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Debtors Liable for Willful Injury In Removing Fixtures From Foreclosed Home

Thursday, March 7, 2013

Two Chapter 7 debtors were liable for a willful and malicious injury when they removed various fixtures from their home after it had been foreclosed upon according to a Feb. 13 ruling from the U.S. District Court for the District of Colorado (Schrader v. Vectra Bank Colorado NA (In re Schrader), D. Colo., No. 1:12-cv-01961 (RBJ), 02/13/13).

Judge R. Brooke Jackson found no clear error in the bankruptcy court's determination that the debtors were real estate professionals who knew the removal of the fixtures would be injurious. 

Removal of Fixtures

In October 2003, Gary and Jeanne Schrader executed and delivered a promissory note in the amount of $670,000 to Vectra Bank Colorado NA that was secured by a deed of trust on the Schraders' residence. The deed of trust covered all improvements and fixtures on the property.

The Schraders eventually defaulted on the note and the property was sold at a foreclosure on June 23, 2010. That same day, the Schraders filed for Chapter 7 protection. At the foreclosure sale, the property was purchased by Zions Bank, which was both the parent corporation of Vectra Bank and the servicer of the note. Before vacating the property, the Schraders removed certain light fixtures, appliances, furnaces, air conditioning units, sinks, toilets and faucets. 

Willful and Malicious Injury

Vectra Bank filed an adversary proceeding against the Schraders on Sept. 22, 2010, arguing that its debt should not be discharged pursuant to Bankruptcy Code Section 523(a)(6) because the Schraders willfully and maliciously caused injury to Vectra Bank. After a trial on the matter, the bankruptcy court held in its written order that the defendants “knew that their removal of the light fixtures, furnaces, air conditioning units and appliances would cause injury to Vectra or at least believed it was substantially certain to occur.” The bankruptcy court held that Vectra Bank could recover $29,673 from the debtors and that the debt could not be discharged.

The Schraders appealed to the district court and argued that Vectra Bank did not have standing to pursue non-dischargeability claims, nor was Vectra Bank the real party in interest. The Schraders also argued that the bankruptcy court erred in its determination that the Schraders had caused a willful and malicious injury. 

Holder vs. Owner

Pursuant to Section 523(a) of the Bankruptcy Code, only a creditor can initiate a proceeding to determine if the debt owed to that creditor is nondischargeable. In this case, the Schraders argued that only Zions Bank was a creditor because Zions Bank was the party that purchased the Schraders' residence at foreclosure. However, Vectra Bank argued, and the district court agreed, that Zions Bank was merely the servicer of the note and Vectra Bank was at all times the owner of the note and a creditor of the Schraders.

The duties of a loan servicer, the district court said, often include receiving payments from a borrower pursuant to the loan terms and can also include making decisions concerning acceleration, foreclosure, redemption and deficiencies. The district court agreed with the bankruptcy court's conclusion that while Zions Bank purchased the property at foreclosure as the servicer and holder of the note, Vectra Bank was still the owner of the note. Pursuant to Colorado law, the holder of an instrument evidencing a debt can foreclose on a property, and the holder need not be the owner.

The Schraders also argued that the bankruptcy court should have been precluded from determining that Vectra Bank was the owner of the note because of claim preclusion and the Rooker-Feldman doctrine, both of which prevent relitigation of issues under certain circumstances. However, the only evidence the Schraders submitted to support this contention were three documents that referred to Zions Bank as the “holder” of the note, which the court previously held did not preclude Vectra Bank from being the owner. Therefore, the court found there was no prior determination that would preclude Vectra Bank from being the owner of the note and therefore the real party in interest. 

Real Estate Professionals

Pursuant to Section 523(a)(6), a debt will not be discharged if it is the result of a willful and malicious injury. The court said this requires a “deliberate or intentional injury, not merely a deliberate or intentionalact that leads to injury.”

In this case, the bankruptcy court determined that the Schraders were “sophisticated real estate professionals” who knew that removing the various fixtures and appliances would cause injury to Vectra Bank. The bankruptcy court noted that in the past, the Schraders had attempted to sell their home by advertising many of the items that they later removed. The district court said that the bankruptcy court properly applied the willful and malicious standard and that there was no clear error in their conclusion that the Schraders knew removing the fixtures would injure Vectra Bankr. Accordingly, the bankruptcy court's entry of a nondischargeable money judgment was affirmed.

By Stephanie M. Acree

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