When is a foreclosure sale ‘final’ for bankruptcy purposes and does it matter?

The foreclosure process begins when the foreclosure trustee records a notice of default at the County Recorder’s Office. It proceeds through more notices and what have you until the foreclosure trustee conducts an “auction” about four months later, ultimately declaring a winning bidder. Until Jan. 1, 2021, ownership of the property passed to the winning bidder on the completion of the auction. A bankruptcy petition filed by the property owner did not stop the process unless filed before the hammer fell at the auction. Civil Code § 2924m has modified that so that now, notwithstanding the completed auction, the process is probably still open to more bidding, possibly giving the property owner additional time to stop the process through bankruptcy and save/retain the property.

A little history: a foreclosure “sale” is nominally an auction conducted by a foreclosure trustee. The lender, i.e., the beneficiary of the deed of trust, is entitled to credit bid the amount of its debt. We say “nominally” because typically no bidders appear and the bank’s credit bid “wins” the auction; the hammer falls and equitable title to the property passes to the winning bidder at that time, perfected later by recording a trustee’s deed. Under the previous iteration of § 2924h(c), the sale by the trustee was “deemed perfected,” i.e., “final,” on the date of the sale as long as the trustee’s deed was recorded within 21 days of the auction. The automatic stay under Bankruptcy Code § 362(b)(3) did not stop the post-bankruptcy recording of the trustee’s deed as long as it was recorded within the time permitted under California law. See In re Bebensee-Wong, 248 B.R. 820, 823 (9th Cir BAP 2000) (“It is clear that the relation back effect of California Civil Code § 2924h(c) operate[s] to perfect the trustee’s sale on the actual date of sale.”).

Under amended § 2924m, it still works the same way if the successful bidder at the auction is a “prospective owner-occupant,” i.e., someone who intends to live in the property including an “eligible tenant buyer.” § 2924m(a)(1). A prospective owner-occupant, when the successful bidder, provides an affidavit to the foreclosure trustee certifying such. When that happens, the sale is final as of the day of the auction and a bankruptcy filing is too late. Sorry to say, it’s time to pack.

The process changes however when banks, corporate lenders, flippers and the like, are the successful bidders - which is the case most of the time. They must now deal with the possibility of being displaced by another bidder after the hammer falls. And, according to at least one bankruptcy court, the debtor can still save the property as it is still theirs until the sale becomes final down the road.

But how does that work? Under revised § 2924m, when the successful bidder is anyone other than a prospective owner-occupant, the sale is not final until 15 days after the auction. § 2924m(c)(2). If an “eligible bidder” submits a bid equal to the highest bid at the auction (with a cashier’s check thank you) within 15 days after the auction, the new bidder wins the auction and the sale becomes final on the 15th day. Id. An eligible bidder is a prospective owner-occupant, various non-profit type entities, or an “eligible tenant buyer.” § 2924m(a)(3).

If an eligible bidder submits a “nonbinding written notice of intent to place such a bid” within 15 days of the auction, the time to bid is extended for 30 more days (meaning 45 days after the auction took place). Id. The eligible bidder must include with the notice of intent to bid, an affidavit establishing that the eligible bidder qualifies as such. § 2924m(c)(2)(B). The foreclosure trustee is entitled by the statute to rely on the affidavit and need not verify the bona fides of the declaration. § 2924m(d).

So the reality is that most foreclosure sales these days are not final until 15 days after the auction or 45 days after the auction if an eligible bidder submits a notice of intent to bid.

I have checked around a little bit and am advised that receipt by the foreclosure trustee of a notice of intent to bid on or near the 15th day is common extending out the final sale date for another 30 days. Surprise! The intending bidder rarely follows up with a check during the prescribed time.

There is a surprising dearth of published case law on § 2924m in any iteration. Luckily, we have two relatively recent bankruptcy opinions discussing the revised statute and reaching opposite results. In re Yolanda Ford, 2022 WL 17742285 (Bkrtcy C.D. Cal, Dec. 15, 2022) (J. Brand) and In re Shannon Hager, 651 B.R. 873 (Bkrtcy E.D. Cal 2023) (J. Lastreto).

In Ford, the key dates are:

· Auction date: June 2, 2022;

· Notice of intent to bid submitted before June 17;

· Therefore sale “final” on July 17;

· Bankruptcy petition date: July 2;

· Trustee’s deed recorded: July 21.

The bankruptcy petition was filed before the sale became final on July 17. The debtor argued that trustee’s deed was recorded too late, i.e., not within 21 days of the petition and was therefore void. The bankruptcy court disagreed based on § 2924h(c) which provides for recording up to 60 days from the auction when a notice of intent to bid has been submitted. And since the recording here was prior to the 60-day deadline, it related back to the actual auction and the automatic stay did not save the debtor’s home even though the petition was filed before the sale was deemed final.

In Hagar, the key dates are similar:

· Auction date: Nov 7, 2022;

· Notice of intent to bid submitted before Nov 22;

· Therefore sale final on Dec 22;

· Bankruptcy petition date: Dec 1;

· Trustee’s deed recorded on Dec 2.

As in Ford, the bankruptcy petition was filed before the sale became final. The buyer filed a motion to annul the stay apparently realizing that he had an issue with the condition of his title. The debtor argued in response that the sale was not final when the petition was filed. That is true because the sale became final on December 22. And as the trustee’s deed was filed prematurely, i.e., before the sale was final, it was not properly perfected under California law and was then void. The bankruptcy court however ruled broadly that “[f]inalizing the sale on or after [the petition] date violates the stay.” It stated further, “the sale became final under CC § 2924m(c)(4) post-petition and is void. CC § 2924h(c) cannot be used to finalize an incomplete sale to a time before the petition was filed. [The buyer] does not qualify for the relation back effects of CC § 2924h(c) as the statute was written in 2022.”

So Ford or Hager? Who knows? Section 2924m has muddled the finality of a sale and the identity of the ultimate buyer, but either way the debtors in Ford and Hager lost all rights to the property when the foreclosure auction concluded. There is no scenario where the debtor gets the property back. The foreclosure trustee has the original buyer’s cashier’s check (or the lender’s credit bid). At the end of the day, the original buyer owns the property as of the date of the auction unless someone else steps up with a check within the four corners of § 2924m. This seems to mean that the debtor brings nothing beyond bare legal title into the bankruptcy in any event. We also don’t think that the legislature intended § 2924m to create a de facto right of redemption for foreclosed owners by using bankruptcy.

We are sure the competent bankruptcy lawyer will never permit the auction to take place before filing the bankruptcy petition (or even tell the prospective client it is possible for heaven’s sake). But in the case where the hammer has fallen, file the chapter 13 and take the Hager position. Have a good appellate attorney in the fold.