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In re Downing

96-36604 (U.S. Bankr. Ct. D. N.J. 1997) (Unpublished)

BANKRUPTCY; FORECLOSURE—For purposes of a Chapter 13 bankruptcy, the foreclosure is not complete until the Sheriff’s deed is delivered. Debtor gets to cure default after the auction took place.

After a debtor defaulted in payment of a promissory note, the creditor who held a mortgage on residential property as security for the note brought a foreclosure action. One week after a sheriff’s foreclosure sale, the debtor filed a Chapter 13 petition in bankruptcy which caused the deed not to be delivered to the creditor. The applicable federal bankruptcy statute states that “a default…may be cured…until a residence is sold at a foreclosure sale conducted in accordance with applicable nonbankruptcy laws.” The debtor interpreted this statute to permit cure of the delinquency and reinstatement of the mortgage, since a judicial foreclosure sale is not final until the deed is actually conveyed. The creditor claimed the statute provides that a debtor’s right to cure terminates when the property is sold at a foreclosure auction, and that the only way a debtor can defeat a sale is by payment of the entire debt within ten days after the auction. In New Jersey, a debtor may file an objection with the Court challenging the sale and the bankruptcy court could invalidate the sale. If no objection is filed, the sheriff then delivers the deed to the purchaser. Accordingly, a sale is not final until the objection period has expired and the deed has been delivered.

The U.S. Bankruptcy Court looked to the language of the statute and concluded that a default may be cured until “completion” of a foreclosure sale, and that state law determines the time at which a foreclosure sale has been completed. First, the Court distinguished between a right of a debtor to cure a default under federal bankruptcy law and a right of redemption, which is controlled by state law. Even though a right to cure a default terminates once property is sold at a foreclosure sale, the Court looked to the legislative intent of the federal bankruptcy law and determined that a debtor’s right of redemption extends until the time the foreclosure transaction becomes final, which in New Jersey is not until delivery of the deed by the sheriff. The Court stated that if Congress intended a debtor’s right to terminate at the sheriff’s sale it could have expressly said so. It also found that Congress did not intend to reduce rights, but to extend rights for debtors in jurisdictions that were too restrictive. The legislative history shows an intent to give debtors the right to cure a default at least through completion of a foreclosure sale, and to leave intact any additional cure rights permitted under state law. The Court found New Jersey case law split on the issue of when a foreclosure sale is complete. Some cases have held that a debtor’s right to cure terminates upon completion of the sale, and that delivery of the deed by the sheriff is only a ministerial function distinguishable from the sale and does not affect the substantive rights of the parties. Other cases have determined that a Chapter 13 debtor may cure a default and reinstate a residential mortgage until actual delivery of the sheriff’s deed to the successful purchaser. The Court agreed with the latter line of cases and held that a debtor may reinstate a mortgage until actual delivery of a sheriff’s deed to the purchaser.


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