By Kitty J. Lin
If you are trying to save your house from foreclosure the best way to avoid any confusion is to file for bankruptcy as soon as possible before your trustee sale date. Once your bankruptcy case is filed there is an automatic stay in place to prevent the sale of your home. If the trustee sale still goes through, the sale will be voided as it is in violation of the automatic stay.
What happens when you filed your bankruptcy case after the trustee sale was conducted but before the trustee’s deed is recorded with the county? Pursuant to California Civil Code Section 2924h(c), “…the trustee’s sale shall be deemed final upon the acceptance of the last and highest bid, and shall be deemed perfected as of 8 a.m. on the actual date of sale if the trustee’s deed is recorded within 15 calendar days after the sale…”
The courts in California are divided over the interpretation of this issue. One court in the Northern District of California indicated that if the bankruptcy case was filed after the trustee’s sale but before the recording of the trustee’s deed, the recording of the trustee’s deed is not a violation of the automatic stay and the secured creditors can proceed, making the foreclosure final. In Re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997). In the Garner case, Minnie Bee Garner defaulted on her mortgage and her home was foreclosed on March 11, 1997. She filed for Chapter 13 bankruptcy protection on March 12, 1997. The foreclosure sale deed was issued to the third party purchaser on March 13, 1997 and the third party purchaser recorded the deed with the county on March 18, 1997. The secured creditor’s bankruptcy attorney filed a motion for relief from stay and the court granted it and held that as long as the deed was recorded within 15 days of the sale, issuing the deed did not violate the automatic stay. Therefore, the third party purchaser’s interest in the property was not avoided by the filing of Ms. Garner’s bankruptcy case.
A more recent case in the Central District of California held differently than Garner above. In In re: Gonzalez, Case No. 6:11-BK-15665-MW (C.D. Cal. 2011), there was a foreclosure sale of Mr. Gonzalez’s property on February 22, 2011. Mr. Gonzalez filed for bankruptcy on the same day. The exact time of the final bid is uncertain but for purposes of the case the exact time and whether the foreclosure sale went through before or after Mr. Gonzalez filed for bankruptcy did not matter. The deed was recorded with the county recorder’s office on March 2, 2011. The judge in this case held that at the time the bankruptcy petition was filed Mr. Gonzalez still held title to the property because the deed was not recorded yet. The subsequent filing of the deed after the bankruptcy petition was filed violated the automatic stay and therefore the recorded deed is void. The judge goes on to say that the provision of the California Civil Code Section 2924h that deems the sale to be final as of 8 a.m. on the actual date of sale does not matter because the deed filed with the county was void, and execution of a voided deed is a void act and does not create or perfect title. Upon appeal of this decision to the District Court for the Central District of California the Bankruptcy Court judge’s ruling was reversed. Like in Garner, the recording of the deed of trust was not a violation of the automatic stay.
This is a perfect example of similar facts but different outcomes even though they are all from the state of California. Maybe legislation will resolve this issue in a future time so there is no more confusion. As of right now if you have any issues you should consult a bankruptcy lawyer. The best way to avoid this issue is to make sure your bankruptcy case is filed at least a day before your trustee sale date. So that is what happens if your house is foreclosed on before filing bankruptcy and the recording of the trustee’s deed is after you file bankruptcy.