by The bankruptcy court erred when it denied prospective relief from stay based on the same analysis it used when it denied the mortgage creditor’s retroactive annulment of stay motion. Wilmington Savings Fund Soc’y v. Fairbanks, No. 21-1019 (B.A.P. 9th Cir. Aug. 12, 2021) (unpublished).
When the debtor defaulted on her mortgage payments, she hired Home Matters USA to communicate with the foreclosure trustee. Home Matters assured her that, due to Covid foreclosure restrictions, her home would not be sold at auction. Home Matters failed to adequately protect her and her mortgage creditor, Wilmington Savings Fund Society, held a nonjudicial foreclosure auction where it sold the property for $7,000 in excess of the total debt. The sale was the first indication to the debtor that her property was not protected from foreclosure. In an effort to save her home, she immediately filed a chapter 13 petition. Three days later, the foreclosure trustee executed the deed and the purchaser recorded it within the statutory fifteen-day period. A month later, Wilmington moved for retroactive annulment of the stay to validate the transfer, or, in the alternative, for prospective relief from the stay to allow the foreclosure trustee to make the transfer again. The bankruptcy court denied both the retroactive and prospective stay motions. Wilmington appealed to the Bankruptcy Appellate Panel for the Ninth Circuit.
The BAP began with the question of whether the automatic stay was in effect when the foreclosure trustee executed the deed. It found the question turned on the nature of the debtor’s property interest under state law. Washington property law provides:
“Upon physical delivery of the trustee’s deed to the purchaser . . . the trustee’s deed shall convey all of the right, title, and interest in the real and personal property sold at the trustee’s sale. . . . Except as provided in subsection (2) of this section, if the trustee accepts a bid, then the trustee’s sale is final as of the date and time of such acceptance if the trustee’s deed is recorded within fifteen days thereafter.” RCW 61.24.050(1).
The panel found that, under state law, the debtor here had an interest in the property when she filed her petition, and that interest was protected by the automatic stay. The panel noted that other bankruptcy courts have found that the relation-back provision for recording the deed and finalizing the sale is tied to the conveyance date and, until the deed is physically delivered to the purchaser and the deed properly recorded, the debtor retains an interest in the property. This is in contrast to cases cited by Wilmington where, under California law, the relation-back date for final sale was tied to the date of the auction. The panel further found that recording the deed violated the automatic stay because it was an “act to . . . enforce any lien against property of the estate,” under section 362(a)(4), and to “collect . . . or recover a [prepetition] claim against the debtor,” under section 362(a)(6).
The panel rejected Wilmington’s argument that the transfer of the deed by the foreclosure trustee was merely a “ministerial act” which did not violate the stay. A ministerial act under federal law is an act requiring no discretion or deliberation, such as issuing a check in compliance with a court order. In this case, state law provides that the foreclosure trustee or the beneficiary under the deed of trust may challenge a foreclosure sale. Therefore, the trustee must exercise discretion in determining whether to invalidate a foreclosure sale or convey the deed to the purchaser and the act is not ministerial.
The panel also rejected Wilmington’s argument that the debtor’s interest in the property at the time of the petition was insufficient to trigger the automatic stay. Wilmington argued that because of the foreclosure sale, the debtor could not provide for the property in her chapter 13 plan. Wilmington cited Oregon v. Hurt (In re Hurt), 158 B.R. 154 (9th Cir. BAP 1993), where the panel found that despite the fact that the chapter 13 debtor retained an interest in her residence on the petition date, the pre-petition foreclosure sale extinguished her right to “cure and maintain,” under section 1322(b)(5).
The panel found that there were other possible ways the property could be treated in a confirmed plan and that the unavailability of the cure and maintain option did not automatically require the bankruptcy court to lift the stay.
Wilmington argued that the bankruptcy court should have annulled the stay under the authority of Fjeldsted v. Lien (In re Fjeldsted), 293 B.R. 12, 21 (9th Cir. BAP 2003), which established a “balancing of the equities” test for retroactive lifting of the stay. The panel disagreed, finding that the bankruptcy court applied the legal standard set forth in Fjeldsted to the facts in a proper exercise of its discretion. Specifically, the bankruptcy court found that “(1) Ms. Fairbanks’ chapter 13 case was her first bankruptcy filing, (2) she had filed schedules and a plan to deal with the mortgage on the property, (3) she acted promptly once she learned of the foreclosure sale to obtain an attorney and proceed with the bankruptcy, showing no lack of good faith, (4) the foreclosure trustee knew of the bankruptcy filing but took actions to execute and deliver the trustee’s deed four days after receiving notice of the bankruptcy filing, (5) it is ‘relatively easy’ to rescind a foreclosure trustee’s deed and reconduct the sale, so the cost to the mortgage provider would likely be minimal, (6) Wilmington was adequately protected by the equity in the property, as the winning bid at the foreclosure sale exceeded the amount of the debt by $7,000 and the real estate market in the surrounding area was ‘very hot,’ and (7) Home Matters USA, ostensibly acting on Ms. Fairbanks’ behalf, had in fact exacerbated her problems. The court also contrasted the harm to the parties, noting that the third-party purchaser would receive his bid back from the foreclosure trustee or lender if the sale were rescinded, whereas annulment of the stay would cause the debtor to lose her home.”
The panel affirmed the order denying Wilmington’s motion to annul the automatic stay and retroactively validate the post-petition transfer of title.
The same was not true of the bankruptcy court’s exercise of discretion in its order denying Wilmington’s motion for prospective relief from stay to allow the trustee to redo the conveyance of the deed. Here the panel was “left with the definite and firm conviction that a mistake [had] been committed.” The panel found that the bankruptcy did not conduct a separate analysis of the question of prospective relief, but simply based its decision on the same reasoning as it used in addressing the retroactive relief motion. Here, again, the panel noted that the debtor did not have the option of cure and maintain to save her house. It found that the bankruptcy court should have considered whether there were other viable options, such as loan refinancing, by which the debtor could retain her property given the small amount of equity in the home and her poor track record on mortgage payments.
The panel vacated and remanded that portion of the bankruptcy court’s decision denying prospective relief from stay.