the following is a case update analyzing a recent case of interest written by retired judge Meredith Jury, analyzing In re Hager, 2023 WL 3668208 (Bankr. E.D. CA. May 25, 2023).
When is a foreclosure final for purposes of determining if it occurred pre-petition or post-petition? The Bankruptcy Court for the Eastern District of California (the “Court”) recently denied a motion by a buyer at a nonjudicial foreclosure sale to annul the automatic stay to validate his purchase of the property and to allow him to evict the debtor who owned and resided in the property. The case turned on the Court’s application of amendments which were made to Cal. Civ. Code § 2924 et seq., effective on January 1, 2021, which altered the finality date of certain nonjudicial foreclosures by giving contingent overbid rights to any “prospective owner-occupant,” “eligible tenant buyer,” and “eligible bidder.” These changes meant that the date when the sale was called might no longer be the final sale date. In the circumstances of this case, the sale was not final on the date it was called, with the finality occurring post petition. Therefore, the sale was void, causing the Court to deny the requested relief.
To read the full published decision, click here.
Debtor Shannon Hager had owned and occupied property in Pine Mountain, California (the “Property”) for 24 years. Covid-19 disrupted her income, causing her to default to her lender, Flagstar Bank. She was unable to qualify for a loan modification, so Flagstar proceeded with a nonjudicial foreclosure on the Property. The nonjudicial foreclosure sale took place on November 7, 2022, at which time Ian McGilvray, an investor, was the successful bidder for $164,512. Under the new provisions of Cal. Civ. Code § 2924m(c), multiple parties submitted notices of intent to bid on the property between November 10 and November 21, 2022, but no bids were received. The foreclosure trustee executed the Trustee’s Deed Upon Sale (“Trustee’s Deed”) on November 23, 2022, and sent it to McGilvray, who recorded it on December 2, 2022.
One day prior to recordation of the Trustee’s Deed (December 1, 2022), the debtor filed a chapter 13 bankruptcy. Asserting that she was unaware of the foreclosure sale, the debtor proposed a plan which paid Flagstar’s secured claim as if no sale had taken place. Being unaware of the sale and purchase by McGilvray, the debtor did not list him in her schedules or master mailing list. McGilvray learned of the bankruptcy, and, on March 1, 2023, he filed a motion for relief from the automatic stay without a request for retroactive relief, which the Court granted. He subsequently moved for annulment of the stay, arguing that California law allows the post-petition recording of a Trustee’s Deed to relate back to the date of the sale and since notices of intent to bid were submitted, the Trustee’s Deed would be deemed perfected as of the sale date if it was recorded within 60 days of the sale, as it was here. He also argued that the balancing test of In re Fjeldsted, 293 B.R. 12, 32 (9th Cir. BAP 2003) supported annulment. The debtor opposed, asserting the foreclosure sale was void as a matter of law because the recorded Trustee’s Deed did not relate back to the sale date under the facts of this matter.
The Court agreed with the debtor that the Trustee’s Deed did not relate back, making the sale a violation of the automatic stay and therefore void.
The Court recognized that prior to January 1, 2021, California nonjudicial foreclosure statutes, as interpreted uniformly by the bankruptcy courts, deemed a prepetition foreclosure sale final on the date of the sale. A trustee’s deed timely recorded post-petition would have not been a stay violation and would have related back to the original sale date. A debtor had no right to cure a prepetition default to save a home in a chapter 13 if the sale was prepetition and the trustee’s deed related back. Cal. Civ. Code § 2924h(c).
The Court noted that the law changed on January 1, 2021. Cal. Civ. Code § 2924m(c) gave contingent overbid rights to any “prospective owner-occupant,” “eligible tenant buyer,” and “eligible bidder.” Under this section, if a foreclosure sale of real property with 1-4 residential units is completed and the prevailing bidder is a prospective owner-occupant, then the sale is final and that buyer will immediately take title to the property. A trustee’s deed recorded within 21 days of the sale will be deemed perfected as of the original date of the sale. If the bidder was not a prospective owner-occupant, as happened here, then a 15-day window opens for eligible third parties to either submit bids or notices of intent to bid and the date of finality changes. If no bids or notices are received by the 15th day, then the sale is final on the 15th day after the sale and a trustee’s deed recorded within 21 days after this date will be deemed final and perfected on the original sale date.
If a notice of intent to bid is submitted by the 15th day, then a 45-day window opens for bidders to match or exceed the highest bid at the original sale. If that bid is ultimately consummated, then finality will be on the 45th day, with no relation back of the recorded trustee’s deed. Finally, if a notice to bid opens the 45-day window but no eligible bid is submitted within the 45 days, then the highest bidder at the initial foreclosure sale will take title to the property. In that event, the sale is deemed final on the 45th day.
Reviewing the undisputed facts, the Court concluded that the last scenario occurred here. McGilvray was not an owner-occupant, so the sale was not final when called. The 21-day relation back of the trustee’s deed thus was not relevant. Notices of intent to bid were made within the 15-day window, but no eligible bids were received within the 45-day window. Therefore, the sale to McGilvray was deemed final, but not until 45 days after the sale, December 22, 2022, by which time the automatic stay was in effect. The sale was thus void and McGilvray had no rights to the Property. The Court emphasized that its decision did not turn on perfection of the sale, but rather on finality. Before the statutory changes, the sale would have been deemed final when called and perfected on the same date if the trustee’s deed was timely recorded. After the changes, the finality date was 45 days later, by which time the automatic stay was in effect.
At the end of the opinion, the Court addressed the 12 Fjeldsted factors in the balancing test for annulment and found they weighed in favor of the debtor, giving her an opportunity to save her home through a chapter 13 plan.
The new amendments to nonjudicial foreclosure sale finality and perfection are found primarily in Cal. Civ. Code §§ 2924m and 2924h but they modify § 2924c. The new laws are compound and complex, making them difficult to read and digest. The Court’s analysis of perfection and finality is much more comprehensive than this review can cover. I urge practitioners faced with prepetition foreclosures on property with 1-4 residential units to familiarize themselves with the statutes and to read the Court’s analysis in detail, which lays solid groundwork for understanding the sections. Notwithstanding the opaque language of the new statutes, however, one lesson is very clear. A prepetition nonjudicial foreclosure sale of a debtor’s home may not be deemed final on the date of the sale. This opens the possibility for debtors to file chapter 13’s to cure arrearages and save residences which was not available prior to January 2021, when a prepetition sale was deemed final upon call. A subsequent chapter 13 would not save the home. Consumer lawyers should investigate whether such a sale was final because the bidder was an owner occupant or whether a 15-day window for bids and notices of intent to bid opened the 45-day extension of finality. Learning and understanding these new laws may provide an avenue for attorneys not contacted until after a sale to help a debtor nevertheless save her home.
These materials were written by retired judge Meredith Jury. Editorial contributions were provided by D. Edward Hays of Marshack Hays Wood, LLP in Irvine, California.