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In re Comer

decided: August 26, 1983.



Adams and Weis, Circuit Judges, and Debevoise, District Judge.*fn*

Author: Weis


WEIS, Circuit Judge.

In this case we conclude that we have jurisdiction to hear an appeal from a district court order that lifted the automatic stay provided by the Bankruptcy Reform Act against a lien enforcement action. The district court found that the bankruptcy judge had erred in allocating a series of pre-bankruptcy payments by debtors to mortgages rather than to unsecured obligations. We agree with the district court's reasoning but direct a remand to the bankruptcy judge for findings of fact on one transaction that might affect the creditors' security and the validity of the stay modification.

Debtors James and Martha Comer were in the residential home construction business when they filed a Chapter 11 bankruptcy petition on February 13, 1981. Two weeks later, creditors Lefferage and Anna Pauline Moxley sought modification of the automatic stay imposed under section 362 of the Bankruptcy Code so they could foreclose on several mortgages they held on the debtors' real estate.*fn1 After a hearing, the bankruptcy judge denied the application in an order entered on March 30, 1982, and creditors appealed the decision to the district court. In an opinion dated September 28, 1982, the district court determined that the bankruptcy judge's findings were clearly erroneous, lifted the stay as to one lot, and remanded the case for reconsideration.

Debtors secured a significant amount of the financing for their home building from creditors who are appellees here. Debtors owned three parcels of land in York County, Pennsylvania and creditors held a mortgage on each one as security for construction loans. They also held promissory notes evidencing unsecured sums advanced for the financing of structures on two of the parcels. In addition, when debtors were unable to pay the interest on the three mortgages, creditors took a note for the amount due and entered judgment on it in November 1979.

For purposes of construction and resale, each parcel was subdivided into three lots.*fn2 When construction on a lot was complete and it was sold, debtors paid a portion of the sale proceeds to creditors, who then released that particular lot from the parcel-wide mortgage. In the exchange, creditors also returned promissory notes evincing unsecured advances for construction on the parcel containing the lot being sold. At the time the Chapter 11 petition was filed, two lots in parcel 1, one in parcel 2, and one in parcel 3 remained unsold.

The situation in parcel 2 illustrates the problem presented to the bankruptcy court by the request to modify the automatic stay. The mortgage on that parcel was $90,000 and unsecured loans totaled $48,000. When lot 31 was sold in September 1978, creditors received $40,000. Lot 30 was sold in November 1979 and creditors were paid $54,223. Thus, creditors received a total of $94,223 from the sale of the two lots. They contended that they first applied this amount against unsecured loans and the remainder to the mortgage. According to the creditors' contention, therefore, the unsecured debt on parcel 2 had been paid in full and an amount in excess of the value of lot 32 was owed on the mortgage obligation, including the remaining principal of $43,777, accrued interest, and attorney's commission.

The bankruptcy judge, however, took a different view. He concluded that in parcel 2, for example, the total of $94,223 should be applied first to the mortgage of $90,000, thus extinguishing it. The remaining $4,223 was applied to the unsecured debt. A similar conclusion was reached as to parcel 3, resulting in the satisfaction of the mortgage and some reduction in the unsecured indebtedness.

The bankruptcy judge reasoned that although the parties had no express written agreement on the allocation of payments, there was an implied understanding to apply the funds against the secured debt. He drew that inference from the practice of releasing the lot being sold from the mortgage. In addition, the bankruptcy court concluded that since a trustee has the status of a hypothetical lien-creditor under section 544 of the Bankruptcy Code, he could demand allocation of the payments "in the way most beneficial to him to the extent that the parties had not previously applied the proceeds." In this instance, application against the secured debt would be the most beneficial arrangement for a lien-creditor.*fn3

Creditors received $22,000 from the sale of lot 28. They contended that, unlike the other transactions, they specifically requested allocation of these funds to the judgment note for interest due on the mortgage. However, the bankruptcy judge concluded that in this instance also creditors had allocated the money to the mortgage on parcel 1.

The net effect of the findings by the bankruptcy court was that payments were found to be allocated to the secured debt, and as a result, the bulk of the secured debt was viewed as extinguished. As a consequence, debtors had equity in the property and the creditors' remaining secured interest was adequately protected. Accordingly, the bankruptcy court concluded that the statutory requirements for lifting the automatic stay were not satisfied.*fn4

In contrast, the district court found that the creditors' conduct demonstrated allocation of the proceeds to the unsecured debt and held that the bankruptcy judge's findings on this point were clearly erroneous. The district judge pointed to the uncontroverted evidence that creditors had returned the promissory notes covering the unsecured advances but had never satisfied any of the mortgages. These facts convinced the district judge that payment had first been made against the unsecured debt and only the remainder had been applied to the mortgages. The district court also concluded that debtors had acquiesced in the crediting of $22,000 from the sale of lot 28 to the amount due on the judgment note for mortgage interest.

Finding little or no equity in lot 32, and that the lot was not necessary for reorganization, the court lifted the stay on it. As to the other lots covered by the stay, the case was remanded for "reconsideration not inconsistent with this decision."*fn5


We first consider whether this appeal is properly before us. Because the case arises under the Bankruptcy Reform Act of 1978, we examine that statute for a jurisdictional basis. Although portions of the Act do not go into effect until April 1, 1984, the courts are vested during the transitional phase with the appellate authority they will have after that date. In re Marin Motor Oil, Inc., 689 F.2d 445, 447-48 (3d Cir. 1982), cert. denied, 459 U.S. 1206, 459 U.S. 1207, 103 S. Ct. 1196, 75 L. Ed. 2d 440, 51 U.S.L.W. 3611 (1983) (Nos. 82-1038, 82-1094); Universal Minerals, Inc. v. C.A. Hughes & Co., 669 F.2d 98, 100 n.2 (3d Cir. 1981); see Pub.L. 95-598, title IV, ยง ...

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