In re: Gerald N. Reed

May a mortgage lender foreclose on the secured property to collect on a debt discharged by a bankruptcy court?

Facts: An owner of property executes a note and trust deed which encumbers the property. The owner defaults and the mortgage lender files a judicial foreclosure action. The lender is awarded a money judgment and order for the property to be sold and the lender paid the judgment amount out of the sales proceeds. The owner files a petition for Chapter 7 bankruptcy protection and receives a discharge of the debt owed on the trust deed note. Later, the lender completes the judicial foreclosure sale under the trust deed to satisfy the amount secured by the property.

Claim: The owner claims the mortgage lender was barred from selling the property at a foreclosure sale since the lender’s foreclosure judgment converted the trust deed note debt into a money judgment which was discharged by the bankruptcy court.

Counterclaim: The mortgage lender claims the judicial sale of the property was proper since the bankruptcy discharge has no effect on the lender’s ability to sell the property to collect on the debt secured by the trust deed.

Holding: A United States Bankruptcy Appellate court holds the mortgage lender’s judicial foreclosure sale under the trust deed lien was not barred by the bankruptcy discharge since the judgment did not transform the trust deed debt into a separate judicial money award against the owner. [In re: Reed (9th Cir. BAP 2023) 640 932]

In re: Gerald N. Reed

Related Reading:

Real Estate Finance: Chapter 43: Judicial foreclosure

Word-of-the-Week: Judicial foreclosure

Related Videos:

Judicial Foreclosure and Pursuit of the Deficiency

Related Form:

Note Secured by Deed of Trust Installment – Interest Included – RPI Form 420

Note Secured by Deed of Trust Installment Note – Interest Extra – RPI Form 422

Note Secured by Deed of Trust Straight Note – RPI Form 423