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California Bankruptcy Court Lifts Automatic Stay for Purchaser of Real Property at Pre-Bankruptcy Foreclosure Sale

Foundry [Public domain, CC0 1.0 (], via PixabayA California federal district court recently affirmed a bankruptcy court’s order lifting the automatic stay in a Chapter 13 proceeding, finding that the matter in question was not subject to the automatic stay under one or more exceptions found in the Bankruptcy Code at 11 U.S.C. § 362(b). The district court’s most recent ruling on the issue referenced two earlier orders:  In re Silva, No. 2:15-cv-02061, order denying appellant’s motion for stay pending appeal (“Silva I”) (C.D. Cal., Apr. 24, 2015); order denying appellant’s ex parte motion for reconsideration (“Silva II”) (May 1, 2015). The court incorporated those orders’ reasoning in the most recent order (“Silva III”), issued on June 22, 2015. The various orders draw on dense statutory language in the Bankruptcy Code, which frequently defines exceptions to the automatic stay entirely by reference to other code sections.

The debtor/appellant has, according to the court, lived in her home since 1988. She and her husband/co-debtor borrowed $125,000, secured by a first-mortgage lien on the property, in 2004. They took out a second mortgage the following year for $30,000. At some point, they began to discuss modifying the first mortgage loan, but they then defaulted on the second mortgage in 2008. The second-mortgage lender sold the property to a family trust (the “Buyer”) in a foreclosure sale in August 2009. Several weeks later, an employee of a property management company owned by the Buyer (the “Company”) went to the residence to inform the debtor of the sale, but the debtor reportedly did not believe him because of the ongoing loan modification negotiations with the first-mortgage lender.

Although the Buyer had an executed trustee’s deed, it did not record the deed right away, opting “to allow [the debtor] and her husband to remain in the property rent-free until the property increased in value.” Silva I at 3. In April 2010, the first-mortgage lender recorded a foreclosure notice. The debtors filed for Chapter 13 bankruptcy in August 2010, but no one recorded a notice of the bankruptcy proceeding in the property’s chain of title. In October 2014, the Buyer recorded the trustee’s deed and then executed and recorded a quitclaim deed transferring title to the Company. Neither party was aware of the pending bankruptcy proceeding at the time.

Upon learning of the bankruptcy case, the Company moved to lift the automatic stay in December 2014. The debtor brought an adversary proceeding against the Company, seeking an injunction against transferring title. The bankruptcy court denied the preliminary injunction and granted the Company relief from the automatic stay. The debtor appealed to the district court.

Both the bankruptcy and the district courts reviewed the exception to the automatic stay found in § 362(b)(3), which excepts certain interests in property that are superior under state law to the bankruptcy estate’s interest. The district court ultimately concluded, however, that the residence was excepted under § 362(b)(24), which applies to transactions that are not avoidable by the bankruptcy trustee under §§ 544 or 549 of the Bankruptcy Code. Even though the Buyer did not record the deed until long after both the purchase and the bankruptcy filing, it was deemed to have recorded the deed on the same day as the sale under 11 U.S.C. § 546(b).

Bankruptcy lawyer Devin Sawdayi has represented individuals and families in the Los Angeles and surrounding areas in Chapter 7 and Chapter 13 bankruptcies since 1997, helping them repair and rebuild their finances with dignity and respect. Contact us online or at (310) 475-9399 today to schedule a free and confidential consultation with a knowledgeable and experienced financial advocate.

More Blog Posts:

City of San Bernardino, California’s Bankruptcy Case Results in Multitude of Legal Disputes, Los Angeles Bankruptcy Lawyer Blawg, August 29, 2015

Bankruptcy Court Considers Whether to Lift Automatic Stay for Foreclosure-Related Proceedings, Los Angeles Bankruptcy Lawyer Blawg, May 11, 2015

Violation of Automatic Stay Can Result in Emotional Distress and Punitive Damages, According to Ninth Circuit Ruling, Los Angeles Bankruptcy Lawyer Blawg, April 12, 2015

Photo credit: Foundry [Public domain, CC0 1.0], via Pixabay.