Debtors owned a number of rowhouses in Oregon which they bought with loans secured by Fannie Mae/Freddie Mac Uniform Instrument deeds of trust.  The deeds of trust defined “miscellaneous proceeds” to include settlements of tort claims for damage to or diminished value of the rowhouses, and gave the lenders a security interest in those miscellaneous proceeds.  The debtors recovered a settlement from the developer of the rowhouses after filing a Chapter 7 bankruptcy petition.  This decision holds that the lenders had a superior right to those settlement proceeds under the terms of their deeds of trust and 11 USC 552(b)(1), so none of the proceeds should be paid to the bankruptcy trustee.  This was true even as to a share of the proceeds attributable to a rowhouse that secured a loan from a lender that had defaulted by failing to answer the bankruptcy trustee’s adversary complaint.

Ninth Circuit Bankruptcy Appellate Panel (Kirscher, J.); April 8, 2016; 2016 WL 1427753