A chapter 7 debtor contended that a mortgage creditor’s postponement of a scheduled nonjudicial foreclosure sale after receiving notice of the debtor’s bankruptcy constituted a violation of the automatic stay. Accordingly, it sought an order for contempt and sanctions against the trustee and beneficiary under a deed of trust and a law firm involved in the foreclosure. The trustee and law firm moved for summary judgment, requesting that the bankruptcy court deny the debtor’s motion.
The debtor owned certain real property that was subject to a deed of trust:
- The deed of trust trustee issued a Notice of Trustee’s Sale and scheduled a nonjudicial foreclosure sale for November 14.
- The debtor filed for relief under Chapter 7 on November 14.
- After receiving notice of the bankruptcy filing, the trustee had the auctioneer postpone the sale date to December 5.
- As of November 21, the beneficiary instructed the trustee to cancel the foreclosure sale.
- The beneficiary moved to terminate the automatic stay. The bankruptcy court granted the request for relief from stay, and the debtor appealed that order.
- In the meantime, the debtor filed the motion seeking sanctions for violation of the automatic stay.
The debtor claimed that the state statute governing postponements of nonjudicial foreclosure sales mandated that the trustee immediately cancel any sale noticed for a post-petition date. Under the state statute:
- The person conducting a sale has the discretion to postpone it by making a public declaration at the time and place initially designated for the sale.
- No other notice is required unless the delay is longer than 45 days.
- If the delay is more than 45 days, then the sale must be re-noticed in the same manner as originally required to commence the foreclosure sale.
The debtor contended that the oral postponement of the nonjudicial foreclosure sale constituted a violation of the automatic stay. In particular, filing a petition operates as a stay of “the commencement or continuation” of a proceeding against the debtor, and an individual injured by a willful violation of the stay can recover damages.
Under applicable case law, the debtor had to prove (1) a violation of the automatic stay occurred, (2) the violation was willful, and (3) the debtor suffered damages as a result. In this case, the court concluded that the debtor failed to establish that there was a violation of the stay in the first place.
To start with, the court found nothing in the state statute mandating immediate cancellation of a foreclosure sale scheduled post-petition. The only mandatory provision it saw was the requirement that a sale be re-noticed if the postponement was for more than 45 days.
As for the automatic stay under section 362 of the Bankruptcy Code, the court found persuasive the line of cases holding that postponement of a foreclosure sale does not constitute a violation. In particular, the court noted decisions from the Third, Sixth, and Ninth Circuits, as well as the First and Tenth Circuit Bankruptcy Appellate Panels. The general theme was that a postponement did not “continue” a proceeding in violation of the automatic stay, but rather was a preservation of the status quo.
As one court explained, the purpose of the stay is to (1) give the debtor a breathing spell, (2) stop all collection efforts, harassment and foreclosure actions, and (3) prevent piecemeal diminution of the bankruptcy estate. A foreclosure sale postponement “merely maintains the status quo” and is consistent with the purpose of the automatic stay.
Of course, postponing the sale date did not mean that the sale could be held on the postponed date. Further, mailing a foreclosure notice to the debtor and filing it with state court, advertising a sale or causing the property to be posted for sale went beyond mere postponement and has been found to be a violation of the stay by some courts.
Accordingly, the court denied the debtor’s motion.
The adjournment statute in this case is fairly typical – namely a foreclosure sale can be adjourned for a shorter period of time without starting over, but a longer adjournment requires complying with the notice requirements for a new foreclosure. (Note that in some states a mortgagee can do a series of shorter adjournments without triggering the requirement to comply with original noticing requirements.)
This can provide a strategic advantage since a mortgagee that obtains relief from the automatic stay may be able to proceed almost immediately with a foreclosure sale, as opposed to delaying a couple of months to comply with full-blown notice requirements. Of course, this works only if the interim adjournments do not violate the automatic stay. So, it is worth double checking local precedent.
Vicki R Harding, Esq.