Unreported / Non-Citable
Background
Klara Gianna Gallusz purchased her residence in 2005 with a loan secured by a deed of trust. After she defaulted in 2024, lender LPP Mortgage, Inc. began foreclosure proceedings. Gallusz responded by filing a voluntary Chapter 13 bankruptcy petition, which automatically halts most creditor collection efforts — including foreclosure — under the Bankruptcy Code’s “automatic stay.”
LPP asked the bankruptcy court to lift the stay under 11 U.S.C. §§ 362(d)(1) and (d)(4) so it could resume foreclosing on the property despite the pending bankruptcy case. To support its motion, LPP submitted a copy of the promissory note and a declaration from its records custodian stating that she had personally located and examined the original note in the company’s vault. The bankruptcy court granted relief from the stay in July 2025, finding that LPP had adequately shown it had standing and possession of the note.
Gallusz appealed to the district court, arguing primarily that LPP was not a “party in interest” entitled to seek stay relief because, in her view, the chain of ownership of the note was defective.
The Court’s Holding
The district court affirmed. Reviewing the bankruptcy court’s discretionary ruling for abuse of discretion, the court applied the Ninth Circuit’s two-part test from United States v. Hinkson: first, whether the bankruptcy court identified the correct legal rule, and second, whether its application of that rule to the facts was illogical, implausible, or unsupported by the record.
On the legal standard, the court explained that a creditor seeking relief from the automatic stay need only establish a “colorable claim” to enforce the note — not prove its case on the merits, since stay relief proceedings are summary in nature and final adjudication of the parties’ rights comes later. Under California’s Commercial Code, a party is entitled to enforce a note if it is the holder of the instrument or a nonholder in possession with a holder’s rights. The court found LPP met this standard through its submission of the note and a custodian’s declaration describing personal verification of the original.
The court distinguished Gallusz’s main authority, In re Veal, where the Ninth Circuit’s Bankruptcy Appellate Panel had reversed stay relief because the movant never showed it or its agent actually possessed the note. Here, by contrast, LPP’s declarant personally inspected the original note in the vault — precisely the kind of possession evidence Veal found lacking. The court also rejected Gallusz’s argument that LPP needed to have filed a proof of claim before seeking stay relief, noting the Bankruptcy Code imposes no such precondition. Finding no abuse of discretion, the district court affirmed and directed the clerk to close the case.
Key Takeaways
- A creditor seeking relief from the automatic stay to pursue foreclosure needs only a “colorable claim” to enforce the note — a low bar compared to the merits standard that applies later in the case.
- A declaration from a records custodian who personally examined and verified the original note can establish the possession needed to show standing, even without a recorded assignment or filed proof of claim.
- A Chapter 13 debtor cannot defeat stay relief merely by alleging gaps in the chain of assignments; the debtor must show the movant lacks actual or constructive possession of the note.
- Stay relief proceedings are summary and do not resolve the underlying dispute over the parties’ substantive rights, which remains available in other forums.
Why It Matters
For California consumer-bankruptcy and foreclosure-defense practitioners, this decision reinforces how low the bar is for lenders seeking relief from the automatic stay. Debtors’ counsel often raise note-ownership and standing challenges to slow foreclosure, but courts applying In re Veal and its progeny will accept a credible possession declaration as sufficient at the stay-relief stage, reserving deeper ownership disputes for later proceedings.
Lenders and their counsel should take note that a well-documented custodian declaration — describing personal inspection of the original note — remains an effective and judicially favored way to establish standing quickly, without the delay of filing a formal proof of claim first.