PENNSYLVANIA CASE LAW UPDATE Frequently, borrowers file for bankruptcy at the 11th hour to halt foreclosure sales. Once a petition for bankruptcy relief has been filed, secured creditors must cease their collection efforts to avoid violating the automatic stay. However, the automatic stay terminates upon a debtor’s dismissal and closure of the bankruptcy case. A Pennsylvania bankruptcy court recently ruled that if a foreclosure sale occurs between the time when a bankruptcy case is dismissed and when it is reinstated, the foreclosure sale is not void and does not violate the automatic stay. In In re Parker, the debtor filed a petition for bankruptcy relief to prevent a foreclosure sale of her residence. Notably, the debtor failed to file any of the required documents at the time she filed her bare-bones petition. This was the debtor’s fourth bankruptcy filing, and as such, she was familiar with the necessary documents that must be completed and filed in Chapter 13 cases. The debtor timely filed some, but not all, of the missing documents, and the bankruptcy court thus entered an order dismissing her case. Under section 362(c)(2)(B) of the Bankruptcy Code, at the time a case is dismissed the automatic stay is terminated. After the automatic stay was terminated, the debtor’s residence was sold in foreclosure to Laurel Valley Development, LLC. Slightly more than a week after the foreclosure sale, the debtor filed a motion for reconsideration of the dismissal. Laurel was not served with notice of the motion, and the court was not advised that the residence had been sold. Ultimately, the court granted the debtor’s motion and reinstated the bankruptcy case.
About three months after the foreclosure sale, Laurel received a sheriff’s deed giving them title to the property. Approximately five months later, Laurel obtained a judgment to eject the debtor from the sold property. However, the sheriff refused to proceed with the ejectment due to the reinstated bankruptcy case. Accordingly, Laurel filed a motion for stay relief to proceed with the ejectment action. The debtor defended against Laurel’s motion for stay relief, arguing that the order vacating the bankruptcy case’s dismissal resulted in reinstating the automatic stay retroactively to the date the bankruptcy case was filed. If this was true, then the foreclosure sale would be deemed void. The bankruptcy court rejected the debtor’s position. Ruling similarly as a multitude of other courts, the bankruptcy court determined that vacating an order dismissing a Chapter 13 bankruptcy case does not result in imposing the automatic stay retroactive to the date the case was first filed. Accordingly, the automatic stay was not in place when the foreclosure sale occurred, and the sale is thus valid. Takeaway This case highlights the benefits of actively monitoring the proceedings of borrowers who file for bankruptcy. Chapter 13 cases are often dismissed and shortly thereafter reinstated due to debtors’ failures to file required documents or falling behind on monthly payments. These periods between bankruptcy case dismissals and reinstatements afford creditors extra opportunities to enforce their mortgages. However, because these windows quickly close, creditors that are not actively monitoring bankruptcy proceedings may miss any such opportunities. Creditors should be mindful to not pursue enforcement actions after bankruptcy cases are reinstated to avoid violations of the automatic stay. Comments are closed.
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