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In-Grid Malat Irrevocable Trust v. Surety Title Corp.


September 16, 2010


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


Appellant, the In-grid Malat Irrevocable Trust, has appealed a decision by the United States Bankruptcy Court denying Appellant's motion to reinstate its Chapter 11 bankruptcy case and to impose temporary restraints. As a result of the Bankruptcy Court's prior rulings, Appellant's real property, located at 214 White Horse Pike, Haddon Heights, New Jersey ("the property"), was sold during a sheriff's sale. Appellant argues that the Bankruptcy Court improperly stripped it of the protection afforded by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. Surety Title Corporation ("Surety Title"), the property's mortgagee, and Hugh O'Connell, the property's purchaser, oppose Appellant's appeal.

For the reasons expressed below, the Court will affirm the Bankruptcy Court's decision.*fn1


United States district courts have mandatory jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. 28 U.S.C. S 158(a)(1).


In April 2009, Appellant filed for Chapter 11 bankruptcy protection. In an Order dated June 23, 2009, the Bankruptcy Court granted Surety Title stay relief with respect to its foreclosure actions against Appellant's property. Moreover, at a hearing held on the same day, June 23, 2009, the Bankruptcy Court granted the United States Trustee's motion to dismiss the case, holding that, as an irrevocable trust, Appellant did not properly constitute a "person" or "entity" under Chapter 11 and, thus, was not a debtor entitled to bankruptcy protection.*fn2 The Bankruptcy Court filed an order memorializing its dismissal of the case on or around June 26, 2009. In the meantime, on June 24, 2009, Appellant's property was sold at a sheriff's sale to a third-party purchaser, Hugh O'Connell.

Soon thereafter, in July 2009, Appellant filed a second Chapter 11 bankruptcy petition. The Bankruptcy Court, in or around August 2009, granted Surety Title relief from stay and prospective relief and denied Appellant's second petition. A motion for reconsideration of the Bankruptcy Court's decision was denied. Appellant then filed a motion in the Superior Court of the State of New Jersey to vacate the property's sale and to extend the redemption date. In an Order dated October 7, 2009, the Superior Court denied Appellant's application to show cause and held that Appellant's "motion to vacate Sale held June 24, 2009 is hereby denied." The Superior Court, however, did extend the redemption period for about ten days. Appellant did not redeem the property during the time period prescribed by the court.

Instead, Appellant moved to reinstate the Chapter 11 case, and sought additional relief, so that it could initiate an adversary proceeding in the Bankruptcy Court. The Bankruptcy Court held a hearing on or around November 30, 2009 and, as set forth in an Order dated December 8, 2009, denied Appellant's motion to reinstate the Chapter 11 case and to impose temporary restraints in the form of stay continuation. At the hearing, the Bankruptcy Court reiterated that Appellant was ineligible to be a debtor entitled to bankruptcy protection and that on June 23, 2009, the Court had both granted stay relief to Surety Title and dismissed the original bankruptcy proceeding. In light of the equities of the case, the Bankruptcy Court retroactively annulled any stay that may have existed at the time of the sheriff's sale and, in turn, validated the sale. Accordingly, in its December 8th Order, the Bankruptcy Court decreed that "any stay existing from June 23, 2009 through June 26, 2009 be and is hereby annulled" and that "the Sheriff's Sale conducted by Surety on June 24, 2009 in connection with the sale of [the property] be and is hereby validated."

On or around December 21, 2009, Appellant filed an application for an order to show cause in this Court, seeking injunctive and temporary stay relief. The Court denied Appellant's request. Present before the Court is Appellant's appeal of the December 8, 2009 ruling of the Bankruptcy Court.


A. Standard of Review

On appeal, legal conclusions are subject to de novo review. In re United Healthcare Sys., 396 F.3d 247, 249 (3d Cir. 2005). Factual findings are reviewed for clear error. Discretionary decisions are examined for abuse of that discretion. Id.

B. Analysis

Appellant advances several arguments in support of its appeal and its request to reinstate its bankruptcy proceedings. First, because the Bankruptcy Court did not file the Order to dismiss the bankruptcy proceeding until June 26, 2009, says Appellant, the sheriff's sale of the property on June 24, 2009 was premature and should be voided. Second, Appellant argues that the Bankruptcy Court's refusal to void the sale of the property violates 11 U.S.C. § 362, which stays all collection efforts during the pendency of a bankruptcy case, and 11 U.S.C. § 349, which re-vests property back to the party who possessed it before the case commenced. Third, Appellant contends that it was entitled to an automatic stay for ten days following the Bankruptcy Court's June 26th decision by virtue of Federal Rule of Bankruptcy Procedure 4001(a)(3), thereby precluding any sale of the property. Lastly, Appellant asserts that the equities of the case counsel in favor of voiding the sheriff's sale.

To begin, as a threshold matter, Appellant contends that the sheriff's sale, held on June 24, 2009, occurred before the Bankruptcy Court dismissed the bankruptcy action by way of its Order dated June 26, 2009. Although its ruling may not have been formally memorialized until June 26th, the Bankruptcy Court granted the United States Trustee's motion and dismissed the case as part of the hearing held on June 23, 2009, thereby effectively terminating Appellant's bankruptcy action a day before the sale.*fn3 See In re Justice, 1999 U.S. App. LEXIS 4071, at **4-5 (9th Cir. Mar. 10, 1999) (finding the bankruptcy court's oral ruling effective and enforceable); Noli v. Comm'r of Internal Revenue, 860 F.2d 1521, 1525 (9th Cir. 1988) (holding that bankruptcy court's oral order lifted automatic stay even though a written order was never entered); cf. United States v. Scarfo, 263 F.3d 80, 88 (3d Cir. 2001) (noting that "[t]he oral order possessed judicial force and effect" and could have been enforceable). During the hearing on November 30, 2009, the Bankruptcy Court explained that while the delay in filing the dismissal order was a procedural lapse, the Court, nonetheless, granted dismissal at the June 23rd hearing. This Court agrees. Consequently, the bankruptcy action was dismissed prior to the sale of the property and, thus, there was no legal impediment to the sale.*fn4

Second, Appellant relies on 11 U.S.C. §§ 362 and 349. Section 362 automatically stays any proceedings concerning a debtor or its property during the pendency of a bankruptcy petition. See In re Advanced Elecs., Inc., 283 F. App'x 959, 965 (3d Cir. 2008); see also In re Siciliano, 13 F.3d 748, 750 (3d Cir. 1994) ("The Bankruptcy Code states that a bankruptcy petition operates as a stay to all enforcement proceedings against the debtor." (citing 11 U.S.C. § 362(a))). Further, Section 349(b)(3) provides: "Unless the court, for cause, orders otherwise, a dismissal of a case... revests the property of the estate in the entity in which such property was vested immediately before the commencement of the case under this title." As intended by Congress, however, the dismissal of a case "was to undo the bankruptcy case as far as practicable, and restore all property rights to the position in which they were found at the commencement of the case." In re Nagel, 245 B.R. 657, 662 (D. Ariz. 1999) (citations and internal quotation marks omitted); see In re Webb Mtn, LLC, 414 B.R. 308, 339 (Bankr. E.D. Tenn. 2009) (noting that "termination of the automatic stay at the moment a dismissal order is entered is the quickest and most effective means of restoring debtors and creditors to their status quo positions prior to the case in bankruptcy" (citations, internal quotation marks, and brackets omitted)). Section 349(b), its legislative history clarifies, "was not intended to unwind sales to bona fide purchasers," nor, presumably, any "transfers made in accordance with the Bankruptcy Code and orders of the court." In re Sports & Science, Ind., Inc., 95 B.R. 745, 747 (Bankr. C.D. Cal. 1989); see In re Randall, 358 B.R. 145, 168 (Bankr. E.D. Pa. 2006) (noting that the purpose of Section 349(b) "does not necessarily encompass undoing sales of property from the estate to a good faith purchaser" (citation and internal quotation marks omitted)). After all, the court is permitted to order a different result for cause. Sports & Science, Ind., 95 B.R. at 747-48.

It appears that sometime before the bankruptcy proceedings, Appellant's property became subject to foreclosure and a sheriff's sale. However, not until after the bankruptcy proceedings were dismissed and the stay annulled was the sheriff's sale executed and the property sold. Therefore, by dismissing the case, the sheriff's sale was permitted to proceed.*fn5

Furthermore, the Bankruptcy Court's decision to validate the sale, in effect, fulfilled the basic purpose of Section 349(b), as articulated in its legislative history, by returning the property rights to the position they would have been in the absence of the bankruptcy proceedings. There is no indication or suggestion that the Bankruptcy Court's disposition of this case induced a sale, awarded the property to another party, or otherwise altered the property's fate. On the contrary, the resolution of this matter simply terminated the bankruptcy case and invited the continuation of whatever non-bankruptcy proceedings were already in motion. The Bankruptcy Court made as much clear in its June 23rd Order, in which it permitted Surety Title relief from the Section 362 stay so that it could "institute or resume and prosecute" a foreclosure of its mortgage. This result seems entirely fair given that, by the Bankruptcy Court's own determination, Appellant, an irrevocable trust, was not legally entitled to avail itself of the benefits of bankruptcy law.

Alternatively, even if the case had not been dismissed until June 26th, the Court finds that Section 349(b) should not alter the outcome of this case. For one thing, the Court questions whether Appellant ever presented its argument concerning Section 349(b) to the Bankruptcy Court. Based on the record, it appears that this argument was never advanced below and is presented here for the first time. See In re Rauh, 119 F.3d 46, 51 (1st Cir. 1997) ("As the bankruptcy court was never afforded an opportunity to consider the theory and authorities now advanced..., we decline the invitation to do so on appeal."); Deck v. Chase Home Fin., L.L.C., 2007 U.S. Dist. LEXIS 76800, at *8 (S.D. Ind. Sept. 28, 2007) (noting in a bankruptcy appeal that "[a]rguments first raised on appeal are waived"); In re CK Liquidation Corp., 332 B.R. 72, 76 (D. Mass. 2005) (noting in a bankruptcy appeal that "'appellate courts will not consider an issue which was not before the trial court and which is first raised on appeal'" (citation omitted)). Moreover, Section 349(b)(3) makes clear that, for cause, courts may refrain from restoring the property with the party that possessed it before the bankruptcy proceedings commenced. Reasons to excuse the application of Section 349(b)(3) may include the decision to protect bona fide purchasers and to effectuate or enforce orders of the Bankruptcy Court. See Sports & Science, Ind., 95 B.R. at 747-48.

Here, ample cause exists to deviate from whatever applicability Section 349(b)(3) may have in this case. The Bankruptcy Court held that Appellant was not an entity entitled to protection or relief under bankruptcy law. The Court is unaware of any law or ruling that contravenes this determination, nor is that matter presently before the Court. Because, as contemplated by bankruptcy law and in accordance with the law of the case, Appellant was not a "debtor" and its property never constituted an "estate," it is reasonable that Appellant not be afforded the protection of Section 349(b)(3). Moreover, in its June 23rd Order, the Bankruptcy Court annulled any stay under Section 362(a) to specifically enable Surety Title to foreclose on the mortgage -- presumably, as soon as was practicable and with the understanding that the case was to be dismissed. Therefore, Section 349(b)(3) should not serve to undo a sale to a third-party bona fide purchaser simply because the written order dismissing the bankruptcy case was not filed until three days after the same case was orally dismissed.*fn6 The Bankruptcy Court, after all, had discretion to annul a stay or choose to validate the sale. See In re Snyder, 293 F. App'x 140, 142 (3d Cir. 2008) (holding that, upon a review of the relevant factors and equities, "we cannot say that the Bankruptcy Court abused its discretion in annulling the automatic stay for the purpose of ratifying the... sheriff's sale").

Third, Federal Rule of Bankruptcy Procedure 4001(a)(3) provides: "An order granting a motion for relief from an automatic stay made in accordance with Rule 4001(a)(1) is stayed until the expiration of 10 days after the entry of the order, unless the court orders otherwise."*fn7 As the Court explained when it denied Appellant's application for an order to show cause, Rule 4001(a)(3) is inapplicable here because the Bankruptcy Court's decision on June 23, 2009 did not simply grant a motion for relief from an automatic stay but, rather, dismissed Appellant's bankruptcy action altogether. See In re Gargani, 398 B.R. 839, 840 (Bankr. W.D. Pa. 2009) ("In clear and unambiguous language, Congress has stated its intent for the automatic stay to terminate upon the dismissal of the case. Once the case is dismissed, creditors are free to exercise their rights in the debtor's assets." (internal citation omitted)); see also Webb Mtn, 414 B.R. at 339 (noting that "when a case is dismissed, the stay is terminated" (citation and quotation marks omitted)). The Bankruptcy Court expounded upon the same reasoning during its November 30th hearing. Appellant has not presented any legal authority to rebut this conclusion.

Moreover, by its own clear and plain language, Rule 4001(a)(3)'s stay is amendable if "the court orders otherwise." Thus, assuming arguendo the applicability of the stay in this case, the Bankruptcy Court was able to exercise its discretion as to whether a stay should be granted. See In re Stoltzfus, 2009 Bankr. LEXIS 2634, at **18-19 (Bankr. E.D. Pa. Mar. 30, 2009) (holding that, "given the totality of the circumstances," the Rule 4001(a)(3) stay shall not apply in this case); In re El Mariachi, L.L.C., 2008 Bankr. LEXIS 4238, at *6 (Bankr. D. Conn. Jul. 14, 2008) (holding that, under the circumstances of the case, the Rule 4001(a)(3) stay, "if applicable, shall be deemed inapplicable so that the Movants may immediately exercise their right to possession of the Property in accordance with applicable non-bankruptcy law"). Because the Bankruptcy Court concluded that Appellant was not an entity entitled to bankruptcy protection, a ruling that has not been successfully challenged by Appellant, the Bankruptcy Court had ample reason not to apply the stay imposed by Rule 4001(a)(3), as iterated by that Court during the November 30th hearing. At the very least, the Bankruptcy Court annulled any putative stay in its Order dated December 8, 2009.

Finally, the Court does not agree that the equities of this case so favor Appellant that the Bankruptcy Court's decisions should be disrupted. Accepting the law of the case, Appellant was not entitled to any legal protections under bankruptcy law. Further, the record suggests that O'Connell is a bona fide third-party purchaser of the property who would suffer harm if the sale were voided. Moreover, to the extent that Appellant wanted the property, Appellant had additional time to redeem it as ordered by the New Jersey Superior Court on October 7, 2009. Appellant, however, did not exercise its right to redeem. It also appears that Appellant did not prosecute an appeal on the merits after the Bankruptcy Court's dismissal of its action in June 2009, nor did it pursue any adversary proceedings while its prior bankruptcy actions were active. Both the Bankruptcy Court and the Superior Court have denied Appellant the relief it has sought, and at this late date, this Court cannot find any reason, as presented by the parties, to reverse any prior decisions made in this case.

Therefore, the Court will affirm the Bankruptcy Court's judgment in this matter.


For the foregoing reasons, the Bankruptcy Court's judgment, set forth in its Order dated December 8, 2009, is affirmed. An Order consistent with this Opinion will be entered.


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