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Court Clarifies ‘Single-Satisfaction Rule’ After Mortgage Lien Avoidance

In an examination of Jones v. Brand Law Firm PA (In re Belmonte), the U.S. Court of Appeals for the Second Circuit affirmed a lower court decision that a chapter 7 trustee's avoidance of an unauthorized postpetition mortgage lien did not amount to a "double recovery" precluding the trustee from avoiding and recovering a transfer of the loan proceeds.

JD Supra reports that like the lower courts, the Second Circuit concluded that the trustee's recovery of a portion of the loan proceeds did not constitute a double recovery in violation of section 550. Because the transfer of the loan proceeds was avoided pursuant to section 549, the court reasoned that the trustee was permitted to seek recovery of either the transferred property or its value pursuant to section 550.

“In so ruling, the court rejected the trustee's argument that the trustee had already recovered the debtor's interest in the proceeds of the loan when it approved the settlement avoiding and preserving the second mortgage,” JD Supra reports. “Rather, the Second Circuit panel found that the settlement gave the trustee only the rights of a lien creditor with respect to the property, and the second mortgage lien carried with it only the right to foreclose on the property in the event of default.”

According to JD Supra, the courts' conclusion that only one-half of the amount received by Brand was recoverable as "estate property" is interesting.

The Second Circuit was not the only court of appeals to weigh in on the scope of the single-satisfaction rule in 2019, JD Supra notes. In Whitlock v. Lowe (In re Deberry), 2019 WL 7046904 (5th Cir. Dec. 23, 2019), the U.S. Court of Appeals for the Fifth Circuit ruled that a bankruptcy trustee may not recover transfers under section 550(a) if the payments were returned by the transferee to the debtor prior to the bankruptcy petition date. Noting that every other court to consider the question has reached this conclusion, the Fifth Circuit vacated the bankruptcy court's determination that "the single-satisfaction rule does not apply to funds that were returned prior to the petition date."

About Author: Seth Welborn

Seth Welborn is a Reporter for DS News and MReport. A graduate of Harding University, he has covered numerous topics across the real estate and default servicing industries. Additionally, he has written B2B marketing copy for Dallas-based companies such as AT&T. An East Texas Native, he also works part-time as a photographer.

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