Bankr. M.D.N.C.: Daniel v. Jones Family Holdings – § 548 Avoidance of Foreclosure for Less than Reasonably Equivalent Value

Summary:

Mr. Daniel, together with the Chapter 13 Trustee subsequently added as a necessary Plaintiff, sought to avoid a pre-petition foreclosure by his homeowner’s association of his residence (in which the upset period had elapsed prior to filing of the bankruptcy) pursuant to 11 U.S.C. § 548(a)(1), as it had occurred within two years prior to the filing of the bankruptcy, had made the Debtor insolvent and provided less than “reasonably equivalent value” in exchange for the transfer. Jones Family Holdings (“JFH”), the highest bidder and purchaser of the property, moved to dismiss for failing to adequately state a claim, as it is a good faith, third party purchaser protected by state law, and that the Rooker-Feldman doctrine, res judicata, and collateral estoppel prevent the Daniel from bringing a claim.

In order to survive a motion to dismiss for failure to state a claim, the court restated that Mr. Daniel and the Chapter 13 Trustee “must merely demonstrate the plausibility of their claim, element by element.” It was not contested that the foreclosure had occurred within two years of the bankruptcy nor that the loss of the his home, which was Mr. Daniel’s primary asset and had substantial equity, caused his insolvency. The only issue which JFH contested was whether Mr. Daniel had received “reasonably equivalent value” for the transfer.

Following BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), which held that the price received at a mortgage foreclosure sale conclusively establishes reasonably equivalent value if state foreclosure law requirements had been met, and Hollar v. Myers (In re Hollar), 184 B.R. 243, 252 (Bankr. M.D.N.C. 1995), which extended BFP to forced sales for tax liens, the bankruptcy court found the same applied to sales by homeowner’s associations. See also Callaway v. Cimarron Homeowners Ass’n (In re Roszkowski), 494 B.R. 671, 680 (Bankr. E.D.N.C. 2013).

Under North Carolina law a merely inadequate final bid is insufficient to overturn a foreclosure. Instead there must be some material irregularity in the sale. Beneficial Mortg. Co. of N.C. v. Peterson, 592 S.E.2d 724, 728 (N.C. App. 2004). Mr. Daniel alleged, however, that the substitute trustee breached his fiduciary duty to the Mr. Daniel by acting as the sale trustee while also representing the Association and presenting evidence to the Clerk, in so doing violating the neutrality of the substitute trustee’s role by failing to maximize the sales price and instead acting as advocate for the homeowner’s association in merely seeking sufficient funds to satisfy its lien.

The bankruptcy court held that, despite a previous ruling denying a stay of eviction of Mr. Daniel from the property as he was unlikely to ultimately prevail, to survive a motion to dismiss, Mr. Daniel merely had to demonstrate a plausible claim, which he had.

As to JFH contention that it was insulated from recovery as a good faith, third party purchaser, the bankruptcy court held that a Trustee can recover from an initial transferee. Further, the res judicata/estoppel and Rooker-Feldman defenses failed both because the Trustee was not a party to the earlier litigation and also because the § 548 cause of action was not (and could not) have been raised in the pre-bankruptcy state court case.

Commentary:

Despite finding that Mr. Daniel stated a sufficiently plausible claim to satisfy the relatively low standard to survive a motion to dismiss for failure to state a claim, not only had he failed to show a likelihood of success on the merits to obtain a preliminary injunction to retain possession of his house, but he subsequently also failed to meet the burdens for confirmation. There the bankruptcy court held that, in conjunction with the odor that arose from his purchase of a new car mere hours before filing bankruptcy, Mr. Daniel’s “attempt to circumvent” the unfavorable state court foreclosure “constitutes an improper purpose” for filing bankruptcy. See, e.g., In re Lundahl, 307 B.R. 233, 246–47 (Bankr. D. Utah 2003) and In re McGovern, 297 B.R. 650, 659 (S.D. Fla. 2003). As such, confirmation of his case was denied as neither the plan nor case were filed in good faith.

The North Carolina State Bar has held in 2014 FEO 2 that a lawyer representing a party by serving as the substitute trustee in a contested foreclosure proceeding cannot also represent that party in the proceeding. This, while unmentioned in this opinion, it does give a basis for asserting a material irregularity in sales. A future case, where the debtor is not tainted with other factors indicating bad faith, could stand a better chance of prevailing.

Foreclosure firms should advise their clients, whether homeowner’s associations or mortgage holders, that the roles of substitute trustee and attorney for the creditor need to be separated. This would seem to be beneficial to law firms, since then two firms get paid for each foreclosure rather than one.

For a copy of the opinion, please see:

Daniel v. Jones Family Holdings – § 548 Avoidance of Foreclosure for Less than Reasonably Equivalent Value

Daniel v. Jones Family Holdings – Denial of Confirmation for Bad Faith Filing to Relitigate Issues

2014 Formal Ethics Opinion 2- Serving as Substitute Trustee and Attorney for Creditor

About

1. Bachelor of Arts degree in English Literature from Washington University, 1993.

2. Juris Doctor degree from George Washington University, 1996.

Admissions to Practice of Law:

North Carolina Bar, 1996.
Federal District Courts for the Eastern and Middle Districts of North Carolina.

Specialty Certification:

North Carolina State Bar: Certified as a Specialist in Consumer Bankruptcy.

Areas of Practice:

Practice limited to consumer and business debtor bankruptcy law, 1998 to present.

Memberships:

National Association of Consumer Bankruptcy Attorneys (NACBA).
North Carolina Academy of Trial Lawyers (NCATL).
North Carolina Bar Association, Bankruptcy Section.

Lectures prepared and presented:

North Carolina Academy of Trial Lawyers seminar on bankruptcy; Topic: Counseling the Consumer Debtor Prior to Court – C.Y.A. Forms to Help ‘Gird They Loins’; 2001.
Middle District Bankruptcy Seminar; Topic: Preparing Chapter 13 Plans; 2002.
NACBA National Convention; Topic: Efficient Office Practices; 2003.
NACBA National Convention; Topic: Chapter 7 vs. Chapter 13 Debates; 2004.
Middle District Bankruptcy Seminar; Topic: Chapter 7 & 13 Hot Issues; 2004.

Positions held:

NACBA National Convention; Convention Chair; 2008.
NACBA National Convention; Panel Moderator: Topic: Basic Bankruptcy Issues; 2008.
NACBA National Convention; Panel Moderator; Topic: Chapter 13-Disposable Income and Other Issues; 2007.
NACBA National Convention; Panel Moderator; Topic: Representing Members of the Military and Their Families; 2007.
NACBA, Member of National Board of Directors, 2006 to present.
NCATL, Chair of the Bankruptcy Section, 2003 to 2007.
NACBA, Chair of the North Carolina Section, 2003 to 2007.
NC Bar Association, Bankruptcy Section, Bankruptcy Council Member, 2004 to present.

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