In Re Geris
In re Samuel Joseph GERIS, Sr., Debtor.
SARATOGA GROUP, LTD.; R. Donald Honeycutt; Sidney Worley,
Jr., Plaintiffs-Appellants,
v.
PEOPLES NATIONAL BANK; Robert Lawrence, IV; Walker, Jones,
Lawrence, Payne & Duggan, P.C.; Martin & Walker,
P.C., Trustee; Samuel Joseph Geris,
Sr.; J. Frank Supplee, IV,
Defendants-Appellees.
No. 91-1856.
United States Court of Appeals,
Fourth Circuit.
Argued April 8, 1992.
Decided Aug. 19, 1992.
As Amended Sept. 28, 1992.
Paul Dennis Scanlon, Manassas, Va., argued, for plaintiffs-appellants.
Stephen Scott Mitchell, McKinley, Schmidtlein & Mitchell, Alexandria, Va., argued, Robert G. Mayer, Fairfax, Va., on brief, for defendants-appellees.
Before PHILLIPS and NIEMEYER, Circuit Judges, and WARD, Senior District Judge for the Middle District of North Carolina, sitting by designation.
OPINION
PHILLIPS, Circuit Judge:
The question on appeal is whether the 11 U.S.C. § 362(a) automatic stay provision of the Bankruptcy Code prevents foreclosure on a deed of trust under circumstances where the real estate involved is not owned by the debtor, but the debtor is liable for the indebtedness underlying the deed of trust. The bankruptcy court held and the district court affirmed that the automatic stay provision does not prevent foreclosure under these circumstances. We agree and affirm.I
In May 1987, appellant Saratoga Group, a Virginia corporation, purchased from Samuel Geris, one of the corporation's thrеe shareholders, 3.7293 acres of real property located in Manassas, Virginia, for $717,102.75. Saratoga Group financed the purchase of the Manassas property (1) by obtaining a $400,000 loan from appellee Peоples National Bank of Warrenton, Virginia, which was evidenced by a promissory note executed by Saratoga Group, endorsed by Geris and the other principals of the corporation, including appellants R. Donаld Honeycutt and Sidney Worley, Jr., on behalf of Saratoga Group, and secured by a deed of trust on the Manassas property; and (2) by executing a $317,102.75 note in favor of Geris, secured by a second deed of trust on the Manassas рroperty, due and payable in April 1988.
In August 1987, Geris pledged the $317,102.75 note to the Blakely Bank and Trust of Blakely, West Virginia. When Geris's obligation to Blakely Bank and Trust came due in the spring of 1988, payment was demanded of Saratoga Group on thе $317,102.75 note. Together, Geris and Saratoga arranged to borrow $300,000 from Peoples National Bank, which was paid over to Blakely Bank and Trust for release of the Saratoga Group note. Both Geris and Saratoga Grouр are obligated to Peoples National Bank for payment of this $300,000 loan, which was also secured by a deed of trust on the Manassas property.
In June 1988, Geris sold his interest in Saratoga Group to R. Donald Honeycutt and Sidney Wоrley, Jr., in exchange, inter alia, for their agreement to indemnify Geris against any liability he had incurred as guarantor or comaker of the debts of the corporation.
Geris filed a Chapter 11 petition in bankruptcy in May 1990. At about the same time, Saratoga Group fell into default on the original $400,000 obligation to Peoples National Bank. On July 27, 1990, the bank foreclosed on the deed of trust securing the obligation and sold the Manassas property at public auction. There were no bidders on the Manassas property other than Peoples National Bank, which bought the property for $300,000, an amount at which the property recently had been appraised.1
On November 9, 1990, Sаratoga Group and shareholders Honeycutt and Worley filed an adversary complaint in the bankruptcy court exercising jurisdiction over the Geris Chapter 11 proceeding. The complaint alleged that the foreclosure sale of the Manassas property violated the automatic stay provision of 11 U.S.C. § 362(a)2 and was therefore void. After motions to dismiss for lack of jurisdiction, failure to state a claim for relief, and lack of standing wеre filed by both Peoples National Bank and Geris, Saratoga Group amended its complaint. After hearing oral argument and granting Saratoga Group leave to amend its complaint, the bankruptcy court ruled that Sarаtoga Group had sufficient standing to raise the issue of whether the automatic stay provisions had been violated, but held that the automatic stay did not apply to Peoples National Bank's action against Saratogа Group as codebtor on the $400,000 note, nor against the bank's foreclosure sale of the Manassas property, which secured the debt, since the property was not owned by Geris, the debtor in bankruptcy, who alone was entitled to the protection of the 11 U.S.C. § 362(a) automatic stay, and then only with respect to property of the bankruptcy estate. The bankruptcy court accordingly dismissed the amended complaint pursuant to Fed.R.Civ.P. 12(b)(6) fоr failure to state a claim upon which relief could be granted.
Saratoga Group appealed the bankruptcy court ruling to the district court, which, after considering the briefs of the parties and oral argument, affirmеd the order of the bankruptcy court. This appeal followed.
II
Saratoga Group argues on appeal that even though Geris had no ownership interest in the Manassas property, Geris had a right to redeem the dеbt the property secured because he was an obligor on the $400,000 Saratoga Group note held by Peoples National Bank that was secured by a deed of trust on the Manassas property. Citing In re Bialac,
In the present case, Geris, the debtor, has no ownership interest in the collateral, the Manassas property. Saratoga Group argues, however, that under Virginia law, the interest of an obligor secured by a deed of trust on property he does not own is an equitable interest. Saratoga Group cites the venerable case of Gatewood v. Gatewood,
"It may be laid down as a rule of almost universal acceptance," the court went on to note in Gatewood, "thаt where there is a mortgage upon real estate, any person who has a right to redeem such mortgage, and actually does redeem it, is entitled for his indemnity to be subrogated to the lien of the mortgage." Id. And it is "well settled that а judgment creditor, a junior mortgagee, a purchaser of the equity of redemption, a tenant in dower, a tenant by courtesy, and indeed all persons having an interest in the estate, may insist upon the redemption of the mortgage in order to the due enforcement of their claims." Id. at 412. Gatewood added to the list of "persons having an interest in the estate" one who has an inchoate dower interest in property subject to a mortgage lien. Unlike Mrs. Gatewood, who had a protectible inchoate dower interest in her husband's property, Geris has no comparably cognizable property interest in the Manassas property. Saratoga Group suggests thаt such an interest might be the preservation of as much of the Geris bankruptcy estate as possible by limiting its exposure on the debt secured by the Manassas property. The argument is as follows: If the foreclosure sale stands, Geris, as an obligor on the underlying debt, is liable for the deficiency;3 if Geris had a right to redeem the debt, he could pay it off, which would entitle him to equitable assignment of Peoples National Bank's interest in the Manassas property, and could then sell the property at a price more favorable than that which foreclosure sales typically bring.
Certainly Geris has an interest, and a material one, in having the value of the Manassas property maximized, insofar as it bears directly on the size of the deficiency for which he may be obligated to Peoples National Bank. But if we were to accept this interest as sufficient to invoke in Saratoga's favor the automаtic stay provision of 11 U.S.C. § 362(a), we would be cutting off foreclosure rights of secured creditors in any property standing as security for a debt that happened to be guaranteed by a bankrupt. This cannot have been an intendеd function of the automatic stay provision, any more than it was intended to prevent a secured creditor from collecting from or foreclosing on the property of a bankrupt debtor's guarantors, Credit Alliance Cоrp. v. Williams,
The interest Geris has in seeing that the value of the property, when sold to satisfy the debt, is maximized, thereby limiting the exposure of the bankruptcy estate on the underlying debt, is far toо attenuated to warrant extending the automatic stay protections of the Bankruptcy Code to prevent Peoples National Bank from foreclosing on the Manassas property.4 Accordingly, we affirm the deсision of the district court affirming the bankruptcy court's dismissal of Saratoga Group's action to bring the foreclosure sale of the Manassas property under the automatic stay provision of 11 U.S.C. § 362(a).
AFFIRMED.
Notes
In 1990, the City of Manassas had аssessed the property at $966,200
In particular, Saratoga Group alleged that the foreclosure and sale violated 11 U.S.C. § 362(a)(6), which provides that a petition in bankruptcy operates as a stay of "any act to сollect, assess, or recover a claim against the debtor that arose before the commencement" of the bankruptcy proceeding
Peoples National Bank has filed a proof of claim agаinst Geris for this deficiency in Geris's Chapter 11 bankruptcy proceeding
We note that Geris already acted to limit his exposure on obligations of Saratoga Group when he obtained from the corporation an agreement to indemnify him against any such obligations in exchange for his interest in the corporation