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March 8, 2008

1st Circuit BAP Affirms Lien Avoidance on Postpetition Home Refi

Miranda v. Doral Financial Corp.  (In re Marrero)  ---- B.R.  ----, 2008 WL 612790  (1st Cir BAP Jan. 2008)

Issue:   When a secured creditor obtains relief from stay to foreclose but no order abandoning the property and then agrees to a refinance of the debtor’s residence, is the new mortgage an unauthorized postpetition transfer?         

Holding:      Yes, and since the bank gave up its prepetition lien, it is now unsecured.    

The debtor filed chapter 13 and shortly thereafter converted it to chapter 7.  After the bank received relief from stay in the chapter 7, the debtor and the bank agreed to a refi of the two mortgages on the debtor’s residence.  The trustee was not served with the Motion for Relief.  There apparently was never any equity in the property beyond the homestead exemption.  Neither the trustee nor other creditors were given notice of the refi.   The facts do not say if a new trust deed was recorded, only that a new mortgage was “delivered” and that that was a postpetition transfer of property of the estate.  The trustee filed a complaint seeking declaratory relief that the residence was free and clear of liens and that the bank was now unsecured.  The bank defended on the basis that the residence was no longer property of the estate at the time of the refi and that if the new mortgage is to be avoided the prior mortgages should be reinstated.  The court granted the trustee’s motion for summary judgment declaring the debt to be unsecured and permitting the sale of the residence.

The BAP affirmed.  On appeal, the bank conceded that the new mortgage was a postpetition transfer but argued that the court abused its discretion in avoiding the lien.  The bank argued “the phrase ‘the trustee may avoid a transfer of property of the estate’ in the first sentence § 549(a) requires the bankruptcy court to review a trustee’s exercise of the power under a benefit to the estate test as a condition of avoidance.”  But the BAP said it is the trustee who “may” avoid the transfer.  “[A] bankruptcy court may not apply its general equitable powers to disregard or  contravene the Code’s unambiguous provisions; or, as [the bank] would have it in this case, to save a defendant creditor from its own improvident actions.”  Furthermore, the avoidance was clearly a benefit to the estate.  The bank also argued that the effect of the ruling was to give the trustee a double satisfaction which is improper under Section 550(d) and therefore the old lien should reattach if the new lien is avoided.  The BAP rejected that since Section 550(d) clearly doesn’t apply.      

March 8, 2008 in Other Circuit Briefs | Permalink

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