the Trustee asserts that any attempt to sell the Avoided Interest will not obtain its true value. Moreover, the Trustee contends that the expenses and difficulty involved in such a sale are such that preservation of the Avoided Interest would not restore the Debtor's bankruptcy estate to the position it would have been in had the transfer not taken place. The Trustee also asserts that a money judgment is appropriate because the value of the Debtor's interest in the Mortgage is readily ascertainable — through either a valuation hearing
The Trustee argues that a money judgment would not unfairly penalize PNC or result in a windfall to the estate, because the money judgment would replace avoidance of the Mortgage as the remedy. Thus, if monetary relief is granted, PNC would then hold the Mortgage as to both the Debtor's and Kelley's interest in the property. The Trustee contends that PNC would additionally share with the Debtor's other creditors in a distribution of whatever amount is recovered.
In fact, the Trustee asserts that it is PNC that has received a windfall, because PNC has continued to receive mortgage payments from the Debtor, notwithstanding the Trustee's avoidance of the Mortgage as to the Debtor. The Trustee asserts that the estate is entitled to such payments and contends that any determination of damages should include the payments made to PNC on account of the Avoided Interest.
Finally, the Trustee asserts that the "dilatory" manner in which PNC addressed the present litigation should weigh in favor of granting the Trustee a money recovery, and that the administrative expenses which the Trustee has incurred throughout these proceedings ought to be taken into account in the assessment of damages.
PNC asserts that a money judgment is not necessary in this case, as avoidance of the Mortgage as to the Debtor restores the parties to the position they were in prior to the preferential transfer. PNC points out that the property interest that the Debtor preferentially transferred was the right to look to the Property for satisfaction if the Debtor defaulted on its loan. PNC argues that avoidance deprives it of this right, renders PNC's loan unsecured as to the Debtor, and further allows the Trustee to recover on behalf of the estate the interest the Debtor had in the Property pre-transfer. PNC contends that requiring it to pay money damages would unfairly penalize it for having lent the Debtor money shortly prior to her bankruptcy filing.
Moreover, PNC argues that the Trustee is not entitled to money damages simply because avoidance of the Mortgage as to the Debtor will not eliminate the Mortgage as to Kelley's interest in the Property. PNC contends that if it had never recorded the mortgage against the Debtor, or the Debtor had never granted it the Mortgage, there would have been no preference; yet the Trustee would still face the difficulty of administering an asset encumbered by a valid mortgage on Kelley's interest in it. Thus, PNC asserts that avoidance of the mortgage as to the Debtor's interest in the Property constitutes a complete recovery for the bankruptcy estate.
Additionally, PNC asserts that the Trustee is not entitled to a money judgment simply because he is dissatisfied with the potential market for the Avoided Interest. PNC further argues that even if money damages were appropriate, the correct measure would be the market value of the avoided interest, not the value of the real property or the remaining mortgage debt. Moreover, PNC contends that any payments it has received from the Debtor are not proceeds of the Avoided Interest, because Kelley is jointly and severally liable for the full amount of the debt.
Finally, PNC asserts that it has not engaged in any dilatory conduct in these proceedings. PNC contends that it had no reason to oppose the entry of a non-monetary default judgment against it because it does not dispute the avoidability of the
Pursuant to § 547(b), the Trustee may avoid as a preference "any transfer of an interest of the debtor in property" made: (1) to a creditor; (2) on account of an antecedent debt; (3) while the debtor was insolvent; (4) on or within 90 days of the petition date; and (5) that enables the creditor to receive more than the creditor would have in a Chapter 7 case if the transfer had not been made.
As is relevant here, two Bankruptcy Code sections provide remedies in the case of a preferential transfer. First, pursuant to § 551, "[a]ny transfer avoided under [§ 547] of this title ... is preserved for the benefit of the estate."
The purpose of § 550 is to "to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred."
In the case of a non-possessory security interest or lien, avoidance and preservation of the lien is generally sufficient to return the bankruptcy estate to its pre-transfer condition.
In this case, preservation of the Avoided Interest for the benefit of the estate is sufficient to return the "property transferred" to the estate. Neither the Mortgage not the Property were transferred to third parties, and thus this case is unlike other cases in which courts have found a monetary recovery necessary. Nevertheless, the Trustee asserts that there are special circumstances warranting a monetary recovery in this case and requests that I award him the value of the
The Trustee relies on the recent decision by the First Circuit, In re Traverse, in which the court described the effect of preservation as follows:
Here, as in Traverse, the Debtor has not defaulted on the Mortgage. Thus, the Trustee is not entitled to sell the Property itself to realize the value of the Avoided Interest. Moreover, the Trustee asserts that none of the options discussed in Traverse will realize the "full value" of the mortgage, rendering preservation an insufficient remedy. He contends that a voluntary sale is not in prospect and the maturation date of the mortgage is in 2041, making it unfeasible to keep the case open for a potential default. Primarily, however, the Trustee argues that the "liquid market value" of the avoided interest is not equal to its "full value," given the difficulty of selling a partial interest in a mortgage.
The Trustee relies on a decision by the bankruptcy court in In re Early as support for this view.
Unlike the court in Early, I do not find the difficulty of administering the Avoided Interest a special circumstance entitling the Trustee to a monetary recovery. First, I note that if the Debtor had never granted PNC a mortgage in the property, and only Kelley had mortgaged her interest in the property, there would have been no preference. Nevertheless, the Trustee would be faced with a similar difficulty of disposing of property in which a non-debtor holds an interest. Second, the court in Early emphasized that in attempting to sell one half of a lien, the Trustee would "not be able to realize one half of the value of the entire lien."
Furthermore, the approach taken by the court in Early mischaracterizes the nature of the property interest at issue. The proper measure of value in this case is the market value of the Avoided Interest itself, not the value of half of the entire Mortgage.
Accordingly, I find that preservation of the Avoided Interest for the benefit of the estate is sufficient to put the estate in its pre-transfer position, and thus constitutes a complete recovery in this case. As PNC points out, the "interest of the debtor in property" that was preferentially transferred was PNC's right to enforce its claim against the property in the event of default.
In light of the foregoing, I will enter an order denying the Trustee's request for entry of a money judgment.