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Bankruptcy Panel Approves Unsecured Claim by Private Parties Who Hold Mortgage - In re Rader

May 15, 2013

Vincent Howard and our Corona consumer bankruptcy lawyers frequently write about bankruptcy mortgage disputes involving a bank or loan servicer. But in In re Rader, the Bankruptcy Appellate Panel for the Ninth U.S. Circuit Court of Appeals ruled that a married couple who held the mortgage on another couple's property in Arizona should be permitted to pursue an unsecured claim for the "underwater" portion of the home debt. Robert and Sandra Carson held a mortgage on the real estate, which was purchased by Marshall and Barbara Rader. The claim was bifurcated and the home foreclosed. But more than a year later, the trustee argued that the Carsons should have pursued state-law remedies to collect the unsecured portion of that debt. The bankruptcy court disagreed, and the BAP for the Ninth U.S. Circuit Court of Appeals affirmed.

The Raders filed for Chapter 13 bankruptcy in 2010, and the case was converted a few months later to Chapter 7. Later that year, the Carsons moved for relief from the automatic stay so they could foreclose on the property, because the Raders were in default on their payment obligations. The motion indicated that the Carsons, Raders and trustee all agreed that the stay should be lifted. The motion was granted, and the Carsons filed a proof of claim for $739,100.61 for the debt. The bankruptcy court bifurcated this into a secured claim for $370,000--the contemporary appraised value of the property--and an unsecured claim of $369,100.61. A foreclosure sale was held at the end of 2010 and the Raders received a discharge the next month. More than a year later, in March of 2012, the trustee filed an objection arguing that the Carsons' claim should be disallowed because they should have been required to pursue the deficiency claim process laid out by Arizona law. The bankruptcy court overruled this, saying it would be impossible to file an adversary proceeding or a deficiency action without lifting the automatic stay.

On appeal, the trustee maintained that the Carsons could have pursued the unsecured portion of the claim without violating the automatic stay or the discharge injunction. The Carsons disagreed and noted that requiring them to pursue separate actions for the deficiency would be burdensome and a waste of resources. After consideration, the BAP found that the Arizona law at issue--which requires creditors to pursue a deficiency judgment within 90 days of a foreclosure sale--is preempted by the bankruptcy code because they conflict. The automatic stay and discharge injunction made compliance with Arizona law impossible, the panel said; the order lifting the stay didn't expressly address the issue and an order lifting a stay is strictly construed. And a post-discharge case would have violated the discharge injunction, because the Carsons could not have pursued it without naming the Raders. Finally, the panel said, this claim is a "core bankruptcy matter," and permitting another court to get involved would be inefficient and cumbersome. Thus, it affirmed the bankruptcy court.

Vincent Howard and our Anaheim personal bankruptcy attorneys believe this decision was in everyone's best interests. Though the debtor may benefit when the bankruptcy trustee excludes certain claims from the bankruptcy, it's not at all clear that the Raders would have benefited by having to defend an extra case against them brought in state court while also managing their bankruptcy. Bankruptcy exists as a way for debtors like the Raders to sort out their debts and pay what they can. As the BAP noted, Congress intended bankruptcy to be orderly and efficient. Going outside that process to create a new case is neither of those things, and in fact it might hurt the debtors because the second court would not be considering all of their financial circumstances with its decision. Given the large deficiencies faced by many people who bought homes during the real estate bubble, Vincent Howard and our Claremont individual bankruptcy lawyers believe it's better for debtors to have these debts considered as a whole.

Based in Orange County, Howard Law, P.C., represents Californians of all backgrounds who are considering bankruptcy as a way to deal with overwhelming debt. If you'd like to tell us about your situation or learn more, send us a message through our website or call 1-800-872-5925 today.

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