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In Re Sanabria

2007 WL 2746802 (U.S. Bkrtcy. D. N.J. 2007) (Unpublished)

BANKRUPTCY; LACHES — The equitable doctrine of laches applies to bankruptcy turnover claims such as one filed more than four years after a final sale order was docketed.

Mortgages were granted on two properties with the same mortgagor, one recorded and one unrecorded,. Four years later, the mortgagee filed a voluntary petition for Chapter 13 bankruptcy relief. The mortgagee, as debtor, filed a motion in the Chapter 13 case to sell both properties free of all encumbrances. Pursuant to the sale order the servicing company for the mortgagor received payment. The bankruptcy matter was eventually converted into a Chapter 7 action.

A dispute arose involving a subsequent Chapter 7 motion filed by the Chapter 7 bankruptcy trustee against the servicing company for the mortgagor seeking turnover of that part of the sale proceeds paid by the debtor alleged to have been paid on the account of the unrecorded mortgage. This motion was filed more than two years after the alleged transfer. The servicing company asserted that it never received any such payment, claiming that the money it had received represented funds for other than the property with the unrecorded mortgage. The trustee responded that the disputed funds were paid on that very property.

The Bankruptcy Court held that the claim fell within Section 549(a) of the Bankruptcy Code which provides for the avoidance of an unauthorized post-petition transfer of property that constituted part of the bankruptcy estate, and found that the statutory limitations period under that section had run. The Court held that it was therefore incumbent on the Chapter 7 trustee to justify the delay in bringing the cause of action and to negate any prejudice to the servicing company. In this case, the Court saw no justification presented; rather it believed the Chapter 13 trustee, who supervised the debtor’s proceeding for one year after the sale order was entered, or the debtor himself, could have brought a timely motion. The Court therefore held that the Chapter 7 trustee could not recover excess funds paid to the servicing company, assuming such funds were indeed transferred.

The Court also refused to alter or amend the sale order, finding that the sale order was drafted by debtor’s counsel, had been entered over four years earlier, and no evidence had been presented why the debtor or the Chapter 13 trustee failed to act on an allegedly mistaken payment. The Court concluded, in regard to this turnover claim, that the equitable doctrine of laches applied to bar such a claim against the servicing company.


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