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Home > Underwriting > Title News > Seventeen Volume One

SERIES: Seventeen VOLUME: One DATED: January, 2002

~ TAX FORECLOSURE DEED RECORDED SUBSEQUENT TO CHAPTER 13 BANKRUPTCY UPHELD ~

In a recent proceeding brought in the U.S. Bankruptcy Court, In Re Sandra Lee Rodgers (U.S. Bankruptcy Court, Western District of New York, decided January 10, 2002) the Bankruptcy Judge upheld the delivery and recordation of a tax foreclosure deed despite the prior filing of a Chapter 13 Bankruptcy by the owner of the property foreclosed.

After notice to the debtor, entry of a judgment of foreclosure and an advertised public sale, Rodgers failed to redeem her property by paying the back taxes and her property was sold at a public tax sale on October 25, 2001. Subsequent to that sale, on November 6th, Rodgers filed a Chapter 13 Bankruptcy, notified the county of that filing and requested that the county not deliver a deed to the tax sale purchaser. On November 7th the referee in the tax foreclosure proceeding delivered a deed for the property to the purchaser which was recorded in the Clerk's Office on November 8th. Rodgers subsequently commenced a contempt action in Bankruptcy Court alleging that when she filed her petition, because the deed had not yet been delivered, she was still the owner of the property and therefore the property was property of the estate under Bankruptcy Code Section 541. Rodgers further alleged that the county violated the automatic stay provided for under Bankruptcy Code Section 362 when it allowed the referee to deliver the foreclosure deed after the filing of her bankruptcy petition. Rodgers requested that the Bankruptcy Judge set aside the tax sale and allow her to redeem the property by payment of the taxes owed. The judge denied her request and upheld the tax sale with the following decision which is applicable to both mortgage foreclosure proceedings as well as real estate tax foreclosure proceedings:

"As in the case of regularly conducted New York In Rem Mortgage Foreclosure Proceedings, in a New York In Rem Tax Real Estate Tax Foreclosure Proceeding such as that conducted by the County of Monroe, where the governing statute provides for judicial involvement and a public sale, once the owner's right to redeem has been extinguished by the completion of the public sale: (1) the foreclosed property is not property of the [bankruptcy] estate for purposes of Section 541, even though the owner may retain some incidents of ownership between the time of the public sale and the time when the referee delivers a deed; and (2) the Stay provided for by Section 362 does not apply to prevent the referee from delivering a deed. . .

Even though, as the Debtor asserts, the mortgagor may still retain some of the incidents of ownership until the referee delivers a deed, such as the right to possession and record legal title, those retained interests in the property, without an equitable interest or the ability to reacquire the equitable interest, are not sufficient for the property to be considered to be property of the estate for purposes of Section 541, since neither the estate nor its creditors can benefit from these retained interests.

By the time the 'hammer has fallen' at the public sale, the mortgagor has had sufficient opportunities, both before and after the entry of a judgment of foreclosure and sale, to redeem the property by paying whatever amounts were necessary to have the foreclosure action discontinued. Therefore, terminating the interests of the mortgagor in the property at the completion of the public sale for bankruptcy purposes provides needed finality for purchasers at mortgage foreclosure sales. . .

Permitting the post-petition delivery of a deed by a referee in a mortgage foreclosure proceeding where the public sale has been completed prior to the filing of a bankruptcy petition does not frustrate any of the underlying purposes or policies for the enactment of the Stay provided for by Sections 362(a)(1) and 362(a)(6), in that: (1) the debtor's status with respect to an equitable interest in the property or the ability to redeem would not be affected . . . (2) it would not be an affirmative act by the mortgagor to harass the debtor or attempt to force the debtor to pay the amounts due on the mortgage because once the public sale was completed the debtor lost any ability or right to pay off the mortgage and redeem the property; (3) it would not alter the relationships between the mortgagor and the debtor or the debtor and any of the debtor's other creditors. . . (4) . . . no property of the estate would be affected; and (5) terminating the debtor's remaining incidents of ownership, such as the right to possession and record legal title, would not affect the relationships between the debtor and the debtor's pre-petition creditors.

In the event that an owner of real property has lost the right to redeem the property as part of a regularly conducted New York In Rem Real Estate Tax Foreclosure Proceeding, the law applicable to mortgage foreclosure proceedings should be extended to such real estate tax foreclosure proceedings should that owner file a bankruptcy petition. Therefore, once the ability to redeem has been lost pre-petition, the foreclosed property sold at a public sale is no longer property of the estate for purposes of Section 541, and the Stay provided for by Section 362 does not apply to prevent the delivery of a deed by a referee, . . .

In the case of the Webster Property, the Foreclosure Act provides, and the Notice of Sale and Judgment of Foreclosure and Sale in the Tax Foreclosure Proceeding specifically provided, that the last opportunity for the Debtor to redeem the Webster Property was noon on the day preceding the October 25, 2001 public sale. In addition, as discussed above, the Foreclosure Act states that except as otherwise provided, the law of mortgage foreclosure proceedings is applicable. Therefore, there can be no question that in the Tax Foreclosure Proceeding of the Webster Property, the Debtor lost any right to redeem the Property at the latest at the time of the completion of the public sale on October 25, 2001, and that after that time the Debtor had no further equitable interest in the Property. Therefore, upon the filing of her petition on November 5, 2001, the Webster Property did not become property of the estate, and, for the reasons discussed above, the Stay did not apply to prevent the referee from delivering a deed . . .

The Tax Foreclosure Proceeding, which was governed by statute, provided for: (1) notice to the Debtor that complied with the requirements of due process; (2) judicial involvement, including the entry of a judgment of foreclosure and sale by a New York State Court with jurisdiction; (3) an advertised public sale; and (4) a procedure to administer surplus proceeds if they were generated at the public sale. Therefore, the proceeds received in the Webster Property Real Estate Tax Foreclosure Proceeding were for reasonably equivalent value and the sale of transfer were not avoidable fraudulent conveyances under Section 548 . . .

The Contempt Motion is in all respects denied.

IT IS SO ORDERED."

~ ROBERT D. SCHIAN, JR. ~

Congratulations to Bob Schian, Supervisor of our Lockport office in Niagara County, who was elected as an Assistant Secretary of Monroe Title at the December meeting of Monroe's Board of Directors. Bob began his tenure at Monroe in July 1996 and has worked continuously in Niagara County since that time. Bob's election by the Board was, no doubt, in recognition of his outstanding performance as our Niagara County representative.


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