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Melikian Enterprises, LLLP v. McCormick

United States Court of Appeals, Eighth Circuit

July 11, 2017

Melikian Enterprises, LLLP, Creditor Appellant
Steven D. McCormick; Karen A. McCormick, Debtors Appellees

          Submitted: November 15, 2016

         Appeal from United States District Court for the District of North Dakota - Bismarck

          Before BENTON and SHEPHERD, Circuit Judges, and STRAND, [1] District Judge.

          SHEPHERD, Circuit Judge.

         Debtor-appellees Steven and Karen McCormick signed a promissory note in favor of creditor-appellant Melikian Enterprises, LLLP. After the McCormicks defaulted on their payments and sought bankruptcy relief, Melikian filed a proof of claim in the bankruptcy proceeding seeking to recover a deficiency judgment. The bankruptcy court sustained the McCormicks' objection to this proof of claim, and the district court[2] affirmed. We see no error and likewise affirm.

         I. Background

         In January of 2006, Centennial Commercial Complex, LLC ("Centennial")-a company in which the McCormicks held an ownership interest-purchased from Melikian several parcels of property located in Arizona. Centennial executed a promissory note in favor of Melikian in the principal amount of $6, 475, 000, and the McCormicks signed this note as guarantors. The promissory note was secured by a deed of trust covering the real property purchased from Melikian.

         Centennial defaulted on the note at some point late in 2011. On August 2, 2012, Melikian filed a complaint in Arizona state court against Centennial and the McCormicks to recover the balance owed under the promissory note or, alternatively, to recover the deficiency remaining after a trustee's sale. On August 29, the McCormicks filed a petition for relief under Chapter 11 of the Bankruptcy Code, listing an unsecured debt to Melikian owing under the promissory note. A trustee's sale under Arizona law was held on October 9, 2012, at which Melikian purchased the properties on credit bids totaling $444, 000. Melikian never perfected service on Centennial or the McCormicks in the state court action. As a result, the Arizona court dismissed the deficiency suit on January 30, 2013.

         Melikian filed a proof of claim with the bankruptcy court for an unsecured debt in the amount of $6, 428, 599 pursuant to the McCormicks' guarantee. The McCormicks filed an objection to this proof of claim on the basis that it neglected to reflect the market value of the real property securing the debt, and the court scheduled a hearing on the matter for December 17, 2013. The court confirmed the McCormick's Chapter 11 plan in September of 2013, and the case was closed as fully administered on November 14, 2013. The following day, however, the case was reopened on a motion from a different creditor.

         For a number of reasons, the McCormicks requested and were granted three continuances of the December hearing.[3] Ultimately, on March 5, 2014, they moved for summary judgment on their objection to Melikian's proof of claim, arguing that Arizona law barred Melikian's claim because Melikian had failed to maintain a deficiency action within 90 days of the trustee's sale. The bankruptcy court heard argument on this motion on April 15, 2014, and granted the motion in favor of the McCormicks.

         Ruling from the bench, the bankruptcy court offered the following analysis. Consistent with Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co., 549 U.S. 443, 450 (2007), the court noted that Melikian's entitlement to a deficiency against the debtors was to be determined by state law. Arizona Revised Statute section 33-814(D) declares,

If no action is maintained for a deficiency judgment within the time period prescribed in subsections A and B of this section, the proceeds of the sale, regardless of amount, shall be deemed to be in full satisfaction of the obligation and no right to recover a deficiency in any action shall exist.

Under subsection (A), the court noted, Melikian had to commence its deficiency action within 90 days of the trustee's sale. But, the court continued, because Melikian had already filed the state court suit against the McCormicks, it needed only to pursue that action. As noted above, that suit was dismissed for failure to obtain proper service.

         Continuing its analysis, the court addressed Melikian's preemption arguments. The court first ruled that Arizona law was not preempted by 11 U.S.C. §§ 501-02-the sections of the Bankruptcy Code that determine whether a particular claim is "allowed"-because it is state, rather than federal, law that creates the right to a claim. The court then accepted Melikian's second argument, ruling that section 33-814 was preempted by 11 U.S.C. §§ 362 and 108. According to the court, § 362(a)(1)-the automatic stay provision-prevented Melikian from perfecting service on the McCormicks within the 90-day period allowed by section 33-814(A), so the state law was impliedly preempted by § 362. Further, the court ruled that section 33-814(A) was expressly preempted by 11 U.S.C. § 108(c), under which the time period for Melikian's potential deficiency action did not expire until the later of (1) 90 days after the trustee's sale or (2) 30 days after the expiration of the automatic stay. Returning to § 362(c), the court determined that the stay expired on November 14, 2013, when the case was declared closed. Thus, the court observed that Melikian's right to file a claim did not expire until the later of January 7, 2013, under § ...

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