Saturday, June 08, 2013

Bankruptcy Appeals Court: Homeowner's Challenge To Foreclosing Bankster's Right To Enforce Promissory Note Requires Evidentiary Hearing; Order Granting Automatic Stay Relief Reversed

From a recent ruling by a 3-judge Bankruptcy Appellate Panel for the 10th Circuit Court Of Appeals:
  • A mortgage creditor may seek stay relief to pursue its nonbankruptcy law remedies in enforcing its mortgage on a debtor’s home. But, as in any other civil proceeding, that creditor must demonstrate standing to invoke the court’s jurisdiction and the bankruptcy court has an affirmative obligation to determine whether its jurisdiction has been properly invoked.

    Here, the debtor, Dianna Kay Steinberg (“Debtor”), challenged the bank’s standing by questioning whether it had the right to enforce the note.

    The bankruptcy court granted the motion without providing an opportunity for a hearing on that very important threshold issue.

    Debtor appeals the bankruptcy court’s order granting Bank of America, N.A.’s (“BOA”) motion for relief from the automatic stay to foreclose on its interest on her home.

    We REVERSE the order of the bankruptcy court and REMAND the motion for a determination whether the creditor holds the note or may enforce the note on some other legal basis.(1)
For the rest of the court's ruling, see In re Steinberg, BAP No. WY-12-082 (10th Cir. BAP May 30, 2013) (unpublished).

Thanks to Deontos for the heads-up on this court ruling.

(1) From the court's ruling:
  • Once the issue of BOA’s standing to enforce the Note was raised, the bankruptcy court was required to resolve it on the merits.

    Indeed, the Tenth Circuit has previously said as much in In re Miller. There, the Tenth Circuit held that a secured creditor must demonstrate that it has a “right to payment” by adducing evidence that it possesses the note.

    And in In re Thomas, we held that if a secured creditor’s possession of the note is challenged, the bankruptcy court has a “duty to ensure that debtors are not subjected to legal challenges by those without standing to do so” by conducting an evidentiary hearing at which the creditor must demonstrate either its possession of the note or some other legal basis for being able to enforce it.

    Here, the bankruptcy court granted BOA’s motion without conducting any inquiry into that important threshold issue. Because the bankruptcy court had an affirmative obligation to determine whether BOA has standing, it abused its discretion in granting relief from stay when it failed to conduct an inquiry into whether BOA had possession of the original note.

    We therefore reverse the order of the bankruptcy court and remand the motion for a determination whether BOA holds the Note or may enforce the Note on some other legal basis.