In re Russell

• Court: U.S. Bankruptcy Court — Southern District of Alabama
• Writing for the Court: JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE
• Citation: In re Russell, 608 B.R. 893 (Bankr. S.D. Ala. 2019)
• Decision Date: 11 October 2019
• Docket Number: Case No. 19-11514
• Parties: IN RE: Ray Artis RUSSELL, Debtor.

608 B.R. 893

IN RE: Ray Artis RUSSELL, Debtor.

Case No. 19-11514

United States Bankruptcy Court, S.D. Alabama, Southern Division.

Signed October 11, 2019

Alexander P. Almond, III, Orr & Almond, Mobile, AL, for Debtor.

Daniel B. O'Brien, Mobile, AL, for Trustee.

MEMORANDUM OPINION AND ORDER

JERRY C. OLDSHUE, JR., U.S. BANKRUPTCY JUDGE

This matter came before the Court on the Motion for Relief from the Automatic Stay (hereinafter "the Motion") filed by Carrington Mortgage Services, LLC (hereinafter "Carrington") pursuant to 11 U.S.C. § 362. Proper notice of hearing was given and appearances were noted by Attorney Kent McPhail on behalf of Carrington and Attorney Alexander Almond, on behalf of the Debtor. Having considered the record, the motion, the brief and the arguments of the parties, the Court finds that the Motion is due to be and is hereby GRANTED for the following reasons:

JURISDICTION

This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. §§ 1334 and 157, and the order of reference of the District Court dated August 25, 2015. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G).

FINDINGS OF FACT

The parties submitted a Joint Stipulation of Undisputed Facts with Exhibits, (hereinafter "Stipulation") which the Court adopts and the summation of which is set out herein. (Doc. 41). On August 9, 2010, the Debtor executed and delivered a mortgage and promissory note wherein he promised to make mortgage payments totaling $74,003.00 payable in 360 consecutive installments. (Id. at ¶1, Ex. A, B). To secure all payments under the promissory note, Debtor granted a security interest in real property commonly referred to as: 3104 First Avenue, Mobile, AL 36617 and all appurtenances therein and thereto (hereinafter "Property"). (Id. at ¶2, Ex. C). Carrington had a perfected security interest in the Property. (Id. at ¶3). The Debtor subsequently defaulted on his mortgage obligation and Carrington initiated foreclosure proceedings against the Property. (Id. at ¶4). On March 7, 2019, notice of foreclosure was sent to the Debtor. (Id. at ¶6, Ex. E). The notice of foreclosure was published in The Call News, a newspaper of general circulation published in Mobile County Alabama, on March 13, 2019, March 20, 2019, and March 27, 2019. (Id. at ¶7, Ex. F). On May 3, 2019, at 11:00 a.m., during the legal hours of sale, pursuant to the power of sale provisions included in the mortgage, the Property was sold by public auction on the courthouse steps in Mobile, Alabama. (Id. at ¶8). At the end of the foreclosure auction, often referred to as "the fall of the gavel", Carrington Mortgage Services, LLC was the high bidder in the amount of $61,180.00. (Id. at ¶9, Ex. F).

Post-foreclosure, on May 7, 2019, Carrington sent a written demand to Debtor to vacate the Property. (Id. at ¶10, Ex. G). On May 7, 2019, Debtor filed this chapter 13 bankruptcy case. (Id. at ¶11, Ex. H).

Debtor listed the Property as his address of residence on the petition and on schedule A wherein Debtor stated he was the only owner of the Property having a fee simple ownership interest. (Id. at ¶12). The Debtor claimed the Property as exempt on schedule C under the homestead exemption. (Id. at ¶12, Ex. I). On May 8, 2019, the foreclosure deed was executed by the auctioneer who conducted the foreclosure sale. (Id. at ¶13). On May 15, 2019, the foreclosure deed was recorded as instrument number 2019026625 in the Probate Court of Mobile County. (Id. at ¶16). On July 24, 2019, Carrington filed a motion for relief from the automatic stay of 11 USC § 362 to proceed with the post-foreclosure ejectment and all acts necessary to enforce its interest in the Property. (Id. at ¶17, Ex. K). At the hearing of this matter, there was no dispute as to the validity of the foreclosure. The parties stipulated that the foreclosure sale was properly conducted in accordance with Alabama law, including all necessary notices and publication and that the foreclosure sale was valid. (Id. at ¶16). No other pertinent facts are in dispute and this matter is ripe for adjudication by this Court based upon the pleadings filed and the Stipulation.

CONCLUSIONS OF LAW

The issue presented is whether the "gavel rule", establishing that a mortgagor lacks the ability to cure a mortgage default upon the fall of the gavel at a duly conducted, pre-petition foreclosure sale, remains the appropriate standard for determining a chapter 13 debtor's interest in foreclosed property. Property of the bankruptcy estate is comprised of all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a). The filing of a bankruptcy petition creates a stay applicable to all entities of any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate. 11 U.S.C § 362 (a)(3). Most courts agree that the foreclosure of a debtor's principal residence in accordance with state law, prior to the filing of a bankruptcy petition, excludes the foreclosed property from the bankruptcy estate. See Commercial Fed. Mortgage Corp. v. Smith (In re Smith) , 85 F. 3d 1555 (11^th Cir. 1996) ; Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428, 1435 (6th Cir. 1985) ; In re Cain, 423 F.3d 617, 619–620 (6th Cir. 2005) ; McCarn v. WYHY Fed. Credit Union (In re McCarn) , 218 B.R. 154 (10th Cir. BAP 1998) ; In re Crawford , 232 B.R. 92, 95 (Bankr. N.D. Ohio 1999) ); In re Connors , 497 F.3d 314, 321, 322 (3d Cir. 2007).

Alabama Foreclosure Law

The starting point in determining a mortgagor's status vis-à-vis a foreclosed mortgage is state law. In re McKinney , 174 B.R. 330, 333. Alabama is a power of sale foreclosure state. Ala. Code § 35-10-12 (1975). Alabama mortgagees hold legal title to the real property subject to the mortgagor's equitable right of redemption and title is not revested in the mortgagor until payment of the debt. Ala. Code § 35–10–26 (1975). A power of sale foreclosure consists of notice of sale in the manner prescribed in the mortgage instrument or as allowed by statute and a public sale by auction at a specified time and place. Ala Code §§ 35-10-2 ; 35-10-8; 35-10-13 (1975). Alabama Code § 6-5-248 (1975) provides mortgagors a post foreclosure statutory right of redemption, stating in pertinent part:

(a) Where real estate, or any interest therein, is sold, it may be redeemed by:

(1) Any debtor, including any surety or guarantor.

(2) Any mortgagor, even if the mortgagor is not personally liable for payment of a debt...

(b) All persons named or enumerated in subdivisions (a)(1) through (a)(7) may exercise the right of redemption granted by this article within 180 days from the date of the sale for residential property on which a homestead exemption was claimed in the tax year during which the sale occurred, or within one year from the date of the sale for all other property.

A purchaser at foreclosure sale holds legal title to the property, subject to the mortgagor's statutory right of redemption. Id. A mortgagor's statutory redemption period runs from the date of the foreclosure sale. Garrison v. Dickerson , 631 So 2d 255 (Ala. Civ. App. 1993). Debtors failing to deliver possession of foreclosed property to purchaser upon a 10 day written demand forfeit their statutory right of redemption. Ala. Code § 6-5-251 (1975).

Pre-1994 Difference of Opinions

Bankruptcy courts faced with determining the point in the pre-petition foreclosure process at which a mortgagor's interest in a principal residence terminates, thereby placing the property outside a chapter 13 bankruptcy estate and without protection of the automatic stay, previously reached differing conclusions. See In re Ragsdale, 155 B.R. 578 (Bankr. N.D. Ala.1993) (providing a synopsis of differing opinions throughout the circuit courts at that time). Most courts recognized the analysis involves the interplay of state law and Section 1322 of the Bankruptcy Code. 11 U.S.C. § 1322 provides the framework for inclusion of debts in a Chapter 13 plan and states in pertinent part:

(b) Subject to subsections (a) and (c) of this section, the plan may...

(2) modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor's principal residence, or of holders of unsecured claims, or leave unaffected the rights of holders of any class of claims;

(3) provide for the curing or waiving of any default;

(4) provide for payments on any unsecured claim to be made concurrently with payments on any secured claim or any other unsecured claim;

(5) notwithstanding paragraph (2) of this subsection, provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.

Due to differences of state law, bankruptcy court determinations concerning when in the pre-petition foreclosure process a mortgagor's interest in property was sufficiently terminated to place it outside the bankruptcy estate ran the gamut of outcomes from pre-foreclosure sale acceleration to post-foreclosure redemption. See generally In re Roach, 824 F.2d 1370 (3d Cir.1987) (cannot cure after foreclosure judgment); In re Glenn, 760 F.2d 1428 (6th Cir. 1985) (cannot cure after foreclosure sale); In re Thompson, 894 F.2d 1227 (10th Cir.1990) (cure allowed before foreclosure sale; however, the court indicates in dictum that the right to cure should extend to the end of a statutory redemption period); In re Klapp, 80 B.R. 540 (Bankr.W.D.Okla.1987) (may cure if petition is filed after judicial sale has been held but not confirmed); In re Chitwood, 54 B.R. 396 (Bankr.W.D.Va.1985) (cure may occur if foreclosure deed has not been delivered to purchaser); In re Rutterbush, 34 B.R. 101 (E.D.Mich.1982) (cannot cure after acceleration); In re Tucker, 131 B.R....