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Court Rejects Lender’s Late Challenge

A Roanoke U.S. Bankruptcy Court denies a mortgage company’s motion to revoke confirmation of debtor’s Chapter 13 plan that included her home which had been sold at a foreclosure sale prior to the plan’s confirmation; the mortgage company did not appeal the confirmation order and cannot challenge it belatedly.

The Alexandria U.S. District Court has held that a foreclosure sale occurring prior to the filing of a bankruptcy petition cuts off the debtor’s interest in the foreclosed property. Sale of the property extinguishes the debtor’s equitable interest absent a showing that the sale process was deficient. Once the auctioneer’s hammer fell and a memorandum of sale was signed, debtors retained no legal or equitable interest in the property at the time they filed their bankruptcy petition. Therefore, the real estate never became property of the estate under 11 U.S.C. § 541.

Here, both debtor and the trustee attempt to attack the sale process by asserting deficiencies in the memorandum of sale. The suggestion that the foreclosure trustee may have completed the memorandum after the bankruptcy petition was filed is mere conjecture. No evidence was offered to show that the memorandum of sale was not completed on April 18, 2013 at 9:48 a.m. as noted. The court finds the sale was completed prior to debtor’s bankruptcy petition filing.

The Chapter 13 trustee makes an additional argument: because a plan was confirmed and the mortgage company did not object, it is bound by confirmation under United Student Aid Funds Inc. v. Espinosa, 559 U.S. 260 (2010). The order confirming debtor’s plan was a final order, from which SunTrust did not appeal. Absent uncommon circumstances, such as under Fed. R. Civ. P. 60(b), the finality of a bankruptcy court’s orders following the conclusion of direct review would stand in the way of challenging their enforceability.

By the thinnest of margins, the court finds the necessary circumstances sufficient to challenge the confirmation order are not present here. When debtor filed her pro se petition, she only listed one creditor: SunTrust Mortgage. Notice was sent to SunTrust and it has never contended that it did not receive service of the initial filing or of the Chapter 13 plan, and the certificate of service on the Order of Confirmation of debtor’s Chapter 13 plan was clearly served to that same address. No timely appeal was taken from that order. By a plain reading of the Chapter 13 plan SunTrust knew, or reasonably should have known, action was being taken to affect its rights. For whatever reason, it chose not to act.

Even though there is case law providing that debtor’s house did not become property of the estate, she still had a possessory interest in the real estate and the right to challenge the viability of the foreclosure sale. Those rights survived the bankruptcy filing, and the court had jurisdiction over those rights. Had the court known the foreclosure sale had occurred and been completed pre-petition, or had SunTrust raised the issue in an objection to confirmation, the plan may not have been confirmed as violative of, at a minimum, 11 U.S.C. § 1322(c)(1) and §§ 1325(a)(1) and (3). That does not mean the court was without jurisdiction in this matter.

Once the confirmation order was entered, debtor had obligations to SunTrust. Even though SunTrust refused to accept certain payments she made, it returned each of them to her. She should have set those funds aside and continued to preserve subsequent payments necessary to comply with her Chapter 13 plan. If she is going to get the benefits of a confirmed Chapter 13 plan, she is going to have to accept its burdens as well. If she fails to bring her plan current, the automatic stay will terminate as to debtor’s residence without further order from this court allowing SunTrust to pursue its available state law remedies.

In re Rachel Sue Ulrey (Black) No. 13-70645, June 2, 2014; USBC at Roanoke, Va. VLW 014-4-012, 10 pp.

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