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Deed from Foreclosure Sale Valid Despite Being Recorded During the Automatic Stay in Borrower’s Bankruptcy Case, Court Rules

800px-Sign_of_the_Times-ForeclosureAn individual who filed for bankruptcy protection shortly after a bank foreclosed on his home sought to prevent the bank from taking title to the house, arguing that the automatic stay prohibits the bank from recording the trustee’s deed. A district court affirmed the bankruptcy court’s order granting relief from the automatic stay to the bank. In re Shirazi, No. CV 12-6597 CAS, civ. min. (C.D. Cal., Jun. 18, 2013). The issues presented to the district court involved whether the bank actually held title to the property, and whether it had standing to request relief from the automatic stay.

Bank of America, N.A. (BANA) purchased the debtor’s home, located in La Verne, California, at a public foreclosure auction on April 16, 2012. The debtor filed a voluntary bankruptcy petition in the Central District of California the following day, April 17. BANA had not recorded the Trustee’s Deed Upon Sale (TDUS) at the time the debtor filed his petition. It recorded the deed on April 25.

One month after recording the TDUS, BANA moved for relief from the automatic stay with regard to the property. BANA asserted in support of its motion that it was the record owner of the property and that the debtor held no equity in the property, rendering it unnecessary to the bankruptcy proceeding. It also claimed that the debtor filed his bankruptcy petition in bad faith. The bankruptcy court granted the motion in July 2012, and the debtor appealed to the district court.

The debtor made two principal arguments in his appeal. First, he argued that the TDUS did not transfer title to the property because the automatic stay was already in effect at the time of recording. This meant, he alleged, that the property remained part of the bankruptcy estate. Second, he asserted that BANA did not have standing to move for relief from the automatic stay, since it did not hold title to the property.

The court rejected both arguments. First, it held that the “relation back” doctrine makes a transfer of title in a foreclosure auction sale effective as of the date of the sale, provided the TDUS is recorded within fifteen days. Cal. Civ. Code § 2924h(c). The court cited multiple cases with nearly-identical facts to the present case, including In re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997), in which courts have found the TDUS to be valid.

The debtor cited In re Gonzalez, 456 B.R. 429 (Bankr. C.D. Cal. 2011), which declined to apply § 2924h in similar circumstances. The court held that Gonzalez was “not consistent with the majority of opinions” regarding this issue, Shirazi, min. at 4, and therefore declined to rely on it. It also cited a legislative committee report in concluding that the California legislature intended to make TDUS’s effective as of the date of sale in most cases. Id. at 4-5.

The bankruptcy system offers an opportunity for people in financial distress to climb out from under their debt. Debtors in a bankruptcy case may be able to work out new payment plans with their creditors, find ways to pay down their debts, and even discharge their debts entirely. Bankruptcy attorney Devin Sawdayi has helped thousands of clients in Los Angeles through the process of personal bankruptcy since 1997, offering his knowledge and experience with dignity and respect. Contact us today online or at (310) 475-9399 to schedule a free and confidential consultation.

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Court Addresses Grounds for Granting Relief from Automatic Stay in Chapter 7, Los Angeles Bankruptcy Lawyer Blawg, July 2, 2013

Illness or Other Misfortune Often Leads to Bankruptcy, as Shown by a Los Angeles Chapter 13 Case, Los Angeles Bankruptcy Lawyer Blawg, June 25, 2013

Debtor’s Retirement Annuity is Not Excludable from Disposable Income in Chapter 13, Los Angeles Bankruptcy Lawyer Blawg, June 24, 2013

Photo credit: respres [CC-BY-2.0], via Wikimedia Commons.