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February 10, 2012 01:34 AM
Bankruptcy fails as foreclosure rescue
Law of the LandFebruary 10, 2012 01:34 AM
By Tara-Nicholle Nelson
Inman News®
In this case, homeowner David Coletta secured a note for $60,000 with mortgages on two properties in favor of mortgage holder Nicholas Mattera. After the homeowner defaulted on payments on the note, Mattera filed a foreclosure action in the county court.
The homeowner's response failed to conform to the court's rules, and he was given an extension of time to respond appropriately. Instead of responding, the homeowner filed a Chapter 11 bankruptcy action, which automatically stayed the foreclosure proceedings. His attorney was unable to provide evidence that he notified Mattera of this bankruptcy filing. The homeowner failed to follow through with the bankruptcy case, and it was dismissed.
When the homeowner failed to file a conforming response, the county court entered a default judgment in favor of Mattera, who attempted to collect by scheduling the properties for foreclosure sale. The day prior to the scheduled sale, the homeowner filed a Chapter 13 bankruptcy action, again automatically staying the foreclosure.
Mattera requested that the bankruptcy court lift the stay and expressed that this was his first notice of either bankruptcy proceeding. The bankruptcy court lifted the stay and allowed Mattera to foreclose on the properties. Mattera then purchased both properties at the foreclosure sale. The homeowner again failed to follow through with this bankruptcy case, and it was dismissed.
After the sale, the homeowner returned to the county court and requested that the default judgment and foreclosure sale be set aside, because they violated the automatic stay of the initial Chapter 11 bankruptcy filing.
Mortgage holder Mattera argued that the automatic stay of the foreclosure on these two properties from the homeowner's initial bankruptcy filing should be retroactively annulled. The bankruptcy court ordered the automatic stays retroactively annulled; on appeal, the district court upheld the annulment.
On this second level of appeals, the Court of Appeals upheld the lower court's ruling to retroactively annul the automatic stays. The court found that the bankruptcy court did not abused its discretion in finding that Mattera likely was unaware of the initial bankruptcy filing. The factors that should be considered, explained the Court of Appeals, for retroactively annulling an automatic stay are "whether a creditor violated the automatic stay inadvertently and in ignorance of a pending bankruptcy and whether the debtor acted in bad faith."
The bankruptcy court in this matter analyzed the proper factors and found that it was more likely that the homeowner's attorney failed to notify Mattera of the Chapter 11 bankruptcy filing than it was that Mattera's attorney ignored the bankruptcy filing, especially given that the homeowner's attorney could not produce a fax cover sheet or copy of a letter notifying the mortgage holder, according to court records.
Accordingly, the bankruptcy court did not abuse its discretion in finding that mortgage holder's violation of the stay was "innocent," the court found. Further, as the bankruptcy court pointed out, the homeowner was "chargeable with inequitable conduct because he allowed an inordinate amount of time (eight months) to elapse before he raised the violation of the automatic stay."
Given the weight of the evidence showing the innocence of Mattera's violation of the automatic stay, and the wide latitude of authority possessed by the bankruptcy court to order an automatic stay retroactively annulled, the Court of Appeals ruled that the lower court did not abuse its discretion and upheld the retroactive annulment of the stays with respect to the foreclosure actions on the two properties at issue.
Tara-Nicholle Nelson is author of "The Savvy Woman's Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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Copyright 2009 Tara-Nicholle Nelson
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