UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF KENTUCKY
LARRY JOE HENSON
ALANA KAY HAMMONS CASE NO. 89-60476
This matter is before the Court on the plaintiff trustee's Motion to Reconsider its ruling at a hearing on its Order to Show Cause conducted on January 4, 1991, and on the objection of defendant HLC Enterprises, Inc. d/b/a The Affordable Housing Mart ("HLC") to the debtors' claim of exemptions. All parties have filed briefs. This Court has jurisdiction of this matter pursuant to 28 U.S.C.'1334(b); it is a core proceeding pursuant to 28 U.S.C. '157(b)(2)(B).
FINDINGS OF FACT
The debtors purchased a mobile home from HLC on January 17, 1987. They financed $16,517.00 of the purchase price with HLC and gave it a security interest in the mobile home. HLC assigned the contract and security agreement to Greentree Acceptance Corporation ("Greentree") which accepted payments from the debtors until sometime in 1988. On September 27, 1988, Greentree reassigned the contract and security interest to HLC under the full recourse provisions of the contract. On the same date Greentree addressed a letter to the Lexington Credit Bureau advising it that their reference in regard to the debtors was to be released from the Credit Bureau files. This letter was also forwarded in some unknown manner to the Knox County Clerk's Office where it was accepted as a release of HLC's lien. Notation of the lien was then removed from the motor vehicle lien statement file for the mobile home.
The debtors filed their bankruptcy petition in this Court on August 31, 1989. An Agreed Order entered in the case on January 5, 1990, provided that the mobile home in the possession of the debtors and in which HLC claimed a security interest be abandoned by the trustee; that HLC be granted relief from the automatic stay; and that the debtors deliver the mobile home to HLC for eventual sale. The debtors' Motion to Vacate Agreed Order was sustained by this Court at a hearing conducted on February 7, 1990. On February 16, 1990, HLC filed a Motion for Determination of Lien Validity and for Reinstatement of Agreed Order in the debtors' bankruptcy case. On May 16, 1990, the trustee filed a Motion to Revoke Discharge to Allow Trustee to File Adversary Complaint to Contest the Validity of a Lien and a Motion to Compel Debtors to Turn Property Over to Trustee or Provide Proof of Insurance. The Court sustained both Motions at a hearing on June 21, 1990. After consideration of HLC's Motion for Determination of Lien Validity and for Reinstatement of Agreed Order and the responses of the parties, this Court entered an Order overruling that Motion on July 13, 1990. The Court's decision was based on the fact that HLC's lien was not perfected as of the date of the filing of the bankruptcy petition because it had been terminated prior to that date and did not appear on the title to the mobile home. The trustee therefore became a judgment lien creditor and had priority. See 11 U.S.C'544.
The within adversary proceeding was commenced by the filing of the trustee's Complaint on August 29, 1990. Therein the trustee alleged that HLC's security interest was unperfected in that an indication of the security interest was not placed on the title to the mobile home; that an unperfected security interest is void as to the trustee by virtue of 11 U.S.C.'544; and that the lien should be avoided and preserved for the benefit of the estate. HLC filed its Answer, Counterclaim and Cross-claim on September 28, 1990. The Counterclaim against the trustee alleged that the release of HLC's security interest in the mobile home by the Knox County Clerk was ineffectual. The Cross-claim against the debtors alleged that the release of the lien was obtained by the fraud of Larry Henson.
The debtors sought to amend their schedules to claim homestead and pourover exemptions on October 9, 1990. They filed their Answer and Cross-claim on the same date. Their Answer alleged that they executed and delivered a note and security agreement for the subject mobile home to HLC but that the mobile home was damaged during delivery and they only accepted it conditionally. They agreed that the security interest was unperfected and void as to the trustee. They alleged that their homestead exemption attached prior to the filing of the bankruptcy petition and that the exemption exceeds the fair market value of the mobile home.
Their Cross-claim against HLC alleged that the mobile home was damaged during delivery and that HLC, by its actions thereafter, waived, forfeited, and released its security interest or any claims to a valid and enforceable security interest. They maintained that HLC should be estopped from asserting any such interest. They also maintained that HLC should be required to make repairs on the damage alleged caused during the installation of the mobile home. Their prayer for relief includes requests for a declaration that HLC's lien is void and unenforceable, that the debtors have a valid homestead exemption and pourover exemption which attaches to the mobile home, that the trustee should surrender the mobile home to the debtors, that HLC be required to repair the mobile home and reimburse the debtors for all their associated costs and expenses, that any sums paid to HLC or Greentree Acceptance Corporation pursuant to the contract for the purchase, delivery and installation of the mobile home be returned to the debtors and a judgment be entered therefor, that a judgment be entered against HLC for $10,000.00 for damages, and that the debtors' discharge be reinstated.
The debtors also filed their Answer to HLC's Cross-claim on October 9, 1990. HLC filed its Answer to debtors' Cross-claim on October 30, 1990. The trustee filed a Motion for Summary Judgment on November 29, 1990. Therein he asked the Court to rule that HLC had no lien upon or security interest in the mobile home, that the trustee was a judgment lien creditor, that the debtors could not claim their homestead exemption as to the loan principle or interest balance on August 31, 1989, and that the mobile home was the property of the bankruptcy estate.
On December 8, 1990, HLC filed its objection in the bankruptcy case to the debtors' claim of exemptions. At a hearing conducted on December 13, 1990, the Court sustained the trustee's Motion for Summary Judgment as to HLC and overruled it as to the debtors. A Cross-Motion for Summary Judgment submitted by the debtors was also overruled at this hearing. The Cross-Motion was filed on December 18, 1990. This case was scheduled to proceed to trial on January 4, 1991, on the issues remaining after the Court's ruling on the trustee's Motion for Summary Judgment and the debtors' Cross-Motion for Summary Judgment.
On December 28, 1990, an Order to Show Cause was issued, directed to all parties on the basis of their failure to comply with the Order for Trial issued in this case. At a hearing conducted on the Order to Show Cause on January 4, 1991, the Court ruled that the debtors had made an attempt to comply with the Order for Trial and thereupon ruled in their favor. The Court stated, ...it is appropriate to direct that judgment be entered finding that the debtors own the mobile home in question free and clear of any lien of HLC; that as of the date of the filing of the petition, they were entitled to claim a homestead exemption in the property pursuant to their answer and counterclaim in this matter and that the claim of the trustee to the property is secondary and subject to the homestead exemption of the debtors in this matter. (Transcript of Hearing, p. 5).
The trustee filed a Motion to Reconsider on February 4, 1991. That Motion was heard on February 14, 1991. On that same date a hearing was conducted in the bankruptcy case on HLC's objection to the debtors' claim of exemptions. The Court entered an Order on February 25, 1991, which dealt with both matters. The Court directed that the case should stand submitted on the objections of HLC to the debtors' claim of homestead and pourover exemptions and on the trustee's motion for the Court to reconsider its ruling precluding the trustee from taking possession of the mobile home for his non-compliance with the Order for Trial. All parties submitted briefs on these issues.
CONCLUSIONS OF LAW
The Court will deal first with the trustee's Motion to Reconsider. The trustee maintains that the Court should reverse its ruling because he understood that the issues to be tried had been narrowed to one, and that testimony must be heard on that issue. He also maintains that a possible dividend would result if the mobile home were declared to be property of the estate and could be sold. The Court has considered the trustee's arguments and the consequences to the estate of the severe sanction of the striking of the trustee's Answer, and has come to the conclusion that the trustee's Motion to Reconsider should be SUSTAINED. A separate Order will issue resetting the adversary proceeding for a pre-trial conference.
By the Court -
James R. Westenhoefer, Esq., Trustee
John E. Davis, Esq.
Stuart K. Olds, Esq.