Consumer Finance Insights
January 19, 2016

Tenth Circuit Bankruptcy Appellate Panel Approves Settlement Agreement with Foreclosing Lender Over Objections of the Debtor

EDITOR’S NOTE:  This post was guest-authored by Christopher J. Somma, an attorney in Goodwin Procter’s Consumer Financial Services Litigation Practice.  Mr. Somma represents clients in distressed loan workouts, forbearances, restructurings, commercial and residential foreclosures, UCC foreclosure sales, distressed portfolio and asset sales, property disposition, creditors’ rights and insolvency, origination of commercial real estate loans, asset-based and structured-based finance, note and mortgage sales and other issues surrounding OREOs.

Often overlooked by lenders and servicers, sometimes striking a deal with the Chapter 7 Trustee in bankruptcy court, is the more prudent and cost effective approach to resolving frivolous lawsuits filed by defaulting borrowers in state court.  In Brumfiel v. Lewis, Chapter 7 Trustee, et al. (In re Lisa Kay Brumfiel ), 2015 WL 5895213 (10th Cir. BAP 2015), the Tenth Circuit Bankruptcy Appellate Panel (“10th Circuit BAP”) affirmed the bankruptcy court’s approval of a settlement reached between the Chapter 7 Trustee and a secured creditor over the objections of the borrower/debtor.

In 2010, the debtor, Brumfel, (“Debtor”) defaulted on a promissory note that was secured by a deed of trust on her home.  The Debtor alleged that she was not obligated to pay the note as it had been improperly assigned to U.S. Bank, which had initiated foreclosure proceedings against the Debtor in October 2011.  Approximately two months after the filing of her Chapter 7 Bankruptcy Petition, the Debtor received her Chapter 7 Discharge.  Her case was deemed to be a “no asset” bankruptcy, meaning that there were no assets to be administered by the Chapter 7 Trustee.  In October 2012, the Debtor filed a wrongful foreclosure action in federal district court against the foreclosing lender.  After the federal district court temporarily enjoined execution in the non-judicial foreclosure proceeding, the foreclosing lender filed a judicial foreclosure action.

In October 2013, the court dismissed the counts in the Debtor’s complaint finding that the bankruptcy estate was the proper party to pursue the claims presented in the complaint and not the Debtor.  In short, the Debtor lacked standing.  The Debtor appealed this order and simultaneously reopened her bankruptcy case.  In its initial effort to rid itself of the Debtor’s Claims, the Chapter 7 Trustee moved to abandon the claims on behalf of the Bankruptcy Estate to which the foreclosing lender objected.  Subsequently, the Chapter 7 Trustee agreed to accept $10,000 (the claim’s alleged nuisance value) to settle the claims.  The Debtor appealed arguing that her claims had been abandoned by the Chapter 7 Trustee.

The 10th Circuit BAP, however, found that the claims could not have been abandoned because they were not disclosed on the Debtor’s original Chapter 7 Bankruptcy Petition.  The 10th Circuit BAP also disagreed with the Debtor that her claims arose post-petition, finding that they came into being no later than two months prior to the bankruptcy filing when the lender initiated the foreclosure  proceedings.  The Debtor next argued that the settlement order was void because the Bankruptcy Court “wrongly assumed jurisdiction during the pendency of [appeals] of the real party in interest issue first filed in the federal and state courts.”  The 10th Circuit BAP noted that while a notice of appeal divests the trial court of jurisdiction and confers jurisdiction on the appellate court, the appeals filed by the Debtor had no effect on the bankruptcy court’s jurisdiction because they were not appeals from the Bankruptcy Court.  “Moreover, by statute the Bankruptcy Court has ‘exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of [the] case, and the property of the estate.’  Once Debtor filed her [Chapter 7 Petition], she could not divest the bankruptcy court of jurisdiction over property of the bankruptcy estate simply by filing claims against the lender in other courts.  Additionally, subsequent to Debtor’s appeal to this Court of the Bankruptcy Court’s Order Approving Settlement Agreement, both the appeal pending before the Colorado Court of Appeals and the appeal pending before the Tenth Circuit were decided,” the 10th Circuit BAP said.  Those decisions affirmed the dismissal of the complaints that the debtor filed in state and federal court.

Finally, the 10th Circuit BAP rejected the Debtor’s argument that the Bankruptcy Court should have abstained from hearing the Chapter 7 Trustee’s Motion to Approve the Settlement, and affirmed  the Bankruptcy Court’s decision.  “A bankruptcy court’s order approving a negotiated settlement is entitled to deferential review, and this Court can only reverse the Order Approving Settlement if there has been an abuse of discretion.  Debtor points to no specific finding or conclusion in the bankruptcy court’s analysis that constitutes error, and we see none.  In fact, the record firmly supports its findings,” the 10th Circuit BAP said “[Chapter 7] Trustee testified that in his opinion Debtor’s claims had no merit and Creditor’s proposed payment of $10,000 represented the nuisance value of the claims.  This seems likely true, given that the Colorado state trial court has already determined that the Creditor had standing to pursue foreclosure and was entitled and allowed to foreclose on the property, and the Colorado Court of Appeals has affirmed that decision.  Further, the Bankruptcy Court found that the estate had no resources with which to pursue the claims, regardless of their merit.  Therefore, we conclude the bankruptcy court did not abuse its discretion in approving the Settlement Agreement.”