A subordinate secured lender did not have appellate standing to challenge the bankruptcy court’s annulment of the automatic stay in favor of a senior lender, even though it meant the subordinate lender’s lien was extinguished, the Ninth Circuit held.
In a perfect world, it might have been preferable to pour out the subordinate lender on the ground of laches, but the Ninth Circuit panel based its decision on circuit authority, which says that a creditor lacks standing to appeal an order finding no violation of the automatic stay.
In the case on appeal, enforcing the automatic stay would have conferred benefit only on the subordinate lender, not on creditors generally. The opinion may not mean that creditors are always out of luck when the debtor or trustee is asleep at the switch.
Foreclosure Violates the Automatic Stay
The Ninth Circuit’s nonprecedential, per curiam opinion on October 28 only contains a cursory statement of the facts.
The record indicates that the couple purchased their home in 2005 and filed a chapter 7 petition in 2008. They received their discharges in 2010. While the case was pending, and without notice to anyone, the homeowners’ association filed a notice of delinquency giving rise to a lien having priority under California law over the lien of the $1.4 million mortgage.
After discharge, but while the case was still pending, and again without notice to anyone, the homeowners’ association conducted and completed a foreclosure sale, taking title to the property and ostensibly extinguishing the mortgage.
Four years after the bankruptcy case was closed and nine years after discharge, the mortgage lender reopened the case and filed a motion seeking a declaration that the foreclosure sale violated the automatic stay and was void. The homeowners’ association countered with a motion of its own to annul the automatic stay.
No Standing to Enforce the Stay
The bankruptcy court recognized there was a willful stay violation, meaning that the foreclosure sale was void. The bankruptcy judge nevertheless found cause for annulling the automatic stay, that is, retroactively modifying the automatic stay to validate the foreclosure. The bankruptcy court recognized the “extreme consequence” of annulling the stay, because it meant the mortgage was extinguished.
The mortgage lender appealed, but the Bankruptcy Appellate Panel dismissed the appeal for lack of appellate standing. The panel of the Ninth Circuit agreed.
The result turned on Tilley v. Vucurevich (In re Pecan Groves of Ariz.), 951 F.2d 242, 245 (9th Cir. 1991), where the Ninth Circuit held that “a creditor has no independent standing to appeal an adverse decision regarding a violation of the automatic stay.”
The mortgage lender argued, unsuccessfully, that the automatic stay protects both debtors and creditors.
The panel of the Ninth Circuit disagreed, interpreting Pecan Groves to mean “that the automatic stay is not intended to benefit individual creditors.” Consequently, the panel said that the mortgage lender was not a “person aggrieved” because it was not “directly and adversely affected pecuniarily,” citing Harkey v. Grobstein (In re Point Ctr. Fin., Inc.), 890 F.3d 1188, 1191 (9th Cir. 2018). To read ABI’s report on Point Center, click here.
Since the automatic stay “is not intended to benefit individual creditors,” the Ninth Circuit panel dismissed the appeal because the mortgage lender lacked appellate standing. Stating the result more fully, the panel said that the lender did “not have standing to enforce the automatic stay against other creditors, to oppose the motion for retroactive annulment of the automatic stay, or to appeal the bankruptcy court’s grant of the retroactive annulment motion.”
Observations
Taking Pecan Groves at face value, creditors aren’t necessarily out of luck if a debtor or trustee declines to enforce the automatic stay, to the detriment of creditors generally.
A creditor could file a motion seeking derivative standing to enforce the stay on behalf of the estate, just like creditors or committees can be authorized to file a lawsuit if the debtor ignores a demand to pursue a meritorious claim.
In the case on appeal, the debtors purchased their home in 2005 and evidently fell behind on the mortgage following the crash in the housing market. Presumably, there was no equity in the home and thus no reason to enforce the automatic stay for the benefit of creditors generally.
Furthermore, the mortgage lender could have protected its rights by paying the fees owing to the homeowners’ association or foreclosing its own mortgage.
In short, the facts did not present a case for allowing one creditor to enforce the stay for its benefit alone.
A subordinate secured lender did not have appellate standing to challenge the bankruptcy court’s annulment of the automatic stay in favor of a senior lender, even though it meant the subordinate lender’s lien was extinguished, the Ninth Circuit held.
In a perfect world, it might have been preferable to pour out the subordinate lender on the ground of laches, but the Ninth Circuit panel based its decision on circuit authority, which says that a creditor lacks standing to appeal an order finding no violation of the automatic stay.
In the case on appeal, enforcing the automatic stay would have conferred benefit only on the subordinate lender, not on creditors generally. The opinion may not mean that creditors are always out of luck when the debtor or trustee is asleep at the switch.
Foreclosure Violates the Automatic Stay
The Ninth Circuit’s nonprecedential, per curiam opinion on October 28 only contains a cursory statement of the facts.
The record indicates that the couple purchased their home in 2005 and filed a chapter 7 petition in 2008. They received their discharges in 2010. While the case was pending, and without notice to anyone, the homeowners’ association filed a notice of delinquency giving rise to a lien having priority under California law over the lien of the $1.4 million mortgage.