Maryland Bankruptcy Court: Trustee cannot rely on sec. 544(a)(1) or (3) to avoid equitable lien

In Janet M. Nesse, Trustee v. GMAC Mortgage, LLC, Adversary No. 11-00290 (Bankr. D. Md. Apr. 19, 2012), the Bankruptcy Court considered the issue whether the Trustee could utilize sec. 544(a)(1) or (3) to avoid an equitable lien against property held as tenants by the entireties where only on spouse is a debtor in bankruptcy. The Court concluded that the Trustee cannot rely on sec. 544(a)(1) or (3) to avoid the equitable lien, and that GMAC was entitled to relief under the doctrine of equitable subrogation. The Court granted summary judgment in favor of GMAC.

The GMAC deed of trust was never recorded. However, it was undisputed that the facts made out a prima facie claim under Maryland law of the equitable subrogation of GMAC to the loan and a deed of trust executed in favor of MortgageIT. The Trustee, however, argued that sec. 544(a) allowed her to avoid GMAC's equitable lien and defeat GMAC's equitable subrogation claim. She argued that she had the rights and powers of a judicial lien creditor under sec. 544(a)(1) and a bona fide purchaser of the Property without knowledge of the GMAC deed of trust under sec. 544(a)(3), and that those rights and powers enabled her to defeat GMAC's equitable subrogation claim. The Trustee also argued that the debtor's spouse consented to allowing her to sell the Property, and that consent bolstered the Trustee's standing under sec. 544.

GMAC argued that sec. 544(a) is not available because only the Debtor, and not the spouse, is the subject of this bankruptcy proceeding and the spouse's consent is irrelevant.

The Court found that Maryland law defeats the Trustee's claim. In Maryland, creditors of only one spouse may not reach tenancy by the entireties property for satisfaction of their claims. Property held as tenants by the entireties cannot be taken to satisfy individual debts of a husband and wife. Thus, in Maryland, a "creditor that extends credit to the debtor" could not obtain a judicial lien on property owned as tenants by the entireties. Accordingly, the Trustee could not avoid GMAC's equitable lien armed with the powers of sec. 544(a)(1).

As for sec. 544(a)(3), that section allows the Trustee to avoid an interest avoidable by "a bona fide purchaser of real property ... From the debtor . . . ." However, under Maryland law, there can be no bona fide purchaser of real property from one spouse, where the property is owned in tenancy by the entireties. Section 544(a)(3) cannot give the Trustee the status of a bona fide purchaser of the Property from the Debtor where there is no way, under Maryland law, that anyone could obtain that status.

The consent of the spouse could not give the Trustee the standing of a bona fide purchaser because the Trustee had actual knowledge of GMAC's equitable lien.

Deborah M. Whelihan of Jordan Coyne & Savits, L.L.P. was co-counsel for GMAC Mortgage, LLC in this matter.

Categories: Maryland