WILLIAM HOWISON, in his capacity as Trustee of the Bankruptcy Estate of John B. and Susan E. Everest, Appellant
BANK OF AMERICA, N.A., et al., Appellees
Represented By Aaron P. Burns Joshua R. Dow Pearce & Dow, LLC
Represented By Jeffrey J. Hardiman Shechtman, Halperin, Savage, LLP
Represented By Pamela W. Waite Thomas A. Knowlton Assistant Attorneys General
DECISION AND ORDER ON BANKRUPTCY APPEAL
D. Brock Hornby United States District Judge
This bankruptcy appeal presents a puzzling question of how sale proceeds should be distributed under Maine mortgage statutory foreclosure law and foreclosure judgments, given the following chronology. The facts are stipulated and/or a matter of judicial record. I heard oral argument on May 8, 2014.
In the beginning, a second mortgagee foreclosed its second mortgage on a parcel of Maine real estate through the judicial foreclosure process. The judgment of foreclosure and order of sale stated that the second mortgagee was to sell the premises and disburse the proceeds. The mortgagor did not exercise her equity of redemption within the statutory 90 days. But the second mortgagee failed to conduct a foreclosure sale following the expiration of the redemption period.
Next, the first mortgagee foreclosed its first mortgage on the same parcel through the judicial foreclosure process. The first mortgagee served its foreclosure complaint on the mortgagor as a defendant, and on the second mortgagee and Maine Revenue Services (holder of a state tax lien) as parties-in-interest. Both the mortgagor and the second mortgagee defaulted in that judicial proceeding, but Maine Revenue Services appeared. The resulting foreclosure decree directed payment to the first mortgagee, then Maine Revenue Services, and ordered any sale surplus thereafter to go to the defendant (the mortgagor) and any “other party appearing in this action.” The second mortgagee had not appeared. Maine courts rejected the second mortgagee’s belated attempt to amend the language of that foreclosure decree.
The second mortgagee next purchased the first mortgagee’s interest. As of yet, no foreclosure sale has occurred pursuant to the second decree, but the parties agree that there will be a surplus after the first mortgagee and Maine Revenue Services are paid (even after costs and expenses).
The question is, does the surplus that will result from the public sale pursuant to foreclosure of the first mortgage go to the mortgagor or to the second mortgagee? The dispute began in bankruptcy court and the bankruptcy court’s decision has been appealed here. If under Maine law the surplus goes to the mortgagor, the trustee in bankruptcy takes her place and the funds become available for her unsecured creditors. Otherwise, the surplus goes to the second mortgagee. The question is close, there are no controlling Maine Law Court precedents, and such issues of mortgage law with possible title implications are generally of paramount state law concern. I therefore will certify the issue to the Maine Supreme Judicial Court sitting as the Law Court before I enter final judgment.
Facts and Procedural Background
Susan E. Everest (“Everest”) owned real estate in Kennebunk, Maine. On February 17, 2009, as holder of a second mortgage that Everest had granted on the premises, Bank of America began a lawsuit in the Maine District Court to foreclose its second mortgage. Bank of America named Everest as the defendant and a third mortgagee as a party-in-interest. On May 10, 2010, the Maine District Court entered a Foreclosure Judgment in favor of Bank of America and against mortgagor Everest and the third mortgagee.
Everest and her husband then filed a petition for relief under Chapter 7 of the United States Bankruptcy Code with the Bankruptcy Court of this District on July 23, 2010, and a Trustee was appointed for the case. Neither Everest nor the Trustee ever exercised the equity of redemption on the second mortgage foreclosure, and it has expired. But Bank of America failed to conduct a public sale of the premises (more precisely, of the mortgagor’s equity of redemption under a first mortgage, as I explain later).
On August 10, 2010, People’s United Bank (“Peoples United”), the holder of a first mortgage that Everest had granted earlier on the same parcel, obtained a relief from stay from the Bankruptcy Court so that it could proceed with its own state court foreclosure action on the premises. On October 29, 2010, Peoples United began its foreclosure lawsuit in Maine District Court, naming Everest as a defendant and Maine Revenue Services and second mortgagee Bank of America as parties-in-interest. All were properly served with process and both Everest and Bank of America defaulted. On March 22, 2011, the Maine District Court entered a Foreclosure Judgment on Peoples United’s first mortgage. That Judgment stated that the proceeds of a foreclosure sale of the real estate were to be paid (after deducting costs of the sale) first to Peoples United to the extent of its debt, then to Maine Revenue Services for tax liens,  then to the “Defendant or any other party appearing in this action.” Appellate Designation, Judgment of Foreclosure and Order of Sale at 16 (ECF No. 1-6). Everest was the defendant and Bank of America had not appeared.
The Trustee learned of the impending foreclosure sale from this foreclosure in late June 2011. Although the Trustee had previously abandoned the bankruptcy estate’s interest in the premises (August 30, 2010) and the bankruptcy case had been closed (November 2, 2010), on July 7, 2011, the Trustee filed motions in the Bankruptcy Court to reopen the bankruptcy case and to revoke his abandonment of the property. The Bankruptcy Court did reopen the case and on July 20 granted the Trustee’s motion to revoke abandonment.
On July 21, 2011, Bank of America purchased Peoples United’s interest in Everest’s first mortgage debt and obtained an assignment of the Peoples United loan and first mortgage documents and the Peoples United Foreclosure Judgment. Appellate Designation, Loan Sale Agreement, Exhibit N (ECF No. 1-6); Appellate Designation, Assignment of Mortgage, Exhibit O-1 (ECF No. 1-6); Appellate Designation, ...