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In re Ryker

November 20, 2003

IN THE MATTER OF: EDWARD J. RYKER, DEBTOR.
EDWARD J. RYKER, PLAINTIFF,
v.
DAVID AND DENISE CURRENT, DEFENDANTS.



The opinion of the court was delivered by: Lifland, District Judge

FOR PUBLICATION

MEMORANDUM AND ORDER

This is an appeal from an Order of the United States Bankruptcy Court for the District of New Jersey, which granted a Chapter 13 debtor's cross-motion for summary judgment and set aside a foreclosure sale as a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B). For the following reasons, the matter is remanded to the Bankruptcy Court to determine whether the Chapter 13 debtor had standing to bring a fraudulent transfer action pursuant to 11 U.S.C. § 548. In addition, the Court, in an effort to promote judicial efficiency, will discuss the Bankruptcy Court's grant of the Chapter 13 debtor's cross-motion for summary judgment. Were the Court to decide the merits of this matter, the Court would likely conclude that the Bankruptcy Court's grant of summary judgment was proper and that the foreclosure sale should be set aside as a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B).

BACKGROUND

This case arises out of the bankruptcy proceedings of Edward J. Ryker ("Ryker" or "Debtor"), who at one time, together with Beverly Ackerson ("Ackerson"), partially owned a piece of real property located in Stillwater, New Jersey ("Property"). The Currents ("Appellants") were first priority mortgagees of the Property. When Ryker and Ackerson failed to make payments and subsequently defaulted on the mortgage, the Appellants obtained a foreclosure judgment in the amount of $219,084.26. A Sheriff's Sale was initially scheduled for March 15, 1999. A Notice of Sheriff's Sale ("Notice of Sale") was published in two newspapers, the New Jersey Herald and the New Jersey Sunday Herald. The Notice of Sale was also posted in the sheriff's office. The Notice of Sale stated the amount necessary to satisfy the foreclosure judgment as the "approximate amount of $219,084.26, in addition to interest, Sheriff's fees and advertising costs." After Ryker and Ackerson exercised their statutory adjournments to postpone the sale until April 12, 1999, Appellants and Ryker and Ackerson entered into a Forbearance Agreement. Under the Forbearance Agreement, the Appellants received $150,000, payment of attorney fees amounting to $7,575.06 and establishment of an escrow amounting to $7,500 for payment of the Sheriff's Centage Fee and anticipated property taxes. In addition, Ryker and Ackerson were obligated to make monthly payments of $1,654.34, and the Appellants agreed to adjourn the sale on a monthly basis. In the event of default, the Forbearance terms were deemed to automatically terminate.

Ryker and Ackerson failed to make the October 1, 1999 payment, and the Sheriff's Sale was subsequently held on October 25, 1999, at which the Appellants were the successful bidders. On the sale date, counsel for the Appellants advised the sheriff that a credit of $169,605.40 should be given against the amount due of $219,084.26 listed in the original Notice of Sale. There was no re-notice or re-advertisement prior to the actual sale date reflecting that the approximate amount now due to satisfy the foreclosure judgment had decreased by nearly $170,000. The Appellants were the only bidders at the foreclosure sale and bid $100.00 over their lien for the Property.

On November 3, 1999, nine days after the Sheriff's Sale, Ryker filed his voluntary petition for relief pursuant to Chapter 13 of Title 11 of the United States Code ("Bankruptcy Code"). Appellants then filed a Notice of Motion for Entry of an Order Deeming Certain Real Property Not Property of the Estate and For Present and Prospective Relief from Automatic Stay Pursuant to 11 U.S.C. § 362(d) of the Bankruptcy Code. The Debtor opposed this motion by alleging that the foreclosure sale should be set aside as a fraudulent transfer pursuant to 11 U.S.C. § 548(a)(1)(B) due to the inadequacy of price. The Bankruptcy Court found that the Debtor made a credible showing that § 548 was applicable and therefore denied the motion and directed the Debtor to file the instant adversary proceeding. On March 30, 2000, Debtor filed an adversary complaint against Appellants. Appellants moved to dismiss the complaint for lack of jurisdiction, or in the alternative, for abstention from hearing the case. Debtor then filed a cross-motion for summary judgment, contending that the Sheriff's Sale is voidable under § 548 because a defect in the notice of sale resulted in an inadequate sales price. The Bankruptcy Court found that the foreclosure sale of the Property was not conducted in accordance with New Jersey foreclosure law due to the absence of proper notice, and thus, pursuant to § 548(a)(1)(B), the foreclosure sale constituted a fraudulent transfer. Appellants appeal from the Order granting Debtor's cross-motion for summary judgment.

DISCUSSION

A. Chapter 13 Debtor Standing Under 11 U.S.C.§ 548

Although Appellants argue that the Bankruptcy Court erred in ever reaching the merits of the Debtor's § 548 avoidance action, Appellants never maintain that a Chapter 13 debtor lacks standing to bring a fraudulent transfer action pursuant to § 548. Appellants' challenges to the jurisdiction of the Bankruptcy Court to adjudicate the Debtor's § 548 avoidance action rest on other grounds, all of which are not relevant to the issue of standing. Notwithstanding the failure of Appellants to raise this issue with either the Bankruptcy Court or this Court on appeal, the Court believes that standing is an issue that must be addressed by the Bankruptcy Court prior to its consideration of the merits of the Debtor's avoidance action, in light of the plain language of § 548, which affirmatively confers standing only on Chapter 13 trustees. See 11 U.S.C. § 548 ("[t]he trustee may avoid any transfer of an interest of the debtor in property . . .").

Standing is subject to review at all stages of litigation because a lack of standing undermines the jurisdiction of not only the bankruptcy court, but also the district court acting as an appellate tribunal. See In re Dionisio, No. 02-3020, (3d Cir. Apr. 17, 2003) (citing Bender v. Williamsport Area Sch. Dist., 475 U.S. 534, 546-47 (1986)). In In re Dionisio, neither this Court nor the Bankruptcy Court considered the issue of standing and, on appeal, the Third Circuit held that, in the context of a Chapter 7 proceeding, the debtor lacked standing because the trustee alone had standing to raise certain issues before the bankruptcy court and to prosecute appeals. The result was a waste of judicial resources. The Court therefore hopes to avoid a possible similar outcome by affording the Bankruptcy Court the opportunity to consider whether the Debtor had standing to exercise the trustee's avoidance powers and thereby commence the fraudulent transfer action pursuant to § 548.

While the Bankruptcy Court directed the Debtor to bring this § 548 adversary proceeding, it did not expressly consider whether the Debtor had standing to seek avoidance of the foreclosure sale. In a limited context, a Chapter 13 debtor undoubtedly does have standing to initiate an avoidance action when the property to be reclaimed or recaptured is exempt from execution. See 11 U.S.C. § 522(h). That a Chapter 13 debtor may commence a § 548 avoidance action pursuant to § 522(h) is beyond dispute. However, the record does not indicate whether the Debtor's avoidance action is based, at least in part, on an exemption claim; and thus, it is not clear whether the Debtor can utilize this avenue to commence this § 548 avoidance proceeding. *fn1

There are two lines of cases adopting contradictory and opposing views as to whether a Chapter 13 debtor enjoys independent standing to exercise the avoidance powers of the trustee, including the power to avoid fraudulent transfers pursuant to § 548. The majority of cases that have addressed this specific issue hold that although § 522(h) allows a Chapter 13 debtor to bring a fraudulent transfer action when the property to reclaimed is exempt from execution, Chapter 13 debtors do not have independent standing to exercise the trustee's avoidance powers. See, e.g., In re Stangel, 219 F.3d 498 (5th Cir. 2000), cert. denied, 532 U.S. 910 (2001) (Chapter 13 debtor-taxpayer lacked standing to avoid IRS tax lien, since Bankruptcy Code provision governing power to avoid statutory liens did not expressly confer power on anyone besides trustee); In re Merrifield, 214 B.R. at 365 ("The Eighth Circuit has determined that the statutory language of § 548 expressly confers avoidance powers exclusively on the trustee."); In re Miller, 251 B.R. 770 (Bankr. E.D. Mass. 2000) (Chapter 13 debtors did not have standing, independent of that granted under bankruptcy exemption provision, to bring adversary proceeding to recover their voluntary prepetition payment to creditor as preference); In re Montoya, 285 B.R. 490 (Bankr. D.N.M. 2002) (Chapter 13 debtor did not have standing to bring fraudulent transfer avoidance proceeding in order to avoid mortgage on nonresidential real property, when there was no indication that this property was exempt); In re Dudley, 38 B.R. 666 (Bankr. M.D. Pa.. 1984) (Chapter 13 debtor has proper standing to commence a § 548 action only pursuant to § 522(h)); In re Compton, 1998 WL 372659 (Bankr. E.D. Pa. 1998) (Chapter 13 debtor's rights and powers are specifically prescribed in § 1303 and the power to exercise the trustee's avoidance powers is conspicuously absent).

However, there are a number of cases which hold that a Chapter 13 debtor does have standing, independent of § 522(h), to exercise the avoidance powers of the trustee. The rationale for these cases appears to be a pragmatic one, based on the realities of the bankruptcy practice and the Chapter 13 trustee's lack of incentive to bring such actions. See,e.g., In re Ottaviano, 68 B.R. 238 (Bankr. D. Conn. 1986) (Chapter 13 debtor had independent standing to bring action to avoid fraudulent transfer); In re Ciavarella, 28 B.R. 823 (Bankr. S.D.N.Y. 1983) (Chapter 13 debtor is the entity most appropriately stationed to reclaim those avoidable transfers whose recovery would further debtor's rehabilitative interests).

It should also be noted that a recent United States Supreme Court decision appears to cast doubt upon those cases conferring independent standing on Chapter 13 debtors to commence fraudulent transfer avoidance actions, notwithstanding the wording of the statute which expressly gives that power only to the trustee. In Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., the Supreme Court held that ยง 506(c) of the Bankruptcy Code, which provides that a trustee may recover, from property securing an allowed secured claim, the costs and expenses of preserving such property, did not provide an administrative claimant an independent right to seek payment of its claim from property encumbered by a secured creditor's lien. 530 U.S. 1 (2000). The Court noted that Congress "`says in a statute what it means and means in a statute what it says.'" Id. at 6 (citations omitted). Furthermore, the Court stated that when the statute's language is plain, "the sole function of the courts - at least where the disposition required by the text is not absurd - is to enforce it according to its terms." Id. (citations and internal quotation marks ...


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