In the appellate brief, the McCulloghs asserted that the foreclosure was improper due to the fact that they no longer owed any debt to CitiMortgage by the time it initiated the foreclosure action. The McCulloghs based their argument on (1) documentation showing they paid $122,007.21 in principal to CitiMortgage during their three bankruptcies; (2) their assertion that CitiMortgage did not properly apply the McCulloghs’ payments; and (3) their assertion the mortgage was paid in full when the Trustee’s Final Report in third bankruptcy showed the McCulloghs had been “discharged.”
However, the Supreme Court determined that the McCulloghs lacked any admissible evidence that they had paid over $120,000.00 in mortgage payments and had provided no proof that the payments were improperly applied.
The Supreme Court also found that the McCulloghs’ debts discharged in the bankruptcy court were done so under Chapter 7 and not Chapter 13. Under Chapter 7, debts that are discharged are typically unsecured debt. Therefore a secured debt, such as the McCulloghs’ mortgage, would not be discharged under a Chapter 7 bankruptcy filing.
The Supreme Court further clarified that under Chapter 7, only the McCulloghs’ personal obligations were extinguished by a “discharge” and that CitiMortgage’s lien on the property survived the bankruptcy. “[A] bankruptcy discharge removes the ability of creditors to seek to collect against the debtor individually (known as in personam liability). Liens, on the other hand are in rem meaning they are rights against the property which are enforceable.”
In its ruling, the Supreme Court affirmed the granting of summary judgment for CitiMortgage because the Chapter 7 bankruptcy only protected the McCulloghs from personal liability, and because CitiMortgage only sought an in rem order against the property and not an in personam judgment.