Court: United States Bankruptcy Court, D. Oregon; April 15, 2002; Us Bankruptcy; United States Bankruptcy Court
Patricia M. Brown, Bankruptcy Judge, presided over the objection by the Portland Teacher’s Credit Union (PTCU) to the confirmation of the debtors’ Chapter 13 plan, with a hearing conducted on February 7, 2002. The debtors were represented by Jason Wilson-Aguilar, while PTCU was represented by Peter McCord. After reviewing notes, exhibits, pleadings, and applicable legal authorities, the court made the following findings.
The debtors borrowed a total of $42,129 from PTCU, initially $17,129 on February 9, 1996, secured by a Deed of Trust on their residential property at 13403 SW Clearview Way, Tigard, Oregon. An additional $25,000 was borrowed on November 21, 1996, under a home equity loan, also secured by a second Deed of Trust on the same property. Both deeds allowed PTCU to foreclose in case of default, specifying that exercising one remedy did not preclude pursuing others.
The debtors defaulted on their obligations, prompting PTCU to file suit in Washington County Circuit Court, which resulted in a judgment on July 21, 2000, against the debtors for $43,700.02, plus costs and attorney fees, establishing a lien on the debtors’ real property. Subsequently, on July 25, 2000, PTCU recorded a Lien Record Abstract in Clackamas County, extending the lien to the debtors' properties there.
Debtors made partial payments toward a judgment held by PTCU but did not fully satisfy it. They filed for Chapter 13 bankruptcy on June 28, 2001, declaring ownership of two properties: their residence on Clearview Way valued at $360,000 and a rental property on Bryant Rd. valued at $218,440. The Clearview Way property has a first mortgage lien of $279,000 from Washington Mutual, a real property tax lien of $3,808.18, and judgment liens from PTCU and Wells Fargo. The Debtors claim a deed of trust in favor of PTCU on this property is "disputed" and that their portion is merged into the judgment.
The Bryant Rd. property has a first mortgage lien of $206,250 from Mainlander Service Corp and a tax lien of $2,569.18, along with judgment liens from PTCU and Wells Fargo. The original Chapter 13 plan, filed on July 19, 2001, stated there was no equity in the properties for PTCU’s or Wells Fargo’s judgment liens, categorizing these claims as wholly unsecured and providing that their liens would be extinguished upon discharge. It also indicated that PTCU’s lien could be avoided under 11 U.S.C. 522(f)(1)(A).
PTCU objected to the confirmation of this plan, asserting its secured status due to the deeds of trust on the Clearview Way property and claiming its rights were not subject to modification as it was secured solely by the Debtors' principal residence. PTCU argued its claim superseded any homestead exemption claimed by the Debtors, thus cannot be avoided under 11 U.S.C. 522.
The Debtors filed an amended Chapter 13 plan on October 17, 2001, which increased their total payment amount without altering how PTCU's claim was treated. Wells Fargo was replaced by First Select as a judgment lien creditor. PTCU subsequently objected to the amended plan, reiterating its prior objections. The Debtors dispute PTCU’s characterization, arguing that by suing on the notes tied to the deeds of trust, PTCU waived its rights to the deeds and holds no security except for its judicial liens. They cite O.R.S. 86.735(4) and the case In re Morrison, which supports their position that suing on a promissory note led to a loss of the deed of trust lien.
ORS 86.735(4) indicates that after the entire note has been litigated, no further actions can be initiated. PTCU distinguishes Morrison, arguing that the deed of trust in that case limited remedies to one, while the current trust deeds allow for multiple remedies. PTCU acknowledges being restricted from foreclosing through advertisement and sale per ORS 86.735(4) but claims it can treat the trust deeds as mortgages, thus pursuing judicial foreclosure under ORS 88.010 et seq. ORS 86.715 states that a trust deed is treated as a mortgage, subject to relevant mortgage laws unless inconsistent with ORS 86.705 to 86.795. ORS 88.010 allows for foreclosure by suit, but ORS 88.040 restricts maintaining a foreclosure action during a debt recovery lawsuit unless a judgment is obtained and execution against the property is unsatisfied.
PTCU argues that ORS 88.040 supports a creditor's right to pursue a judgment on the note and subsequently foreclose if the judgment cannot be satisfied. Debtors counter that PTCU misinterprets ORS 86.715, asserting that allowing judicial foreclosure would conflict with ORS 86.770(2)(b), which prohibits further actions or deficiency judgments against the grantor after a foreclosure sale. PTCU concurs that the trust deeds are residential and acknowledges the inability to obtain a deficiency judgment post-foreclosure. However, it maintains that the prohibition in ORS 86.770(2) is not triggered until after a foreclosure sale has occurred. Therefore, PTCU believes it can pursue judicial foreclosure without violating that statute, emphasizing that a creditor who forecloses a residential deed of trust cannot subsequently seek a deficiency judgment on the obligation.
Oregon law does not explicitly address whether a creditor with a note secured by a residential deed of trust can sue on the note and subsequently foreclose on the deed of trust. Case law indicates that a holder of a security interest in real property, such as a mortgage or deed of trust, can foreclose and then sue for any deficiency unless the security agreement is a purchase money mortgage or residential deed of trust, in which case seeking a deficiency is statutorily prohibited (ORS 86.770(2) and 88.070).
Oregon case law consistently holds that if a purchase money mortgagee opts to foreclose, they cannot also pursue a judgment for the mortgage debt, thus losing their mortgage lien (Banteir v. Harrison, 259 Or. 182, 1971; Ward v. Beem Corporation, 249 Or. 204, 1968). A purchase money mortgagee can either foreclose and forfeit the right to collect a deficiency or obtain a judgment for the debt and lose the mortgage lien (Beckhuson v. Frank, 97 Or.App. 347, 1989).
The doctrine of election of remedies, noted in Knight v. Boese, states that once a creditor chooses a remedy—either to foreclose or to sue on the note—they cannot pursue the alternative remedy afterward. This doctrine exists to prevent creditors from indirectly circumventing anti-deficiency statutes. Consequently, if a creditor sues on a note secured by a residential deed of trust, they waive their lien on the trust deed. In this case, PTCU does not hold enforceable trust deeds against the Debtor’s property but instead has judgment liens that rank below the Debtors' homestead exemption of $33,000, as per ORS 23.240.
PTCU's judgment lien may be stripped under 11 U.S.C. 522(f)(1)(A). PTCU contends that 11 U.S.C. 1322(b)(2) prevents modification of its rights since its only security is the Debtors' principal residence. However, this claim is incorrect; PTCU holds a judgment lien on both the Washington County residence and a rental property in Clackamas County, making 1322(b)(2) inapplicable. This section only restricts modification of secured claims tied to a "security interest" in the principal residence, defined as a lien created by agreement, whereas a judicial lien is not. Therefore, 1322(b)(2) does not apply even if PTCU's lien were limited to the residence. The court lacks evidence regarding the value of the properties or the amount and priority of First Select’s judgment lien relative to PTCU’s. There is at least $8,549.70 in equity that could be affected by these liens, but insufficient information prevents a determination on priority or amounts. Consequently, confirmation is denied, allowing the Debtors 28 days to submit an amended plan.
