Is The Sale Good Even With A Bankruptcy Stay?

Generally, the answer is no and servicers know the drill.  A foreclosure sale is scheduled for Wednesday and goes ahead smoothly (a third party is the successful bidder.)  Unbeknownst to the servicer, however, the borrower filed a bankruptcy petition on Tuesday B obviously before the sale. Because the filing of a bankruptcy petition imposes an automatic stay B even if the filing was a secret B the sale is void.  But a recent New York case addresses special circumstances whereby the sale may be declared valid and exploring those is the mission here. [See Bank of America v. Duncan, N.Y.L.J., Jun. 11, 2003, at 26, col. 5 (Sup. Ct., Nass. Co., DeMaro, J.)].

Normally, of course, any effort to attack an automatic stay or to seek a declaration that an intercepted foreclosure sale is valid must be pursued in bankruptcy court.  In this case, though, by the time the sale bidder moved for the order to validate the sale, the bankruptcy case had been dismissed.  That gave the state court jurisdiction to rule on the matter.

In what will be designed to be a more succinct fashion, here are the points and circumstances highlighted by the court which may offer helpful focus.

• The bankruptcy code [11 USC ‘549(c)] provides exceptions to the rule that a prior stay voids a later sale.
• One such exception applies to a good faith purchaser of real property without knowledge of commencement of the bankruptcy case for present equivalent value, or to a purchaser at a judicial sale located in a county other than where the petition was filed and so long as a copy of the petition is not filed in the county of the sale.  (In this case, the foreclosure was in Nassau County but the petition had been filed in Suffolk County.)
• The code [11 USC ‘362(d)] allows bankruptcy courts to grant retroactive relief from a stay to validate actions which would otherwise be void.
• The absence of prejudice is another basis to validate the sale (and no prejudice was found here).
• The automatic stay created by filing for a bankruptcy petition does not deprive a state court of jurisdiction, but merely suspends that jurisdiction.

It is apparent that the group of circumstances which came together in this one case are likely to be uncommon.  Nevertheless, these things do happen and it can be meaningful to be aware of the factors.  Oh yes, the court declared the foreclosure sale valid.

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.