Facts: An investor purchases an income property encumbered by multiple mortgages including a seller carryback junior mortgage. The investor files for Chapter 11 bankruptcy. As part of the bankruptcy plan, the bankruptcy court lifts the automatic stay allowing the senior mortgage holder to commence foreclosure. The proceeds from the foreclosure satisfy all but the seller carryback junior mortgage.

Claim: The junior mortgage holder seeks payment for the deficiency due on the remaining balance, claiming they have the right to repayment under Chapter 11 bankruptcy law.

Counterclaim: The investor claims the junior mortgage holder is not entitled to payment of the mortgage deficiency since, when the automatic stay was lifted and the property was foreclosed, California anti-deficiency protection was restored, eliminating the junior mortgage holder’s right to collect on the post-foreclosure nonrecourse deficiency.

Holding: A bankruptcy court holds the junior mortgage holder is not entitled to payment for the remaining mortgage balance since the automatic stay and subsequent foreclosure removed the property from the bankruptcy estate, triggering California anti-deficiency protection, which precluded the junior mortgage holder’s right to repayment. [In re Salamon (9th Cir. BAP 2015) 14 BR 3736]


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