A lender has a note secured by a Deed of Trust on its borrower’s home. The debtor defaults on the debt. The lender proceeds to notice a nonjudicial foreclosure under the Deed of Trust instrument and Texas law. A foreclosure of the real property collateral is scheduled to take place on the first Tuesday of next month. The debtor files chapter 7 the day before but the lender does not receive notice of the filing until a week later. The substitute trustee is not aware of the bankruptcy and proceeds to foreclose on the property and records a substitute trustee’s deed in the county deed records office. Then the lender is advised of the bankruptcy filing. What effect if any?
During the 2015 legislative session, the Texas legislature adopted a new section 51.0016 of the Texas Property Code which became effective September 1, 2015. The new section provides that it applies only to nonjudicial foreclosures of residential real property. It further provides that no later than the 15th day following the foreclosure sale, the sale may be rescinded if, among other things, at the time of the sale, “a court-ordered or automatic stay of the sale imposed in a bankruptcy case filed by a person with an interest in the property was in effect.” The party rescinding the sale is then required to serve written notice of the rescission – describing the reason for the rescission – that includes the recordation information. The notice must be sent by certified mail. Any funds received from the sale must be returned to the purchaser within 15 days of the foreclosure sale is rescinded. The party rescinding must then file an affidavit in the deed records attesting to return of the bid amount and compliance with the statute. The affidavit is prima facie evidence of compliance with the statute. The statute provides that the “rescission of the foreclosure sale under this section restores the mortgagee and the debtor to their respective title, rights, and obligations under any instrument relating to the foreclosed property that existed immediately prior to the sale.”
The amendment is worth a read to anyone involved in mortgage lending. In summary, the amendment permits the foreclosing lienholder to rescind a foreclosure sale if, at the time of the sale, there was an automatic stay in effect as a result of the borrower’s bankruptcy (section 51.0016(b)(6)). The statute further provides that rescission of the sale restores the parties to the state of affairs that existed immediately prior to the foreclosure sale (section 51.0016(h)). The amendment begs several questions. Does the provision of the notice or compliance itself constitute a violation of the automatic stay requiring relief from the Bankruptcy Court? What if the purchaser is a good faith purchaser for value? Section 362(b) of the Bankruptcy Code provides that a violation of the automatic stay occurs when there is “any act to create, perfect, or enforce any lien against property of the estate” and “any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this title.” Since the rescission has the effect of re-imposing the foreclosed lien, it could be considered an act to create, perfect or enforce a lien, although perhaps excusable under the factual circumstance. In such situations, it is probably a good idea to get relief from the automatic stay, on an expedited basis due the temporal limitations in the amendment, just be safe.