Effect of Foreclosure Sale on Right to Cure and Maintain

Posted by NCBRC - March 17, 2014

A couple recent cases deal with application of the automatic stay when the debtor files his bankruptcy petition in the no-man’s-land between a foreclosure sale and the legal transfer of title through recordation. TD Bank v. LaPointe, No. 13-29 (B.A.P. 1st Cir. Feb. 24, 2014) and In re Comer, No. 13-12148 (Bankr. E.D. Tenn. March 10, 2014).

In LaPointe, when the debtor defaulted on his mortgage the bank conducted a foreclosure auction and was the successful bidder. The next day, the Debtor filed a chapter 13 petition proposing to cure the mortgage arrears through his plan and maintain regular payments outside the plan. The bank moved for relief from stay to record the deed and evict the debtor. The bankruptcy court denied the motion on the grounds that because the foreclosure had not been recorded prior to the petition, the debtor had the opportunity to cure the default in bankruptcy. This decision was supported by In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999), where the court resolved the issue saying: “Section 1322(c)’s language unambiguously provides that (1) state redemption law is preempted with respect to when a Chapter 13 debtor’s rights to cure and reinstate a principal residence mortgage are cut off; (2) such cure and reinstatement rights end when a foreclosure sale process is complete; and (3) state foreclosure law determines when the foreclosure sale process ends.”

The BAP for the First Circuit disagreed.

Finding that an interlocutory appeal was appropriate, the BAP began with the principle that the automatic stay applies only to estate property, therefore, the dispositive issue was whether at the time of filing the debtor still had an interest in the property. Property interests generally turn on state law. On the one hand, under New Hampshire property law, N.H. Rev. Stat. Ann. ” 479:25-28, interest in real property transfers “free and clear of all encumbrances,” upon recording the deed. On the other hand, the mortgagor’s state redemption rights expire upon foreclosure. The state Supreme Court had interpreted these provisions to mean that the debtor loses all interest in the property upon the fall of the hammer at the foreclosure sale notwithstanding the fact that legal title does not pass to the new owner until the deed is recorded. Barrows v. Boles, 141 N.H. 382, 393 (1996).

The BAP then turned to the effect of the cure and maintain provision of the federal bankruptcy law, section 1322(c)(1). That provision provides:

“Notwithstanding subsection (b)(2) and applicable nonbankruptcy law . . . a default with respect to, or that gave rise to, a lien on the debtor’s principal residence may be cured . . . until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law; . . “.

This section was apparently intended to clarify the rule that even if state law divests the debtor of an interest in his residence prior to the actual foreclosure sale, federal law will permit a cure and maintain plan at least until the sale takes place. Interpreting this provision, some courts have found that the debtor’s right to cure and maintain no longer exists after the foreclosure sale regardless of whether state law gives the debtor an interest in the property until the completion of actual title transfer – the “gavel rule.” See, e.g., In re Connors, 497 F.3d 314 (3d Cir. 2007); Cain v. Wells Fargo Bank, N.A. (In re Cain), 423 F.3d 617 (6th Cir. 2005); In re Smith, 85 F.3d 1555, 1558 n.3 (11th Cir. 1996); McCarn v. WyHy Fed. Credit Union (In re McCarn), 218 B.R. 154 (B.A.P. 10th Cir. 1998); In re Medaglia, 402 B.R. 530 (Bankr. D.R.I. 2009).

The other school of thought is that Congress intended the foreclosure sale to constitute the earliest date upon which the debtor loses his right to cure and maintain, but that right may be extended if under state law the debtor retains an interest in the property beyond the foreclosure auction. See, e.g., In re Jenkins, 422 B.R. 175 (Bankr. E.D. Ark. 2010) (“The bankruptcy code’s use of the word “sold,” which is the past tense of “sell,” implies the requirement that the foreclosure process, not just the sale, has been concluded.”); In re Wescott, 309 B.R. 308, 314 (Bankr. E.D. Wis. 2004) (allowing cure when petition filed after judicial foreclosure sale but before judicial confirmation of the sale); Randall v. Equicredit Fin. Serv. Corp. (In re Randall), 263 B.R. 200, 202 (D.N.J. 2001) (holding that ‘ 1322(c)(1) right to cure is not extinguished until rights of redemption have expired under state law); In re Spencer, 263 B.R. 227, 231 (Bankr. N.D. Ill. 2001) (referring to state law and finding that, in Illinois, “foreclosure sale is not complete until an order confirming the sale has been entered”); In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999); In re Barham, 193 B.R. 229, 232 (Bankr. E.D.N.C. 1996) (determining that property is “sold” only when a foreclosure sale has been completed under state law).

In adopting the “gavel rule,” the BAP concluded that the phrase “sold at a foreclosure sale” was a specific reference to the actual sale and did not admit of later actions to delay the debtor’s loss of his right to cure and maintain. The court also held that even if section 1322 were to be deemed ambiguous, New Hampshire law divests the debtor of an interest in the residence upon the foreclosure sale even though legal title need not be actually transferred for another 60 days.

Although reaching the same result, a recent case out of the bankruptcy court in Tennessee takes a slightly different approach to the issue. In re Comer, No. 13-12148 (Bankr. E.D. Tenn. March 10, 2014). There, the status of the foreclosure sale was the same as in LaPointe, but the court did not find that the mere occurrence of the foreclosure sale cut off the debtor’s cure and maintain right. Rather, the court looked to state law to determine what events would extinguish the debtor’s interest in the property and found that Tennessee requires that the foreclosure sale involve an exchange of consideration and satisfy the statute of frauds. Because those requirements were met, the debtor had no interest in the property at the time of her bankruptcy petition. Thus, the residence did not become property of the estate and the court had no basis upon which to deny relief from stay.  Accord, In re Westcott, 309 B.R. 308 (E.D. Wis. 2004) (“Wisconsin debtors may exercise their redemption rights until the sheriff’s sale is confirmed by the state court. Accordingly, under Colon, since the Debtor can redeem after the foreclosure sale, the Debtor can cure his defaults utilizing § 1322(c)(1) of the Bankruptcy Code.”).

The decision in Comer comports with the legislative history of section 1322 as discussed in the Seventh Circuit case of Colon v. Option One Mortgage Corp., 319 F.3d 912 (7th Cir. 2003) (permitting lifting of automatic stay to permit foreclosure purchaser to take the steps necessary to have foreclosure sale confirmed under state law, but noting that if sale is not confirmed debtor’s right to cure and maintain under section 1322 exists to the extent it would exist under Illinois law). In that case, the court quoted from the congressional record that section 1322(c)(1) is designed to:

“’Allow[ ] the debtor to cure home mortgage defaults at least through completion of a foreclosure sale under applicable nonbankruptcy law. However, if the State provides the debtor more extensive “cure” rights (through, for example, some later redemption period), the debtor would continue to enjoy such rights in bankruptcy.’ 140 Cong. Rec. H10,769 (daily ed. Oct. 4, 1994) (remarks of Rep. Jack Brooks) (emphasis supplied), reprinted in Vol. E, Alan Resnick & Henry J. Sommer, Collier on Bankruptcy, App. Pt. 9(b), at 92 (15th ed.2002); see also 5 William L. Norton, Jr., Norton Bankruptcy Law & Practice § 121:6, at 121-81 (2d ed.1997) (finding this legislative history persuasive and concluding that § 1322(c)(1) “assures that… [redemption] rights are cut of[f][sic] no earlier than the foreclosure sale date”); Christian, 214 B.R. at 355 (citing this legislative history as persuasive).” In enacting section 1322, Congress merely set an earliest date upon which the debtor’s right to cure and maintain may be cut off—the date of the foreclosure sale—it left to the states to determine through their foreclosure law the outside date.

The approach taken by LaPointe and other “gavel rule” courts, leaves hanging the question of what happens in the event that the foreclosure is never completed by the purchaser in accordance with state requirements for transfer of title. See, e.g., In re Holmdahl, 439 B.R. 876 (Bankr. W.D. Wis. 2010) (Debtor may cure and maintain after foreclosure sale where foreclosure purchaser declines to complete foreclosure process and finalize sale).

LaPointe opinion

Comer opinion


Tags: , ,

Post a Comment

You must be logged in to post a comment.