In re Richard Louis Alexander

Nos. 11-1797 & 11-1798
Affirming the judgments of the district court and the bankruptcy court below, the Seventh Circuit held that a secured creditor's failure to file a proof of claim pursuant to Bankruptcy Rule 3003(c)(2) did not preclude stay relief pursuant to section 362(d) of the Bankruptcy Code. The court reasoned that (i) a secured creditor need not file a proof of claim unless it wishes to receive a distribution from estate assets and (ii) consistent with section 506(d) of the Bankruptcy Code, a secured creditor may seek to separate the mortgaged property from the bankruptcy estate to pursue its lien rights in state court foreclosure proceedings. The Seventh Circuit further held that the bankruptcy court did not abuse its discretion when it ordered stay relief, in light of the debtor's clear lack of equity in the property, the debtor's failure to make monthly payments and the debtor's failure to show that he had insured the property or that he could pay accrued tax obligations. The Seventh Circuit also held that the bankruptcy court's refusal to extend the debtor's time to object to the requested stay relief was not reversible error because the bankruptcy court nonetheless considered the merits of the debtor's late-filed objection. Finally, the court declined to receive evidence of the debtor's fraud claims, which were raised for the first time on appeal.
Procedural context:
The United States Bankruptcy Court for the Western District of Wisconsin entered two orders: (i) lifting the automatic stay to permit secured creditors to pursue their state court foreclosure proceedings and (ii) denying the debtor's motion for reconsideration. The United States District Court for the Western District of Wisconsin and the United States Court of Appeals for the Seventh Circuit both affirmed.
The debtor issued two notes -- both secured by mortgages on certain real property -- to two creditors. After the debtor defaulted on the notes, the secured creditors filed state court foreclosure proceedings, and the debtor filed for bankruptcy. The secured creditors then sought stay relief to pursue their foreclosure cases. Notwithstanding their failure to file proofs of claim, the secured creditors showed the validity and amount of their secured claims and the debtor's lack of equity in the property through the debtor's schedules and through the underlying loan and security documents. The debtor was unable or unwilling to make monthly adequate protection payments to the secured creditors. The debtor also failed to provide any evidence that he had any equity in the property, that he had insured the property or that he could pay accrued taxes.
Easterbrook, Coffey, Manion

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