by Bankruptcy law enhances and expands a debtor’s state law property rights by specifying the time within which a debtor may cure a mortgage default. In re Ausburn, No. 16153 (Bankr. E.D. Ark. Feb. 10, 2015). In Ausburn, the debtors defaulted on their mortgage with First Security Bank and FSB instituted foreclosure proceedings. The parties then negotiated a settlement in which the debtors agreed to cure the default and remain current on their mortgage payments. As security against another default, the debtors signed an Agreed Order Granting Decree of Foreclosure which permitted FSB to reopen the “dormant” foreclosure. When the debtors again defaulted, FSB filed the agreement with the county court, notified the debtors, and scheduled the foreclosure sale. The debtors then filed for chapter 13 bankruptcy. The home was sold the following day at the previously scheduled sale. The bankruptcy court found the post-petition foreclosure sale of the debtors’ home was conducted in violation of the automatic stay and was, therefore, void ab initio.
The case required analysis of the interplay between state property law and section 1322(c)(1) of the Bankruptcy Code. Arkansas law recognizes a statutory and equitable right of redemption. The Agreed Order specified that the debtors had ten days within which to redeem the property after default. Having failed to do so, they lost their equitable right to redeem before they filed for bankruptcy. They also lost their statutory right to redeem under state law by express agreement in the Agreed Order. Thus, the court concluded that under state law the debtors had no interest in the property at the time they filed their bankruptcy.
But this did not resolve the issue. While property rights in bankruptcy are generally determined according to state law, where there is tension between state and federal rights, state law gives way. Section 1322(c)(1) provides in part: “Notwithstanding subsection (b)(2) and applicable nonbankruptcy law . . . a default . . . may be cured . . . until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” Section 1322(c)(1) was enacted in response to previous confusion as to when a debtor’s right to cure a default ended. Based on the statutory text and the legislative history, courts have found that “Congress clearly intended that section 1322(c) would preempt state law and create a federal right to cure that only terminates upon a foreclosure sale.”
The court concluded that at the time of the foreclosure sale the property was property of the estate under section 541 because the debtors possessed a federal legal or equitable right to cure under section 1322(c)(1) “[n]otwithstanding . . . applicable nonbankruptcy law.” While state law comes into play again to determine when the foreclosure is complete, in this case the sale post-dated the bankruptcy petition under either the “gavel” rule or the “sold” rule. Thus, the foreclosure sale constituted a violation of the automatic stay and was void ab initio.