After a debtor reopened her chapter 7 bankruptcy case, a lender moved for relief from the automatic stay in order to continue with a foreclosure action. The debtor objected, arguing among other things that the lender did not have standing to request relief.
A securitized mortgage loan had been made to the debtor. The deed of trust identified the bank that originated the loan as the lender and Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for the lender and its successors and assigns, as the beneficiary.
There was an assignment from the original lender to the initial trustee for the securitized assets (LaSalle Bank), and additional assignments to successor trustees (Bank of America, and then US Bank). The debtor stopped making payments in the summer of 2010, which she claimed was justified by the fact that she did not believe the note and deed of trust were properly assigned. In October 2011, US Bank commenced a non-judicial foreclosure. The debtor opposed on the basis that US Bank was not the real party in interest and lacked standing to foreclose.
Then in December 2011 the debtor filed a chapter 7 bankruptcy. She listed the property in her schedules with Bank of America (the trustee prior to US Bank) as the creditor holding a secured claim on the property. She disclosed the pending non-judicial foreclosure, but did not disclose any potential claims arising from the purported improper assignments.
She received a chapter 7 discharge in April 2012, and the bankruptcy case was closed in May 2012. At that point the property was deemed abandoned to the debtor pursuant to the Bankruptcy Code.
After the bankruptcy case was closed, the debtor commenced a lawsuit against US Bank and others in federal district court asserting various claims, including wrongful foreclosure, fraud, common law conspiracy, and intentional and negligent infliction of emotional distress. She also sought to enjoin the non-judicial foreclosure.
Prior to a hearing on the matter, US Bank agreed to dismiss the non-judicial foreclosure and commenced a judicial foreclosure in state court instead. The federal district court dismissed the case, finding that (1) the debtor had not scheduled her claims in her bankruptcy case, and thus they were not abandoned to her when the case was closed, and (2) the request for injunctive relief was moot.
The state court issued an order in the judicial foreclosure proceeding determining that US Bank had standing to bring the foreclosure action, “[a]pplying well-established law”:
- “Mere possession” of negotiable paper indorsed in blank gives rise to a legal presumption of ownership;
- a security interest follows the note;
- a holder of the note is entitled to enforce it and the corresponding security interest; and
- a negotiable instrument payable to bearer is negotiated by delivery alone.
Thus, the state court issued an order concluding that US Bank was entitled to a foreclosure order and directing that the property be sold.
The day before issuance of this order the debtor filed a motion with the bankruptcy court to reopen the bankruptcy case in order to avoid junior liens on the property. The motion did not mention the status of the property or disclose the pending judicial foreclosure proceeding. It also did not request imposition of a stay on the foreclosure proceeding, nor was the motion served on US Bank or its counsel.
The debtor also sought reappointment of the chapter 7 trustee so that the chapter 7 trustee could abandon her damage claims. The Chapter 7 trustee filed a notice of intent to abandon that was served on the entire creditor matrix. Presumably this is what brought the reopened case to US Bank’s attention, and it filed a motion requesting relief from the automatic stay to allow it to proceed with the sheriff’s sale of the property.
The bankruptcy court first determined that reopening the Chapter 7 case did not reinstate the automatic stay. Although a court could decide to impose a stay in connection with reopening a bankruptcy case, no stay was requested. In addition, the court’s order reopening the case also did not vacate the prior order closing the case, nor did it reinstate the case to its pre-dismissal position. Because there was no stay in effect, there was no need for relief from the stay.
However, in the alternative, the court addressed US Bank’s right to relief from the stay. As a threshold question, the court considered whether US Bank had adequately shown that it was a party in interest with standing. First, the bankruptcy court found that the state court’s decision had a preclusive effect. And even if it did not, US Bank presented sufficient evidence to show a “colorable claim” – which is all that is required to establish standing to request relief from the stay.
On the merits of the motion for relief, the court noted that the debtor had not made any payments since the summer of 2010, did not maintain insurance and did not pay property taxes. Thus US Bank’s interest was not adequately protected. Further, the debtor had no equity in the property, and by definition the property was not necessary for a reorganization since this was a chapter 7 liquidation case.
Consequently, the court found that no stay was applicable, and in the alternative US Bank sufficiently established standing and was entitled to relief from the stay.
Among other things, this opinion is interesting for what it had to say about the status of the automatic stay. An instinctive reaction is that any time a bankruptcy proceeding is pending, the automatic stay is in effect. This case illustrates that this may not always the case. So, on the one hand, a debtor reopening a case should request reinstatement of the automatic stay if that is important; although on the other hand, it would behoove a creditor to either confirm that the stay is not in place or seek relief before proceeding with actions that would otherwise be subject to the stay.