In re: James Harry Salamon Jeanne Fixler Salamon

Citation: Not availableDocket: CC-14-1334-PaKiTa

Court: United States Bankruptcy Appellate Panel for the Ninth Circuit; April 6, 2015; Us Bankruptcy; United States Bankruptcy Court

Original Court Document: View Document

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Peter J. Mastan, the chapter 7 trustee for David J. Behrend, appeals a bankruptcy court order that disallowed his claim in the chapter 11 case of James Harry Salamon and Jeanne Fixler Salamon. The court affirmed the disallowance. The case centers on the undisputed facts regarding a 28-unit apartment building in Los Angeles purchased by Jeanne in 2009 from a trust controlled by Behrend. At the time of purchase, the property was encumbered by two loans: a first priority loan of $829,575 from United Commercial Bank and a second priority loan of $135,000 from Frank McHugh.

To facilitate the purchase, Jeanne executed a wrap-around note and mortgage (All Inclusive Note and All Inclusive Deed of Trust, AITD) for $1,030,000 to Earthwise LLC, which incorporated the first and second loans, and recorded it as a third priority deed of trust. Additionally, she executed a fourth loan note for $325,000, also to Earthwise, secured by a fourth priority deed of trust. Both the AITD and Fourth Loan proceeds were used for the property purchase.

Behrend filed for chapter 11 bankruptcy on March 25, 2010, later converting to chapter 7, with Mastan appointed as trustee. The Salamons filed their chapter 11 petition on June 8, 2012. Mastan submitted a secured proof of claim for $1,355,000, covering the AITD and Fourth Loan, on October 3, 2012. Following a stipulation allowing American West Bank to foreclose on the property, the bankruptcy court approved stay relief on October 19, 2012. The property was subsequently sold at foreclosure on March 13, 2013, for $1,275,500.

In November 2013, Mastan discovered that the sale of a property had generated enough funds to cover the full amounts due on two loans and provide surplus funds to Behrend’s estate. After demanding payment from the foreclosing trustee, Mastan received a check for $150,560.14, which was enough to pay the remaining balance on an AITD and part of the Fourth Loan. Subsequently, Mastan filed an amended unsecured proof of claim (APOC) for $303,345.75 in the Salamons’ chapter 11 case. On April 28, 2014, the Salamons moved to disallow Mastan's APOC, arguing that California Civil Code §580b(a)(2) barred any unsecured deficiency claims after foreclosure. In response, Mastan contended that Bankruptcy Code §1111(b)(1) allowed his claim despite the state law.

The Salamons maintained that since the property was removed from the bankruptcy estate after the foreclosure, the anti-deficiency law applied, preventing Mastan's claim. The bankruptcy court issued a tentative decision incorporating the legal analysis from the Salamons’ motion and reply, stating that the property remained part of the estate until the foreclosure sale occurred on March 13, 2013. Thus, Mastan's claim was no longer secured by a lien on estate property under §1111(b), and California's anti-deficiency provisions applied.

After hearing arguments, the bankruptcy court granted the Salamons’ motion to disallow Mastan's claim, confirming that the property remained estate property until the foreclosure sale and that Mastan's claim was not secured as per §1111(b). Mastan appealed this decision on June 27, 2014. The bankruptcy court had jurisdiction under 28 U.S.C. §§1334 and 157(b)(2)(B), while the appellate jurisdiction was under 28 U.S.C. §158. The primary issue for review is whether the bankruptcy court erred in disallowing Mastan’s amended claim, with the court's interpretations and disallowance reviewed de novo.

Resolution of the appeal hinges on the bankruptcy court's interpretation of 11 U.S.C. § 1111(b)(1)(A), which governs claims secured by liens on property of the estate. This section mandates that such claims be treated as if they have recourse against the debtor, unless certain conditions apply: either a class of claims elects to apply a different provision or the creditor does not have recourse and the property is sold under specific sections. Collier notes that § 1111(b) aims to balance debtor protection with equitable treatment for creditors, instructing courts to disregard state law and nonrecourse agreements.

A partially secured nonrecourse creditor may fare better in Chapter 11 than in Chapter 7 if their deficiency claim holds value. In Chapter 11, any deficiency valuation is judicial, and Congress has indicated that this valuation falls outside the nonrecourse creditor's original agreement, allowing the creditor to have deficiencies recognized. However, for a creditor to benefit from this provision, it must hold a claim secured by a lien on property of the estate at the time of the bankruptcy filing.

The key issue is whether Mastan had such a lien when the Salamons filed for bankruptcy, as the lien no longer existed when Mastan's claim was later challenged. The interpretation of the statute requires courts to enforce clear statutory language as written, considering the context within the overall statutory framework. The bankruptcy court determined that after the foreclosure sale on March 13, 2014, the property was no longer part of the Salamons’ estate, rendering Mastan’s claim not secured by a lien on property of the estate according to § 1111(b). Consequently, the bankruptcy court ruled that § 1111(b)(1)(A) was inapplicable, and California’s anti-deficiency statutes barred the enforcement of Mastan’s unsecured claim.

Mastan's amended claim was disallowed under 11 U.S.C. § 502(b)(1), which mandates that claims are only allowed if they are enforceable against the debtor and the debtor's property, excluding those that are contingent or unmatured. Mastan contended that the bankruptcy court failed to consider 11 U.S.C. § 1111(b)(1)(A), which indicates that a claim secured by a lien on estate property should be evaluated under § 502. He argued that his claim was secured by liens at the petition's filing date and should be treated as recourse, irrespective of subsequent events.

The court referred to precedent, specifically the Fifth Circuit's decision in *In re Tampa Bay Assocs. Ltd.*, where a creditor's claim was disallowed after foreclosure extinguished their lien, affirming that § 1111(b)(1)(A) requires a claim to be secured by a lien at the time of objection. Other appellate courts have also supported this interpretation. In Mastan's case, the foreclosure sale extinguished his liens under California law, meaning he no longer had a valid claim secured by estate property when the bankruptcy court considered the objection. Consequently, the bankruptcy court did not err in disallowing Mastan's claim as it was unenforceable under applicable law. The court affirmed the decision to disallow the amended claim, emphasizing that § 1111(b)(1)(A) applies only when the claim remains secured by a lien on estate property.