Cornell v Envoy Mortgage, Ltd. (In re Hosch), 551 B.R. 696 (Bankr. D. N.H. 2016) –

A foreclosing mortgagee that was the successful bidder at the foreclosure sale delayed recording the sale deed. A chapter 7 trustee claimed that as a result lien rights asserted using his “strong-arm” powers had priority over any interests held by the mortgagee.

Under state law the successful bidder at a foreclosure sale “shall within 60 days of the sale” record a sale deed and related documents. Otherwise the sale is rendered “void and of no effect only as to liens or other encumbrances of record with the register of deeds for said county intervening between the day of the sale and the time of recording of said deed and affidavit.”

The timeline was as follows:

• July 30, 2015 – foreclosure sale.
• August 27, 2015 – debtor files chapter 13.
• September 22, 2015 – mortgagee files motion for relief from the automatic stay.
• September 28, 2015 – 60 days after sale.
• October 6, 2015 – bankruptcy case converted to chapter 7.
• October 7, 2015 – chapter 7 trustee records a notice asserting rights against the property as a hypothetical lien creditor under section 544 of the Bankruptcy Code.
• October 14, 2015 – court grants motion for relief from the stay and enters order that is stayed 14 days under the bankruptcy rules.
• November 3, 2015 – mortgagee records foreclosure deed:
  • 96 days after foreclosure
  • 28 days after conversion
  • 20 days after entry of order granting stay relief
  • 6 days after stay relief order became effective

The mortgagee argued that the deed was timely filed because it first had to obtain relief from the automatic stay, and a state statute provided that if recording is prevented by a court stay order then the deadline is extended until 10 days after the stay is no longer in effect.

However, stay is applicable only if the debtor continued to have an interest in the property. Under state law a mortgagor may cure defaults and retain the property only until it is sold at a foreclosure sale. So, the only argument that the mortgagor continued to have an interest post sale that would trigger the automatic stay was based on a chapter 13 debtor’s right to cure and reinstate a mortgage under the Bankruptcy Code.

The court rejected the mortgagee’s argument. The argument that the debtor had an interest based on a right to cure under the Bankruptcy Code no longer applied once the case was converted from chapter 13 to chapter 7. Thus, the court found that at the latest the automatic stay expired October 6 when the case was converted.

Consequently the court concluded that the foreclosure deed was not recorded within the 60 day period – which left the question of the impact of delayed recording of the deed. The trustee argued that once the foreclosure deed was recorded, the mortgage was extinguished or merged into the deed. And because of the untimely recording of the deed, the purchasing mortgagee held the property subject to the trustee’s intervening lien creditor rights.

The court disagreed and instead followed the reasoning of a prior district court opinion concluding that (1) the mortgage itself was not extinguished, (2) the mortgage and deed interests did not merge since (a) under common law the intervening lien meant that the interest could not be united, and (b) merger does not apply where a mortgagee does not intend merger or merger would be disadvantageous to the mortgagee, and (3) thus the mortgagee retained a separate mortgage interest (in addition to its interest under the sale deed), which was senior to the trustee’s lien creditor interests.

Accordingly, the court granted the mortgagee’s motion to dismiss the trustee’s case.

This type of issue is highly dependent on the nuances of state law. Questions such as merger and the point in time when a mortgage is affected by a foreclosure sale have very different answers depending upon the jurisdiction. It is much better to follow the rules in the first place and avoid trying to recover after a mistake.

Vicki R Harding, Esq.