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Bascom Corporation v. Chase Manhattan Bank

363 N.J. Super. 334, 832 A.2d 956 (App. Div. 2003)

FORECLOSURE; TAX SALES; BANKRUPTCY—Obtaining an order fixing the terms of redemption while a bankruptcy proceeding is active does not invalidate the underlying judgment of foreclosure if that was properly obtained.

A first mortgage lender obtained a foreclosure judgment but made no attempt to enforce the judgment until after a tax sale foreclosure had taken place. Its searcher missed the existence of the tax sale certificate. The holder of the tax sale certificate gave appropriate notice to both the property owner and the lender and neither responded. Instead, the owner filed for bankruptcy protection. The initial bankruptcy filing was dismissed and the holder of the tax sale certificate then obtained a final judgment of tax foreclosure. The owner filed again for bankruptcy. That second filing was followed by a dismissal, as was a third filing. During the period of time in which the second bankruptcy filing was still active, the certificate holder, without knowledge of any of the bankruptcy filings, obtained an order fixing the terms of redemption. That order was properly served on both the property owner and the lender, but neither responded. After the third bankruptcy filing was dismissed, a tax sale foreclosure took place.

More than a year later, the lender sought to conduct a sheriff’s sale based upon the foreclosure judgment it had obtained two years earlier, but the property owner responded that the mortgage had been wiped out by the tax sale foreclosure. The lender then sought to have the tax sale foreclosure set aside, primarily on the theory that because the order setting the terms of redemption had been issued during the pendency of the second bankruptcy filing, it was a violation of the automatic stay. Under the lender’s theory, this should have caused the original tax foreclosure judgment to be void ab initio.

The Appellate Division held that because the final judgment of tax foreclosure was entered after the initial bankruptcy petition was dismissed, there was no stay in effect. Consequently, it was not the final judgment that was void. “What was void was the order fixing the terms of redemption, the only action in the proceeding that occurred while the stay was in effect.” The Appellate Division asked the question whether a void interlocutory order (having been issued in violation of the automatic stay) automatically vitiates the final judgment as well. It concluded that it does not. “We do not believe that federal law is offended when the final judgment itself is free of the impediment of the automatic stay. Tax foreclosure law, affecting as it does, the security of title to real estate involves ‘an essential state interest’ and ‘the power to ensure that security inheres in the very nature of [state] government.’” Both the property owner and the lender were aware of the terms of redemption, but neither acted. Further, the lender knew of the bankruptcy and failed to tell the tax certificate holder of the bankruptcy, the fact of which was unknown to the tax certificate holder.


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