Henson v. Bank of America, N.A. (In re Henson), 477 B.R. 786 (Bankr. D. Colo. 2012) –

In Henson a foreclosure sale was stayed by the debtors’ filing of a chapter 13 bankruptcy.  The bank allowed the sale date to be automatically continued from week-to-week during the bankruptcy, including after a chapter 13 plan of reorganization was confirmed.  The debtors contended that this constituted a violation of the automatic stay entitling them to damages.

Section 362(a) of the Bankruptcy Code provides that filing a bankruptcy automatically operates as a stay of (emphasis added):

(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor…

(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.

Under Colorado law, if a foreclosure sale is not held, it is automatically continued from week to week by the public trustee.  In fact, the foreclosure statute expressly provides that if all publications prescribed by the statute have been completed before a bankruptcy petition is filed and the automatic stay prevents the officer from conducting the sale, then the officer is to “allow the sale to be automatically continued from week to week” unless the lender requests otherwise.

So, unlike many jurisdictions, no affirmative act by the lender was required in order to adjourn the sale.  However, the court noted that even though there was no technical act by the lender, if a lender takes an action that sets things in motion, it may be required to affirmatively stop the proceeding.  (As an example, if a creditor has a continuing garnishment, it must terminate the garnishment once it learns of a bankruptcy.)

On the other hand, while the bank did nothing to cancel the foreclosure sale, the public trustee was notified of the bankruptcy and did not proceed with the sale.  So in effect, the process was halted and no steps were taken to collect a pre-petition debt or exercise control over the debtor’s property or to enforce the bank’s lien as prohibited by Section 362(a)(6) of the Bankruptcy Code.

The court felt that the question of whether adjournment of the sale date constituted a “continuation” of a proceeding under Section 362(a)(1) was a more difficult question.  It noted a Massachusetts bankruptcy case that made a distinction between a single continuance of the sale date to permit the lender to seek relief in the automatic stay from continuing the sale five times without seeking relief from the stay.  The Massachusetts court held that each of the five continuances was a violation of the automatic stay.

Notwithstanding this example, the Henson court noted that the “overwhelming weight of authority, however, is to the contrary.”  In particular it noted cases from the Third, Sixth and Ninth Circuit Courts that held that a postponement of a foreclosure sale did not constitute a violation of the automatic stay.  This was despite the fact that these cases involved affirmative action by the mortgagee, such as publishing successive notices postponing the foreclosure sale to a new date.  The Henson court agreed with the Circuit Court decisions, explaining that it viewed “continuations” as meaning taking steps to move the process forward, in contrast to maintaining the status quo.

Henson involved a further complication that the debtors had confirmed a chapter 13 plan that provided for payment of the bank’s loan.  One of the Ninth Circuit cases addressed this precise scenario.  A lower court found that plan confirmation resulted in an immediate “cure” of the pre-petition mortgage defaults so that the lender was not entitled to proceed with a foreclosure.  The Ninth Circuit reversed on the basis that a plan does not provide an immediate cure, but rather the cure takes place once the loan is fully repaid.  Agreeing with this case, the Henson court found that there was no violation of the automatic stay even though a plan had been confirmed.

As noted in prior blog posts (for example, see Beware the Automatic Stay) bankruptcy courts take the automatic stay very seriously, and the Bankruptcy Code provides individual debtors with an opportunity to obtain sanctions in the case of a willful violation of the automatic stay.  In this case, the debtors alleged that the continuation of the foreclosure sale date resulted in “numerous calls” to the debtors from brokers and others wanting to buy their home which caused them to “fear the imminent loss of their home.”  Consequently, they had been seeking damages for emotional distress, punitive damages and attorneys fees and costs under Section 362(k) of the Bankruptcy Code.

While the reasoning that adjourning a foreclosure sale simply maintains the status quo and does not violate the automatic stay appears sound, a lender will want to think twice adjourning without court blessing in a jurisdiction that does not have any precedent – particularly in the case of an individual debtor.

Vicki R. Harding, Esq.