In Babaee v. Marshack (In re Babaee), No. 22-60022, the Ninth Circuit affirmed the decision of the Bankruptcy Appellate Panel (“BAP”), holding that the Debtors do not have constitutional or prudential standing to challenge the short sale of their property.
A short sale in real estate is an offer of a property at an asking price that is less than the amount due on the current owner’s mortgage. All of the proceeds of the short sale go to the lender. The lender then has two options: (1) to forgive the remaining balance or (2) to pursue a deficiency judgment that requires the former homeowner to pay the lender all or part of the difference.
Constitutional standing requires an injury in fact that is caused by, or fairly traceable to, some conduct, and which the requested relief will likely redress. Prudential standing provides that only a person aggrieved, that is, someone who is directly and adversely affected pecuniarily by a bankruptcy court’s order, has standing to appeal that order.
In Babaee, the Debtors filed a joint Chapter 7 petition in January 2020. The appointed Chapter 7 trustee negotiated lien-assignment agreements (“Agreements”) with two of the Debtors’ secured creditors – Comerica Bank (“Comerica”) and Valley Economic Development Center, Inc. (“VEDC”) – who held liens on the Debtors’ overencumbered residential property. In exchange for partial payment from the sale of the property, Comerica and VEDC agreed to: (1) subordinate a portion of their liens to the claims of Trustee and unsecured creditors; (2) transfer those portions to the estate; and (3) consent to the sale of the Debtors’ residential property free and clear of their liens. In the process, Debtors’ homestead exemption became junior to claims of the Trustee and unsecured creditors.
The Debtors challenged the lien assignments, arguing the Trustee improperly circumvented their homestead exemption. The bankruptcy court found the Trustee acted properly and the Debtors appealed to the BAP. The BAP found the Debtors lacked standing because reversing the Agreements would not allow payment on the homestead exemption. The Ninth Circuit affirmed the BAP’s decision holding that the Debtors do not have constitutional or prudential standing to challenge the lien assignments and unwinding of the Agreements would provide the Debtors with no redress.
The Ninth Circuit reasoned that the Debtors do not have constitutional or prudential standing to challenge the lien assignments because the Debtors fail to show they would have been eligible to receive their homestead exemption but for the negotiated Agreements. The property was overencumbered, so the Debtors are likely to receive nothing at this point in the bankruptcy proceedings, and the same would be true had the Agreements not been executed. The Ninth Circuit further reasoned that unwinding the Agreements would provide the Debtors no redress because restoring the parties to their original positions would simply return the liens to the original lienholders: Comerica and VEDC. Since the balance of the creditors’ lien assignments is worth more than the remaining proceeds held by the Trustee, the Debtors would not be eligible for payment on their homestead exemption.
Thus, the Ninth Circuit affirmed the decision of the BAP, holding that the Debtors do not have constitutional or prudential standing to challenge the short sale of their property.