Bankruptcy Judge Voids Foreclosure Sale.


Henry Chuang

by Henry Chuang on October 17, 2011

in Foreclosure

In a surprising ruling in August 2011, a bankruptcy judge in the Central District of California voided a foreclosure sale that occurred before the borrower’s bankruptcy filing.  Normally, a non-judicial foreclosure sale is final as to a bona fide purchaser, someone who does not have knowledge of any defects, if the Trustee’s Deed is issued and recorded within 15 days of the auction.  In fact, California Civil Code Section 2924h provides that a trustee’s sale is final upon acceptance of the last bid and is perfected as of the morning of the foreclosure if the trustee’s deed is recorded within 15 days of the sale.  This means that if the foreclosure occurred on August 1, and the Trustee’s Deed is recorded on August 13, the Trustee’s Deed would relate back to foreclosure sale and would be deemed to have been completed on August 1.

However, in the bankruptcy case In Re Gonzalez, Judge Wallace found that although the foreclosure sale may have occurred prior to the filing for bankruptcy protection, the issuance of the Trustee’s Deed, even if it was within the 15-day period, was a violation of the automatic stay.  The automatic stay, as the name implies, is triggered on filing for bankruptcy protection and stops most creditor action.  The Judge reasoned that while Civ. Code §2924h may allow for the recording of the Trustee’s Deed to relate back to the date of the foreclosure sale, the issuance of the Trustee’s Deed was an independent creditor action.  Any creditor action after the filing of bankruptcy violated the automatic stay and is void.  Further, since title had not actually transferred to the purchaser, a transfer of title from the debtor would violate the automatic stay.  Accordingly, even though the Trustee’s Deed would relate back to the foreclosure sale, it would still be in violation of bankruptcy laws.

While the ruling is not binding on any other judges, it does highlight a potential loophole in the law.  However, given the large number of cases that have found that trustee’s sales to a bona fide purchaser are final, it seems unlikely that other courts will follow this decision.  If you are facing problems with contentious homeowners or other problems with foreclosures, please contact us so that we can help you manage those issues.

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{ 7 comments… read them below or add one }

avatar Tony Scott October 18, 2011 at 4:31 am

You are right, this is a potential area of conflicting decisions which may arise due to interpretation of facts and application of the laws. I do hope that a proper remedy could be applied in the immediate future to avoid further dissonance in Judges’ decisions involving the same question.

avatar NewOralean May 9, 2012 at 6:49 am

Debtor file a chapter 13 Bankruptcy case, doing so before the new bankruptcy law took effect in 2005. The Judge dismiss Debtor’s case for failure to prosecute. However, Debtor, file a timely appeal (within the 10 day limited before an Order becames final), appealing to District Court as opposed to BAP (Bankruptcy Appelant Panel). Creditor, conducted a foreclosure sale on Debtor’s real property, doing so during the appeal, and without seeking permission from either the Bankruptcy Court, or District Court,. Plus, Creditor had accepted post petition payments, but failed to start the Notice process anew. My question, what is the status of the Automatic stay, after the dismissal, but during a timely appeal to District Court?

avatar Henry Chuang May 15, 2012 at 6:27 pm

Wow, this sounds like a great question for law school! Given how fact specific this question is, I would not be able to provide an answer without getting additional facts. If you would like me to look into this, please feel free to call my office to set up an appointment.

avatar Henry Chuang May 1, 2013 at 8:59 am

Thank you for your kind words. We work hard to stay informed on all the new and developing law in this area.

avatar Harold Gregg February 22, 2016 at 4:57 pm

Is a full reconveyance only as between the lender and the borrower(who has put up his house as collateral to secure the repayment of the loan?

avatar Harold Gregg February 22, 2016 at 5:00 pm

Is a full reconveyance only as between the lender and the borrower(who has signed a deed of trust giving an interest in his residence as collateral to secure the repayment of the loan)?

avatar Harold Gregg February 22, 2016 at 5:04 pm

Is a full reconveyance only as between the lender and the borrower(who has signed a deed of trust giving an interest in his residence as collateral to secure the repayment of the loan)?
Can a full reconveyance be used to assign the deed of trust from one lender to another lender?

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