Prepared by Kristine Brown, Managing Attorney
The United States Bankruptcy Court for the Northern District of Mississippi found that for purposes of interpreting 11 USC 1322(c)(1), the debtor’s right to cure a default terminates at the conclusion of the foreclosure auction and not delivery or recordation of a trustee’s deed. The Court found that this is because the mortgagor is divested of legal title upon default and the equity of redemption upon the conclusion of the public auction. In the absence of a legal or equitable interest at the commencement of a bankruptcy case filed subsequent to the completion of the auction, the property is not property of the estate.
The firm received this positive ruling in a matter of first impression with respect to the finality of the foreclosure sale under Mississippi law. The Court found that a valid foreclosure auction constitutes a foreclosure sale and divests a debtor of both legal and equitable title to real property so that the automatic stay of 11 USC 362(a) will not come into effect to invalidate a foreclosure sale even though a deed has not been delivered or recorded. In a well reasoned memorandum, Judge Woodard affirmed the arguments put forth by Shapiro & Brown, LLC to find that the debtor’s interest terminates when the auction concludes and does not require a trustee’s deed to be delivered or recorded. In this case, the auction began at 11:05 A.M. concluded at 11:28 A.M. and the bankruptcy case was filed at 11:28 A.M. The trustee’s deed was signed and delivered on February 5th 2020 and subsequently recorded on February 12th 2020.
The Court rejected the application of Miss. Code Ann. Section 89-1-3 which provides that title shall not be conveyed until the grantor delivers a deed to the grantee. Instead Judge Woodward noted that with respect to bankruptcy, the issue is not so much when title is perfected in the grantee, but when the debtor is divested of all right, title and interest. These are well established principles in other non judicial states, such as Maryland, and Shapiro & Brown, LLC’s Managing Attorney, William Savage has been successful throughout his 30+ year career arguing such pivotal cases to the advantage of our clients across the industry. (See In Re Denny, 242 B.R. 593 (Bankr. D. Md. 1999)).
The Court found that under Mississippi law, divestiture of title by foreclosure occurs in two steps: legal title is divested upon default and subsequently the equity of redemption when the public auction concludes. Therefore, the redemption provided under 11 USC 1322 (c)(1), terminates when the residence is sold at foreclosure sale. The Court did not decide whether the sale concluded at the fall of the gavel or the execution of the memorandum as both occurred prior to the filing. However, best practice would appear to be to have a signed memorandum to avoid arguments based on the statue of frauds. Notably, the Court also expressed that relief from the automatic stay would be required for eviction proceedings as to the debtor.