Peter Mastan v. James Salamon, 854 F.3d 632

Jeanne Salamon bought property already subject to two liens and executed two notes in favor of seller Behrend: an All-Inclusive Note ($1,030,000) and a junior Note ($325,000).
Behrend later filed Chapter 11; Peter Mastan became trustee for Behrend’s estate and filed a timely proof of claim asserting the two liens on the Westlake Property.
The Salamons filed bankruptcy; the senior lienholder obtained relief from stay and conducted a non-judicial foreclosure sale that extinguished junior liens and transferred the property to the purchaser.
The foreclosure proceeds fully satisfied the All-Inclusive Note but left a deficiency on the junior Note; Mastan amended his claim as an unsecured deficiency for the remaining balance.
The Salamons moved to disallow the amended (deficiency) claim on the ground that Mastan no longer held a lien on “property of the estate,” so § 1111(b) could not convert a non-recourse claim into a recourse claim; the bankruptcy court and the BAP agreed.
The Ninth Circuit affirmed, holding that once the foreclosure extinguished the liens and the property ceased to be estate property, § 1111(b) no longer applied and the deficiency claim was disallowed under California law.

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether § 1111(b) allows a creditor whose non-recourse claim was secured by a lien at petition to treat it as recourse after a foreclosure sale extinguished the lien and removed the property from the estate	Mastan: rights fixed at petition date; § 502 fixes claim as of filing, so § 1111(b) applies because he held a lien when the petition was filed	Salamons: § 1111(b) requires a present “claim secured by a lien on property of the estate”; a foreclosure extinguished the liens and removed the property from the estate, so § 1111(b) is inapplicable	Court: Affirmed. § 1111(b) cannot be invoked once the claim ceases to be secured by a lien on estate property (foreclosure ended the lien), so no recourse claim exists

Law v. Siegel, 134 S. Ct. 1188 (Sup. Ct. 2014) (courts may not create non‑statutory exceptions to the Code)
Lamie v. U.S. Tr., 540 U.S. 526 (Sup. Ct. 2004) (apply statutory text unless result is absurd)
Tampa Bay Assocs., Ltd. v. DRW Worthington, Ltd., 864 F.2d 47 (5th Cir. 1989) (foreclosure extinguished lien so § 1111(b) inapplicable)
In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013) (§ 1111(b) requires a claim secured by a lien on estate property)
680 Fifth Ave. Assocs. v. Mutual Benefit Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 29 F.3d 95 (2d Cir. 1994) (precondition to § 1111(b) is lien on estate property)
In re Costas, 555 F.3d 790 (9th Cir. 2009) (bankruptcy law respects substantive state law rights regarding creditor remedies)