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In Re Karagiannis

453 B.R. 548 (D. N.J. 2011)

MORTGAGES; FORECLOSURE; BANKRUPTCY — A Bankruptcy Court grants a debtor a fair market value hearing to determine the value of two properties bought-in by a lender at a sheriff’s sale even though the lender was not seeking to recover the deficiency.

The co-owner of a residence and three rental properties filed a Chapter 13 bankruptcy petition. A bank holding a blanket mortgage on the properties sought relief from automatic stay to pursue foreclosure. A previous foreclosure judgment obtained by the bank did not impose personal liability on the debtor. It fixed the sum due, foreclosed the equity of redemption, and provided for possession in the purchaser following the sale. The filing of the bankruptcy petition interrupted the scheduled sale.

The bank debt was scheduled as “unknown” on the debtor’s Schedule D. The debtor claimed he was unable to obtain a payoff statement from the bank, blaming the failure on a strained relationship between him and the bank. The bank claimed that there was very little equity in the collateral. The appraised value of the properties was less than the bank’s claim. While two properties were subject to a court-ordered stay, a sheriff’s sale for the other two properties took place. In each case, there was no active bidding and the bank was successful with a nominal bid of $100 for each property. No timely objection to the sale was raised by the debtor.

The bank moved for relief from the stay, seeking access to the two properties, one occupied as a residence, and the other as a tavern. Embedded in the motion and the response to it was the question of an entitlement to a credit for the fair market value (FMV) of each previously sold property against the overall debt owed by the debtor, and, if a credit was due, the amount of the credit. The bank maintained that New Jersey law bars a debtor from receiving anything more than the nominal $200 credit against the overall debt. The debtor claimed credits for the sold properties based upon fresh appraisals

The Court conducted a detailed survey of New Jersey mortgage law, exploring various incongruities between note and bond mortgage foreclosures. The Court summarized its findings by noting that, when a commercial note holder brings its foreclosure action first but no personal judgment is rendered at the time of the foreclosure judgment, there is no well-defined approach to matching of deficiencies and FMV credits. The Court noted, however, that New Jersey law supported the right to a FMV hearing in similar circumstances. Thus, the Court concluded that New Jersey law would not have denied the debtor and her co-obligor a FMV hearing (and credit) under the circumstances of the dispute. In doing so, the Court distinguished the case at bar from a landmark New Jersey Supreme Court case establishing a seemingly contrary rule; here, the proofs of FMV were not inadequate, and this case involved a potential windfall to the bank. New Jersey law stresses that a mortgagee is not entitled to recover more than the full amount of the mortgage debt.

As a result, the Court granted the debtor a FMV hearing to determine the value of the two properties transferred by sheriff’s sale; and denied the bank’s motion for relief from the stay because the debt due the bank was a function of a yet-to-be-determined FMV credit. Further, the Court found that independent bankruptcy considerations entitled the debtor to a FMV hearing in order to prevent a windfall in favor of the bank at the expense of the debtor.

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