{"id":342,"date":"2024-04-26T23:15:00","date_gmt":"2024-04-26T23:15:00","guid":{"rendered":"https:\/\/usatrustedlawyers.com\/blog\/chapter-13-debtor-avoids-pre-petition-foreclosure-sale\/"},"modified":"2024-04-28T10:07:38","modified_gmt":"2024-04-28T10:07:38","slug":"chapter-13-debtor-avoids-pre-petition-foreclosure-sale","status":"publish","type":"post","link":"https:\/\/usatrustedlawyers.com\/blog\/chapter-13-debtor-avoids-pre-petition-foreclosure-sale\/","title":{"rendered":"Chapter 13 debtor avoids pre-petition foreclosure sale"},"content":{"rendered":"\n
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Listen to this article<\/div>\n<\/div>\n

A U.S. Bankruptcy Court judge has decided that a Chapter 13 debtor whose home was sold at a foreclosure auction before he filed his bankruptcy petition could avoid the transfer of his equity of redemption under Section 544(a)(3) of the U.S. Bankruptcy Code.\n<\/p>\n

That provision of the code, in essence, permits a trustee to avoid a pre-petition transfer of a debtor\u2019s property if the transfer was not perfected in accordance with applicable state law. In Massachusetts, a transfer is perfected once there is a sufficient record to put a hypothetical third-party bona fide purchaser on notice of such transfer.\n<\/p>\n

Here, the debtor, plaintiff Fernando Neiva, brought an adversary proceeding contending that the transfer was avoidable under the statute because neither the foreclosing lender nor the purchaser at auction had recorded the foreclosure deed or any other post-foreclosure documentation at the appropriate Register of Deeds as of the date of his bankruptcy filing.\n<\/p>\n

\"JudgeJudge Elizabeth D. Katz agreed.\n<\/p>\n

\u201cIn short, this Court agrees with the analysis and the holding set forth by the court in [its 2017 Weiss v. U.S. Bank N.A.<\/em> (In re Mularski<\/em>) decision] and rules that (1) the foreclosure of the Debtor\u2019s equity of redemption was a transfer of property of the Debtor, (2) that transfer was not evidenced by a recording at the Registry as required to be effective against third parties under Massachusetts law, and (3) the transfer is therefore avoidable by a trustee in bankruptcy pursuant to 11 U.S.C. \u00a7544(a)(3),\u201d Katz wrote in granting Neiva\u2019s motion for summary judgment.\n<\/p>\n

Katz also distinguished the case from Tran v. Citizens Bank N.A.<\/em>, in which a U.S. District Court judge decided in January that a debtor could not avoid the pre-petition transfer of his equity of redemption.\n<\/p>\n

In Tran<\/em>, the debtor alleged that the lender\u2019s failure to notarize the foreclosure deed before recording it rendered the deed defective and insufficient to constructively notify third parties of the sale.\n<\/p>\n

Katz pointed out in a footnote that the District Court found that the recording of the memorandum of sale in Tran<\/em> was sufficient to provide requisite notice.\n<\/p>\n

\u201c[I]n this case, as in Mularski<\/em>, \u2018because none of the foreclosure documents were recorded before the filing of the bankruptcy petition, I need not decide what documents must be on record to perfect the transfer of an equity of redemption vis-\u00e0-vis third parties,\u2019\u201d Katz said, quoting Mularski<\/em>.<\/p>\n

The 25-page decision is In Re: Neiva, Fernando A.<\/em>, Lawyers Weekly No. 04-002-24.\n<\/p>\n

\u2018Flies in the face\u2019<\/strong><\/h2>\n

Neiva\u2019s attorney, Richard S. Ravosa Jr. of Boston, said the decision is significant because it \u201cflies in the face\u201d of the gavel rule, the conventional precedent that once the gavel hits, the auction is over and the property is owned by the high bidder.\n<\/p>\n

\u201cThe important takeaway here is that if you are representing a debtor who loses their house to foreclosure, you need to get their bankruptcy petition filed immediately before the foreclosure deed is recorded,\u201d Ravosa said. \u201cHad the lender had the closing and recorded the deed, the debtor would have been out of luck and out of the house.\u201d\n<\/p>\n

Because nothing was recorded that would provide notice to the world, Ravosa said, his client will now be able to realize approximately $400,000 worth of equity in a home that was sold at auction for $315,000 but is valued at nearly $700,000.\n<\/p>\n

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\"RichardThe important takeaway here is that if you are representing a debtor who loses their house to foreclosure, you need to get their bankruptcy petition filed immediately before the foreclosure deed is recorded.<\/strong><\/p>\n<\/blockquote>\n

Ravosa\u2019s co-counsel, Matthew H. Hamel, noted that Katz rejected the defendants\u2019 argument that Neiva lacked standing under Section 522(h) of the Bankruptcy Code.\n<\/p>\n

\u201cBecause the high bidder failed to record the deed, [Neiva] had direct standing to step into the Chapter 13 trustee\u2019s shoes under Section 522(h) to avoid the transfer pursuant to Section 544,\u201d he said.\n<\/p>\n

Worcester attorney Barry A. Bachrach represented the purchaser at auction, and Jennifer L. Joubert of Warwick, Rhode Island, was counsel for the lender. Neither attorney responded to requests for comment.\n<\/p>\n

Springfield attorney Steven Weiss, who was the trustee in Mularski<\/em>, said that in light of both cases, foreclosing mortgagees seeking to avoid this situation should record the foreclosure documents very quickly following the auction.\n<\/p>\n

\u201cThere was about a three-week gap between the foreclosure auction and the Chapter 13 being filed,\u201d he said. \u201cHad they gone to record before the Chapter 13 was filed, the debtor would have no case.\u201d\n<\/p>\n

But Laura White Brandow of Quincy, who represents lenders, said it was surprising that the court viewed a gap of that length to be excessive.\n<\/p>\n

If the purchaser at a mortgage foreclosure auction has to obtain financing, there will inevitably be a delay since the new lender and its title insurer need to review all documents to ensure everything was done according to state law.\n<\/p>\n

Still, Brandow said that while she has not seen many homeowners attempt to avoid a foreclosure sale pursuant to Section 544, the court seemed to be sending a reminder that under the statute, a bankruptcy trustee is not a normal purchaser and needs only rely on what is actually recorded at the registry, as opposed to other indicators that might put them on notice of a foreclosure in progress.\n<\/p>\n

\u201cAs it does not appear that any legislative fix will be forthcoming anytime soon on this matter, foreclosure attorneys may need to take some action on their own to head off such future situations,\u201d Brandow added. \u201cI, myself, would not want to record the memorandum of sale or the attorney\u2019s affidavit in case there was a default on the part of the foreclosure sale purchaser. However, perhaps the recording of the certificate of entry attesting as to the fact that the lender made entry to foreclose its mortgage would be enough to stave off such future attempts.\u201d\n<\/p>\n

Boston attorney David G. Baker, who represented the debtor in Tran<\/em>, said he was pleased that Katz easily distinguished Neiva<\/em> from Tran<\/em>, in which the foreclosing lender had already recorded a foreclosure deed and affidavit of sale before the debtor came to him to file a bankruptcy petition.\n<\/p>\n

\u201cThe issue we raised was based on the fact that the foreclosure deed was void because it had not been notarized,\u201d Baker said. \u201cThe [Supreme Judicial Court] has repeatedly emphasized that the statutory requirements regarding foreclosures must be strictly enforced, so the lack of a notarization should have been fatal in the Tran<\/em> case. We will see what the [1st U.S. Circuit Court of Appeals] has to say.\u201d\n<\/p>\n

Adversary proceeding<\/strong><\/h2>\n

Neiva took out a mortgage to buy his Marlborough home in August 2014.\n<\/p>\n

At some point, he defaulted on his loan, and on Jan. 11, 2023, defendant Loancare, which held the mortgage by assignment, conducted a foreclosure sale of the property.\n<\/p>\n

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<\/p>\n

In Re: Neiva, Fernando A.<\/strong>\n<\/p>\n

THE ISSUE:<\/strong> Could a Chapter 13 debtor whose home was sold at a foreclosure auction before he filed his bankruptcy petition avoid the transfer of his equity of redemption under Section 544(a)(3) of the U.S. Bankruptcy Code?\n<\/p>\n

DECISION:<\/strong> Yes (U.S. Bankruptcy Court)\n<\/p>\n

LAWYERS:<\/strong> Richard S. Ravosa Jr. and Matthew M. Hamel, of Ravosa Law Offices, Boston (plaintiff)\n<\/p>\n

Barry Bachrach of Bachrach & Bachrach, Worcester; Jennifer L. Joubert of Marinosci Law Group, Warwick, Rhode Island (defense)\n<\/p>\n<\/div>\n<\/div>\n

Defendant David Wellons was the high bidder.\n<\/p>\n

No foreclosure deed or other post-foreclosure documents related to the sale were recorded at the Registry of Deeds as of Feb. 2, 2023, when Neiva filed his Chapter 13 petition.\n<\/p>\n

On May 4, Neiva \u2014 whose plan contemplated a sale of the property to satisfy the mortgage debt within six months \u2014 commenced an adversary proceeding against Loancare, seeking to avoid the transfer under Section 544(a)(3). He soon amended his complaint to add Wellons.\n<\/p>\n

The parties filed cross-motions for summary judgment.\n<\/p>\n

Transfer avoided<\/strong><\/h2>\n

Granting summary judgment to Neiva, Katz rejected the defendants\u2019 argument that the proceeding was not within the Bankruptcy Court\u2019s \u201ccore\u201d jurisdiction because Neiva was seeking to adjudicate rights arising under state law.\n<\/p>\n

\u201cHere, the adjudication of the rights and powers asserted by the Debtor under \u00a7\u00a7522(h) and 544(a) \u2026 are unquestionably within the Court\u2019s jurisdiction because those rights and powers are created by the Bankruptcy Code and \u2018would not exist outside of bankruptcy,\u2019\u201d she said, quoting the court\u2019s 2013 In re Felice<\/em><\/a> decision.\n<\/p>\n

Turning to the question of avoidability, Katz said the case was identical to Mularski<\/em>, in which the court found a pre-petition foreclosure of a debtor\u2019s equity of redemption avoidable under \u00a7544(a)(3) because no documents evidencing the foreclosure were filed in the relevant registry at the time of the bankruptcy petition.\n<\/p>\n

In applying Mularski<\/em>, Katz declined the defendants\u2019 invitation to look to caselaw from other jurisdictions holding that pre-foreclosure documents of record were enough to put a bona fide purchaser on \u201cinquiry\u201d notice.\n<\/p>\n

According to the defendants, a pre-foreclosure recording of a Servicemembers Civil Relief Act judgment and associated affidavit in this case served that purpose.\n<\/p>\n

Katz, however, emphasized that unlike the other jurisdictions, Massachusetts law does not charge bona fide purchasers with inquiry notice of matters not on record.\n<\/p>\n

\u201cWhile the pre-foreclosure documents on record at the Registry in this case certainly indicated that a foreclosure sale was in prospect, those pre-foreclosure documents obviously did not, and could not, evidence that the foreclosure sale had actually occurred,\u201d she said.\n<\/p>\n

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