A chapter 13 debtor sought damages for a mortgagee’s violation of the automatic stay, which he contended occurred when the mortgagee continued a foreclosure sale while the bankruptcy case was pending. The bankruptcy court ruled in favor of the mortgagee, finding that the first continuation of the sale was not willful and the second continuation “merely preserved the status quo.” The debtor appealed to the Bankruptcy Appellate Panel (BAP).
The debtor defaulted on its mortgage loan in 2010 and the mortgagee commenced foreclosure. Initially the foreclosure sale was scheduled in October 2013, but was postponed and ultimately rescheduled for February 10, 2015.
The debtor filed bankruptcy on February 8, 2015. Although he left a voicemail message with the mortgagee’s counsel, due to an inclement weather state of emergency the message was not received until after the time scheduled for the foreclosure sale. In the meantime, the mortgagee rescheduled the sale for the next day (February 11) due to the bad weather, and then planned to reschedule the sale at least 30 days later after receiving notice of the bankruptcy.
The debtor claimed that both post-petition continuances violated the automatic stay pursuant to section 362(a)(1) of the Bankruptcy Code. This section provides (emphasis added):
[A petition] operates as a stay, applicable to all entities, of –
(1) the commencement or continuation, including the issuance or employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title.
Under section 362(k)(1) “an individual injured by any willful violation of a stay” may recover damages. To recover damages a debtor must show (1) a stay violation (2) that was willful and (3) that the debtor suffered damages as a result.
The debtor argued that (1) the plain language of the Bankruptcy Code was unambiguous and “continuation” must include postponement of the foreclosure sale; (2) the bankruptcy court erred when it treated a postponement of a foreclosure sale as only maintaining the status quo; and (3) both postponements were violations.
In response the mortgagee noted that this was a non-judicial foreclosure, so there was no foreclosure litigation to stay. Rather the postponement just suspended the foreclosure process. It agreed that the statute was unambiguous, but read “continuation” as meaning an action that advanced a proceeding.
In this case, although technically the first continuation was post-petition, the mortgagee was not even aware of the bankruptcy. So any stay violation could not have been willful, and thus the debtor could not recover damages. Consequently, the BAP concluded that the only issue before it was whether the bankruptcy court erred in finding that the second continuation did not violate the automatic stay.
On that issue, the court agreed with the mortgagee that it was bound by First Circuit precedent. In ruling that a bankruptcy court erred in avoiding a sale and awarding damages the First Circuit specifically considered and determined that it was error to find a violation of the automatic stay when the mortgagee rescheduled a foreclosure auction and advertised the new sale while the stay was in effect. The First Circuit cited with approval a Ninth Circuit case that concluded publishing successive notices of foreclosure sale postponements did not violate the stay because the creditor “merely maintained the status quo, and did not harass, interfere or gain any advantage.”
Although the First Circuit opinion dealt with a judicial foreclosure, while this case involved a non-judicial foreclosure, the BAP concluded that the procedure used to get to the point of the foreclosure sale was not relevant. So the First Circuit case was not merely analogous, but rather was binding precedent, and accordingly the second postponement did not constitute a violation of the stay.
Consequently the court affirmed the bankruptcy court.
Since violating the automatic stay can have significant adverse consequences, lawyers often conclude that it is better to be safe than sorry and seek relief from the automatic stay even though arguably that is not required. But in some cases – such as timely adjourning a foreclosure sale – that may not be practical. As catalogued in the opinion, there are a large number of cases holding that continuing a foreclosure sale does not violate the automatic stay even though it involves the affirmative act of publishing notice of the new sale date. However, before taking action it would be prudent to verify the status of the law in the applicable jurisdiction.
Vicki R Harding, Esq.