Bank Lawyer: It’s Important to Record the Trustee’s Deed Promptly After Foreclosure

While we always recommend that our lender clients make sure the trustee’s deed is signed and recorded as soon as possible after a trustee sale, my partner, Joe Demko alerted us to new reason why this is a good idea.

The United States Bankruptcy Court for the Central District of California recently held that the filing of a bankruptcy petition by a borrower can void a trustee sale even where the petition is filed after the trustee sale, so long as the borrower files the petition before the execution of the trustee’s deed upon sale.

Joe knows his way around Bankruptcy Court and he follows all the decisions that affect our lender clients. This one is a real eye-opener. As Joe notes, whether or not the decision is correct, foreclosing lenders need to take heed.

It’s Important to Record the Trustee’s Deed Promptly After Foreclosure

by Joseph Demko

The United States Bankruptcy Court for the Central District of California recently held that the filing of a bankruptcy petition by a borrower can void a trustee sale even where the petition is filed after the trustee sale, so long as the borrower files the petition before the execution of the trustee’s deed upon sale. In re: Gonzales 2011 WL3328508 (Bkrtcy. C.D.Cal. August 1, 2011). A real property secured lender is generally aware that the borrower always has the option of filing a bankruptcy to stay the trustee sale prior to the trustee’s sale but once a trustee sale occurs, most lenders believe the bankruptcy filing by the borrower does not impact the sale.

However, In re: Gonzales the Bankruptcy Court by the Hon. Mark S. Wallace was faced with a situation where a borrower gave a deed of trust on a house in Riverside as collateral for a loan and then defaulted. The Lender conducted a trustee sale and a third party successfully bid at the sale, paying $167,000 for the property. On the same day as the sale but after the sale, the borrower filed a Chapter 7 bankruptcy petition. The Trustee then issued the Trustee’s deed, memorializing the sale to the third-party purchaser, and the deed was not recorded until a number of days later. When the borrower was asked to vacate the residence, the borrower refused and the purchaser at the sale filed a motion for relief from the automatic stay in order to evict the borrower. The purchaser argued the deed issued by the foreclosure trustee was valid, notwithstanding the fact that it was not recorded until after the bankruptcy because it “related back” to the date and time of the foreclosure sale.

The Bankruptcy Court denied relief from the automatic stay and disagreed with a number of earlier Bankruptcy Court opinions, holding that the doctrine of relation back did not apply because California Civil Code section 1091 provides that title to real estate can pass only by deed or operation of law. Since no deed had been executed prior to the bankruptcy filing, the title remained in the hands of the debtor/borrower. For a decision that disagrees, see In re: Garner 208 BR 698 (BK ND Cal 1997). While you may disagree with the court, and the decision is not a binding precedent on any other court, it illustrates that once a trustee sale takes place, it is important to have the trustee’s deed signed and recorded as soon as possible.

This is Dick Rogan, bank lawyer and author of www.SpecialAssetsLawyer.com, signing off for now. Join us again soon to check out what’s new in the World of Workouts.

Year after year, day after day, workout professionals in the know rely on JMBM’s Special Assets Team™ to handle problem commercial and real estate loans. Whatever problem loans you have, chances are, we’ve seen it. Give us a call.

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Joseph N. Demko
is a partner and member of the JMBM Special Assets Team. Joe is an experienced trial lawyer who specializes in representing banks, lenders and financial institutions in complex commercial litigation involving creditors’ rights, lender liability, claims of fraud and real property secured transactions. Joe’s recent trials and arbitrations have involved loan enforcement and fraudulent transfer claims as well as lender defense against claims for fraud, successor liability, breach of fiduciary duties, elder abuse and imposition of constructive and/or resulting trust on real property. In addition, Joe has extensive experience in representing lenders and special servicers in real property secured transactions and in cases involving California Commercial Code Articles 4, 9 and 10. For more information, please contact Joe at (415) 984-9676 or JDemko@JMBM.com.

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Our Perspective. JMBM represents commercial banks, special servicers, private lenders, asset-based lenders, hard money lenders and factors. We help lender clients throughout the United States craft business and legal solutions to their commercial and real estate troubled loans. For more information, please contact Dick Rogan at RRogan@JMBM.com, or (415) 398-8080.

Richard A. Rogan is Chair of the JMBM Special Assets Team™. He also serves as the co-managing partner of JMBM’s San Francisco office and co-chair of its Bankruptcy Practice Group.

JMBM’s Special Assets Team™ has represented hundreds of lenders in California and throughout the United States. We regularly appear in bankruptcy courts, district courts and superior courts. We are proud to serve as trusted counsel and advisors who look for a business solution and try to help lenders find the best possible resolution for each troubled loan. Whether a loan is being newly documented, restructured or litigated, JMBM’s Special Assets Team™ has the skill, know-how and experience to solve your problem in a practical no-nonsense way.

NOTE TO CONSUMERS: As a matter of Firm policy, JMBM does not represent individual consumers who have disputes with their lenders. Many lenders have specialized consumer workout professionals who have the time to help consumer borrowers. There are many fine attorneys who specialize in representing consumers. Individuals with consumer lending problems should contact a lawyer or law firm who specializes in consumer insolvency and bankruptcy in their local area. When in doubt, we suggest you contact your local bar association’s Lawyer Referral Service. [For example, see Bar Association of SF or LA County Bar Association Lawyer Referral Services]

JMBM does not provide legal advice to consumers, and cannot respond to consumer inquiries.