A mortgagee that obtained relief from the automatic stay and conducted a nonjudicial foreclosure sale of the real estate securing its claim subsequently filed a deficiency claim in the bankruptcy. Two other creditors objected on the grounds that it was not entitled to a deficiency claim since it did not comply with state law requirements.
The mortgagee, which was owed more than $6 million, obtained relief from the automatic stay as follows:
ORDERED that the automatic stay of 11 U.S.C. § 362(a) is hereby lifted to permit and authorize [the mortgagee] to pursue its rights and remedies under the terms of the Loan Documents and state law with respect to the Collateral, including, but not limited to, institution of foreclosure proceedings with respect to the Collateral.
The mortgagee foreclosed in a nonjudicial foreclosure sale. An affiliate was the winning bidder with a bid of $4.5 million.
Under state law, if real estate is sold at a nonjudicial foreclosure sale less than the secured debt:
[N]o action may be taken to obtain a deficiency judgment unless the person instituting the foreclosure proceedings shall, within 30 days after the sale, report the sale to the judge of the superior court of the county in which the land is located for confirmation and approval and shall obtain an order of confirmation and approval thereon.
Rather than seeking state confirmation and approval, the mortgagee filed an amended bankruptcy proof of claim for the remaining deficiency. Two creditors filed objections to the proof of claim, contending that the mortgagee was not entitled to a deficiency since it failed to seek and obtain confirmation and approval from the state court within 30 days after the sale.
As a procedural matter, the court noted that when there is a chapter 7 trustee, generally creditors can object to another creditor’s claim only if (1) the trustee refuses to pursue the objection after a demand to so and (2) the creditor obtains court authorization. However, the trustee did not object, so the court did not address the issue.
Turning to substantive matters, as a preliminary matter the court noted that even if the report was not filed with the state court a creditor could continue to pursue its collateral. The only thing that would be blocked would be an in persona in and m claim against the debtor.
In response to the objecting creditors’ claim that the mortgagee was required to report the foreclosure sale to state court, the mortgagee contended that it was prevented from doing so by the automatic stay. The court sided with the mortgagee. In Citing with approval another case, the court interpreted its stay relief language as permitting only action against the debtor’s property. In an Thus, the court agreed that the automatic stay prevented the mortgagee from requesting state court approval.
However, that was not the end of the matter. Rather, the court raised the question of whether a bankruptcy court could consider and resolve applicable issues. In fact the state supreme court had concluded that the state foreclosure statute could not deprive federal courts of jurisdiction. Thus will a federal court continued to have jurisdiction to determine the amount of a claim at issue in a bankruptcy case, including confirming a foreclosure sale.
In deciding that a bankruptcy court could substitute for the state court in making a foreclosure sale determination, the court concluded that (1) determination and allowance of claims is a core proceeding that is within the original jurisdiction of the bankruptcy court, and besides (2) a federal court proceeding should be sufficient to satisfy the state statutory purpose, which was to “protect debtors from deficiency judgments when the forced sale of their property brings less than fair market value.”
Thus, the court denied the creditors’ objections without prejudice to objections by the trustee or other proper party on the merits of the proof of claim.
It is easy to envision a decision that reached the opposite conclusion – namely something to the effect that a bankruptcy court generally looks to state law to define the rights of parties. In this case state law decrees that a mortgagee is not entitled to assert a deficiency claim unless it timely requests and obtains authorization and approval from a state court within 30 days.
However, even that approach would not necessarily have given the objecting creditors a victory. As long as the automatic stay precluded the mortgagee from proceeding in state court, as noted in the opinion section 108 of the Bankruptcy Code tolls the running of limitations periods that would otherwise expire while the stay use in effect until 30 days after the case is dismissed or the stay is lifted.
Vicki R. Harding, Esq.
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