United States Court of Appeals, Eleventh Circuit

839 F.
2d 1517
Bankr. L. Rep. P 72,243

In re FIDELITY STANDARD MORTGAGE CORP., f/k/a
S.B.I.
Investors Corp., and First Fidelity Financial
Services, Inc., Debtors.
Rebecca DARWIN, a/k/a R.R. Darwin, Plaintiff-Appellant,
v.
Jeffrey H. BECK, Successor Trustee to A.W. Beck, DefendantAppellee.
No. 87-5007.
United States Court of Appeals,

Eleventh Circuit.
March 17, 1988.
1
Reggie D. Sanger, Ft. Lauderdale, Fla., for plaintiff-appellant.
Chad P. Pugatch, Ft. Lauderdale, Fla., for defendant-appellee.
Appeal from the United States District Court for the Southern District of
Florida.
Before JOHNSON and ANDERSON, Circuit Judges, and ATKINS * , Senior

District Judge.
ATKINS, Senior District Judge:
Mrs. Rebecca Darwin appeals a district court affirmance of the bankruptcy

court's ruling that she is not entitled to any interest in, or proceeds from two
mortgages because the mortgages are the property of the bankrupt estate. WE
AFFIRM.
BACKGROUND
Mrs. Darwin was investing in fractionalized interests in mortgages through the
6
debtors, First Fidelity Financial Services, Inc. and Fidelity Standard Mortgage
Corporation. Funds she advanced for this purpose were retained in escrow for
eventual placement by the debtors into various mortgage interests. She received
interest on these funds from the time they were placed with the debtors,
regardless of whether they were held in escrow or they were invested in a
mortgage. As mortgages were paid off, or at the request or agreement of an
investor, funds would be "rolled out" or "rolled over" into either another
mortgage or into the escrow account.
Mrs. Darwin held interests in many of the debtors' mortgages. She received
monthly checks from the debtors reflecting the interest payments on her
mortgage interests and funds held in escrow. The investments were described
on the check stubs. Where funds had been invested into a mortgage, the
investments would be designated by the name of the mortgagor, while the
terms "interest," "investment," or "escrow" were used interchangeably to
designate funds held in escrow. The bankruptcy court found that Mrs. Darwin
took great care each month to clip and retain the check stubs in order to confirm
the status of her investments. Findings of Fact and Conclusions of Law at 2.
Among Mrs. Darwin's investments were the "Wright" mortgage and the "Ivy"
mortgage. Her August 1981 check stub read as follows:In November 1981, the
name "Wright" was not included on the check stub, and was replaced with the
words, "Interest on $21,000.00."
In December 1981 the name "Ivy" was not included on the check stub, and was
replaced with the word "Investment."
10
Mrs. Darwin's check stubs contained neither the name "Wright" nor the name
"Ivy" after December 1981. Records of the debtors from the same time period,
introduced into evidence in the bankruptcy court, indicate that Mrs. Darwin's
interests in these mortgages had been converted to escrow.
11
The debtors filed voluntary Chapter 7 petitions on April 9, 1982. The

proceedings were subsequently converted to Chapter 11 reorganization, and
then reconverted to Chapter 7 liquidation after that. As a result of the
bankruptcy proceedings, investors holding specific mortgage interests were
entitled to retain their interest in them, while those with funds in escrow were
treated as general unsecured creditors. Mrs. Darwin did not object to the roll out
of the Wright and Ivy mortgages until after the debtors' Chapter 7 filing, and its
subsequent conversion to Chapter 11 reorganization.
12
Mrs. Darwin thereafter engaged in a series of transactions with the debtor in

possession in which she sought to regain her interests in the Wright and Ivy
mortgage. She reassigned her interest in the Wright mortgage to the debtors. A
dispute arose concerning the Ivy mortgage. Mrs. Darwin had signed a
Satisfaction of Mortgage on the Ivy mortgage on November 15, 1981, around
the time of the roll out. The debtors, however used reassignments and
satisfactions interchangeably, and asserted that the Satisfaction has been
erroneously executed. The parties agreed to execute another Satisfaction of this
mortgage in order to facilitate its impending pay off, and to place the proceeds
in escrow pending resolution by the bankruptcy court of the dispute. Finally, on
December 10, 1982, Mrs. Darwin and the debtor in possession executed a
Letter Agreement, in which the debtor in possession agreed to reassign her
interest in the Wright mortgage, and in which the foregoing series of
transactions was detailed. It is interesting to note that the Letter Agreement
provides that Mrs. Darwin was to furnish the debtor in possession with an
"Assignment" of the Ivy mortgage.
13
1) You will furnish us an Assignment of Mortgage back to Fidelity Standard

Mortgage Corp. on the Ivy investment.
14
2) At the time this loan is refinanced and we are funded, we will place in trust
with your attorney $9,918.24. This amount will be held in trust pending his
seeking clarification from the Court on your rights to this money.
15
3) The monies will be disbursed to you or back to First Fidelity when the
Court's decision is arrived at.
16
4) Simultaneously with funding of the Ivy mortgage, we will reassign you your
interest in the Wright mortgage.
THE ADVERSARY PROCEEDING

17
Mrs. Darwin commenced an adversary proceeding in bankruptcy court for

declaratory relief and specific performance in which she sought a reassignment
of her interest in the Wright mortgage and the turnover of the proceeds of the
Ivy mortgage held in escrow. The trustee argued, as he does here, that the
transactions show that Mrs. Darwin agreed to be rolled out of the two mortgage
interests into the general escrow fund. He argued that the reassignment of the
Wright mortgage and the satisfaction of the Ivy mortgage did no more than
administratively clear up what had been previously agreed to by Mrs. Darwin
by her acceptance of monthly interest checks. He further contended that the
Letter Agreement between Mrs. Darwin and the debtor in possession was
ineffective against him in his capacity as trustee post conversion to Chapter 7.
18
The bankruptcy court agreed and found that the interests in both mortgages
were the property of the bankrupt estate. It held that the "clear intent" of the
parties in the transaction reflects that Mrs. Darwin was rolled out of both
mortgages, and "consented to same by the informed receipt and cashing of the
monthly interest checks reflecting the change in status of these investments in
November and December of 1981." Findings of Fact and Conclusions of Law
at 4. In so holding, the bankruptcy court extended the standard articulated in In
re Fidelity Standard Mortgage Corp., 36 B.R. 496 (Bankr.S.D.Fla.1983), in
which the court held that the facts indicated that the assignment of a particular
mortgage interest was "sufficiently complete" to be protected by 11 U.S.C.,
section 541(d), so as not to become property of the estate. The bankruptcy court
reasoned that this "standard for measuring consent to an assignment provides
equally strong evidence of an intent to a transfer out of a particular investment."
Findings of Fact and Conclusions of Law at 5.
19
The bankruptcy court held that the Letter Agreement did not alter the fact that
Mrs. Darwin had already rolled out of both mortgage interests. As to the Ivy
proceeds, the court explained that the letter and circumstances made it clear
that the proceeds of the mortgage were to be held in escrow pending resolution
of the dispute concerning the ownership of the interest. "These issues have now
been resolved favorable to the Trustee and he is entitled to a release of the
proceeds of $9,000.00 into the general funds of the estate." Id. As to the Wright
reassignment, the court held that the agreement to reassign the Wright
mortgage was gratuitous and unenforceable against the Trustee, post
reconversion of the proceeding to Chapter 7, on three grounds.
20 agreement was without consideration and, to the extent that it constituted a

This
settlement of contested issues was not approved by the Court as required by the
applicable Bankruptcy Rules. The agreement to reconvey this interest would
likewise constitute an invalid post-petition transfer pursuant to 11 U.S.C. Sec.
549(a). It is further clear that the waiver of the debtor's rights after the
commencement of the case is not binding upon the estate or the Trustee pursuant to
11 U.S.C. Sec. 541(e). Under this principle, the Trustee may even reject a settlement
agreement. See, ex, Jenson v. Continental Financial Corporation, 591 F.2d 477 (8th
Cir.1979).
21
Id. at 5-6.
APPEAL TO THE DISTRICT COURT
22
The district court affirmed. It held that there was more than ample evidence to
support a finding that Mrs. Darwin had agreed to be rolled out of both the Ivy
and Wright mortgages in the general business practices of the Debtors, the
records of the debtors, Mrs. Darwin's dealings with the Debtors, her cashing of
checks in which interest on "investment" or "interest" was indicated at rates
different from the yields on the mortgages, and her provision of a satisfaction of
the Ivy mortgage. The district court identified as "key" to understanding the
Letter Agreement the erroneous execution of the first Satisfaction of the Ivy
mortgage.
23
When
the satisfaction was erroneously executed by [Mrs. Darwin], rather than an
assignment of the mortgage interest back to Debtors, the stage was set for the
erroneous filing of the satisfaction during the Chapter 11 phase. When the debtor in
possession sought to correct the record, a dispute arose, as evidenced by Exhibits 2
and 12 and testimony before the bankruptcy court, as well as the language of the
letter agreement. Given this evidence, the bankruptcy court correctly concluded that
the letter agreement was not in the ordinary course of business and thus required
court approval, see 11 U.S.C. Sec. 363, rendering the letter agreement unenforceable
against [the Trustee].
24
Opinion at unnumbered page 3. The district court found it unnecessary to reach

the alternative bases for the bankruptcy court's ruling, but noted that had the
Wright mortgage actually been reassigned to Mrs. Darwin, the reassignment
would have been a voidable post-petition transfer under 11 U.S.C. Sec. 549.
THE PRESENT APPEAL

25
The bankruptcy court's findings of fact shall not be set aside unless clearly
erroneous. Bankr.R. 8013. Our application of this standard of review is guided
by the principles set forth in State Farm Mutual Automobile Ins. Co. v. Fielder
(In re Fielder), 799 F.2d 656, 657 (11th Cir.1986).
26
[T]his
court as an appellate court gives deference to all findings of fact by the fact
finder if based upon substantial evidence, but freely examines the applicable
principles of law to see if they were properly applied and freely examines the
evidence in support of any particular finding to see if it meets the test of
substantiality.
The Roll Out
27
Title 11 U.S.C., section 541(d) excludes from the bankruptcy estate an

investor's interests in mortgages:
Property in which the debtor holds, as of the commencement of the case, only legal
28
title and not an equitable interest, such as a mortgage secured by real property, or an
interest in such a mortgage, sold by the debtor but as to which the debtor retains
legal title to servicing of such mortgage or interest, becomes property of the estate
under subsection (a) of this section only to the extent of the debtor's legal title to
such property, but not to the extent of any equitable interest in such property that the
debtor does not hold.
29
(Emphasis added.) The legislative history indicates that the statute is intended
to protect the secondary mortgage market:
30 committee notes that in secondary mortgage market transactions the parties may
The
characterize their relationship as one of trust, agency, or independent contractor. The
characterization adopted by the parties should not affect the statutes (sic) in
bankruptcy of bona fide secondary mortgage market purchases and sales.
31
S.Rep. No. 95-989, 95th Cong., 2d Sess. 84, reprinted in 1978 U.S.Code Cong.
& Admin.News 5787, 5870.
32
The determination of whether the mortgage interest is the property of the

investor or the bankruptcy estate turns on whether the interest has been sold to
the investor prior to the commencement of the case. In In re Fidelity Standard
Mortgage Corp., 36 B.R. at 500, the court held that this determination is a
question of fact: "If, on the other hand, the particular facts represent a
transaction in progress, with no sale complete ... it will not be protected by Sec.
541(d)." The court found that assignment of mortgage interests to three
investors were sufficiently complete to be afforded section 541(d) protection by
formulating the following standard in accordance with its legislative purpose:
33the investor and debtors agreed on what specific mortgage interest was to be
If
assigned to the investor, with the debtors' assent being evidenced by any writing
which links the investor and the specific mortgage interest; if the investor paid in
full for the mortgage interest; and if that mortgage was in existence (having been
funded and not repaid or foreclosed); then the [investors'] interests in the various
mortgages should be protected under Sec. 541(d).
34
Id.
35
We hold that the bankruptcy court's findings that Mrs. Darwin's funds had been
rolled out of both the Wright and Ivy mortgages prior to the commencement of
the case, and that she consented to the roll out, are supported by substantial
evidence, and that therefore the finding of the bankruptcy court was not clearly
erroneous. It was the usual business practice of the debtors to distinguish

between funds invested in specific mortgages and those retained in escrow on
check stubs sent to investors along with their monthly interest checks. Funds
invested into mortgages were designed by the name of the mortgagor, while
funds retained in escrow were referred to interchangeably as "interest,"
"investment," or "escrow." It was also the usual practice of the debtors to roll
funds out of specific mortgages when the mortgages had been paid off, or at
the request or agreement of the investor. The debtor's records indicate that Mrs.
Darwin's funds in the Wright and Ivy mortgages were rolled out of the
investments, and into the general escrow funds in November and December
1981, respectively. Consistent with the records, Mrs. Darwin's check stubs
indicated that payments were made on the Wright mortgage until November
1981 and on the Ivy mortgage until December 1981. Thereafter, the stubs
indicated a change by the substitution of the words "interest" or "investment"
for "Wright" and "Ivy." Mrs. Darwin carefully clipped and retained the check
stubs prior to cashing the monthly interest checks in an effort to monitor the
status of her investments. She did not object to the change in the designations
on her check stubs until after the bankruptcy petitions were filed. This evidence
supports the bankruptcy court's finding that Mrs. Darwin understood and
agreed to the roll out of her Wright and Ivy investments, and that this occurred
prior to the commencement of the bankruptcy proceedings. Under these
circumstances, we hold that Mrs. Darwin's claimed interests in these mortgages
are the property of the bankruptcy estate in accordance with section 541(d).
The Letter Agreement
36
Having determined that the Wright and Ivy mortgage interests were the
property of the bankruptcy estate, the bankruptcy court correctly determined
that they could not be properly transferred pursuant to the Letter Agreement
without court approval. 11 U.S.C.A. Sec. 363(b) (1979). Section 363(b)
provides: "The trustee, after notice and hearing, may use, sell, or lease, other
than in the ordinary course of business, property of the estate." The bankruptcy
court reasoned that the Letter Agreement represented a settlement of contested
issues. Implicit in this determination, as the district court acknowledged, is a
finding that the execution of the Letter Agreement was not in the ordinary
course of business, and therefore was not enforceable against the trustee, post
re-conversion to Chapter 7.
37
We agree with the bankruptcy and district courts. We hold that the transfer of
property of the estate for purposes of settling a dispute is not within the
ordinary course of business of the debtor, and that it requires the approval of
the court pursuant to section 363. The Letter Agreement is therefore not
enforceable.
38
Mrs. Darwin had signed a Satisfaction of Mortgage on the Ivy investment on

November 15, 1981. When she sought to collect on this document after the
bankruptcy proceedings had begun, she was informed by the debtors that a
satisfaction had been erroneously executed, and a dispute arose between the
parties as to her interest in the Ivy mortgage. The parties agreed to execute
another satisfaction of the mortgage so that it could be paid off, and to place the
proceeds in escrow pending resolution of the dispute by the court. They
executed the Letter Agreement to memorialize the terms of their settlement,
and included a provision for the reassignment of the Wright mortgage to Mrs.
Darwin. As such, the agreement represents the settlement of contested issues,
and it was not within the debtors' ordinary course of business. Its terms are not
enforceable against the trustee, and therefore do not alter the roll out and Mrs.
Darwin's consent to it. Approval of the bankruptcy court as to each purported
transfer set forth in the agreement is required by Section 363, but was not
obtained.
39
Having determined that the Letter Agreement is not enforceable, we find it

unnecessary to reach the bankruptcy court's alternative holdings.
40
AFFIRMED.
Honorable C. Clyde Atkins, Senior U.S. District Judge for the Southern District
of Florida, sitting by designation

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839 F.

Bankr. L. Rep. P 72,243

United States Court of Appeals,

Reggie D. Sanger, Ft. Lauderdale, Fla., for plaintiff-appellant.

Chad P. Pugatch, Ft. Lauderdale, Fla., for defendant-appellee.

Before JOHNSON and ANDERSON, Circuit Judges, and ATKINS * , Senior

Mrs. Rebecca Darwin appeals a district court affirmance of the bankruptcy

The debtors filed voluntary Chapter 7 petitions on April 9, 1982. The

Mrs. Darwin thereafter engaged in a series of transactions with the debtor in

1) You will furnish us an Assignment of Mortgage back to Fidelity Standard

THE ADVERSARY PROCEEDING

Mrs. Darwin commenced an adversary proceeding in bankruptcy court for

20 agreement was without consideration and, to the extent that it constituted a

APPEAL TO THE DISTRICT COURT

Opinion at unnumbered page 3. The district court found it unnecessary to reach

THE PRESENT APPEAL

Title 11 U.S.C., section 541(d) excludes from the bankruptcy estate an

The determination of whether the mortgage interest is the property of the

erroneous. It was the usual business practice of the debtors to distinguish

Mrs. Darwin had signed a Satisfaction of Mortgage on the Ivy investment on

Having determined that the Letter Agreement is not enforceable, we find it

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