Court Opinion

ID: 4153970
Source: CourtListenerOpinion
Date Created: 2017-03-20 16:00:57.5219+00
Date Added: 2024-06-11T14:34:26.020244
License: Public Domain

RECOMMENDED FOR FULL-TEXT PUBLICATION
                              Pursuant to Sixth Circuit I.O.P. 32.1(b)
                                     File Name: 17a0062p.06

                  UNITED STATES COURT OF APPEALS
                                 FOR THE SIXTH CIRCUIT

 IN RE: SUSAN G. BROWN,                                 ┐
                                      Debtor.           │
 ___________________________________________            │
 SUSAN G. BROWN,                                        │       No. 16-1967
                                                         >
                                    Appellant,          │
                                                        │
                                                        │
       v.                                               │
                                                        │
 DOUGLAS ELLMANN,                                       │
                                            Appellee.   │
                                                        ┘

                        Appeal from the United States District Court
                       for the Eastern District of Michigan at Detroit.
                No. 2:15-cv-11017—Denise Page Hood, Chief District Judge.
                           United States Bankruptcy Court for the
                           Eastern District of Michigan at Detroit.
                          No. 14-48421—Marci B. McIvor, Judge.

                             Decided and Filed: March 20, 2017

              Before: MERRITT, KETHLEDGE, and WHITE, Circuit Judges.
                               _________________

                                         COUNSEL

ON BRIEF: Gary Boren, Westland, Michigan, for Appellant. Douglas S. Ellmann, ELLMANN
& ELLMANN, P.C., Ann Arbor, Michigan, for Appellee. Tara A. Twomey, NATIONAL
CONSUMER BANKRUPTCY RIGHTS CENTER, San Jose, California, for Amicus Curiae.
 No. 16-1967                                      In re Brown                                              Page 2

                                             _________________

                                                   OPINION
                                             _________________

        MERRITT, Circuit Judge. This appeal centers upon a bankruptcy court order denying
Chapter 7 Debtor-Appellant, Susan G. Brown, an exemption under 11 U.S.C. § 5221 on the basis
of the value of her state-law redemption rights in a piece of real property sold by Trustee-
Appellee, Douglas Ellmann, on behalf of Brown’s bankruptcy estate.                           We AFFIRM the
bankruptcy court’s denial of Brown’s proposed exemption because she lacked any equity in the
property after the sale—that is, the property sold for substantially less than the value of the
secured claims on the property.

                                                         I.

        In 2014, Brown filed a voluntary petition for bankruptcy protection under Chapter 7 of
the Bankruptcy Code. In an attachment to her original petition, Brown disclosed her ownership
of a residence in Ypsilanti, Michigan. The home—valued at $170,000—was subject to $219,000
in secured mortgage claims held by two separate creditors. Brown’s initial petition stated her
intent to surrender her residence to the bankruptcy estate and did not claim any exemptions for
the value of her redemption rights under Michigan law. The bankruptcy court granted Brown a
discharge in August of 2014.

        After the filing of the bankruptcy petition, the Trustee sought the court’s permission to
sell the Ypsilanti property for $160,000 and to distribute the proceeds of the sale among Brown’s
creditors and the various professionals involved in selling the home. Brown objected to the
Trustee’s request and sought to amend her initial disclosures to claim exemptions for the value of
the redemption rights she enjoyed under Michigan law. See Mich. Comp. Laws § 600.3240.
Specifically, she sought exemptions in the amount of $11,475 under § 522(d)(1) and $11,675

        1
           11 U.S.C. § 522 provides in relevant part: “The following property may be exempted under subsection
(b)(2) of this section: (1) The debtor’s aggregate interest, not to exceed $23,675 in value, in real property or
personal property that the debtor or a dependent of the debtor uses as a residence . . . . (5) The debtor’s aggregate
interest in any property, not to exceed in value $1,250 plus up to $11,850 of any unused amount of the exemption
provided under paragraph (1) of this subsection.” 11 U.S.C. § 522(d) (footnotes omitted).
 No. 16-1967                               In re Brown                                      Page 3

under § 522(d)(5). The bankruptcy court granted the Trustee permission to sell the property and
denied Brown’s requested exemptions.

       Brown appealed the bankruptcy court’s order to the district court. The district court
affirmed, citing this court’s decision in Baldridge v. Ellmann (In re Baldridge), 553 F. App’x
598 (6th Cir. 2014). This appeal followed.

                                                II.

       At the outset, the Trustee argues that this court lacks jurisdiction to hear Brown’s appeal
on two grounds. First, the Trustee argues that the case before us is moot on constitutional,
statutory, and equitable grounds. Second, he argues that Brown lacks appellate standing because
she lacks a pecuniary interest in the distribution of her assets among her creditors. We hold that
the case is not moot and that Brown has standing to appeal the order of the bankruptcy court.

                                           A. Mootness

       The Bankruptcy Code declares a specific, statutory mootness rule that extends beyond the
mootness analysis under Article III’s “case or controversy” requirement. Specifically, 11 U.S.C.
§ 363(m) provides:

       The reversal or modification on appeal of an authorization . . . of a sale or lease of
       property does not affect the validity of a sale or lease under such authorization to
       an entity that purchased or leased such property in good faith, whether or not such
       entity knew of the pendency of the appeal, unless such authorization and such sale
       or lease were stayed pending appeal.

Under § 363(m), appeals from a bankruptcy court’s decision to grant the trustee authority to sell
certain property are moot if the appellant has failed to obtain a stay from the bankruptcy court’s
order and the trustee has already conveyed the property to a bona fide purchaser for value.
Official Comm. of Unsecured Creditors v. Anderson Senior Living Prop., LLC (In re Nashville
Senior Living, LLC), 620 F.3d 584, 591 (6th Cir. 2010). This mootness rule applies “regardless
of the merits of legal arguments raised against” the bankruptcy court’s order and functions to
“encourage participation in bankruptcy asset sales and increase the value of the property of the
estate by protecting good faith purchasers from modification by an appeals court of the bargain
struck with the [trustee].” Id. (internal quotation marks and citations omitted).
 No. 16-1967                                In re Brown                                     Page 4

          A “majority of our sister circuits construe § 363(m) as creating a per se rule
automatically mooting appeals for failure to obtain a stay of the sale at issue.” Parker v.
Goodman (In re Parker), 499 F.3d 616, 621 (6th Cir. 2007). At least two other circuits require
the party alleging mootness to prove an additional element: that the reviewing court is unable to
“grant effective relief without impacting the validity of the sale.” Id.; see In re ICL Holding Co.,
802 F.3d 547, 554 (3d Cir. 2015) (holding § 363(m) inapplicable despite failure to obtain a stay
when funds remained in escrow for payment of administrative fees and unsecured claims);
C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1239 (10th
Cir. 2011) (same when state law provided for equitable relief in the form of a constructive trust
on the proceeds of the conveyance at issue).

          The panel in In re Nashville Senior Living noted that “[t]his court has not yet committed
to following one or the other of these two approaches,” and refrained from deciding the issue
because there was no way to fashion relief without materially altering the transaction in that case.
In re Nashville Senior Care, 620 F.3d at 593 n.3. We decide that issue today. Because there is
no question that Brown failed to obtain a stay of the sale of the Ypsilanti property and because
we might well be able to issue relief that would not disturb the bargain struck with the good faith
purchaser—whether by redistributing money still in escrow or by imposing a constructive trust
on the proceeds of the sale—the answer to this question is central to the mootness analysis.

          We adopt the approach of the Third and Tenth Circuits requiring parties alleging
statutory mootness under § 363(m) to prove that the reviewing court is unable to grant effective
relief without affecting the validity of the sale. This is the superior interpretation of § 363(m) as
it accommodates the provision’s clear preference in favor of upholding the validity of
bankruptcy sales without unduly restricting the appellant’s right to contest errors of law made by
the bankruptcy court. Moreover, it is in line with the plain language of § 363(m), which
prohibits reviewing courts from modifying or setting aside a sale of property purchased in good
faith. The statute does not prevent a reviewing court from redistributing the proceeds from such
a sale.

          The Trustee bears the burden to prove that the case is actually moot. See Riverview
Trenton R.R. Co. v. DSC, Ltd. (In re DSC, Ltd.), 486 F.3d 940, 945-46 (6th Cir. 2007). Here, the
 No. 16-1967                               In re Brown                                     Page 5

Trustee’s briefing does not indicate whether any proceeds from the sale of the Ypsilanti property
remain accessible to the Trustee—whether in escrow or otherwise. Nor does it address whether
Michigan law provides for equitable relief in cases involving conveyances to good-faith
purchasers. Indeed, assuming Michigan law permits the imposition of a constructive trust over
the assets flowing from the sale of Brown’s residence, this court could order relief without
disturbing the earlier conveyance. Accordingly, we hold that the Trustee has not carried his
burden to demonstrate mootness under § 363(m).

       Because this court is capable of issuing effective relief, we also hold that the Trustee has
failed to prove that the case is moot under the narrower Article III standard. We do not address
the Trustee’s argument in favor of applying the prudential doctrine of equitable mootness to
cases involving Chapter 7 debtors because he unduly delayed raising that issue until a sur-reply
to an already-untimely amicus brief, which left Brown without the opportunity to meaningfully
respond.

                                           B. Standing

       The Trustee also claims that Brown lacks standing to pursue this appeal from the
bankruptcy court’s order. The standard used to determine if a party has standing to appeal a
claim in the bankruptcy context is narrower than the constitutional standard under Article III.
Harker v. Troutman (In re Troutman Enters.), 286 F.3d 359, 364 (6th Cir. 2002). Under this
narrower standard, a party may only appeal a bankruptcy court order if they have been “directly
and adversely affected pecuniarily by the order.” Id. (internal quotation marks and citations
omitted). The Trustee charges that Brown lacks standing under that standard because she has no
claim to the proceeds of the sale of the Ypsilanti property since she held no residual equity in the
property. That characterization, however, misconstrues Brown’s claim—she specifically appeals
the bankruptcy court’s order denying her request for exemptions under § 522 on the basis of the
value of her redemption rights under Michigan law. If the bankruptcy court had granted her
request, she would have been entitled to the exempted portion of the proceeds of the sale of the
Ypsilanti property. Since the effect of the bankruptcy court’s order was to deprive Brown of her
purportedly exempted share of the proceeds from the sale of her residence, we hold that she has
 No. 16-1967                               In re Brown                                     Page 6

been “adversely affected pecuniarily” by the bankruptcy court’s order denying her request for
exemptions and has standing to appeal. Id.

                                               III.

       The only issue remaining is whether the bankruptcy court erred in denying Brown’s
request for exemptions under § 522 of the Bankruptcy Code on the basis of the value of the
redemption rights guaranteed to her under Michigan law. We review the legal conclusions of the
bankruptcy court de novo, giving “no special deference to the district court’s decision.” Caradon
Doors & Windows, Inc. v. Eagle-Picher Indus., Inc. (In re Eagle-Picher Indus., Inc.), 447 F.3d
461, 463 (6th Cir. 2006). Because no equity remained in the Ypsilanti property after it was sold,
we affirm the decision of the bankruptcy court.

         A. Brown’s Redemption Rights Did Not Entitle Her to Exemption Under § 522

       In a decision relied upon by the bankruptcy court below, this court has previously
affirmed a bankruptcy court’s denial of an exemption under § 522 on the basis of redemption
rights when the property was encumbered with security interests that eliminated any “residual
equity” in the property. In re Baldridge, 553 F. App’x at 599. The court reasoned that any
exemption on the basis of the value of the debtor’s redemption rights must attach to some equity
held by the debtor after satisfaction of the secured liens on the property. Id. Absent such equity,
the debtor had no interest to which the claimed exemption could attach. Id.

       While that unreported decision does not bind our decision in this case, the rule it
announced is consistent with the decisions of other courts addressing similar facts. Simonson v.
First Bank of Greater Pittston (In re Simonson), 758 F.2d 103, 105-06 (3d Cir. 1985);
Drummond v. Urban (In re Urban), 375 B.R. 882, 885 n.7 (B.A.P. 9th Cir. 2007) (“Section
522(d) exempts the debtor’s interest in property—not the property itself. The value that can be
exempted is the unencumbered portion. Consequently, the amount of exemption available to a
debtor is the lesser of either the equity in the property or the maximum amount of the applicable
exemption.”). It is also consistent with Congress’s intent when it enacted § 522. See In re
Simonson, 758 F.2d at 106 (“We have found no indication in the legislative history of section
 No. 16-1967                                In re Brown                                  Page 7

522 suggesting that Congress intended it to be a means of creating equity, which did not
otherwise exist, in property for the benefit of a debtor.”).

       Brown argues that the Supreme Court’s recent decision in Law v. Siegel, 134 S. Ct. 1188
(2014), counsels in favor of a departure from the decision in Baldridge. We disagree. In Law v.
Siegel, the Supreme Court addressed a situation in which the bankruptcy court used its equitable
powers under 11 U.S.C. § 105(a) to approve a trustee’s request to surcharge the debtor’s
undisputed $75,000 homestead exemption as reimbursement for more than $500,000 in fees
associated with an investigation of the debtor’s fraudulent conduct. Id. at 1193. In a decision
reversing the bankruptcy court’s approval of the surcharge, the Court held that the bankruptcy
court lacked authority to surcharge the debtor’s homestead exemption because the statute
providing for that exemption expressly and unconditionally stated that exempt property was “not
liable for payment of any administrative expense.” Id. at 1195; 11 U.S.C. § 522(k) (homestead
exemption). In short, the holding of Law is that the bankruptcy court may not use its equitable
powers to contravene the express requirements of the Bankruptcy Code. Id.

       Brown contends that the bankruptcy court’s application of the “no equity-no exemption”
rule here was invalid under Law because it was not drawn from the Bankruptcy Code and
functioned to “defeat” the clear language of § 522(d). However, Law is not relevant to our
analysis. Whereas Law addressed the extent of the bankruptcy court’s discretionary powers
under § 105(a), this case addresses the bankruptcy court’s interpretation of a specific provision
of the Bankruptcy Code. Brown is certainly convinced that the “clear language” of § 522(d)
requires us to decide in her favor and that any contrary interpretation would “defeat” her rights
under the Code. However, that proposition is far from obvious, especially in light of previous
decisions of this court—and others—suggesting her purported rights do not actually exist. Law
does not strip bankruptcy courts of their ability to interpret the Bankruptcy Code; it merely
reinforces the common-sense notion that bankruptcy courts may not use their discretionary
powers to reach results that are inconsistent with the clear meaning of the Bankruptcy Code.
The parties disputed the applicability of § 522(d) in this case, and the bankruptcy court duly
interpreted that provision. While the court’s interpretation was not the one Brown would have
 No. 16-1967                                In re Brown                                     Page 8

preferred, that does not mean the court lacked the power to interpret the statute in the first place.
Accordingly, we find Brown’s reliance on Law unpersuasive.

          Since Brown points to no authority contrary to our holding in Baldridge, we adhere to the
rule articulated in that case: Section 522 will not support an exemption on the basis of state-law
redemption rights in a piece of property if the proceeds from the sale of that property are
“insufficient to satisfy the prior obligations owed to the secured creditors.” Baldridge, 553 F.
App’x at 599. It is undisputed that the $160,000 in proceeds from the sale of the Ypsilanti
property were insufficient to satisfy the $219,000 in secured claims held by the two mortgage
creditors.    Consequently, we affirm the bankruptcy court’s denial of Brown’s request for
exemptions under § 522 on the basis of her redemption rights under Michigan law because there
was no “residual equity” in the Ypsilanti property to which Brown’s claimed exemptions could
attach.

                B. Amici’s Abandonment Argument Not Properly Before This Court

          In a helpful brief submitted to this court, amici curiae question the propriety of the
Trustee’s decision to administer Brown’s residence as part of the bankruptcy estate since it was
fully encumbered by secured creditors. Specifically, amici suggest that decision was improper in
light of this court’s decision in Hoehn v. McIntosh, 110 F.2d 199, 202 (6th Cir. 1940), and the
abandonment procedures codified at 11 U.S.C. § 554. However, the issue of abandonment was
not raised below and was not adequately briefed by the parties on appeal. Accordingly, we hold
that it is not properly before this court. See Self-Ins. Inst. of Am., Inc. v. Snyder, 827 F.3d 549,
560 (6th Cir. 2016) (quoting Cellnet Commc’ns, Inc. v. FCC, 149 F.3d 429, 443 (6th Cir. 1998))
(“[W]hile an amicus may offer assistance in resolving issues properly before a court, it may not
raise additional issues or arguments not raised by the parties.” (internal quotation marks
omitted)).

                                                 IV.

          The bankruptcy court properly denied Brown’s claim for an exemption under § 522 on
the basis of the value of her state-law redemption rights in the Ypsilanti property because there
 No. 16-1967                           In re Brown                             Page 9

was no residual equity in the property upon which her claimed exemptions could attach.
Accordingly, we AFFIRM the order of the bankruptcy court.