This article examines the time at which a mortgage foreclosure sale cuts off a former owner’s interests in and rights of redemption of the property. Occasionally, a debtor who is the defendant in a mortgage foreclosure action will file for bankruptcy after a foreclosure sale, but before the deed is transferred to the purchasers of the property. The Court in Rodgers v. County of Monroe, 333 F.3d 64 (2d Cir. 2003) examined whether transfer of the deed after the bankruptcy filing violates the Automatic Stay imposed by Section 362 of the United States Bankruptcy Code. In this recent decision, the Court of Appeals for the Second Circuit decided that such a transfer does not violate the Automatic Stay, as the debtor’s rights in the property are cut off at the time of the public auction.

Facts of the Case:

The County of Monroe, New York held a foreclosure tax sale of a property belonging to the debtor, Sandralee Rodgers. At said sale, the property was sold to a third party purchaser, who paid an initial deposit of ten percent (10%) at the auction and was to pay the balance of the purchase price one month later, in exchange for delivery of the deed. Prior to the delivery of that deed, Rodgers filed a petition under chapter 13 of the Bankruptcy Code. Shortly after, the County conveyed the deed to the purchaser of the property upon payment of the balance of the purchase price. Upon this transfer, Rodgers filed a motion in the bankruptcy court to hold the County of Monroe in contempt for violating the automatic stay.

Legal Argument:

Sandralee Rodgers contended that transfer of the deed was a violation of the automatic stay because since the deed had not yet been transferred when she filed bankruptcy, she retained legal or equitable interests in the property. In accordance with 11 U.S.C. §362(a)(3), "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate" is a violation of the automatic stay. Thus, Rodgers argued that transfer of the deed after she filed for bankruptcy violated the automatic stay because the property had become part of the bankruptcy estate.

Legal Analysis:

The question before the Court was whether, in New York, after the sale at public auction, but before completion of payment and delivery of the deed, Rodgers possessed "legal or equitable interests" in the property, so that it became part of the bankruptcy estate pursuant to 11 U.S.C. §541(a)(1). In determining that she did not possess "legal or equitable interests" in the property, the Court turned to State law.

The Court based its decision on two conclusions of law. The first was that under New York law, a foreclosure sale occurs when the property is "struck down" at auction, rather than when the deed is conveyed to the purchaser. They went on to point out that this sale extinguishes the debtor’s interests in the property, unless a right to redeem the property exists. The Court’s second conclusion of law was that such a right of redemption also expired at the conclusion of the auction.

Based on these two conclusions of law, the Court held that transfer of the deed of property after Rodgers filed bankruptcy was not a violation of the automatic stay. The Court reasoned that Rodgers’ "legal or equitable interests" in the property were cut off at the auction and the property did not become part of the bankruptcy estate. Rodgers’ right of redemption having expired at the conclusion of the public auction, the County of Monroe was free to transfer the deed to the third party purchaser.

The decision in Rodgers v. County of Monroe is significant because it decides the issue of when property sold at a foreclosure sale ceases to be a part of the bankruptcy estate for purposes of the automatic stay. In applying New York State law, the Court determined that a debtor’s "legal and equitable interests" in the property are cut off at the time of the public auction and that a property that is sold at public auction does not become a part of the bankruptcy estate, even if the deed has not yet been transferred to the purchaser.

Rodgers v. County of Monroe, 333 F.3d 64 (2d Cir. 2003)