In re: James Harry Salamon Jeanne Fixler Salamon
CC-14-1334-PaKiTa
| 9th Cir. BAP | Apr 6, 2015Background
- Jeanne Salamon bought a 28-unit apartment building in 2009; purchase was financed by a wrap-around All Inclusive Note and Deed of Trust (AITD) and a separate Fourth Loan, both owed to entities controlled by Behrend.
- Behrend later filed bankruptcy; Peter Mastan became chapter 7 trustee of Behrend’s estate and asserted the estate’s beneficial interest in the loans/deeds of trust securing the Salamons’ Property.
- The Salamons filed chapter 11 in 2012. Mastan filed a secured proof of claim for the AITD and Fourth Loan; AWB (first lienholder) obtained relief from stay and foreclosed the Property, selling it at auction on March 13, 2013.
- Foreclosure produced surplus funds; Mastan received payment and amended his proof of claim as an unsecured claim for the remaining balance.
- The Salamons moved to disallow the amended claim under California anti-deficiency law (Cal. Civ. Proc. Code § 580b); Mastan argued § 1111(b)(1)(A) of the Bankruptcy Code converted his nonrecourse claim to recourse because the claim was secured by estate property as of the petition date.
- Bankruptcy court disallowed the amended claim; the BAP affirmed, holding § 1111(b) did not apply once the lien was extinguished by foreclosure and state anti-deficiency law barred the unsecured claim.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether § 1111(b)(1)(A) applies when a creditor’s claim was secured by a lien on estate property at filing but the lien was extinguished by foreclosure before allowance of the claim | Mastan: § 1111(b) looks to petition date; because the claim was secured by estate property at filing, it must be treated as recourse and state anti-deficiency law is preempted | Salamons: Foreclosure removed the Property from the estate and extinguished the lien; § 1111(b) no longer applies and California’s anti-deficiency statute bars the unsecured claim | Court: § 1111(b)(1)(A) requires the claim be "secured by a lien on property of the estate" when allowance is considered; after foreclosure the lien was gone, so § 1111(b) did not apply and the claim was disallowed under state law |
Key Cases Cited
- Tampa Bay Assocs., Ltd. v. DRW Worthington, Ltd., 864 F.2d 47 (5th Cir. 1989) (foreclosure that extinguishes a lien eliminates the § 1111(b) predicate and bars a deficiency claim)
- In re Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013) (§ 1111(b)(1)(A) applies only where the claim is secured by a lien on estate property)
- 680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. Co., 29 F.3d 95 (2d Cir. 1994) (same interpretation: § 1111(b)’s sole precondition is a claim secured by a lien on property of the estate)