Second Circuit Finds Willful Breach of Stay in Foreclosure Sale of Non-Debtor Property

On July 6, 2022, the Court of Appeals for the Second Circuit (Court of the Circuit) issued a decision analyzing the first impression issue and clarifying the broad applicability of bankruptcy law’s automatic stay clause.of Bayview Loan Servicing LLC v. Fogarty (In re Fogarty), No. 20-2187, 2022 US App. In LEXIS 18515 (2d Cir. July 6, 2022), the Circuit Court ruled that the automatic stay provision of Section 362(a) of the Bankruptcy Code could be extended by a foreclosure sale of real estate if the debtor was a named defendant. I was tasked with determining whether a violation had occurred. Underlying foreclosure proceedings, even if the debtor’s direct interest in the property was simply the possession. The Circuit Court upheld a decision of the Eastern District of New York District Court (District Court) that reversed an earlier decision of the Eastern District of New York Bankruptcy Court (Bankruptcy Court) that the foreclosure was a willful violation of the automatic stay of the sale.

Background of facts and history of procedure

Eileen Fogarty (Debtor) held a 99% interest in 72 Grandview LLC (Grandview). 72 Grandview LLC (Grandview) was the sole owner of a residential property located in Shirley, New York (the Property), which was also the primary residence of the Debtor. Bayview Loan Servicing LLC (Bayview) commenced a foreclosure action (Foreclosure Action) against its assets in early 2011 in the Supreme Court of the State of New York, Suffolk County (State Court). Initially, Bayview named Grandview and John Dowes #1-50, among others, as defendants in the foreclosure suit, but not the debtor. However, in October 2014, Bayview requested that she be substituted as a party defendant in place of John Doe #1 as the debtor “co-tenants owning a portion of the property.”[1] In early 2018, the State Court ruled that Determination of seizure and salenamed the debtor among the defendants, and Bayview scheduled a foreclosure sale of the property on April 17, 2018.

On April 13, 2018, four days before the property’s scheduled foreclosure sale, the debtor filed a petition for Chapter 7 relief in the bankruptcy court. The debtor’s attorney then notified Bayview’s attorney: (i) the debtor has applied for protection under Chapter 7; (ii) the continuation of the foreclosure sale violates the automatic suspension of Section 362(a) of the Bankruptcy Code; (iii) Debtor shall seek costs, fees and sanctions for such breach of stay. Bayview’s attorneys responded that the automatic suspension does not apply because her Grandview, a non-debtor rather than a debtor, is the legal owner of the property and is legally distinct from the debtor. Bayview then proceeded with the foreclosure sale as planned.

The debtor then filed bankruptcy, alleging willful breach of Section 362(a)(1) and (a)(2) of the Bankruptcy Act, seeking actual damages, costs, fees, and punitive damages. I filed sanctions against Bayview in court. In dismissing the petition, the bankruptcy court ruled that the foreclosure action was single-handed because the debtor cannot be held liable under the covered loan documents executed solely by Grandview. in rem Bayview did not violate the automatic suspension in proceeding with the sale. On appeal by the debtors, the district court reversed the bankruptcy court’s ruling and held that Bayview willfully violated the automatic suspension for the following reasons: (ii) the sale interfered with the debtor’s ownership interest in the Property which was the property of the debtor’s Chapter VII property; Bayview appealed to the Circuit Court.

Circuit Court Basis

The filing of a bankruptcy petition by a debtor “acts as a stay and applies to all entities,” among other things: (i) the continuation of an action “against the debtor” initiated before the bankruptcy case;[2] (ii) “enforcement against the debtor or property of property of a judgment obtained before the commencement of the action” under bankruptcy law;[3]

In analyzing these two sections of the bankruptcy law, the Circuit Court held that the action “against the debtor” as used in Section 362(a)(1) is a case where the debtor is a named defendant. I was the first to point out that litigation must be included as a matter of course.[4] As a result, because the debtor was substituted as a party defendant in the foreclosure action, the Circuit Court “can only conclude that the foreclosure action is ‘against the debtor’ and is therefore subject to section 362(a)(1). I couldn’t put it on.”[5] The circuit court further ruled that the debtor remained a named party defendant from her representation in the foreclosure action until the sale of the property, as reflected in the caption of the petition filed in state court. I pointed out that[6] A foreclosure sale is a “continuation” of the pre-bankruptcy action against the debtor and is therefore subject to automatic suspension.[7]

With respect to Section 362(a)(2) of the Bankruptcy Code, the Circuit Court ruled that foreclosure was granted on February 14, 2018 and that the debtor filed for Chapter 7 protection on April 13, 2018. pointed out that it was definitely “taken before”. Commencement of the Chapter 7 case of the debtor.[8] The sale of this property was “compulsory execution and violation of the law.” [D]ebtor. . . of the judgment. . . ”[9] Specifically, a foreclosure judgment authorizes the sale of a property by a court-appointed umpire, the judgment is binding on all defendants under it, and the debtor was a party defendant in the foreclosure action at least until the sale.[10] The Circuit Court concluded its analysis of Section 362(a) as follows: proceedings, and up to the enforcement of judgments rendered in the proceedings. “[11]

In addressing the bankruptcy court’s decision, the circuit court dismissed Bayview’s claims. in rem The debtor was only named as a party defendant as an “interested party” and had no effect on the debtor’s Chapter 7 estate.[12] The Circuit Court held that Section 362(a) of the Bankruptcy Code in rem When Personally Nor do I inquire about it. why The debtor is named as a defendant in legal proceedings.[13] Rather, the plain text apparently “continued .[14]

Conclusion

Attorneys for creditors and other stakeholders in bankruptcy proceedings should make great efforts to heed the following warnings. . omnipotent and uncompromising. “[15] (ii) “[w]Questionable edition. . File a motion for relief from stay. . . ”[16] as demonstrated in bay view, willful violations of automatic suspensions will in most cases result in severe, and in most cases preventable, financial penalties for violators. Indeed, under Section 362(k) of the Bankruptcy Code, a party found to have willfully breached an automatic stay is not only liable for the debtor’s actual damages, including costs and attorneys’ fees, but also , and may also be liable for punitive damages.[17] As such, it is often in the party’s best interest to seek stay when there is a question about the applicability of stay. “Frankly, the system requires creditors to ask permission, not forgiveness.”[18]

If you have any questions or need additional information, please contact Travis Powers ([email protected]; 212.868.4837).

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[1] Fogerty, 2022 US App. LEXIS 18515, at *5.

[2] 11 USC § 362(a)(1).

[3] 11 USC § 362(a)(2).

[4] Fogerty, 2022 US App. LEXIS 18515, *13.

[5] Fogerty, 2022 US App. LEXIS 18515, *13.

[6] Fogerty, 2022 US App. LEXIS 18515, *13.

[7] Fogerty, 2022 US App. LEXIS 18515, *13-14.

[8] Fogerty, 2022 US App. LEXIS 18515, *14 (Quote 11 USC § 362(a)(2)).

[9] Fogerty, 2022 US App. LEXIS 18515, *14.

[10] Fogerty, 2022 US App. LEXIS 18515, *14.

[11] Fogerty, 2022 US App. LEXIS 18515, *15.

[12] Fogerty, 2022 US App. LEXIS 18515, *17-18.

[13] Fogerty, 2022 US App. LEXIS 18515, *18.

[14] Fogerty, 2022 US App. LEXIS 18515, *18. The Circuit Court immediately dismissed the rest of his Bayview claims: (ii) Bayview was not an interested party and therefore could not seek redress for the stay; (iii) The stake required the Circuit Court to overrule the District Court.

[15] off. Cmtee. Unsec. Creditors Vs Provident Nut Bank (In re Un. Church of the Minists of God)74 BR 271, 275 (Bankr. ED Pa. 1987).

[16] Top Roofing, Inc. v. Roy Kirby & Sons, Inc. (at Top Roofing, Inc.)No. 12-00041, 2013 WL 5636628, *37 (Bankr. D.Md. 15 October 2013).

[17] 11 USC § 362(k).

[18] About Stephanie, No. 18-00395-LT13, 2019 Bankr. LEXIS 481, at *43 (Bankr. SD Cal. Feb. 15, 2019).