IN RE BRADSHAW, (Bankr.E.D.Va. 1995)

STEPHEN MITCHELL, Bankruptcy Judge

This matter comes before the Court on the objection of Richard G. Hall, the chapter 7 trustee, to claim No. 5 filed by Florence E. Joseph on October 8, 1992, in the amount of $23,500.00. At the request of the claimant, a hearing on the trustee's objection was held on January 31, 1995, attended by the trustee and counsel from the Office of the United States Trustee. Neither the debtors nor the claimant, who resides in North Carolina, was present.

This case was initially noticed to creditors as a "no-asset" case, and creditors were instructed not to file claims. On September 19, 1992, the Clerk gave notice to creditors of a possible dividend and of the requirement for filing claims within 90 days of the date of the notice. It appears that Mrs. Joseph mailed her supporting documentation separately from the proof of claim form, with the documentation being file-stamped October 7, 1992, and the proof of claim form October 8, 1992. In any event, it is undisputed that the proof of claim was timely filed.

The thrust of the trustee's objection is that the basis for the claim is unclear and not adequately substantiated. And, indeed, the proof of claim and the documents submitted in support of it are somewhat confusing. The stated basis of the claim is "Loss of property jointly owned with above debtor." A statement attached to the proof of claim form provides the following additional explanation:

Property located at 905 Clay Street in Franklin, Virginia, and jointly owned by my sister, Harriet Bradshaw and myself, Florence E. Joseph was used by my sister as collateral for a loan through Sovran Bank. My understanding was that only her portion was to be used to secure the loan, but found out at the time of the bankruptcy petition that my half was also used. The balance owed to me at the time this property was taken by Sovran Bank was $23,500.

Attached to and made a part of the claim are two documents, obviously not prepared by an attorney, which attempt to memorialize the transaction. The first, dated May 21, 1986, is addressed to Mrs. Joseph and signed by Harriet E. Bradshaw. It recites in pertinent part:

This is to verify that the Money Deed of Trust to the property located at 905 Clay Street in Franklin, Virginia, of which I am one-half owner with the above listed party owning the other one-half is being used as collateral to secure a loan for my business, Chocolates, Ltd with the following agreements:

1) Only my share of this note is being used — the balance as of May 1986 is $53,562.00 — my share being one-half of this amount.

* * *

4) You will not be held responsible for this debt in any manner. Your signature is necessary in order to have the document released for use as collateral based on my share of ownership.

The second document, dated January 2, 1991, is entitled "Agreement between: Harriet E. Bradshaw and Florence A. Joseph." It recites:

The deed of Trust Note offered to Sovran Bank, Lot #9 in subdivision of J. L. Camp Home Place in Southampton County, Virginia, on June 6, 1986 in the amount of $56,000.00 as collateral for a loan obtained for Chocolates, Ltd. by Harriet E. Bradshaw and Carol A. Frymyer is owned jointly by Harriet E. Bradshaw and her sister Florence A. Joseph.

That I, Harriet E. Bradshaw, in the event of loan default, do hereby give, grant, bargain, sell and convey unto Florence A. Joseph, real estate located in Franklin, Virginia, Southampton county in the amount based on the balance of the loan at the time of default. This will be one-half the value of this note, and the real estate to be conveyed will be based on the fair market value of the properties at the time a default should occur.

The trustee represented that he attempted, without success, to obtain from Mrs. Joseph some indication of value, even a tax assessment, for the property at 905 Clay Street, and that, without such an indication of value, it was impossible to determine what loss, if any, Mrs. Joseph suffered as a result of Sovran Bank taking the property. The United States Trustee represented that his office, in an effort to assist in resolving the matter, had communicated by telephone with Sovran Bank, and had received in response only a singularly unhelpful hand-written note stating:

RE: Florence Joseph.

There was no appraisal done on Florence's mother's house the bank took the property as collateral. Florence said this needed to be in writing.

The Court, in an effort to cut through some of the confusion, obtained from the Office of the City Assessor, Franklin, Virginia, certain information-of which the Court takes judicial notice under Fed.R.Evid. 201(b) and (c) — from the public assessment records. The property at 905 Clay Street, Franklin, Virginia, is listed as being owned, since 1983, by Benjamin B. and Joan H. Powell. The prior owners of the property were Florence Johnson and Harriet Bradshaw, and the price at which they reportedly sold the property to the Powells was $96,000.00. The short legal description of the property on the assessor's records is Camp Homeplace Plat Lot 9. The property was assessed in 1991 for real estate tax purposes at $124,900.00.

The confusion in this case arises from the claimant's statement that her claim is predicated on the "loss of property jointly owned with above debtor" and her explanation that " Property located at 905 Clay Street in Franklin, Virginia, and jointly owned by my sister, Harriet Bradshaw and myself had been "used by my sister as collateral" for a loan from Sovran Bank. If, in fact, the real estate were the collateral, then, as the chapter 7 trustee correctly noted, the claimant's loss would have been the fair market value of her one-half interest in the property. But a careful reading of the May 21, 1986 and January 2, 1991 agreements leads inescapably to the conclusion that it was not the real estate itself that was pledged to Sovran Bank but rather a jointly-held promissory note — presumably a seller take-back — secured by a deed of trust against the real estate. This would be consistent with Mrs. Florence's explanation attached to the proof of claim that "[t]he balance owed to me at the time this property was taken by Sovran Bank was $23,500.00" and is further consistent with the debtors' schedules, which list Sovran Bank, N.A. as a secured creditor with a claim in the amount of $65,546.13, and with the collateral being described as "Note with a current balance of $47,000.00".

It is impossible to tell from the information before the Court precisely what happened with respect to the deed of trust note which Sovran Bank held as collateral — i.e., whether only the obligation owed by Mrs. Bradshaw to the Bank went into default, and the Bank simply applied the note owned by her and Mrs. Joseph in satisfaction of the debt to the Bank, or whether in addition the note pledged as collateral also went into default and the Bank foreclosed against the real estate. In either event, however, the measure of Mrs. Joseph's loss would be her one-half share of the balance due on the pledged note at the time the Bank applied it to Harriet Bradshaw's debt. In her proof of claim, the claimant states that the balance due her was $23,500.00. As noted above, this is consistent with the debtors' schedules, which reflect a balance of $47,000.00 on the note held by Sovran Bank as collateral (one-half of $47,000.00 being $23,500). Under Fed.R.Bank.P. 3001(f), a proof of claim executed and filed in accordance with the Federal Rules of Bankruptcy Procedure "shall constitute prima facie evidence of the validity and amount of the claim." The chapter 7 trustee offered no evidence to rebut the prima facie showing arising from the filing of the claim, and, as noted above, while the statement of the claim is at best inartful and in a number of respects confusing, the essential basis of the claim is clear enough for the Court to rule on its validity. Based on the documentation attached to the proof of claim, the schedules filed in this case, the assessment records of the City of Franklin, Virginia, and the evidentiary effect under F.R.Bankr.P. 3001(f) of a properly executed and filed proof of claim, the Court concludes that the claim is valid and should be allowed.

Although the claim was filed as "secured," the proof of claim contains no evidence of any perfected security interest. The January 2, 1991 Agreement contains language which could be construed as an executory grant of a security interest in the other parcels of real estate in Franklin, Virginia owned by Mrs. Bradshaw, but the Agreement does not appear to have been recorded in the land records. For that reason, any such security interest is unenforceable against the bankruptcy trustee, and the claim can be allowed only as an unsecured claim.

For the foregoing reasons, an order will be entered overruling the trustee's objection and allowing Mrs. Joseph's claim in the amount of $23,500.00.

To avoid any potential confusion on the part of the creditor, the Court notes that the allowance of the claim in the amount of $23,500.00 does not mean that Mrs. Joseph will receive that sum. It means only that she will be entitled to share, pro rata, in whatever funds are available to pay allowed unsecured claims in this case. The chapter 7 trustee's final report has not been filed, but it would appear, based on other pleadings in the file, that the total sum available for distribution to all unsecured creditors will probably not exceed $10,000.00. Ten proofs of claim (including Mrs. Joseph's) have been filed in the aggregate amount of $82,272. It seems clear, therefore, that allowed unsecured claims will be paid at substantially less than 100 cents on the dollar.