Omni Enterprises, Inc.
MEMORANDUM ON TRUSTEE‘S OBJECTION TO AMENDED PROOF OF CLAIM NO. 41
Debtor Omni Enterprises, Inc. (“Omni“) borrowed money from creditor Alaska Growth Capital BIDCO, Inc. (“AGC“) under two business loan agreements secured by its personal and real property. After Omni filed its chapter 7 bankruptcy petition, AGC timely filed Proof of Claim No. 41 in Omni‘s case. AGC stated an undersecured debt comprised of a secured and unsecured claim. The estate paid off one of the loans when it sold AGC‘s collateral. AGC subsequently obtained relief from the automatic stay to foreclose on the deed of trust securing the remaining loan. The foreclosure sale proceeds were insufficient to pay off the remaining balance owed to AGC.
The chapter 7 trustee, Nacole Jipping, now objects to AGC‘s proof of claim. She argues that any unsecured claim for the remaining deficiency is barred by Alaska‘s anti-deficiency statute. Her argument is contrary to a longstanding, but seldom referenced local decision. While there is considerable appeal to simply reading the statue to bar AGC‘s deficiency claim post-foreclosure, upon further examination the issue presented is more nuanced. Alaska does not terminate an undersecured creditor‘s debt upon foreclosure. Rather, it precludes the creditor from taking further action to recover any deficiency after a nonjudicial foreclosure. But in this instance AGC filed its unsecured claim against Omni‘s bankruptcy estate prior to foreclosure. Under
FACTS
Omni filed its chapter 7 petition on March 31, 2015. The case was originally designated as a no asset bankruptcy. Consequently, the court did not set a deadline for filing proofs of claim at that time.
On April 9, 2015, the trustee filed her notice of asset determination in the case, triggering the establishment of a claims deadline. ECF No. 20. The court sent notice to creditors that proofs of claim were to be filed by July 8, 2015. ECF No. 21. Shortly afterwards, the trustee noticed motions to sell a vehicle and three lots located in Big Lake, Alaska (the “Big Lake Property“). See ECF Nos. 22-27.
On April 23, 2015, AGC moved for relief from the automatic stay to foreclose its interests in various personal property, as well as real property in Dillingham, Alaska
Omni entered into a second Business Loan Agreement, dated September 3, 2013, under which it could borrow an additional $365,000.00 from AGC. This loan also was secured against Omni‘s personal property. AGC‘s motion for relief from stay did not mention any deeds of trust securing the second loan, but in response to the Trustee‘s motion to sell the Big Lake Property it asserted a lien against that property. The estate recognized AGC‘s lien and paid off the debt on the second loan from the sale of the Big Lake Property. ECF No. 96.
Roughly a week after approving the sale of the Big Lake Property, the court granted AGC‘s motion for relief from the automatic stay. ECF No. 72. AGC then commenced a nonjudicial foreclosure on its deed of trust covering the Dillingham Property.
On June 17, 2015, AGC timely filed Proof of Claim No. 41. AGC stated a claim in the total amount of $2,582,615.69 for monies loaned. AGC bifurcated its claim into secured and unsecured components, though it stated only that the value of the collateral was “to be liquidated.” It also stated an unsecured claim for the “full amount of [the] deficiency.”
The foreclosure sale of the Dillingham Property took place on September 30, 2015, to a third party. The details of the foreclosure sale are lacking. But it is clear that the sale price did not satisfy the first loan balance. On September 1, 2016, AGC amended its proof of claim to state an unsecured claim in the amount of $1,612,687.66, again for monies loaned. AGC did not include any calculation of the claim.
The estate spent much of the next couple of years liquidating its assets, which were primarily comprised of litigation claims. Most of the estate‘s time was devoted to litigating avoidance claims against First National Bank Alaska (“FNBA“). The estate sought to avoid a prepetition offset for approximately $1.3 million under
On January 24, 2019, AGC filed its Motion to Allow Amended Proof of Claim (ECF No. 189) (“Motion to Allow“). At the same time, it also filed a second amended proof of claim in the amount of $2,009,054.72. AGC asserted for the first time a secured interest in the estate‘s recovery from FNBA in the amount of $1,612,687.66. AGC additionally asserted an unsecured claim for $486,367.06.
The trustee opposed AGC‘s Motion to Allow, and further objected to the allowance of any unsecured claim for AGC. ECF No. 190. The trustee argued that Alaska‘s anti-deficiency statute precluded AGC from recovering anything on the balance of its claim after foreclosure of the Dillingham Property. FNBA joined in the
On February 26, 2019, AGC withdrew its Motion to Allow, effectively conceding that it did not have a secured interest in the estate‘s avoidance claims against FNBA. ECF No. 194. However, briefing and oral argument on the claim objection proceeded. See ECF Nos. 193, 195, and 196. As a result, the only matter remaining is whether AGC holds an enforceable unsecured claim against the bankruptcy estate.1
ANALYSIS
The claims allowance process is governed by
the court, after notice and a hearing, shall determine the amount of such claim in lawful currency of the United States as of the date of the filing of the petition, and shall allow such claim in such amount, except to the extent that—
(1) such claim is unenforceable against the debtor and property of the debtor, under any agreement or applicable law for a reason other than because such claim is contingent or unmatured....
The trustee does not dispute the basis or amount of AGC‘s deficiency claim. Rather, she argues that Alaska‘s anti-deficiency statute,
When a sale is made by a trustee under a deed of trust, as authorized by AS 34.20.070 - 34.20.130, no other or further action or proceeding may be taken nor judgment entered against the maker or the surety or guarantor of the maker, on the obligation secured by the deed of trust for a deficiency.
Importantly,
extinguished for all purposes.” Fireman‘s Fund Mortg., 838 P.2d at 794 (emphasis in original). Rather,
the statute‘s plain language supports the conclusion that the loan obligation is not completely extinguished as a matter of law at the time of a non-judicial foreclosure sale. The statute contemplates the survival of a loan “obligation” following the sale, but precludes the lender from seeking any “deficiency” on this obligation from the debtor or from the debtor‘s guarantor.
Thus, in Hull v. Alaska Fed. Sav. & Loan Ass‘n of Juneau, 658 P.2d 122 (Alaska 1983), the Alaska Supreme Court held that a creditor could retain two pledged savings accounts after it nonjudicially foreclosed its deed of trust. The Court held that application of the accounts to the debts did not run afoul of the statutory prohibition against any “other or further action or proceedings.” Rather, it construed that phrase to mean “a form of litigation or some type of in-court proceeding.” Id. at 125. In reaching its decision, the Court agreed with the superior court‘s observation that Alaska‘s anti-deficiency statute applied to “additional legal actions or court proceedings,” and that no such actions had been brought by the defendants. Id. (emphasis in original).
Nor does Alaska impose a “one-action rule” to compel a secured creditor to seek recovery only against its collateral.3 In Moening v. Alaska Mut. Bank, 751 P.2d 5 (Alaska
1988), the Alaska Supreme Court rejected the debtors’ efforts to require their secured creditor to proceed against the collateral rather than by an action on the underlying note. Reviewing the applicable Alaskan statutes governing the rights of creditors secured by deeds of trust against real property, the Court concentrated on a secured creditor‘s right to bring an action on the debt under
During or after the pendency of an action for the recovery of a debt secured by a lien mentioned in AS 09.45.170, an action cannot be maintained for the foreclosure of the lien unless judgment is given in that action that the plaintiff recover the debt or a part of it, and an execution issued in the action against the property of the defendant is returned unsatisfied in whole or in part.
Moening, 751 P.2d at 8 (quoting
The clear implication of [AS 09.45.200] is that the creditor may sue directly on the note without first foreclosing the property. Moreover, if the creditor prevails in the legal action and cannot satisfy the judgment against the debtor‘s personal property, it may then maintain an action for judicial foreclosure of the security.
Id. (emphasis in original).
The Court then considered the impact of
The anti-deficiency statute prohibits a deficiency judgment following exercise of a power of sale; however, it does not preclude the exercise of a power of sale following a judgment on the note.... Under the common law, a prior suit on the note does not preclude subsequent judicial or nonjudicial foreclosure of the security. The doctrine of election of remedies does not apply, because foreclosure and a suit on the note are not inconsistent remedies.
We conclude that the statutes permit a secured creditor initially to ignore the security and sue on the note. Once the creditor obtains a personal judgment which is returned unsatisfied in whole or in part, the creditor may judicially or nonjudicially foreclose the security.
Id. (internal citations omitted).
Not much case law has developed addressing the application of
Judge MacDonald held that despite the prohibition against any post-foreclosure action imposed by
While it is indeed ironic that a secured creditor will receive more in bankruptcy than it would at state law, such a result is compelled by the language of the federal statutes. Even though there is explicit state authority forbidding a deficiency judgment after a foreclosure, and even though the creditor has non-judicially foreclosed post-petition, federal law controls the date of establishment of claims. Federal law supersedes any inconsistent provisions of state law pursuant to the supremacy clause of Art. 6, [§] 2 of the Constitution. The controlling date for determination of the amount of the unsecured claim is the date of the filing of the petition. The fact that the creditor later exercised its right to nonjudicial foreclosure is irrelevant.
Judge MacDonald pointed out, however, that under
The trustee notes that the lone bankruptcy citation in Allard is to In re Hougland, 886 F.2d 1182 (9th Cir. 1989), a chapter 13 case in which the Ninth Circuit allowed the debtor to strip down a deed of trust claim into a secured and unsecured claim within his chapter 13 plan. As correctly noted by the trustee, in Nobelman v. Am. Sav. Bank, 508 U.S. 324 (1993) the Supreme Court overruled such lien stripping of deeds of trust against their residences by debtors through chapter 13 plans. See also Dewsnup v. Timm, 502 U.S. 410 (1992) (chapter 7 debtor could not strip down deed of trust). The trustee appears to contend that when the Supreme Court overruled Hougland in Nobelman, it necessarily overruled Allard as well. The court disagrees.
Allard reasoned that the creditor held both a secured and unsecured claim as of the petition date, and that
Instead, the court finds the reasoning in In re Ricks, 2010 WL 4257598 (Bankr. D. Idaho 2010) to be persuasive. There, the Idaho bankruptcy court addressed the chapter 7 debtor‘s claim objection to his secured creditor‘s bifurcated proof of claim. The creditor in Ricks was secured by a deed of trust against two parcels of real property. Id. at *1. The creditor filed a total claim for $1,162,847.98. The creditor listed its secured claim at $990,000.00, and the remaining balance of $175,858.19 as unsecured. Id. The debtor objected to the unsecured claim arguing that “before any unsecured claim may be asserted in relation to a debt secured by real property, Idaho law requires completion of a state court deficiency action.” Id. The court explained
Relying upon
Here, when Debtor‘s bankruptcy petition was filed, there had been no foreclosure sale on Creditor‘s deed of trust on the Property, no deficiency action, and no determination by the state court that any portion of the claim was unenforceable. Simply put, in this case, Idaho‘s deficiency statute did not render Creditor‘s claim unenforceable as of the date of Debtor‘s petition because none of the prerequisites for a deficiency determination had occurred at that time.
Because applicable state law did not preclude the creditor‘s claim when filed, the court determined that the claim was “allowed” for purposes of
Section 506(a) bifurcation is allowed in chapter 7 cases, and creditors are not required to first obtain a non-bankruptcy deficiency judgment in order to bifurcate a claim into secured and unsecured parts. § 103(a) (providing that the provisions of chapter 5 of the Code apply in cases under chapter 7); Dewsnup v. Timm, 502 U.S. 410, 413 (1992) (recognizing that § 506(a) bifurcation may occur in a chapter 7 case); see, e.g., In re Gangestad, 358 B.R. 394, 396 (Bankr. D. Or. 2006) (quoting In re Costello, 184 B.R. 166, 171 (Bankr. M.D. Fla. 1995)) (“[In] a Chapter 7 case, ‘[t]here is no requirement that the creditor first obtain a deficiency judgment in the non-bankruptcy forum as a prerequisite for bifurcating a claim into a secured and unsecured part.‘“). Creditor‘s bifurcation of its claim into secured and unsecured claims was, therefore, appropriate.
The analysis in Ricks is equally applicable here. As of the petition date, AGC held a valid undersecured claim against Omni. AGC timely filed its proof of claim against the bankruptcy estate. The trustee has not identified any reason under Alaska law why the claim was not valid as of Omni‘s petition date, or when filed.
Both parties direct the court‘s attention to Pierce v. Carson (In re Rader), 488 B.R. 406 (B.A.P. 9th Cir. 2013), where a secured creditor sought relief from the automatic stay in the debtor‘s chapter 7 bankruptcy to conduct a non-judicial foreclosure sale of Arizona real property. After obtaining relief from stay, but before conducting the foreclosure sale, the creditor timely filed its proof of claim in the bankruptcy court. Based upon its valuation of the collateral, the creditor listed its secured claim at $370,000.00, and an unsecured claim for $369,100.61. Id. at 409. The secured creditor subsequently purchased the property at foreclosure for $370,000.00. Id. The trustee objected to the creditor‘s remaining unsecured claim, arguing that it was barred under Arizona‘s anti-deficiency statute.
Specifically,
affirmed. The BAP explained that the creditor did not obtain relief from the automatic stay to pursue a deficiency action, and therefore, was prohibited from proceeding with any such action within the 90-day period under Arizona law. Id. at 412-13. Additionally, after debtor received her discharge, the discharge injunction permanently prohibited the creditor from pursuing a deficiency action. Id. at 415. The BAP therefore concluded that Arizona state law was preempted by the Bankruptcy Code, thereby obviating the creditor‘s obligation to comply with applicable Arizona law:
[T]he automatic stay and the discharge injunction acted as a legal bar to the [creditors] doing what A.R.S. § 33-814 required them to do. Thus, the Bankruptcy Code and A.R.S. § 33-814 are in conflict and the state law must yield. As a result, the [creditors] were not required to comply with A.R.S. § 33-814.
Id. (citations omitted). The BAP further reasoned that “[r]equiring the [creditors] to file a deficiency action pursuant to
The trustee distinguishes the allowance of the undersecured creditor‘s unsecured claim in Rader on the basis that unlike Arizona, Alaska does not permit an action for a deficiency judgment.5 She also argues that there is “no federal interest that requires that [a] deed of trust holder, who forecloses post-petition, be entitled to an unsecured
deficiency claim, where that same creditor would have had no such deficiency claim outside of bankruptcy.” ECF No. 196 at 5. The court does not dispute this general statement. Indeed, the legislative history of
unsecured creditors, while retaining its secured claim. See generally Ricks, 2010 WL 4257598 at *3 (“Here, neither the loan agreement between the parties, nor applicable law, render any portion of Creditor‘s claim unenforceable against Debtor.“).
And this is where Omni‘s bankruptcy does come into play. While state law controls AGC‘s substantive rights against Omni, the Bankruptcy Code and Federal Rules of Bankruptcy Procedure fixed the time and procedures for filing and determining AGC‘s claim against the bankruptcy estate.
Perhaps the trustee argues that the filing of a bankruptcy claim is not the equivalent of suing on the note and returning a partially satisfied judgment as alluded to
in Moening. But the filing of a proof of claim has been held to constitute an action for purposes of triggering an anti-deficiency statute. See Wiggins, 167 B.R. at 994 (filing of proof of claim after postpetition nonjudicial foreclosure was an action precluded by Georgia‘s anti-deficiency statute). It follows that filing a proof of claim after a nonjudicial foreclosure is an action barred under
Moreover, such an argument is inconsistent with Rader. There, the court allowed an unsecured claim for a deficiency under Arizona law where the automatic stay precluded further action by the creditor. As noted in both Allard and Ricks, this result is compelled by
[§ 502(b)] thus suggests that the bankruptcy court should determine whether a creditor‘s claim is enforceable against the debtor as of the date the bankruptcy petition was filed.”
As of the petition date, AGC held an undersecured claim against Omni. AGC timely filed Proof of Claim No. 41 asserting an undersecured debt prior to commencing its nonjudicial foreclosure. The trustee has not argued any basis for disallowance of the unsecured debt apart from the subsequent nonjudicial foreclosure. However, Alaska law did not preclude the filing of AGC‘s claim ahead of the foreclosure. Moreover, the foreclosure did not violate
The court shall prepare a separate order to this effect.
DATED: March 31, 2020
BY THE COURT
/s/ Gary Spraker
GARY SPRAKER
United States Bankruptcy Judge
Serve: Debtor
M. Jungreis, Esq.
C. Christianson, Esq.
N. Jipping, Trustee
U.S. Trustee
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