Mastan v. Salamon (In re Salamon)

9th Circuit Bankruptcy Appellate Panel; Case No. CC-14-1334-PaKiTa (April 6, 2015)
The Ninth Circuit Bankruptcy Appellate Panel ("BAP") affirmed the bankruptcy court's order disallowing the amended proof of claim filed by chapter 7 trustee, Peter Mastan ("Mastan"). A condition precedent to a creditor's enjoyment of the status set forth in 11 U.S.C. Sec. 1111(b) is that the creditor must hold "a claim secured by a lien on property of the estate."
Procedural context:
Mastan appeals the bankruptcy court's order disallowing the amended proof of claim filed in the chapter 11 case of James and Jeanne Salamon ("Salamons").
Jeanne Salamon ("Jeanne") purchased a 28-unit apartment complex ("Property") from a trust that was created and controlled by David Behrend ("Behrend"). At the time of the purchase the Property was encumbered by two deeds of trust. Additionally, Jeanne, entered into a "wrap around note" referred to as a All inclusive Note and All Inclusive Deed of Trust ("AITD") in favor of Earthwise, LLC (controlled by Behrend). Behrend recorded the third priority deed of trust. Lastly, Jeanne executed a fourth loan in favor of Earthwise (Behrend) secured by a fourth priority deed of trust. Behrend filed for relief under chapter 11, and Mastan was appointed as the chapter 11 trustee. Approximately one year later, Behrend's case was converted to chapter 7, and Mastran was appointed as the chapter 7 trustee. The Salamons filed for relief under chapter 11 on June 8, 2012, and stipulated to termination of the automatic stay with the first priority lien holder on the Property. Mastran filed a secured proof of claim relating to the AITD loan and fourth loan. The bankruptcy court granted stay relief on October 19, 2012. On March 13, 2013, the Property was sold at foreclosure sale. Mastan learned the foreclosure sale generated fund in excess of the first and second priority liens on the Property and made demand for the excess funds. The funds received were sufficient to pay the balance of the AITD loan and a portion of the fourth loan. After applying the funds to the loans, Mastan filed an amended proof of claim for balance remaining on the fourth loan. The Salamons filed a motion to disallow Mastran's amended proof of claim asserting that Mastran was not entitled to an unsecured claim for the deficiency pursuant to state law. Mastran asserted that 11 U.S.C. Sec. 1111(b) overrides state law prohibiting deficiency claims. The bankruptcy court entered an order determining that the Property was property of the estate until the foreclosure sale occurred on March 13, 2013, and the state statutory anti-deficiency law applied; therefore, Mastran's amended proof of claim was disallowed.
PAPPAS, KIRSCHER, and TAYLOR, Bankruptcy Judges.

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