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Bankruptcy Judge Voids Foreclosure Sale.

Foreclosure Litigation by Peter N. Brewer, Esq.

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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