Third Circuit Supports “Gavel Rule” Holding that a Foreclosed Property is “Sold” at the Sheriff’s Sale and Not after Delivery of the Deed
January 14, 2013 | No Comments
Posted by Donald F. Campbell, Jr.
For more than ten years, New Jersey Federal Bankruptcy and District Courts have been divided over whether Chapter 13 debtors have the right to cure a default on a mortgage secured by the debtor’s principal residence between the time the residence is sold at the foreclosure sale and the time the Sheriff delivers the deed. In In re Connors, D.C. Civ. No. 05-cv-02236, the Third Circuit Court of Appeals (the “Court”) ruled that, under applicable bankruptcy law, the debtor does not have the right to cure default after the gavel falls at the foreclosure sale.
In Connors, the debtor defaulted on his home loan with Deutsche Bank (the “Bank”) causing the Bank to foreclose on Connors’ principal residence. At the foreclosure sale, the Sheriff’s Office sold the property to the successful bidder, 41 Lakeridge, LLC (“Lakeridge”). Four days after the Sheriff’s sale, Connors filed for Chapter 13 Bankruptcy Protection and two weeks after filing, submitted a Chapter 13 Plan proposing to cure the pre-petition arrears owed to the Bank. However, Connors failed to exercise his statutory right to object to the sale or redeem the property within sixty (60) days of filing his Chapter 13 Petition as permitted under R. 4:65 of the New Jersey Court Rules and Section 108(b) of the Bankruptcy Code. Due to the expiration of the 60-day redemption period, Lakeridge filed a motion with the Bankruptcy Court seeking to lift the stay to permit Lakeridge to tender the balance of the purchase price and receive the Sheriff’s Deed. The Bankruptcy Court granted Lakeridge’s motion, which was affirmed by the District Court.
Connors filed an appeal with the Third Circuit based upon an interpretation of Section 1322 of the Code, which states that a default with respect to a lien on the debtor’s principal residence may be cured “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable non-bankruptcy law….” 11 U.S.C. §1322(c)(1). Connors cited numerous cases holding that the foreclosure “sale” is not concluded until after the Sheriff has delivered the deed. Chisolm v. Cendant Mortgage Corp., 2005 WL 1522232, at *1 (D.N.J. 2005); In re Randall, 263 B.R. 200, 201 (D.N.J. 2001); and In re Downing, 212 B.R. 459, 467 (Bankr. D.N.J. 1997). Lakeridge opposed the motion citing numerous cases holding that the sale is concluded after the “gavel falls” at the sheriff’s sale (a.k.a. the “Gavel Rule”). In re Mangano, 253 B.R. 339, 344-45 (Bankr. D.N.J. 2000); In re Hric, 208 B.R. 21, 26 (Bankr. D.N.J. 1997); and In re Cain, 423 F.3d 617, 619 (6th Cir. 2005).
The Third Circuit ruled in favor of Lakeridge finding that the meaning of “foreclosure sale” only refers to the foreclosure auction and not the entire foreclosure process terminating with the delivery of the deed since the word “at” signifies a “discrete event rather than an ongoing process.” Furthermore, New Jersey practitioners refer to the foreclosure auction as the “sale” and distinguish between the sale and delivery of the deed. Though the Third Circuits’ decision may decrease a debtor’s opportunity to save their home resulting in more foreclosure sales, the ruling should promote the finality of sheriff’s sales and, as a result, could increase the quantity and price of bids, which would ultimately benefit both creditors and debtors.
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