The Ninth Circuit Bankruptcy Appellate Panel explained why “extremely narrow relief [is] available to a chapter 13 debtor who files bankruptcy to save [her] property after confirmation of a judicial foreclosure and payment of the underlying debt.”

In his opinion for the BAP on January 24, Bankruptcy Judge Gary Spraker held that “there is no claim to be addressed through the plan even if the debtor’s right to redeem becomes property of the bankruptcy estate. At best, such debtors may extend the time to redeem their property for 60 days under § 108(b).”

In short, a chapter 13 plan cannot retrieve property sold at foreclosure unless the redemption period has not expired before bankruptcy and the debtor exercises the right of redemption within the statutory redemption period, as extended for 60 days under Section 108(b).

No Redemption

The debtor owned property subject to fees assessed by a homeowners’ association. The HOA recorded a notice of assessment for about $1,000 in unpaid assessments. Two years later, the HOA began judicial foreclosure and obtained a default judgment awarding the HOA a total of about $5,000 for principal and attorneys’ fees.

After the state court issued a writ of execution and sale, a purchaser bought the property at a sheriff’s sale for $25,000. Judge Spraker’s opinion does not tell us what the property was worth.

In the order confirming the sale, the state court directed that almost $9,000 be paid to the HOA to satisfy the debt. The remainder of the sale price was held by the court clerk pending further order of the court.

State law gave the debtor a one-year statutory right of redemption. Five days before the right of redemption expired, the debtor filed a chapter 13 petition.

The debtor filed a chapter 13 plan that would pay the purchaser $60,000 within 10 days of confirmation. The payment was intended to “function like a redemption,” Judge Spraker said. The purchaser objected to confirmation.

Although ruling that the payment was neither a cure nor a redemption, the bankruptcy court confirmed the plan. The bankruptcy court also denied a motion by the purchaser to modify the automatic stay.

The purchaser appealed to the BAP.

Right of Redemption Isn’t a ‘Claim’

Unlike nonjudicial foreclosures, Judge Spraker said that Washington State law includes a one-year right of redemption after judicial foreclosure and sale. After sale, the debtor retains both legal title and a revisionary interest arising from the right of redemption. Because the period for redemption had not elapsed before filing, Section 108(b) gave the debtor 60 days after filing to “cure a default, or perform any other similar act.”

The debtor did not redeem within 60 days as permitted by Section 108(b). By the time the debtor confirmed her plan, Judge Spraker said that the debtor had “failed to exercise her statutory right of redemption [and] could not invoke . . . § 108(b) to redeem the Property from the foreclosure sale under Washington law.”

Indeed, the debtor conceded that her right of redemption had expired 60 days after filing. She argued, though, that Sections 1322(b)(3) and (5) allowed her to recover the property. The subsections allow a debtor’s plan to “provide for the curing or waiving of any default” and to “provide for the curing of any default within a reasonable time and maintenance of payments while the case is pending on any unsecured claim or secured claim on which the last payment is due after the date on which the final payment under the plan is due.”

The purchaser argued, successfully, that Sections 1322(b)(3) and (5) were not available because the debtor had no ‘claim,’ given that she owed no debt to the purchaser.

Judge Spraker conceded that “[s]ome courts . . . have held that the amount needed to redeem a foreclosed property constitutes a ‘claim’ under the Bankruptcy Code’s broad definition of that term.”

However, Judge Spraker adopted the reasoning of the bankruptcy court in In re Richter, 525 B.R. 735 (Bankr. C.D. Cal. 2015), a case involving nonjudicial foreclosure under California law where the debtor had filed a chapter 13 petition before the redemption period elapsed.

Judge Spraker characterized Richter as holding “that the foreclosure sale purchaser had no right to any payment from the judgment debtor, so it did not qualify as a creditor and hence § 1322(b)’s cure and modification provisions were inapplicable.”

“Though the Bankruptcy Code’s definition of a ‘claim’ is exceedingly broad,” Judge Spraker said, “we cannot conjure a ‘right to payment’ where none exists.” He explained that the purchaser had no right to payment from the debtor and that “the right of redemption did not impose any obligation on the debtor to pay the third party that purchased the foreclosed property.”

Because there was no debt or claim, Judge Spraker said “there was nothing [the debtor] could modify, cure, or pay off within the purview of § 1322(b) to reclaim the Property from [the purchaser] in chapter 13.” Since the redemption period had expired, he held that the debtor “lacked the means to compel [the purchaser] to accept payment to reclaim the Property.”

When Is a Property ‘Sold’ at Foreclosure?

Section 1322(c)(1) was another problem for the debtor. The subsection says that a default resulting in a lien on a debtor’s principal residence “may be cured under paragraph (3) or (5) of subsection (b) until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.” 

Although courts differ in deciding when a property is “sold” at foreclosure, the Ninth Circuit BAP had held in 2021 that the sale occurs in foreclosure when the gavel falls. Wilmington Savings Fund Society, FSB v. Fairbanks (In re Fairbanks), 2021 WL 3578937 at *6 (B.A.P. 9th Cir. Aug. 12, 2021). [Note, Fairbanks was a nonprecedential BAP opinion.]

Even if the debtor could have used her redemption rights to redeem the property, Judge Spraker followed Fairbanks in holding that “§ 1322(c)(1) cut off Sharp’s right to use § 1322(b)(3) or (5) to cure any prepetition default.”

Section 1322(b)(8) Doesn’t Work for Lack of a ‘Claim’

Section 1322(b)(8) likewise afforded the debtor no relief. The subsection allows a chapter 13 debtor to “provide for the payment of all or part of a claim against the debtor from property of the estate or property of the debtor.”

Judge Spraker said that a debtor’s rights under Section 1322(b)(8) “presupposes that there is a ‘claim’ to pay off.” Because he had already decided that the debtor had no claim, he held that Section 1322(b)(8) afforded the debtor no relief.

Judge Spraker reversed both the order confirming the plan and the order denying the debtor’s motion to modify the stay.

Observations

Not having redeemed within 60 days of filing, could the debtor recover the property by suing to set aside a constructively fraudulent transfer, based on the idea that the sale price was a fraction of the property’s market value?

A fraudulent transfer claim would seem to fail under BFP v. Resolution Trust, 511 U.S. 531 (1994), where the Supreme Court held that regularly conducted real estate mortgage foreclosures cannot be fraudulent transfers, no matter how much equity the debtor loses above the mortgage debt.

But what about Tyler v. Hennepin County, 598 U.S. 631 (2023), where the Supreme Court decided that a real estate tax foreclosure can violate the Takings Clause of the Fifth Amendment when a municipality takes title but doesn’t give the owner the difference between the unpaid taxes and the value of the property? To read ABI’s report on Tyler, click here.

Tyler wouldn’t help the debtor in Judge Spraker’s case, because a governmental unit was not foreclosing and there was no Fifth Amendment taking.

Maybe there’s a theory to avoid BFP.

In the appeal before the BAP, Judge Spraker followed the BAP’s own prior nonprecedential opinion, which had held that property was “sold” when the hammer falls.

Perhaps a debtor in similar circumstances could argue that the property was not “sold” because the automatic stay prevented entry of the sheriff’s deed. In short, the outcome might differ from state to state under a fraudulent transfer theory, depending on when the property was “sold.”