United States District Court, D. Columbia
December 13, 2005.
THELMA E. ALLEN and CHARLES R. ALLEN, Appellants,
WELLS FARGO BANK MINNESOTA, N.A., Appellee.
The opinion of the court was delivered by: RICARDO URBINA, District Judge
MEMORANDUM OPINION AFFIRMING THE BANKRUPTCY COURT'S DENIAL OF THE
APPELLANTS' MOTION FOR RECONSIDERATION
This matter comes before the court on appeal from the United
States Bankruptcy Court for the District of Columbia ("Bankruptcy
Court"). The pro se appellants appeal an adverse ruling in
their bankruptcy case. The appellants argue that the Bankruptcy
Court erred by denying their motion for reconsideration of its
earlier decision to annul the automatic stay*fn1
foreclosure proceedings. Because the Bankruptcy Court did not
commit a clear error with respect to its factual findings and
because the Bankruptcy Court's legal conclusions are correct, the
court affirms the Bankruptcy Court's decision to deny the
appellant's motion for reconsideration. II. BACKGROUND
A. Factual History
From 1986 until 2003, appellant Charles Allen ("Mr. Allen") was
the sole record owner of his residence, a property located at
1854 Fifth Street, N.W. in Washington, D.C. Bankr. Ct. Decision
Regarding Mot. for Recons. ("Bankr. Ct. Decision") at 2.
Appellant Thelma Allen ("Mrs. Allen"), Mr. Allen's mother, claims
that she had an ownership interest in the property because she
allegedly provided unsecured financial assistance to Mr. Allen
between 1986 and 1999. Id. According to the appellants, they
used Mrs. Allen's financial assistance to fund a substantial
renovation of the property. Id.
Mr. Allen executed a mortgage with the appellee in August 1999.
The terms of the mortgage agreement required Mr. Allen to make
monthly payments of $1,941.64 over a 30-year term. Id. at 3.
Mr. Allen secured the mortgage with his property at 1854 Fifth
Street, N.W. via a deed of trust. Id. at 3. The deed of trust
securing the property contained a covenant of seisin*fn2 and
a warranty of title*fn3 stipulating that Mr. Allen was the
sole owner of the property and that he agreed to acceleration of
his mortgage payments in the event that he breached any terms of
the deed. Id. at 4-5. The deed of trust also contained a
due-on-transfer clause stipulating that if all or any part of the
property was sold or transferred without the appellee's prior
written consent, the appellee could require immediate payment in full of all sums
secured by the deed of trust. Id. at 8.
After falling more than thirteen months behind in monthly
mortgage payments, Mr. Allen owed the appellee more than $200,000
on the mortgage. Id. at 11. Mr. Allen filed a petition in the
Bankruptcy Court under Chapter 13 of the Bankruptcy Code on
February 27, 2002. Id. Because Mr. Allen had made only one
payment as part of his bankruptcy plan,*fn4 the Bankruptcy
Court dismissed Mr. Allen's case with prejudice on January 23,
2003. Id. After the Bankruptcy court dismissed Mr. Allen's
case, the appellee scheduled a foreclosure sale of the property
at 1854 Fifth Street, N.W. on March 27, 2003. Id. at 11, 13.
Six days prior to the scheduled foreclosure sale, on March 21,
2003, Mr. Allen executed a deed conveying the property at 1854
Fifth Street, N.W. to himself and Mrs. Allen as tenants in
common, each owning a 50% interest. Id. at 13-14. Three days
later, on March 24, 2003, Mr. Allen filed his mother's bankruptcy
petition commencing her case under Chapter 13 of the Bankruptcy
Code. Id. at 14. The appellants allegedly called the office of
Draper & Goldberg, the law firm representing the appellee, and
left a voice mail message to notify the appellee of Mrs. Allen's
pending bankruptcy petition in an effort to stop the foreclosure
sale. Appellants' Br. at 4. The appellee claims, however, that it
did not receive notice of Mrs. Allen's pending bankruptcy
petition. Appellee's Br. ¶ 3. On March 27, 2003, the appellee
sold the property located at 1854 Fifth Street, N.W. for $226,000
at a foreclosure sale to Case Capitol Corporation. Bankr. Ct. Decision. at 14-15.
B. Procedural History
After Mrs. Allen failed to complete the required bankruptcy
filings, the Bankruptcy Court voluntarily dismissed her case on
May 27, 2003. Appellee's Br. ¶ 4. On June 25, 2003, the appellee
filed a motion to reopen Mrs. Allen's bankruptcy petition and to
annul the automatic bankruptcy stay for cause pursuant to
11 U.S.C. § 362(d)(1). Id. ¶ 6. On July 17, 2003, the Bankruptcy
Court annulled the stay in the appellants' foreclosure
proceedings, effectively validating the foreclosure of the
appellants' property. Mem. Order Den. the Appellee's Mot. to
Dismiss Appeal and to Strike the Appellants' Br. (March 22, 2003)
("Mem. Order") at 1. The appellants then moved for
reconsideration of the annulment, and on September 5, 2003, the
Bankruptcy Court issued its final order denying the appellants'
On September 15, 2003, the appellants filed a notice of appeal
with the Bankruptcy Court. Id. After a complicated series of
filings by the appellants and errors in assignment of motions to
various judges in the district court,*fn5 the case came
before this court. Id. at 1-2. The appellants filed a brief in
support of their appeal on April 7, 2004. On March 22, 2005, this
court directed the appellee to file a brief in opposition of the
appeal. Id. at 4. The appellee filed its opposition to the
appellants' appeal on April 25, 2005. The court now turns to the
appellants' motion. III. ANALYSIS
A. Legal Standard for Review of a Bankruptcy Court Decision
U.S. district courts have jurisdiction over appeals of
bankruptcy court decisions. 28 U.S. § 158(a). On appeal from a
bankruptcy court, a district court may affirm, modify, or reverse
a bankruptcy court's judgment, or remand with instructions for
further proceedings. FED. R. BANKR. P. 8013; Johnson v. McDow
(In re Johnson), 236 B.R. 510, 518 (D.D.C. 1999). A district
court shall not set aside findings of fact unless they are
clearly erroneous, and due regard shall be given to the
opportunity of the bankruptcy court to judge the credibility of
the witnesses. FED. R. BANKR. P. 8013; Johnson,
236 B.R. at 518. "The burden of proof is on the party that seeks to reverse
the Bankruptcy Court's holding. That party must show that the
court's holding was clearly erroneous as to the assessment of the
facts or erroneous in its interpretation of the law and not
simply that another conclusion could have been reached."
Johnson, 236 B.R. at 518 (citing Anderson v. Bessemer City,
470 U.S. 564, 573-74 (1985)). "A finding is clearly erroneous
when, although there is evidence to support it, the reviewing
court on the entire evidence is left with the definite and firm
conviction that a mistake has been committed." United States v.
U.S. Gypsum Co., 333 U.S. 364, 395 (1948). As the Seventh
Circuit memorably explained, "[t]o be clearly erroneous, a
decision must . . . strike us as wrong with the force of a five
week old, unrefrigerated dead fish." Parts & Elec. Motors, Inc.
v. Sterling Elec., Inc., 866 F.2d 228, 233 (7th Cir. 1988).
Courts, however, should review questions concerning the
application of the controlling law de novo on appeal. Cooter &
Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). B. The Court Affirms the Bankruptcy Court's Decision to Deny
Reconsideration of the Annulment of the Automatic Stay on
On September 5, 2003, the Bankruptcy Court denied the
appellants' motion to reconsider the July 2003 annulment of the
bankruptcy stay. Bankr. Ct. Decision at 1. The appellants now
argue that the Bankruptcy Court's factual findings and legal
conclusions were erroneous, and therefore, that the Bankruptcy
Court abused its discretion by denying the appellants' motion for
reconsideration of the Bankruptcy Court's earlier ruling
annulling the automatic stay. See generally Appellants' Br.
Specifically, the appellants argue that the Bankruptcy Court
erred when it determined that: (1) the appellee did not receive
notice of Mrs. Allen's March 2003 bankruptcy petition prior to
the foreclosure sale, (2) Mrs. Allen's bankruptcy petition was
filed in bad faith, (3) the deed of trust voided Mr. Allen's
conveyance to Mrs. Allen, and (4) it was appropriate to annul the
automatic stay. The court addresses each one of these arguments
1. The Bankruptcy Court's Determination that the Appellee did Not
Receive Notice of Mrs. Allen's Chapter 13 Filing Prior to
Foreclosure is Not Clearly Erroneous
The appellants argue that the Bankruptcy Court erred in
determining that the appelle did not receive notice of Mrs.
Allen's bankruptcy filing. Appellants' Br. at 9. Specifically,
they allege that the Bankruptcy Court's determination is not
supported by substantial evidence because the appellee's witness
offered only uncorroborated hearsay testimony. Id. Further, the
appellants introduce Federal Rules of Evidence 1002 and 1004 as
bars to the admissibility of the Loss Mitigation Supervisor's*fn6
at 11. As a last resort, the appellants argue that the Bankruptcy
Court should have drawn an adverse inference from the fact that
the appellee failed to produce any record of the appellants'
voice mail message.*fn8
The appellee, on the other hand,
argues that the court's conclusion that the appellee did not
receive notice of Mrs. Allen's bankruptcy filing represents a
permissible view of the evidence, and therefore, is not clearly
erroneous. Id. ¶ 18.
The Bankruptcy Court's finding that the appellee did not
receive notice of Mrs. Allen's Chapter 13 filing prior to
foreclosure is a factual finding and, as such, is subject to the
clearly erroneous standard of review. Johnson, 236 B.R. at 518
(citing Anderson, 470 U.S. at 573-74). The Bankruptcy Court heard testimony and reviewed voice mail
records before coming to the conclusion that the appellee never
received notice of Mrs. Allen's March 24, 2003 bankruptcy
filing.*fn9 Bankr. Ct. Decision at 41-42. As the Bankruptcy
Court stated, the appellants' description of the voice mail
message "was at best sketchy." Id. at 43. Mr. Allen himself
recognized that he was "uncertain whether he had contacted the
appropriate office to stop the foreclosure sale." Id. at 43,
46. Accordingly, the Bankruptcy Court's conclusion that the
appellee did not receive notice of the automatic stay in Mrs.
Allen's bankruptcy case was not a clear error.
2. The Bankruptcy Court's Determination that the Appellants'
Chapter 13 Filing was an Abuse of the Bankruptcy System is Not
The appellants argue that the Bankruptcy Court erred by
re-opening Mrs. Allen's bankruptcy case to annul the automatic
stay because the appellee failed to establish that Mrs. Allen's
bankruptcy petition was filed in bad faith. Appellants' Br. at
14. The appellee counters that regardless of whether the
appellants acted in bad faith, the appellants' actions constitute
an abuse of the bankruptcy system. Specifically, the appellee
argues that the last minute transfer of title from Mr. Allen to Mrs. Allen, a Pennsylvannia resident
without sufficient resources to fund a bankruptcy plan, and Mrs.
Allen's filing of the bankruptcy petition on the eve of the
foreclosure sale, shows that the appellants abused the bankruptcy
system. Appellee's Br. ¶ 16.
Under 11 U.S.C. § 1307(c), courts have the power to dismiss
Chapter 13 bankruptcy petitions "for cause." 11 U.S.C. § 1307(c).
Although this circuit has not ruled on the issue, other circuits
have ruled that a lack of good faith is sufficient cause for
dismissal of a bankruptcy petition. These circuits have
articulated a totality of the circumstances test for determining
whether a bankruptcy petition was filed in good faith. In re
Love, 957 F.2d 1350, 1354, 1357 (7th Cir. 1992); Robinson v.
Tenantry (In re Robinson), 987 F.2d 665, 668 (10th Cir. 1993);
Soc'y Nat'l Bank v. Barrett (In re Barrett), 964 F.2d 588, (6th
Cir. 1992). In considering whether the totality of the
circumstances shows that a bankruptcy petition was filed in good
faith, courts have generally considered factors such as
the nature of the debt . . . the timing of the
petition, how the debt arose, the debtor's motive in
filing for bankruptcy, how the debtor's actions
affected creditors, the debtor's treatment of
creditors both before and after the petition was
filed, and whether the debtor has been forthcoming
with the bankruptcy court and the creditors.
In re Love, 957 F.2d at 1357. The Bankruptcy Court's
determination that a bankruptcy petition was or was not filed in
good faith is a purely factual finding evaluated under the
clearly erroneous standard of review. Id. at 1354; Robinson,
987 F.2d at 668; Barrett, 964 F.2d at 591.
The appellee points primarily to the timing of Mrs. Allen's
bankruptcy filing, just three days before the foreclosure sale
was scheduled to take place, in arguing that she did not file her
bankruptcy petition in good faith. Appellee's Br. ¶¶ 2-3, 16.
Additionally, the appellee notes that Mrs. Allen was a
Pennsylvania resident at the time she filed for bankruptcy, and
that she lacked the financial resources necessary to fund a bankruptcy
plan. Id. ¶ 16. As the Bankruptcy Court noted, when Mrs. Allen
sought dismissal of her case just 56 days after filing, she had
yet to file a schedule, a statement of financial affairs, or a
bankruptcy plan. Bankr. Ct. Decision at 14. All of this, the
appellees contend, shows that Mr. Allen's transfer to Mrs. Allen,
and Mrs. Allen's subsequent bankruptcy filing, are nothing more
than a sham. Appellee's Br. ¶ 16.
The appellants argue that the Bankruptcy Court's conclusion
that Mrs. Allen filed her bankruptcy petition in bad faith was
clearly erroneous. Appellant's Br. at 14. As stated previously, a
factual "finding is clearly erroneous when, although there is
evidence to support it, the reviewing court on the entire
evidence is left with the definite and firm conviction that a
mistake has been committed." U.S. Gypsum Co., 333 U.S. at 395.
In the instant case, this court's review of the evidence does not
leave it with the firm conviction that the Bankruptcy Court made
a mistake. Coupled with Mr. Allen's last minute conveyance to
Mrs. Allen after his own bankruptcy petition was dismissed with
prejudice, the timing of Mrs. Allen's bankruptcy petition
supports the Bankruptcy Court's determination. Assuming
arguendo that this court would have ruled differently than the
Bankruptcy Court, this court would still uphold the Bankruptcy
Court's decision. Johnson, 236 B.R. at 518 (explaining that if
the lower court's factual findings are plausible in light of the
record, the reviewing court may not reverse those factual
findings even if it would have weighed the evidence differently)
(citing Anderson, 470 U.S. at 573-74). Consequently, the court
affirms the Bankruptcy Court's finding that the appellants' March
2003 Chapter 13 filing was not made in good faith. 3. The Bankruptcy Court did not Err in Determining that the Deed
of Trust Voids Mr. Allen's Conveyance to Mrs. Allen
Mr. Allen's deed of trust contained a due-on-transfer clause.
Bankr. Ct. Decision at 7. Pursuant to the terms of that clause,
Mr. Allen agreed that if he sold or transferred any part of the
property without the appellee's prior written consent, the
appellee had a right to require full and immediate payment of the
mortgage. Id. at 8. The Bankruptcy Court held that Mr. Allen's
failure to receive the appellee's written consent prior to
conveying part of the title to Mrs. Allen voided the transfer to
Mrs. Allen. The appellants argue that the Bankruptcy Court erred
by finding, as a matter of law, that Mr. Allen's deed of trust
voids the conveyance from Mr. Allen to Mrs. Allen. Appellants'
Br. at 20. The appellants argue that the deed of trust simply
provides an option to the lender to accelerate full payment of
the loan in the event that the debtor transfers the property to
another without the lender's written consent. Id. at 21. They
believe that it does not, however, void the property interest
transferred from Mr. Allen to Mrs. Allen without written consent.
Id. The appellee counters that the court's finding is supported
by the record and represents a permissible view of the evidence.
Appellee's Br. ¶ 17.
The effect of the deed of trust upon the conveyance of property
from Mr. Allen to Mrs. Allen is a legal question subject to de
novo review by this court. Cooter, 496 U.S. at 405. Courts are
split as to the effect that a transferor's violation of a
due-on-transfer clause has on a transferee's power to bring a
bankruptcy case. Some courts hold that a party who, like Mrs.
Allen, purchases property in violation of a mortgage's
due-on-transfer clause may nevertheless cure the violation and
reinstate that mortgage in a bankruptcy case. See generally In
re Garcia, 276 B.R. 627 (Bankr. D. Ariz. 2002); In re
Rutledge, 208 B.R. 624 (Bankr. E.D.N.Y. 1997); In re Allston, 206 B.R. 297). In other words, when a party has
purchased property in violation of the mortgage's due-on-transfer
clause and that purchaser subsequently files a bankruptcy
petition, the mortgagor may not seek relief from the automatic
stay on the basis that the purchaser is not the original
mortgagee. In re Garcia, 276 B.R. at 628. Other courts have
held to the contrary, reasoning that the new owner's continued
retention of the property constitutes a modification of the
mortgage, and that such modification is a violation of
11 U.S.C. § 1322(b)(2).*fn10 In re Parks, 227 B.R. 20 (Bankr.
W.D.N.Y. 1998); In re Kizelnik, 190 B.R. 171 (Bankr. S.D.N.Y.
1995); In re Martin, 176 B.R. 675 (Bankr. D. Conn. 1995); In
re Threats, 159 B.R. 241 (Bankr. N.D. Ill. 1993). The D.C.
Circuit has not decided which line of cases controls in this
Assuming, as the appellants urge, that the Bankruptcy Court
should have followed the first line of cases, this court would
nevertheless uphold the Bankruptcy Court's determination that the
conveyance to Mrs. Allen was void. In other words, the Bankruptcy
Court was correct in concluding that the appellants' case was
distinguishable from the cases holding that a party who purchases
property in violation of a mortgage's due-on-transfer clause may
nevertheless cure the violation. Specifically, the Bankruptcy
Court found that the instant case was distinguishable from the
first line of cases because "[i]n those cases, the mortgagees
either did not argue the existence of bad faith, or the court
expressly found no bad faith existed." Bankr. Ct. Decision at
24-25. In contrast to the first line of cases, the instant case
deals with a last-minute transferee filing for bankruptcy on the
eve of foreclosure after the original mortgagor had already tried
unsuccessfully to file for bankruptcy. Bankr. Ct. Decision at 24.
For the foregoing reasons, the court affirms the Bankruptcy Court's determination that the
due-on-transfer clause precludes the appellants' filing.
4. The Bankruptcy Court did Not Err in Annulling the Automatic
The appellants argue that there is no substantial evidence in
the record to support the court's decision to annul the automatic
stay. Appellants' Br. at 23. The appellee counters that there is
substantial evidence in the court record to support the
Bankruptcy Court's decision to annul the stay. Appellee's Br. ¶
15. Whether it was appropriate to annul the automatic stay in the
appellants' foreclosure proceedings is a legal question subject
to de novo review by this court. Cooter, 496 U.S. at 405. The
"decision of whether to lift the stay is committed to the
discretion of the bankruptcy judge." Sonnax Indus., Inc. v. Tri
Component Prods. Corp., 907 F.2d 1280
, 1286 (2d Cir. 1990)
(internal brackets omitted) (citing Holtkamp v. Littlefield,
669 F.2d 505
, 507 (7th Cir. 1982). The Second Circuit noted that
"[i]n extreme cases a finding that the bankruptcy case was not
commenced in good faith has been used as a basis for vacating or
annulling the automatic stay." Sonnax Indus., Inc.,
907 F.2d at 1286. As discussed supra, the Bankruptcy Court held that the
appellants' bankruptcy filing constituted an abuse of the
bankruptcy system. Because substantial evidence exists in support
of the annulment, this court affirms the Bankruptcy Court's
conclusion. IV. CONCLUSION
For the foregoing reasons, the court affirms the Bankruptcy
Court's decision to deny reconsideration of its annulment of the
stay in the appellants' foreclosure proceedings. An order
consistent with this Memorandum Opinion is separately and
contemporaneously issued this 13th day of December, 2005.
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