Azby Fund v. Wadsworth Estates
- Summarized by Timothy Byrd , McGlinchey Stafford, PLLC
- 5 months 2 weeks ago
- Case Type:
- Business
- Case Status:
- Affirmed
- Citation:
- No. 22-30092 (5th Circuit, Dec 12,2022) Not Published
- Tag(s):
-
- Ruling:
- The Fifth Circuit affirmed the district court's ruling that a debtor in possession had prudential standing to contest the creditor's §506(b) motion. Also, the Fifth Circuit upheld the district court's ruling that the creditor lost its senior status by not reinscribing the mortgage within ten years of the date of the mortgage as required by Louisiana law.
- Procedural context:
- Following a debtor's Chapter 11 bankruptcy filing, a creditor moved to declare its creditor status under 11 U.S.C. § 506 related to a mortgage. The debtor in possession objected and argued that the creditor lost its secured status by failing to reinscribe a mortgage from 2006 within ten years as required under Louisiana law. The bankruptcy court found that the failure to timely reinscribe the mortgage under Louisiana law resulted in the creditor losing its priority status. The district court affirmed the bankruptcy court's decision on the merits and rejected the creditor's argument that the debtor in possession lacked standing to object to the creditor's motion under 11 U.S.C. § 506. Finally, the creditor appealed to the United States Fifth Circuit Court of Appeals.
- Facts:
- After the debtor declared Section 11 bankruptcy, a creditor moved to declare its creditor status under 11 U.S.C. § 506 related to a mortgage. The debtor in possession objected and argued that the creditor lost its secured status by failing to reinscribe a mortgage from 2006 within ten years as required under Louisiana law. The mortgage was amended in 2013 to change a section concerning obligations secured by the mortgage, but all of the other terms in the original 2006 mortgage remained the same. The bankruptcy court found that the failure to timely reinscribe the mortgage under Louisiana law resulted in the creditor losing its priority status over other junior creditors. Following an appeal by the creditor, the district court affirmed the bankruptcy court's decision on the merits and rejected the creditor's argument that the debtor in possession lacked standing to object to the creditor's motion under 11 U.S.C. § 506. The creditor then appealed to the United States Fifth Circuit Court of Appeals.
The Fifth Circuit affirmed the district court's order on both issues. First, the Fifth Circuit found that the debtor in possession had standing because it is vested with the same "rights, powers, and duties as a bankruptcy trustee under 11 U.S.C. § 1107(a) and a trustee is required to examine proofs of claims and object to improper claims under 11 U.S.C. § 704(a)(5). Since a debtor in possession takes on fiduciary responsibility to all creditors, it had prudential standing to contest the creditor's §506(b) motion.
Second, the creditor claimed that under Louisiana law, the recordation of the amended mortgage in 2013 started a new ten-year inscription period. Under Louisiana law, the general rule is that a recorded mortgage is effective for ten years from the date of the instrument. Louisiana Civil Code Article 3357. If the mortgage is reinscribed before the effective date of recordation ceases, the mortgage is effective for an additional ten years from the date of the notice of reinscription. La. Civil Code Article 3364. And if a mortgage is not properly reinscribed, junior security interests can outrank the mortgage. Accordingly, the Fifth Circuit upheld the district court ruling as the mortgage was not reinscribed within ten years.
- Judge(s):
- Judge Patrick E. Higginbotham, Judge Stuart Kyle Duncan, and Judge Kurt D. Engelhardt
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