The U.S. Court of Appeals for the Tenth Circuit recently held that a foreclosing loan owner had standing to seek relief from a Chapter 7 automatic stay in order to proceed with a foreclosure.
The Court held that, even though a "Notice of Election" recorded after the date of the assignment from the original lender to the foreclosing entity indicated that the original lender was still the owner of the note and trust deed, the assignment of the note and deed of trust from the original lender to the foreclosing entity, as well as a state-court decree stating that the foreclosing entity was the original lender's successor in interest, were sufficient to show that the foreclosing entity had a colorable claim of a lien on property of the estate. The Court also ruled that an appellant who was neither a debtor nor a creditor and had no interest in the property lacked standing to challenge the motion for relief from the stay.
A copy of the opinion is available at: http://www.ca10.uscourts.gov/opinions/12/12-1087.pdf.
Appellant property owner ("Property Owner") was the co-owner of property that served as security under a deed of trust for a construction loan. The original lender on the construction loan assigned the deed of trust and note to appellee loan owner ("Loan Owner"), which later initiated foreclosure proceedings on the property, as no loan payments had been made.
A second appellant ("Lewis"), who was involved with Property Owner and the property as part of a foreclosure assistance program, was the subject of various Colorado state-court orders: (1) stating that Lewis had engaged in fraudulent and deceptive activities; (2) requiring Lewis to reconvey any interest he had in the property back to Property Owner; (3) declaring that Lewis's claimed interest in the property was subordinate to Loan Owner's interest in the property; (4) ordering Lewis to return to Property Owner money that Property Owner had paid him; and (5) permanently enjoining Lewis from the unauthorized practice of law and offering foreclosure or mortgage assistance.
A week before the scheduled foreclosure sale, Property Owner filed a Chapter 7 bankruptcy petition. Loan Owner moved for relief from the automatic stay, stating that the amount due on the loan was more than the value of the property. Both Lewis and Property Owner (collectively, "Appellants") filed virtually identical responses to Loan Owner's motion. Property Owner never appeared at the hearing to argue his own response to the motion.
The bankruptcy court granted Loan Owner's motion, explaining among other things that Lewis lacked standing to oppose the motion, that Loan Owner had demonstrated cause for relief from the stay, and that Property Owner lacked equity in the property.
The Bankruptcy Appellate Panel affirmed. Appellants appealed to the Tenth Circuit, which also affirmed.
As you may recall, Section 362(d) of the Bankruptcy Code provides "[o]n request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under [§ 362(a)] . . . – (1) for cause, including the lack of adequate protection of an interest in property of such party in interest; [or] (2) with respect to a stay of an act against property under [§ 362(a)], if – (A) the debtor does not have an equity in such property; and (b) such property is not necessary to an effective reorganization." 11 U.S.C. § 362(d).
Noting that Lewis had an unspecified claim against Property Owner's property, the Tenth Circuit ruled that Lewis lacked standing to challenge Loan Owner's motion for relief from the automatic stay, because Lewis was neither the trustee nor the debtor in possession. The Court thus concluded that Lewis lacked a cognizable interest in opposing Loan Owner's motion.
Next, the Tenth Circuit rejected Appellants' contention that Loan Owner was not a creditor, and therefore could not seek relief from the stay. In so doing, the Court noted among other things that the original lender had assigned the deed of trust and promissory note to Loan Owner, and that a state court had declared Loan Owner to be the successor in interest to the original lender. Accordingly, the Court ruled that, as a creditor, loan owner was a "party in interest" under section 362(d) and thus had standing to seek relief from the automatic stay.
Observing that Property Owner failed to appear at the hearing on the motion for relief, the Tenth Circuit rejected Property Owner's argument that the assignment was invalid because a "Notice of Election," recorded after the date of the assignment from the original lender to Loan Owner, indicated that the original lender was still the owner of the note and trust deed. Pointing out that Loan Owner produced the assignment and a state-court decree that Loan Owner was the lender's successor in interest, the Court ruled that Loan Owner had satisfied the low threshold showing that it had a colorable claim of a lien on property belonging to the estate and thus had standing to seek relief from the automatic stay.
Accordingly, the Tenth Circuit affirmed.
Ralph T. Wutscher
McGinnis Wutscher LLP
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