by A panel for the First Circuit BAP found that the debtor could not cure and maintain her mortgage in bankruptcy because she had no interest in the property which was sold in a foreclosure sale prior to her bankruptcy petition, despite the fact that the mortgagee failed to record the deed of sale in accordance with state foreclosure law. U.S. Bank Nat’l Assoc. v. Vertullo, Nos. 18-56, 18-63 (B.A.P. 1st Cir. Jan. 10, 2020).
After the debtor defaulted on her mortgage, the mortgagee, U.S. Bank, sold the property to a third party through a foreclosure sale. The foreclosure deed was not recorded. When Ms. Vertullo filed for chapter 13 bankruptcy, the Bank sought to lift the automatic stay in order to evict Ms. Vertullo from the property. Ms. Vertullo countered that, because the foreclosure sale was not recorded within the time required by state law, she retained an interest in the property and could cure and maintain the mortgage through her plan. The bankruptcy court agreed. It denied the Bank’s motion for relief from stay and, in a separate order, confirmed the debtor’s plan. In re Vertullo, 593 B.R. 92, 94 (Bankr. D.N.H. 2018). The Bank appealed both orders to the Bankruptcy Appellate Panel for the First Circuit.
The BAP began with the question of whether the bankruptcy court properly denied the Bank’s motion for relief from stay. A creditor’s right to have the stay lifted depends upon whether it has a “colorable” claim to the property: a standard setting a low threshold, not difficult to meet. The panel turned to New Hampshire foreclosure law to answer whether the Bank’s claim to the property was colorable. State law requires a foreclosure seller to submit an affidavit and record the foreclosure deed within 60 days or the sale is rendered void “as to intervening encumbrances.” In addition, “Title to the foreclosed premises shall not pass to the purchaser until the time of the recording of the deed and affidavit.” The mortgagor has a right to redeem the property any time before foreclosure. The court in Barrows v. Boles, 687 A.2d 979, 988 (N.H. 1996), held that even where the foreclosure sale has not been properly recorded, the debtor’s right to redeem is lost once “the auctioneer’s hammer fell” and the memorandum of sale was signed despite the fact that legal title had not passed to the purchaser.
In the context of a debtor’s rights in bankruptcy, section 1322(c)(1) permits a debtor to cure and maintain a mortgage that is in default at the time of the petition but which has not been sold “at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law[.].” The case therefore turned on whether Ms. Vertullo’s property had been sold in accordance with New Hampshire foreclosure law. In TD Bank, N.A. v. LaPointe (In re LaPointe), 505 B.R. 589, 595 (B.A.P. 1st Cir. 2014), another panel for the first circuit BAP discussed the two approaches to this issue. First is the “gavel rule” under which the foreclosure sale is deemed a discrete event after which the debtor loses the right to cure and maintain without regard to whether subsequent state foreclosure procedures are met. The second approach gives greater weight to the word “sold” and finds that until the steps are taken to complete the sale according to state law, including but not ending with the foreclosure sale, the debtor retains her right to cure and maintain. The LaPointe panel adopted the gavel rule.
The panel turned to whether the bankruptcy court was obligated to adhere to a ruling by a bankruptcy appellate panel and the related question of whether another panel was bound by an earlier panel decision by the doctrine of stare decisis. Because the First Circuit has applied stare decisis in addressing issues already decided by other panels of the circuit court, the BAP found it, likewise, should apply the doctrine when reviewing issues decided by other BAP panels. It found that in the interest of predictability, courts should adhere to earlier case decisions except where intervening law from a superior court or by statute dictates otherwise, or where new authority renders the previous decision suspect. Against that background, the panel pointed out that LaPointe had not been overruled or abrogated and that the only decision criticizing it came from the court below in this case.
Here, the bankruptcy court found that it was not bound to LaPointe because that case was undermined by its own misinterpretation of In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999), which held that a foreclosure sale encompasses the entire foreclosure process, as relying on a finding that the statutory language was ambiguous. To the contrary, the panel here read LaPointe to acknowledge Beeman’s holding correctly and then to dismantle it.
The panel found that LaPointe correctly separated section 1322(c)(1) into two parts such that: “the debtor’s right to cure ends [1] when the residence is sold at a foreclosure sale [2] that is conducted in accordance with applicable nonbankruptcy law.” This reading, it found, supports LaPointe’s conclusion that it is the foreclosure sale itself that must comply with nonbankruptcy law and that subsequent procedures are irrelevant to the debtor’s right to cure and maintain. The panel noted that the “gavel rule” represents the majority view. Looking at the reasoning behind some of those other cases, the court agreed that the recording of the deed is merely a ministerial act. Furthermore, in other provisions of the Code, Congress distinguished between foreclosure sales and the subsequent steps necessary to consummate the sale, therefore, the panel found that it was reasonable to conclude that Congress deliberately limited the right to cure and maintain to pre-foreclosure sale. Finally, the panel found the plain language of the statute supported the decision in LaPointe.
For the foregoing reasons, the panel found that the Bank had a colorable claim to the property, that Ms. Vertullo had no right to cure and maintain, and that that bankruptcy erred in finding otherwise. It reversed.
Ms. Vertullo has appealed to the First Circuit, Case No. 20-9004.