In Re Universal Farming Industries, Debtor. George C. Spacek v. Jerry Thomen

George C. Spacek, holder of a trust deed on a piece of real property held by the debtor in a bankruptcy case, brought suit in bankruptcy court against Jerry Thomen, the holder of the first trust deed on the same piece of real property. Spacek claims that Thomen’s trust deed should be equitably subordinated or, alternatively, that the first trust deed merged with the title to the property. We reject both contentions.

In February 1983, Thomen, the lawyer and business associate of Kewars Tabata-bay (“Tabatabay”), purchased from a third party the first deed of trust on a property owned by Universal Farming Industries (“UFI”). UFI had filed a bankruptcy petition under Chapter 11 on January 11, 1983.

Spacek, holder of a deed of trust on the same real property, brought suit in the bankruptcy court, claiming that Thomen’s claim should be equitably subordinated, or, alternatively, that the first deed of trust merged with the title to the real property. The bankruptcy court granted judgment for Thomen. Following the judgment, a number of creditors, including Thomen and Spacek, and the debtor stipulated to the dismissal of the debtor’s Chapter 11 case. This stipulation expressly included a…