Court Opinion

ID: 9650717
Source: CourtListenerOpinion
Date Created: 2023-08-23 15:50:05.801469+00
Date Added: 2024-06-11T13:22:32.199072
License: Public Domain

STEVEN RHODES, Bankruptcy Appellate Panel Judge,
concurring in part and dissenting in part.
I concur in the majority’s conclusions in Part IV.A.2. regarding the Hamerlys’ equitable subordination claim. I dissent, however, from the majority’s conclusion in Part IV.A.1., affirming the bankruptcy court’s dismissal of the Hamerlys’ claim under 11 U.S.C. § 365(i)(2)(B). Contrary to the bankruptcy judge’s conclusion, the Hamerlys’ complaint plainly alleged that their contract with the debtor required delivery of a clear title to the subject property. As a matter of law, under the plain language of § 365(i)(2)(B), if the Hamerlys prove that allegation, they are entitled to delivery of clear title from the trustee.
I.
Paragraph 18 of the Hamerlys’ complaint alleges, “Under the Purchase Agreement, Salupo was to finance construction of the house on the property, provide a warranty deed to the Plaintiffs and deliver the property to the Plaintiffs free and clear of all hens and encumbrances and interests.” The bankruptcy court dismissed the Hamerlys’ claim based in part on its conclusion that, “As reviewed nothing in the Purchase Agreement, a two page document, executed between the Debtor and the Hamerlys requires the trustee to deliver any property title to the Hamerlys free and clear of liens.” But the debtor’s obligation to deliver clear title is precisely what the Hamerlys alleged in this paragraph of their complaint and what the Hamerlys must be given an opportunity to prove.
As the majority concedes in quoting from Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 312-13 (5th Cir.2002), the Hamerlys’ complaint must be construed liberally and at this stage, their allegations must be viewed in the fight most favorable to them. This means that even if the words of the purchase agreement do not recite an obligation to deliver clear title, as the bankruptcy court found, the Hamerlys must be given the opportunity to prove that the parties nevertheless so intended, as the Hamerlys’ complaint alleged.
In this regard, it must be observed that it would be highly unusual for these parties to have agreed to delivery of a title that is subject to Fifth Third’s mortgage. Experience dictates that much more commonly and ordinarily, the parties to a real estate purchase agreement do intend for the transferor to transfer clear title, especially when the real estate is a residential property.
*807II.
If the Hamerlys do prove that the debt- or was obligated by their purchase agreement to deliver clear title, then under the plain language of § 365(i)(2)(B), upon rejection of the contract in bankruptcy, the trustee is likewise obligated to deliver clear title. That section simply and plainly states that upon rejection, “the trustee shall deliver title to such purchaser in accordance with the provisions of such con-tráete.]” This language is neither ambiguous nor absurd. The Supreme Court has held that our role in these circumstances is only to apply the plain language as written. Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 1030, 157 L.Ed.2d 1024 (2004); Hartford Underwriters Ins. Co. v. Union Planters Bank, N. A., 530 U.S. 1, 6, 120 S.Ct. 1942, 147 L.Ed.2d 1, (2000); United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
The majority’s rationale in circumventing the plain language result is strained at best. Initially, the majority argues that because the trustee abandoned the property by filing a no asset report, the trustee no longer has any title to transfer to the Hamerlys. This argument merely gives the trustee unilateral permission to violate both § 365(f)(2)(B) and the Hamerlys’ substantive property rights, all without notice to them. Moreover, the argument proves too much, because it would relieve the trustee of the obligation to deliver title even subject to the mortgage.
The majority then concludes that § 365(i)(2)(B) must be interpreted to require delivery of only such title as the trustee acquires from the debtor. First, this argument is inconsistent with the majority’s previous argument, which would relieve the trustee of any obligation to deliver any title. Second and more importantly, the majority fails to explain what compels that reading. As noted, nothing in the language of § 365(i)(2)(B) even suggests that reading, let alone compels it. It is true, as the majority asserts, that § 365(f)(2)(B) relieves the trustee of “all other obligations to perform under the contract,” but the “all other” language explicitly excludes the very obligation at issue here-the obligation to “deliver title to such purchaser in accordance with the provisions of the contract.”
Finally, the majority argues that the trustee’s obligation under § 365(i)(2)(B) must be read in conjunction with the purchaser’s right under § 365(f)(2)(A) to setoff damages against the purchase price. The majority then presumes that these damages may include any damages caused by the trustee’s failure to deliver clear title. The difficulty with this presumption is that when the balance of the mortgage exceeds the balance of the purchase price, as here, the purchaser’s rights under § 365(i)(2)(A) become meaningless. Nothing whatever in the language of § 365(f)(2)(B) suggests that Congress intended that the purchaser’s right to clear title upon payment of the balance of the purchase price would depend on whether the balance of the mortgage is less than the balance of the purchase price.
III.
Underlying Fifth Third’s argument and the majority opinion is the suggestion that it is somehow unfair to give priority to a purchaser’s contract right to clear title over a mortgagee’s security interest. The suggestion is both irrelevant and mistaken. It is irrelevant because to creditors, there is very little that is ever fair about bankruptcy.
More specifically in this case, both the purchaser and the mortgage holder are creditors of the debtor. A judgment for the mortgage holder would be just as un*808fair to the purchaser as a judgment for the purchaser would be to the mortgage holder. Congress had to break this symmetry of unfairness and choose which creditor’s claim to give a priority. By the plain language of § 365(i)(2)(B), Congress chose the purchaser’s claim. It is not for a court to overturn this Congressional judgment based on its own sense of what is fair. Hartford Underwriters, 530 U.S. at 13-14, 120 S.Ct. 1942, 147 L.Ed.2d 1 (“[W]e do not sit to assess the relative merits of different approaches to various bankruptcy problems.... Achieving a better policy outcome-if what petitioner urges is that-is a task for Congress, not the courts.”). See also Official Committee of Unsecured Creditors of Cybergenics Corp. v. Chinery, 330 F.3d 548 (3d Cir.2003) (“Kit is not for courts to substitute their policy judgment for Congress’s.”). Our notions of fairness are legally irrelevant.
Moreover, the suggestion of unfairness in a judgment for the purchaser under § 365(i)(2)(B) is also mistaken. Plainly, in the more usual case in which the balance of the purchase price is sufficient to pay off the mortgage, everyone will be satisfied. The purchaser will pay the full balance; the trustee will deliver clear title; and the mortgage holder will be paid in full. There may even be proceeds for the trustee to pay on the debtor’s exemption or other creditors’ claims. Inexplicably, despite the lack of unfairness to anyone in those happy circumstances, the majority opinion would nevertheless prohibit the bankruptcy court from applying § 365(i)(2)(B) to order that result.
But even if the balance of the purchase price is insufficient to pay off the mortgage, there is no unfairness in a judgment for the purchaser, because from an economic perspective, upon foreclosure, the mortgage holder will realize on its claim only what the property is worth. If the property is worth more than the balance of the purchase price, the mortgage holder might prefer to attempt to capture that incremental advantage through foreclosure. But there would be no fairness in that attempt, because that incremental advantage would likely result from the purchaser’s contribution to the construction. Moreover, that economic unfairness adheres even if the mortgage is recorded, because the agreement between the builder and the purchaser ordinarily would not require clear title before the final closing, and the mortgage holder would know that.
There are thus no reasonably foreseeable circumstances in which a mortgage holder should equitably realize more on its claim if it sells the property for market value at a foreclosure sale than if the purchaser pays the balance of the purchase price and obtains clear title under § 365(i)(2)(B). The allocation of rights under § 365(i)(2)(B) is perfectly consistent and aligned with these undeniable economic, legal and equitable realities.
Another important consideration further undermines any suggestion of unfairness in a judgment for the purchasers in these circumstances. The mortgage holder is in full control over the process, approval, and amounts of all construction draws, both before and after the builder and the purchaser enter into a purchase agreement. The mortgage holder is fully capable of appraising the market value of the property at any stage of construction and to protect itself against the risk of loss in the event of a sale at the market value, simply by limiting its exposure. Indeed, there is no rational business reason for a mortgage holder to lend into a building project more money than that project will then be worth in the market. On the other hand, the purchaser never has control over the relationship between the builder and the mortgage holder, or even any participation in it. *809Accordingly, as between the purchaser and the mortgage holder, it is entirely fair to allocate to the mortgage holder the full burden of any economic risk, including the risk of default or bankruptcy by the builder, as well as the risk that the mortgage balance that it controls will exceed the balance of the market value purchase price. It is therefore entirely fair for § 365(i)(2)(B) to require the mortgage holder to accept the balance of the purchase price while the purchaser obtains clear title. Any suggestion to the contrary is mistaken.
I would therefore vacate the bankruptcy court’s judgment and remand for a determination of whether the debtor and the Hamerlys intended to obligate the debtor to deliver clear title upon payment of the purchase price. If so, the Hamerlys are entitled to the judgment they seek.