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Arkansas Bankruptcy Court Reaffirms its Adherence to the “Sale Rule” But Allows Recording of Foreclosure Deed After Bankruptcy Petition Filed
On April 30, 2020, the United States Bankruptcy Court for the Eastern District of Arkansas held that even though a foreclosure sale is not complete until the deed is recorded, a third-party purchaser is still entitled to relief from the automatic stay so that it may record the foreclosure deed, and thus complete the sale, even after the filing of the chapter 13 bankruptcy petition by the debtor. In re King, 614 B.R. 851 (2020).
Background of the Case
The debtor filed her chapter 13 bankruptcy petition on December 6, 2019, but the automatic stay did not go into effect upon the filing because the debtor was a serial bankruptcy filer. On the same date that the petition was filed, the debtor also filed a motion to impose the automatic stay on all creditors. That motion was granted on February 12, 2020, and specifically stated that the stay was effective on the date of entry of the order. The debtor included the property in issue, which was her home, in her chapter 13 plan because the automatic stay was not in effect at the time, the foreclosing creditor held a non-judicial foreclosure sale on December 9, 2019, at which a third-party purchaser, REI Nation, LLC (“REI”) was the high bidder. The creditor then delivered a foreclosure deed to REI on December 18, 2019, but, for an unexplained reason, the deed was not recorded. Thus, “the foreclosure sale and delivery of the Mortgagee’s Deed occurred post-petition but unhindered by the automatic stay.” In re King at 863.
The bankruptcy court was faced with the question of whether the foreclosure sale had been completed so as to vest the ownership in the property in REI and deprive the debtor of any interest in the property, or whether the debtor still had an interest in her homestead property so that she could take advantage of 11 U.S.C. §1322(c)(1) in order to keep her home by maintaining her payments and curing her default.
The “Sale Rule”
The court analyzed the Arkansas Statutory Foreclosure Act at Ark. Code Ann. §118-50-101 et seq. and its interplay with 11 U.S.C. §1322(c)(1), which allows a debtor to cure a mortgage default “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law.” The court drew on prior decisions from Arkansas bankruptcy court to hold that for purposes of 11 U.S.C. §1322(c)(1), the property is not “sold” until the foreclosure deed is recorded. Until the deed is recorded, the debtor may include the property in the chapter 13 plan and cure the default under 11 U.S.C. §1322(c)(1). This is often known as the “Sale Rule.”
Relief from the Automatic Stay
This holding was quite predictable based on prior case law from Arkansas bankruptcy court. The court in In re King, however, did not end its analysis there. Instead, the court went on to determine that there was “cause” for relief from the automatic stay in favor of REI pursuant to 11 U.S.C §362(d)(1) because REI, as a third-party purchaser, lacked adequate protection of its interest in the property. Therefore, the stay was terminated as to REI so that it could proceed with recording the foreclosure deed, thus completing the foreclosure process, and take possession of the property.
In summary, even though the foreclosure sale was incomplete, and the debtor retained the right to maintain and cure its mortgage payment through the bankruptcy, because REI was a third-party purchaser to whom a foreclosure deed had been delivered, it was entitled to complete the sale by recording the deed and was entitled to take possession of the property from the debtor. An otherwise predictable result, given the prior adherence of Arkansas bankruptcy courts to the Sale Rule, ended in somewhat surprising fashion in that the debtor was deprived of her right to cure the default on her home mortgage even though the sale was not completed pre-petition.
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