Friday, November 28, 2014

FYI: Colorado BK Court Holds Re-Opening of BK Did Not Reimpose Automatic Stay, Motion for Relief from Stay Only Requires "Colorable Claim" to Interest in Property

The U.S. Bankruptcy Court for the District of Colorado recently held that the reopening of a closed chapter 7 bankruptcy did not automatically reimpose the automatic stay.  The Bankruptcy Court further held that, for a motion for relief from stay, a creditor is only required to show a “colorable claim” to an interest in the property.


A copy of the opinion is available at:  Link to Opinion


In November 2006, the borrower (“Debtor”) obtained a loan secured by a deed of trust as to the subject property (the “Deed of Trust”).  The Debtor stopped making payments in 2010, resulting in the assignment of the Deed of Trust by MERS to Foreclosure Trustee and commencement of a non-judicial foreclosure. 


Shortly thereafter, Debtor filed a chapter 7 bankruptcy but did not disclose the existence of any claims or potential claims arising out of the loan or Foreclosure Trustee’s non-judicial foreclosure.  In April 2012, the Debtor received a discharge in bankruptcy and the case was closed.  As stated in the order closing the case, all nonexempt property listed by Debtor and not administered by her bankruptcy case were deemed abandoned to Debtor pursuant to 11 U.S.C. § 554(c).


Following the close of her bankruptcy case, Debtor filed a lawsuit in federal court alleging that Foreclosure Trustee lacked standing to foreclose because the Deed of Trust was not properly signed or notarized (the “Federal Action”).  The district court dismissed the lawsuit, finding that Debtor was not the real party in interest with respect to her claims which were not scheduled in her bankruptcy case and therefore not abandoned to her when the case was closed.  Additionally, the court found her request for injunctive relief was moot because Foreclosure Trustee had dismissed its non-judicial foreclosure.  Debtor sought reconsideration of the dismissal.


In the meantime, Foreclosure Trustee brought a judicial foreclosure action and the Debtor moved to dismiss.  Relying on Irvine v. Minshull, 152 P. 1150, 1154 (Colo. 1915), the court applied the well-established law that mere possession of negotiable paper payable to order, indorsed in blank, raises a legal presumption of ownership in the holder. 


Because Foreclosure Trustee had tendered the original promissory note signed by Debtor and bearing a blank indorsement, the court denied Debtor’s motion to dismiss.  The court further held that Debtor did not have standing to bring her claims for damages because her claims belonged to the bankruptcy estate.  The Debtor’s pending claims were dismissed and Trustee’s judicial foreclosure was set for trial.


In response, Debtor filed a motion to reopen her bankruptcy pursuant to 11 U.S.C. § 350(b), but the motion did not request a stay of any proceedings in any court.  Foreclosure Trustee then filed a motion requesting relief from automatic stay to proceed with the foreclosure sale.  Debtor objected, arguing that the documents Foreclosure Trustee submitted to the court in the judicial foreclosure were forgeries or counterfeits. 


Foreclosure Trustee could not present the original loan documents to the Bankruptcy Court because the state court refused to release the documents in its possession.  In lieu of the original note and Deed of Trust, the Bankruptcy Court allowed Foreclosure Trustee to present certified copies of the documents held by the state court. 


In ruling on the motion for relief from stay, the first issue before the Bankruptcy Court was whether the reopening of Debtor’s bankruptcy case reimposed the automatic stay as to the property.  Relying on In re Burke, 198 B.R. 412 (Bankr. S.D. Ga. 1996) and In re Trevino, 78 B.R. 29 (Bankr. M.D. Pa. 1987), the Court held that reopening a chapter 7 bankruptcy case did not reimpose the automatic stay because only the filing of a petition imposes an automatic stay.


Notably, the Court acknowledged that a bankruptcy court could decide to impose a stay after reopening under 11 U.S.C. § 105, but no such stay was requested by the Debtor.


The Bankruptcy Court further held that even if the automatic stay did apply to the property, Trustee established that it was entitled to relief from stay under 11 U.S.C. § 362(d). 


Debtor also argued that Foreclosure Trustee is required to present the original note under Miller.  As you may recall, a party must have standing in order to obtain relief from stay.  See, e.g., In re Miller, 666 F.3d 1255 (10th Cir. 2012).  In Miller, the Tenth Circuit Court of Appeals held that a standing determination made in a non-judicial foreclosure proceeding had no preclusive effect, and that a creditor seeking relief from stay in order to proceed with foreclosure must produce evidence of a right to payment, such as an original note.  Id. at 1262-63.  When the creditor in Miller failed to present evidence showing that it had possession of the original note, the Tenth Circuit held that the bankruptcy court erred in granting relief from stay.  Id.


The Bankruptcy Court disagreed with Debtor’s standing argument, distinguishing Miller as the preclusive effect of a standing determination made in a non-judicial proceeding has no applicability to a standing determination made in a judicial foreclosure proceeding.  See Colo. R. Civ. P. 105(a).  Because the state court determined that Foreclosure Trustee held the original note in the judicial foreclosure, the Bankruptcy Court refused to review the document to make a contrary determination while the documents remained in the custody of the state court.  Moreover, the Bankruptcy Court noted that relief from stay was appropriate because it would allow the state court, in its discretion, to further review the document at issue.


Therefore, the Bankruptcy Court held that relief from stay did not require Foreclosure Trustee to prove by the preponderance of the evidence that it was the holder of the original note.  Instead, Foreclosure Trustee was only required to show a “colorable claim” to an interest in the property, and it did so by presenting evidence of its interest in the note and right to enforce the Deed of Trust.


Finally, turning to the merits of the motion for relief, the Bankruptcy Court concluded that Foreclosure Trustee had shown cause for relief because no payments have been made since 2010, and Debtor had neither maintained insurance on the property nor paid applicable property taxes. 


Accordingly, the Bankruptcy Court granted Foreclosure Trustee’s Motion for Relief from Stay.





Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


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