Chapter 13 Can Cure a Home Mortgage Default Even After a Foreclosure Auction

Declining to follow the Bankruptcy Appellate Panel in his own circuit, Bankruptcy Judge Bruce A. Harwood of Concord, N.H., ruled that a chapter 13 debtor’s plan may cure a default on a home mortgage even though a foreclosure auction was completed before bankruptcy, so long as the foreclosure deed has not been recorded.

The facts were simple, but the interpretation of Section 1322(c) was not.

Before the first chapter 13 filing, the mortgage lender had completed a foreclosure auction on the debtor’s home but had not recorded the foreclosure deed. Although the debtor had filed a plan to cure arrears on the mortgage, the bankruptcy court dismissed the first petition when the debtor failed to make payments.

Less than one month after dismissal of the first case, the debtor filed a second chapter 13 petition. Not having recorded the foreclosure deed, the bank filed a motion to modify the stay. The debtor responded by filing a plan to cure arrears on the mortgage and make current payments.

Citing TD Bank N.A. v. LaPointe (In re LaPointe), 505 B.R. 589 (B.A.P. 1st Cir. 2014), the bank contended that the debtor had no property interest in the home because the foreclosure auction had been completed, even though the lender had not recorded the foreclosure deed.

Judge Harwood held a hearing on confirmation of the plan and the lender’s lift-stay motion. Finding “serious concerns with the legal reasoning of LaPointe,” Judge Harwood decided in his October 1 opinion to follow a contrary 1999 decision by his predecessor, Bankruptcy Judge J. Michael Deasy: In re Beeman, 235 B.R. 519 (Bankr. D.N.H. 1999).

The outcome was governed by Section 1322(c), added to the Bankruptcy Code in 1994. Notwithstanding “applicable nonbankruptcy law,” the subsection allows a chapter 13 debtor to cure a default on a mortgage on the debtor’s principal residence “until such residence is sold at a foreclosure sale that is conducted in accordance with applicable nonbankruptcy law.”

According to Judge Harwood, Judge Deasy explained in Beeman how Section 1322(c) overruled prior case law saying there was no estate property protected by the automatic stay once a foreclosure auction was held, even if a foreclosure deed had not been recorded.

Focusing on the word “sold” in Section 1322(c), Judge Deasy concluded that the plain language of the statute allows the debtor to cure arrears unless the foreclosure deed has been recorded.

In LaPointe, the First Circuit BAP rejected Beeman and held to the contrary in 2014. The BAP concluded that “sold” refers to the conclusion of a foreclosure auction.

The BAP said some courts have found the statute unambiguous, while Beeman said it was ambiguous. Judge Harwood said that was factual error, because Judge Deasy in Beeman said the statute was unambiguous. Judge Harwood said “the misreading of Beeman fogs the rest of [the BAP’s] legal analysis.”

Judge Harwood also found the BAP’s “legal reasoning to be problematic.” He characterized the BAP as saying that “foreclosure sale” really means “foreclosure auction.” According to Judge Harwood, the BAP effectively rewrote the statute to say “foreclosure auction” rather than “foreclosure sale.”

Like Judge Deasy, Judge Harwood said the statute was “clear without any paraphrasing or glossing of terms.” Judge Harwood found Beeman more persuasive than LaPointe. In the absence of controlling authority, Judge Harwood followed Beeman and allowed the debtor’s plan to cure the mortgage arrears because the bank had not completed the foreclosure sale by recording the deed.

Assuming that one BAP panel is unlikely to disagree with a previous panel’s decision, the debtor presumably will elect for an appeal to be heard by a district judge if the lender appeals.

Although not discussed in the opinion, the debtor is not the only beneficiary of Judge Harwood’s reading of Section 1322(c). By keeping the plan alive, creditors other than the lender stand to realize a recovery on their claims. The result is not prejudicial to the lender, because the lender will be paid in full with interest during the life of the plan and emerge from chapter 13 with an unimpaired mortgage that survives bankruptcy.

N.B.: The debtor was pro se.