Public Trustee's Deeds and Redemption Under Section 362 of the Bankruptcy Code
| Jurisdiction | United States,Federal,Colorado |
| Citation | Vol. 12 No. 2 Pg. 229 |
| Pages | 229 |
| Publication year | 1983 |
1983, February, Pg. 229. Public Trustee's Deeds and Redemption Under Section 362 of the Bankruptcy Code
One morning a client tells his attorney that he has a terrific piece of developable property, but his deal to sell it fell through yesterday. Even worse, he says a foreclosure sale was held on the property five months ago, and now he is practically broke. Can this client be helped?
The recent decision by the U.S. District Court for the District of Colorado of Jenkins v. Peet,(fn1) clearly holds that this client can be helped. The court's decision seriously alters the secured lender's expectation of promptly obtaining possession of real property through a public trustee's foreclosure proceeding. Judge Kane held in this case that the United States Bankruptcy Code ("Code") automatically stays a secured creditor from applying for his public trustee's deed after foreclosure and, furthermore, that the Code tolls the expiration of the client's rights of redemption.(fn2) In effect, the opinion means that so long as the public trustee's deed has not been issued to the lender, the client, assuming he is technically bankrupt, may seek help through the bankruptcy courts.
This article reviews some of the practices and assumptions which appear to have been prevalent in Colorado prior to this decision and explains the legal theories and authorities underlying the decision. It also explores some undecided issues and analyzes tactics involved in representing a debtor or a secured creditor in a real estate foreclosure and bankruptcy context. In this article, it is assumed that Congress will reenact a Bankruptcy Code which overcomes the constitutional defects identified in Northern Pipeline Construction Co. v. Marathon Pipeline Co.(fn3) It also assumes that the substantive provisions of the Code related to foreclosure will not be changed. In the following discussion, the debtor is involved in a Chapter 7 liquidation or a Chapter 11 reorganization---the article does not deal with Chapter 13 wage-earner proceedings.
The bankruptcy courts seemingly have always been used by debtors to forestall a foreclosure sale. The debtor who filed a bankruptcy petition prior to the foreclosure sale became the beneficiary of the Bankruptcy Court's automatic stay.(fn4) Where the debtor had no equity in the property, the creditor could seek relief from the stay and, if relief was granted, could proceed normally with his foreclosure.(fn5) Until relief was granted, the debtor had an opportunity to rehabilitate his financial condition and cure his default.
If the debtor faced liquidation, his unsecured creditors might benefit from a sale of the property for an amount in excess of the secured debt. If the debtor was in a reorganization proceeding, the debtor's equity might make it possible to devise a plan of reorganization in the Bankruptcy Court. However, if the debtor filed for bankruptcy after the foreclosure sale, the prevalent understanding and practice in Colorado was that the debtor's rights were limited to his equity of redemption.(fn6) The debtor owned no property which could be reorganized in the Bankruptcy Court. This was clearly the law under the old Bankruptcy Act and cases construing it.(fn7)
In Colorado, a debtor may redeem platted real property within seventy-five days of the foreclosure sale (six months for unplatted ground).(fn8) Under the Code, § 108 provides the debtorin-possession the additional right to redeem from a foreclosure sale sixty days after filing even if this extended date is past the time set by Colorado law.(fn9) If the debtor fails to redeem within the redemption period as extended by the Code, the creditor is entitled to receive his public trustee's deed upon application, provided the creditor applies for his deed within nine months after the redemption period expired.(fn10)
Until Jenkins, no bankruptcy case in Colorado challenged an application for a public trustee's deed. The conventional practice in bankruptcy cases where the redemption period had expired either prior to or after the bankruptcy filing seems to have been to leave a subsequent application for the public trustee's deed unchallenged. After enactment of the Bankruptcy Code in 1978, at least one commentator suggested that the Code might provide more relief to debtors.(fn11)
As the real estate market turned sour in 1980-1981, the Jenkins case emerged with the proper set of facts to test the assumptions of prior practice under the Code and Colorado law. Jenkins did not file for bankruptcy until the redemption period had expired on one of his properties (the creditor had not applied for the public trustee's deed), and redemption periods were about to expire on two other properties. Jenkins appeared to have substantial equities in each of the properties and the equity on one property was so large that a reorganization plan and complete rehabilitation seemed feasible at the time of filing.
Therefore, the question was squarely presented. After the redemption periods (as extended by Code § 108) expired, did Jenkins (the debtor-inpossession) have any interest in the property which was subject to Bankruptcy Court jurisdiction? If so, was that property protected from creditor repossession by the Bankruptcy Code?
Jenkins filed a summons and complaint and petition for temporary restraining order commencing an adversary proceeding in the Bankruptcy Court. Under bankruptcy procedures, Jenkins was able to have a preliminary injunction hearing within three weeks of filing the summons and complaint and before the redemption period expired. The Bankruptcy Court ruled against Jenkins and that court's decision was treated...
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