Daily Development for
Monday, August 19, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

The Reporter for this Development is Jim Stillman of Murphy, Weir & Butler, San Francisco.

BANKRUPTCY; FORECLOSURE; NOTICE: Bankruptcy courts may apply Constitutional Due Process notice requirements to set aside foreclosures occuring after dismissal of the debtor's bankruptcy petition, even when a bankruptcy case is not pending at the time of sale and even where the foreclosure is non-judicial, but such notice is not required where the foreclosure had not been postponed while the former bankruptcy petition had been pending. In re Anderson, 195 B.R. 87 (9th Cir. BAP 1996).

Although the description of this case makes the issue sound like a typical bankruptcy procedural rat's nest kind of problem, there is an important Constitutional and policy question at the heart of it.

The private foreclosure sale here was lawfully conducted after the dismissal of a chapter 13 case and before it was reinstated. There was no need to continue the sale by public proclamation as allowed by Arizona law, as the sale could be, and was, conducted in a timely manner according to the original notice. Later, the debtor successfully filed a new bankruptcy petition, and asked that the foreclosure be set aside. The bankruptcy court had held that the debtor might have been confused about the impact of the bankruptcy petition on the pending foreclosure, and that new notice of the sale should have been provided.

On appeal: Held: Where the sale proceeded as originally scheduled there should be no need for additional notice, but such notice might be Constitutionally compelled if the sale had been postponed during the pendency of the earlier bankruptcy case.

The court distinguished In re Tome, 113 B.R. 626 (Bankr. C.D.Cal. 1990), which does establish a requirement for additional, actual notice where the foreclosing creditor had changed the sale date by oral continuance during the case.

Reporter's Comment 1: A debtor should not be expected to track oral postponements while its bankruptcy case is being administered. For cases in accord with the reporter's thinking, see In re Peters, 184 B.R. 799 (9th Cir. BAP 1995); In re Fritz, 188 B.R. 438 (Bankr. E.D.Wash. 1995).

Reporter's Comment 2: It is noteworthy that the BAP in the principle case openly embraces the test of Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314-35,1 70 S.Ct. 652, 657-658 (1950) ("notice reasonably calculated, under all the circumstances, to apprise interested parties..."), for measuring the "constitutional due process requirements" even of private power-of-sale foreclosure. (p. 90).

Editor's Comment 1: The Reporter's right, and the court appears to be wrong. Although one or two decisions have interpreted deed of trust notice statutes to require, in effect, Mullane-standard notice, the vast majority of the decided cases have concluded that a "garden variety" trustee sale under a deed of trust, where no public official is involved, is not "state action" and the Due Process Clause is not operative.

Tome is a thoughtful case that is certainly worth reading in this context. Its conclusion that a California deed of trust foreclosure sale requires new notice following the granting of relief from the stay is not based upon Constitutional principles, but rather upon bankruptcy policy. But in Tome, the creditor received relief from the automatic stay in an ongoing bankruptcy proceeding. The bankruptcy court took pains to explain why there was a continuing interest of the court in the foreclosure process. (The opinion also explains in detail the significance of the fact that the sale had been continued a number of times during the pendency of the bankruptcy case.)

A post-Tome Arizona bankruptcy decision, In re Acosta, 181 B.R. 477 (Bankr. D. Ariz. 1995), however, concludes without analysis that the basis for the bankruptcy court's imposition of the new notice requirement is Constitutional Due Process. The Acosta court also extends the rule to situations in which the original bankruptcy case actually had been dismissed, rather than there simply being relief from the stay in an ongoing case.

Here is the Acosta reasoning:

"Due process requires actual notice be given to a debtor prior to a Trustee's Sale which is scheduled to occur after stay relief or the dismissal of a bankruptcy case. Actual notice then allows a party the opportunity to exercise their legal rights in regard to such a sale. Creditors should take stock of the totality of the circumstances, including the possibility that a case might be reinstated within a reasonable time after dismissal. This procedure also protects the creditor from possibly holding a sale in violation of the automatic stay when a case is reinstated and thereby adds fairness to the procedure.

Finally, the Court notes that the Bankruptcy Code favors allowing a debtor to have a "fresh start". The purpose of the Bankruptcy Code is to give debtors a reasonable opportunity to make a fresh start. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). This Court is aware that the provisions contained in ARS 33-810(B) do not take into consideration this type of issue, which is strictly an issue in a bankruptcy case."

Note that Acosta, like the instant case, and unlike Tome, involved a bankruptcy case that actually had been dismissed, not just a relief from a stay in a pending case. It would be harder to argue preemptive bankruptcy law ought to apply, and perhaps this is why the court resorted to a Due Process analysis. (The editor still would prefer a reliance on bankruptcy law.)

Editor's Comment 2: The basic problem with the analysis is that it places every foreclosure sale into question on the chance that the debtor might be able to file a successful bankruptcy petition at some later date. We have Durrett all over again, this time suspending certainty of title based upon on the adequacy of notice. The instant case, although it upholds the sale, throws the issue into even more of a quandry by agreeing that the Constitutional requirement will apply when there are postponements, but not otherwise. Although the distinction might make sense if one were writing legislation, it is not clear why a Constitutionally-based line ought to be drawn here. If we're to have the rule, then it ought to be based upon Bankruptcy policy and it ought to apply across the board. To that extent, the editor agrees with the reporter.

Editor's Comment 3: Note that the notice issue here is somewhat distinct from the standard Mullane inquiry. The question is not whether the method of delivering notice is adequate, but rather whether all efforts have been made to insure that the receipient of the notice understands what is going on. It is an even more ephemeral test, and one that is certain to cause uncertainty in the future if the Bankruptcy courts pursue it.

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