In re Lieber

Citation: 600 B.R. 408Docket: Bankruptcy No. 18-00766

Court: United States Bankruptcy Court, N.D. Iowa; April 22, 2019; Us Bankruptcy; United States Bankruptcy Court

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The Court addressed a "Motion for Declaration that Redemption Period is not Tolled and that Issuance of Sheriff’s Deed will not Violate the Automatic Stay." During the hearing in Sioux City, Iowa, Iowa-Nebraska State Bank, represented by Daniel L. Hartnett, argued that the automatic stay under 11 U.S.C. § 362 does not extend the one-year redemption period following a foreclosure sale. Donald Lieber, Debtor, contested this based on changes to the Bankruptcy Code in 1994, asserting that these changes necessitate a different interpretation. 

The Debtor defaulted on a mortgage, leading to a foreclosure sale on July 12, 2017, where the Bank was the sole bidder and obtained a Sheriff’s Certificate of Purchase. The statutory redemption period, which allows the Debtor to redeem the property, was set to expire on July 12, 2018. The Debtor filed for Chapter 13 bankruptcy on June 5, 2018, without redeeming the property.

The Court concluded that the Chapter 13 filing and the associated automatic stay do not toll the redemption period as per Iowa Code § 628.3. It referenced the precedent set in In re Lally, which found that the automatic stay does not modify state-created property rights. This decision was consistent with Eighth Circuit case law, particularly Johnson v. First National Bank of Montevideo, establishing that the automatic stay does not extend redemption periods defined by state law. The Court noted that the current Iowa statutory scheme mirrors that of prior rulings, affirming the Bank's position.

In Lally, the Court adopted a two-part test from Johnson to evaluate a debtor's interests in mortgaged property post-foreclosure in relation to bankruptcy. The first part involves identifying the debtor's remaining interest after a foreclosure sale, determining if it constitutes property of the bankruptcy estate. Here, following a foreclosure sale on July 12, 2017, the Debtor held only bare legal title and a statutory right of redemption, both set to expire on July 12, 2018. The Debtor failed to redeem the property before filing bankruptcy on June 5, 2018; thus, only the right of redemption, not the property itself, entered the bankruptcy estate.

The second part assesses the applicability of the automatic stay under 11 U.S.C. § 362(a), which prevents legal actions against property of the estate. Since the Debtor held no equitable interest in the property at the time of filing, his possessory interest was not protected by the automatic stay. Consequently, when the redemption period expired, the transfer of the property to the Bank via Sheriff's Deed did not impact the estate. The Eighth Circuit's ruling in Johnson established that the automatic stay cannot extend state property rights beyond statutory periods.

The Debtor contends that 11 U.S.C. § 1322(c), enacted in the Bankruptcy Reform Act of 1994, provides him a right to cure the mortgage default until the property is sold at foreclosure. He argues that the sale isn't complete until the redemption period ends, thus preserving his right to cure beyond July 12, 2018. The Debtor maintains that he initiated a plan to cure the deficiency on his residence before the property was formally sold under Iowa law.

The Bank argues that the language in 11 U.S.C. § 1322(c)(1) effectively codifies the analysis from the Lally case, asserting that a debtor's ability to modify creditor rights under bankruptcy law ends at the foreclosure sale, leaving only a statutory redemption period under Iowa law, which the debtor failed to utilize before expiration. The Court finds that § 1322(c)(1) does not invalidate Lally or Johnson but suggests that it provides an additional right to cure beyond state law redemption periods. This perspective aligns with Bankruptcy Judge Richard D. Taylor's opinion in In re Ausburn, which highlights that Congress aimed to clarify when a debtor's right to cure terminates by adopting § 1322(c)(1) in 1994. Numerous courts have interpreted this subsection as granting a supplemental federal right that enhances state law rights, establishing the foreclosure sale as the uniform point at which the federal right to cure expires. Senator Grassley's statements during the bill's introduction emphasized the intent to support homeowners facing foreclosure despite bankruptcy court orders. Judge Taylor affirmed that the federal right to cure under § 1322(c)(1) persists even when state law redemption rights have lapsed, with the right extending until the property is officially sold at a foreclosure sale, which in Arkansas is defined as the confirmation of the sale by the court. Consequently, bankruptcy debtors may have multiple avenues to cure defaults, but the debtor's equity of redemption ended at the foreclosure sale, and state statutory rights are not applicable under the Lally test.

The Debtor's sole recourse under the Bankruptcy Code is the right to cure under 1322(c)(1) until the property is "sold at a foreclosure sale." There is a legal debate on the precise interpretation of "sold at a foreclosure sale," with two prevailing views. One interpretation, known as the "gavel rule," posits that the debtor's rights to cure cease when the foreclosure auction occurs. The opposing view argues that the property is only considered sold once all steps of the foreclosure process are completed according to state law.

The Court adopts the "gavel rule," determining that the property is regarded as "sold" on July 12, 2017, the date of the foreclosure sale. The phrase "sold at a foreclosure sale" is defined as a specific event, rather than a procedural sequence. Previous case law, such as Lally, indicated that the debtor held only "naked legal title" at the time of filing for bankruptcy. The Bank asserts that equitable title transfers to the purchaser at the foreclosure sale, arguing that the sale is finalized at that moment, with the subsequent issuance of the sheriff's deed being merely a ministerial act.

Additionally, Iowa law supports this interpretation, as the statutory redemption period begins with the foreclosure sale, further linking the sale's timing to that event. Consequently, the Court grants the Bank's motion, confirming that the redemption period is not tolled and that the issuance of the sheriff's deed will not infringe upon the automatic stay. Judgment will be entered accordingly.