By David Swedelson, Condo lawyer / HOA and Community Association Attorney; Partner, SwedelsonGottlieb
It has been assumed by many that if a California community association holds its foreclosure sale (as part of the assessment collection process) and after the sale the delinquent owner files bankruptcy, that the bankruptcy did not impact the sale. Not so, according to the United States Bankruptcy Court for the Central District of California, which recently held that the filing of a bankruptcy petition by a borrower (in our case a delinquent owner) can void a trustee sale even where the petition is filed after the trustee sale, so long as the borrower/delinquent owner files the bankruptcy petition before the execution and recordation of the trustee’s deed upon sale. [In re: Gonzalez (Bkrtcy. C.D.Cal. August 1, 2011) 456 B.R. 429].
As we know, a delinquent owner has the ability to file a bankruptcy to stay or stop a trustee sale prior to the actual sale. And many delinquent owners do. Many people believe that once the trustee sale occurs, the bankruptcy filing by the owner does not impact the sale. Wrong!
In the Gonzales case, the Bankruptcy Court was faced with a situation where a homeowner/borrower gave a deed of trust on a house in Riverside as collateral for a loan and then defaulted. The lender conducted a trustee sale and a third party successfully bid at the sale, paying $167,000 for the property. On the same day as the sale, but after the sale, the homeowner/borrower filed a Chapter 7 bankruptcy petition. The Trustee then issued the Trustee’s deed, memorializing the sale to the third-party purchaser, but the deed was not recorded for several days after the sale. When the homeowner/borrower was asked to vacate the residence, he refused and the buyer at the sale filed a Motion for Relief from the Automatic Stay in order to evict the borrower. The buyer argued the deed issued by the foreclosure trustee was valid, notwithstanding the fact that it was not recorded until after the bankruptcy because it “related back” to the date and time of the foreclosure sale.
The Bankruptcy Court denied Relief from the Automatic Stay and disagreed with a number of earlier Bankruptcy Court opinions, holding that the doctrine of relation back did not apply because California Civil Code Section 1091 provides that title to real estate can pass only by deed or operation of law. Since no deed had been executed prior to the bankruptcy filing, the title remained in the hands of the debtor/borrower. The decision is apparently contrary to other Court decisions and is not a binding precedent on any other court. But it does demonstrate that once a trustee sale takes place, it is important to have the trustee’s deed signed and recorded as soon as possible.
But here is the problem for California condominium and HOA community associations. Civil Code Section Civil Code §1367.4(c)(4) and Code of Civil Proc. §729.035 provide for a 90 day redemption period that precludes the recording of a trustee’s deed until the expiration of the redemption period.
Code of Civil Procedure §729.035. Right of Redemption
“Notwithstanding any provision of law to the contrary, the sale of a separate interest in a common interest development is subject to the right of redemption within 90 days after the sale if the sale arises from a foreclosure by the association of a common interest development pursuant to Section 1367.1(g) of the Civil Code, subject to the conditions of Section 1367.4 of the Civil Code.”
So what is an association to do? We recommend having the trustee’s deed prepared and signed by the Trustee as soon as possible after the sale and ready to record on the 91st day following the foreclosure sale. But even then, there is no guarantee that the delinquent owner won’t file bankruptcy or that the filing of the bankruptcy won’t void that deed and mean that the owner may be able to keep the property.
Of course, this may just delay the inevitable, as the association may decide to petition the bankruptcy court to grant the association Relief from the Stay to hold the sale.
Assessment collection: it is complicated and best left to professionals.
David Swedelson is a senior partner at SwedelsonGottlieb, and a principal of Association Lien Services, The Assessment Lien Foreclosure Specialists (www.alslien.com). He can be contacted via email for comments: firstname.lastname@example.org