Court Opinion

ID: 4161962
Source: CourtListenerOpinion
Date Created: 2017-04-20 17:04:24.059614+00
Date Added: 2024-06-11T07:46:48.971550
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

IN RE JAMES HARRY SALAMON;              No. 15-60031
JEANNE FIXLER SALAMON,
                       Debtors,           BAP No.
                                          14-1334

PETER J. MASTAN, Chapter 7
Trustee,                                  OPINION
                        Appellant,

                v.

JAMES HARRY SALAMON; JEANNE
FIXLER SALAMON,
                      Appellees.

             Appeal from the Ninth Circuit
              Bankruptcy Appellate Panel
   Kirscher, Pappas, and Taylor, Bankruptcy Judges,
                       Presiding

       Argued and Submitted February 8, 2017
                Pasadena, California

                 Filed April 20, 2017
2                          IN RE SALAMON

        Before: Mary M. Schroeder, Andre M. Davis,*
            and Mary H. Murguia, Circuit Judges.

                   Opinion by Judge Schroeder

                            SUMMARY**

                             Bankruptcy

    The panel affirmed the Bankruptcy Appellate Panel’s
decision affirming the bankruptcy court’s order disallowing
a claim in a Chapter 11 case.

    Under 11 U.S.C. § 1111(b), those who hold non-recourse
liens on real property are granted recourse against the
bankruptcy estate upon the filing of the bankruptcy petition.
Those protected are creditors who have “a claim secured by
a lien on property of the estate.” The panel held that a
creditor does not continue to have a right of recourse after
there has been a non-judicial foreclosure, so that the property
is no longer part of the estate and the liens have been
extinguished.

    *
     The Honorable Andre M. Davis, United States Circuit Judge for the
Fourth Circuit, sitting by designation.
    **
       This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                       IN RE SALAMON                           3

                         COUNSEL

John N. Tedford, IV (argued) and Aaron E. De Leest,
Danning Gill Diamond & Kollitz LLP,s Los Angeles,
California, for Appellant.

Michael R. Totaro (argued) and Maureen J. Shanahan, Totaro
& Shanahan, Pacific Palisades, California, for Appellees.

                          OPINION

SCHROEDER, Circuit Judge:

    In this bankruptcy appeal we consider for the first time
some of the key provisions of 11 U.S.C. § 1111(b) that apply
to Chapter 11 proceedings. They provide that those who hold
non-recourse liens on real property are granted recourse
against the bankruptcy estate upon the filing of the
bankruptcy petition. Those protected are creditors who have
“a claim secured by a lien on property of the estate.” The
issue before us is whether the creditor continues to have a
right of recourse after there has been a non-judicial
foreclosure, so that the property is no longer part of the estate
and the liens have been extinguished. The Bankruptcy
Appellate Panel (“BAP”) in a well-reasoned decision said no
and we affirm. Mastan v. Salamon (In re Salamon), 528 B.R.
171, 175–78 (B.A.P. 9th Cir. 2015).

                      BACKGROUND

    In April of 2009, Jeanne Salamon purchased a piece of
real property located at 716 South Westlake Avenue, Los
Angeles, California (“the Westlake Property”) from David
4                      IN RE SALAMON

Behrend. The Westlake Property was already subject to two
liens. Rather than fund the purchase price at the time of
closing, Salamon executed a wrap-around mortgage in the
amount of $1,030,000 in favor of Behrend called the “All
Inclusive Note Secured by a Deed of Trust” (the “All-
Inclusive Note”) and funded the balance of the purchase price
with a “Note Secured by Deed of Trust” (“the Note”) in the
amount of $325,000 in favor of Behrend. Under the terms of
these notes, Salamon would make monthly payments to an
entity designated by Behrend, and that entity would make
monthly payments to the senior lienholders.

    Behrend, the seller, filed a Chapter 11 bankruptcy petition
on March 25, 2010, and on March 1, 2011, Peter Mastan, the
appellant, became the Behrend estate’s Chapter 11 trustee;
the proceeding was later converted into a Chapter 7
bankruptcy with Mastan remaining the trustee. On June 8,
2012, Salamon, the buyer, and her husband James, the
appellees, also filed a Chapter 11 bankruptcy petition. On
October 3, 2012, Mastan filed a timely proof of claim on
behalf of the Behrend estate for the two liens secured by the
Westlake Property. On October 19, 2012, the bankruptcy
court approved a stipulation between the Salamons and the
most senior lienholder that lifted the stay so the senior
lienholder could foreclose on the Westlake Property.

    The Westlake Property was sold at a foreclosure sale on
March 13, 2013 for $1,275,500. The foreclosing trustee sent
Mastan, as the trustee of the seller’s estate, a check for
$150,560.60, representing the balance of the sale proceeds.
This satisfied the whole of the All-Inclusive Note, but only
part of the Note. On April 15, 2014, Mastan filed an
amended proof of claim for the unsecured balance of the
Note, $303,304.75. The Salamons filed a motion for an order
                       IN RE SALAMON                         5

disallowing the amended claim on the ground that there was
no longer any property in the estate on which there could be
a recourse lien. The bankruptcy court agreed and the BAP
affirmed in a published opinion, holding that since Mastan no
longer had liens on property of the estate, his non-recourse
claim could not be transformed into a recourse claim under
11 U.S.C. § 1111(b). See In re Salamon, 528 B.R. at 176–77.

                       DISCUSSION

    The only issue for us to decide is whether under 11 U.S.C.
§ 1111(b) Mastan could treat his claim based on a non-
recourse lien as a recourse claim after the property in the
estate had been sold. The text of that statute in relevant part
states:

       A claim secured by a lien on property of the
       estate shall be allowed or disallowed under
       section 502 of this title the same as if the
       holder of such claim had recourse against the
       debtor on account of such claim, whether or
       not such holder has such recourse unless:

       (i) the class of which such claim is a part
       elects . . . application of paragraph (2) of this
       subsection; or

       (ii) such holder does not have such recourse
       and such property is sold under section 363 of
       this title or is to be sold under the plan.

11 U.S.C. § 1111(b)(1)(A).
6                      IN RE SALAMON

     Mastan argues that whether he has a claim secured by a
lien on property of the estate must be determined by looking
to the situation on the date the Salamon bankruptcy was filed.
According to Mastan, this is because 11 U.S.C. § 502 states
that a bankruptcy court “shall determine the amount of such
claim in lawful currency of the United States as of the date of
the filing of the petition.” 11 U.S.C. § 502(b). As the BAP
correctly noted, the question is “whether that condition was
satisfied because Mastan held such a lien on the date the
Salamons’ petition was filed, even though the lien no longer
existed when the allowance of Mastan’s claim was
challenged.” In re Salamon, 528 B.R. at 176.

    Mastan asks us to interpret the phrase “property of the
estate” in § 1111(b)(1)(A) as a reference to the property that
existed at the time of filing the petition, and fix his rights as
of that date. But neither the terms of § 1111(b)(1)(A) nor
§ 502 support that result. Under § 502, what must be
determined as of the date of the filing of the petition is the
amount of the claim. As the BAP explained, there is no case
law supporting Mastan’s interpretation of § 1111(b)(1)(A),
and to the degree there is any case law, it is contrary to his
position. The only other circuit to address this precise issue
held there was no lien on property in the estate after a
foreclosure. The foreclosure “extinguished the ‘claim
secured by a lien’ necessary to invoke [section 1111(b)].”
Tampa Bay Assocs., Ltd. v. DRW Worthington, Ltd. (In re
Tampa Bay Assocs., Ltd.), 864 F.2d 47, 51 (5th Cir. 1989).

    It is true that the Fifth Circuit did not go into depth in
explaining this conclusion because its primary holding was
based on other grounds, which have since been undermined
by an intervening Supreme Court decision. See Law v.
Siegel, 134 S. Ct. 1188, 1196–97 (2014) (clarifying that
                        IN RE SALAMON                           7

courts may not create non-statutory exceptions to the
bankruptcy code). Other circuits, however, have emphasized
the basic statutory condition that the existence of a lien on
property in the estate is necessary to invoke § 1111(b). See
In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596, 598
(7th Cir. 2013) (“There is one prerequisite: the claim is
secured by a lien on the property of the estate.”) (internal
quotation omitted); 680 Fifth Ave. Assocs. v. Mutual Benefit
Life Ins. Co. (In re 680 Fifth Ave. Assocs.), 29 F.3d 95, 98 (2d
Cir. 1994) (“The only precondition to the statute’s application
is a claim secured by a lien on property of the estate.”)
(internal quotation and citation omitted).

    The Supreme Court has made clear that courts are to
apply the bankruptcy code as written so long as the
“disposition required by the text is not absurd.” Lamie v. U.S.
Tr., 540 U.S. 526, 534 (2004). Courts are not allowed to
construct extra statutory exceptions. See Law, 134 S. Ct. at
1196–97. The plain language of § 1111(b) mandates that it
cannot apply if the lien does not exist. As Mastan concedes,
the lien no longer existed when his claim was challenged.
Thus, under its plain language, § 1111(b) has no applicability
to his claim.

     This result is sensible, not absurd. When interpreting a
provision of the bankruptcy code, we look to its “context and
. . . place in the overall statutory scheme.” Danielson v.
Flores (In re Flores), 735 F.3d 855, 859 (9th Cir. 2013) (en
banc) (internal quotation and citation omitted). In a
foreclosure sale, the debtor is not electing to sell the property,
or retain it to benefit the estate. Rather, a creditor is electing
to sell the property. The purpose of § 1111(b), however, is to
“put[] the Chapter 11 debtor who wishes to retain collateral
property in the same position as a person who purchased
8                      IN RE SALAMON

property ‘subject to’ a mortgage lien would face in the non-
bankruptcy context.” 7 Alan N. Resnick & Henry J.
Sommers, Collier on Bankruptcy, ¶ 1111.03[1][a] (16th Ed.
2013). The debtor cannot improve his position by filing for
bankruptcy and retaining the property.

    Here, the Salamons were not seeking to retain the
collateral property. After they filed for bankruptcy, a creditor
elected to sell it. Thus, in the context of the statutory scheme,
it would make little sense to grant Mastan the creditor
protections of § 1111(b), and the plain meaning of the
statutory language is reinforced. Mastan is left with exactly
what he bargained for in the non-bankruptcy context: a senior
creditor foreclosed on the property, extinguishing Mastan’s
junior liens and leaving Mastan without recourse to pursue
deficiency judgments against the Salamons. If anything,
allowing Mastan to assert a deficiency claim against the
Salamons would afford him more rights in bankruptcy than
he would otherwise have under state law. In re Costas,
555 F.3d 790, 797 (9th Cir. 2009) (holding that the
bankruptcy code “largely respects substantive state law rights,
neither granting a creditor new rights in the debtor’s property
nor taking any away”).

    Under California law, the liens securing Mastan’s claim
were extinguished as a necessary consequence of the judicial
foreclosure sale. Thoryk v. San Diego Gas & Elec. Co., 225
Cal. App. 4th 386, 399 (2014). As the BAP noted, “Although
Mastan’s original proof of claim may have asserted a claim
secured by liens on property of the estate, as recognized in the
amended proof of claim Mastan filed, those liens were
eliminated as a matter of law as a result of the foreclosure.”
In re Salamon, 528 B.R. at 178. Accordingly, we hold that
§ 1111(b)’s requirement that a creditor hold a “claim secured
                       IN RE SALAMON                           9

by a lien on the property of the estate” means that if a
creditor’s claim, for any reason, ceases to be secured by a lien
on property of the estate, the creditor can no longer transform
a non-recourse claim into a recourse claim.

    Mastan argues that under this reading, part of § 1111(b)’s
language will be rendered meaningless. He points to an
exception in § 1111(b), which disallows non-recourse claims
when “property is sold under § 363 of this title.” Mastan
asserts that if there is no recourse once the property is sold at
a foreclosure sale, there is no reason to create an exception
providing there is no recourse after a § 363 sale. Section 363
provides that “[t]he trustee, after notice and a hearing, may
use, sell, or lease, other than in the ordinary course of
business, property of the estate.” 11 U.S.C. § 363(b)(1). The
§ 363 sale exception is not meaningless. A § 363 sale is a
sale by the trustee of property of the estate secured by an
allowed claim. Unlike a non-judicial foreclosure sale, a § 363
sale does not necessarily extinguish liens, so bankruptcy
courts are authorized to order that liens be extinguished. 11
U.S.C. § 363(f). Thus, the § 363 exception serves to prevent
a creditor whose liens survive a § 363 sale from seeking
recourse against both the purchaser and the debtor.

    We also note that Mastan had an alternate means of
protecting his rights, which he chose not to pursue. As a
creditor of the Salamon’s bankruptcy estate, he could have
objected to the relief from the automatic stay to permit the
foreclosure sale if he was concerned the foreclosure sale
would not adequately protect his rights. He made no such
objection.

   Since Mastan’s claim is no longer secured by any lien on
property, he cannot claim the protections of § 1111(b). Under
10                     IN RE SALAMON

California law, he has no recourse for his claim, and thus, the
bankruptcy court properly disallowed it.

     AFFIRMED.