The Sixth Circuit widened an existing split on mooting appeals from sale orders and went on to hold that a consumer cannot claim a homestead exemption without equity in her residence, even if the trustee has cobbled together a deal with a distribution of sale proceeds to unsecured creditors that cuts out the debtor.
A woman in Michigan filed a chapter 7 petition and scheduled her home as worth $170,000 but encumbered by mortgages totaling almost $220,000. Originally, the debtor stated her intention to surrender the property and claimed no homestead exemption.
With the lenders’ consent, the trustee sold the home for $160,000. The holder of the first mortgage agreed to take about $148,000 in full satisfaction of the debt, with $6,000 earmarked for the second mortgagee. After paying the brokerage fee and closing costs, the trustee would have money left for distribution to unsecured creditors.
Now claiming a homestead exemption, the debtor objected and contended that she was entitled to some of the sale proceeds. The bankruptcy judge overruled the debtor’s objection and approved the sale. The district court affirmed in May.
When the debtor appealed to the Sixth Circuit, the trustee argued that the appeal was moot under Section 363(m), which provides that reversal or modification of a sale-approval order “does not affect the validity of a sale” to a good faith purchaser in the absence of a stay pending appeal.
In his March 20 opinion for the appeals court, Circuit Judge Gilbert S. Merritt noted the existing split of circuits on Section 363(m). He said a majority of circuits employ a per se rule and automatically dismiss an appeal from a sale order in the absence of a stay.
The Third and Tenth Circuits, he said, take an opposing view and impose an additional condition by requiring the appellee to prove that the court cannot grant effective relief before the appeal is dismissed.
Judge Merritt sided with the Third and Tenth Circuits. He held that the appellate court must be “unable to grant effective relief without affecting the validity of the sale” before dismissing under Section 363(m).
According to Judge Merritt, the additional condition to dismissal “is in line with the plain language” of the statute and upholds “the validity of bankruptcy sales without unduly restricting the appellant’s right to contest errors of law made by the bankruptcy court.”
Because the trustee had not shown why effective relief was impossible, Judge Merritt concluded that the appeal was not moot. He then turned to the merits.
In a nonprecedential opinion called Baldridge, the Sixth Circuit said in 2014 that a debtor cannot claim an exemption without equity in the property. Although Baldridge was not binding precedent, Judge Merritt followed it.
He said that the Third Circuit and the Ninth Circuit Bankruptcy Appellate Panel reached the same conclusion based on similar facts. He cited the BAP for the proposition that the “value that can be exempted is the unencumbered portion.”
To read ABI’s discussion of the district court opinion, click here.
The Sixth Circuit widened an existing split on mooting appeals from sale orders and went on to hold that a consumer cannot claim a homestead exemption without equity in her residence, even if the trustee has cobbled together a deal with a distribution of sale proceeds to unsecured creditors that cuts out the debtor.