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REAL ESTATE: HOMESTEAD AND BANKRUPTCY ISSUES

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

Real Estate issues that can be confusing as related to homestead, anti-deficiency and judgments.

Real property with liens or security interests: in Arizona this is usually in the form of a deed of trust “DOT” (mortgages in other states).  A deed of trust is a security interest on the real property, whereas a mortgage is a lien.  The only way to foreclose on a mortgage is by judicial foreclosure, but DOTs can be foreclosed either by trustee sale (also referred to as non-judicial foreclosure) or judicial foreclosure.  DOTs have been used in Arizona since the late 1970’s.

Order of recording document determines priority.  If a second DOT is recorded before a first DOT, then the second takes priority over first.  HOA are secured by language in Covenants, Conditions and Restrictions (CC&R’s) recorded at the start of the development.  HOA has a security interest on the real property Because the CC&Rs are recorded.  A statute specifically gives the first lender recording priority over the existing HOA.

Homestead protection: ARS 33-1101 established automatic protection of homesteads when realty purchased.

  • Covers house, condo, coop, mobile home or mobile home and attached land.
  • The value of the homestead protection is $150,000 for a single person or married couple.
    • A married couple’s homestead is not doubled like other exemptions; they just get one of $150,000 in value.
  • Homestead applies even if property was transferred to a Trust so long as the Claimant retains administration of the property.
  • There is no limit on the size of the parcel of real estate, but the owner’s dwelling must be on the property.
  • Homestead on contiguous parcels: In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002), the Court has previously determined that Arizona law does not preclude a homestead claim in multiple adjoining parcels. See also, Banner Bank v. Johns (In re Johns), 2014 WL 6892744, at *5-7 (BAP 9th Cir. 2014).
  • Attaches to sale proceeds for 18 months, which would include excess sale proceeds after foreclosure, but only if the borrower owed the property at the time of the trustee’s sale.
  • Declaration of homesteads no longer required.
  • If the owner has more than one residential property the lender can require the borrower to disclose which of the properties is the homestead, which is usually done by recording a homestead declaration. (See ARS 33-1101 below).
  • Recorded mortgage or Deed of trust is not affected by homestead (ARS 33-1104(D))

Abandonment of Homestead: ARS 33-1104(A). Homestead is abandoned if:

  • File declaration of abandonment
  • Transfer the title to the property
  • Remove from property for two years or more.

Trustee’s sale or judicial foreclosure:

  • ARS 33-807 addresses deed of trust “trustee’s sale”.
  • ARS 33-721 deals with “judicial foreclosure” which can be either a mortgage or a deed of trust. (see 33-807 and 33-721 below).

Anti-Deficiency statutes:

  • Has a limit on the size of the real estate – 2 ½ acres or less, utilized and occupied as a one- or two-family dwelling (see 33-729 and 33-814 below).
  • Not required to be homestead residence.
  • Prohibits deficiency actions of any DOT or mortgage if loan is purchase money, with the exception of “engaged in business”..
  • Judicial foreclosure –
    • if purchase money and under 2 ½ acre limit, then no deficiency rights. (33-729(A)), unless purchaser was “engaged in the business of constructing and selling dwellings) (33-729(C)).
    • redemption right
    • This is litigation, so involves discovery, defenses, trial, etc., that are part of a traditional process. Therefore, this takes more time and is more expensive than a trustee’s sale.
    • Junior DOT/mortgages wiped out as to the real property, but not the borrower’s obligation. There is an exception – if the first and second were somehow bound together.
    • Completion of senior judicial foreclosure wipes out all juniors as to the property, except a redemption period each, but does not normally wipe out borrower’s obligation. Lender normally sues on their promissory note.
  • Trustees sale –
    • Does not matter if purchase money, no deficiency action if:
      • Under 2 ½ acres, limited to and utilized for either a single one-family or two-family dwelling (33-814).
      • DOT prohibits recovery of deficiency.
    • Lender may pursue deficiency claim (assuming none of the above applies) if:
      • Action brought within 90 days after the trustee’s sale (33-814(A))
      • owned by person engaged in constructing and selling dwellings. (33-814(H)). Same 90-day requirement as above.
    • Borrower or junior can reinstate, but no redemption allowed.
    • Minimum of 3-month notice (33-808(C)).
    • Less expensive than judicial foreclosure.
    • Completion of senior trustee’s sale wipes out all juniors as to the property, except a redemption period for IRS, but does not normally wipe out borrower’s obligation. Lender normally sues on their promissory note.

Recorded judgment does NOT become a lien on homestead property (see ARS 33-964(C) below).

  • What if the property is worth more than the homestead and other secured debts? A judgment creditor can require the sheriff to auction the real estate if a creditor’s judgment exceeds the homestead ($150,000), plus consensual liens on the property having priority to the judgment, plus the costs of the sale allowable under title 12. (see 33-1105 below).

 

Taxes:

  • 1099(C) – may be filed within three year at the conclusion of trustee’s sale or judicial foreclosure.

Appreciation in value and bankruptcy:

  • Schwab v. Reilly, 130 S. Ct. 2652 (2010), means that 1) the debtor properly exempted one dollar’s worth of his oil and gas lease and no more; and 2) when a debtor retains only an interest in an asset, rather than the asset itself, the debtor is limited to the value of the exemption and the estate is entitled to any appreciation in the asset’s value beyond the amount exempted.

33-721. Foreclosure of mortgage by court action

Mortgages of real property and deeds of trust of a type not included in the definition of deed of trust provided in section 33-801, notwithstanding any other provision in the mortgage or deed, shall be foreclosed by action in a court.

33-729. Purchase money mortgage; limitation on liability

  1. Except as provided in subsections B and C of this section, if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.
  2. The balance due on a mortgage foreclosure judgment after sale of the mortgaged property shall constitute a lien against other property of the judgment debtor, general execution may be issued thereon, and the judgment may be otherwise satisfied out of other property of the judgment debtor, if the court determines, after sale upon special execution and upon written application and such notice to the judgment debtor as the court may require, that the sale price was less than the amount of the judgment because of diminution in the value of such real property while such property was in the ownership, possession, or control of the judgment debtor because of voluntary waste committed or permitted by the judgment debtor, not to exceed the amount of diminution in value as determined by such court.
  3. For mortgages that are originated after December 31, 2014, subsection A of this section does not apply to real property as follows:
  4. Real property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a mortgage given to secure payment of a loan for construction of a dwelling on the property for sale to another person.
  5. Real property that contains a dwelling that was never substantially completed.
  6. Real property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.
  7. For the purposes of this section, a dwelling is substantially completed if either of the following occurs:
  8. Final inspection is completed, if required by the governmental body that issued the building permit for the dwelling.
  9. If a final inspection is not required by the governmental body that issued the building permit, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling.

33-807. Sale of trust property; power of trustee; foreclosure of trust deed

  1. By virtue of his position, a power of sale is conferred upon the trustee of a trust deed under which the trust property may be sold, in the manner provided in this chapter, after a breach or default in performance of the contract or contracts, for which the trust property is conveyed as security, or a breach or default of the trust deed. At the option of the beneficiary, a trust deed may be foreclosed in the manner provided by law for the foreclosure of mortgages on real property in which event chapter 6 of this title governs the proceedings. The beneficiary or trustee shall constitute the proper and complete party plaintiff in any action to foreclose a deed of trust. The power of sale may be exercised by the trustee without express provision therefor in the trust deed.
  2. The trustee or beneficiary may file and maintain an action to foreclose a deed of trust at any time before the trust property has been sold under the power of sale. A sale of trust property under the power of sale shall not be held after an action to foreclose the deed of trust has been filed unless the foreclosure action has been dismissed.
  3. The trustee or beneficiary may file an action for the appointment of a receiver according to sections 12-1241 and 33-702. The right to appointment of a receiver shall be independent of and may precede the exercise of any other right or remedy.
  4. The power of sale of trust property conferred upon the trustee shall not be exercised before the ninety-first day after the date of the recording of the notice of the sale.  The sale shall not be set for a Saturday or legal holiday.  The trustee may schedule more than one sale for the same date, time and place.
  5. The trustee need only be joined as a party in legal actions pertaining to a breach of the trustee’s obligation under this chapter or under the deed of trust. Any order of the court entered against the beneficiary is binding upon the trustee with respect to any actions that the trustee is authorized to take by the trust deed or by this chapter. If the trustee is joined as a party in any other action, the trustee is entitled to be immediately dismissed and to recover costs and reasonable attorney fees from the person joining the trustee.

33-814. Action to recover balance after sale or foreclosure on property under trust deed

  1. Except as provided in subsections F, G and H of this section, within ninety days after the date of sale of trust property under a trust deed pursuant to section 33-807, an action may be maintained to recover a deficiency judgment against any person directly, indirectly or contingently liable on the contract for which the trust deed was given as security including any guarantor of or surety for the contract and any partner of a trustor or other obligor which is a partnership. In any such action against such a person, the deficiency judgment shall be for an amount equal to the sum of the total amount owed the beneficiary as of the date of the sale, as determined by the court less the fair market value of the trust property on the date of the sale as determined by the court or the sale price at the trustee’s sale, whichever is higher. A written application for determination of the fair market value of the real property may be filed by a judgment debtor with the court in the action for a deficiency judgment or in any other action on the contract which has been maintained. Notice of the filing of an application and the hearing shall be given to all parties to the action. The fair market value shall be determined by the court at a priority hearing upon such evidence as the court may allow. The court shall issue an order crediting the amount due on the judgment with the greater of the sales price or the fair market value of the real property.  For the purposes of this subsection, “fair market value” means the most probable price, as of the date of the execution sale, in cash, or in terms equivalent to cash, or in other precisely revealed terms, after deduction of prior liens and encumbrances with interest to the date of sale, for which the real property or interest therein would sell after reasonable exposure in the market under conditions requisite to fair sale, with the buyer and seller each acting prudently, knowledgeably and for self-interest, and assuming that neither is under duress. Any deficiency judgment recovered shall include interest on the amount of the deficiency from the date of the sale at the rate provided in the deed of trust or in any of the contracts evidencing the debt, together with any costs and disbursements of the action.
  2. If a trustee’s sale is a sale of less than all of the trust property or is a sale pursuant to one of two or more trust deeds securing the same obligation, the ninety day time limitations of subsection A of this section shall begin on either the date of the trustee’s sale of the last of the trust property to be sold or the date of sale under the last trust deed securing the obligation, whichever occurs last.
  3. The obligation of a person who is not a trustor to pay, satisfy or purchase all or a part of the balance due on a contract secured by a trust deed may be enforced, if the person has so agreed, in an action regardless of whether a trustee’s sale is held. If, however, a trustee’s sale is held, the liability of a person who is not a trustor for the deficiency is determined pursuant to subsection A of this section and any judgment for the deficiency against the person shall be reduced in accordance with subsection A of this section. If any such action is commenced after a trustee’s sale has been held, it is subject, in addition, to the ninety-day time limitations of subsections A and B of this section.
  4. If no action is maintained for a deficiency judgment within the time period prescribed in subsections A and B of this section, the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.
  5. Except as provided in subsection F of this section, the provisions of this chapter do not preclude a beneficiary from foreclosing a deed of trust in the same manner as a real property mortgage. In an action for the foreclosure of a deed of trust as a real property mortgage the provisions of chapter 6, article 2 of this title are applicable.
  6. A deed of trust may, by express language, validly prohibit the recovery of any balance due after trust property is sold pursuant to the trustee’s power of sale, or the trust deed is foreclosed in the manner provided by law for the foreclosure of mortgages on real property.
  7. If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.
  8. For deeds of trust that are originated after December 31, 2014, subsection G of this section does not apply to trust property as follows:
  9. Trust property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another person.
  10. Trust property that contains a dwelling that was never substantially completed.
  11. Trust property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.
  12. For the purposes of this section, a dwelling is substantially completed if either of the following occurs:
  13. Final inspection is completed, if required by the governmental body that issued the building permit for the dwelling.
  14. If a final inspection is not required by the governmental body that issued the building permit, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling.

33-964. Lien of judgment; duration; exemption of homestead; acknowledgment of satisfaction by judgment creditor

  1. Except as provided in sections 33-729 and 33-730, from and after the time of recording as provided in section 33-961, a judgment shall become a lien for a period of ten years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property, in the county in which the judgment is recorded, whether the property is then owned by the judgment debtor or is later acquired. A civil judgment lien obtained by this state and a judgment lien for support, as defined in section 25-500, remain in effect until satisfied or lifted.
  2. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.
  3. A judgment of the justice court, municipal court, superior court or United States court that has become a lien under this article, immediately on the payment or satisfaction of the judgment, shall be discharged of record by the judgment creditor or the judgment creditor’s attorney by recording a satisfaction of judgment with the county recorder of the county in which the judgment is recorded. The judgment creditor or the judgment creditor’s attorney shall enter a notation of satisfaction on the docket of the clerk of the superior court of each county in which the judgment has been entered or docketed, and in a like manner enter a notation of satisfaction on the docket of the clerk of the United States district court.
  4. In a title IV-D case, if the title IV-D agency or its agent is listed as the holder of the lien and the judgment has been satisfied but the obligee is unwilling to sign the release of the lien or, after reasonable efforts, cannot be located to sign the release of the lien, the title IV-D agency or its agent may sign the satisfaction of judgment and release of lien without the signature of the obligee.  The title IV-D agency or its agent shall send a copy by first class mail to the last known address of the obligee.

33-1101. Homestead exemptions; persons entitled to hold homesteads

  1. Any person the age of eighteen or over, married or single, who resides within the state may hold as a homestead exempt from attachment, execution and forced sale, not exceeding one hundred fifty thousand dollars in value, any one of the following:
  2. The person’s interest in real property in one compact body upon which exists a dwelling house in which the person resides.
  3. The person’s interest in one condominium or cooperative in which the person resides.
  4. A mobile home in which the person resides.
  5. A mobile home in which the person resides plus the land upon which that mobile home is located.
  6. Only one homestead exemption may be held by a married couple or a single person under this section. The value as specified in this section refers to the equity of a single person or married couple. If a married couple lived together in a dwelling house, a condominium or cooperative, a mobile home or a mobile home plus land on which the mobile home is located and are then divorced, the total exemption allowed for that residence to either or both persons shall not exceed one hundred fifty thousand dollars in value.
  7. The homestead exemption, not exceeding the value provided for in subsection A, automatically attaches to the person’s interest in identifiable cash proceeds from the voluntary or involuntary sale of the property. The homestead exemption in identifiable cash proceeds continues for eighteen months after the date of the sale of the property or until the person establishes a new homestead with the proceeds, whichever period is shorter. Only one homestead exemption at a time may be held by a person under this section.

33-1104. Abandonment of homestead; encumbrance of homestead

  1. A homestead may be abandoned by any of the following:
  2. A declaration of abandonment or waiver.
  3. A transfer of the homestead property by deed of conveyance or contract for conveyance.
  4. A permanent removal of the claimant from the residence or the state. A claimant may remove from the homestead for up to two years without an abandonment or a waiver of the exemption.
  5. A declaration of abandonment or waiver shall be executed by the claimant and acknowledged. A declaration of abandonment or waiver is effective only from the time of its recording in the office of the county recorder in the county in which the homestead property is located.
  6. This article shall not be construed to repeal the provisions of section 25-214, subsection C, pertaining to the acquisition, conveyance or encumbrance of community property.
  7. Any recorded consensual lien, including a mortgage or deed of trust, encumbering homestead property shall not be subject to or affected by the homestead claim or exemption.
  8. Notwithstanding the provisions of subsection A, paragraph 2 of this section, a transfer of the homestead property by deed of conveyance or contract for conveyance under a trust, as defined in section 14-1201, in which the claimant retains the power to administer and revoke the trust shall not constitute an abandonment of the homestead.

33-1105. Sale by judgment creditor of property subject to homestead exemption

A judgment creditor other than a mortgagee or beneficiary under a trust deed may elect to sell by judicial sale as specified in title 12 the property in which the judgment debtor has a homestead under section 33-1101, subsection A, provided that the judgment debtor’s interest in the property shall exceed the sum of the judgment debtor’s homestead plus the amount of any consensual liens on the property having priority to the judgment. A bid shall not be accepted by the officer in charge of a sale under this section which does not exceed the amount of the judgment debtor’s homestead plus the amount of any consensual liens on the property having a priority to the judgment plus the costs of the sale allowable under title 12. After receipt of a sufficient bid, the officer shall sell the property. From the proceeds, the officer shall first pay the amount of the homestead to the judgment debtor plus the amount of any consensual liens on the property having a priority to the judgment and then pay the costs of the sale. The remaining proceeds shall be applied in accordance with the provisions of section 12-1562, subsection A. If the sale does not occur, either because of voluntary abandonment by the judgment creditor or because no sufficient bid is made, the judgment creditor may not charge any costs or attorney fees incurred in connection with the sale against the judgment debtor by addition to the judgment or otherwise.

In re: Gebhart In consolidated Chapter 7 bankruptcy petitions in which the value of debtors’ homes increased so that they had equity in excess of the homestead exemptions, the bankruptcy court’s order approving the appointment of a real estate broker to sell the home for the benefit of the estate is affirmed where the fact that the value of the claimed exemption plus the amount of the encumbrances on the debtor’s residence was, in each case, equal to the market value of the residence at the time of filing the petition did not remove the entire asset from the estate.


In re Wilson, (9th Cir. Ct of Appeals,  11-27-18) The State of Washington’s homestead exemption statute says “the exemption amount shall not exceed the lesser of (1) the total net value of the [homestead] . . . or (2) $125,000 thousand dollars . . . .”  “Net Value” under Washington law is defined as the home’s equity value (just like AZ).

FINDING: The filing date of a bankruptcy petition determines the law governing exemptions and freezes the value of the exemptions that the debtor may claim. Because Debra Wilson’s amended bankruptcy schedules sought to claim more than Washington law permitted her to claim as of the petition date, we affirm the district court’s decision, limiting her claimed exemption to the amount she was entitled to under Washington law as of the petition date.

In this case, the debtor’s equity value at the time of filing was $3560.  She used that number on Schedule C when filing.  Then after filing, the house appreciated and had increased equity.  The increased equity was still less than $125,000.  Thereafter, debtor amended Schedule C to exempt the house “100% of fair market value, up to any applicable statutory limit” (using Washington State’s homestead exemption).  The intent of the debtor was to allow the exemption to be increased up to $125,000 per the Washington statute to capture the appreciation post-petition.

The court said she could not amend Schedule C to increase the exemption amount after the case was filed.  The court explained that any post-petition appreciation is always for the benefit of the estate, not the debtor.  The Washington homestead statute specified that the exemption is either the lesser of the total equity value or $125,000.  Because exemptions are fixed as of the date of filing, the debtor only gets to exempt what the equity was as of the date of filing.  Any post-petition appreciation is for the benefit of the estate,  not the debtor, even if the appreciation is still below $125,000.


In re Smith, 3:10-bk-19970-MCW, 526 B.R. 343 (Az District Ct. 2015) Turnover of post-petition sale from homestead. On May 16, 2014, the Trustee filed his turnover motion. Id. The bankruptcy court held oral argument on June 9, 2014. Id. at 5. On July 1, 2014 the bankruptcy court issued a preliminary order directing the Trustee to file an affidavit explaining why he did not close the Debtors’ bankruptcy case prior to the expiration of the eighteen-month reinvestment period, nearly four years after the petition date. Id. On August 26, 2014, after accepting the Trustee’s declaration, the bankruptcy court issued an order granting the Trustee’s turnover motion, holding that the proceeds from the post-petition sale were subject to the eighteen-month reinvestment period imposed under § 33-1101(C). Id. On September 9, 2014, Debtors filed notice of their appeal. Affrimed on appeal

In re Jacobson, 676 F.3d 1193 (9th Cir.2012), the Court of Appeals was asked to decide the applicability of California’s homestead exemption reinvestment requirement, which compelled a debtor to turn over proceeds from the sale of her exempt homestead after she failed to reinvest those proceeds within the six months permitted by the statute. In re Jacobson, 676 F.3d at 1198-99. Before Jacobson, California had elected to opt out of the Bankruptcy Code’s list of default property exemptions outlined in § 522(d), and defined their own exemptions as permitted by § 522(b)(2). Id. at 1198. California provided a homestead exemption similar to the exemption provided by many states, including Arizona. Id.; In re White, 377 B.R. 633, 643 (Bankr.D.Ariz. 2007) (recognizing that California’s homestead exemption is similar to A.R.S. § 33-1101).

The debtor in Jacobson argued that the reinvestment requirement should be read out of California’s homestead exemption. In re Jacobson, 676 F.3d at 1200. Jacobson rejected the argument, stating that “nothing in 11 U.S.C. § 522(b) limits California’s power to restrict the scope of its exemptions; indeed, it could theoretically accord no exemptions at all.” Id. (internal quotations omitted). Jacobson held that bankruptcy exemptions are fixed at the time of the bankruptcy petition’s filing, and the entire state law that is applicable on the petition’s filing date, including the reinvestment requirement, is determinative of whether an exemption applies.

Relying on the analysis of the court in In re Allman, 286 B.R. 402 (Bankr. D. Ariz. 2002), the Court has previously determined that Arizona law does not preclude a homestead claim in multiple adjoining parcels. In Allman, the court cited to Wuicich v. Solomon-Wickersham Co., 18 Ariz. 164, 166, 157 P. 972 (1916) for the proposition hat two adjacent parcels can satisfy the requirement of one compact body for homestead purposes. Allman, 286 B.R. at 405. Ultimately, the court determined that Arizona courts would allow a homestead on contiguous parcels of land, whether purchased at the same time or not, unless there is evidence that a sub-divided portion of the entire  parcel is not being used for residential purposes. Allman, 286 at 407; see also Banner Bank v. Johns (In re Johns), 2014 WL 6892744, at *5-7 (BAP 9th Cir. 2014) (interpreting Idaho law and finding a homestead exists in multiple parcels on which more than one dwelling exists).

Section 522(f) addresses a lien which “impairs” a debtor’s exemption. “[U]nless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning, …” Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979), cited in Sanders, 39 F.3d at 261 and in Pioneer Inv. Services Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 388, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993). 13 Webster’s Third New International Dictionary Unabridged (1981), at 1131, provides as one of the definitions of “impair” the meaning “diminish in quantity, value, excellence or strength.” Sanders ruled that because the lien does not fix upon the Utah exemption, the homestead is not impaired. Sanders, 39 F.3d at 262. (Emphasis added.) But there can be little question that not avoiding this lien results in a diminishing of the value of the Debtors’ exemption (and of their discharge and their fresh start). While the Debtors’ homestead exemption is technically and legally “exempt from attachment”, in these days in which a title policy is ordinarily a condition of the transfer of an interest in real property, Debtors may well not be able to convey or refinance their property without (1) further state-court litigation to clarify the “non-attachment” of the judgment lien, (2) paying off or otherwise compromising with the creditor, or (3) convincing a title company to insure the title over the existence of this judgment lien on the *339 record. See also Coats, 232 B.R. at 214 n. 8:


A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property.  Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.  The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00.  In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12.  Also see, ARS 33-1103 (A)(4).  Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101.  See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)

Note:  The recorded judgment lien survives the bankruptcy.  The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead.  522 addresses an “interest” in debtor’s property in support of a lien avoidance.  Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522?  The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.

It appears that the judgment lien and the right to enforce that lien survive a Chapter 7.  If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity.  Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.


Pacific, et al. v. Castleton, et alDecember 27, 2018 – 1 CA-CV 17-0667 – Issue:Whether a judgment creditor may attach a judgment lien to homestead property, or whether it may execute on its judgment only by way of a forced sale of the property under Ariz. Rev. Stat. section 33-1105.  Holding: The court holds that a recorded judgment is not a lien on homestead property.

§ 33-964 A RECORDED JUDGMENT DOES NOT BECOME A LIEN ON HOMESTEAD PROPERTY:

Section 33-964 thus establishes the general rule that a recorded judgment does not become a lien on homestead property. See also Union Oil Co. of Ariz. v. Norton Morgan Commercial Co., 23 Ariz. 236, 245 (1922) (holding that “no lien shall be permitted to attach to the real property claimed as a homestead”).

EXCESS EQUITY (consensual secured debts + homestead) IN HOMESTEAD CAN BE JUDICIALLY FORECLOSED UNDER § 33-1105

See In Evans v. Young, 135 Ariz. 447, 453 (App. 1983), and Grand Real Estate, Inc. v. Sirignano, 139 Ariz. 8, 13 (App. 1983); see also In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008) (clarifying that a recorded judgment does not create a lien on property subject to homestead even when the value of the property exceeds the amount of the homestead. “It remains the case that both the homestead statute and the judgment lien statute both conceive of the ‘homestead’ as being the real property, not the equity value of such real property.” 400 B.R. at 754); and In re Glaze, 169 B.R. 956, 966 (Bankr. D. Ariz. 1994)

ONCE A JUDGMENT ATTACHES IT RUNS WITH THE LAND

  • 33-964 establishes the general rule that a judgment lien does not attach to homestead property, and that homeowners hold their homestead property free and clear of judgment liens. See A.R.S. § 33-964(B). Although it is true that once a lien has attached, it “runs with the land,”, but in this case the judgment lien never attached to the Home in the first place.

ABANDONMENT OF HOMESTEAD BY CONVEYING TO TRUST A.R.S. § 33-1104(A):

  • When a homestead exemption is abandoned by a conveyance of the property, the judgment lien does not re-attach to the property upon the sale. See Sec. Tr. & Sav. Bank, 29 Ariz. 325, 332 (1925).
  • 33-1104(A)(3) a homeowner “may remove from the homestead for up to two years” without abandoning the homestead exemption. Sepics’ departure from the Home shortly before its sale did not constitute an abandonment.
  • Because of the protection afforded by the homestead statutes, the Judgment never attached as a lien to the Home. Therefore, the Sepics conveyed the Home free and clear of the Judgment.

CONCLUSION: For the foregoing reasons, we affirm the entry of an injunction enjoining a Sheriff’s sale of the Home.


Motion to Reopen Bankruptcy and Motion to Avid Lien on Real Property

In re Awdisho, 2:14-bk-06594-DPC. (2/12/20) IT IS ORDERED denying Debtors’ Motion to Reopen. IT IS FURTHER ORDERED denying Debtors’ Motion to Avoid Lien. The judgment recorded by Midland prior to the Petition Date does not constitute a lien against the homestead property owned by the Debtors. Midland’s claim has been discharged in Debtors’ bankruptcy proceedings. Should Midland refuse to voluntarily remove its judgment from the Recorder’s records, the Debtors may seek relief in State Court under A.R.S. § 33-420.

AT LEAST ONCE OR TWICE A WEEK SOMEONE ASKS IF THEY HAVE TO PAY A JUDGMENT WHEN TRYING TO SELL THEIR HOME.

The answer is probably ‘no’, but depends on certain facts.  It depends on the law of the state where the judgment debtor lives.  It also depends on the type of assets the judgment debtor has – exempt versus non-exempt.

I WANT TO SELL MY HOME BUT THE TITLE COMPANY SAYS I HAVE TO PAY A JUDGMENT.

bad advice

Very bad information from title company.

Assuming this is in Arizona then you are dealing with a title company that does not know how to read Arizona law.  See Arizona Revised Statutes 33-964:

A. Except as provided in sections 33-729 and 33-730, from and after the time of recording as provided in section 33-961, a judgment shall become a lien for a period of ten years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property, in the county in which the judgment is recorded, whether the property is then owned by the judgment debtor or is later acquired. A civil judgment lien obtained by this state and a judgment lien for support, as defined in section 25-500, remain in effect until satisfied or lifted.

B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.

If this is your Arizona home (homestead) then do not let the title company bully you into paying the judgment.  Move to a different title company who knows how to read the law.


Pacific, et al vs Castleton  Arizona Court of Appeals, Div 1, No. 1 CA-CV 17-0667  Pacific Western Bank and Coastline Re Holdings Corp. (collectively, “PWB”) appeal from the superior court’s entry of a preliminary injunction enjoining the sale of a home owned by the Castleton Revocable Trust (the “Castleton Trust”). Because a judgment creditor may not attach a judgment lien to homestead property, but instead may execute on its judgment only by way of a forced sale of the property under Arizona Revised Statutes (“A.R.S.”) § 33-1105, we affirm the superior court’s preliminary injunction. The amount of equity is immaterial.  The only method of enforcement is by Sheriff sale.

Notes: Bottom line for a creditor’s remedy:  The creditor cannot record a judgment lien and just wait for the house to sell before getting paid on a homestead, even if the house has $1 million dollars of equity.  It is incumbent on the creditor to initiate the sheriff sale on the homestead if and only if:  (a) it is done before the home is transferred/sold; and (b) there is sufficient equity above $150,000 (which means over and above homestead, plus all consensual or liens that attach by law).  There is no such thing as a judgment lien that attaches to a homestead.  This does not apply if the realty is not a homestead.


I FILED BANKRUPTCY AND WANT TO SELL MY ARIZONA HOME, BUT THE TITLE COMPANY REQUIRES THAT I PAY A JUDGMENT.

Again, the Arizona law applies even if you filed for bankruptcy.  It is important to list all debts, including judgments (remember you signed a sworn declaration that you listed 100% of all your debts).  Even if you forget to list this judgment it is still not a lien against your home (see the Arizona law above).

Note – selling your home while in bankruptcy will be a problem.  Most likely you will need to get permission from the court, or at least the trustee, in order to sell your home.  Talk to your bankruptcy attorney before deciding to sell your home.  If your bankruptcy attorney does not know the answer to your questions then hire another attorney.  This issue is a very basic one and every bankruptcy attorney should know the process.


WHAT SHOULD I DO?

If a title company does not ignore judgment liens that show up on a title report with respect to a seller’s homestead (even if no bankruptcy was filed), send a letter to the title company’s lawyer explaining the law and why this judgment lien does not attach to the homestead (include copies of the statutes: ARS 33-964.  Highlight the provisions dealing with homestead ‘exempt’ property.).  If the title company refuses to change their requirements then move the escrow to a title company that will (such as North American Title or First American Title).

Note: if there is equity over the allowed $150,000 homestead then the judgment creditor must initiate a sheriff sale before the property is transferred.  If the creditor fails to go through the sheriff sale process before the property is transferred, the creditor has lost its remedy to get paid with respect to the homestead.

When is a house a home?  Article from ABI with lots of cases (2/2019)

In re Gilman,16-55436 (9th Circuit, Apr 13, 2018)  The court had jurisdiction over the district court’s order affirming the grant of a homestead exemption. The bankruptcy court erred because it did not determine whether the debtor intended to continue to reside in the property in question. The court explained: physical occupancy on the filing date without the requisite intent to live there does not establish residency, which is necessary for a homestead exemption.

Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?

§ 506(a) provides: “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” The various approaches all prefer their approach as meeting this standard.

For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.] For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),

Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].

The trustees will require the following (generic list):

1.    A purchase contract

2.    A proposed amendment to schedules I and J

3.    The debtors must be current with all plan requirements (plan payments and turn-over of taxes/refunds)

4.    If there is no title company involved yet, they will require that once a sales offer is made, and escrow opened, Preliminary Closing docs. But, the best practice is to open escrow before going this far.

Once sold, the debtors must file the amended schedules which means they need to be in another property and know the expenses associated with that property.

The letters from the trustee usually take less than a week to process.  More often than not, they do not require a court order assuming the confirmed plan re-vests the home to the debtor(s).

If pre-confirmation will probably need a Motion to sell.  If post-confirmation the sale can be done informally as long as the plan is confirmed.  Make certain the SOC/Plan provides that the property re-vests in the debtor(s) and that they are debtors are free to use the property in anyway (such as sell it or refinance) without further order of the court.  I believe the only reason for the trustee permission letter is the title agency and the trustee needs to know if the house sells for more then $150,000 in equity.

If you have to file a Motion, include the name of the mortgage company, the realtors, their percentage of commission, the proposed sales price, the amount of the debt and the purchaser’s name(s).  If no purchaser, a generic request to allow the sale with the provide that additional information, including amended schedules, can usually be filed.  The motion should allege that based on market prices, and opinions of the realtor, the sale price is reasonable and the sale would not impact on the creditors of the estate.

Ex-parte: see LR 2084-25 (http://www.azb.uscourts.gov/rule-2084-25


If lender is being difficult (debtor cannot get a final payoff for the sale – as evidenced by a history of lender’s failure to respond): consider drafting the motion to not provide for higher and better offers (unless the property could sell for more than secured debts, plus homestead). If the sale could (reasonably) produce non-exempt proceeds, then will need to allow for higher and better offers.

When there is a difficult lender – consider drafting the order to give the option to hold (escrow) out a specified amount of money and sell it free and clear of the mortgage lien.  That will help if later the lender continues to be difficult to work with (obtain payoff).

In re Won Case No: 3:17-bk-01600-DPC (AZ BK Court 6/5/19) Discusses several cases regarding co-mingling of homestead proceeds with non-homestead.  The Court now finds that on December 14, 2018, net homestead proceeds of $73,709.15 from the sale of the Debtors’ homesteaded real property  (the “Property”) were deposited in Debtors’ Chase Bank account which then contained non-homestead proceeds. $50,000 of the homestead proceeds were admittedly spent by the Debtors but they failed to supply any evidence that the $50,000 was spent on acquiring a new homestead property. ORDERS that the homestead exemption asserted by the Debtors in the sale proceeds from the sale of the Property has lapsed to the extent of $58,368 and the sum of $58,368 is no longer exempt.


Homestead Post-Petition Sale Proceeds Retain Exempt Status in Chapter 7

Proceeds from the post-petition sale of the chapter 7 debtor’s homestead did not become part of the bankruptcy estate even though the debtor did not reinvest them in another homestead. Lowe v. DeBerry (In re DeBerry), No. 17-50315 (5th Cir. March 7, 2018).

When Curtis DeBerry filed for chapter 7 bankruptcy he exempted his homestead without objection by the trustee. Post-petition he sold the residence and transferred some of the proceeds to his wife and used the rest to pay unrelated criminal attorney fees. The trustee filed an adversary complaint arguing that, because Mr. DeBerry did not reinvest the proceeds in another homestead within six months as required by Texas proceeds law, the proceeds were not exempt. The bankruptcy court found in favor of Mr. DeBerry and the district court reversed.

On appeal, Mr. DeBerry relied on Hawk v. Engelhart (In re Hawk), 871 F.3d 287 (5th Cir. 2017) (blogged here), where the Fifth Circuit held that in chapter 7, an allowed, unconditional, exemption is removed from the bankruptcy estate and the property cannot be distributed to creditors even if the exemption loses its exempt status post-petition under the state proceeds rule. Like the IRA proceeds rule applicable in Hawk, the state homestead proceeds rule, TEX. PROP. CODE § 41.001(c), provides that “proceeds of a sale of a homestead are not subject to seizure for a creditor’s claim for six months after the date of sale.”

The circuit court found that the purpose behind the homestead proceeds rule is to allow the homeowner time to reinvest the proceeds in a new homestead without fear of attachment by creditors. In the bankruptcy context, the proceeds rule protects the debtor who no longer owns the homestead at the time of filing, by preventing the proceeds from the sale of homestead within six months of filing from entering the bankruptcy estate. In this case, however, it was not the debtor seeking the protection of the rule, but the trustee seeking to use the rule to bring the proceeds into the estate.

As it did in Hawk, the court relied on the snapshot rule to fix the debtor’s exemption at the time of the petition. To find otherwise, the court cautioned, would leave the issue of exemptions open through the entire course of the bankruptcy, the length of which would be at least partially controlled by the trustee, since a debtor could sell his homestead at any time. The court distinguished In re Zibman, 268 F.3d 298, 301 (5th Cir. 2001), where it held that a homestead exemption for proceeds of a homestead sold before the bankruptcy petition is merely conditional upon reinvestment in a new homestead. In contrast, Mr. DeBerry owned the homestead when he filed for bankruptcy and, therefore, his exemption was unconditional. The court also distinguished In re Frost, 744 F.3d 384, 389 (5th Cir. 2014), where it found that the proceeds from the post-petition sale of the chapter 13 debtor’s homestead were not exempt unless reinvested according to the Texas proceeds rule. The fact that Frost was a chapter 13 case was dispositive because, under section 1306(a)(1), property acquired post-petition is added to the bankruptcy estate. There is no comparable post-petition asset capture provision in chapter 7.

Based on its reasoning in Hawk, the Fifth Circuit reversed the district court and reinstated the order of the bankruptcy court.

9th BAP Holds that Post-Petition Excess Proceeds from sale of exempt or non-exempt real property is not DMI

In re Black, 609 B.R. 518 (9th Cir BAP 2019) “Excess proceeds that Chapter 13 debtor obtained, beyond those necessary to make final balloon payment contemplated in his confirmed plan and to satisfy his obligations thereunder, as result of post-confirmation sale of his real property, were not “disposable income,” such as had to be devoted to payment of unsecured creditors under plan.”

In re Krohn, Arizona Supreme Court No. CV-01-0246-CQ, Bankruptcy Court No. 00-10623-PHX-RTB  (8/27/2002)   Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed.  Shortly after that dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee’s sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: “May a trustee’s sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?”  We answer the certified question in the affirmative.


Whittle Development, Inc. v. Branch Banking & Trust Co. (10/11) It is common practice for mortgagees, such as banks, to foreclose on the collateral securing their loans and, in the absence of a third party purchaser for a reasonable value, to purchase such collateral by credit bidding their debt at the foreclosure sale. Due to the circumstances of foreclosure sales, however, often such sales do not result in as a high a sale price as would a private sale transaction. In the recent case of Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 2011 WL 3268398 (Bankr. N.D. Tex. July 27, 2011), the United States Bankruptcy Court for the Northern District of Texas (the “Court”) held that a bankruptcy trustee can avoid a prepetition foreclosure sale of a debtor’s property as a preferential transfer under section 547 of the Bankruptcy Code despite the fact that the sale was non-collusive and conducted in accordance with applicable state law. Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation. Whittle is significant not only because it calls into question the long-accepted notion that foreclosure sales are final, but also because it represents a departure from Supreme Court precedent in the related area of fraudulent transfers under section 548 of the Bankruptcy Code.

Background In 2007, Whittle Development, Inc. (“Whittle”) borrowed $2.7 million from Colonial Bank, N.A. (“Colonial”). Branch Banking and Trust Company (“BB&T”) later acquired Colonial and became the successor-in-interest to Colonial’s loan to Whittle. In 2010, BB&T declared a default under the loan, accelerated the outstanding payments owed by Whittle and foreclosed on the real property securing the loan. The foreclosure sale complied with all relevant state law requirements. A subsidiary of BB&T purchased the property at the foreclosure sale for $1.22 million.

Within ninety days of the foreclosure sale, Whittle filed a Chapter 11 petition. BB&T subsequently filed a proof of claim, claiming a debt owed of $2,855,243 of which BB&T alleged $1,181,513 represented a deficiency from the foreclosure sale. Thereafter, Whittle brought an action to avoid, as a preferential transfer, the foreclosure sale. Whittle took the position that the approximate value of the property was $3.3 million, that BB&T’s claim on the property at the time of foreclosure was approximately $2.2 million, and thus BB&T had received approximately $1.1 million more that it would have received in a chapter 7 case.

Whittle and BB&T agreed that the foreclosure sale effected a transfer of Whittle’s interest in property and that Whittle stated a “facially plausible” claim as to all the requirements of 11 U.S.C. section 547(b) except subsection (5), which “requires a finding that the creditor received more than it would have under chapter 7.” BB&T argued that the price paid at the foreclosure sale was the fair-market value of the property based on the Supreme Court’s decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Whittle asserted that since the property was worth more than the amount due to BB&T, BB&T received more than it would have received in a chapter 7. Whittle reasoned that BB&T received a total of $3,261,513, comprised of a deficiency claim in the amount of $1,181,513 and the net property value of $2,080,000 (calculated by subtracting the amount paid at foreclosure of $1.22 million from $3.3 million, the value of the property). Whittle argued that BB&T’s maximum recovery in chapter 7 would have been $2.2 million, the amount of BB&T’s claim at the time of foreclosure.

BFP v. Resolution Trust Corp. in BFP, a partnership formed for the purpose of buying a home defaulted on its mortgage payments, resulting in a foreclosure by the bank. A third party purchased the home for $433,000 at a properly noticed foreclosure sale shortly before the partnership filed for bankruptcy. Acting as a debtor in possession, the partnership sued to avoid the transfer as a fraudulent conveyance, alleging that the property had an actual value of $725,000.

In BFP, the Supreme Court addressed whether a foreclosure sale could be avoided as a constructively fraudulent transfer under section 548. The key issue in BFP was whether the foreclosure sale price could qualify as “reasonably equivalent value” or whether the purchaser has to pay fair market value for the property to be insulated from avoidance under section 548. The Supreme Court held that a “fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state’s foreclosure law have been complied with.” To hold otherwise, the Supreme Court stated, would interfere with the essential state interest in ensuring the security of title to real property. This ruling effectively insulated regularly conducted foreclosure sales from avoidance under fraudulent conveyance law. In Whittle, BB&T requested that this result be extended to preference actions.

Holding Despite the differences in the language of sections 547 and 548 of the Bankruptcy Code, the Court in Whittle noted that some courts have simply held that the test for preferences — a transfer which enables a creditor to receive more than in a chapter 7 liquidation — is essentially the same as the Supreme Court’s test for “reasonably equivalent value” in the fraudulent conveyance context. See Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836 (Bankr. W.D. Pa. 2001); Glaser v. Chelec, Inc. (In re Glaser), 2002 WL 32375007 (Bankr. E.D. Va. 2002).

In contrast, other courts analyzing the preference test simply highlight the plain language of the statute and point out that the test for whether a transfer is a preference is fundamentally different than the test used in the fraudulent conveyance statute. In Whittle, the Court sided with this second group of cases, holding that BFP was inapplicable in the preference context based on the clear language of the statute. “[L]ooking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a chapter 7 liquidation . . . .” The Court found BFP’s assessment of “reasonably equivalent value” wholly inapplicable to the preference context.

Conclusion The Whittle court denied BB&T’s motion to dismiss and allowed Whittle’s preference action to proceed. As such, the critical issue remaining is whether the value of the property was the appraised value of $3.3 million or the price paid at the foreclosure sale of $1.2 million. Whittle’s position is sustainable only if it rebuts the claim that the selling price of the property did not reflect its true value of $3.3 million and that the deficiency claim of $1,181,513 is worth its face amount. If Whittle’s position on value is correct, BB&T did receive a preference in the amount of $1.1 million. However, if BB&T’s position on value is correct, then BB&T did not receive a preference because it did not receive more than it would have in a chapter 7. It only received the sum of the amount paid at foreclosure and a deficiency claim.

Although the Whittle decision does not stand for the proposition that all valid prepetition foreclosure sales are susceptible to avoidance as preferential transfers, it does carve out a narrow subset of such sales for which the foreclosure sale may be anything but final. Based on this ruling and others like it, secured creditors and purchasers of foreclosed property who are also creditors of the estate should be cautious. These parties should view this case as a clear warning that, depending on the jurisdiction, the foreclosure sale may not be final. Additionally, purchasers of a foreclosed property must also take into account the risk that the property owner will file bankruptcy and seek to avoid the sale as a transfer under section 547 of the Bankruptcy Code. Purchasers may discount the price they are willing to pay for foreclosed properties to account for this additional risk, a result that is detrimental to the secured creditor, the debtor and its general creditors. If the Whittle opinion gains a widespread following in other jurisdictions and the market reacts to this risk by low bids from third parties, lenders may experience an increased incidence of being required to credit bid and take such assets into its OREO inventory. The determination of the amount of the credit bid may require re-examination as well in light of the risk that the credit bid will be determined to result in the lender receiving a voidable preference.

Hicks v. E.T. Legg & Associates (05/25/01 – No. D034398) Civil Code 2924c(e), and 2924g(d) do not prohibit the postponement of a foreclosure sale for successive periods of five of fewer business days during the period a sale is on hold because of an injunction or bankruptcy stay.

Bankruptcy of Wytch, US BAP 9th, Nos. 97-1089 and 79-1145, 7/1/98: 11 U.S.C. Section 349(b) does reinstate a debtor’s pre-petition property rights by invalidating specified bankruptcy court orders, Section 349(b) does not vacate orders for relief from the automatic stay under 11 U.S.C. Section 362(d). real property sold 2 hours after BK filed (chapter 7) property purchased by third party with no knowledge of bankruptcy, lender brought action to annul stay, no objection , relief granted. Case inadvertently dismissed, then reinstated, debtor’s argued that set aside earlier Order lifting stay – Bankruptcy Court and BAP did not agree – Order lifting stay stands.

Post-Petition attorney fees based on pre-petition contract: In re SNTL Corp., 571 F.3d 826, Bankr. L. Rep. ¶ 81,515 (9th Cir., June 23, 2009), pages 154, 183 (case no. 08-60001) The Ninth Circuit Court of Appeals, in a unanimous panel decision, affirmed, and adopted as its own, In re SNTL Corp., 380 B.R. 204 (9th Cir. B.A.P. 2007), holding that an unsecured creditor may include, as part of its claim, attorney’s fees incurred post-petition but based on a pre-petition contract. The opinion reasoned that (1) Code § 506(b), permitting an over-secured creditor to recover post-petition attorney’s fees, speaks only to the secured status of a claim, and not to its allowability; (2) the claim for attorney’s fees exists on the petition date, although it is contingent and unliquidated, as the “right to payment” exists on the petition date; thus, the claim is not disallowed under Code § 502(b)(1), requiring a bankruptcy court to “determine the amount of such claim … as of the date of the filing of the petition”; and (3) neither United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988) (holding that an undersecured creditor could not receive post-petition interest on the unsecured portion of its debt) nor public policy mandated disallowance of such a claim.

Helvetica Servicing Inc. v. Giraudo, 1 CA-CV 15-0490 2/9/17 The redemption price for a junior lienholder is the sale price of the secured property plus the outstanding value of the senior lienholder’s allowable deficiency judgment. If a property is subject to two deeds of trust and the senior lienholder purchases the property at a foreclosure sale without joining the junior lienholder, the junior lienholder may seek to redeem the property under A.R.S. § 12-1285(B).

The redeeming junior lienholder is not required to pay any portion of the senior lien that is unenforceable
against the judgment debtor under the statutes.


12-1282. Time for redemption

  1. The judgment debtor or his successors in interest may redeem at any time within thirty days after the date of the sale if the court determined as part of the judgment under which the sale was made that the property was both abandoned and not used primarily for agricultural or grazing purposes.
  2. The judgment debtor or his successor in interest may redeem at any time within six months after the date of the sale except when the court has made the determinations as provided in subsection A.
  3. If the redemption as provided in subsection A or B is not made, the senior creditor having a lien, legal or equitable, upon the premises sold, or any part thereof, subsequent to the judgment under which the sale was made, may redeem within five days after expiration of the applicable period provided in subsection A or B, and each subsequent creditor having a lien in succession, according to priority of liens, within five days after the time allowed the prior lienholder, respectively, may redeem by paying the amount for which the property was sold and all liens prior to his own held by the person from whom redemption is made, together with the eight per cent added to the amount as provided in section 12-1285.

VERY IMPORTANT TO CHECK STATUS OF CASE LAW:

Bankruptcy related: Most likely fee remains property of the estate until the foreclosure judgment is entered, after which the right to redeem is what remains property of the estate (see ARS § 12-1281 to -1289 (esp. -1282 and -1283(A)), but there’s a pair of older case saying that title doesn’t pass to the purchaser until after the redemption period passes, In re Sapphire Investments, 27 B.R. 56 (Bankr. Ariz. 1983), and that this period can be extended. In re Sapphire Investments, 19 B.R. 492 (Bankr. Ariz. 1982).

Cohen v. Chernushin (In re Chernushin), 18-1068 (10th Cir. Dec. 21, 2018)  At least when joint tenancies with right of survivorship are involved, the common conception of the snapshot test does not apply to fix an interest in property as of the filing date, according to the Tenth Circuit.

Gregory and Andrea Chernushin owned a second home in Colorado in joint tenancy with right of survivorship. Eventually, Mr. Chernushin (but not Ms. Chernushin) filed for bankruptcy. During the bankruptcy proceedings,
Mr. Chernushin died. The bankruptcy trustee, Robertson B. Cohen, then filed an adversary complaint against Ms. Chernushin, seeking to sell the home. Ms. Chernushin argued the bankruptcy estate no longer included any interest in the home because Mr. Chernushin’s joint tenancy interest ended at his death. The bankruptcy court agreed with Ms. Chernushin, as did the district court on appeal. Mr. Cohen now appeals to this court. Because the bankruptcy estate had no more interest in the home than Mr. Chernushin and Mr. Chernushin’s interest extinguished when he died, we affirm.

“Consequently, Section 363(h) confers no power on [the trustee] to sell the second home,” Judge McHugh said. In sum, she said, the estate had “no interest in the second home that extends beyond [the debtor’s] death.”

Madatian v. Goldman (In re Madatian) CC-18-1166-FKuTa 9th Cir BAP, 2/11/19.  This shows how dangerous it can be to assume filing for bankruptcy is under the debtor’s control (I would never allow a client to act in this way).  Trustee filed a Motion for Turnover to compel debtor to vacate her residential property and turn over possession of the property and certain records. Trustee argued that debtor had failed to cooperate with the real estate agent’s efforts to market and sell the property. Specifically, the Trustee argued that debtor had a duty to cooperate and turn over all property of the estate. The Trustee’s real estate agent needed to inspect the interior of the residential property, take photos, and show the property to prospective buyers. The agent twice attempted to make these arrangements with debtor, but debtor did not respond.

At the hearing on the Motion for Turnover, the bankruptcy court ruled that the Trustee was entitled to turnover of the Residential Property and the records associated with certain rental property. Regarding the rental property records, the court required debtor to surrender the requested documents under § 521(a)(4). It also found that debtor was “interfering with the Trustee’s collection of rent from which to pay expenses and refusing to simply provide the documents containing the information necessary to pay the expenses ….” Finally, the court stated that the Trustee “is absolutely entitled to turnover of the residence.”

The court stated that the Trustee can evict an uncooperative debtor under § 542(a), and “there’s ample evidence demonstrating that this Debtor and her family will not cooperate with the [Trustee’s] efforts to market the residence and that turnover is necessary.” The court listed the various facts demonstrating debtor’s failure to cooperate with the Trustee: “(1) Ms. Madatian failed to file chapter 11 monthly operating reports; (2) she failed to file a disclosure statement; (3) she sent the Trustee an e-mail threatening civil and criminal prosecution if the Trustee or her agents “trespassed” on the Rental Property; (4) she stormed out of the § 341(a) meeting and refused to appear thereafter; (5) she refused to provide the Trustee with her tax returns and other requested documents; (6) she appeared to tell the tenants not to pay rent to the Trustee; (7) she did not respond to the real estate agent’s e-mails; and (8) she did not provide any evidence to contravene the declaration testimony offered by the Trustee.

The court concluded that Ms. Madatian’s “obstreperous conduct demonstrates there’s really no practical way for the Trustee and her broker to market this residence and show it to prospective buyers while the Debtor continues to occupy it.” The bankruptcy court issued an order granting the Motion for Turnover but allowed debtor a reasonable time to vacate the residential property.

PMSIs in consumer goods are perfected without any recording (other than vehicles).  See ARS 47-9309(1).  Panels probably are part of the real estate.  However, the attached case says because the air conditioner is a consumer good, no recording was necessary (either UCC-1 or fixture filing).

Also, even assuming a lien is avoidable in BK, perfection is about priority and notice which may not be required to make a security agreement enforceable.  In other words, a security interest is not void by the fact a UCC or fixture filing is not recorded (assuming it is required because the collateral is not a consumer good).  Unless a trustee or DIP avoids it under the BK code.  A non-recorded financing statement/fixture filing cannot be avoided when it wasn’t required under state law to begin with (because they are consumer goods).

See attached case that says no recording was required for an air conditioner, which seems akin to solar panels.  And again, even if a recording were required, the lack of recording doesn’t defeat the lien.

Attached (NOTE: Bankruptcy Court in N. Carolina): UCC not necessary to grant security interest in consumer goods.pdf

Serap v. Idnani (In re Serap)

Ruling : BAP for 9th Circuit affirmed ruling of bankruptcy (D. Nev. May 2, 2019) in 2-1 split, concluding Nevada’s “one-action rule” renders a creditor’s deed of trust void if, prior to the completion of the creditor’s foreclosure sale, the creditor obtained a personal judgment against a guarantor who is unable to waive the protections of the one action rule under state law. The BAP agreed with bankruptcy court that under Nevada law, creditor’s lien was released and discharged once she obtained a personal judgment against the guarantor for full amount of the debt. Dissent disagreed with ruling on Nevada law.

(not bankruptcy case)
U.S. DISTRICT COURT DISMISSES NON-JUDICIAL FORECLOSURE: MERS NOT AUTHORIZED TO FORECLOSE MAY 15 2011

Issues order blocking foreclosure and grants declaratory relief to homeowner

Hooker v. Northwest Trustee Services, Bank of America, MERS District Court District of Oregon case no. 10-3111-PA “Considering what is commonly known about the MERS system and the secondary market in mortgage loans, plaintiffs allege sufficient facts to make clear that defendants violated the Oregon Trust Deed Act by failing to record all assignments of the trust deed.

“While I recognize that plaintiffs have failed to make any payments on the note since September 2009, that failure does not permit defendants to violate Oregon law regulating non-judicial foreclosure.
” … MERS, and its registered bank users, created much of the confusion involved in the foreclosure process. By listing a nominal beneficiary that is clearly described in the trust deed as anything but the actual beneficiary, the MERS system creates confusion as to who has to do what with the trust deed.

“The MERS system raises serious concerns regarding the appropriateness and validity of foreclosure by advertisement and sale outside of any judicial proceeding. “MERS makes it much more difficult for all parties to discover who “owns” the loan. When a borrower on the verge of default cannot find out who has the authority to modify the loan, a modification, or a short sale, even if beneficial to both the borrower and the beneficiary, cannot occur.”

After an individual debtor receives a bankruptcy discharge, a creditor may not seek to recover the discharged debt. Under section 524(a)(2) of the Bankruptcy Code, a discharge injunction permanently enjoins creditors from trying to collect discharged debts and prohibits a creditor from collecting any debt where the debtor has been discharged of personal liability.

A bankruptcy discharge does not completely extinguish the prepetition debt. While the debtor’s in personam (personal) liability for the debt is discharged, the discharge does not extinguish a creditor’s in rem rights to foreclose on the property against which it holds a lien (see Johnson v. Home State Bank, 501 U.S. 78, 82–83 (1991); Long v. Bullard, 117 U.S. 617, 620–21 (1886)).

When the mortgage against the debtor’s home remains enforceable in rem, and the debtor wants to keep its residence and continues to engage with its mortgage servicer by making monthly payments or participating in a loss mitigation program, the mortgage servicer is in a complicated situation. The mortgage servicer must balance trying to communicate with the discharged debtor about the mortgage without engaging in collection attempts that may violate the discharge injunction or other law. Mortgage servicers can face potential sanctions and damages for engaging with discharged debtor-borrowers and should therefore have clearly outlined policies and protocols for addressing these scenarios based on the servicer’s risk tolerance.

This Note provides guidance to mortgage servicers when servicing the residential mortgage debt of a discharged debtor-borrower, highlights the risks that servicers encounter from this continued relationship, and provides recommended language for post-discharge communications to help servicers mitigate the risk of discharge injunction violations.

Understanding a Residential Mortgage

Residential mortgages involve several key parties. These include:

  • The lender, who is the original entity (originator) that lends the money to the borrower.
  • The investor, who owns the mortgage loan. Investors can be government-sponsored entities (GSEs) such as the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) or privately owned. Often, the originator sells the loan to an investor.
  • A mortgage servicer who manages the loan account. The servicer can be the loan owner or the owner can sell the right to service the loan to another company. The duties of the servicer include:
    • collecting and processing payments;
    • sending monthly billing statements;
    • managing escrow accounts;
    • communicating with borrowers;
    • reviewing borrowers’ loss mitigation applications;
    • managing the property if abandoned by the borrower; and
    • managing foreclosures.

Discharged Debt in Individual Bankruptcy Cases

Debtors in both Chapter 7 and Chapter 13 bankruptcy may seek to retain their primary residence in bankruptcy. While debtors in a Chapter 11 or 12 bankruptcy may also seek to retain their residence, this Note addresses only individual Chapter 7 and 13 bankruptcies because individual Chapter 11 and Chapter 12 cases are less common.

Discharging Debt Under Chapter 7

A Chapter 7 debtor has several options to retain real property encumbered by a loan. A Chapter 7 debtor may:

  • Redeem the loan and pay it off.
  • Reaffirm the loan and agree under contract to be personally liable for the debt (despite the discharge of other debts) while maintaining ownership and possession of the property.
  • If the debtor is current on its loan, convert the mortgage into a non-recourse obligation through a “ride-through” and remain in the property while continuing to make regularly scheduled mortgage payments.

Unless the debt has been reaffirmed, a Chapter 7 discharge relieves an individual debtor from personal liability for mortgage debt and prevents the mortgage servicer from taking any collection actions against the debtor personally.

For more information on Chapter 7 bankruptcy, see Practice Note, Chapter 7 Liquidation: Overview (W-000-6231).

Discharging Debt Under Chapter 13

A Chapter 13 debtor will typically elect to file a Chapter 13 case to keep the family home. Generally, this is done when a Chapter 13 debtor chooses to catch up on past due payments and make go forward payments under the terms of the Chapter 13 plan of repayment.

A Chapter 13 debtor can also elect to surrender the property through the Chapter 13 bankruptcy plan. If the debtor receives a discharge but remains in possession of the property despite an intent to surrender in the confirmed plan, the debtor is discharged of personal liability. However, the security interest survives the discharge.

For more information on Chapter 13 bankruptcy, see Chapter 13 Bankruptcy Timeline (W-019-8355).

Section 24(J) Safe Harbor

Section 524(j) of the Bankruptcy Code provides a limited safe harbor for a creditor holding a secured claim on the debtor’s principal residence that seeks to collect periodic payments from the debtor in the ordinary course in lieu of foreclosure relief. Under particular circumstances, a creditor may take certain actions with respect to the mortgage outside of foreclosure without violating the discharge injunction.

Section 524(j) does not completely protect against allegations of discharge injunction violations that can arise from communications relating to collecting payments on the mortgage debt. If servicers elect to accept payments in lieu of foreclosing on the property post-discharge, it is critical to ensure that all servicing activity, particularly communications:

  • Are narrowly tailored to eliminate the risk that they are viewed as coercive.
  • Attempt to inform of, rather than demand, payments.

Post-Discharge Communication

While it is widely accepted that a mortgage servicer may send informational statements to a discharged debtor (see Best v. Nationstar Mortg. LLC, 540 B.R. 1, 10-11 (B.A.P. 1st Cir. 2015)), statements that attempt to coerce payment violate the discharge injunction. Therefore, servicers must adapt servicing correspondence to avoid a discharge violation through routine correspondence such as:

  • Periodic statements.
  • Default and foreclosure notices.
  • Loss mitigation solicitations. Loss mitigation is generally governed by investor requirements whereby the loan servicer solicits the borrower for information to evaluate it for potential loss mitigation options. This can mitigate or lessen the loss to the investor resulting from a borrower’s default. In some circumstances, loss mitigation can help a borrower keep its home through a loan modification (see Guidelines For Post-Discharge Loan Modification).
  • Force-placed insurance notices (where the lender must place an insurance policy on a property when the homeowners’ own property insurance has lapsed or is insufficient).

The only way to fully eliminate the risk of violating the bankruptcy discharge injunction is to cease all communications with debtor-borrowers who receive a discharge. This drastic change in practice is not realistic because:

  • Where a debtor-borrower still lives in the home and pays on the loan, the debtor-borrower may seek additional information about the loan, including how much the debtor borrower must pay to avoid foreclosure. Additionally, the discharge injunction does not absolve the servicer of sending escrow statements as required by the Real Estate Settlement Procedures Act (12 U.S.C. §§ 2601–2617).
  • Other non-bankruptcy laws may require certain communications. For example, the servicer may have a statutory requirement to send the debtor-borrower pre-foreclosure notices and information (see In re Kirby, 589 B.R. 456 (Bankr. D. Me. 2018) (post-discharge default letter sent by mortgagee to Chapter 7 debtors that included information required under Maine law to preserve mortgagee’s in rem right to foreclose, contained bankruptcy disclaimer in bold type and indicated that it was not attempt to collect a debt that might have been discharged in bankruptcy, did not violate the discharge injunction)).

Servicers must balance between providing statutorily mandated correspondence to debtor-borrowers and avoiding allegations that the correspondence violates the discharge injunction. In these cases, a carefully worded, narrowly tailored disclaimer is advisable.

Bankruptcy Disclaimer Wording

To determine whether a post-discharge communication violates the discharge injunction, courts conduct a fact-intensive inquiry into whether the communication was an attempt to collect the debt from the debtor-borrower personally. Courts heavily scrutinize the existence of and language within bankruptcy disclaimers on debtor-borrower communications. As part of this scrutiny, courts view these communications from the perspective of the unsophisticated consumer.

Courts have found discharge violations where correspondence with a debtor-borrower following the debtor’s discharge included:

  • Due dates.
  • Amounts owed.
  • A statement that a late fee would be charged for untimely payment.

Where courts have found violations for correspondence containing these items, the correspondence has typically been coupled with other conduct that could be viewed as coercive or harassing (see In re Forson, 583 B.R. 704 (Bankr. S.D. Ohio 2018); In re Sharak, 571 B.R. 13 (Bankr. N.D. N.Y. 2017); In re Vanamann, 561 B.R. 106 (Bankr. D. Nev. 2016); In re Brown, 481 B.R. 351 (Bankr. W.D. Pa. 2012); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).

Courts are less likely to find a violation if the statement:

  • Is for informational purposes only.
  • Has a proper disclaimer that includes a statement:
    • acknowledging the effect of the discharge;
    • that the creditor is not attempting to collect discharged debt against the debtor-borrower personally; and
    • that any payments would be voluntary.
  • (See In re McConnie Navarro, 563 B.R. 127 (Bankr. D. P.R. 2017) (monthly statements to debtor indicated, in multiple places and in all capital letters, that they were being sent for informational purposes only); In re Best, 2015 WL 6643649 (B.A.P. 1st Cir. 2015) (correspondence containing language stating that, if the debtor had received a discharge in bankruptcy, the communication was not an attempt to collect a debt and was provided for informational purposes only); In re Lemieux, 520 B.R. 361 (Bankr. D. Mass. 2014) (mortgagee’s notice of change in interest rate mailed to Chapter 7 debtor post-discharge did not violate discharge injunction because notice indicated that, if debtor had received a bankruptcy discharge, then notice was not intended to collect a debt, and mortgagee would “only exercise rights as against the property”).)

Mortgage servicers should be mindful that there is no language that has been deemed an absolute shield for a bankruptcy disclaimer. Even innocuous statements under the right facts may be found to violate the discharge injunction.

Circumstances of Communication

The specific circumstances of the borrower-servicer relationship, and the facts presented by the debtor-borrower, weigh heavily in a court’s analysis of whether the servicer has violated the discharge injunction. For example, if:

  • A servicer sends a large quantity of letters offering alternatives to foreclosure in a short period of time, it will look more like coercive behavior than sending similar correspondence once (see In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (lender sent 24 letters over ten-month period in post-discharge communication); In re Nibbelink, 403 B.R. 113 (Bankr. M.D. Fla. 2009) (mortgagee violated the discharge injunction by making numerous telephone calls and sending numerous letters to debtors post discharge, demanding that they become current or face foreclosure)).
  • The debtor-borrower indicated an intent to surrender the property, that fact will often weights in favor of a finding of a discharge injunction violation during a review of the servicer’s correspondence with the debtor-borrower (see In re Plummer, 513 B.R. 135 (Bankr. M.D. Fla. 2014); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011); In re Bruce, 2000 WL 33673773 (Bankr. M.D. N.C. 2000)).
  • The debtor-borrower previously requested that the servicer cease sending post-discharge correspondence, the court is more likely to find a violation (see In re Szenes, 515 B.R. 1 (Bankr. E.D. N.Y. 2014) (bank’s conduct of sending two letters to debtor inquiring about payment of debt, the second of which was mailed after debtors’ counsel had contacted bank and pointed out that the first letter violated discharge injunction, violated the discharge injunction); In re Nordlund, 494 B.R. 507 (Bankr. E.D. Cal. 2011) (debtors had requested that communications cease and had filed contempt motion against lender for excessive post-discharge communications)).

FDCPA Disclaimer

Under the Fair Debt Collection Practices Act (FDCPA), when a third-party debt collector makes any communication with a debtor, they must include a disclaimer that the correspondence:

  • Is a communication from a debt collector.
  • Is for collecting a debt.
  • Will use information obtained from the communication only for that purpose.

(15 USC § 1692e(11)).

Crafting correspondence to discharged debtor-borrowers is complicated when both an FDCPA disclaimer and a bankruptcy disclaimer are necessary. The servicer can appear to tell the debtor-borrower that it intends to collect the debt (under the FDCPA disclaimer) while also recognizing that they cannot do so (under the bankruptcy disclaimer). This has led some courts to find this type of double disclaimer misleading to the least sophisticated consumer.

Some courts find it permissible to include both FDCPA disclaimers and significant and prominent bankruptcy disclaimers (see Whalen v. Specialized Loan Servicing, LLC, 155 F.Supp.3d 905, 908 (W.D. Wis. 2016) (where the notice contained both FDCPA and bankruptcy discharge disclaimer language as follows: “Bankruptcy notice—if you are a customer in bankruptcy or a customer who has received a bankruptcy discharge of this debt, please be advised that this notice is sent to comply with the requirements of the Fair Debt Collection Practices Act (’FDCPA’). This notice constitutes neither a demand for payment nor a notice of personal liability to any recipient hereof, who might have received a discharge of such debt in accordance with applicable bankruptcy laws or who might be subject to the automatic stay of section 362 of the United States Bankruptcy Code. However, it is being sent to you as the lien against the collateral property has not been discharged in your bankruptcy.”)).

For more information on the FDCPA, see Practice Note, FDCPA Litigation: Key Issues and Considerations (W-007-2315).

Drafting a Disclaimer: Practice Pointers

To help mitigate the risk of discharge injunction violation allegations, mortgage servicers should ensure that all communications to discharged debtor-borrowers:

  • Acknowledge the bankruptcy discharge.
  • State the voluntary nature of continued payments.
  • Confirm that the debtor-borrower has no personal obligation to pay the servicer.
  • Prominently display any disclaimer, rather than include it as a part of the fine print.
  • Are specific and personalized, not generic or hypothetical.
  • Include repeated disclaimers on correspondence related to payments of any type.

Servicers should also consider the totality of the communications with debtor-borrowers, including quantity and frequency of the following:

  • All letters.
  • Loss mitigation overtures.
  • Monthly statements.
  • Escrow statements.
  • Phone calls.

Servicers should avoid sending any unnecessary letters to discharged debtor-borrowers, including letters not otherwise required by non-bankruptcy law.

Guidelines for Post-Discharge Loan Modification

A bankruptcy discharge of personal liability does not preclude a debtor-borrower from seeking a loan modification.

Loan Modification Generally

A loan modification permanently restructures the terms of a mortgage, which often provides a more affordable payment to the borrower. A loan modification can reduce monthly payments by:

  • Reducing the borrower’s interest rate.
  • Converting a variable interest rate to a fixed interest rate.
  • Extending the term of the loan.

There are many different loan modification programs available. While debtors may seek a loan modification following discharge, a servicer is not required by law to modify the loan. Instead, the servicer is directed through the modification process by investor guidelines such as the Department of the Treasury’s Home Affordable Modifications Program (HAMP) or a servicer’s own policies.

HAMP Guidelines for Loan Modifications

The now expired HAMP program provided clear and consistent loan modification guidelines when the debtor-borrower had discharged its personal liability.

The HAMP guidelines encouraged loan modification language to include:

  • A disclaimer that all payments are voluntary.
  • An acknowledgment that the servicer cannot seek to collect against the debtor-borrower personally.

Fannie Mae and Freddie Mac have both given guidance that loan modification documents include similar suggested language.

Servicer Guidelines for Loan Modifications

Where a debtor has received a discharge of personal liability, servicers are often wary of violating the discharge injunction and offering loan modifications in general. To protect themselves, servicers that offer loan modifications to post-discharge debtors should:

  • Tailor the loan modification offerings to only those debtor-borrowers who have indicated an intent to retain the property. Discharge violations are often found where a debtor-borrower surrenders the property and a servicer solicits that debtor-borrower for loss mitigation. Upon surrender, the debtor-borrower indicates intent to sever the relationship with the servicer, and the servicer should not offer loss mitigation to that borrower.
  • Carefully consider which products are offered to borrowers who have discharged personal liability. Investors, particularly GSEs, offer partial claim modification, which involves the borrower entering into a separate note, with a second lien position, in favor of the Department of Housing and Urban Development (HUD). When considered within the context of a bankruptcy discharge, the second lien note may be viewed as an impermissible post-discharge reaffirmation if it lacks language acknowledging the bankruptcy discharge. The standard subordinate note provided by HUD does not currently contain this acknowledgement language.
  • Take care when deciding whether, and how, to modify a discharged debtor-borrower’s loan. Servicers should ensure the loan modification process is tailored to mitigate risk of other discharge injunction violations.

Best Practices for Offering Loss Mitigation to Discharged Debtor-Borrowers

As a practical matter, regulators, investors, and bankruptcy courts expect lenders and servicers to evaluate debtor-borrowers for possible loan modifications post-discharge. Notwithstanding this expectation, lenders and servicers should proceed with caution when processing post-discharge requests for loss mitigation assistance, as courts are unlikely to accept widespread industry practice as a defense to discharge injunction violations.

Be Cautious When Using Templates

Investors often provide templates or required language to document loan modification agreements. Some specifically include language to reflect a bankruptcy discharge. For example, the Fannie Mae loan modification agreement (Fannie Mae Form 3179) provides:

Notwithstanding anything to the contrary contained in this Agreement, Borrower and Lender acknowledge the effect of a discharge in bankruptcy that has been granted to Borrower prior to the execution of this Agreement and that Lender may not pursue Borrower for personal liability. However, Borrower acknowledges that Lender retains certain rights, including but not limited to the right to foreclose its lien evidenced by the Security Instrument under appropriate circumstances. The parties agree that the consideration for this Agreement is Lender’s forbearance from presently exercising its rights and pursuing its remedies under the Security Instrument as a result of Borrower’s default thereunder. Nothing in this Agreement shall be construed to be an attempt to collect against Borrower personally or an attempt to revive personal liability.

If templates do not include similar disclaimers:

  • Servicers should consider discussing and seeking approval from the investor to incorporate these disclaimers.
  • Servicers can send separate correspondence to the debtor-borrower confirming that personal liability has been extinguished by the bankruptcy discharge and including an acknowledgement to be signed by both parties.

Evaluate Treatment of Debtor-Borrowers Who Have Surrendered

Courts generally view a debtor-borrower’s statement of intention to surrender property under Chapter 7 or intent to surrender property in a confirmed plan under Chapter 13 as evidence that the debtor-borrower no longer wants to continue the relationship with the servicer or stay in the property. To eliminate risk, servicers should avoid soliciting and entering into loan modifications following a debtor-borrower’s stated intent to surrender the property. These broad prohibitions are likely impractical because:

  • Many discharged debtor-borrowers who have surrendered property continue to make voluntary payments and may even seek loan modifications.
  • Some states such as California and Nevada have statutory pre-foreclosure requirements that include loss mitigation solicitation (see Practice Notes, Residential Foreclosures (CA): Pre-Foreclosure Requirements and Considerations (W-013-8580), Residential Foreclosures (Nonjudicial) (NV): Pre-Foreclosure Requirements and Considerations (W-010 1072), and Residential Foreclosures (Judicial) (NV): Pre-Foreclosure Requirements and Considerations (W-019-0178)).

Because of these situations, servicers should mitigate risk by developing robust procedures regarding solicitation of discharged debtor-borrowers for loss mitigation to avoid soliciting debtor-borrowers who have surrendered. This will allow servicers to:

  • Outline their process for credit pulls (even soft credit pulls) for debtor-borrowers who have indicated an intent to surrender. Under the Fair Credit Reporting Act, credit pulls are only permissible where there is a “legitimate business need for the information.” If the debtor-borrower has indicated it does not want the property anymore, there is arguably no legitimate business need for the mortgage servicer to pull that borrower’s credit.
  • Tailor communications to minimize the risk of violating the discharge injunction by drafting and reviewing these communications on a one-off basis rather than relying on forms to ensure all of the debtor-borrower’s specific circumstances are considered.

Personalized, individual analysis and communication decreases the likelihood of complaints or litigation by the debtor-borrower for post-discharge conduct relating to loan modification outreach.

Beware of Court-Specific Loss Mitigation Requirements

Among the nearly 100 bankruptcy courts across the country, approximately only two dozen courts or individual bankruptcy judges have programs permitting debtors and creditors to engage in loss-mitigation negotiations under court supervision. These have been published as:

  • Local rules.
  • Administrative orders.
  • Published formal guidelines.

These bankruptcy loss-mitigation programs share some common traits, such as the entry of an order setting deadlines and establishing certain ground rules for the process. However, many variations exist, including the use of an electronic portal for all communications related to the loss-mitigation process and the appointment of a mediator.

While many post-discharge loss mitigation efforts occur after a bankruptcy case has closed, servicers should stay apprised of all local court requirements related to loan modifications.

For more information on the local bankruptcy rules in bankruptcy courts across the jurisdictions, see Local Bankruptcy Rules Toolkit (W-001-4018).

Conduct Specialized Training for Customer-Facing Employees

To mitigate risk, lenders and servicers must develop and conduct cross-department training to educate employees on the complexity and risks of solicitation and loan modifications for discharged debtor-borrowers. Key concepts can also be memorialized in an FAQ or talking points, particularly for employees handling customer calls or complaints.

The original article, “Servicing Post-Discharge Residential Mortgage Debt,” first appeared in Practical Law on June 5, 2019.

Bradley Arant Boult Cummings LLP – Alexandra Dugan and Karlene A. Archer

California Homestead Works in Other States, Too article by Cathy Moran, California bankruptcy attorney.


Do Arizona exemptions have an extraterritorial effect?

730-day rule for the use of exemptions in bankruptcy: First, if there is a state “in which the debtor’s domicile has been located for the 730 days immediately
preceding the [anticipated] date of the filing of the petition,” that is the state whose law is applicable. 11 USC § 522(b)(3)(A). (Note that the rule requires the debtor to have been domiciled in that state for every one of those 730 days.) (“Days” means calendar days and the counting begins on the calendar day before the day the petition was filed. In re Dufva, 2008 WL 2065198 (Bankr.W.D.Mo.2008).)”

Arizona exemptions might have an extraterritorial effect,but there are competing opinions and case law is constantly developing. There is an argument that Arizona’s homestead statute is not limited to property located in Arizona, it is limited to the debtor’s “dwelling.” See In re Jarski, 301 B.R. 342, 346 (Bankr. D. Ariz. 2003) (RJH- a debtor may have several residences under A.R.S. 33-1102(a), but only one domicile.). Determining a debtor’s domicile is an issue of fact and requires i) residence and ii) a present intent to remain. See Colliers. Sounds like the debtors reside in Rocky Point and Arizona and maybe intend to make Rocky Point their permanent domicile?  Second, a state’s exemption laws may be used for out of state property to the extent allowed by the state exemption statutes. See In re Fernandez, 2011 WL 3423373 (W.D. Tex. Aug. 5, 2011) (attached, finding that NV exemption statutes allowed a claimed exemption of property located in TX.). AZ’s homestead exemption statute, like the NV statue, is really broad. It would costly to litigate, but for a house that is owned free and clear, it might be worthwhile, and such a claim could give you leverage with the Mexican trustee.


in In re Rody, 468 B.R. 384 (Bankr. D. Ariz. 2012) by judge Marlar:

“As in Cole, Arizona’s opt-out statute is also an “exemption” statute that limits the availability of the state’s exemption scheme to its residents. See also Camp, 631 F.3d at 761; Battle, 366 B.R. at 636–37. Moreover, neither party to this dispute has presented any Arizona authority for the extraterritorial effect of its personal property exemptions. Even assuming that A.R.S. § 33–1125 has extraterritorial effect, the exemption is limited to Arizona residents.

As an illustration, in In re Jarski, 301 B.R. 342 (Bankr.D.Ariz.2003), a debtor resided in a home in Arizona, filed bankruptcy in Arizona, and also owned a residence in California. This being a lien avoidance case, the court did not adjudicate which state’s exemption laws actually applied, but it nonetheless opined that Arizona’s homestead exemption statute “expressly contemplates that a debtor might have more than one residence that could qualify for the exemption because it creates a procedure for the debtor to choose which to claim as exempt.” Id. at 346; A.R.S. § 33–1102(A). The Jarski court also stated that § 522(b)(3)(A) (formerly § 522(b)(2)(A)) “determines whose law governs the exemptions, but not whether the property claimed exempt must exist in that same state.” Id. (emphasis added).

While the logic of Jarski and Arrol could require the Court to review the extraterritorial effect of Arizona’s personal property exemption in the event that Arizona law was “applicable,” 11 U.S.C. § 522(b)(3)(A), here, Arizona law is not applicable. Arizona’s opt-out statute limits the state exemptions to residents of Arizona.

33-1807(F) (and its counterpart in the Condo statutes) was amended last year such that the HOA lien for an unpaid assessment is extinguished unless proceedings to enforce the lien are instituted within 6 years after the full amount became due. It used to be 3 years. That means that any HOA claim filed in a Chapter 13 must be paid in full as a secured claim so long as the amount related to unpaid assessments from the last 6 years.

HOMEOWNERS’ ASSOCIATION “HOA” AND BANKRUPTCY ISSUES

IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO.  WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.

Even though the pre-petition obligations are discharged in the chapter 7, the HOA most likely (check the CC&Rs) has a statutory lien for unpaid dues.  Therefore the lien is not extinguished in a Chapter 7 even if the personal liability is discharged.   But, there is a 3 year statute of limitations on the lien itself.  ARS 33-1807(F) establishes a 3 year statute of limitations on each particular assessment, during which time the HOA must foreclose on that particular assessment, or the assessment is removed from the lien.  So to the extent there is pre-petition unpaid HOA assessments that are older than 3 years old, then they are not a lien anymore.  You will only need to take care of those that are less than 3 years old.  But see Section 108 (c) (tolling during chapter 7) (c) Except as provided in section 524 of this title, if applicable nonbankruptcy law, an order entered in a nonbankruptcy proceeding, or an agreement fixes a period for commencing or continuing a civil action in a court other than a bankruptcy court on a claim against the debtor, or against an individual with respect to which such individual is protected under section 1201 or 1301 of this title, and such period has not expired before the date of the filing of the petition, then such period does not expire until the later of—

  1. the end of such period, including any suspension of such period occurring on or after the commencement of the case; or
  2. 30 days after notice of the termination or expiration of the stay under section 3629221201, or 1301 of this title, as the case may be, with respect to such claim.

1) Statutory – Under Arizona planned community and condominium law (Title 33), an HOA has a statutory lien for unpaid assessments on the property which is subject to the CC&R’s. The statutory lien is subordinate only to property taxes and the first mortgage or deed of trust.  Arizona law specifically gives an HOA the right to foreclose its statutory lien.

2) Judicial – Any judgment lien that an HOA obtains through a lawsuit would be subject to the same requirements and restrictions that any other judicial lien has, and is potentially voidable in a bankruptcy case.

Limitation Based on Length and Amount of Delinquency
The HOA/COA cannot foreclose unless:
• the owner has been delinquent in paying the amounts secured by the lien (excluding collection fees, attorney fees, charges for late payments, and costs incurred with respect to the assessments) for a period of one year, or
• the delinquent amount is $1,200 or more, whichever occurs first (Ariz. Rev. Stat. § 33-1807(A), § 33-1256(A)).

No Foreclosure for Penalties and Fees Only
Fines, in contrast to assessments, are the penalties that an HOA or COA imposes if you violate the CC&R’s or other governing documents. For example, letting your lawn become overgrown, leaving trash cans outside, and parking in forbidden areas can result in fines and associated fees.  The HOA or COA can get a lien for penalties, fines, and related fees after the entry of a judgment in a civil suit, but it cannot foreclose that lien (Ariz. Rev. Stat. § 33-1807(A), §33-1256(A)). Basically, Arizona law makes a distinction between assessments and fines, and allows foreclosure actions only based on liens for unpaid assessments and related charges, but not for fines.

In re Foster sides with the HOA basically stating that the assessments are a liability that runs with the land. I do not know where that leaves Congress’ leaving out 1328(a) as one of the exceptions to 523(a)(16), – basically it makes no difference even though Congress specifically excluded 1328(a). (L. Karandreas briefed 9/11)


NOTE -BANKRUPTCY AND HOAs: HOAs have a statutory lien (usually in the CC&Rs) for unpaid assessments for the last 6 years. ARS 33-1256(F) and 33-1807(F). Used to be only 3 years, but the legislature quietly amended it to 6 years in 2019. So even though the personal liability of the pre-petition HOA assessments are discharged, the lien and the HOA’s foreclosure lien rights survive.

A.R.S. Section 33-964: B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property.  Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.  The protection of A.R.S. Section 33-964(B) is good, but not necessarily all-encompassing when the homestead’s equity exceeds $150,000.00.  In Judge Haines’ Rand v. United Auto Group decision 400 B.R. 749 (Bankr. Az 2008), he mentioned creditors had another possible recourse, specifically A.R.S. Section 33-1105 whereby the creditor can require an execution sale and obtain a bid in excess of the consensual liens plus the homestead amount and the allowable costs of sale under Title 12.  Also see, ARS 33-1103 (A)(4).  Except – To the extent that a judgment or other lien may be satisfied from the equity of the debtor exceeding the homestead exemption under section 33-1101.  See also Evans vs Young, 661 P.2d 1148 (Az Court of Appeals, Div 1, 1983) (“In conclusion, we find that a judgment lien obtained pursuant to A.R.S. § 33-964 does not extend to homestead property. Given the special protection of the homestead statutes, a judgment creditor can reach excess value in the property over the amount of the homestead exemption only by first invoking the appraisal procedure set forth in A.R.S. § 33-1105.”)

Note:  The recorded judgment lien survives the bankruptcy.  The creditor can go after real property the debtor owned at the time of filing the bankruptcy that secures that lien. This is the reason why these liens must be avoided under 522, irrespective of the Haines decision in Rand that the lien does not attach to debtor’s homestead.  522 addresses an “interest” in debtor’s property in support of a lien avoidance.  Irrespective of the fact as to whether there is equity in the property, or that the homestead exemption is not affected by a lien, a debtor’s interest is impaired, and thus avoidance is appropriate, otherwise, what is the point of 522?  The point of 522 is to give the debtor a fresh start and that is not achieved by the refusal to avoid a lien which will remain in place post discharge and could eventually be foreclosed when property values increase.

It appears that the judgment lien and the right to enforce that lien survive a Chapter 7.  If the judgment creditor seeks to enforce its lien prior to the expiration of that lien, perhaps the owner could file a Chapter 13 and pay the creditor the value of the excess equity.  Sales to enforce Judgment liens are done by Sheriff’s sale and somewhat rare. The expense in the form of bonding the Sheriff of this procedure make it very price prohibitive.


Pacific, et al. v. Castleton, et alDecember 27, 2018 – 1 CA-CV 17-0667 – Issue:Whether a judgment creditor may attach a judgment lien to homestead property, or whether it may execute on its judgment only by way of a forced sale of the property under Ariz. Rev. Stat. section 33-1105.  Holding: The court holds that a recorded judgment is not a lien on homestead property.

§ 33-964 A RECORDED JUDGMENT DOES NOT BECOME A LIEN ON HOMESTEAD PROPERTY:

Section 33-964 thus establishes the general rule that a recorded judgment does not become a lien on homestead property. See also Union Oil Co. of Ariz. v. Norton Morgan Commercial Co., 23 Ariz. 236, 245 (1922) (holding that “no lien shall be permitted to attach to the real property claimed as a homestead”).

EXCESS EQUITY (consensual secured debts + homestead) IN HOMESTEAD CAN BE JUDICIALLY FORECLOSED UNDER § 33-1105

See In Evans v. Young, 135 Ariz. 447, 453 (App. 1983), and Grand Real Estate, Inc. v. Sirignano, 139 Ariz. 8, 13 (App. 1983); see also In re Rand, 400 B.R. 749 (Bankr. D. Ariz. 2008) (clarifying that a recorded judgment does not create a lien on property subject to homestead even when the value of the property exceeds the amount of the homestead. “It remains the case that both the homestead statute and the judgment lien statute both conceive of the ‘homestead’ as being the real property, not the equity value of such real property.” 400 B.R. at 754); and In re Glaze, 169 B.R. 956, 966 (Bankr. D. Ariz. 1994)

ONCE A JUDGMENT ATTACHES IT RUNS WITH THE LAND

  • 33-964 establishes the general rule that a judgment lien does not attach to homestead property, and that homeowners hold their homestead property free and clear of judgment liens. See A.R.S. § 33-964(B). Although it is true that once a lien has attached, it “runs with the land,”, but in this case the judgment lien never attached to the Home in the first place.

ABANDONMENT OF HOMESTEAD BY CONVEYING TO TRUST A.R.S. § 33-1104(A):

  • When a homestead exemption is abandoned by a conveyance of the property, the judgment lien does not re-attach to the property upon the sale. See Sec. Tr. & Sav. Bank, 29 Ariz. 325, 332 (1925).
  • 33-1104(A)(3) a homeowner “may remove from the homestead for up to two years” without abandoning the homestead exemption. Sepics’ departure from the Home shortly before its sale did not constitute an abandonment.
  • Because of the protection afforded by the homestead statutes, the Judgment never attached as a lien to the Home. Therefore, the Sepics conveyed the Home free and clear of the Judgment.

CONCLUSION: For the foregoing reasons, we affirm the entry of an injunction enjoining a Sheriff’s sale of the Home.  Read opinion

AT LEAST ONCE OR TWICE A WEEK SOMEONE ASKS IF THEY HAVE TO PAY A JUDGMENT WHEN TRYING TO SELL THEIR HOME.

The answer is probably ‘no’, but depends on certain facts.  It depends on the law of the state where the judgment debtor lives.  It also depends on the type of assets the judgment debtor has – exempt versus non-exempt.

I WANT TO SELL MY HOME BUT THE TITLE COMPANY SAYS I HAVE TO PAY A JUDGMENT.

bad advice

Very bad information from title company.

Assuming this is in Arizona then you are dealing with a title company that does not know how to read Arizona law.  See Arizona Revised Statutes 33-964:

A. Except as provided in sections 33-729 and 33-730, from and after the time of recording as provided in section 33-961, a judgment shall become a lien for a period of ten years from the date it is given, on all real property of the judgment debtor except real property exempt from execution, including homestead property, in the county in which the judgment is recorded, whether the property is then owned by the judgment debtor or is later acquired. A civil judgment lien obtained by this state and a judgment lien for support, as defined in section 25-500, remain in effect until satisfied or lifted.

B. Except as provided in section 33-1103, a recorded judgment shall not become a lien on any homestead property. Any person entitled to a homestead on real property as provided by law holds the homestead property free and clear of the judgment lien.

If this is your Arizona home (homestead) then do not let the title company bully you into paying the judgment.  Move to a different title company who knows how to read the law.


Pacific, et al vs Castleton  Arizona Court of Appeals, Div 1, No. 1 CA-CV 17-0667  Pacific Western Bank and Coastline Re Holdings Corp. (collectively, “PWB”) appeal from the superior court’s entry of a preliminary injunction enjoining the sale of a home owned by the Castleton Revocable Trust (the “Castleton Trust”). Because a judgment creditor may not attach a judgment lien to homestead property, but instead may execute on its judgment only by way of a forced sale of the property under Arizona Revised Statutes (“A.R.S.”) § 33-1105, we affirm the superior court’s preliminary injunction. The amount of equity is immaterial.  The only method of enforcement is by Sheriff sale.

Notes: Bottom line for a creditor’s remedy:  The creditor cannot record a judgment lien and just wait for the house to sell before getting paid on a homestead, even if the house has $1 million dollars of equity.  It is incumbent on the creditor to initiate the sheriff sale on the homestead if and only if:  (a) it is done before the home is transferred/sold; and (b) there is sufficient equity above $150,000 (which means over and above homestead, plus all consensual or liens that attach by law).  There is no such thing as a judgment lien that attaches to a homestead.  This does not apply if the realty is not a homestead.


I FILED BANKRUPTCY AND WANT TO SELL MY ARIZONA HOME, BUT THE TITLE COMPANY REQUIRES THAT I PAY A JUDGMENT.

Again, the Arizona law applies even if you filed for bankruptcy.  It is important to list all debts, including judgments (remember you signed a sworn declaration that you listed 100% of all your debts).  Even if you forget to list this judgment it is still not a lien against your home (see the Arizona law above).

Note – selling your home while in bankruptcy will be a problem.  Most likely you will need to get permission from the court, or at least the trustee, in order to sell your home.  Talk to your bankruptcy attorney before deciding to sell your home.  If your bankruptcy attorney does not know the answer to your questions then hire another attorney.  This issue is a very basic one and every bankruptcy attorney should know the process.


WHAT SHOULD I DO?

If a title company does not ignore judgment liens that show up on a title report with respect to a seller’s homestead (even if no bankruptcy was filed), send a letter to the title company’s lawyer explaining the law and why this judgment lien does not attach to the homestead (include copies of the statutes: ARS 33-964.  Highlight the provisions dealing with homestead ‘exempt’ property.).  If the title company refuses to change their requirements then move the escrow to a title company that will (such as North American Title or First American Title).

Note: if there is equity over the allowed $150,000 homestead then the judgment creditor must initiate a sheriff sale before the property is transferred.  If the creditor fails to go through the sheriff sale process before the property is transferred, the creditor has lost its remedy to get paid with respect to the homestead.

Differing opinions on whether to use date of filing or date of plan confirmation: In a real estate climate where values are quickly changing, the question arises when is the value of the residence determined? The date of filing of the Chapter 13 petition, the date of confirmation, the date of the hearing on for determining the value or some other day?
§ 506(a) provides: “Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.” The various approaches all prefer their approach as meeting this standard.

For the proposition that the date of valuation is the date of hearing/confirmation see In re Crain, 243 B.R. 75 (Bankr. C.D. Cal 1999); In re Boyd, 410 B.R. 95, 100 (Bankr.N.D.Cal. Aug 04, 2009). See also In re Zook, 2010 WL 2203172 (Bankruptcy D. Ariz. 2010) [Chapter 11 proceeding in front of Judge Haines.] For the date of filing, see In re Dean, 319 B.R. 474 (Bankr.E.D.Va.2004) In re Young, 390 B.R. 480 (Bankr.D.Me.2008),

Some Courts ruled in favor a “flexible approach” or a determination of the “totality of circumstances.” In re Aubain, 296 B.R. 624, 636 (Bankr.E.D.N.Y.2003); Wood v. LA Bank (In re Wood), 190 B.R. 788, 794-96 (Bankr.M.D.Pa.1996) [Using an eleven factor analysis].

In re Krohn, Arizona Supreme Court No. CV-01-0246-CQ, Bankruptcy Court No. 00-10623-PHX-RTB  (8/27/2002)   Linda Lorraine Krohn (Krohn) filed a chapter 13 bankruptcy petition that was dismissed.  Shortly after that dismissal, her home was sold to Sweetheart Properties, Ltd. (Sweetheart) at a trustee’s sale conducted under authorization of a deed of trust. She filed a second bankruptcy petition seeking to have the sale of her home vacated for gross inadequacy of price. Bankruptcy Judge Redfield T. Baum certified a question of Arizona law to this court: “May a trustee’s sale of real property [under a deed of trust] be set aside solely on the basis that the bid price was grossly inadequate?”  We answer the certified question in the affirmative.


Whittle Development, Inc. v. Branch Banking & Trust Co. (10/11) It is common practice for mortgagees, such as banks, to foreclose on the collateral securing their loans and, in the absence of a third party purchaser for a reasonable value, to purchase such collateral by credit bidding their debt at the foreclosure sale. Due to the circumstances of foreclosure sales, however, often such sales do not result in as a high a sale price as would a private sale transaction. In the recent case of Whittle Development, Inc. v. Branch Banking & Trust Co. (In re Whittle Development, Inc.), 2011 WL 3268398 (Bankr. N.D. Tex. July 27, 2011), the United States Bankruptcy Court for the Northern District of Texas (the “Court”) held that a bankruptcy trustee can avoid a prepetition foreclosure sale of a debtor’s property as a preferential transfer under section 547 of the Bankruptcy Code despite the fact that the sale was non-collusive and conducted in accordance with applicable state law. Section 547 provides for the avoidance of a prepetition transfer made to a creditor, on account of an antecedent debt, if the debtor was insolvent and the transfer enabled the creditor to receive more than it would have in a hypothetical chapter 7 liquidation. Whittle is significant not only because it calls into question the long-accepted notion that foreclosure sales are final, but also because it represents a departure from Supreme Court precedent in the related area of fraudulent transfers under section 548 of the Bankruptcy Code.

Background In 2007, Whittle Development, Inc. (“Whittle”) borrowed $2.7 million from Colonial Bank, N.A. (“Colonial”). Branch Banking and Trust Company (“BB&T”) later acquired Colonial and became the successor-in-interest to Colonial’s loan to Whittle. In 2010, BB&T declared a default under the loan, accelerated the outstanding payments owed by Whittle and foreclosed on the real property securing the loan. The foreclosure sale complied with all relevant state law requirements. A subsidiary of BB&T purchased the property at the foreclosure sale for $1.22 million.

Within ninety days of the foreclosure sale, Whittle filed a Chapter 11 petition. BB&T subsequently filed a proof of claim, claiming a debt owed of $2,855,243 of which BB&T alleged $1,181,513 represented a deficiency from the foreclosure sale. Thereafter, Whittle brought an action to avoid, as a preferential transfer, the foreclosure sale. Whittle took the position that the approximate value of the property was $3.3 million, that BB&T’s claim on the property at the time of foreclosure was approximately $2.2 million, and thus BB&T had received approximately $1.1 million more that it would have received in a chapter 7 case.

Whittle and BB&T agreed that the foreclosure sale effected a transfer of Whittle’s interest in property and that Whittle stated a “facially plausible” claim as to all the requirements of 11 U.S.C. section 547(b) except subsection (5), which “requires a finding that the creditor received more than it would have under chapter 7.” BB&T argued that the price paid at the foreclosure sale was the fair-market value of the property based on the Supreme Court’s decision in BFP v. Resolution Trust Corp., 511 U.S. 531 (1994). Whittle asserted that since the property was worth more than the amount due to BB&T, BB&T received more than it would have received in a chapter 7. Whittle reasoned that BB&T received a total of $3,261,513, comprised of a deficiency claim in the amount of $1,181,513 and the net property value of $2,080,000 (calculated by subtracting the amount paid at foreclosure of $1.22 million from $3.3 million, the value of the property). Whittle argued that BB&T’s maximum recovery in chapter 7 would have been $2.2 million, the amount of BB&T’s claim at the time of foreclosure.

BFP v. Resolution Trust Corp. in BFP, a partnership formed for the purpose of buying a home defaulted on its mortgage payments, resulting in a foreclosure by the bank. A third party purchased the home for $433,000 at a properly noticed foreclosure sale shortly before the partnership filed for bankruptcy. Acting as a debtor in possession, the partnership sued to avoid the transfer as a fraudulent conveyance, alleging that the property had an actual value of $725,000.

In BFP, the Supreme Court addressed whether a foreclosure sale could be avoided as a constructively fraudulent transfer under section 548. The key issue in BFP was whether the foreclosure sale price could qualify as “reasonably equivalent value” or whether the purchaser has to pay fair market value for the property to be insulated from avoidance under section 548. The Supreme Court held that a “fair and proper price, or a ‘reasonably equivalent value,’ for foreclosed property, is the price in fact received at the foreclosure sale, so long as all the requirements of the state’s foreclosure law have been complied with.” To hold otherwise, the Supreme Court stated, would interfere with the essential state interest in ensuring the security of title to real property. This ruling effectively insulated regularly conducted foreclosure sales from avoidance under fraudulent conveyance law. In Whittle, BB&T requested that this result be extended to preference actions.

Holding Despite the differences in the language of sections 547 and 548 of the Bankruptcy Code, the Court in Whittle noted that some courts have simply held that the test for preferences — a transfer which enables a creditor to receive more than in a chapter 7 liquidation — is essentially the same as the Supreme Court’s test for “reasonably equivalent value” in the fraudulent conveyance context. See Chase Manhattan Bank v. Pulcini (In re Pulcini), 261 B.R. 836 (Bankr. W.D. Pa. 2001); Glaser v. Chelec, Inc. (In re Glaser), 2002 WL 32375007 (Bankr. E.D. Va. 2002).

In contrast, other courts analyzing the preference test simply highlight the plain language of the statute and point out that the test for whether a transfer is a preference is fundamentally different than the test used in the fraudulent conveyance statute. In Whittle, the Court sided with this second group of cases, holding that BFP was inapplicable in the preference context based on the clear language of the statute. “[L]ooking at the unambiguous language of the statute, it would seem that the only thing that must be shown is that the creditor did, in fact, receive more from the pre-petition transfer than it would have under a chapter 7 liquidation . . . .” The Court found BFP’s assessment of “reasonably equivalent value” wholly inapplicable to the preference context.

Conclusion The Whittle court denied BB&T’s motion to dismiss and allowed Whittle’s preference action to proceed. As such, the critical issue remaining is whether the value of the property was the appraised value of $3.3 million or the price paid at the foreclosure sale of $1.2 million. Whittle’s position is sustainable only if it rebuts the claim that the selling price of the property did not reflect its true value of $3.3 million and that the deficiency claim of $1,181,513 is worth its face amount. If Whittle’s position on value is correct, BB&T did receive a preference in the amount of $1.1 million. However, if BB&T’s position on value is correct, then BB&T did not receive a preference because it did not receive more than it would have in a chapter 7. It only received the sum of the amount paid at foreclosure and a deficiency claim.

Although the Whittle decision does not stand for the proposition that all valid prepetition foreclosure sales are susceptible to avoidance as preferential transfers, it does carve out a narrow subset of such sales for which the foreclosure sale may be anything but final. Based on this ruling and others like it, secured creditors and purchasers of foreclosed property who are also creditors of the estate should be cautious. These parties should view this case as a clear warning that, depending on the jurisdiction, the foreclosure sale may not be final. Additionally, purchasers of a foreclosed property must also take into account the risk that the property owner will file bankruptcy and seek to avoid the sale as a transfer under section 547 of the Bankruptcy Code. Purchasers may discount the price they are willing to pay for foreclosed properties to account for this additional risk, a result that is detrimental to the secured creditor, the debtor and its general creditors. If the Whittle opinion gains a widespread following in other jurisdictions and the market reacts to this risk by low bids from third parties, lenders may experience an increased incidence of being required to credit bid and take such assets into its OREO inventory. The determination of the amount of the credit bid may require re-examination as well in light of the risk that the credit bid will be determined to result in the lender receiving a voidable preference.

Hicks v. E.T. Legg & Associates (05/25/01 – No. D034398) Civil Code 2924c(e), and 2924g(d) do not prohibit the postponement of a foreclosure sale for successive periods of five of fewer business days during the period a sale is on hold because of an injunction or bankruptcy stay.

Bankruptcy of Wytch, US BAP 9th, Nos. 97-1089 and 79-1145, 7/1/98: 11 U.S.C. Section 349(b) does reinstate a debtor’s pre-petition property rights by invalidating specified bankruptcy court orders, Section 349(b) does not vacate orders for relief from the automatic stay under 11 U.S.C. Section 362(d). real property sold 2 hours after BK filed (chapter 7) property purchased by third party with no knowledge of bankruptcy, lender brought action to annul stay, no objection , relief granted. Case inadvertently dismissed, then reinstated, debtor’s argued that set aside earlier Order lifting stay – Bankruptcy Court and BAP did not agree – Order lifting stay stands.

Post-Petition attorney fees based on pre-petition contract: In re SNTL Corp., 571 F.3d 826, Bankr. L. Rep. ¶ 81,515 (9th Cir., June 23, 2009), pages 154, 183 (case no. 08-60001) The Ninth Circuit Court of Appeals, in a unanimous panel decision, affirmed, and adopted as its own, In re SNTL Corp., 380 B.R. 204 (9th Cir. B.A.P. 2007), holding that an unsecured creditor may include, as part of its claim, attorney’s fees incurred post-petition but based on a pre-petition contract. The opinion reasoned that (1) Code § 506(b), permitting an over-secured creditor to recover post-petition attorney’s fees, speaks only to the secured status of a claim, and not to its allowability; (2) the claim for attorney’s fees exists on the petition date, although it is contingent and unliquidated, as the “right to payment” exists on the petition date; thus, the claim is not disallowed under Code § 502(b)(1), requiring a bankruptcy court to “determine the amount of such claim … as of the date of the filing of the petition”; and (3) neither United Sav. Ass’n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365, 108 S. Ct. 626, 98 L. Ed. 2d 740 (1988) (holding that an undersecured creditor could not receive post-petition interest on the unsecured portion of its debt) nor public policy mandated disallowance of such a claim.

In re Goudelock, (9th Cir Ct Appeals, July 10, 2018)   The panel reversed the district court’s decision affirming the bankruptcy court’s summary judgment in favor of a condominium association, which sought in an adversary proceeding to determine the dischargeability of a debtor’s personal obligation to pay condominium association assessments that accrued between the date the debtor filed her Chapter 13 bankruptcy petition and the date the condominium unit was foreclosed upon.

Agreeing with the reasoning of the Seventh Circuit in a Chapter 7 case, the panel held that condominium association assessments that become due after a debtor has filed for bankruptcy under Chapter 13 are dischargeable under 11 U.S.C. § 1328(a). The panel concluded that the debt arose prepetition and was not among exceptions listed in § 1328(a). The panel held that the Takings Clause was not implicated because the condominium association retained its in rem interest. The panel also concluded that equitable arguments did not override the express provisions of the Bankruptcy Code.

The trustees will require the following (generic list):

1.    A purchase contract

2.    A proposed amendment to schedules I and J

3.    The debtors must be current with all plan requirements (plan payments and turn-over of taxes/refunds)

4.    If there is no title company involved yet, they will require that once a sales offer is made, and escrow opened, Preliminary Closing docs. But, the best practice is to open escrow before going this far.

Once sold, the debtors must file the amended schedules which means they need to be in another property and know the expenses associated with that property.

The letters from the trustee usually take less than a week to process.  More often than not, they do not require a court order assuming the confirmed plan re-vests the home to the debtor(s).

If pre-confirmation will probably need a Motion to sell.  If post-confirmation the sale can be done informally as long as the plan is confirmed.  Make certain the SOC/Plan provides that the property re-vests in the debtor(s) and that they are debtors are free to use the property in anyway (such as sell it or refinance) without further order of the court.  I believe the only reason for the trustee permission letter is the title agency and the trustee needs to know if the house sells for more then $150,000 in equity.

If you have to file a Motion, include the name of the mortgage company, the realtors, their percentage of commission, the proposed sales price, the amount of the debt and the purchaser’s name(s).  If no purchaser, a generic request to allow the sale with the provide that additional information, including amended schedules, can usually be filed.  The motion should allege that based on market prices, and opinions of the realtor, the sale price is reasonable and the sale would not impact on the creditors of the estate.

Ex-parte: see LR 2084-25 (http://www.azb.uscourts.gov/rule-2084-25


If lender is being difficult (debtor cannot get a final payoff for the sale – as evidenced by a history of lender’s failure to respond): consider drafting the motion to not provide for higher and better offers (unless the property could sell for more than secured debts, plus homestead). If the sale could (reasonably) produce non-exempt proceeds, then will need to allow for higher and better offers.

When there is a difficult lender – consider drafting the order to give the option to hold (escrow) out a specified amount of money and sell it free and clear of the mortgage lien.  That will help if later the lender continues to be difficult to work with (obtain payoff).

In re De Guillen, BAP No. CC-18-1248-LSTa and BAP No. CC-18-1242-LSTa (9th Circuit, Aug 26,2019) The homeowner’s association lien for unpaid assessments on the debtor’s condominium was limited to the amount of the HOA’s recorded pre-petition state court judgment, and the remainder of its claim was unsecured.  Highland Greens Homeowners Association (“Highland Greens”) appeals the bankruptcy court’s order sustaining in part Debtor Maria Basave de Guillen’s objection to Highland Greens’ proof of claim. The bankruptcy court found that, under California law, Highland Greens’ recorded notice of lien for delinquent homeowners assessments on Debtor’s condominium did not secure amounts accruing after the recordation of the lien. Accordingly, the bankruptcy court limited Highland Greens’ secured claim to the amount of its recorded pre-petition state court judgment, classifying the remainder of the claim as unsecured. We AFFIRM. 


NOTE -BANKRUPTCY AND HOAs: HOAs have a statutory lien (usually in the CC&Rs) for unpaid assessments for the last 6 years. ARS 33-1256(F) and 33-1807(F). Used to be only 3 years, but the legislature quietly amended it to 6 years in 2019. So even though the personal liability of the pre-petition HOA assessments are discharged, the lien and the HOA’s foreclosure lien rights survive.