If a junior lien securing a non-recourse debt is wiped out by a senior creditor’s foreclosure sale before the debtor files a Chapter 11 bankruptcy petition, the sold-out junior lienholder is not entitled to a recourse claim against the Chapter 11 bankruptcy estate. Under 11 USC 1114(b), a creditor that holds a nonrecourse debt secured by real property of the bankrupt estate is given a recourse claim against the bankrupt estate on the filing of the petition. This decision holds, however, that if the creditor’s security interest in the real property was eliminated before bankruptcy by the non-judicial foreclosure of a senior lien on the property, then on foreclosure, the property is no longer property of the bankrupt estate and all junior liens in the property are eliminated. So the sold-out junior lienholder is not entitled to a recourse claim against the bankrupt estate.
Ninth Circuit Court of Appeals (Schroeder, J.); April 20, 2017; 2017 WL 1404194