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In re Madeoy

United States District Court, D. Maryland

March 8, 2016

IN RE STEVEN F. MADEOY
v.
STEVEN MADEOY, Through his Bankruptcy Trustee, ROGER SCHLOSSBERG, Appellee. ROBERT D. SCHAECHTER, Appellant,

MEMORANDUM OPINION

THEODORE D. CHUANG United States District Judge

Appellant Robert D. Schaechter appeals a judgment of the United States Bankruptcy Court for the District of Maryland. The bankruptcy court granted summary judgment to Appellee Trustee Roger Schlossberg (“Trustee”) on Schaechter’s claim in an adversary proceeding seeking reformation of a deed of trust. The Appeal is fully briefed and ripe for disposition. No hearing is necessary to resolve the issues. D. Md. Local R. 105.6. For the reasons set forth below, the judgment of the bankruptcy court is AFFIRMED.

BACKGROUND

I. The Deed of Trust

On December 7, 2006, Schaechter loaned $500, 000 to Debtor Steven Madeoy. Schaechter and Madeoy claim that they both intended for Schaechter to receive a lien on Madeoy’s 45 percent interest in 350113th Street, N.W., LLC (the “LLC”) as collateral for the loan. Instead, the Money Loaned Deed of Trust (“Deed of Trust”) executed by Madeoy and another member of the LLC purported to grant Schaechter a lien on the LLC’s real property at 350113th Street, N.W., Washington, D.C. (the “Property”). In August 2010, the attorney who drafted the Deed of Trust recorded it with the District of Columbia Recorder of Deeds. Schaechter claims that he did not receive a copy of the Deed of Trust until 2014 and only then discovered that it did not grant him an interest in Madeoy’s LLC membership.

II. Bankruptcy Proceedings

On December 21, 2012, Madeoy filed a petition for Chapter 7 bankruptcy. Schlossberg was appointed Trustee. Schedules filed with that petition listed Schaechter as a creditor with a $900, 000 claim, $540, 000 of which was unsecured, and an unsecured nonpriority claim of $300, 000. On July 19, 2013, the LLC filed for bankruptcy. The LLC’s schedules listed Schaechter as a creditor with a $900, 000 claim, $500, 000 of which was secured by the Deed of Trust.

On April 7, 2014, Schaechter initiated an adversary proceeding in Madeoy’s bankruptcy case by filing a two-count complaint with the United States Bankruptcy Court for the District of Maryland. Count One asserted that the Deed of Trust was the product of a mutual mistake by Schaechter and Madeoy and should be reformed to create a lien nunc pro tunc, effective as of December 7, 2006, against Madeoy’s membership interest in the LLC.[1] Schaechter also requested the Court to “order[] the parties to effect such filings as may be requisite or advisable to perfect such lien.” Compl. ¶ 22. Count Two sought a determination of the extent, priority, and amount of Schaechter’s lien against Madeoy’s LLC membership interest. On May 9, 2014, the Trustee filed an Answer, Affirmative Defenses, and Counterclaims, asserting, among other things, that Schaechter’s interest in the LLC, if any, was not perfected pre-petition because he had not filed a Uniform Commercial Code (“UCC”) financing statement registering that interest. The Trustee argued that 11 U.S.C. § 544(a) empowered the Trustee to avoid the security interest that Schaechter hoped to gain through reformation.

After discovery, the Trustee moved for summary judgment on Schaechter’s claims. On June 4, 2015, United States Bankruptcy Judge Thomas J. Catliota held a hearing on the motion at which he made an oral ruling. Judge Catliota adopted the Trustee’s Undisputed Statement of Material Facts, with some modifications, as his findings of fact. He then concluded that, if Schaechter’s reformation claim succeeded, Schaechter would obtain a pre-petition security interest in Madeoy’s LLC membership stake that would be unperfected. Citing Greenbelt Cooperative, Inc. v. Werres Corp. (In re Greenbelt Cooperative, Inc.), 124 B.R. 465 (Bankr. D. Md. 1991), Judge Catliota noted that intervening judgment lien creditors have priority over unperfected security interests, and because 11 U.S.C. § 544(a), the “strong-arm” provision of the Bankruptcy Code, vests the Trustee with the same rights as a judgment lien creditor, reformation would be futile because the Trustee could simply avoid the unperfected security interest. The following day, Judge Catliota issued a written order holding that the Trustee’s strong-arm authority would defeat Schaechter’s reformation claim and granting summary judgment on both counts of Schaechter’s complaint.

III. Procedural History

On June 18, 2015, Schaechter filed a Notice of Appeal. The same day, Schaechter filed a motion seeking leave from the bankruptcy court to file a late proof of claim in Madeoy’s bankruptcy case. On July 15, 2015, the bankruptcy court denied that request. On September 17, 2015, Schaechter submitted an opening brief in this Appeal. He argued that the bankruptcy court erred in concluding that reformation would have resulted in an unperfected security interest, that the Trustee’s strong-arm authority under 11 U.S.C. § 544 could be used to avoid such an interest, and that such authority trumped the bankruptcy court’s equitable power. Schaechter further argued that the statute of limitations in 11 U.S.C. § 546 barred the bankruptcy court from relying upon 11 U.S.C. § 544(a).

On October 9, 2015, the Trustee filed his brief, arguing that the bankruptcy court’s judgment should be affirmed for the reasons stated by the bankruptcy court, or, alternatively, because the automatic stay provision of 11 U.S.C. § 362 barred Schaechter’s claim, because Schaechter failed to file a timely proof of claim in Madeoy’s bankruptcy, or because Schaechter had failed to present clear and convincing evidence of a mutual mistake and thus had not proven that the Deed of Trust should be reformed. On October 21, 2015, Schaechter filed a reply brief.

DISCUSSION

I. Standard of Review


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