Johnson v. First National Bank

Curtis and Gloria Jean Johnson (defendants), the owners of agricultural concerns, executed first and second mortgages to First National Bank of Montevideo (First National) (plaintiff) in security for promissory notes totaling $950,000. In September 1980, the Johnsons defaulted on their loans and First National initiated foreclosure proceedings. At an auction on October 31, 1980, First National purchased the mortgaged property for $566,355.34. Under Minnesota law, which applied to the foreclosure, the Johnsons were afforded a one-year redemption period in which they could repurchase the property for the price paid by First National plus interest. If they did not so repurchase, title to the property would automatically vest in First National without any further action. Approximately three weeks before the October 31, 1981, expiration date of the one-year redemption period, the Johnsons filed a joint bankruptcy petition under Chapter 11. They concurrently filed an adversary complaint against First National, alleging that they held substantial equity in the mortgaged property and requesting that the court stay expiration of the redemption period. Based on Curtis Johnson’s testimony that the property was valued at $2,720,000 and encumbered to the amount of $2,043,000, the court found that the Johnsons possessed substantial equity and that, pursuant to 11 U.S.C. § 105, an exigency warranted suspending the Minnesota exemption period until further order or the conclusion of bankruptcy proceedings involving the property. The district court affirmed. First National appealed.