In re Tomlin
| Decision Date | 25 January 1999 |
| Docket Number | Bankruptcy No. 98-41988M. |
| Citation | 228 BR 916 |
| Parties | In re James M. TOMLIN, Debtor. |
| Court | U.S. Bankruptcy Court — Eastern District of Arkansas |
Stephen Bennett, Sherwood, AR, for Debtor.
Daniel Parker, Little Rock, AR, for Hibernia National Bank.
David D. Coop, North Little Rock, AR, Trustee.
The matter before the Court is an objection to confirmation of a chapter 13 plan and a motion for relief from the automatic stay filed by Hibernia National Bank ("Hibernia"). Hibernia challenges the Debtor's chapter 13 plan to cure an arrearage and resume payments on his home mortgage debt pursuant to 11 U.S.C. § 1322(c)(1) after the home has been sold at a foreclosure auction, but before the recording of the trustee's deed as required by statute. After a hearing, the Court took the matter under advisement.
This is a core proceeding pursuant to 28 U.S.C. § 157(G) and (L), and the Court has jurisdiction to enter a final judgment in this case.
Hibernia is a holder of a first mortgage on the Debtor's principal residence located in Sherwood, Arkansas. The mortgage secures a promissory note executed by the Debtor and held by Hibernia. The Debtor defaulted under the terms of the note and mortgage when he failed to make the required monthly payments.
In January 1998, Hibernia initiated statutory foreclosure pursuant to Arkansas law. Hibernia filed and properly served the Debtor with a mortgagee's notice of default and intention to sell the property, which the Debtor acknowledged receiving. The notice set the foreclosure auction of the property for April 21, 1998, at 11:00 a.m.
On April 21, 1998, at 11:00 a.m., Johnny Weaver, an employee of Wilson and Associates, Attorneys at Law, conducted an auction of the subject property. Weaver testified that there were four bidders at the sale and bidding started at approximately $16,000.00. GGF, Inc. entered the final bid of $35,000.00, which was accepted, and a cashier's check for $35,000.00 was tendered to Wilson and Associates at 11:50 a.m. before Weaver returned to his office.
Also on April 21, 1998, at 3:41 p.m., the Debtor filed his petition for bankruptcy relief under the provisions of chapter 13. At the time the petition was filed, the affidavit of sale had not been prepared and filed, nor was a trustee's deed delivered and recorded as required by state statute.
The Debtor's plan filed May 6, 1998, proposes to pay the regular monthly mortgage payment of $268.49 and to cure the arrearage owed to Hibernia with a monthly payment of $125.00 pursuant to 11 U.S.C. § 1322(b)(3) and (5) of the Bankruptcy Code.
Hibernia requested relief from the automatic stay and objected to confirmation, arguing that the Debtor is not entitled to employ 11 U.S.C. § 1322(b)(3) and (5) to cure the default because under 11 U.S.C. § 1322(c)(1), a default may not be cured after "such residence is sold at a foreclosure sale . . . conducted in accordance with applicable non-bankruptcy law. . . ." Hibernia contends that a non-judicial foreclosure sale is final under Arkansas law when the auction is concluded, and thus the Debtor may not cure his default through his plan.
The Debtor argues that under Arkansas law, a non-judicial sale is not final until the mortgagee's deed and the affidavit of sale are filed of record as required by Ark.Code Ann. §§ 18-50-107(e), 110, 111 (Michie Supp. 1997).1
The Bankruptcy Code provides in relevant part as follows:
11 U.S.C. §§ 1322(b)(2),(3),(5) & (c)(1)(1994).
Prior to 1994, courts were divided as to the precise point in a foreclosure process when the debtor loses his right to cure a default and reinstate a mortgage in a chapter 13 case. Many courts had concluded that the right to cure continued until the foreclosure sale process had become final. See, e.g., Federal Land Bank v. Glenn (In re Glenn), 760 F.2d 1428, 1435 (6th Cir.1985), cert. denied sub nom., Miller v. First Fed., 474 U.S. 849, 106 S.Ct. 144, 88 L.Ed.2d 119 (1985); In re Clark, 738 F.2d 869, 870 (7th Cir.1984). However, the point in the foreclosure process when the sale was deemed final varied from state to state. See, e.g., Ferrell v. Southern Fin., 179 B.R. 530, 532 (W.D.Tenn.1994) (); In re Ragsdale, 155 B.R. 578, 587 (Bankr.N.D.Ala.1993) (); In re Gordon, 161 B.R. 459, 462 (Bankr. E.D.Ark.1993) ().
In 1987, the Court of Appeals for the Third Circuit held that the entry of the foreclosure judgment, not the conclusion of the sale, severed a debtor's right to cure a delinquent note secured by a mortgage in the debtor's personal residence. In re Roach, 824 F.2d 1370 (3rd Cir.1987). In response to the decision in In re Roach, Congress enacted, as part of the Bankruptcy Reform Act of 1994, section 1322(c)(1), which states that a debtor may cure and reinstate a home mortgage until the property is sold in a foreclosure sale.
This attempt by Congress to clarify when the debtor loses his right to cure a defaulted mortgage has been unsuccessful. Some courts have declared that the language of U.S.C. § 1322(c)(1) is clear and unambiguous. These courts have followed the brightline approach that the cure provisions of 11 U.S.C. § 1322 are only available prior to the date of the foreclosure auction. See, e.g., McCarn v. WyHy Fed. Credit Union (In re McCarn), 218 B.R. 154, 161 (10th Cir. BAP 1998); Cottrell v. United States (In re Cottrell), 213 B.R. 378, 381 (Bankr.M.D.Ala.1996) (quoting In re Smith, 85 F.3d 1555 (11th Cir.1996)); In re Ziyambe, 200 B.R. 790, 794 (Bankr.D.N.J.1996); In re Sims, 185 B.R. 853, 865-66 (Bankr.N.D.Ala.1995).
Other courts have found the language of 11 U.S.C. § 1322(c)(1) ambiguous and have resorted to an analysis of legislative history to resolve the ambiguity. These courts generally favor a more liberal statutory interpretation that a debtor's right to cure is severed at the point when the foreclosure sale, as distinguished from the auction, has been completed under state law. See, e.g., Christian v. Citibank, 214 B.R. 352, 355 (N.D.Ill.1997); In re Downing, 212 B.R. 459, 461 (Bankr.D.N.J. 1997); In re Ross, 191 B.R. 615, 618 (Bankr. D.N.J.1996); In re Barham, 193 B.R. 229, 231-32 (Bankr.E.D.N.C.1996); In re Reid, 200 B.R. 265 (Bankr.S.D.Fla.1996) (quoting In re Jaar, 186 B.R. 148 (Bankr.M.D.Fla. 1995)); In re Blair, 196 B.R. 477, 479-80 (Bankr.E.D.Ark.1996); In re Ross, 191 B.R. 615, 618 (Bankr.D.N.J.1996); In re Jaar, 186 B.R. 148, 151-54 (Bankr.M.D.Fla.1995).
The more persuasive of these two competing interpretations is that the statutory language "sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law" is ambiguous. The term "foreclosure sale" could refer either to the foreclosure process under state law which is conducted in numerous stages, or to the foreclosure auction. If Congress had intended to sever a debtor's ability to cure a delinquent mortgage on the date of the auction, which is typically only one step in the foreclosure sale process, it could have easily done so. One leading commentator has found significance in the fact that the statute does not pinpoint a specific event as a cut-off point of the debtor's cure rights. 8 Collier on Bankruptcy ¶ 1322.15 () ("It may well be significant that Congress did not say that a debtor may cure `until the sale,' or `until the date of the foreclosure sale,' indicating that completion of the sale might be on a later date than the date of the auction").
Courts routinely examine legislative history when resolving statutory ambiguity. But as the court in In re McCarn accurately observed, portions of the legislative history of section 1322(c)(1) are contradictory and seem "to advocate components of both approaches employed by courts prior to the passage of 11 U.S.C. § 1322(c)(1). . . ."2 218 B.R. at 154, 161 n. 5.
Support for the more liberal interpretation of the statute comes not only from portions of the section's legislative history, but also from legal tradition. Section 1322(c)(1) deals exclusively with property that usually qualifies as the homestead of the debtor under state law. Homestead laws have traditionally been liberally construed in favor of maintaining the homestead. Bank of Sun Prairie v. Hovig, 218 F.Supp. 769, 783 (W.D.Ark. 1963) (quoting 26 Am.Jur. Homestead § 11).
The legislative history of section 1322(c)(1) is consistent with the construction that applicable state law controls when a sale is `final' for the purpose of fixing the termination point for the right to cure default. Furthermore, many courts have construed this section in this fashion. In re Ross, 191 B.R. 615, 618 (Bkrtcy.D.N.J.1996). Thus, the Court will look to state law to determine when a statutory foreclosure sale is final.
Arkansas law permits two types of foreclosure actions, commonly referred to as judicial and...
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