In re Bramham

• Decision Date: 15 March 1984
• Docket Number: Bankruptcy No. BK-R-82-424,Adv. No. 83-245.
• Citation: 38 BR 459
• Court: U.S. Bankruptcy Court — District of Nevada
• Parties: In re Donald and Zoe Ann BRAMHAM, Debtors. Donald and Zoe Ann BRAMHAM, Plaintiffs, v. NEVADA FIRST THRIFT, Defendant.

38 B.R. 459 (1984)

In re Donald and Zoe Ann BRAMHAM, Debtors Donald and Zoe Ann BRAMHAM, Plaintiffs, v. NEVADA FIRST THRIFT, Defendant.

Bankruptcy No. BK-R-82-424, Adv. No. 83-245.

United States Bankruptcy Court, D. Nevada.

March 15, 1984.

Vernon E. Leverty and Victor Perri, Miller & Daar, Reno, Nev., for plaintiffs.

C.N. Pereos, Reno, Nev., for defendant.

MEMORANDUM DECISION

ROBERT C. JONES, Bankruptcy Judge.

Background^*

In April of 1980, plaintiffs Don and Zoe Bramham (debtors) were the owners of a residence and an adjacent undeveloped lot located at Lake Tahoe, Nevada. At that time, the debtors obtained a loan with a principal amount of some $47,000 from defendant Nevada First Thrift (NFT),¹ which was secured by a deed of trust on the residence junior to one held by First Interstate Bank of Nevada (FIB).² The monthly payments on the NFT note were made until October 1981, when the debtors ceased making payments. Following this default, NFT filed on 22 December 1981 a notice of default and election to sell the residence pursuant to NEV.REV.STAT. § 107.080 (1979). Shortly before NFT's scheduled non-judicial foreclosure sale, the debtors filed their joint Chapter 11 petition and obtained the protection of 11 U.S.C. § 362(a)'s automatic stay, thereby preventing the foreclosure and becoming debtors in possession. Since filing their petition, the debtors have made no payments to FIB or NFT.

While the debtors and NFT disagree on the value of the residence as of the 1 July 1982 petition date, the Court establishes that value at $160,000.³ The parties do agree that the amount of FIB's allowed secured claim on the petition date was $108,885.34.⁴ It being an oversecured creditor, that figure represents the full amount of FIB's claim on that date. See 11 U.S.C. § 506(a).⁵ NFT's claim as of the petition date was listed on the debtors' Schedule A-2 (Creditors Holding Security) in the amount of $68,853.89. However, the debtors have not contested but have adopted NFT's subsequent representation that the petition date claim amount was $79,208.67, even though NFT has not filed a proof of claim for this higher, unscheduled amount. For the purpose of this matter the Court accepts the higher figure, and shall deem the schedule as amended to reflect the higher amount, pursuant to Bankruptcy Rule 1009 (debtor may amend a schedule as a matter of course "at any time before the case is closed"). Given the $160,000 petition-date value and FIB's allowed secured claim of $108,885.34, the amount of NFT's allowed secured claim on that date was $51,114.66, and its allowed unsecured claim was $28,094.01.⁶

On 15 November 1982, NFT filed a "Motion for Order to Provide Adequate Protection," pursuant to 11 U.S.C. § 363(e).⁷ With this motion NFT sought to have the Court "enter an order prohibiting or otherwise conditioning the use" of the residence "as is necessary to provide adequate protection" of NFT's interest. On 16 November 1982, notice of a 16 December 1982 hearing on NFT's motion (and notice of an earlier motion to convert the case to Chapter 7) was sent to all creditors listed on the debtors' mailing matrix. At the time set for hearing, NFT informed the Court that it was withdrawing its motion to convert and that it had reached a stipulation with the debtors regarding its adequate protection request. Counsel for the debtors then put the essence of the stipulation, which gave NFT an interest in the unimproved lot and allowed the debtors four months to sell their real property, on the record.⁸ No creditors other than NFT were heard at the hearing, and apparently none attended. The oral stipulation was then reduced to writing, signed by visiting Judge Samuel J. Steiner, and filed with the Clerk of the Court the following day.

In consideration of NFT's waiver of payments on its note until 15 April 1983, the debtors agreed to provide NFT a first deed of trust on the lot (amount or value of this security interest in the lot was not specified). The stipulation also allowed the debtors until 15 April 1983 to liquidate the residence and the lot,⁹ "for a sum sufficient to pay all principal and accrued interest, together with any and all advances, due and owing" NFT. And if the payment of "all sums due and owing pursuant to the terms of NFT's note" were not paid on or before 15 April 1983, the stipulation provided for the automatic modification of the § 362(a) stay to permit NFT "to immediately file notice of intent to sell and to proceed to foreclose its security interest."¹⁰ This stipulation made no mention of the residence's value. Pursuant to the stipulation the debtors encumbered the lot with a trust deed naming NFT as the beneficiary.

Between December 1982 and April 1983 the debtors were unable to sell the house and lot. Faced with the prospect of foreclosure, they sought on 15 April 1983 a preliminary injunction restraining NFT's foreclosure until the Court could determine the exact amount of NFT's allowed secured claim. (The debtors had filed an objection to NFT's claim on 30 March 1983.) On 15 April 1983, pending a decision on NFT's right to the additional security and the true amount of its allowed secured claim, this Court enjoined NFT from taking any action to enforce its trust deed on the lot, but allowed the trustee's sale on the residence to proceed. On or about 25 May 1983, NFT purchased the residence at the trustee's sale for $162,705.00.

During the pendency of the injunction against NFT's sale of the lot, the debtors filed a "complaint to set aside lien" against NFT on 26 May 1983. This complaint, which is the subject of the present adversary proceeding, pleads two causes of action: first, that NFT's trust deed on the lot be set aside as invalid because the underlying stipulation and notice to creditors was defective; and second, that the amount of NFT's allowed secured claim be reduced because of its undersecured status at the time the Chapter 11 petition was filed. The second cause of action effectively supplants the debtors' earlier "objection to claim" pleading. With this complaint on file, the Court's preliminary injunction was extended until trial.

At the 8 July 1983 trial of the complaint, the parties were instructed by the Court to list both the house and lot for sale, with the final disposition of the proceeds to await the resolution of the complaint. After the parties completed a post-trial briefing schedule, the matter was submitted for the Court's decision.

Discussion

Under their first cause of action, the debtors seek to invalidate NFT's trust deed on the undeveloped lot because: 1) the underlying written stipulation contained a serious error regarding the value of the residence, without which the stipulation providing adequate protection would not have been executed, i.e., NFT was actually undersecured; and 2) the stipulation was, in effect, a "settlement of a controversy," whose hearing was not noticed as required by Interim Bankruptcy Rule 2002(b).¹¹

I.

The debtors cite the case of In re Callister, 15 B.R. 521 (Bkrtcy.D.Utah 1981), in support of their argument that the stipulation here must be set aside because of an error as to the value of the residence. In Callister, the court denied a creditor's request for a superpriority administrative claim, 11 U.S.C. § 507(b), which was based upon a purported "loss" caused by a decrease in the collateral's value. The court found there was no actual loss, but that the claimed loss was the product of a "gross miscalculation of value in the stipulation which could have been easily detected," id. at 532. The Callister court did not reject the stipulation in toto, but merely denied one purported measure of loss because of a gross and obvious error. In the present proceeding, unlike Callister, the value of the residence collateral was not even mentioned in the stipulation. The fact that NFT may have been undersecured should not deprive it of a right to the adequate protection provided in the stipulation. As will be discussed below, given that the debtors were making no payments on the oversecured senior lienor's FIB debt, and given NFT's undersecured position, NFT had ample cause for its § 363(e) request regardless of any mistaken belief as to the collateral's value.¹² The Court will first analyze NFT's right to adequate protection.

II.

Section 361 reads, in part: "When adequate protection is required under section 362, 363, or 364 . . . of an interest of an entity in property, such adequate protection may be provided by— . . . (2) providing to such entity an additional . . . lien to the extent that such stay under § 362, or use under § 363 . . . results in a decrease in the value of such entity's interest in such property . . ." An allowed secured claim¹³ is an interest in property entitled to § 361's protection¹⁴ against any decrease in value attributable to use or the stay.¹⁵ The automatic stay may be said to "forestall a creditor from preventing or mitigating a decline in value"¹⁶ of the allowed secured claim, and to this extent the holder of an evaporating allowed secured claim is entitled to adequate protection if, but for the stay or use, or both, the evaporation could be prevented or mitigated.

Generally, the amount of an allowed secured claim decreases either because the value of the collateral is depreciating,¹⁷ or the allowed secured claim of a senior creditor is increasing faster than the allowed secured claim of a junior creditor. The facts of this case present an example of the second cause. Given the Court's adoption of the 8 December 1982 appraisal, the bid price at the May 1983 foreclosure sale, and the overall sluggishness of the Lake Tahoe real estate market,¹⁸ the Court will assume the residence's value remained relatively static (at $160,000) during the year between the petition date (1 June 1982) and the foreclosure (25 May 1983). What jeopardized and dissipated the amount of NFT's allowed secured claim ($51,114.66 on 1 June...