The law in California on non-judicial foreclosures has been pretty firm for some time – the Trustee’s Sale is FINAL as to a bona fide purchaser for sale if the Trustee’s Deed is issued and recorded within 15 days of the sale. At least until one bankruptcy judge in California’s Central District disagreed.
The Relation Back Doctrine
Section 2924h of the California Civil Code governs bidding rules for the trustee’s sale at a nonjudicial foreclosure. The statute contains a provision – set forth in section 2924h(c) – that deems the trustee’s sale to be “final” upon the acceptance of the last and highest bid, and deemed perfected as of 8 a.m. on the actual date of the sale if the trustee’s deed is recorded within 15 calendar days of the sale.
One bankruptcy court has relied on this provision to hold that the postpetition issuance of a deed does NOT violate the automatic stay because the recordation of the deed within 15 days of the sale causes the sale to relates back to 8 a.m. on the sale date, thereby preceding the filing of a bankruptcy petition (and, as a corollary, the imposition of the automatic stay). In re Garner, 208 B.R. 698 (Bankr. N.D. Cal. 1997)
In Re Gonzalez
On Aug. 1, 2011, Judge Wallace of the Central District went against the weight of established law in California and issued a lengthy memorandum concluding that the Trustee’s Sale is not final if a bankruptcy petition is filed before the Trustee’s Deed is issued.
He reasoned that the Trustee has the power to not issue the deed for a variety of reasons and since it is the deed itself that actually conveys title, that the BFP does NOT have title until the Trustee’s Deed is actually issued.
In the Gonzalez case, the lender conducted the foreclosure sale on Feb. 22, 2011. The trustee then issued the deed on Feb. 25, 2011. In between that time, the borrower filed for bankruptcy protection and the automatic stay went into effect.
Judge Wallace concluded that the lender was not entitled to relief from the automatic stay, that the trustee’s deed issuance was a violation of the automatic stay and the Deed was void.
This decision isn’t binding in other courts, but the reasoning should folks pause as it suggests there may be some loopholes that should be taken care of by the legislature. [In re Gonzalez, No 6:11-BK-15665-mw]