Elwood Dean French

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Case 01-56579 Doc 88 Filed 10/09/03 Page 1of9

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MARYLAND

In re: BETTY I. FRENCH * Case No. 0@-6-3163-JS

In re: ELLWOOD DEAN. FRENCH Case No. 01-5-6579-dJS
*

* * * * * * * * k * k * * k *
*

REAL ESTATE & CONSTRUCTION *

FUND OF MIAMI, LTD. *

Vv. * Civil Action No. WMN-03-549
* (consolidated with

GEORGE LIEBMANN, TRUSTEE, * Civil Action No. WMN-

03-550)
et al. *
MEMORANDUM

_Thege consolidated appeals challenge a December 23, 2002
os fam) ars
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Ordex of-the Bankruptcy Court which authorized the sale of
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Gertain eal property of the Debtors free and clear of any

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“tiens purported to be held by Appellee The Real Estate &

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-Gonstiructitén Fund of Miami, LTD. (REMiami). The factual and
3 co mes

“procedural background leading up to these appeals is as

follows.

On October 10, 2000, Elwood Dean French filed a chapter 7
petition in the United States Bankruptcy Court for the Middle
District of Florida. That case was subsequently transferred
to Maryland. On October 20, 2000, Peninsula Bank filed an
involuntary Chapter 7 case against Betty Irene French in the
Bankruptcy Court for this District. James Wooten was

initially appointed trustee in both cases, but he was later

AUTHENTICATED
U.S. GOVERNMENT
INFORMATION

GPO

Case 01-56579 Doc 88 Filed 10/09/03 Page 2 of 9

replaced by George Liebmann.

At the time that these bankruptcy cases were filed, a
piece of residential real estate known as 3999 Green Hill
Church Road, in Wicomico County, Maryland (the property) was
jointly titled in the names of Elwood and Betty French (the
Debtors). The Property was subject to a judgment in the
amount of $397,425.10 in favor of Peninsula Bank (Peninsula).
The Property was also subject at one time to an Indemnity
Mortgage from the Debtors to Sharon Savings and Loan, dated
October 1, 1986 in the original principal amount of $175,000.?
By an instrument dated September 6, 1996 and recorded in the
Land Records, this mortgage was assigned to Chesapeake Group,
Inc., a Bahamian corporation (Chesapeake). This mortgage was
subsequently reassigned to Appellant REMiami, which is also a
Bahamian corporation. It is this mortgage that is at the
heart of these appeals.

On or about May 30, 2000, before this assignment to
REMiami, and before the filing of the bankruptcy cases,
Appellee Peninsula filed an action in the Circuit Court for
Wicomico County seeking, inter alia, a declaration that the

Chesapeake Mortgage was “released, paid and satisfied.” As

1 In addition, the property was subject to other obligations,
jncluding a mortgage in favor of Wendover Funding and various tax
liens. These obligations have either been satisfied, or are
otherwise not relevant to this action.

2

Case 01-56579 Doc 88 Filed 10/09/03 Page 3 of 9

grounds, Peninsula noted that the Frenches were making no
payments on account of the mortgage. Peninsula averred that
“Elwood Dean French and Betty I. French have by design caused
their corporate alter ego, Defendant Chesapeake Group, Inc.,
to appear to have a bona fide lien of record, for the purpose
of impairing and thwarting the ability of [Peninsula Bank] to
realize upon the collateral securing its claim.” Peninsula

Bank v. Elwood Dean French, Civil No. 00-679, Complaint at

16.

On February 5, 2002, James Wooten substituted himself for
Defendants Elwood and Betty French as a party in the Wicomico
County action.? Shortly thereafter, on March 26, 2002, Judge
William Simpson of the Wicomico County Circuit Court entered
an order granting final judgment against Chesapeake and in
favor of Peninsula Bank. The order provided, inter alia, that
the Chesapeake mortgage was “declared to be RELEASED, PAID AND
SATISFIED.” Almost three months later, on June 24, 2002,
Chesapeake moved to vacate the order, but Judge Simpson denied
that motion on August 12, 2002. On September 11, 2002,

Chesapeake filed a notice of appeal with respect to the denial

2 Although the Trustee entered an appearance in the Wicomico
County action, it does not appear that he took an active role in the
litigation of this issue. The reason for his lack of involvement is
obvious: Peninsula’s claim secured by the Property exceeded the
Property’s market value so that the elimination of the
Chesapeake/REMiami lien would not add any benefit to the estate.

3

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of the motion to vacate.

On November 1, 2002, Peninsula filed a “Notice of
Substitution of Party Appellant” with the Court of Special
Appeals, seeking to substitute REMiami for Chesapeake as the
real party in interest in the appeal. Chesapeake opposed the
substitution, but the Court of Special Appeals accepted the
notice of substitution, over objection, on December 18, 2002.
On February 6, 2003, the Court of Special Appeals dismissed
the appeal as moot.? The Court of Special Appeals issued its
mandate in the action on March 10, 2003.

On November 26, 2002, while the appeal of the Wicomico
Circuit Court order remained pending, the Trustee filed
motions in both bankruptcy actions for authority to sell the
Property free and clear of liens. The motions specifically
requested that the lien of Chesapeake, REMiami, or any other
entity to which that lien might be assigned, not attach to the
proceeds of the sale, based upon the state court determination
that the mortgage had been “paid, settled, and satisfied.”
REMiami filed a limited opposition to the motions, agreeing to
the sale of the Property, but challenging the motions to the
extent that the Court would prevent its interest from

attaching to the proceeds. After a hearing held on December

3 The record does not reveal why the appeal had become moot.
Presumably, it was due to the sale of the Property on January 7,
2003. See infra.

Case 01-56579 Doc 88 Filed 10/09/03 Page 5of9

20, 2002, the Bankruptcy Court granted the Trustee’s motion to
authorize the sale, including the request that REMiami’s
interest not ‘attach to the proceeds. The Property was sold on
or about . January 7, 2003, for a contract sales price of
$275,000. The proceeds were distributed to Peninsula.
Peninsula has moved to dismiss these appeals on two
grounds.* Paper No. 8 in Civil Action No. WMN-03-550. First,
Peninsula argues that the sale of the property renders these
appeals moot. It is true that an appellant’s failure to
obtain a stay pending appeal might moot an appeal that intends

to void a sale of estate property. See In re Vanguard Oil &

Service Co., Inc., 88 B.R. 576 (E.D.N.Y¥. 1988). Here,

however, where the appeals challenge not the sale but the
distribution of proceeds, that distribution can be undone, and
the failure to obtain a stay does not render the appeal moot.

See In re Blumer, 66 B.R. 109 (Bankr. App. 9 Cir. 1986).

This is particularly true when the party receiving the

disputed disbursement is a party to the appeal. See id. at

112 (holding that an appeal is not moot where appellate court

* Peninsula raises a third argument in its motion to
dismiss that goes more to the merits of the appeal itself.
Peninsula argues that the appeal is an impermissible
collateral attack on the final and unappealable judgment of
the Wicomico County Circuit Court. This argument will be
addressed below, in the context of the Court’s discussion of
the merits (or lack thereof) of REMiami’s appeal.

5

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could structure effective relief by ordering the return of

erroneously disbursed funds).

Peninsula also argues that the appeals must be dismissed
because Appellant does not have the legal capacity to bring
suit. In support of that argument, Peninsula supplies the
affidavit of an attorney in the Bahamas in which he states
that he searched the Registrar General’s records and learned
that REMiami was struck from the Register for non-payment of
fees. Affidavit of Kirk Seymour. REMiami, however, responds
to this portion of Appellee’s motion by submitting a
Certificate of Good Standing from the Registrar General dated
April 10, 2003, indicating that REMiami is still on the
Register of the International Business Companies and has paid
all fees due and payable. See Exh. B to Opp. to Mot. to
Dismiss. In light of that submission, the Court will assume
that REMiami is a corporation in good standing.°>

Thus, the motion to dismiss the appeal will be denied.

Turning to the merits of the appeal, the gravamen of
REMiami’s argument is that once the bankruptcy cases were

filed, the Circuit Court for Wicomico County lacked

5 Counsel for REMiami admitted, at least implicitly, in the
hearing before the Bankruptcy Court that his client had lost its
charter for failure to pay a fee. See Trans. of Dec. 20, 2002
hearing at 24. Apparently, at some point after the hearing but

before April 10, 2003, REMiami paid its delinquent fees in order to

bring itself back into good standing.

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jurisdiction to continue to adjudicate Peninsula’s claims due
to the automatic stay provisions of 11 U.S.C. § 362. In
REMiami’s view, Peninsula’s claim was in the nature of a § 544
fraudulent transfer claim, which could only have been brought
by the Trustee. Because the claim was litigated by Peninsula,
and not the Trustee, and in violation of the automatic stay,
REMiami contends that the order of the Wicomico County Circuit
Court was void, and the Bankruptcy Court erred in giving it
any effect.

As REMiami’s counsel readily acknowledged before the
Bankruptcy Court, the position taken by REMiami in this
litigation is “bizarre and somewhat absurd.” Dec, 20, 2002
Trans. at 16. On that point, the Court agrees. Counsel for

REMiami was compelled to argue that the circumstances alleged

in the Peninsula claim, i.e., that “Dean and Betty French took

sufficient sums of monies to pay off the preexisting owner of
[the Sharon Savings and Loan] mortgage, deposited those moneys
jnto a Bahamian corporation, and then used that corporation to
buy the claim of the preexisting mortgage holder,” presented
what would be a “fairly classic” § 544 claim. Id. at 17-18.
He then faults the Trustee for not bringing this facially
meritorious claim against his own client.

The Court concludes that REMiami lacks standing to

challenge any alleged violation of the § 362 automatic stay.

Case 01-56579 Doc 88 Filed 10/09/03 Page 8 of 9

As the Ninth Circuit has observed, “the majority of
jurisdictions which have considered standing under the
automatic stay provision, 11 U.S.C. § 362, have concluded that
section 362 is inténded solely to benefit the debtor estate.
Language from many cases indicates that, if the trustee does
not seek to enforce the protections of the automatic stay, no

other party may challenge acts purportedly in violation of the

automatic stay.” In re Pecan Groves, 951 F.2d 242 (9 Cir.

1991) (citations omitted); See also Winters v. George Mason
Bank, 94 F.3d 130 (4 Cir. 1996) (observing that section 362 is
a “shield” for the benefit of the estate, not a “sword” to be
used against it).

The self-acknowledged absurdity of REMiami’s position
perhaps best demonstrates why standing to challenge alleged §
362 stay violations is limited. The Wicomico County Circuit
Court and Court of Special Appeals proceedings led to a valid
and final judgment that eliminated REMiami’s interest in the
Property, on grounds that had nothing to do with the Debtor's
bankruptcy. REMiami now seeks to use the happenstance that
the Frenches were placed into bankruptcy before the completion
of those proceedings as an opportunity to undo the finality of

that judgment, presumably so that it can take another bite at

Case 01-56579 Doc 88 Filed 10/09/03 Page 9 of 9

the apple. That is not the purpose of § 362.6

The decision of the Bankruptcy Court will be affirmed. A

separate order will issue.

/s/

William M. Nickerson
Senior United States District Judge

Dated: September 11, 2003

§ Even should it be found that REMiami has standing to
challenge the state court proceedings, and it was determined
that those proceedings were in violation of the automatic
stay, the Bankruptcy Court has the power to ratify a state
court judgment obtained in violation of the automatic stay
where equity so requires. See In re Sililiano, 13 F.3d 748
(3%? Gir. 1994) (observing that bankruptcy court can grant
retroactive relief from stay and thereby validate proceedings
that would otherwise be void ab initio); Matthews v. Rosene,
739 F.2d 249 (7 Cir. 1984) (although ordinarily orders issued
in violation of § 362 stay are void, Bankruptcy Court as court
of equity must neverthelss be guided by equitable principles
in exercising its jurisdiction); In re Oliver, 38 B.R. 245
(Bankr D. Minn. 1984) (noting that under 11 U.S.C. § 362(d), a
bankruptcy court may ratify a state court judgment obtained in
violation of the automatic stay). Here, the equities
undeniably support ratification of the state court judgment.

9