Daily Development for Friday, September 1, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BANKRUPTCY; AUTOMATIC STAY; FORECLOSURE: Bankruptcy court validates California's new statute protecting trustee sales from post foreclosure filings.

In re BebenseeWong, (BebenseeWong v. FNMA ), 248 BR 820 (Bkrtcy 9th Cir. 2000)

Mortgagee conducted a trustee's foreclosure sale and bought the property. Twelve days later, mortgagor/debtor, who was still in possession of the property, filed a Chapter 13 petition. Two days = after the petition, mortgagee filed an unlawful detainer action. On that = same day, fourteen days after the sale, mortgagee recorded the trustee's = deed.

A new California statute, CC Sec. 2924h(c) allows a fifteen day grace period for a prepetition foreclosure purchaser to file a trustee's = deed.

In arguing for relief from the automatic stay to pursue the unlawful detainer action, Mortgagee argued that this statute rendered the foreclosure title held by mortgagee "perfected" as of the time of the = sale, notwithstanding the later filing, and that therefore the debtor had no interest in the property.

The trial court agreed and the Bankruptcy Panel affirmed in this = decision. It was careful to warn that the analysis applied only to prepetition = sales. Postpetition sales, even if recorded within fifteen days of the sale, = are still subject to the stay.

Reporter's Comment 1: It looks like the lending industry, which got CC =A72924h(c) enacted to protect trustee sales from post foreclosure bankruptcy filings took the right path in attempting to solve this = problem. It is easier to go to the state legislature than to Congress to get = relief from federal bankruptcy rulings, but the success of such a local strategy remains in doubt until the federal courts react to it. Similar = scenarios played out in the areas of rent assignment CC =A72938; see FNMA v Bugna (1997) 57 CA4th 529, 67 CR2d 233; MDFC Loan Corp. v Greenbrier Plaza Partners (1994) 21 CA4th 1045, 26 CR2d 596) and unlawful detainer (CCP =A7715.050; see Lee v Block (1999) 73 CA4th 1116, 86 CR2d 913). Since this validating decision comes from a federal court, = it gives much more comfort than a state court could ever offer

Now, under CC =A72924h(c), a beneficiary who manages to complete her trustee sale before the debtor files his bankruptcy papers will = prevail, even if she doesn't get her trustee's deed recorded until after the bankruptcy filing (as long as it is within 15 days). There is still a = race, but it no longer depends on who gets to the recorder's office first, as = was the case before the 1993 amendment. See In re Duncombe 143 BR 243. (Bkrtcy C.D Cal 1992) What the beneficiary has to do to win is to have the hammer fall before the debtor completes his bankruptcy filing. But reconfiguring the race track does not mean there won't be interesting races to watch. What about the beneficiary who sold after = the bankruptcy filing but claims that her timely recording relates back to = a time before that filing. What about the beneficiary who sold before = the filing, but was unable to get the sale trustee to deliver a deed to her within the next 15 days (because the debtor had given notice of his bankruptcy filing before the deed was completed)? What about the debtor who filed before the trustee sale started but couldn't get his bankruptcy papers recorded until after the hammer fell?

Reporter's Comment 2: Since foreclosing beneficiaries always have a better chance when the trustee's sale process is completed sooner = rather than later, they should probably be advised that generously giving a = final hour extension to the debtor may be asking for a sale to be stayed at = the last minute. (These comments are from Professor Roger Bernhardt of Golden Gate Law School in San Francisco.)

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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