John S. Lovald v. Kathryn M. Tennyson ( 2010 )

United States Bankruptcy Appellate Panel
FOR THE EIGHTH CIRCUIT
No. 10-6050
In re: *
*
Theodore Stephen Wolk, *
d/b/a Ted Wolk Apartments, *
*
Debtor. *
*
* Appeal from the United States
John S. Lovald, Trustee, * Bankruptcy Court for the
* District of South Dakota
Plaintiff - Appellant, *
*
v. *
*
Kathryn M. Tennyson, *
*
Defendant - Appellee. *
*
Submitted: September 23, 2010
Filed: October 14, 2010
Before KRESSEL, Chief Judge, FEDERMAN and SALADINO, Bankruptcy Judges.
SALADINO, Bankruptcy Judge.
The Chapter 7 trustee appeals the June 24, 2010, judgment of the bankruptcy
court in favor of the defendant, denying the trustee’s request to sell jointly owned real
estate free and clear of the defendant co-owner’s interest pursuant to 11 U.S.C.
§ 363(h). For the reasons set forth below, we remand.
Background
The debtor and his wife own a single-family residence in Rapid City, South
Dakota. They hold title as tenants in common. When the debtor filed his bankruptcy
petition, he and his wife were in the process of dissolving their marriage. The debtor
did not claim a homestead exemption in the house. The trustee sought a court order
authorizing him to sell the property under § 363(h),1 arguing that partition was
impracticable, a sale of only the estate’s interest would realize significantly less than
a sale free of the co-owner’s interest, and that the benefit to the estate of the sale
1
Section 363 governs the use, sale, or lease of property. Subsection (h) states
in relevant part:
(h) [T]he trustee may sell both the estate’s interest, under
subsection (b) or (c) of this section, and the interest of any co-owner in
property in which the debtor had, at the time of the commencement of
the case, an undivided interest as a tenant in common, joint tenant, or
tenant by the entirety, only if —
(1) partition in kind of such property among the estate and
such co-owners is impracticable;
(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.
2
would outweigh any detriment to the co-owner. The property is not used for energy
production, so the fourth element of § 363(h) is not an issue. The third element –
benefit to the estate vs. detriment to the co-owner – is the only element in dispute.
At the conclusion of trial, the bankruptcy court made findings of fact and
conclusions of law on the record. The court ruled that the trustee had the initial burden
of establishing that the proposed sale would create a benefit to the bankruptcy estate.
The court further found that under South Dakota law, the record title as tenants in
common gives rise to a presumption that each co-owner holds an equal share.
Cudmore v. Cudmore, 311 N.W.2d 47, 49 (S.D. 1981). The presumption is rebuttable
by a showing of unequal contribution. Id. The evidence at trial indicated that the
co-owner contributed more toward the purchase price of the house than the debtor did,
and had made all of the payments on the first mortgage. The court found that the fair
market value of the house was $185,000.00, with equity at the time of trial of
approximately $63,000.00. Since the undisputed evidence showed that all of the
equity amount was attributable to the co-owner’s financial input, the bankruptcy court
determined that all of the equity would accrue to her upon sale. Therefore, the court
held that since the trustee stands in the shoes of the debtor, the bankruptcy estate had
nothing to gain from a sale of the jointly held property.2
Judgment was entered denying the trustee’s request to sell the property free and
clear of the co-owner’s interest.
2
Because the court found that there was no benefit to the estate, it did not
complete the balancing test of § 363(h)(3).
3
The trustee filed this appeal, arguing that 11 U.S.C. § 544(a)3 grants him the
rights and powers of a hypothetical judicial lienholder or bona fide purchaser. As
such, the trustee asserts that the presumption of equal ownership cannot be rebutted
because South Dakota caselaw holds that, as to bona fide purchasers and creditors, co-
owners hold in accordance with the recorded title. See Cudmore, 311 N.W.2d at 50.
Therefore, the trustee asserts, because the co-owner’s contribution argument would
be inapplicable to the sale of the property to a third party, it should not be imposed
against him and he should be permitted to sell the house and distribute half of the
proceeds to the co-owner and half to the bankruptcy estate.
3
That section states:
§ 544. Trustee as lien creditor and as successor to certain creditors and
purchasers
(a) The trustee shall have, as of the commencement of the case,
and without regard to any knowledge of the trustee or of any creditor, the
rights and powers of, or may avoid any transfer of property of the debtor
or any obligation incurred by the debtor that is voidable by —
(1) a creditor that extends credit to the debtor at the time of
the commencement of the case, and that obtains, at such time and
with respect to such credit, a judicial lien on all property on which
a creditor on a simple contract could have obtained such a judicial
lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of
the commencement of the case, and obtains, at such time and with
respect to such credit, an execution against the debtor that is
returned unsatisfied at such time, whether or not such a creditor
exists; or
(3) a bona fide purchaser of real property, other than
fixtures, from the debtor, against whom applicable law permits
such transfer to be perfected, that obtains the status of a bona fide
purchaser and has perfected such transfer at the time of the
commencement of the case, whether or not such a purchaser
exists.
4
In response, the co-owner argues that the bankruptcy court correctly decided
the matter, and that the trustee should not be allowed to raise § 544 now when it had
not been pleaded in his complaint or raised in the bankruptcy court. The co-owner also
argues that § 544 does not offer relief to the trustee because there is no transfer to
avoid and the trustee cannot act as a lien creditor of the bankruptcy estate.
Discussion
We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. First Nat'l Bank of Olathe v. Pontow (In re Pontow), 111
F.3d 604, 609 (8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888
(8th Cir. 1997); Fed. R. Bankr. P. 8013. We review issues committed to the
bankruptcy court’s discretion for an abuse of that discretion. Official Comm. of
Unsecured Creditors v. Farmland Indus., Inc. (In re Farmland Indus., Inc.), 397 F.3d
647, 651 (8th Cir. 2005) (citing Jones Truck Lines, Inc. v. Foster’s Truck & Equip.
Sales, Inc. (In re Jones Truck Lines, Inc.), 63 F.3d 685, 686 (8th Cir. 1995)). The
bankruptcy court abuses its discretion when it fails to apply the proper legal standard
or bases its order on findings of fact that are clearly erroneous. Farmland Indus.,
supra (citing Stalnaker v. DLC, Ltd., 376 F.3d 819, 825 (8th Cir. 2004)). The
authorization to sell property under § 363(h) is discretionary with the court. Probasco
v. Eads (In re Probasco), 839 F.2d 1352, 1357 (9th Cir. 1988).
The parties seem to be in agreement that long-standing caselaw in South Dakota
holds that tenants in common are presumed to hold title in equal shares, although as
between them the deed is not conclusive and they may put forth evidence of intent or
disproportionate contributions to establish their ownership interests in something other
than equal shares. Cudmore, 311 N.W.2d at 49. However, the trustee asserts that the
presumption of equal ownership cannot be rebutted as to bona fide purchasers and
creditors who take in accordance with the recorded title and the presumption of equal
ownership. Id. at 50 (citing Stover v. Stover, 36 A. 921, 922 (Pa. 1897)).
5
The Bankruptcy Code, at § 704, directs the trustee to collect and reduce to
money the property of the estate. One of the tools the trustee may use in performing
that duty is 11 U.S.C. § 544(a) which expressly confers on the trustee – as of the
commencement of the case and without regard to knowledge – the rights and powers
of a bona fide purchaser of real property. This authority underpins the trustee’s ability
to use § 363(h) to maximize the estate’s liquidation of assets to be used to pay
creditors and must necessarily be part of the analysis. However, in this instance, the
trustee’s status under § 544(a) is newly raised on appeal. Ordinarily, we would not
consider an issue that is newly raised on appeal since the bankruptcy court did not
have the opportunity to address it. However, the trustee’s rights in the property
(including his rights and powers under § 544) must necessarily be addressed in
connection with any proposed sale in order to determine exactly what can be sold.
Further, failing to consider the trustee’s rights under § 544 could leave the erroneous
impression that the trustee must take some affirmative action to acquire his status as
a bona fide purchaser. To the contrary, the rights and powers of a bona fide purchaser
are conferred upon the trustee as a matter of law under the terms of § 544 (a).
The trustee’s position as a bona fide purchaser affects the analysis of a motion
under § 363(h). According to Cudmore, a bona fide purchaser must be able to rely on
the title records regardless of whatever unrecorded arrangements the owners may have
made between or among themselves. Otherwise, such a purchaser would bear the
untenable burden of conducting a factual inquiry into the respective ownership
interests on any jointly owned real estate before completing the transaction. See
Morris v. Kasparek (In re Kasparek), 426 B.R. 332, 348 (B.A.P. 10th Cir. 2010) (“We
believe that a duty to inquire about the possibility of an implied trust or other
unrecorded agreements when title is held by joint tenants undermines the purpose of
6
the Kansas recording statutes, imposes an undue burden on purchasers, and impairs
the reliability of record title.”).4
The bankruptcy court’s ruling relied upon the proposition that the trustee “stands
in the shoes of the debtor.” We review that conclusion of law de novo. While that
statement is often accurate under the Bankruptcy Code, under § 544(a), the trustee’s
rights are actually greater than those of the debtor. However, the trustee’s status as a
hypothetical bona fide purchaser was not raised at the trial level, so the bankruptcy
court did not have occasion to consider it and to complete the § 363(h) analysis with
regard to the estate’s benefit vis-à-vis the co-owner’s detriment.5 Therefore, the matter
will be remanded to permit the bankruptcy court to consider the impact under South
Dakota law of the trustee’s rights and powers under § 544(a) and to complete the
analysis under § 363(h).
Conclusion
Because the bankruptcy court did not consider the effect of § 544(a), we remand
the matter for further consideration consistent with this opinion.
4
Kasparek is factually similar to the case at hand and involves a trustee’s
motion to sell jointly owned property under § 363(h) and a discussion of the trustee’s
rights and powers under § 544(a).
5
While there is nothing in the record on appeal to indicate that this issue was
raised at trial, we note that we were only provided a partial transcript of the
proceedings in the bankruptcy court.
7