When in response to a foreclosure a borrower files a petition in bankruptcy – which of course acts as a stay of all actions against the borrower – the lender or servicer may eventually move to lift the stay to allow the foreclosure to proceed. Before that happens it is possible, though, that the bankruptcy will be dismissed which effectively serves the same purpose – the mortgage servicer is free to go forward with the foreclosure.
From a practical standpoint then, servicers don’t often contemplate the technical difference between a lifting of the stay and a dismissal of the bankruptcy; that there is no roadblock to proceeding is the key. But the distinction between the two became an issue in a recent case which seemed to threaten the lender but which worked out in the end. [Brown v. Aames Capital Corporation, 14 A.D.3d 418, 789 N.Y.S. 2d 475 (1st Dept., 2005)].
Here is what the case tells us.
If one never thought much about it, when a bankruptcy case is dismissed, that dismissal revests the property back to the borrower (from the trustee) as of the moment before the bankruptcy petition was filed. A lifting of the stay, on the other hand, doesn’t change the status of ownership – it just withdraws the impediment to going forward with an action.
These two concepts clashed in the noted case upon these facts. One of the borrowers filed a petition in bankruptcy (the third filing by the way) during the course of a foreclosure action. The foreclosing plaintiff obtained an order lifting the stay and went on to conduct a foreclosure sale. Five weeks later, and two days before delivery of the referee’s deed to the foreclosing party who had bid in, the bankruptcy was dismissed.
You can see the claim coming. Because a dismissal revests title in the borrower, it argued that title was now in the borrower, thereby nullifying the foreclosure sale previously conducted, No, said the court, it would be nonsensical to say that the Bankruptcy Court intended the lender to proceed with its foreclosure sale, only then to award title back to the borrowers and trump the sale. Indeed.
So the borrower’s motion to vacate the sale was rejected.
Mr. Bergman, author of the four-volume treatise, Bergman on New York Mortgage Foreclosures, LexisNexis Matthew Bender (rev. 2017), is a partner with Berkman, Henoch, Peterson, Peddy & Fenchel, P.C. in Garden City, New York. He is also a member of the USFN, The American College of Real Estate Lawyers, The American College of Mortgage Attorneys, an adviser to the New York Times on foreclosure issues and writes a regular servicing column for the New York Law Journal. He is AV rated by Martindale-Hubbell, his biography appears in Who’s Who In American Law and he has been for years listed in Best Lawyers In America and New York Super Lawyers.